<PAGE>
As filed with the Securities and Exchange Commission on February 12, 1999
SEC Registration No. 333-68553
- --------------------------------------------------------------------------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ELDORADO ARTESIAN SPRINGS, INC.
------------------------------------------
(Name of small business issuer in its charter)
Colorado 2086 84-0907853
- ------------------------------ ---------------------------- --------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
P.O. Box 445, Eldorado Springs, Colorado 80025 (303)499-1316
-------------------------------------------------------------------
(Address and telephone number of principal executive
offices and principal place of business)
Douglas A. Larson
Eldorado Artesian Springs, Inc.
P.O. Box 445
Eldorado Springs, Colorado 80025
(303) 499-1316
-------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
----------
Laurie P. Glasscock, Esq. Peter B. Shaeffer
Chrisman, Bynum & Johnson, P.C. Suite 1424
1900 Fifteenth Street 135 South LaSalle Street
Boulder, CO 80302 Chicago, IL 60603
(303) 546-1300 (312) 782-5306
- --------------------------------------------------------------------------------
Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
___________________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered offering price per aggregate offering registration fee
registered share price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 805,000 shares /1/ $6.00/2/ $4,830,000 $1,342.74
$0.001 par value
- ---------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Includes 105,000 shares issuable upon exercise of the underwriter's over-
allotment option.
/2/ The proposed maximum offering price per share and the proposed maximum
aggregate offering price are calculated solely for the purpose of
determining the registration fee pursuant to Rule 457 under the Securities
Act of 1933. These amounts are determined using a price of $6.00 per share
which represents the low end of the range of prices to be determined by
Eldorado and the underwriter prior to the offering. The trading market for
Eldorado's common stock is very sporadic.
- --------------------------
ELDORADO ARTESIAN SPRINGS, INC.
700,000 shares of Common Stock
Expected Offering Price...... $6.00 to $7.00 per share
Proposed Trading Symbol NASDAQ
SmallCap Market................................... ELDO
The Offering Per Share Total
--------------- -----------
Public Price $6.00 $4,200,000
Underwriting discounts $0.60 $ 420,000
Proceeds to Eldorado $5.40 $3,780,000
(before expenses
payable by Eldorado)
Eldorado bottles and markets natural artesian spring water from a natural spring
located in the foothills of the Colorado Rocky Mountains. Prior to this
offering, Eldorado common stock has traded on a very limited basis on the NASDAQ
Bulletin Board. Upon completion of this offering, we anticipate that the
securities will trade on the NASDAQ SmallCap Market.
The offering price information in this table assumes that the option granted to
the underwriter of this offering has not been exercised.
--------------------------
This investment involves a high degree of risk and the possibility of
substantial dilution. We strongly urge you to read the entire prospectus and to
consider Risk Factors for a description of the risks involved in Eldorado's
business beginning on page 4 and Dilution for a description of the dilution to
new investors on page 13, before making any investment decisions.
--------------------------
The information in this prospectus is not complete and may be changed. Eldorado
may not sell these securities until the registration statement filed with the
SEC is effective. This prospectus is not an offer to sell or a solicitation of
an offer to buy these securities in any state where the offer or solicitation is
not permitted.
The SEC has not approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------------
Mills Financial Services, Inc.
Mills Financial Services, Inc. will underwrite the securities on a
firm commitment basis, subject to its acceptance of the common stock and certain
other conditions and legal matters. We expect that delivery of the common stock
will be made against payment in _______________________, on or about ______,
1999. The underwriter will receive an option, exercisable within 30 days after
the date of this prospectus, to purchase up to 105,000 additional shares of
common stock solely to cover an over-allotment in addition to other
compensation. See the section "Underwriting", beginning on page 29 for a more
detailed description of the underwriting agreement.
--------------------------
The date of' this prospectus is ________, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................................................................... 1
Eldorado Artesian Springs......................................................... 1
Key Facts......................................................................... 1
Summary of Financial Information.................................................. 2
Risk Factors........................................................................... 3
Additional Information................................................................. 7
Forward-Looking Information and Associated Risks....................................... 7
Use of Proceeds........................................................................ 8
Determination of the Offering Price.................................................... 9
Dilution............................................................................... 9
Capitalization......................................................................... 9
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
Eldorado and its Business.............................................................. 14
Management............................................................................. 21
Principal Stockholders................................................................. 24
Certain Relationships and Related Transactions......................................... 24
Legal Proceedings...................................................................... 25
History of Security Placements......................................................... 25
Description of Securities.............................................................. 25
Shares Eligible for Future Sale........................................................ 26
Underwriting........................................................................... 28
Commission Position on Indemnification for Securities Act Liabilities.................. 30
Legal Matters.......................................................................... 31
Experts................................................................................ 31
Index to Financial Statements.......................................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus and may
not contain all of the information that is important to you. We strongly urge
you to read the entire prospectus which contains more detailed information about
Eldorado, its finances, products and financial statements. All information in
this prospectus, unless otherwise indicated, assumes no exercise of any
outstanding options or warrants. All references to shares of common stock
described in this prospectus have been adjusted to give effect to a twelve (12)
for one (1) reverse stock split that occurred April 1, 1998. We have not
authorized anyone to provide you with information that is different from what is
contained in this prospectus.
ELDORADO ARTESIAN SPRINGS
Eldorado is a Colorado based-company primarily engaged in the bottling and
marketing of natural artesian spring water. Over 90 years ago, the artesian
springs were the center of Eldorado Springs Resort where prominent people of the
day traveled to "take the waters". Today, the springs, located in the foothills
of the Colorado Rocky Mountains, are surrounded by thousands of acres of state
and city park land, providing a well protected source. The water is naturally
purified as it rises through layers of sandstone under its own artesian
pressure. The water is bottled at the source in its natural state and is not
chemically treated in any way. Currently, our operations consist of a
home/commercial delivery business and a retail clear, plastic bottle business.
The clear, plastic bottles, commonly referred to as PET bottles, are typically
1.5 liters and smaller and are sold to retail grocers.
According to beverage industry analysts, the bottled water industry,
currently a $3.9 billion business, is the fastest growing major category in the
entire beverage industry and is growing at a rate of 9% to 10% per year. This
growth is attributable to healthier lifestyles and questionable municipal water
services. The PET segment of the bottled water industry is currently a $930
million business and is growing at a much faster rate--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.
Our principal business address is 294 Artesian Drive, Eldorado Springs, CO
80025 and our phone number is (303) 499-1316. We began our business in April
1983 as a privately-held Colorado company and merged with Lexington Funding,
Inc., a public-traded company in April 1987.
KEY FACTS
<TABLE>
<CAPTION>
Shares to be Sold to the Public by
Eldorado 700,000 shares
<S> <C>
Common Stock Outstanding
Before Offering....................... 2,995,495 shares
Common Stock Outstanding
After Offering........................ 3,695,495 shares
Use of Proceeds....................... Acquisition of additional water
rights, expansion of facilities,
marketing programs and general
working capital purposes
Proposed NASDAQ symbol................ ELDO
</TABLE>
The reference to common stock outstanding before and after this
offering in the table does not include a total of 875,000 shares that are
reserved for options under Eldorado's 1997 stock option plan or a total of
280,000 shares that are reserved for outstanding warrants. Refer to the section
"Management - Stock Option Plan" on page 24
1
<PAGE>
for a more detailed description of Eldorado's stock option plan and to the
section "Description of Securities", beginning on page 25, for a more complete
description of certain warrants that were issued by Eldorado.
SUMMARY OF FINANCIAL INFORMATION
This prospectus contains unaudited financial statements for the nine
months ended December 31, 1997 and 1998 and audited financial statements as of
and for the fiscal years ended March 31, 1996, 1997 and 1998. The following
table highlights some of the financial and operating information of Eldorado.
For more detailed financial and operating information, including the related
notes, see the Financial Statements beginning on page F-1 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
beginning on page 10.
<TABLE>
<CAPTION>
As of and for the As of and for
Year Ended Nine Months Ended
March 31 December 31
--------------------------------------------- --------------------------------
1996 1997 1998 1997 1998
------------- --------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenues............... $2,140,629 $2,644,521 $3,329,444 $2,462,096 $2,981,222
Total operating expenses..... 1,923,849 2,346,999 3,069,859 2,157,860 2,745,193
Earnings before taxes........ 96,481 187,214 117,631 199,881 142,772
Net income................... 73,327 124,152 83,228 158,741 111,362
Earnings per share........... .03 .05 .03 .06 .04
Weighted average of number of
shares outstanding............ 2,695,412 2,695,412 2,695,495 2,695,495 2,972,586
Balance sheet data:
Total assets................. 1,781,763 2,024,414 2,456,721 2,467,572 3,164,164
Total liabilities............ 1,438,223 1,556,722 1,905,801 1,841,139 1,811,801
Stockholders' equiy.......... 3,540 467,692 550,920 626,433 1,352,363
- ----------------------------
</TABLE>
2
<PAGE>
RISK FACTORS
This investment involves a high degree of risk. You should carefully
consider, among other things, the following risk factors before making an
investment decision.
General Business Risks
Water Availability May Be Limited
Our existing water rights were originally decreed by the District Court,
Water Division No. 1 on July 11, 1973. In that decree, the Court determined that
our water rights could be withdrawn from several points of diversion with
priority dates, ranging from December 1901to December 1960. Under Colorado law,
we have the right to beneficially use all of the water physically available from
the points of diversion on our property, provided that all downstream water
rights that have earlier priority dates (called senior water rights) are being
satisfied from water available in the stream system. In the event that
downstream senior water rights are not being satisfied, the State Engineer will
either require us to curtail our diversions to satisfy the senior call for
water, or require us to provide replacement water to the stream system in an
amount necessary to offset our depletions to the stream system.
Lack of Availability of Additional Water
In order to avoid curtailment of our diversions, Eldorado has enrolled in a
substitute supply plan which is a plan approved by the State Engineer on a year-
to-year basis which provides water to the stream system for the benefit of
downstream senior water rights and protects Eldorado's diversions from
curtailment by senior calls. It should be emphasized that the substitute supply
plan is only approved on a year-to-year basis and we do not have permanent
protection of our water rights. Although the State Engineer has approved the
substitute supply plan during every year that Eldorado has owned the water
rights, it is possible that the State Engineer may not continue to do so in the
future.
Management has taken steps to acquire ownership of a replacement water
source and if Eldorado acquires the replacement source, it will ask for approval
of a permanent replacement plan from the water court. The permanent replacement
plan is called our plan for augmentation. Once approved by the court, the plan
for augmentation will protect Eldorado's water rights from senior calls on a
permanent basis and will not require the State Engineer's annual approval.
Management has signed an agreement to acquire the replacement water source but
still requires the approval of the water district and the water court. If
Eldorado fails to obtain approval of a permanent plan for augmentation, it will
continue to need approval from the State Engineer for the substitute supply
plan. If the State Engineer denies approval, it could harm our financial
condition, by causing us to curtail our water use and hinder our ability to
implement our business plan. The replacement water source is water that will be
provided to the stream system to offset depletions to the downstream senior
water rights. The replacement water is not water that would be used by Eldorado
for bottling purposes.
Competition May Affect Our Revenues and Market Position
The bottled water industry is highly competitive. There are numerous
competitors in most major markets, and differentiation among them can be
difficult since the product is often perceived as generic by consumers. There
are numerous operating springs within the United States, like Eldorado,
producing a large number of branded products. These products are offered in
local supermarkets and other retail outlets in the smaller consumer sizes and
sold to home and office markets in one gallon and multiple gallon containers.
More recently, the trend has been toward the development of national brands of
natural spring water. Barriers to entry into markets may be low at certain local
levels but increase significantly at the national level because of large
marketing and distribution costs associated with obtaining and maintaining a
presence at such distribution levels. In addition, many companies are
3
<PAGE>
now bottling water exclusively for retailers. Eldorado may face competition from
these brands since they can compete on a lower price basis and often are given
premium shelf space from the retailers.
At the current level of distribution, Eldorado competes on the basis of
customer service, product quality and price. Eldorado may not be as competitive
as it seeks to expand its distribution area. Our competitors include more
diversified corporations having substantially greater assets and larger sales
organizations than Eldorado, as well as other small firms. Major competitors
include The Perrier Group of America, Inc. and Great Brands of Europe.
Changes in Consumer Preferences for Natural Spring Water
Eldorado believes that the most important factor in the growth of natural
spring water products has been a change in consumer preferences for bottled
water. However, consumer preferences may be influenced by the availability and
appeal of alternative beverages. In addition to drinking water, consumers have a
choice of purified drinking water or they may choose to drink beverages other
than spring water. Consumer demand for natural spring water may not continue to
grow or may diminish in the future.
Changes in Government Regulations
Eldorado cannot guarantee that our operations will not be subject to more
stringent requirements in the future. If Eldorado fails to comply with
applicable laws and regulations, we could face fines, a temporary shutdown of
production, product recalls, loss of certification to market our products or,
even in the absence of government action, loss of revenue as a result of adverse
market reaction to negative publicity. Any of these consequences could
significantly and negatively impact our results of operations and financial
condition.
Lack of Finished Product Inventory
Eldorado maintains a limited amount of finished product inventory. If an
event caused our facilities to shut down, even for a short period, we would be
unable to fill customer orders which could substantially reduce revenues and
damage customer relations.
Risks Relating to Registration Rights of Certain Shareholders and Warrant
Holders
During fiscal 1998, Eldorado issued 300,000 shares of restricted common
stock and warrants to purchase 30,000 shares at $3.30 per share and 250,000
shares at $11.00 per share. When the warrants are exercised, the shares will
have certain registration rights that require Eldorado to register the shares
one time and to include the shares in another public offering by Eldorado an
offering is being done. The subsequent sales of these shares could depress the
public market price for the shares sold in this offering.
Dilution in the Value of Your Shares
At December 31, 1998, after giving effect to a 12 for 1 reverse stock
split, Eldorado had net tangible book value of $1,310,870 or $0.44 per share
based upon 2,995,495 shares of common stock outstanding. Net tangible book value
per share is determined by dividing the number of outstanding shares of common
stock into net tangible book value (total assets less total liabilities and
intangible assets). After giving effect to the receipt of the net proceeds from
this offering, the adjusted net tangible book value at December 31, 1998, would
have been $4,825,870 or $1.31 per share. This represents an immediate increase
of $0.87 per share to current shareholders. This represents an immediate
dilution of $4.69 per share or 78.2% to the investors in this offering.
4
<PAGE>
Lack of Established Trading Market for Public Shares of Eldorado
There is an extremely limited and very sporadic public market for
Eldorado's common stock available for sale. In addition, the underwriter in
this offering does not plan to make a market in Eldorado's shares after the
offering. Although Eldorado intends to remain current in our required filings
with the SEC and plans to register with the NASDAQ Small Cap market, we cannot
assure that a public market will develop or will be maintained. A limited public
market may make it more difficult to sell your shares.
Potential Effects of Failure to List Common Stock on the NASDAQ Small Cap
Market
In the event that we are unable to satisfy the NASDAQ Small Cap listing
requirements, trading would continue to be conducted in the pink sheets or on
the OTC Bulletin Board. If the common stock is not quoted on the NASDAQ Small
Cap Market, trading of the shares would be covered by Rule 15g-9 under the
Securities Exchange Act of 1934 for non-NASDAQ and non-exchange listed shares.
Under this rule, broker-dealers that recommend the shares must make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale. Shares are exempt from this
rule if the market price is at least $5.00 per share. If the shares were
subject to the regulations applicable to penny stocks, the market liquidity for
the shares would likely be reduced by limiting the ability of broker-dealers to
sell the shares. This rule would also limit the ability of shareholders to sell
their shares in the secondary market. There is no assurance that trading in our
shares will not be subject to these or other regulations that would adversely
affect the market for the shares.
Majority Control by Eldorado's Current Officers and Directors
Eldorado's officers and directors currently own a total of approximately
77% of the outstanding shares and after this offering will continue to own 63%
of the outstanding shares. If they act together, our officers and directors
will be in a position to control all matters requiring shareholder approval
after the offering.
Arbitrary Determination of Offering Price
The public offering price of the shares being sold in this offering
resulted from negotiations between Eldorado and the underwriter. The price was
not based on the price of sales of the shares in the limited and sporadic public
market for Eldorado's common stock as is normally the case with a second
offering of stock by a public company. In particular, the offering price is not
based upon the $2.75 sales price which we used in April 1998 to sell 300,000
shares in a private offering. It is also not related to a recent trading price
of Eldorado's common stock of $1.56 on January 26, 1999. Among the factors
considered in determining the public offering price were Eldorado's financial
condition and prospects, market prices of similar shares of comparable publicly
traded companies, certain financial and operating information of similar
businesses and the general condition of the stock market. The offering price
does not necessarily bear any relationship to Eldorado's assets, book value,
earnings, or any other established indication of value.
Significant Shares are reserved for a Stock Option Plan that May be
Exercised in the Future
Eldorado has set aside 875,000 shares of our common stock to issue to our
employees, officers, directors and consultants. On May 26, 1998, our Board of
Directors granted options to purchase 348,000 shares at $2.75 per share. In
addition, on December 7, 1998, we granted options to purchase 150,000 shares at
$2.75 per share. As of December 31, 1998, we have 495,500 options outstanding
under the stock option plan of which 113,500 can be exercised immediately. If
our employees exercise these options, it may affect the market price for your
shares.
5
<PAGE>
Additional Shares that May be Sold Into the Market
After this offering is completed, Eldorado will have 2,707,404 shares of
common stock held by our present shareholders that will not have been registered
for sale. Under certain circumstances, these shares may be available for public
sale by means of ordinary brokerage transactions in the open market. These
shares must be sold according to SEC Rule 144 and shareholders must satisfy
certain volume and time limitations. Rule 144 also permits, under certain
circumstances, the sale of shares, without any limitation, by a person who is
not an affiliate of Eldorado and who has held his or her shares for at least two
years.
The possibility of a sale under Rule 144 may reduce the market price of
Eldorado's shares. In addition, certain outstanding warrants and options have
registration rights which would permit public sale of the underlying shares of
common stock in the future. Sales of these shares might decrease the market
price for the shares you are purchasing in this offering.
Lack of Underwriting History
Mills Financial Services, Inc., the underwriter in this offering, was the
lead underwriter in one initial public offering completed in 1998. Mills has
advised us that they will not make a market in Eldorado's shares after this
offering. You should consider the limited experience of Mills Financial
Services, Inc. in evaluating an investment in the common stock.
Risk of Effects of Year 2000 Compliance Issues
As our assessment of our Year 2000 exposure is not yet complete, we cannot
fully and accurately estimate the impact of the worst case scenario at the
present time. However, Eldorado does not expect the Year 2000 problem to create
a material disruption in its business or have a material financial impact on its
operations. In general, Eldorado believes that it has sufficient time,
resources and expertise to accomplish the hardware and software upgrades that
will be necessary, however, we cannot make any assurances that this will be the
case.
6
<PAGE>
ADDITIONAL INFORMATION
Eldorado is subject to the reporting requirements of the Securities
Exchange Act of 1934 and files quarterly and annual reports, proxy statements
and other information with the SEC. Eldorado intends to furnish its shareholders
with annual reports containing audited financial statements and such other
periodic reports as Eldorado deems appropriate or as may be required by law.
You may read and copy any materials Eldorado files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. The address of the site is http://www.sec.gov.
Eldorado maintains an internet site at http://www.eldoradosprings.com.
With respect to the offered shares, Eldorado has filed a Registration
Statement on Form SB-2 with the Office of the SEC in accordance with the
provisions of the Securities Act. This prospectus does not contain all of the
information included in the Registration Statement. Certain portions have been
omitted as permitted by the registration statement rules and regulations of the
SEC. For further information with respect to Eldorado and the offered shares,
refer to the registration statement and the accompanying exhibits. Statements
in this prospectus concerning the provisions of any document are not necessarily
complete and you should refer to the copy of the document for more information
filed as an exhibit to the registration statement. The registration statement
and the exhibits may be inspected, without charge or copies from:
Public Reference Section Public Reference Section
Securities and Exchange Commission Midwest Regional Office
Judiciary Plaza or 500 West Madison Avenue
450 Fifth Street, NW Room 1400
Room 1024 Chicago, Illinois 60661-2511.
Washington, DC 20549
FORWARD-LOOKING INFORMATION AND ASSOCIATED RISKS
This prospectus contains forward-looking statements, and statements
regarding, among other things, our growth strategy, anticipated trends in the
industry in which we operate, water availability and our ability to enter into
contracts with distributors. These forward-looking statements are based largely
on Eldorado's expectations and are subject to a number of risks and
uncertainties, which may be beyond our control. The forward-looking statements
included in this prospectus are based on current expectations that involve a
number of risks and uncertainties that might negatively affect Eldorado's
operating results in the future. Such risks and uncertainties include, but are
not limited to, the following: availability of debt and equity financing;
interest rate fluctuations; effects of regional economic and market conditions;
our ability to obtain additional water rights; labor and marketing costs;
operating and packaging costs; the intensity of competition, legal claims, and
the contingencies associated with Year 2000 compliance.
Actual results could differ materially from these forward-looking
statements as a result of the factors described in this prospectus, or other,
regulatory or economic influences. In light of these risks and uncertainties,
we cannot assure that the forward-looking statements in this prospectus will in
fact transpire or prove to be accurate.
7
<PAGE>
USE OF PROCEEDS
The net proceeds to Eldorado from the sale of the shares offered in this
prospectus will be $3,515,000, assuming a per share offering price of $6.00 and
deducting the underwriting expenses and other expenses of the offering estimated
at $685,000. We anticipate that we will use the net proceeds of this offering
during the next twelve month period as follows:
Approximate
Description Dollar Amount Percent
---------------------------------------------- ------------- -------
Water Rights.................................. $ 680,000 19.3%
Offsite Facilities............................ 750,000 21.4%
Onsite Improvements........................... 600,000 17.1%
Marketing..................................... 1,250,000 35.6%
Additional Working Capital.................... 235,000 6.6%
------------- -------
TOTAL $3,515,000 100%
The principal goal of Eldorado's water rights augmentation program is to
acquire additional water rights in order to provide for anticipated growth in
water sales. Management has entered into a contract to purchase additional
water rights upon completion of this offering. The cost of the water rights is
$680,000. Water rights in Colorado are generally a valuable asset that
historically have appreciated in value over time. Eldorado believes that it is
important to purchase additional water rights to increase revenues even under
low flow conditions when a senior call on water is likely to occur. The
contract is subject to approval of the water district and the water court and we
cannot make assurances that we will be able to obtain these approvals.
Eldorado intends to enter into an agreement over the next 18 months to two
years to manufacture the PET bottles through construction of an offsite plastics
facility in the Denver area or a joint venture with an existing manufacturer of
the PET bottles. This would allow Eldorado to produce the bottles at a much
lower cost and potentially avoid problems with supplies of the bottles in the
future. We do not have any such agreements in place at this time.
We are currently leasing a temporary warehouse facility. Over the next two
years, we intend to lease or construct a warehouse/distribution facility in the
Denver, Colorado area. The proposed facility would be approximately 30,000
square feet and have the capacity for expansion. In addition, improvements to
the existing bottling plant will be made during the same time period.
In order to meet our expansion objectives, Eldorado intends to pursue
agreements with sellers of bottled water over the next 18 months. Management
believes that Eldorado may be required to pay a distribution fee to a
distributor in order to establish such a relationship. In addition to
establishing an external distribution network, we may also use the proceeds to
expand Eldorado's internal sales and distribution capabilities over the same
time period, for in-store promotions, media advertising, slotting fees and
special promotions.
The balance of the net proceeds, if any, including any additional proceeds
if the underwriter exercises its overallotment option, will be used for working
capital and general corporate purposes.
While this represents Eldorado's present intention with respect to the use
of the offering proceeds, capital requirements or business opportunities, which
are not currently anticipated, could cause management to elect to use proceeds
for other general corporate purposes and for other purposes not contemplated at
this time. Until we use the
8
<PAGE>
net proceeds, we will invest them in money market accounts and short-term
certificates of deposit. Management believes that cash flow from operations,
together with the net proceeds of this offering, will meet Eldorado's cash
requirements for at least the next twelve (12) months.
DETERMINATION OF THE OFFERING PRICE
The public offering price of the shares has been determined by negotiations
between Eldorado and the underwriter. Eldorado and the underwriter considered,
in addition to prevailing market conditions, Eldorado's historical performance,
estimates of the business potential and earnings prospects of Eldorado, an
assessment of Eldorado's management.
DILUTION
At December 31, 1998, Eldorado had outstanding a total aggregate of
2,995,495 shares of common stock the aggregate net tangible book value of these
shares was $1,310,870 or approximately $0.44 per share. Net tangible book value
per share consists of total assets less intangible assets and liabilities,
divided by the total number of shares of common stock outstanding.
After giving effect to the sale of 700,000 shares of common stock at an
assumed public offering price of $6.00 per share and receipt of the net proceeds
of the offering, the pro forma net tangible book value of the common stock at
December 31, 1998 would be $4,825,870, or approximately $1.31 per share. This
represents an immediate increase in pro forma net tangible book value of $0.87
per share to the present shareholders and an immediate dilution of $4.69 per
share to the public purchasers. The following table illustrates the dilution
which investors participating in this offering will incur and the benefit to
current shareholders as a result of this offering:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share......................... $6.00
Net tangible book value per share before offering............... $0.44
Increase per share due to offering.............................. 0.87
-----
Pro forma net tangible book value per share after offering...... 1.31
-----
Dilution of net tangible book value per share to purchasers in
this offering.................................................. $4.69
=====
Dilution per share as a percentage of offering.................. 78.2%
</TABLE>
CAPITALIZATION
The following table sets forth the capitalization of Eldorado as of
December 31, 1998, and as adjusted to give effect to the receipt of the net
proceeds of this offering based upon the assumed public offering price of $6.00
per share.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------
Actual As Adjusted
------------- -----------
<S> <C> <C>
Long Term Debt (including current maturities) $1,574,571 $1,574,571
Stockholders' Equity
Common Stock, $0.001 par value; authorized-50,000,000 shares; issued 2,995 3,695
and outstanding- 2,995,495 actual; and 3,695,495 as adjusted...................
Additional Paid-In Capital 984,656 4,498,956
Retained Earnings............................................................... 364,712 364,712
---------- ----------
Total Stockholders' Equity...................................................... 1,352,363 4,867,363
Total Capitalization............................................... $2,926,934 $6,441,934
========== ==========
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Comparison of Nine Months Ended December 31, 1998 and 1997
- ----------------------------------------------------------
Revenues: Revenues for the nine months ended December 31, 1998 increased
21.1% compared to the same period in 1997. Revenues for the three months ended
December 31, 1998 increased 24.1% compared to the same period ending December
31, 1997. This increase resulted from increased sales volumes to Eldorado's
existing customer base as well as from sales to new customers. In addition, on
October 1, 1998, Eldorado increased the selling price of the five gallon
products. This increase contributed to the increase in revenues by 1.3% and 4.2%
for the nine months and three months ended December 31, 1998. In November 1998,
Eldorado introduced a new 3 gallon product for delivery. Five gallon product
sales generated the majority of the increase in overall revenues compared to the
smaller size products. Revenues for the five gallon products increased $364,816
to $2,327,863 for the nine month period ending December 31, 1998 versus
$1,963,047 for the same period ending December 31, 1997. Sales of the one gallon
products increased 30.3% and sales of the smaller (1.5 liter and less) PET
packages increased by 46.2% for the nine months ended December 31, 1998 compared
to the same period ending December 31, 1997.
Gross Profit: For the first nine months of fiscal 1998, cost of goods sold
was $381,584 compared to $362,822 for the same period of fiscal 1997. Gross
profit increased 23.9% from $2,099,274 for the nine months ended December 31,
1997 to $2,599,638 for the same period in 1998. This represents an increase in
gross profits from 85.3% of sales for the nine months ended December 31, 1997 to
87.2% for the nine months ended December 31, 1998. This increase in gross
profits is attributable to the decrease in production cost and cost of goods as
well as the price increase for the 5 gallon products.
Operating Expenses: Operating expenses for the nine months ended December
31, 1998 increased 31.7% to $2,363,609 from $1,795,038 for the same period of
fiscal 1997. This increase in operating expenses is the result of the increase
in sales as well as an increase in other expenses. Salaries and related expenses
increased 18.3% to $1,162,449 for the period ended December 31, 1998 versus
$982,628 for the same period of fiscal 1997. Salaries and related expenses are
39% and 40% of sales for the nine months ended December 31, 1998 and 1997,
respectively. The increase in salaries and related expenses is due to the 21.1%
increase in revenues for the nine months ended December 31, 1998.
General and administrative expenses increased to $580,970 or 19.5% of sales
for the nine months ended December 31, 1998 compared to $341,988 or 13.9% of
sales for the same period ending December 31, 1997. Officer liability insurance
and general insurance expenses increased 31% for the nine months ended December
31, 1998 versus December 31, 1997. Eldorado added coverage for additional
officers and directors. In addition, Eldorado added additional coverage for new
vehicles and employees. In September 1998, Eldorado leased a temporary off-site
warehouse in order to facilitate the delivery and shipment of goods which also
added to the increase in general and administrative expenses.
Selling and delivery expenses increased to $373,819 for the nine months
ended December 31, 1998 versus $271,408 for the same period of fiscal 1997. As a
percent of sales, this represents 12.6% and 11.1% for the nine months ended
December 31, 1998 and 1997, respectively. This increase is largely attributable
to the increase in promotions and advertising expenses through the nine months
ended December 31, 1998. Promotional and
10
<PAGE>
advertising expenses increased 58.2% for nine months ended December 31, 1998
versus the same period ended December 31, 1997.
Depreciation and amortization was $246,371 for the nine months ended
December 31, 1998 compared to $199,014 for the same period ended December 31,
1997. Eldorado added additional bottling equipment and improvements to the plant
that increased the amount of depreciation.
Interest Income (Expense): Interest income increased to $14,078 for the
nine months ended December 31, 1998 from $3,711 for the same period ended
December 31, 1997. This increase is due to earnings on deposits of proceeds from
the private placement that was completed in April 1998. Interest expense for the
nine months ended December 31, 1998 was $107,335 compared to $108,066 for the
same period ending December 31, 1997.
Net Income and Comprehensive Income: The previous described operations
resulted in net and comprehensive income for the first nine months of fiscal
1998 of $111,362 compared to $158,741 for the nine months ended December 31,
1997. Net and comprehensive income for the three months ended December 31, 1998
was $49,819 compared to $30,369 for the three months ended December 31,
1997.
Comparison of Fiscal Years Ended March 31, 1998 and 1997
- --------------------------------------------------------
Revenues. Revenues increased 25.9% to $3,329,444 for the year ended March
31, 1998 from $2,644,521 for the same period in fiscal 1997. This increase is
primarily due to the increased volume of the five gallon products to existing
customers as well as sales to new customers. Industry averages in the entire
bottled water market were up between 10% and 11% in 1997 by trade analysts.
Gross Profit. Costs of goods sold increased 20.7% from $415,263 in fiscal
1997 to $501,288 in fiscal 1998. This resulted in gross profits of $2,828,156
for fiscal 1998 versus $2,229,258 for fiscal 1997. As a percent of sales, gross
margins increased to 84.9% in fiscal 1998 from 84.3% in fiscal 1997. This
increase is primarily due to the increased sales of the five gallon product with
higher profit margins and the addition of more efficient bottling equipment.
Operating Expenses. For the fiscal years ended March 31, 1998 and 1997
total operating expenses were $2,568,571 and $1,931,736, respectively, an
increase of $636,835 or 33.0%. As a percent of sales, operating expenses
increased to 77.2% in fiscal 1998 from 73.1% in 1997. This is primarily due to
the increase in advertising and promotional expenses and selling and delivery
expenses in nine months for obtaining additional accounts as well as
establishing brand name awareness in the highly competitive bottled water
market. Increases in salaries and wages were 32.7% for the year ended March 31,
1998. This increase is due in part to the additional commissions for the new
revenues generated. Part of the increase is also due to an across the board pay
increase for all employees that became effective January 1998.
Other Income (Expenses). Interest expense increased $31,495 for the year
ended March 31, 1998. The increase in interest expense was a result of
increased levels of debt acquired to finance additional machinery and equipment.
Interest income was not material.
Net Income and Comprehensive Income. Eldorado's net and comprehensive
income decreased from $124,152 in fiscal 1997 to $83,228 in fiscal 1998 due to
the previously described operations.
11
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Eldorado has traditionally financed operations with debt and has generated
cash from its operations. With the restructuring of debt in June 1997, the new
debt structure provided a $1,200,000 loan secured by Eldorado's property, a
$300,000 loan for new equipment and a plant reconstruction, and a $100,000
working capital revolving line of credit. The $1,200,000 loan is due in June
2012 and is payable monthly with interest at the bank's prime rate plus .5% (8%
at December 31, 1998). The $300,000 loan is due in June 2002 and is payable
monthly with interest at 9.75%. Both notes are secured by substantially all of
Eldorado's assets.
Accounts receivable at December 31, 1998 were 19.9% higher than at December
31, 1997. This resulted from the 21.1% increase in revenues for the respective
proceeding nine month period. Days sales outstanding of approximately 53 days
was unchanged between years. Management has implemented new credit policies and
collection programs to reduce the level of receivables. Management believes the
investment in receivables should be under 40 days sales outstanding, more in
line with industry averages. There is no assurance that the new policies and
programs will be successful.
On April 22, 1998, Eldorado completed a private placement of 300,000 shares
of common stock at $2.75 per share. Eldorado 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. for a potential additional
secondary stock offering. The intention for the use of proceeds of the private
placement included 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. In addition, Eldorado
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, Eldorado registered 875,000 shares of common stock of
Eldorado pursuant to the 1997 stock option plan. The stock option plan provides
for the grant of stock options to employees, directors and consultants of
Eldorado.
Year 2000 Compliance Issues
- ---------------------------
The year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
of miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
In anticipation of potential year 2000 problems, Eldorado has begun to
replace and upgrade its management information systems to be year 2000
compliant. We expect to complete this process by the quarter ending June 1999.
Eldorado has retained consultants to coordinate successful system
implementation, including testing of year 2000 related problems. Testing for
year 2000 compliance will commence upon system implementation and will continue
throughout 1999. Eldorado presently believes that with successful system
conversions, the year 2000 issue will not pose significant operational problems
for its systems. However, although Eldorado's new software is designed to be
year 2000 compliant, there can be no assurance that it contains all necessary
data code changes. If Eldorado does not complete its planned conversions in a
timely fashion, year 2000 could have a material impact on the our
operations.
12
<PAGE>
Eldorado expects that assessment, remediation and contingency planning
activities for its internal systems will be ongoing through 1999. We currently
expect the total cost for these activities to be approximately $15,000. This
total cost estimate does not include replacement of internal software and
hardware in the normal course of business. The costs of the project and the date
established for completion of year 2000 modifications are based on managements'
best estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area and the ability to locate and correct all
relevant computer codes.
Eldorado intends to obtain information from its suppliers and major
customers regarding their products' year 2000 compliance. Eldorado does not
currently have any information that would lead it to believe that year 2000
issues relating to its internal systems will have a material adverse impact on
Eldorado's financial condition or overall trends in results of operations.
Since third party year 2000 compliance is not within Eldorado's control, and
since we have not yet obtained compliance information from our suppliers, there
can be no assurance that the failure by a supplier to achieve year 2000
compliance would not adversely affect us. In addition, the purchasing patterns
of our clients may be affected by year 2000 issues. Although Eldorado has
formulated a contingency plan to date, it plans to continue to assess year 2000
risks to determine whether it needs to alter that plan.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the year ended March 31, 1998, Eldorado 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 there are no potential dilutive
common shares. As required by SFAS 128, disclosure of events which would have
had an effect on the number of shares outstanding is reflected in this
prospectus.
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 are components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. Currently, Eldorado'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. SFAS No. 130 is required to be adopted for
Eldorado's 1999 fiscal year end financial statements and, as a reporting
standard, SFAS No. 130 will have no impact on Eldorado's financial position or
results of operations.
In June 1997, FASB issued Statement of Financial Accounting Standards, No.
131, "Disclosures About Segments of an Enterprise and Related Information"
(SFAS No. 131), effective for years beginning after December 15, 1997.
Statement No. 131 establishes standards for reporting information about
operating segments and the methods by which such segments were determined.
Currently, Eldorado only has one significant operating segment. Therefore, this
pronouncement poses no significant changes in Eldorado's reporting methods.
13
<PAGE>
ELDORADO AND ITS BUSINESS
Eldorado bottles, markets and distributes non-sparkling natural spring
water to regional and national customers. Eldorado and the spring are located at
the base of a six hundred foot deep canyon in Eldorado Springs, Colorado. The
history of Eldorado Springs dates back generations. The property was developed
in 1905 as a Colorado resort that attracted famous guests from across the
country.
The artesian springs which are located on Eldorado's property emanate from
one of the most unique geologic sources in the world. The source of Eldorado's
water is rain and snow which has fallen on the Continental Divide in the Rocky
Mountains and which then passes through multiple geologic formations and
aquifers before finally reaching the surface at Eldorado. Due to this
circulation process, the resulting spring water is renowned as being from one of
the purest natural artesian springs in the world.
In 1983, Messrs. Larson, Sipple and Martin purchased the Eldorado Springs
property from the founders of the resort. Eldorado operated as a private
company until 1986 when it merged with Lexington Funding, Inc. Eldorado has
focused on developing and expanding the business of bottling Eldorado Spring
water. Eldorado bottles the water at the source in PET bottles and 3 and 5
gallon bottles. Since inception, Eldorado has expanded the business by focusing
its marketing efforts on the five gallon delivery business. As this business
has grown and gained in profitability, management has had the opportunity to
introduce the PET bottles to the grocery retailers and these products have
gained significant market shares among the large retail grocery chains. Current
retail market shares for Eldorado's PET bottles range from 3% to 29%, depending
on the size of the bottle.
Eldorado has met all FDA requirements for the labeling of its water as
"bottled at the source" and "natural". "Bottled at the source" signifies that
the water is pumped directly from the source to the bottling facility. This
eliminates handling and transportation procedures which might lead to
contamination. "Natural" signifies that the chemical composition and mineral
content of the bottled water are the same as those at the source. This
contrasts with "purified" water from which certain chemicals and minerals are
removed by means of filtration.
Eldorado's objective is to become a leading provider of premium quality
bottled water on a national level. Eldorado's strategy includes increasing
sales to existing customers, broadening its current customer base, expanding its
product line and establishing distributor relationships as well as strategic
distribution alliances with other national beverage companies in order to take
advantage of their established distribution networks.
Industry Overview
- -----------------
The bottled water industry is considered by many analysts to be the fastest
growing major category in the beverage industry. The bottled water industry has
exhibited consistent annual growth over the last twenty years and grew at a rate
of 9% for 1997. According to Beverage Marketing Corp., a major reporter of
bottled water statistics, bottled water sales increased to a $3.9 billion dollar
business. Along with sales and volume, per capita consumption has increased to
nearly 13 gallons, up from 11.7 in 1996. Driving the category's growth is the
premium PET bottle segment which was up 30% in 1997, accounting for two-thirds
of the category's overall growth. Industry analysts predict that premium PET
bottles will drive growth by 6 to 8 percent in 1998. In 1981, bottled water
consumption represented 1.8% of the U.S. consumption of total beverage sales.
In 1997, that percentage had increased to 6.9%. Non-sparkling water comprises
over 87% of the U.S. bottled water market and generated $3.4 billion of
wholesale sales in 1997. PET bottles sales in 1997 reached $930 million and the
segment is expected to double in 3 years.
The bottled water industry is generally broken down into two segments:
sparkling and non-sparkling waters. Non-sparkling waters dominate the industry
with an estimated 87% share of total category volume. Non-sparkling water
gallonage has in fact realized uninterrupted growth every year since statistics
have been kept on the bottled water industry when Beverage Marketing
Corporations began following this market in 1976.
14
<PAGE>
Strategy
- --------
Eldorado's objective is to expand its operations based on the continued
success of its PET bottled water products. Eldorado's plan consists of multiple
phases that ultimately are targeted to expand distribution of Eldorado's retail
products to regional and national markets. Aspects of Eldorado's strategy
include the following:
Water Rights Augmentation. When Eldorado's founders purchased the resort
property in 1983, included in the purchase price were certain water rights for
Eldorado. Eldorado realized substantial growth in its water bottling business
since that date and Eldorado faces the possibility of its sales volume exceeding
its water rights capacity. Of the approximate 105 million gallon total
physical flow of the springs, Eldorado currently has an augmentation contract
for 24 acre feet which is the equivalent of approximately 7,820,424 gallons per
year. Currently, Eldorado uses annualized use is 3,209,700 gallons per year.
The principal goal of Eldorado's water rights augmentation program is to acquire
additional water rights in order to provide for the forecasted increase in water
sales resulting from the implementation of Eldorado's strategy.
Eldorado believes that it is important to acquire additional water rights.
Doing so would provide sufficient water access to implement Eldorado's business
plan even under low flow conditions when a senior call on water is likely to
occur. Management has signed a contract to purchase approximately 32 million
gallons of water per year. The cost of the water rights is $680,000. The
contract is subject to approval by the water district and the water court.
Additional Facilities and Improvements. Eldorado has plans to improve its
production facilities and increase its production capacity in order to
facilitate expansion into new geographic markets. Over the next two years,
plans initially call for remodeling the warehouse and adding additional office
space. Additional improvements of the area surrounding the warehouse will
modernize the current facilities and services.
Warehouse and Distribution Facility. Eldorado will require additional off-
site warehouse facilities in order to store raw materials and finished goods
awaiting delivery to the regional warehouses of its customers. Within the next
two years, Eldorado plans to purchase or construct a warehouse in the Denver,
Colorado area and relocate the distribution operations to that facility. This
would provide Eldorado with the additional warehouse space to accommodate the
future growth of the delivery and retail business.
Plastics Molding Facility-Molds. The second phase of the warehouse
facility would be to operate a plastics facility for the PET bottles. This
would include the equipment and the molds for the Eldorado brand. This facility
can be included into the warehouse/distribution facility or into the existing
warehouse facility. This would provide Eldorado with a more stable supply of
the PET bottles and insure availability of the products in the future.
Marketing. Eldorado believes that building its brand awareness and
consumer loyalty will allow Eldorado to expand distribution. The pure quality
of Eldorado water is one reason why Eldorado's bottled water has achieved
significant market share in a short period of time in the retail stores where it
has already been introduced. Eldorado also believes its attractive label and
unique source of the water is a key factor in building brand awareness. In
addition, Eldorado has positioned its bottled products in the retail market as a
premium water because it is bottled at the source, it is not chemically treated
and is naturally low in total dissolved solids.
Enter New Distribution Channels. Eldorado's opportunity for growth lies in
the ability of Eldorado to expand into additional distribution channels. This
would involve agreements with distributors in the Colorado area. In addition,
Eldorado may try to acquire other companies currently involved in the 5 gallon
distribution business. This will allow Eldorado to build brand awareness and
consumer loyalty by incorporating current operating procedures and sales
strategies into the acquired companies. Any acquisitions will require
additional debt or equity financing. At this time, Eldorado has no agreements
or understandings to acquire additional companies.
15
<PAGE>
Consumer Trends
- ---------------
Much of the demand for bottled water is driven by consumer demand for pure
quality bottled water. The growth in consumption of non-sparkling water is
attributed to consumer trends including increased health and fitness awareness,
concerns for municipal tap water quality and demand for convenience and
innovative packaging. Generally, bottled water is perceived as being a natural,
caffeine and sodium free beverage at a time when more and more consumers are
health conscious. These attributes and the increased availability of convenient
packaging for natural spring water have contributed to the increase in bottled
water consumption. The perception of bottled water has increased the demand for
this product. The bottled water industry is considered by many analysts to be
the fastest growing major category in the beverage industry.
The introduction of bottled water in convenience packaging has recently
driven the explosive growth of the retail segment of the bottled water market.
This market has been driven by manufacturers who have begun bottling their water
in smaller, more portable sizes, which are sold at retail and which are intended
to fit the active lifestyles of bottled water consumers. Manufacturers have
created a new subsegment of the bottled water market that is now growing at a
30% rate for water in 1.5 liters bottles and smaller.
Distribution Channels
- ---------------------
The traditional channels of distribution for bottled water are home
delivery, commercial delivery, grocery outlets, restaurants and vending
machines. The delivery market generally has consisted of the delivery of five
gallon bottles of water to residential and commercial customers. This segment
of the bottled water industry provided the greatest amount of growth for the
industry throughout the 1970's and the 1980's.
Sales of bottled water through retail grocery outlets has become an
increasingly important channel of distribution for bottled water. Retail
outlets have historically sold bottled water in one and two gallon containers.
Increasingly, the retail segment of the bottled water market is defined by the
new, convenient bottled products which are sold in portable 1.5 liter, 1.0 liter
and 0.5 liter sizes.
While the delivery segment of the bottled water market was the principal
driver of bottled water growth in the 1980's, the 1990's became the decade of
the PET bottles sold at retail. According to industry analysts at Beverage
Marketing Corporation, water bottled in these smaller bottles and sold at retail
will, on its own, be a $3 billion revenue segment of the bottled water market.
This represents an annual compounded growth rate of 17% for this segment of the
bottled water market over the course of the next ten years. Since 1992, the
retail segment of the bottled water category continues to grow at a healthy
double-digit pace.
Consolidation
- -------------
The bottled water industry as a whole remains highly fragmented with over
780 companies in the industry. Recent consolidation in the industry has created
six large bottled water companies that when combined account for roughly 50% of
industry sales. These six companies are composed of over 25 different brands of
water with no single brand accounting for more than 7.6% of total bottled water
sales. Based on 1997 wholesale figures from Beverage Marketing Corporation, the
top 10 companies in the industry range in sales from $1,104 million for Perrier
Group to $41 million for AquaPenn.
Products
- --------
Sales of Eldorado's water have historically been made by selling five
gallon bottles of water directly to home and business customers. More recently,
Eldorado began selling its water at wholesale to retail grocery food
16
<PAGE>
stores with Eldorado's water packaged in smaller, more convenient sizes which
are suitable for retail distribution. The products offered by Eldorado and
their respective target markets are listed below:
<TABLE>
<CAPTION>
<S> <C>
Product Target Market
------- -------------
Five Gallon Bottles and Three Gallon Bottles Home/Commercial Delivery
One Gallon Bottles Retail Food Stores
PET Consumer Packaging Retail Food Stores
(1.5 liter, 1.0 liter,
and 0.5 liter)
</TABLE>
Home/Commercial Delivery Business
- ---------------------------------
Direct delivery of bottled water to homes and businesses has historically
been the focus of Eldorado's business. Eldorado's bottled water delivery
business primarily consists of the sale of five gallon containers of water to
customers who lease water dispensers from Eldorado. Eldorado delivers these
five gallon bottles directly to customers using its own fleet of trucks.
Delivery sales are made primarily in the Denver/Boulder metropolitan area, but
also include selected other cities along the front range in Colorado.
Currently, Eldorado has approximately ten thousand (10,000) active delivery
accounts and the delivery business currently accounts for approximately 80% of
Eldorado's revenues.
PET Packaging/Retail Distribution Business
- ------------------------------------------
In 1994, Eldorado introduced its water packaged in convenient consumer-
sized or PET bottles. The first PET product introduced was the 1.5 liter
bottle. This product was followed in 1995 with 1.0 liter and 0.5 liter bottles.
The sale of Eldorado's artesian spring water in PET bottles consists
principally of the wholesale distribution of PET products to grocery store
chains for retail sales located primarily in Colorado. Eldorado uses its own
trucks to deliver its PET water products to grocery chain warehouses in the
Denver metropolitan area. From there, Eldorado's water is shipped to grocery
stores throughout Colorado. In addition, because some of the grocery chains
distribution extends beyond Colorado, Eldorado's products are sold in grocery
stores which are located in New Mexico, Wyoming, Kansas, Oklahoma and
Texas.
The key retail customers for Eldorado's PET products include the largest
grocery chain in Colorado (Krogers) and one of the largest wholesale food
distributors (Rainbow Natural Foods) in the state. Eldorado's product is also
sold to retail customers at Safeway and Albertsons stores.
Bottling
- --------
Eldorado's artesian spring water is bottled naturally at Eldorado's
bottling facilities located at the source. Eldorado does not chemically treat
the water and no chlorine, fluoride, calcium or other minerals or chemicals are
added to, and nothing is removed from, the water during the bottling process.
Eldorado's bottling facilities are located on a portion of approximately 26
acres of land owned by Eldorado in Eldorado Springs, Colorado. Eldorado's
bottling process utilizes several quality control precautions built in to
preserve product integrity. The spring water is bacteria free as it emanates
from the earth due to the fact that the water is naturally lightly carbonated.
The spring water originates 70 feet from the bottling plant and travels through
an entirely closed system. Once at the plant, the water passes through a
protective filter and an ultra-violet light which is required by local
government regulations to safeguard against any contamination. The water is then
treated with ozone for further protection against bacteria.
17
<PAGE>
The bottling process is conducted in a separate, sanitized fill room, where
the bottles are filled utilizing a closed system. While still in the fill room,
the bottles travel a few inches to the capper where they are sealed with a
tamper evident plastic closure. The sealed bottles then exit the fill room
where they are labeled and date coded. They are then packaged in reshipper
cases that are also date/run coded to assist in disaster recall planning. At no
time in the bottling process is anything added to or removed from the water so
that Eldorado's product is bottled naturally at the source.
With regard to the bottling process and Eldorado's facilities, it should
also be noted that Eldorado recently added significant pieces of new equipment
that will increase our production efficiencies. Specifically, Eldorado added
new filler/capper, case packer, bottle rinser, 3 and 5 gallon bottle
stacker/racker, and bottle sorter to its production line. By adding this
equipment, Eldorado anticipates that it will realize significant labor savings
over its previous production cost structure.
Water Rights
- ------------
Our existing water rights were decreed by the District Court, Water
Division No. 1, on July 11, 1973. In that Decree, the Court determined that our
water rights could be withdrawn from several points of diversion with priority
dates ranging from December 1901 to December 1960. Under Colorado law, we have
the right to beneficially use all of the water physically available from wells
and springs on our property, provided that all downstream water rights that have
earlier priority dates ("senior water rights") are being satisfied from water
available in the stream system. In the event that downstream senior water users
are not being satisfied, the State Engineer will either require us to curtail
our diversions to satisfy the "senior call" for water or require us to provide
replacement water to the stream system in an amount necessary to offset our
depletions to the stream system. In order to avoid curtailment of our
diversions, Eldorado has enrolled in a "substitute supply plan" which provides
water to the stream system to down stream water rights and, thus, protects
Eldorado's diversions from senior calls. The substitute supply plan was
approved by the State Engineer on a year-to-year basis only and does not afford
Eldorado permanent protection for its water rights. Although the State Engineer
has approved the substitute supply plan during every year that Eldorado has
owned the water rights, it is possible that the State Engineer may not continue
to do so in the future. Management has, therefore, taken steps to acquire
ownership of a replacement water source and to seek Water Court approval of a
permanent replacement water plan ("plan for augmentation") which will protect
Eldorado's water rights from senior calls on a permanent basis and which will
not require the State Engineer's annual approval. Management has entered into a
contract to acquire the replacement water source at a cost of $680,000. The
contract requires the approval of the water district and court approval of the
plan for augmentation. If Eldorado fails to obtain approval of the permanent
plan for augmentation, it will continue to need to seek approval from the State
Engineer of the substitute supply plan. If the State Engineer denies approval
of a substitute supply plan, it could harm our financial condition by causing us
to curtail our production of bottled water and hinder our ability to implement
our business plan.
Marketing
- ---------
Eldorado focuses on three major areas in marketing its products: three and
five gallon sales, small package product sales, and brand name recognition.
The three and 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 sold principally through retail chain stores are
effectively marketed by using point of purchase offers or incentives to gain new
trial, usually in the form of discounts in price.
18
<PAGE>
Eldorado attempts to build brand name awareness by sponsoring or
participating in many local events. Eldorado Artesian Springs has sponsored the
Boulder, Colorado July 4th Fireworks celebration, Eldorado Springs Cancer
Research Run, 1999 World Alpine Ski Championship and participates in part in
many other local events.
Supplies
- --------
Water bottled by Eldorado comes from springs located on Eldorado's property
which have been flowing for many years. Eldorado 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. Management has anticipated these shortages by implementing
plans to inventory sufficient safety stocks and not interrupt production.
Seasonality of Business
- -----------------------
Sales tend to be 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. Eldorado's
competitors include more diversified companies having substantially greater
assets and larger sales organizations than Eldorado, as well as other small
companies. Eldorado competes on the basis of customer service, product quality
and price. Management believes that the products' superior taste, competitive
pricing and attractive packaging are significant factors in maintaining
Eldorado's competitive position.
Environment
- -----------
Eldorado's bottling operations are subject to regulation by the FDA. These
regulations are administered by the Colorado Department of Public Health and
Environment Consumer Protection Division. An independent state-approved
laboratory conducts weekly product and source bacteriological tests and annual
inspections.
Eldorado 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
Eldorado 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 and is tested by
independent labs.
Additionally, Eldorado operates the company's public pool which is
regulated by the State of Colorado. These regulations are administered by the
Boulder County Health Department and require daily testing by Eldorado and
periodic inspections by the Health Department.
Other Businesses
- ----------------
Eldorado's principal business is bottling and selling spring water.
Eldorado also owns and operates a swimming pool on its property during the
summer months. This portion of the business accounts for approximately 2-3% of
total revenues. Eldorado also owns rental units on the property and supplies
water to some of the residential homes in Eldorado Springs. This portion of the
business accounts for approximately 2% of revenues. Neither of these businesses
represent a significant portion of Eldorado's results of operations.
19
<PAGE>
Employees
- ---------
Eldorado employs 47 full-time employees and 14 seasonal employees during
the summer resort months.
Properties
- ----------
Eldorado owns approximately 26 acres of land in Eldorado Springs, Colorado.
In addition to real property, wells and springs, and water rights, Eldorado
owns a bottling plant (including building and bottling equipment), three
buildings with a total of 2,000 square feet of office space, seven single family
homes, a mobile home park with a maximum of 12 spaces, and an outdoor swimming
pool which are located on the property. Eldorado utilizes the total production
and warehousing space of approximately 12,000 square feet. Eldorado also leases
14 delivery trucks for use in its delivery business.
20
<PAGE>
MANAGEMENT
The following table includes information about the directors and executive
officers of Eldorado. Directors serve for one year terms. Each director is
also a nominee for election to the board of directors.
<TABLE>
<CAPTION>
Tenure as Officer
Name Age Position(s) or Director
----- --- ----------- -----------------
<S> <C> <C> <C>
Douglas A. Larson 43 President and Director 1986 to present
Kevin M. Sipple 43 Vice President, Secretary 1986 to present
and Director
Jeremy S. Martin 43 Vice President and Director 1986 to present
Robert E. Weidler 53 Vice President 1998 to present
Cathleen M. Collins 30 Chief Financial Officer 1998 to present
George J. Schmitt 67 Director 1998 to present
Don P. Van Winkle 42 Director 1998 to present
</TABLE>
Douglas A. Larson was a co-founder of Eldorado and has been President of
Eldorado since 1991. Mr. Larson's responsibilities include corporate strategy
and administration of all operating activities at Eldorado. Prior to his
association with Eldorado, Mr. Larson was employed as a stock broker with
Richey-Frankel and Co. from 1981 to 1983 and with B.J. Leonard, Inc. from 1980
to 1981. Mr. Larson holds a Bachelor of Science Degree in Business Finance from
the University of Colorado.
Kevin M. Sipple was a co-founder of Eldorado and has served as Vice
President and Secretary of Eldorado since 1991. Mr. Sipple's responsibilities
include management of the wholesale products division. In addition, he is also
responsible for quality control, testing, source protection and is a licensed
Water Plant operator and manages the utility productions. Prior to his
association with Eldorado, Mr. Sipple was employed by King Soopers, Inc. from
1972 to 1983, serving in a variety of positions including inventory ordering and
control. Mr. Sipple attended the University of Colorado from 1973 to 1977.
Jeremy S. Martin was a co-founder of Eldorado and has served as Vice
President since 1985. Mr. Martin's responsibilities include management of the
five gallon sales and service business. In addition, he is also responsible for
special event promotions and public relations. Prior to his association with
Eldorado, Mr. Martin was an independent distributor for Sunasu International, a
nutritional products manufacturer. Mr. Martin holds a Bachelor of Science
Degree in Business from the University of Colorado.
Robert E. Weidler joined Eldorado in 1990 and has served as Production
Manager from 1991 to 1998. Currently, Mr. Weidler is Vice President and his
responsibilities include inventory management, daily operations for finished
goods and conforming to safety standards, health department standards and other
governmental requirements. Mr. Weidler holds a Bachelor of Science Degree in
Sociology from Michigan State University.
Cathleen M. Collins joined Eldorado in 1990 and has served as Assistant
Treasurer from 1991 to 1998. Currently, Ms. Collins is Chief Financial Officer
and her responsibilities include the procurement of financing for growth of
operations of Eldorado as well as overseeing the accounting functions for
Eldorado including the annual audit and corporate reporting. Ms. Collins holds
a Bachelor of Science Degree in Economics and a Masters of Business
Administration from the University of Colorado.
21
<PAGE>
George J. Schmitt has been a director of Eldorado since December 1998.
From 1968 to 1996, Mr. Schmitt was CEO and President of Hinckley & Schmitt
Bottled Water Group. Mr. Schmitt was a founding member of the American Bottled
Water Association (now called the International Bottled Water Association) in
1959 and was inducted into the Industry Hall of Fame in 1991. Mr. Schmitt is a
director of Eureka Bottled Water Co. and National Fuel Corporation. Mr. Schmitt
holds a Bachelor of Arts degree from Dartmouth.
Don P. Van Winkle has been a director of Eldorado since December 1998.
From 1996 to present, Mr. Van Winkle has served as President and CEO of Van
Winkle's IGA, a family owned six store retail supermarket chain in New Mexico.
From 1991 to 1996, he resided in Colorado where he provided contract Chief
Financial Officer and Advisory Services to a wide range of companies which
included Eldorado. From 1980 to 1991, Mr. Van Winkle was a corporate banker
with the two largest Colorado based bank holding companies (formerly United
Banks and First National Bancorporation). Mr. Van Winkle is a director of The
Great Divide Brewing Company (Denver, CO) and Fresh Produce Sportswear, Inc.
(Boulder, CO). He holds a Bachelor of Science Degree in Finance from New Mexico
State University.
Committee of the Board of Directors
The board of directors has elected Messrs. Larson, Schmidt and Van Winkle
to the audit committee which will serve until the next annual meeting. Among
other functions, the audit committee will make recommendations to the board of
directors regarding the selection of independent auditors, review the results
and scope of the audit and other services provided by Eldorado's independent
auditors, review Eldorado's financial statements and review and evaluate
Eldorado's internal control functions.
Compensation of Outside Directors
Each outside director receives compensation in the amount of one thousand
dollars ($1,000) for each annual or special meeting of the Board he attends in
person or by qualified electronic means. In addition, each outside director
will receive compensation in the amount of five hundred dollars ($500) for each
committee meeting he attends in person or by electronic means. On December 7,
1998, Eldorado granted a total of 150,000 ten-year options to its outside
directors which are exercisable at $2.75 per share. Assuming the outside
directors remain directors of Eldorado, the options vest at the rate of 25%
each year beginning one year after the date of grant.
In addition, if Eldorado engages an outside director as an independent
consultant, for such duties and responsibilities as the President determines,
the outside director will be compensated at the rate of one hundred fifty
dollars ($150) per hour, plus nominal travel expenses as agreed upon when
necessary.
There are no family relationships between any directors or executive
officers of Eldorado.
Summary Compensation Table
The following table sets forth the compensation of Eldorado's President,
Douglas A. Larson, for the fiscal years ended March 31, 1996, 1997 and 1998. No
other executive officer receives annual compensation in excess of $100,000 per
year.
Annual Compensation
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
Douglas A. Larson 1998 $ 66,832 - $9,848
1997 71,524 - 4,690
1996 102,618 - 4,690
</TABLE>
Other annual compensation in the table above includes $4,690 annual health
care premiums for all three years and a 3% match for all contributions to the
401(k) plan and a car allowance of $5,158 for 1998.
22
<PAGE>
In 1992, Eldorado went through a restructuring of debt. The lender
offering the debt would not assume all corporate debt outstanding. In order to
complete the restructuring, a portion of Eldorado's debt was replaced by Mr.
Larson, who assumed this obligation personally and his salary was increased from
1992-1997 to cover the cost of the note.
Stock Option Plan
On September 10, 1997 Eldorado adopted a stock option plan which set aside
875,000 shares for the grant of non-qualified stock options and incentive stock
options. The stock option plan is administered by the board of directors.
All officers, employees and directors of Eldorado and any subsidiaries are
eligible to receive options under the stock option plan. The stock option plan
will terminate by its terms on September 10, 2007, and also may be terminated at
any time by the exercise of all outstanding options.
Options granted may be exercisable for up to ten years. If any options
granted under the stock option plan expire, terminate or are canceled for any
reason without having been exercised in full, shares reserved for those options
will again be available for the purposes of the stock option plan. The purchase
price of the common stock under each option will not be less than the fair
market value of the common stock on the date on which the option is granted.
The option price is payable either in cash, by the delivery of shares, or a
combination of cash and shares.
Options will be exercisable immediately, after a period of time or in
installments at the discretion of the board of directors. Options will
terminate no later than the expiration of ten years from the date of grant, or
will terminate due to the end of service. Where termination of service is due
to retirement or death, options may be exercised for an additional period of
time following such termination of service. Otherwise, the option may be
exercised only while the employee remains in the employ of Eldorado or one of
its subsidiaries.
As of December 31, 1998, there were options to purchase an aggregate of
495,500 shares of common stock outstanding, of which 113,500 are fully vested.
All of the options were granted at $2.75 per share, representing 100% of fair
market value on the date of grant. Eldorado will not grant options in excess of
15% of its outstanding shares for the one year period after the closing of this
offering.
23
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Eldorado
regarding the beneficial ownership of Eldorado's common stock at the date of
this prospectus, and adjusted to reflect the sale of the common stock offered in
this prospectus. The table includes:
. each person known by Eldorado to beneficially own more than 5% of
Eldorado's common stock;
. Eldorado's directors, and
. the officers and directors of Eldorado as a group.
<TABLE>
<CAPTION>
Percent Owned
----------------------------------------
Number of Before After
Name and Address of Beneficial Owners Shares Offering Offering
- ------------------------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Kevin M. Sipple....................................... 763,674 25.4% 20.6%
43 Fowler Lane
Eldorado Springs, CO 80025
Douglas A. Larson...................................... 770,673 25.7% 20.9%
12 Baldwin Circle
Eldorado Springs, CO 80025
Jeremy S. Martin....................................... 771,060 25.7% 20.9%
2707 - 4th Street
Boulder, CO 80302
George J. Schmitt...................................... 0 --- ---
11 Castle Pines N.
Castle Rock, CO 80104
Don P. Van Winkle...................................... 0 --- ---
1600 Indian Wells
Alamogordo, NM 88310
All Officers and Directors as a Group (seven persons).. 2,375,407 77.3% 63.0%
- ----------------------
</TABLE>
Mr. Larsons's shares include options to purchase 7,000 shares held by Mr.
Larson's spouse which are currently exercisable. The shares owned by all
officers and directors as a group include options to purchase 35,000 shares each
held by Ms. Collins and Mr. Weidler which are currently exercisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the three years ended March 31, 1998, there were no transactions in
which the amount involved exceeded $60,000 between Eldorado and any director,
executive officer, any security holder known to own more than five percent of
Eldorado's stock, or any immediate family member of any of the foregoing persons
except as follows:
During the fiscal year ended March 31, 1996, proceeds from a bank loan were
used to pay off the note payable of $158,000 to Mr. Larson's father. Mr.
Larson's father used the payment received on the note to gift $90,485 back to
Mr. Larson to pay off notes due to Eldorado. Additionally, his father purchased
15,000 shares of Eldorado's common stock.
No other related transactions are currently proposed. All future affiliated
transactions will be made or entered into on terms that are no less favorable to
Eldorado than those that can be obtained from any unaffiliated third party. In
addition, a majority of the independent, disinterested members of Eldorado's
board of directors will approve future affiliates transactions and forgiveness
of loans.
24
<PAGE>
LEGAL PROCEEDINGS
Eldorado is not involved in any material legal proceedings.
HISTORY OF SECURITY PLACEMENTS
12 for 1 Reverse Stock Split
In February 1998, Eldorado's board of directors approved a 12 for 1 reverse
stock split. This reverse stock split was submitted to shareholder vote in
March 1998, and was effective on April 1, 1998.
Historical Stock Issuances
The founders of Eldorado operated the company as a private company from
April 1983 until April 1987 when it was merged into Lexington Funding, Inc.
Lexington Funding, Inc. 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 Lexington Funding, Inc. was directed to
organizational efforts and obtaining initial financing. Lexington Funding, Inc.
sold 208,333 shares of its $.001 par value common stock at $1.20 per share for
total proceeds of $250,000 in a public offering which closed on December 17,
1986.
Lexington Funding, Inc. acquired all of the shares of Eldorado through a
stock exchange. Pursuant to the merger of Eldorado and Lexington, Eldorado
shareholders received an aggregate of 2,340,000 shares of Lexington Funding,
Inc.'s common stock, representing 90% of the outstanding shares of Lexington
Funding, Inc. after the acquisition. The number of Eldorado shares of Lexington
Funding, Inc. stock exchanged in the acquisition was determined through arms-
length negotiations. In June 1988, Lexington changed its name to Eldorado
Artesian Springs, Inc.
1998 Private Placement
In April 1998, Eldorado closed on a private placement of 300,000 shares
of its common stock at $2.75 per share to accredited investors through Mills
Financial Services, Inc. Gross proceeds from the private placement were
$825,000. The net proceeds of $662,000 from the offering were applied to:
purchase of machinery and equipment ($250,000);
PET distribution expenses ($150,000);
working capital ($112,000) and
an escrow for public offering expenses ($150,000).
DESCRIPTION OF SECURITIES
General
Eldorado is authorized to issue 50,000,000 shares of common stock,
$0.001 par value. As of the date of this prospectus, and before the closing of
this offering, 2,995,495 shares of common stock were issued and outstanding. The
outstanding common stock is fully paid and non-assessable.
Common Stock
The holders of common stock are entitled to one vote per share. No
cumulative voting is required or permitted. Therefore, the holders of a majority
of shares voting for the election of directors can elect all directors, if they
vote the same, and the remaining holders will not be able to elect any
directors.
Holders of common stock are entitled to receive such dividends, if any,
as the board of directors may from time to time declare out of funds Eldorado
has legally available for the payment of dividends. Holders of the common stock
are entitled to share pro rata in any dividends declared. It is not anticipated
that dividends will be
25
<PAGE>
paid in the near future. Future dividend policy will depend upon conditions
existing at that time, including Eldorado's earnings and financial condition.
Upon liquidation, dissolution or winding-up of Eldorado, stockholders
are entitled to receive pro rata all of the assets of Eldorado available for
distribution to stockholders. Stockholders of Eldorado do not have preemptive
rights or other rights to subscribe for or purchase any stock, options, warrants
or other securities offered by Eldorado.
Warrants
1998 Warrants
In connection with the 1998 private placement, Eldorado issued to Mills
Financial Services, Inc. for a price of $100.00, a warrant to purchase 250,000
shares of common stock at an exercise price of $11.00 per share. The warrant
will be exercisable at any time after April 22, 1999, but no later than April
22, 2003. The warrant provides for a single demand right of registration for the
shares underlying the warrant and provides for additional rights to register the
underlying shares on registration statements filed by Eldorado, including the
registration statement of which this prospectus is a part.
In connection with the 1998 private placement, Eldorado issued to Mills
Financial Services, Inc. for a price of $100, a warrant to purchase 30,000
shares of common stock at an exercise price of $3.30 per share. The warrant will
be exercisable at any time after April 22, 1999, but no later than April 22,
2003. The warrant provides for a single demand right of registration for the
shares underlying the warrant and provides for additional rights to register the
underlying shares on registration statements filed by Eldorado, including the
registration statement of which this prospectus is a part.
Representative's warrant
Eldorado has agreed to issue for $700 a warrant entitling the
underwriter to purchase shares of Eldorado's common stock in an amount equal to
ten percent (10%) of the shares sold in this offering (not including any shares
sold pursuant to the over-allotment option), at an exercise price of one hundred
sixty-five percent (165%) of the public offering price exercisable any time, in
whole or in part, between the first and fifth anniversary dates of the effective
date of this offering. The warrant exercise price is subject to customary anti-
dilution provisions. At any time during the exercise term, the holders of a
majority of these securities shall have the right to require Eldorado to prepare
and file one (1) post-effective amendment to the registration statement relating
to this offering, or a separate registration statement, if then required under
applicable law, covering all or any portion of the securities. In addition, for
a period of five (5) years after the effective date of the registration
statement relating to this offering, the holders of these securities have
unlimited registration rights to include their shares in an offering by
Eldorado.
Transfer Agent and Warrant Agent
Corporate Stock Transfer, Inc. has been appointed registrar and transfer
agent for the common stock and the warrant agent for the warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, Eldorado will have 3,695,495 shares of
common stock outstanding (3,800,495 if the over-allotment option is exercised in
full). Of these shares, 988,091 (1,093,091 if the over-allotment option is
exercised in full) will be freely tradeable without restriction or registration
under the Securities Act of 1933, as amended, unless held by affiliates of
Eldorado. All of the remaining 2,707,404 shares will be restricted securities as
that term is defined in Rule 144 promulgated under the Securities Act and may
only be sold in the public market if such shares are registered under the
Securities Act or sold in accordance with Rule 144 promulgated thereunder.
In general, under Rule 144 a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned his shares for
one year, may sell in the open market within any three-month period a
number
26
<PAGE>
of shares that does not exceed the greater of (1) 1% of the outstanding shares
of Eldorado's common stock (approximately 36,955 shares or approximately 38,005
shares if the over-allotment option is exercised in full), or (2) the average
weekly trading volume in the common stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
limitations on the manner of sale, notice requirements and availability of
current public information about Eldorado. A person (or persons whose shares are
aggregated) who is deemed not to be an "affiliate" or a recent "affiliate" of
Eldorado and who has beneficially owned his shares for at least two (2) years,
may sell such shares in the public market under Rule 144(k) without regard to
the volume limitations, manner of sale provisions, notice requirements or
availability of current information provisions referred to above. Restricted
shares properly sold in reliance upon Rule 144 are thereafter freely tradeable
without restrictions or registration under the Act, unless thereafter held by an
"affiliate" of Eldorado.
Of the 2,707,404 restricted shares currently outstanding, a total of 2,298,407
shares are held by Douglas A. Larson, Kevin M. Sipple, and Jeremy S. Martin,
officers and directors of Eldorado or their affiliates. Messrs. Larson, Sipple
and Martin and certain other employees holding options which are exercisable
immediately entered into agreements not to sell any shares for a period of six
months following the date of this prospectus (except pursuant to privately
negotiated transactions or by exercise of stock options). As affiliates of
Eldorado, Messrs. Larson, Sipple and Martin will be further subject to the
volume limitations of Rule 144(e)(1) with respect to any such sales. Of the
restricted shares outstanding, 108,997 shares were acquired from Eldorado by
non-affiliates more than two (2) years prior to the date of this prospectus.
The balance of 300,000 of the restricted shares were acquired from Eldorado by
non-affiliates in April 1998, and are therefore eligible for sale under Rule
144(e)(2) subject to certain volume restrictions commencing April 1999. The
underwriter has no plans, proposals, arrangements or understanding regarding
waiver of the lock up agreements. Additionally, 875,000 shares of Eldorado's
common stock are reserved for issuance under Eldorado's stock option plan, of
which 495,500 are outstanding. Of the 495,500 options outstanding, 113,500
options are immediately exercisable and saleable.
Future sales of substantial amounts of common stock in the public market, or
the availability of such shares for future sale, could impair Eldorado's
ability to raise capital through an offering of securities and may adversely
affect the then-prevailing market prices for Eldorado's stock.
27
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting
agreement dated the date hereof, the underwriters named below, through their
representative Mills Financial Services, Inc., have each agreed to purchase from
Eldorado the number of shares of common stock set forth opposite their names
below:
NUMBER
UNDERWRITERS OF SHARES
Mills Financial Services, Inc.................. ___________
Total........................... ___________
The underwriting agreement provides that the obligation of the
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, except those covered
by the over-allotment option described below, if they purchase any of the
shares.
The underwriters propose to offer some of the shares to the public at
the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession of not more than $0.35 per share. After the initial public offering,
the offering price and other selling terms may be changed by Mills Financial
Services, Inc., the representative of the underwriters.
Eldorado has granted to the underwriters an over-allotment option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to 105,000 additional shares at the public offering price less the
underwriting discount. The underwriters may exercise this over-allotment option
solely for the purpose of covering over-allotments, if any, in connection with
this offering. To the extent the over-allotment option is exercised, each
underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares approximately proportionate to such underwriter's
initial purchase commitment.
The following table shows the underwriting discount to be paid to the
underwriters by Eldorado in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' over-
allotment option to purchase additional shares to cover over-allotments.
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................... $ 0.60 $ 0.60
Total....................... $ 420,000 $ 483,000
Eldorado has agreed to pay to Mills Financial Services, Inc., a non-
accountable expense allowance of 3% of the gross proceeds received by Eldorado
from the sale of the shares. A total of $90,000 has been paid as of the date of
this prospectus. The following table shows the amount of the non-accountable
expense allowance to be paid assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares to cover over-
allotments.
NO EXERCISE FULL EXERCISE
----------- -------------
Total allowance............. $ 126,000 $ 144,900
At the closing of this offering, and subject to the terms and
conditions of the underwriting agreement, Eldorado has agreed to sell to Mills
Financial Services, Inc. for $700 a representative's warrant which grants to
Mills Financial Services, Inc. the right to purchase up to 70,000 shares at a
price equal to 165% of the public offering price. The representatives's warrant
may be exercised for a four-year period beginning one year from the date of this
prospectus. For a period of one year from the date of this prospectus, the
Representative's Warrant will be restricted from sale, transfer, assignment or
hypothecation except to officers of Mills Financial Services, Inc.,
28
<PAGE>
other underwriters or their officers. The representative's warrant will also
contain anti-dilution provisions providing for appropriate adjustment of the
exercise price and number of shares which may be purchased upon exercise upon
the occurrence of certain events. The representative's warrant also provides
for a one-time right to require Eldorado, at its expense, to register with the
SEC the shares purchased upon exercise of the representative's warrant. Also
the representative's warrant provides the right to request that the shares
purchased upon exercise of the representative's warrant be included in certain
registration statements, if any, filed by Eldorado with the SEC to register
other shares. Each of these registration rights will be exercisable during the
four-year period beginning one year from the date of this prospectus and
terminating five years from the date of this prospectus.
Eldorado has also agreed that Mills Financial Services, Inc. will have
the right of first refusal for three years from the date of this prospectus to
manage, underwrite or purchase for its own account any securities sold by
Eldorado or its subsidiaries or successors or, subject to certain exceptions,
sold by shareholders of Eldorado owning more than ten percent (10%) of the
outstanding common stock. Eldorado may cancel this right of first refusal upon
the payment of $21,500 to Mills Financial Services, Inc.
Eldorado has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Eldorado's officers and directors, and certain persons to whom options
have been issued pursuant to Eldorado's stock option plan have agreed that, for
a period of 180 days from the date of this prospectus, they will not, without
prior written consent of Mills Financial Services, Inc., offer, sell, contract
to sell, or otherwise dispose of, any shares of common stock of Eldorado. Mills
Financial Services, Inc., in its sole discretion, may release any of the common
stock subject to these lock-up agreements at any time without notice.
Mills Financial Services has advised Eldorado that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
In April 1998, Mills Financial Services, Inc. acted as placement agent
in the sale by Eldorado of 300,000 shares of common stock at $2.75 per share.
As compensation for its service as placement agent, Mills Financial Services,
Inc. received $82,500 in commissions, a non-accountable expense allowance of
$24,750; and a warrant to purchase 30,000 shares of Eldorado common stock at
$3.30 per share, subject to adjustment under certain circumstances. In
addition, on April 22, 1998, Mills Financial Services, Inc. purchased from
Eldorado for $100, a warrant to purchase 250,000 shares of common stock at
$11.00 per share, subject to adjustment under certain circumstances. This
warrant is exercisable at any time during the four-year period commencing on
April 22, 1999 and contains certain rights of registration. Also, on April 22,
1998, in connection with a consulting agreement with Eldorado dated September
10, 1997, Mills Financial Services, Inc. received $25,000 in compensation for
providing investment banking services to Eldorado.
Prior to this offering, there has been only a sporadic public market
for Eldorado's common stock. Consequently, the public offering was determined
by negotiation between Eldorado and Mills Financial Services, Inc. Among the
factors considered in determining the public offering price were:
prevailing market conditions;
Eldorado's results of operations in recent periods;
the present stage of Eldorado's development;
estimates of Eldorado's business potential; and
the current condition of the bottled water industry.
In connection with this offering, certain underwriters, but not Mills
Financial Services, Inc. and selected dealers may engage in transactions that
stabilize, maintain or otherwise affect the market price for the common stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934,
pursuant to which such persons may bid for or purchase shares of common stock
for the purpose of pegging, fixing or maintaining the price of the common
shares.
29
<PAGE>
The underwriters also may create a short position for the account of
the underwriters by selling more shares of common stock in connection with this
offering than they are committed to purchase from Eldorado. The underwriters
may elect to cover any such short position by purchasing shares of common stock
in the open market or by exercising the over-allotment option granted to Mills
Financial Services, Inc. In addition, Mills Financial Services, Inc., on behalf
of the underwriters, may impose penalty bids under contractual arrangements with
the other underwriters whereby it may reclaim from an underwriter (or selected
dealer) for the account of the other underwriters, the selling concession with
respect to shares of common stock that are distributed in this offering but
subsequently purchased for the account of the underwriters in the open market.
Any of the transactions described in this paragraph and the preceding paragraph
may result in the maintenance of the price of the common stock at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, may be
discontinued at any time.
The expenses of the offering, other than underwriting discounts and
non-accountable expense allowance, are set forth below:
SEC Registration Fee $ 1342
NASD Filing Fee 983
NASDAQ Small-Cap Listing Fee 10,000
Accounting Fees and Expenses* 25,000
Printing and Engraving* 35,000
Legal Fees and Expenses* 50,000
Blue Sky Fees and Expenses* 15,000
Transfer Agent and Registrar Fees* 1,000
Miscellaneous Expenses* 675
--------
Total $139,000
*Estimated
Mills Financial Services, Inc. has previously participated as lead
underwriter in one initial public offering on a firm commitment basis. This
initial public offering was completed in May 1998. Accordingly, Mills Financial
Services, Inc. has limited experience as manager or underwriter of public
offerings of securities. In addition, Mills Financial Services, Inc. is a small
firm and does not intend to participate as a market maker in the shares. No
assurance can be given that any broker-dealer will become or continue to be a
market maker in the stock.
COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Eldorado
pursuant to its bylaws, or otherwise, Eldorado has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act, and therefore, is unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by Eldorado
of expenses incurred or paid by a director, officer or controlling person of
Eldorado in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Eldorado will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
30
<PAGE>
LEGAL MATTERS
The legality of the shares offered in this prospectus, will be handled
for Eldorado by Chrisman, Bynum & Johnson, P.C. Peter B. Shaeffer, Esq. will
handle certain legal matters for the underwriter.
EXPERTS
The financial statements of Eldorado as of March 31, 1998 and the
years ended March 31, 1998 and 1997 have been included in reliance upon the
report of Ehrhardt Keefe Steiner & Hottman, P.C., independent certified public
accountants. With respect to the unaudited interim financial information for
the nine months ended December 31, 1998 and 1997, the independent certified
public accountants, have not reviewed or audited such financial information and
have not expressed an opinion or any other form of assurance with respect to
such financial information.
31
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report.............. F - 2
Financial Statements
Balance Sheets..................... F - 3
Statements of Operations........... F - 4
Statement of Stockholders' Equity.. F - 5
Statements of Cash Flows........... F - 6
Notes to Financial Statements............. F - 8
</TABLE>
F-1
<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 Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
---------------------- -----------------------
<S> <C> <C>
(Unaudited)
Assets
Current assets (Notes 3 and 4)
Cash $ 70,166 $ 208,861
Accounts receivable (Note 2)
Trade - net 498,320 570,669
Other 5,506 9,193
Inventories 122,701 246,704
Prepaid expenses and other 48,313 19,183
Deferred income taxes (Note 5) 16,829 4,633
---------- ----------
Total current assets 761,835 1,059,243
---------- ----------
Property, plant and equipment - net (Notes 2, 3 and 4) 1,525,370 1,763,230
---------- ----------
Other assets (Notes 3 and 4)
Water rights - net (Note 2) 114,618 111,252
Restricted cash - 125,000
Deferred offering costs - 41,493
Other 54,898 63,946
---------- ----------
Total other assets 169,516 341,691
---------- ----------
$2,456,721 $3,164,164
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 129,747 $ 92,871
Accrued expenses (Note 2) 79,130 45,428
Line-of-credit (Note 4) 40,000 -
Deposits 49,178 44,136
Current maturities of long-term debt (Note 3) 123,005 177,770
---------- ----------
Total current liabilities 421,060 360,205
Long-term liabilities
Long-term debt (Note 3) 1,431,820 1,396,801
Deferred income taxes (Note 5) 52,921 54,795
---------- ----------
Total long-term liabilities 1,484,741 1,451,596
---------- ----------
Total liabilities 1,905,801 1,811,801
---------- ----------
Commitments (Notes 3, 4 and 6)
Stockholders' equity (Note 7)
Common stock, par value $.001 per share; 50,000,000 shares
authorized; 2,695,495 (March 31, 1998) and 2,995,495 (December 31,
1998) issued and outstanding 2,695 2,995
Additional paid-in capital 294,875 984,656
Retained earnings 253,350 364,712
---------- ----------
550,920 1,352,363
---------- ----------
$2,456,721 $3,164,164
========== ==========
See notes to financial statements.
</TABLE>
F-3
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Statements of Operations
<TABLE>
<CAPTION>
Years Ended For the Nine Months Ended
March 31, December 31,
------------------------------------ --------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue
Water and related $3,211,807 $2,521,642 $2,861,942 $2,351,148
Rentals 49,288 47,460 83,030 68,350
Pool 68,349 75,419 36,250 42,598
---------- ---------- ---------- ----------
Net revenue 3,329,444 2,644,521 2,981,222 2,462,096
Cost of goods sold exclusive of
depreciation and amortization 501,288 415,263 381,584 362,822
---------- ---------- ---------- ----------
Gross profit 2,828,156 2,229,258 2,599,638 2,099,274
---------- ---------- ---------- ----------
Operating expenses
Salaries and related 1,310,303 987,703 1,162,449 982,628
Administrative and general 557,892 437,375 580,970 341,988
Selling and delivery 422,462 288,681 373,819 271,408
Depreciation and amortization 277,914 217,977 246,371 199,014
---------- ---------- ---------- ----------
2,568,571 1,931,736 2,363,609 1,795,038
---------- ---------- ---------- ----------
Operating income 259,585 297,522 236,029 304,236
---------- ---------- ---------- ----------
Other income (expense)
Interest income 3,720 1,000 14,078 3,711
Interest expense (142,803) (111,308) (107,335) (108,066)
Loss on sale of assets (2,871) - - -
---------- ---------- ---------- ----------
(141,954) (110,308) (93,257) (104,355)
---------- ---------- ---------- ----------
Income before income taxes 117,631 187,214 142,772 199,881
---------- ---------- ---------- ----------
Provision for income taxes (Note 5) 34,403 63,062 31,410 41,140
---------- ---------- ---------- ----------
Net income and comprehensive income $ 83,228 $ 124,152 $ 111,362 $ 158,741
========== ========== ========== ==========
Basic and diluted earnings per share $0.03 $0.05 $0.04 $0.06
========== ========== ========== ==========
Weighted average number of shares
outstanding 2,695,495 2,695,495 2,972,586 2,695,495
========== ========== ========== ==========
See notes to financial statements.
</TABLE>
F-4
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Statement of Stockholders' Equity
Years Ended March 31, 1998 and 1997
and for the Nine Months Ended December 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1997 2,695,495 $2,695 $294,875 $170,122 $ 467,692
Net income for the year - - - 83,228 83,228
--------- ------ -------- -------- ----------
Balance - March 31, 1998 2,695,495 2,695 294,875 253,350 550,920
--------- ------ -------- -------- ----------
Sale of common stock (Note7) 300,000 300 689,781 - 690,081
Net income for the period
April 1, 1998 to December
31, 1998 (unaudited) - - - 111,362 111,362
--------- ------ -------- -------- ----------
Balance - December 31,
1998 (unaudited) 2,995,495 $2,995 $984,656 $364,712 $1,352,363
========= ====== ======== ======== ==========
See notes to financial statements.
</TABLE>
F-5
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended For the Nine Months Ended
March 31, December 31,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------------------ ---------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 83,228 $ 124,152 $ 111,362 $ 158,741
----------- --------- --------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 277,914 217,977 246,371 199,014
Loss on sale of asset 2,871 - - -
Deferred income taxes 14,720 16,929 14,070 -
Changes in certain assets and liabilities -
Accounts receivable (221,480) (42,994) (76,036) (197,642)
Inventories (30,153) 3,662 (124,003) (42,471)
Prepaid expenses and other (37,420) 5,890 19,130 1,126
Accounts payable 31,944 44,205 (36,876) 52,213
Accrued expenses (10,765) 8,942 (33,702) (3,912)
Deposits 15,620 9,695 (5,042) (2,564)
----------- --------- --------- -----------
43,251 264,306 3,912 5,764
----------- --------- --------- -----------
Net cash provided by operating
activities 126,479 388,458 115,274 164,505
----------- --------- --------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (535,578) (176,207) (365,091) (563,963)
Proceeds from sale of asset 2,750 - - -
----------- --------- --------- -----------
Net cash flows used in investing
activities (532,828) (176,207) (365,091) (563,963)
----------- --------- --------- -----------
Cash flows from financing activities
Proceeds from line-of-credit 40,000 - - -
Proceeds from additions to long-term debt 1,500,000 - - 1,500,000
Loan fees and origination cost (19,776) - - (17,534)
Payments on line-of-credit - - (40,000) -
Payments on long-term debt (1,288,474) (56,775) (95,076) (1,261,320)
Proceeds from sale of common stock - - 825,000 -
Costs related to issuance of common stock - - (134,919) -
Deferred offering cost - - (41,493) -
Restricted cash - - (125,000) -
----------- --------- --------- -----------
Net cash flows provided by (used in)
financing activities ----------------- --------------- ---------------- ----------------
231,750 (56,775) 388,512 221,146
----------- --------- --------- -----------
Net (decrease) increase in cash (174,599) 155,476 138,695 (178,312)
Cash - beginning of period 244,765 89,289 70,166 244,765
----------- --------- --------- -----------
Cash - end of period $ 70,166 $ 244,765 $ 208,861 $ 66,453
=========== ========= ========= ===========
Continued on next page.
See notes to financial statements.
</TABLE>
F-6
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Statements of Cash Flows
Continued from previous page.
Supplemental disclosures of cash flow information:
Cash paid during the year for interest was $142,803 and $111,308 (March 31,
1998 and 1997, respectively) and $107,335 and $108,066 (December 31, 1998
and 1997, respectively).
Cash paid during the year for income taxes was $33,844 and $44,445 (March
31, 1998 and 1997, respectively) and $17,339 and $20,132 (December 31, 1998
and 1997, respectively).
Supplemental disclosure of noncash investing activity:
During the year ended March 31, 1998 and nine months ended December 31,
1998, equipment was acquired through a capital lease for $41,050 and
$114,822, respectively.
See notes to financial statements.
F-7
<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.
Interim Financial Statements
- ----------------------------
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position of the Company at December 31, 1998 and
the results of its operations and changes in cash flows for the nine months
ended December 31, 1998 and 1997. The results of operations for the nine months
ended December 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
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, 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.
Deferred Offering Costs
- -----------------------
Deferred offering costs represent amounts paid in connection with a future stock
offering. Such amounts are capitalized upon a successful offering or expensed
if the offer is never consummated.
F-8
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
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.
Stock Based Compensation
- ------------------------
The Company has adopted SFAS 123 "Accounting for Stock-Based Compensation" (SFAS
123), which requires disclosure of the fair value and other characteristics of
stock options (Note 7). The Company has chosen under the provisions of SFAS 123
to continue using the intrinsic-value method of accounting for employee stock-
based compensation in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25).
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.
Reclassifications
- -----------------
Certain amounts for the year ended March 31, 1997 and nine months ended December
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.
F-9
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
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 and December 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-10
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 2 - Selected Balance Sheet Information
- -------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
-------------------- ----------------------
<S> <C> <C>
(Unaudited)
Accounts receivable
Trade $ 508,320 $ 580,669
Less allowance for doubtful accounts (10,000) (10,000)
----------- -----------
$ 498,320 $ 570,669
=========== ===========
Property, plant and equipment
Land $ 225,194 $ 225,194
Buildings and improvements 1,101,748 1,163,335
Machinery and equipment 1,706,460 2,058,349
Vehicles 19,831 19,831
Office furniture and fixtures 84,250 147,287
----------- -----------
3,137,483 3,613,996
Less accumulated depreciation (1,612,113) (1,850,766)
----------- -----------
$ 1,525,370 $ 1,763,230
=========== ===========
Other assets
Water rights $ 179,500 $ 179,500
Less accumulated amortization (64,882) (68,248)
----------- -----------
$ 114,618 $ 111,252
=========== ===========
Accrued expenses
Property taxes $ 20,973 $ 13,086
Sales tax 9,408 10,698
Income taxes 16,597 2,586
Payroll and payroll taxes 32,152 19,058
----------- -----------
$ 79,130 $ 45,428
=========== ===========
</TABLE>
F-11
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 3 - Long-Term Debt
- -----------------------
<TABLE>
<CAPTION>
Note Payable to Bank March 31, December 31,
- -------------------- 1998 1998
------------------- --------------------
<S> <C> <C>
(Unaudited)
Note payable to bank due June 20, 2012, interest at bank
prime plus .5% (9% at March 31, 1998 and 8% at December 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 $1,139,243
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. 263,797 224,768
Capital Lease
- -------------
Capital lease for equipment. Monthly minimum lease payments
of $3,159, due April 1, 2002. 82,286 112,641
Capital lease for equipment. Monthly minimum lease payments
of $3,274, due April 25, 2001. 41,050 97,918
---------- ----------
$1,554,825 $1,574,570
========== ==========
</TABLE>
The cost of equipment under capital lease at March 31, 1998 and December 31,
1998 was $143,305 and $190,060 with accumulated depreciation of $25,404 and
$45,775, respectively.
F-12
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 3 - Long-Term Debt (continued)
- -----------------------------------
Future maturities of long-term debt:
<TABLE>
<CAPTION>
Notes Capital
Year Ending March 31, 1998 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
---------- -------- ----------
1,431,489 159,666 1,591,155
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>
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 and December 31, 1998 was $40,000 and $0,
respectively.
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.
F-13
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 5 - Income Taxes (continued)
- ---------------------------------
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, December 31,
1998 1998
--------------------- ----------------------
<S> <C> <C>
(Unaudited)
Current deferred tax asset $16,829 $ 4,633
Current deferred tax liability - -
------- -------
Net current deferred tax asset $16,829 $ 4,633
======= =======
Long-term deferred tax asset $ - $ -
Long-term deferred tax liability 52,921 54,795
------- -------
Net long-term deferred tax liability $52,921 $54,795
======= =======
</TABLE>
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months Ended
March 31, December 31,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(Unaudited)
Current $19,683 $46,133 $20,416 $26,741
Deferred 14,720 16,929 10,994 14,399
------- ------- ------- -------
Total $34,403 $63,062 $31,410 $41,140
======= ======= ======= =======
</TABLE>
F-14
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 5 - Income Taxes (continued)
- ---------------------------------
The following is a reconciliation of income taxes at the Federal Statutory rate
with income taxes recorded by the Company.
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months Ended
March 31, December 31,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(Unaudited)
Computed income taxes at statutory rate
- net of surtax $31,503 $57,862 $28,910 $37,840
State income taxes, net of Federal
income tax benefit and other 2,900 5,200 2,500 3,300
------- ------- ------- -------
$34,403 $63,062 $31,410 $41,140
======= ======= ======= =======
</TABLE>
Income tax amounts for unaudited periods are calculated using estimates based on
projected year end income.
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, December 31,
1998 1998
-------------------- --------------------
<S> <C> <C>
(Unaudited)
Differences related to fixed assets $(43,366) $(58,691)
Differences related to other assets (9,555) (8,300)
Allowance for doubtful accounts 3,633 3,633
Alternative minimum tax and ITC credit carryforward 13,196 13,196
-------- --------
$(36,092) $(50,162)
======== ========
</TABLE>
F-15
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 6 - Commitments
- --------------------
The Company has various long-term leases for delivery trucks and equipment. The
following is a schedule by year of future minimum lease payments as of March 31,
1998.
<TABLE>
<CAPTION>
March 31
Year Ending March 31, 1998
- ----------------------------------------------------------- ---------------------
<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 the years ended March 31, 1998 and 1997 was $133,948
and $96,800, respectively. Total rent expense for the nine months ended
December 31, 1998 and 1997 was $121,883 and $95,142, respectively.
Note 7 - 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. Accordingly, all weighted average share
and per share information throughout the financial statements has been restated
for periods prior to the reverse 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
secondary public offering.
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 are exercisable beginning April 22, 1999 and
expire on April 22, 2003.
F-16
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Financial Statements
Note 7 - 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 the interest
of the Company.
As of December 31, 1998, 495,500 options were outstanding, of which 113,500 are
fully vested. 348,000 of the options were issued on May 26, 1998 and 150,000
were issued on December 7, 1998, with an option price of $2.75 per share, fair
market value at the date of grant. Of the remaining 382,000 options, 68,700
vest in 1999, 71,900 in 2000, 75,100 in 2001, 79,300 in 2002, 45,000 in 2003,
13,000 in 2004, 14,000 in 2005 and 15,000 in 2006. Options will terminate no
later than the expiration of ten years from the date of grant, subject to
earlier termination due to termination of service.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net income and income per share would
have been decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Nine
Months Ended
December 31,
1998
-------------
<S> <C>
Net income - as reported 111,362
Net loss - pro forma (10,282)
Basic income per share - as reported .04
Basic loss per share - pro forma -
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0%; expected volatility of 1%; discount rate of
5.0% and expected lives of 10 years.
F-17
<PAGE>
================================================================================
No dealer, sales person or any other person is authorized to give any
information or to make any representation other than those contained in this
prospectus in connection with this offering. You may not rely on such
information or representations as having been given or made by Eldorado or any
underwriter. This prospectus is not an offer to sell or a solicitation of an
offer to buy the securities in any state where such offer or solicitation is not
permitted. Delivery of this prospectus or any sale of the securities is not an
indication that Eldorado's business has not changed since the date of this
prospectus or that information in the prospectus is correct as of any time after
the date of this prospectus.
---------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary............................................................. 1
Eldorado Artesian Springs............................................ 1
Key Facts............................................................ 1
Summary of Financial Information..................................... 2
Risk Factors................................................................... 3
Additional Information......................................................... 7
Forward-Looking Information and Associated Risks............................... 7
Use of Proceeds................................................................ 8
Determination of the Offering Price............................................ 9
Dilution....................................................................... 9
Capitalization................................................................. 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................10
Eldorado and its Business......................................................14
Management.....................................................................21
Principal Stockholders.........................................................24
Certain Relationships and Related
Transactions.........................................................24
Legal Proceedings..............................................................25
History of Security Placements.................................................25
Description of Securities......................................................25
Shares Eligible for Future Sale................................................26
Underwriting...................................................................28
Commission Position on Indemnification for
Securities Act Liabilities...........................................30
Legal Matters..................................................................31
Experts........................................................................31
Index to Financial Statements.................................................F-1
-------------------------
</TABLE>
Dealer prospectus delivery obligation until ______, 1999. All dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the obligation
of dealers to deliver a prospectus as when acting as underwriters and with
respect to their unsold allotments or subscriptions.
================================================================================
700,000 shares
of
Common Stock
ELDORADO ARTESIAN
SPRINGS, INC.
--------------------------------
PROSPECTUS
--------------------------------
Mills Financial Services, Inc.
_______, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The articles of incorporation and bylaws of Eldorado provide that
Eldorado shall indemnify to the fullest extent permitted by Colorado law any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, by reason of the
fact that he or she is or was a director or officer of Eldorado or is or was
serving at the request of Eldorado in any capacity and in any other corporation,
partnership, joint venture, trust or other enterprise. The Colorado Business
Corporation Act (the "Colorado Act") permits Eldorado to indemnify an officer or
director who was or is a party or is threatened to be made a party to any
proceeding because of his or her position, if the officer or director acted in
good faith and in a manner he or she reasonably believed to be in the best
interests of Eldorado or, if such officer or director was not acting in an
official capacity for Eldorado, he or she reasonably believed the conduct was
not opposed to the best interests of Eldorado. Indemnification is mandatory if
the officer or director was wholly successful, on the merits or otherwise, in
defending such proceeding. Such indemnification (other than as ordered by a
court) shall be made by Eldorado only upon a determination that indemnification
is proper in the circumstances because the individual met the applicable
standard of conduct. Advances for such indemnification may be made pending such
determination. Such determination shall be made by a majority vote of a quorum
consisting of disinterested directors or of a committee of at least two
disinterested directors, or by independent legal counsel or by the shareholders.
In addition, the articles of incorporation provide for the
elimination, to the extent permitted by Colorado law, of personal liability of
directors to Eldorado and its shareholders for monetary damages for breach of
fiduciary duty as directors. The Colorado Act provides for the elimination of
personal liability of directors for damages occasioned by breach of fiduciary
duty, except for liability based on the director's duty of loyalty to Eldorado,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
improper dividends, liability based on violations of state securities laws, and
liability for acts occurring prior to the date such provision was added.
Eldorado has acquired directors and officers liability insurance.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect to
the effect of any indemnification for liabilities arising under the Securities
Act.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated costs and expenses to be
borne by Eldorado in connection with the offering described in the Registration
Statement, other than underwriting Commissions and discounts.
<TABLE>
<CAPTION>
<S> <C>
Registration Fee...................................... $ 1,342
National Association of Securities Dealers, Inc. Fee.. 983
Non-Accountable Expense Allowance..................... 126,000
Legal Fees and Expenses............................... 50,000
Accounting Fees and Expenses.......................... 25,000
Printing and Engraving Expenses....................... 35,000
Blue Sky Fees and Expenses............................ 15,000
Transfer Agent's and Registrar' s Fees................ 1,000
Market Listing Fees................................... 10,000
Miscellaneous......................................... 675
Total................................................. 265,000
=======
</TABLE>
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The Registrant sold the following unregistered securities during the
past three years.
During 1998, the following transaction occurred:
(1) On April 22, 1998, Eldorado sold 300,000 shares of its common stock to
accredited investors through Mills Financial Services, Inc. for the aggregate
offering price of $825,000. Eldorado believes such transaction was private in
nature and was exempt from the registration requirements of Section 5 of the
Securities Act of 1933 (the "Securities Act") by virtue of the exemption
contained in Section 4(2) of the Securities Act and Rules 505 and 506 of
Regulation D.
Item 27. Exhibits
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description of Exhibit
----------------------
1.1 Form of Underwriting Agreement between Eldorado and the
underwriter, as amended.
1.2 Form of warrant to be issued to the underwriter
3.1 Articles of Incorporation, as amended, incorporated by reference
to Exhibit 3.1 filed with Eldorado's Form 10-KSB for the fiscal year ended
March 31, 1998
3.2 Bylaws of Eldorado, incorporated by reference to Exhibit No. 3 to
the Registration Statement (No. 33-6738-D)
4.1 Form of certificate for shares of common stock.**
5.1 Opinion of Chrisman, Bynum & Johnson, P.C.*
10.1 Eldorado Artesian Springs, Inc. 1997 Stock Option Plan*
10.2 Promissory Note with First National Bank of Boulder County dated
June 27, 1997*
10.3 Deed of Trust to secure a loan from First National Bank of
Boulder County dated June 27, 1997*
10.4 Water Augmentation Agreement dated December 8, 1998
23.1 Consent of Ehrhardt Keefe Steiner & Hottman PC
23.2 Consent of Chrisman, Bynum & Johnson, P.C. (included in its
opinion filed as Exhibit 5.1)
24.1 Power of Attorney (included in signature page of original filing)
______________________
</TABLE>
*Previously filed
** To be filed by amendment
Item 28. Undertakings.
The undersigned small business issuer will provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-2
<PAGE>
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer pursuant to Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boulder State of Colorado, on the 10th
day of February, 1999.
ELDORADO ARTESIAN SPRINGS, INC.
By:/s/ Douglas A. Larson
----------------------------------------------
Douglas A. Larson, Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Douglas A. Larson President, Chief Executive Officer, February 10,1999
- ----------------------------- Director
Douglas A. Larson
/s/ Douglas A. Larson, POA Vice President and Secretary February 10, 1999
- ----------------------------- Director
Kevin M. Sipple
/s/ Douglas A. Larson, POA Vice President, Director February 10, 1999
- -----------------------------
Jeremy S. Martin
/s/ Cathleen M. Collins Chief Financial Officer (Principal February 10, 1999
- ----------------------------- Financial Officer)
Cathleen M. Collins
/s/ Douglas A. Larson, POA Director February 10, 1999
- -----------------------------
George V. Schmidt
/s/ Douglas A. Larson, POA Director February 10, 1999
- -----------------------------
Don P. Van Winkle
</TABLE>
II-4
<PAGE>
Exhibit 1.1
"UA3"
700,000 Shares
ELDORADO ARTESIAN SPRINGS, INC.
Common Stock
UNDERWRITING AGREEMENT
_______________, 1999
MILLS FINANCIAL SERVICES, INC.
20 N. Clark Street, Ste. 2411
Chicago, Illinois 60602
Dear Sirs:
Section 1. Introductory.
------------
ELDORADO ARTESIAN SPRINGS, INC., a Colorado corporation (the
"Company"), proposes to issue and sell 700,000 shares of its authorized but
unissued common stock, $.001 par value (the "Firm Common Shares") to you, or if
there be any so named, to the several underwriters named in Schedule A annexed
hereto (the "Underwriters"), for whom you are acting as Representative. In
addition, the Company proposes to grant to you or to the Underwriters, as the
case may be, an option to purchase up to an aggregate of 105,000 additional
shares of common stock (the "Optional Common Shares"), as provided in Section 5
hereof. The Firm Common Shares and, to the extent such option is exercised, the
Optional Common Shares are hereinafter collectively referred to as the "Common
Shares."
In addition, the Company proposes to sell to Mills Financial
Services, Inc. warrants ("Representative's Warrants") to purchase 70,000 shares
of common stock in accordance with the terms and conditions provided for herein.
You have advised the Company that you or the Underwriters, as the
case may be, propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company hereby confirms its agreements with respect to the
purchase of the Common Shares by you or the Underwriters, as the case may be, as
follows.
Section 2. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to the several Underwriters that:
<PAGE>
(a) A registration statement on Form SB-2 (File No. 333-68553) with
---------
respect to the Common Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. If the Company prepares and files prior to the effective date of
such registration statement an amendment or amendments to such registration
statement, such amendment or amendments will have been similarly prepared. There
have been delivered to you two signed copies of such registration statement and
all amendments, if any, together with two copies of each exhibit filed
therewith. Conformed copies of such registration statement and amendments, if
any, (but without exhibits) and of any related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for you and
for each of the Underwriters, as the case may be. The Company will next file
with the Commission one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of final
prospectus, or (ii) a final prospectus in accordance with Rules 430A and 424(b)
of the Rules and Regulations. As filed, such amendment and form of final
prospectus, or such final prospectus, shall include all Rule 430A Information
and, except to the extent that you shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to you prior to the
date and time that this Agreement was executed and delivered by the parties
hereto, or, to the extent not completed at such date and time, shall contain
only such specific substantive changes (beyond that contained in the latest
Preliminary Prospectus) as the Company shall have previously advised you in
writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration Statement
at the time it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Common Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no filing pursuant
to Rule 424(b) of the Rules and Regulations is required, shall mean the form of
final prospectus included in the Registration Statement at the time such
registration statement becomes effective. The term "Rule 430(A) Information"
means information with respect to the Common Shares and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430(A) of the Rules and Regulations. Any reference
herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Form
SB-2 under the Act, as of the date of such Preliminary Prospectus or Prospectus,
as the case may be.
2
<PAGE>
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus, and at the time the Registration Statement
becomes effective, and at all times subsequent thereto up to and including each
Closing Date hereinafter mentioned, the Registration Statement and the
Prospectus, and any amendments or supplements thereto, will contain all material
statements and information required to be included therein by the Act and the
Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, and neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, no representation or warranty
contained in this subsection 2(b) shall be applicable to information contained
in or omitted from the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by you or by or on behalf of any
Underwriter, directly or through the Representative, specifically for use in the
preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity. The Company has been duly incorporated
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with full power and authority (corporate and
other) to own and lease its properties and conduct its business as described in
the Prospectus; the Company is in possession of and operating in compliance with
all authorizations, licenses, permits, consents, certificates and orders
material to the conduct of its business, all of which are valid and in full
force and effect; the Company is duly qualified to do business and in good
standing as a foreign corporation in each jurisdiction in which the ownership or
leasing of properties or the conduct of its business requires such qualification
except for jurisdictions in which the Company has no place of business and in
which the failure to so qualify would not have a material adverse effect upon
the Company; and no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification.
(d) The Company has an authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus and has outstanding
____________ shares of common stock; the issued and outstanding shares of common
stock have been duly authorized and validly issued, are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and conform to
the description thereof contained in the Prospectus. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Prospectus, the Company does not have
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock purchase and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth under the heading "Stock
3
<PAGE>
Option Plan" in Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or purchase
exist with respect to the issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No stockholder of the Company has any right which
has not been waived to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the transfer and sale of
the Common Shares to be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company in accordance with its terms. The
making and performance of this Agreement by the Company and the consummation of
the transactions herein contemplated will not violate any provisions of the
Company's Articles of Incorporation or Bylaws and will not conflict with, result
in the breach or violation of, or constitute, either by itself or upon notice or
the passage of time or both, a default under any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
the Company is a party or by which the Company or any of its properties may be
bound or affected, any statute or any authorization, judgment, decree, order,
rule or regulation of any court or any regulatory body, administrative agency or
other governmental body applicable to the Company or any of its properties. No
consent, approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Act, the Blue Sky
laws applicable to the public offering of the Common Shares by you or the
several Underwriters, as the case may be, the inclusion of the Common Shares in
the NASDAQ SmallCap Market and the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD").
(g) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the respective dates
of such financial statements and schedules, and the results of operations and
changes in financial position of the Company for the respective periods covered
thereby. Such statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis as certified by Ehrhardt Keefe Steiner & Hottman.
(h) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company is or may be a party
4
<PAGE>
or of which property owned or leased by the Company is or may be the subject, or
related to environmental or discrimination matters, which actions, suits or
proceedings might, individually or in the aggregate, prevent or adversely affect
the transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business, results
of operations or prospects of the Company; and no labor disturbance by the
employees of the Company exists or is imminent which might be expected to affect
adversely such condition, properties, business, results of operations or
prospects. The Company is not a party or subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(i) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (1) the Company has not incurred
any material liabilities or obligations, indirect, direct or contingent, or
entered into any material agreement or other transaction which is not in the
ordinary course of business; (2) the Company has not sustained any material loss
or interference with its business or properties from fire, flood, windstorm,
accident or other calamity, whether or not covered by insurance; (3) the Company
has not paid or declared any dividends or other distributions with respect to
its capital stock and the Company is not in default in the payment of principal
or interest on any outstanding debt obligations; (4) there has not been any
change in the capital stock (other than upon the sale of the Common Shares
hereunder and upon the exercise of options or pursuant to other employee benefit
plans described in the Registration Statement) or indebtedness material to the
Company (other than in the ordinary course of business); and (5) there has not
been any material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company.
(j) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown as due
thereon; and the Company has no knowledge of any tax deficiency which has been
or might be asserted or threatened against the Company which could materially
and adversely affect the business, operations or properties of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its businesses and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering product liability and insurance covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; the Company has not been refused any
insurance coverage sought or applied for; and the Company does not have any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
5
<PAGE>
(l) To the best of the Company's knowledge, after reasonable
investigation, no labor disturbance by the employees of the Company exists or is
imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers or customers,
that might be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, after
reasonable investigation, no such agreement is imminent.
(m) The Company owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names and copyrights which are necessary to conduct its businesses as
described in the Registration Statement and the Prospectus, the expiration of
any patents, patent rights, trade secrets, trademarks, licenses, service marks,
trade names or copyrights would not have a material adverse affect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company; the Company has not received notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any patent, patent right, invention, trade
secret, know-how, trademark, license, service mark or trade name.
(n) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Optional Common Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Common Shares, any offering material in connection with the offering and
sale of the Common Shares other than any Preliminary Prospectus, the Prospectus,
the Registration Statement and other materials, if any, permitted by the
Securities Act of 1933.
(o) The Company has not at any time during the last five (5) years (i)
made any unlawful contribution to any candidate for foreign or domestic office
or failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(p) The Company had not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the common stock of
the Company in order to facilitate the sale or resale of the Common Shares.
(q) Each owner of more than ten percent (10%) of the issued and
outstanding common stock of the Company has agreed in writing that such person
will not, without the prior written consent of Mills Financial Services, Inc. as
Representative on behalf of the Underwriters (which consent may be withheld in
its sole discretion) and subject to certain limited exception, offer, pledge,
sell, contract to sell, sell any option or contract to purchase,
6
<PAGE>
sell short, purchase any option or contract to sell, grant any option, right or
warrant to a purchaser, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock of the Company or any securities
convertible into or exercisable or exchangeable for shares of common stock of
the Company, or enter into any swap or similar agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the common
stock , for a period of 180 days commencing on the effective date of the
Registration Statement (the "Lock-up Period"); provided that such restriction s
do not apply to the Common Shares sold or purchased pursuant to this Agreement
or to shares of the common stock of the Company purchased in the open market
following the offering. Mills Financial Services, Inc., on behalf of the
Underwriters, may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to these lock-up
agreements. In addition, the Company agrees hereby that, for a period of 180
days after the effective date of the Registration Statement, it will not,
without the consent of Mills Financial Services, Inc. as Representative of the
Underwriters, make any offering, sale or other disposition of any shares of
common stock or other securities convertible into or exchangeable or exercisable
for shares of common stock (or agreement for such) except for the grant of
options to purchase common stock pursuant to the Stock Option Plan described in
the Prospectus and shares of common stock issued pursuant to the exercise of
options granted under such plan provided that such options shall not vest, or
the Company shall obtain the written consent of the holder of shares issued
pursuant to exercise not to transfer such shares, until the end of such 180 day
period. Furthermore, such person will also agree and consent to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of such shares except in compliance with this restriction. The Company
has provided to counsel for the Underwriters, true, accurate and complete copies
of all of the agreements pursuant to which each covered stockholder has agreed
to such or similar restrictions (the "Lock-up Agreements") presently in effect
or effected hereby. The Company hereby represents and warrants that it will not
release any person from a Lock-up Agreement without the prior written consent of
Mills Financial Services, Inc.
(r) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
businesses, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future material
capital expenditures to comply with Environmental Laws and (iv) no property
which is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. ss. 9601, et seq.), or otherwise
designated as a contaminated site under applicable state or local law.
(s) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
7
<PAGE>
principles and to maintain accountability for assets, (iii) access to assets is
permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(t) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(u) The Representative's Warrants have been duly and validly authorized
by the Company and upon delivery will be duly issued and legal, valid and
binding obligations of the Company.
(v) To the Company's knowledge, after reasonable investigation, there
are no affiliations or associations between any member of the NASD and any of
the Company's officers, directors or 5% or greater securityholders, except as
set forth in the Registration Statement.
Section 4. Representations and Warranties of the Underwriters.
--------------------------------------------------
Mills Financial Services, Inc., for itself or as the Representative, on
behalf of the several Underwriters, as the case may be, represents and warrants
to the Company that the information set forth (i) on the cover page of the
Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under "Underwriting" in the Prospectus was the only
information furnished to the Company by it or on behalf of the Underwriters, as
the case may be, for use in connection with the preparation of the Registration
Statement and the Prospectus and is correct in all material respects. If
applicable, the Representative represents and warrants that it has been
authorized by each of the other Underwriters as the Representative to enter into
this Agreement on its behalf and to act for it in the manner herein provided.
Section 5. Purchase, Sale and Delivery of Underwritten Shares and
------------------------------------------------------
Representative's Warrants
- -------------------------
(a) Firm Common Shares. On the basis of the representations, warranties
------------------
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to you or to the Underwriters,
as the case may be, the Firm Common Shares which are in the amount of 700,000
shares. You or, if applicable, you on behalf of the Underwriters agree,
severally and not jointly, as the case may be, to purchase from the Company the
number of Firm Common Shares described below which are in the aggregate equal to
700,000 shares. The purchase price per share to be paid by you or the several
Underwriters, as the case may be, to the Company shall be $ ____ per share.
8
<PAGE>
The obligation of you or, if applicable, each Underwriter to the Company
shall be to purchase from the Company that number of Firm Common Shares which is
equal to the number of shares set forth opposite the name of you or such
Underwriter, as the case may be, in Schedule A hereto.
Delivery of definitive certificates for the Firm Common Shares to be
purchased by the Underwriters pursuant to this Section 5 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn until the day following the date of its delivery to the
Company) at the offices of Mills Financial Services, Inc., 20 N. Clark Street,
Suite 2411, Chicago, Illinois, or such other place as may be agreed upon between
the Company and Mills Financial Services, Inc. as Representative of the
Underwriters, at 9:00 a.m., Chicago time, on the third (3/rd/) full business day
following the first day that Common Shares are traded or at such other time and
date not later than seven (7) full business days following the first day that
Common Shares are traded as the Representative and the Company may determine,
such time and date of payment and delivery being herein called the "First
Closing Date." The certificates for the Firm Common Shares to be so delivered
will be made available to the Representative at such office or such other
location as you may reasonably request for checking at least one (1) full
business day prior to the First Closing Date and will be in such names and
denominations as requested by the Representative, such request to be made at
least two (2) full business days prior to the First Closing Date. If the
Representative so elects, delivery of the Firm Common Shares may be made by
credit through full fast transfer to the account at the Depository Trust Company
designated by the Representative.
(b) Optional Common Shares. In addition, on the basis of the
----------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company hereby grants an option to
you or to the several Underwriters, as the case may be, to purchase, in the
case of the several Underwriters severally and not jointly, up to 105,000
Optional Common Shares at the purchase price per share to be paid for the Firm
Common Shares, for use solely in covering any over-allotments made by you for
your account or for the account of the Underwriters, as the case may be, in the
sale and distribution of the Firm Common Shares. The option granted hereunder
may be exercised at any time (but not more than once) within 30 days after the
first date that any of the Common Shares are released by you for sale to the
public, upon notice by you to the Company setting forth the aggregate number of
Optional Common Shares as to which you or the Underwriters, as the case may be,
are exercising the option, the names and denominations in which the certificates
for such shares are to be registered and the time and place at which such
certificates are to be delivered. Such time of delivery (which may not be
earlier than the First Closing Date), being herein referred to as the "Second
Closing Date," shall be determined by you, but if at any time other than the
First Closing Date shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If applicable, the
number of Optional Common Shares to be purchased by each Underwriter shall be
the same percentage of the total number of Optional Common Shares to be sold by
the Company as such Underwriter is purchasing of the Firm Common Shares (subject
to such adjustments to eliminate any fractional share
9
<PAGE>
purchases as you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on the business
day preceding the Second Closing Date at a location in Chicago, Illinois as may
be designated by you. The manner of payment for and delivery of the Optional
Common Shares shall be the same as for the Firm Common Shares purchased from the
Company. At any time before lapse of the option, you may cancel such option by
giving written notice of such cancellation to the Company. If the option is
canceled or expires unexercised in whole or in part, the Company will deregister
under the Act the number of Optional Common Shares as to which the option has
not been exercised.
(c) Acceptance of Delivery and Payment. If applicable, you have advised
----------------------------------
the Company that each Underwriter has authorized you to accept delivery of its
Common Shares, to make payment and to receipt therefor. If applicable, you,
individually and not as the Representative of the Underwriters, may (but shall
not be obligated to) make payment for any Common Shares to be purchased by any
Underwriter whose funds shall not have been received by you by the First Closing
Date or the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
(d) Public Offering. Subject to the terms and conditions hereof, you or
---------------
the Underwriters, as the case may be, propose to make a public offering of your
or their respective portions of the Common Shares as soon after the effective
date of the Registration Statement as in your judgment is advisable and at the
public offering price set forth on the cover page of and on the terms set forth
in the Prospectus.
(e) Representative's Warrants. On the basis of the representations,
-------------------------
warranties and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to Mills Financial
Services, Inc., and Mills Financial Services, Inc. agrees to purchase, the
Representative's Warrant at a purchase price of $.01 per share underlying the
Representative's Warrant. The Representative's Warrant shall be substantially
in the form filed as Exhibit ___ to the Registration Statement, with such
changes therein, if any, as may be agreed upon by the Company and Mills
Financial Services, Inc., shall be dated the Closing Date, and shall evidence
the right of Mills Financial Services, Inc. to purchase from the Company up to
70,000 shares of common stock (subject to adjustment as provided in the
Representative's Warrants) at a price of 165% of the public offering price per
share and upon the terms and conditions provided in the Representative's
Warrants.
Section 6 . Covenants of the Company.
------------------------
The Company covenants and agrees that:
(a) The Company will use its reasonable best efforts to cause the
Registration Statement to become effective and will advise you immediately, and
confirm the advice in writing, (i) of the receipt of any comments of the
Commission, (ii) of any request of the Commission for amendment of or supplement
to the Registration Statement (either before or
10
<PAGE>
after it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its reasonable best efforts to obtain
the lifting of such order at the earliest possible moment. The Company will not
file any amendment or supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or the Prospectus of
which you have not been furnished with a copy a reasonable time prior to such
filing or to which you reasonably object or which is not in compliance in all
material respects with the Act and the Rules and Regulations.
(b) If at any time within nine months of the effectiveness of the
Registration Statement when a prospectus relating to the Common Shares is
required to be delivered under the Act any event occurs, as a result of which
the Prospectus, including any amendments or supplements, would include an untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, or if
it is necessary at any time to amend the Prospectus, including any amendments or
supplements, to comply with the Act or the Rules and Regulations, the Company
will promptly advise you thereof and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will correct
such statement or omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to become effective
as soon as possible; and, in case you or any Underwriter, as the case may be, is
required to deliver a prospectus nine months or more after the effective date of
the Registration Statement, the Company upon request, but at your expense or the
expense of such Underwriter, will promptly prepare such amendment or amendments
to the Registration Statement and such Prospectus or Prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of the
Act.
(c) The Company will furnish to you, as soon as available, copies of the
Registration Statement (four of which final Registration Statement will be
signed and which will include all exhibits), each Preliminary Prospectus, the
Prospectus and any amendments or supplements to such documents, including any
prospectus prepared to permit compliance with Section 10(a)(3) of the Securities
Act of 1933 (four of which will include all exhibits) all in such quantities as
you may from time to time reasonably request.
(d) Prior to the Second Closing Date, the Company will not repurchase or
otherwise acquire any of the Company's common stock or declare or pay any
dividend or make any other distribution upon its common stock.
(e) As soon as practicable, but not later than 45 days after the end of
the first quarter ending after one year following the effective date of the
Registration Statement, the Company will make generally available to its
security holders an earnings statement (which need not be audited) covering a
period of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last paragraph
of Section 11(a) of the Act.
11
<PAGE>
(f) During such period as a prospectus is required by law to be delivered
in connection with sales by an Underwriter or dealer, the Company, at its
expense, but only for the first nine months after the effective date of the
Registration Statement, will furnish to you or mail to your order copies of the
Registration Statement, the Prospectus, the Preliminary Prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may request, for the purposes
contemplated by the Act.
(g) The Company will use its best efforts to qualify the Common Shares
for offering and sale under the securities laws of such jurisdictions as you may
designate and continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Common Shares, except that the
Company shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a foreign
corporation. In each jurisdiction in which the Common Shares shall have been
qualified as above provided, the Company will make and file such statements and
reports in each year as are or may be reasonably required by the laws of such
jurisdictions.
(h) The Company will advise you promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the Common
Shares for offering, sale or trading in any jurisdiction or any initiation or
threat of any proceeding for any such purpose, and in the event of the issuance
of any order suspending such qualification, registration or exemption, the
Company, with your cooperation, will use its reasonable best efforts to obtain
the withdrawal thereof.
(i) During the period of five years hereafter, the Company will furnish
to its stockholders as soon as practicable after the end of each respective
period, annual reports (including financial statements audited by independent
certified public accountants) and unaudited quarterly reports of operations for
each of the first three quarters of the fiscal year, and will furnish to you or
upon your request as Representative of the Underwriters, to each of the other
Underwriters, as the case may be: (i) as soon as practicable after the end of
each fiscal year, copies of the Annual Report of the Company containing the
balance sheet of the Company as of the close of such fiscal year and statements
of income, stockholders' equity and changes in financial position for the year
then ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies of
each proxy statement, Annual Report on Form 10-KSB, Quarterly Report on Form 10-
QSB, Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; (iii) as soon as available,
copies of any report or communication of the Company mailed generally to holders
of its common stock; (iv) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to stockholders or prepared by or on behalf of the Company; and (v) any
additional information of a public nature concerning the Company, or its
business which you may reasonably request. During such five (5) year period, if
the Company shall have active subsidiaries, the foregoing financial statements
shall be on a consolidated basis to the extent that the accounts of the Company
and its subsidiaries are
12
<PAGE>
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(j) During the period of 180 days after the date hereof, without your
prior written consent, individually or as Representative of the Underwriters,
the Company will not other than pursuant to outstanding stock options and the
terms of other employee benefit plans disclosed in the Prospectus issue, offer,
sell, grant options to purchase or otherwise dispose of any of the Company's
equity securities or any other securities convertible into or exchangeable for
its common stock or other equity security under circumstances where such
securities may be sold into the public market during such period.
(k) The Company has caused each officer, director, owner of 10% or more
of the outstanding common stock of the Company and each person to whom the
Company has granted an option pursuant to the Company's stock option plan which
is exercisable within the period ending 180 days after this agreement, to
furnish to you, on or prior to the date of this agreement, a letter or letters,
in form and substance satisfactory to the Underwriters, pursuant to which each
such person shall agree not to offer, sell, sell short, or otherwise dispose of
any shares of common stock of the Company or other capital stock of the Company,
or any other securities convertible, exchangeable or exercisable for common
stock or derivative of common stock owned by such person (or as to which such
person has the right to direct the disposition of) for a period of 180 days
after the date of this agreement, directly or indirectly, except with the prior
written consent of Mills Financial Services, Inc.
(l) Subject to notice of inclusion, the Company will cause the Common
Shares to be included in the NASDAQ SmallCap Market.
(m) The Company will apply the net proceeds from the sale of the Common
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(n) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its common stock.
(o) If the transactions contemplated hereby are not consummated for any
reason, the Company will pay the several Underwriters for all out-of-pocket
expenses (including fees and disbursement of counsel) incurred by the
Underwriters in investigating and preparing to market or marketing the Common
Shares, up to a maximum of $ ____________.
13
<PAGE>
Section 7. Expenses.
--------
(a) Expenses of the Company. The Company agrees with each Underwriter
-----------------------
that the Company will pay and bear all costs in connection with the preparation,
printing and filing of the Registration Statement (including financial
statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus
and any amendments or supplements thereto; the printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary
Blue Sky Survey and any supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any of the
foregoing; the issuance and delivery of the Common Shares hereunder to the
several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Common Shares and transfer agents' and registrars'
fees; the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASDAQ application fees
and the cost of qualifying the Common Shares under the laws of such
jurisdictions as you may designate; the costs and expenses of two Due Diligence
presentations (one in Chicago and one in Denver); and all other expenses
directly incurred by the Company in connection with the performance of its
obligations hereunder; provided, however, that the Company shall not be obligate
to pay the fees and disbursements of counsel for the Underwriters.
(b) Non-Accountable Allowance. Upon the consummation of the
-------------------------
transactions contemplated hereunder and, in any event, not later than the date
of the First Closing and, if applicable, again on the date of the Second
Closing, the Company shall reimburse Mills Financial Services, Inc. for its
expenses on a non-accountable basis in the amount of three percent (3%) of the
gross proceeds to the Company from the transactions contemplated herein, of
which amount a total of $ ___________ has been advanced at the date of this
Agreement.
Section 8. Conditions of the Obligations of the Underwriters.
-------------------------------------------------
The obligations of the several Underwriters to purchase and pay for the
Firm Common Shares on the First Closing Date and the Optional Common Shares on
the Second Closing Date shall be subject to the accuracy of the representations
and warranties on the part of the Company herein set forth as of the date hereof
and as of the First Closing Date or the Second Closing Date, as the case may be,
to the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
4:00 P.M., Colorado time, on the date following the date of this Agreement, or
at such later time as shall have been consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or,
14
<PAGE>
to the knowledge of the Company or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' counsel.
(b) All corporate proceedings by the Company and other legal matters in
connection with this Agreement, the form of the Registration Statement and the
Prospectus, and the registration, qualification, authorization, issue, sale and
delivery of the Common Shares shall have been reasonably satisfactory to
Underwriters' counsel, and such counsel shall have been furnished with such
papers and information as counsel may reasonably have requested to enable
counsel to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement and prior
to the First Closing Date and the Second Closing Date, if applicable, there
shall not have been any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company from that
set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Common
Shares as contemplated by the Prospectus.
(d) You shall have received on the First Closing Date and on any later
date on which Common Shares are purchased, as the case may be, the following
opinion of Chrisman, Bynum & Johnson, counsel for the Company, dated the First
Closing Date or such later date on which Optional Common Shares are purchased,
addressed to the Representative, on behalf of the Underwriters (and stating that
it may be relied upon by counsel for the Underwriters), to the effect that:
(i) The Company is a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in
which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where failure to be so
qualified or be in good standing would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations or
business of the Company;
(iv) To such counsel's knowledge, the Company does not own or control,
directly or indirectly, any corporation, association or other entity;
(v) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated
15
<PAGE>
therein, the issued and outstanding shares of capital stock of the
Company have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
stockholders;
(vi) The Firm Common Shares and the Optional Common Shares, as the case
may be, to be issued by the Company pursuant to the terms of this
Agreement each have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable, and will not
have been issued in violation of or subject to any preemptive right, co-
sale right, registration right, right of first refusal or other similar
right of stockholders;
(vii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Common Shares to issued and sold by it hereunder;
(viii) The Company has the corporate power and authority to issue, sell
and deliver to the Representative the Representative's Warrants to be
issued and sold by it hereunder;
(ix) Each of this Agreement and the Representative's Warrant has been
duly authorized by all necessary corporate action on the part of the
Company and has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except insofar as indemnification provisions may be limited by
applicable law and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally or by equitable principles;
(x) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceeding for that
purpose have been instituted or are pending or threatened under the Act;
(xi) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which
such counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Securities Act of 1933 and the applicable Rules
and Regulations thereunder;
(xii) The information in the Prospectus under the captions "Management,"
"Certain Transactions," "Description of Capital Stock," and "Shares
Eligible for Future Sale,"
16
<PAGE>
and in the Registration Statement in Items 24 and 26 and insofar as such
information constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is a fair summary of such matters and
conclusions;
(xiii) The form of certificate evidencing the Common Shares filed as an
exhibit to the R egistration Statement complies with Colorado law;
(xiv) The description in the Registration Statement and the Prospectus
of the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Securities
Act of 1933 and the applicable Rules and Regulations thereunder;
(xv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which are not described or referred to therein or filed as required;
(xvi) The execution and delivery of this Agreement and the
Representative's Warrant and the performance of and the consummation of
the transactions herein and therein contemplated (other than performance
of the Company's indemnification obligations concerning which no opinion
need be expressed) will not (a) result in any violation of the Company's
charter or bylaws or (b) result in any material breach or violation of
any of the terms and provisions of, or constitute a default under, any
bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument known to such counsel to
which the Company is a party or by which its properties are bound, or any
applicable statute, rule or regulation or any order, writ or decree of
any court, government or governmental agency of body having jurisdiction
over the Company or over any of its properties or operations;
(xvii) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or over any of its properties or operations
is necessary in connection with the consummation by the Company of the
transactions contemplated in this Agreement and the Representative's
Warrant, except as such have been obtained under the Securities Act or
such as may be required under the state or other securities or Blue Sky
laws in connection with the purchase and the distribution of the Common
Shares by the Underwriters;
(xviii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character
required to be disclosed in the Registration Statement or the Prospectus
by the Securities Act or the Rules and Regulations thereunder or by the
Securities Exchange Act of 1934 or the applicable Rules and Regulations
thereunder, other than those, if any, described in the Registration
Statement or Prospectus;
17
<PAGE>
(xix) The Company is not presently (a) in material violation of its
charter or bylaws, or (b) to such counsel's knowledge, in material breach
of any applicable statute, rule or regulation, order, writ or decree of
any court or governmental agency or body having jurisdiction over the
Company or over any of its properties or operations;
(xx) The Representative's Warrant Stock to be issued by the Company
pursuant to the terms of the Representative's Warrant has been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms of the Representative's Warrant will be duly
and validly issued and fully paid and nonassessable, and to such
counsel's knowledge, will not have been issued in violation of or subject
to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right of stockholders;
(xxi) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of the common stock of
the Company or other securities of the Company have any registration
rights with respect to securities of the Company, and, except as set
forth in the Registration Statement and Prospectus, all holders of
securities of the Company having rights known to such counsel to require
registration of common stock or other securities, because of the filing
of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement or have included
securities in the Registration Statement pursuant to the exercise of and
in full satisfaction of such rights;
(xxii) The offer and sale of all securities of the Company made within
the last three years as set forth in Item 26 of the Registration
Statement were exempt from the registration requirements of the
Securities Act, pursuant to the provisions set forth in such Item, and
from the registration or qualification requirements of all relevant state
securities laws; and
(xxiii) The Common Shares have been duly authorized for inclusion in the
NASDAQ SmallCap Market upon official notice of issuance.
In addition, such counsel shall state that such counsel has participated in
conferences with the officials and other representatives of the Company, the
Representative, counsel to the Underwriters and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although (except as specifically set forth in paragraphs (xiii) and (xiv) above)
they have not verified the accuracy or completeness of the statements contained
in the Registration Statement or the Prospectus, nothing has come to the
attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and
18
<PAGE>
at all times subsequent thereto up to and on the First Closing Date and on any
later date on which Optional Common Shares are to be purchased, the Registration
Statement and any amendment or supplement, when such documents became effective
or were filed with the Commission (other than the financial statements including
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statement therein not misleading,
or at the First Closing Date or any later date on which the Optional Common
Shares are to purchased, as the case may be, the Registration Statement, the
Prospectus and any amendment or supplement thereto, contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statement therein, in the light of the circumstances under which they
were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or the State of Colorado upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, and of government officials, in which
case the opinion of counsel is to state that they are so relying and that they
have no knowledge of any material misstatement or inaccuracy in any such
opinion, representation or certificate. Copies of any opinion, representation
or certificate so relied upon shall be delivered to you, as Representative of
the Underwriters and to counsel for the Underwriters.
(e) You shall have received on the First Closing Date and on any later
date on which Optional Common Shares are to be purchased, as the case may be, an
opinion of Chrisman, Bynum & Johnson, in form and substance satisfactory to you,
with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the First Closing Date and on any later
date on which Optional Common Shares are to be purchased, as the case may be, a
letter from Ehrhardt Keefe Steiner & Hottman, addressed to the Company and the
Representative, on behalf of the several Underwriters, dated the First Closing
Date or such later date on which Optional Common Shares are to be purchased, as
the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Securities Act
of 1933 and the applicable published Rules and Regulations thereunder and based
upon procedures described in such letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date no more than five (5) business days prior to the First Closing
Date or such later date on which Optional Common Shares are to be purchased, as
the case may be, (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the First
Closing Date or such late date on which Optional Common Shares are to be
purchased, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect
19
<PAGE>
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company from that
set forth in the Registration Statement or Prospectus, which, in your sole
judgment is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Common
Shares as contemplated by the Prospectus. The Original Letter from Ehrhardt
Keefe Steiner & Hottman shall be addressed to or for the use of the Underwriters
in form and substance satisfactory to the Underwriters and shall (i) represent,
to the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Securities Act of 1933 and the
applicable published Rules and Regulations, (ii) set forth its opinion with
respect to its examination of the financial statements of the Company as of and
for the periods ending March 31, 1998 and 1997 and (iii) address other matters
agreed by Ehrhardt Keefe Steiner & Hottman and you. In addition, you shall have
received from Ehrhardt Keefe Steiner & Hottman a letter addressed to the Company
and ;made available to you for the use of the Underwriters stating that its
review of the Company's system of internal accounting controls, to the extent
they deemed necessary in establishing the scope of its examination of the
Company's financial statements as of March 31, 1998, did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.
(g) You shall have received on the First Closing Date and on any later
date on which Optional Common Shares are to be purchased, as the case may be, a
certificate of the Company, dated the First Closing Date or such later date on
which Optional Common Shares are to be purchased, as the case may be, signed by
the President and Chief Financial Officer of the Company, to the effect that,
and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or
any later date on which Optional Common Shares are to be purchased, as
the case may be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at
or prior to the First Closing Date or any later date on which Optio nal
Common Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Securities Act of 1933
or otherwise;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of each certificate, (a) the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Securities Act of 1933 and the Rules and
Regulations thereunder or the Securities Exchange Act of 1934 and the
applicable Rules and Regulations thereunder, as the case may be, and in
all material respects conformed to the requirements of such statutes and
rules and regulations, (b) the Registration Statement, and any amendment
or supplement thereto, did not
20
<PAGE>
and does not include any untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, (c) the Prospectus, and any
amendments or supplements thereto, did not and does not include any
untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (c) the Prospectus, and any amendments or supplements
thereto did not and does not include any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which
has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (b)
any transaction that is material to the Company, except transactions
entered into in the ordinary course of business, (c) any obligation,
direct or contingent, that is material to the Company, incurred by the
Company, except obligations incurred in the ordinary course of business,
(d) change in the capital stock or outstanding indebtedness of the
Company that is material to the Company, (e) any dividend or distribution
of any kind declared, paid or made on the capital stock of the Company,
or (f) any loss or damage (whether or not insured) to the property of the
Company which has been sustained or will have been sustained which has a
material adverse affect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(h) The Company shall have obtained and delivered to you an agreement
from each officer, director, person owning ten percent (10%) of the common stock
------------------
of the Company and each person to whom the Company has granted an option
---------------------------------------------------------
pursuant to the Company's stock option plan which is exercisable within the
- ---------------------------------------------------------------------------
period ending 180 days after this agreement in writing prior to the date hereof
- -------------------------------------------
that such person will not, during the Lock-up Period, effect the disposition of
any securities now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, or (ii) with the prior
written consent of Mills Financial Services, Inc. The foregoing restriction is
expressly agreed to preclude the holder of the securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a disposition of securities during the Lock-up Period, even if
such securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including without limitation, any put or call option) with respect to
any securities of the Company. Furthermore, such person will have also agreed
and consented to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the securities held by such person except
in compliance with this restriction.
21
<PAGE>
(i) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request, including certificates of
officers of the Company as to the accuracy of the representations and warranties
of the Company, as to the performance by the Company of its obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder.
(j) The Representative's Warrant shall have been issued and sold to you.
(k) Prior to the First Closing Date, the Common Shares shall have been
authorized for inclusion in the NASDAQ SmallCap Market upon official notice of
issuance.
All such opinions, certifications, letters and documents provided for in this
Section 8 will be compliance with the provisions hereof only if they are
reasonably satisfactory to counsel for the Underwriters. The Company will
furnish you with such number of conformed copies of such opinions, certificates,
letters and documents as you shall reasonably request.
Section 9. Substitution of Underwriters
----------------------------
If any Underwriter or Underwriters shall fail to take up and pay for the
number of Firm Common Shares agreed by such Underwriter or Underwriters to be
purchased hereunder upon tender of such Firm Common Shares in accordance with
the terms hereof, and if the aggregate number of Firm Common Shares which such
defaulting Underwriter or Underwriters so agreed but failed to purchase does not
exceed 10% of the Firm Common Shares, the remaining Underwriters shall be
obligated, severally in proportion to their respective commitments hereunder, to
take up and pay for the Firm Common Shares of such defaulting Underwriter or
Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number
of Firm Common Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Common Shares, the
remaining Underwriters shall have the right, but shall not be obligated, to take
up and pay for (in such proportions as may be agreed upon among them) the Firm
Common Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If such remaining Underwriters do not, at the First Closing
Date, take up and pay for the Firm Common Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the First Closing
Date shall be postponed for twenty-four (24) hours to allow the several
Underwriters the privilege of substituting within an additional twenty-four (24)
hours (including non-business hours) another underwriter or underwriters (which
may include any nondefaulting Underwriter) satisfactory to the Company. If no
such underwriter or underwriters shall have been substituted as aforesaid by
such postponed First Closing Date, the First Closing Date may, at the option of
the Company, be postponed for a further twenty-four (24) hours, if necessary, to
allow the Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Common Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Common Shares of the defaulting Underwriter or
Underwriters as provided in this Section 9, (i) the Company
22
<PAGE>
shall have the right to postpone the time of delivery for a period of not more
than seven (7) full business days, in order to effect whatever changes may
thereby be necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agreed promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Common
Shares to be purchased by the remaining Underwriters and substituted underwriter
or underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Common
Shares so agreed to be purchased by the defaulting Underwriter or Underwriters
or substitute another underwriter or underwriter as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Common Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to this
Section 9, the Company shall not be liable to any Underwriter (except as
provided in Section 10) nor shall any Underwriter (other than an Underwriter who
shall have failed, otherwise than for some reason permitted under this
Agreement, to purchase the number of Firm Common Shares agreed by such
Underwriter to be purchased hereunder, which Underwriter shall remain liable to
the Company and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company (except as provided in Section 10 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 9.
Section 10. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless you or each
Underwriter and each person, if any, who controls you or any such Underwriter,
as the case may be, within the meaning of the Act against any losses, claims,
damages, liabilities or expenses, joint or several, to which you or such
Underwriter, as the case may be, or such controlling person may become subject,
under the Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or other federal or state statutory law or regulation, or at common law
or otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state in any of them a material fact required to be
stated therein or necessary to make the statements in any of them not
misleading; and will reimburse you or each Underwriter, as the case may be, and
each such controlling person for any legal and other expenses reasonably
incurred by you or such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the Company
will not be liable in any such case to the extent that any such loss, claim,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, the Prospectus
23
<PAGE>
or any amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by you or by or on behalf of any
Underwriter through the Representative, as the case may be, specifically for use
therein; and provided further, that with respect to any untrue statement or
omission or alleged untrue statement or omission made in any Preliminary
Prospectus, the indemnity agreement contained in this paragraph shall not inure
to the benefit of you or any Underwriter, as the case may be, from whom the
person asserting any such losses, claims, damages, liabilities or expenses
purchased the Common Shares concerned (or to the benefit of any person
controlling you or such Underwriter, as the case may be) to the extent that any
such loss, claim, damage, liability or expense of you or such Underwriter, as
the case may be, or controlling person results from the fact that a copy of the
Prospectus was not sent or given to such person at or prior to the written
confirmation of sale of such Common Shares to such person as required by the
Act, and if the untrue statement or omission has been corrected in the
Prospectus unless such failure to deliver the Prospectus was a result of
noncompliance by the Company with its obligations under Section 6(e) hereof; and
provided further, that with respect to any untrue statement or omission or
alleged untrue statement or omission made in the Registration Statement, the
Prospectus, or any amendment or supplement thereto.
(b) You or each Underwriter severally, as the case may be, will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Act, against any losses, claims,
damages, liabilities or expenses to which the Company, or any such director,
officer or controlling person may become subject, under the Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in the Registration Statement, the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, the Prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with Section 4 of this Agreement or any other written
information furnished to the Company by you or such Underwriter through the
Representative, as the case may be, specifically for use in the preparation
thereof; and will reimburse the Company, or any such director, officer or
controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. This indemnity agreement will be in
addition to any liability which you or such Underwriter, as the case may be, may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party
24
<PAGE>
will not relieve it from any liability which it may have to any indemnified
party for contribution or otherwise than under the indemnity agreement contained
in this Section or to the extent it is not prejudiced as a proximate result of
such failure. In case any such action is brought against any indemnified party
and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with all other indemnifying parties
similarly notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if the defendants in
any such action include both the indemnified party and the indemnifying party
and counsel for the indemnified party shall have reasonably concluded that there
may be a conflict between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that there may
be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party.
(d) If the indemnification provided for in this Section 10 is required
by its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b) or
(c) in respect of any losses, claims, damages, liabilities or expenses referred
to herein, then such applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and you or the Underwriters, as the case may be, from the offering of
the Common Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company and you or the Underwriters, as the case may be, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company and you or the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or you or the Underwriters, as the case may
be, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include,
25
<PAGE>
subject to the limitations set forth in subparagraph (c) of this Section 10, any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth in
subparagraph (c) of this Section 10 with respect to notice of commencement of
any action shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be required
with respect to any action for which notice has been given under subparagraph
(c) for purposes of indemnification. The Company and you or the Underwriters, as
the case may be, agree that it would not be just and equitable if contribution
pursuant to this Section 10 were determined solely by pro rata allocation or by
any other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 10, neither you nor any
Underwriter, as the case may be, shall be required to contribute any amount in
excess of the amount by which the total underwriting discount received by you or
such Underwriter, as the case may be, in connection with the Common Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which you or such Underwriter has otherwise been required to pay by
reason of such untrue alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. If applicable, the Underwriters'
obligations to contribute pursuant to this Section 10 are several in proportion
to their respective underwriting commitments and not joint.
(e) In addition to and without in any way limiting the other obligations
of the parties under this Section 10, the Company hereby further agrees to
reimburse you or each Underwriter, as the case may be, and each person who
controls you or any such Underwriter within the meaning of Section 15 of the Act
on a quarterly basis for one-half of all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
paragraph (a) of this Section 10, notwithstanding the possibility that such
payments might later be held to be improper, but only under circumstances where
you or such Underwriter has selected separate counsel or elected to participate
in the defense of the action as permitted by the proviso of the second sentence
of Section 10(c) hereof. To the extent that any payment is ultimately held to be
improper, you or each Underwriter, as the case may be, shall promptly refund
such payment.
Section 11. Effectiveness of Registration Statement.
----------------------------------------
The Company will use its best efforts to cause the Registration Statement
to become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
Section 12. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) After execution of the parties, this Agreement shall become
effective at the earlier of (i) 7:30 a.m., Colorado time, on the second full
business day following the effective date
26
<PAGE>
of the Registration Statement, or (ii) the time of the first public offering of
any of the Common Shares by the Underwriters after the Registration Statement
becomes effective. The time of the first public offering shall mean the time of
the release by you, for publication, of the first newspaper advertisement
relating to the Common Shares, or the time at which the Common Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, which shall first occur. By giving notice as set forth in
this Section 12 before the time this Agreement becomes effective, you, as
Representative of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability to any other party, except
as provided in Section 10 hereof.
(b) You, as Representative of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time at or prior to the First Closing Date or on or prior to any later date
on which Optional Common Shares are to be purchased, as the case may be, (i) if
the Company shall have failed, refused or been unable to perform any agreement
on its part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled is not fulfilled, including,
without limitation, any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company from that
set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material governmental
restrictions not in force and effect on the date hereof, shall have been imposed
upon trading in securities generally or minimum or maximum prices shall have
been generally established on the New York Stock Exchange or the American Stock
Exchange or in the over-the-counter market by the NASD, or trading in securities
generally shall have been suspended on either such exchange or in the over-the-
counter market by the NASD, or if a banking moratorium shall have been declared
by federal, New York, Illinois or Colorado authorities, or (iii) if the Company
shall have sustained a loss by strike, fire, flood, earthquake, accident or
other calamity of such character as to interfere materially with the conduct of
the business and operations of the Company regardless of whether or not such
loss or interference shall have been insured, or (iv) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets as in your reasonable judgment makes it inadvisable or
impracticable to proceed with the offering, sale and delivery of the Common
Shares, or (v) if there shall have been an outbreak or escalation of hostilities
or of any other insurrection or armed conflict or the declaration of the United
States of a national emergency which, in the reasonable opinion of the
Representative, makes it impracticable or inadvisable to proceed with the public
offering of the Common Shares as contemplated by this Prospectus. Any
termination pursuant to this paragraph 12(b) shall be without liability of any
party to any other party except as provided in Section 10 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case, confirmed
by letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
Section 13. Right of First Refusal
----------------------
27
<PAGE>
For a period of three (3) years from the date of this Agreement, the
Company will not enter into an agreement for a public or private offering for
cash (other than to employees) of any securities of the Company or any affiliate
of the Company or any securities offered by the Company or any affiliate for
cash to or through any person, firm or corporation other than Mills Financial
Services, Inc. unless and until the Company shall have first negotiated for the
sale of such securities with or through or offered to sell such securities to
Mills Financial Securities, Inc. Such affiliates shall include, but not be
-----------------------------------------
limited to, persons owning 10% or more of the common stock of the Company. The
- -------------------------------------------------------------------------
Company shall notify Mills Financial Services, Inc. in writing of the Company's
intention or the intention of any affiliate of the Company to offer such
------------------------------------------------
securities in an offering covered by this right of first refusal and the terms
(including the price or other method of determining the underwriting or
placement discount or fee) and the conditions of the proposed offering. Mills
Financial Services, Inc. shall then have 10 days from the date of receipt of
such written notice to decide whether to participate in such proposed offering.
If Mills Financial Services, Inc. determines that it does not wish to
participate in the proposed offering, then it shall so notify the Company of its
intention in writing not later than 30 days from the receipt of notice from the
Company of such proposed offering. If Mills Financial Services, Inc. determines
not to participate in such offering, then the Company may, within a period of 90
days from the date of receipt of notice from Mills Financial Services, Inc. of
its intention not to participate, enter into a letter of intent for the public
sale or, as appropriate, a contract for the private sale, of any of such
securities through any other person, firm or corporation on the same general
terms and conditions as those which were tendered by the Company to Mills
Financial Services, Inc. Provided, however, as to a public offering, it a
definitive underwriting agreement with a firm commitment is not executed by the
Company with such third party within 180 days thereafter, all the rights of
Mills Financial Services, Inc. hereunder with respect to such offering shall be
reinstated. Nothing in this Agreement shall be construed as granting the
continuation of such preferential right on the part of Mills Financial Services,
Inc. beyond such three-year period. The Company shall have the right to
-----------------------------------
terminate this right of first refusal upon the payment of $21,500 to Mills
- --------------------------------------------------------------------------
Financial Services, Inc.
- -----------------------
Section 14. Representations and Indemnities to Survive Delivery.
---------------------------------------------------
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers or key employees and of you or
the Underwriters, as the case may be, set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by you individually or on behalf of any Underwriter, as the case may be, or
the Company or any of its or their partners, officers or directors or any
controlling person, and will survive delivery of and payment for the Common
Shares sold hereunder and any termination of this Agreement.
Section 15. Notices.
-------
All communications hereunder shall be in writing and, if sent to you
individually or on behalf of the several Underwriters, shall be mailed,
delivered, telefaxed or telegraphed and confirmed to you at 20 N. Clark Street,
Suite 2411, Chicago, Illinois 60602, Attention: Joseph Kurczodyna; and if sent
to the Company shall be mailed, delivered, telefaxed or
28
<PAGE>
telegraphed and confirmed to the Company at P.O. Box 445, Eldorado Springs,
Colorado 80025, Attention: Douglas A. Larson. The Company, or you may change the
address for receipt of communications hereunder by giving notice to the other.
Section 16. Successors.
----------
This Agreement shall inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 9
hereof, and to the benefit of the officers and directors and controlling persons
referred to in Section 10, and in each case their respective successors,
personal representatives and assigns, and no other person will have any right or
obligation hereunder. No such assignment shall relieve any party of its
obligations hereunder. The term "successors" shall not include any purchaser of
the Common Shares as such from you or any of the Underwriters merely by reason
of such purchase.
Section 17. Representative of Underwriters.
------------------------------
If applicable, you will act as Representative for the several
Underwriters in connection with all dealings hereunder, and any action under or
in respect of this Agreement taken by the Underwriters jointly or by Mills
Financial Services, Inc., as Representative, will be binding upon all the
Underwriters.
Section 18. Partial Unenforceability.
------------------------
The invalidity or unenforceability of any Section, paragraph or provision
of this Agreement shall not affect the validity or enforceability of any other
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
Section 19. Applicable Law.
--------------
This Agreement shall be governed by and construed in accordance with the
internal laws (and not the laws pertaining to conflicts of laws) of the State of
Illinois.
Section 20. General.
-------
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each one of
which shall be an original, and all of which shall constitute one and the same
document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of
29
<PAGE>
this Agreement may be waived, only by a writing signed by the Company and you,
individually or on behalf of the several Underwriters, as the case may be.
Balance of Page Left Blank, Intentionally)
30
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company and Mills Financial Services,
Inc. or the several Underwriters including you, as the case may be, all in
accordance with its terms.
Very truly yours,
ELDORADO ARTESIAN SPRINGS, INC.
By:____________________________
Douglas A. Larson, President
The foregoing Underwriting Agreement is hereby confirmed and accepted by us in
Chicago, Illinois as of the date first above written.
MILLS FINANCIAL SERVICES, INC.
If applicable, acting as Representative of the several Underwriters named in the
attached Schedule A.
By MILLS FINANCIAL SERVICES, INC.
By: _____________________________
Joseph Kurczodyna, President
31
<PAGE>
SCHEDULE A
Number of Firm Common
Name of Underwriter Shares to be Purchased
- ------------------- ----------------------
Mill Financial Services, Inc.
32
<PAGE>
Exhibit 1.2
"Rep War"
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO ANY EFFECTIVE REGISTRATION STATEMENT
MADE UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT
Representative's Warrant to Purchase 70,000
Shares of Common Stock
REPRESENTATIVE'S WARRANT
------------------------
ELDORADO ARTESIAN SPRINGS, INC.
-------------------------------
THIS IS TO CERTIFY THAT for $700.00 consideration paid and received,
MILLS FINANCIAL SERVICES, INC., 20 North Clark Street, Ste. 2411, Chicago,
Illinois 60602 or registered assigns (hereinafter the "Holder" or "Mills") is
entitled to purchase from ELDORADO ARTESIAN SPRINGS, INC., a Colorado
corporation (hereinafter the "Company"), Seventy Thousand (70,000) shares of the
Company's common stock, $.001 par value ("Common Stock") at a price of $______
per Share of Common Stock, which price shall be 165% of the public offering
price. Except as otherwise provide herein, this Representative's Warrant is
exercisable at any time after 3:30 p.m., Chicago Time, on _______, 2000, and not
later than 3:30 P.M., Chicago Time, on ______, 2004.
The Shares of Common Stock issuable upon exercise of the Representative's
Warrant have not been registered under a registration statement filed by the
---
Company. This Representative's Warrant is issued pursuant to an underwriting
agreement dated _____________ between the Company and Mills Financial Services,
Inc. (the "Representative").
The Common Stock which is issuable upon exercise of the Representative's
Warrant shall bear the same terms and conditions as described under the section
captioned "Description of Capital Stock" in the Registration Statement,
provided, however, that the holders of such Common Stock shall have registration
rights under the Securities Act of 1933 as more fully described in Paragraph 6
of this Representative' Warrant.
1. Exercise of Representative's Warrant.
------------------------------------
(a) The Representative's Warrant will not be exercisable and may not
be sold from _______________, 1999 until 3:30 P.M., Chicago Time, on
____________, 2000, provided, however, that if the Company merges or reorganizes
during such period in such a way as to terminate the Representative's Warrant or
any component thereof, it will be exercisable immediately prior to such action.
<PAGE>
(b) The Representative's Warrant will be exercisable in whole or in
part at any time or from time to time from and after 3:30 P.M., Chicago Time, on
_________, 2000 until 3:30 P.M., Chicago Time, on ____________, 2004.
(c) After 3:30 P.M., Chicago Time, on ____________, 2004, the Holder
shall have no right to exercise the Representative's Warrant.
(d) The exercise price of the Representative's Warrant shall be $_____
per Share of Common Stock, which price shall be 165% of the public offering
price for the common stock sold pursuant to the underwriting agreement pursuant
to which this warrant is issued, and the exercise price shall be subject to
adjustment as provided in Section 8 herein.
2. Procedures for Exercise of Representative's Warrant.
---------------------------------------------------
2.1 Purchase For Cash. The rights represented by this Representative's
-----------------
Warrant may be exercised in whole or in part by (i) presentation and surrender
hereof to the Company (or such other office or agency of the Company as it may
designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company) with the purchase form annexed hereto
duly executed; (ii) payment to the Company of the exercise price then in effect
for the number of Shares of Common Stock specified in the purchase form together
with any applicable stock transfer taxes; and (iii) delivery to the Company of a
duly executed agreement signed by the person(s) designated in the purchase form
to the effect that such person(s) agree(s) to be bound by the provisions of
Section 6 and Section 7 of this Representative's Warrant. This Representative's
Warrant shall be deemed to have been exercised, in whole or in part to the
extent specified, immediately prior to the close of business on the date this
Representative's Warrant is surrendered and payment is made in accordance with
the foregoing provisions of this Section 2, and the person or persons in whose
name or names the certificates for shares of Common Stock shall be issuable upon
such exercise shall become the holder or holders of record of such Common Stock
at that time and date. The certificates for the Common Stock so purchased shall
be delivered to the holder within a reasonable time, not exceeding ten (10) days
after the rights represented by this Representative's Warrant shall have been so
exercised. If this Representative's Warrant should be exercised in part only,
the Company shall, upon surrender of this Representative's Warrant for
cancellation, execute and deliver a new Representative's Warrant evidencing the
right of the holder to purchase the balance of the Shares of Common Stock
purchasable hereunder.
2.2 "Cashless" Exercise. In lieu of the payment to the Company pursuant
-------------------
to Section 2.1(ii) of the exercise price then in effect for the number of Shares
of Common Stock specified in the purchase form together with any applicable
stock transfer taxes, the Holder shall have the right to pay such exercise price
for the shares of Common Stock being so purchased by the surrender to the
Company of an exercisable but unexercised portion of such Holder's
Representative's Warrants having a Value (as determined below) equal to such
exercise price multiplied by the number of shares of Common Stock being
purchased upon such exercise ("Cashless Exercise Right"). The Value of the
portion of the Representative's Warrants being surrendered shall equal the
remainder
2
<PAGE>
derived from subtracting (x) the exercise price then in effect multiplied by the
number of shares of Common Stock underlying the Representative's Warrants being
surrendered from (y) the Fair Market Value per share (as defined in Section
8(a)(3) of this Representative's Warrant) multiplied by the number of shares of
Common Stock underlying the Representative's Warrants being surrendered.
3. Assignment, Transfer, Exchange or Loss of Representative's Warrant.
------------------------------------------------------------------
The Representative's Warrants may not be transferred, assigned or hypothecated,
except that they may be assigned, in whole or in part, to any successor of the
Underwriter, or to a bona fide officer of the Underwriter who is also a
shareholder of the Underwriter, or to members of any underwriting or selling
group who are members of the National Association of Securities Dealers, Inc. or
to a bona fide partner of such member or a bona fide officer of such member who
is also a shareholder of such member, or pursuant to the laws of inheritance or
intestacy, provided, however, that such assigns, if any, are permitted by
applicable rules of the NASD and the applicable state blue sky laws. Any such
assignment shall be made by surrender of this Representative's Warrant to the
Company with the assignment form annexed hereto duly executed with funds
sufficient to pay any transfer tax; whereupon the Company shall, without charge,
execute and deliver a new Representative's Warrant in the name of the assignee
named in such instrument of assignment and this Representative's Warrant shall
be promptly canceled. This Representative's Warrant may be divided or combined
with other Representative's Warrants which carry the same rights upon
presentation thereof at the office of the Company together with a written notice
signed by the Holder specifying the names and denominations in which new
Representative's Warrants are to be issued. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Representative's Warrant , and (in the case of loss, theft or destruction)
of reasonably satisfactory indemnification, and upon surrender and cancellation
of this Representative's Warrant , if mutilated, the Company will execute and
deliver a new Representative's Warrant of like tenor and date. Any such new
Representative's Warrant executed and delivered shall constitute an additional
contractual obligation on the part of the Company, whether or not this
Representative's Warrant so lost, stolen, destroyed or mutilated shall be at any
time enforceable by anyone.
4. Reservation of Shares; Fractional Shares; The Company covenants and
------------------------------------------
agrees that all shares of Common Stock which may be issued upon exercise of the
Representative's Warrant will, upon issuance, be duly and validly issued, fully
paid and nonassessable, and no personal liability will attach to the holder
thereof. The Company further covenants and agrees that during the periods
within which this Representative's Warrant may be exercised, the Company will at
all times have authorized and reserved a sufficient number of shares of its
Common Stock for issuance upon exercise of the Representative's Warrant.
5. Rights of Holder. The Holder of this Representative's Warrant shall
----------------
not, by virtue hereof, be entitled to any rights of a shareholder in the
Company, either at law or equity, and the rights of the Holder are limited to
those expressed in the Representative's Warrant and are not enforceable against
the Company except to the extent set forth herein.
3
<PAGE>
6. Registration Under the Securities Act of 1933. The Holder of this
---------------------------------------------
Representative's Warrant shall have the following Registration Rights with
respect to the shares of common stock underlying the Representative's Warrants
(the "Warrant Shares"):
(a) Registration Rights - Piggy-Back. Subject to the limitation on
--------------------------------
Registration Rights provided for in this Section 6, if at any time during the
Exercise Period, the Company shall file a registration statement (other than on
Form S-4, Form S-8, or any successor form) with the Securities and Exchange
Commission (the "Commission") while any Representative's Warrants are
outstanding, the Company shall give all the then Holders of any Representative's
Warrants (the "Eligible Holders") at least thirty (30) days prior written notice
of the filing of such registration statement. If requested by any Eligible
Holder in writing within thirty (30) days after receipt of any such notice, the
Company shall, at the Company's sole expense (except for legal fees incurred by
the Eligible Holders) register or qualify all or, at each Eligible Holder's
option, any portion of the Warrant Shares of any Eligible Holder who shall have
made such request, concurrently with the registration of such other securities,
all to the extent requisite to permit the public offering and sale of the
Warrant Shares through the facilities of all appropriate securities exchanges
and the over-the-counter market, and will use its best efforts through its
officers, directors, auditors and counsel to cause such registration statement
to become effective as promptly as practicable. Notwithstanding the foregoing,
if the managing underwriter of any such offering shall advise the Company that,
in its opinion, the distribution of all or a portion of the Warrant Shares
requested to be included in the registration concurrently with the securities
being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then the
Company shall not be required to include such Warrant Shares in such
registration, provided that any such reduction shall be on a pro-rata basis
among all selling shareholders; provided, however, (i) that in the event that
the Company does not intend to include all the requested Warrant Shares in the
registration statement due to such advise received from the managing
underwriter, if the Company includes in the registration statement any
securities other than securities being offered by the Company for its own
account, then the Company shall include any of the Warrant Shares requested to
be included in such registration statement by the Eligible Holders and any such
other securities on a pro rata basis and (ii) if the Company does not include
all of the requested Warrant Shares in the registration statement, then the
Company will within six (6) months after the registration statement becomes
effective file at is sole expense a new registration statement relating to those
Warrant Shares which the Company did not include in the prior registration
statement and the Company will use its best efforts to cause the registration
statement to become effective as promptly as practical.
(b) Registration Right - Demand. Subject to the limitation on
---------------------------
Registration Rights provided for in this Section 6, if, on any one occasion
during the Exercise Period the Company shall receive a written request from
Eligible Holders who in the aggregate own (or upon exercise of all
Representative's Warrants then outstanding would own) a majority of the total
number of shares of Common Stock then included (or upon such exercise would be
included) in the Warrant Shares (the "Majority Holders"), to register the sale
of all or part of such Warrant Shares, the Company shall, within ninety (90)
days thereafter, prepare and file with the Commission an
4
<PAGE>
amendment to the Current Registration Statement or, as appropriate, a new
registration statement sufficient to permit the public offering and sale of the
Warrant Shares through the facilities of all appropriate securities exchanges
and the over-the-counter market, and will use its best efforts through its
officers, directors, auditors and counsel to cause such registration statement
to become and remain effective (including taking such steps as are necessary to
obtain removal of any stop order) as promptly as practicable. All expenses
incurred in connection with such registration (provided that such expenses are
reasonable in the case of expenses incurred by the Eligible Holder) shall be
borne by the Company (except for expenses of counsel to the Eligible Holders).
Within five (5) business days after receiving any request contemplated by this
Section 6(b), the Company shall give written notice to all the other Eligible
Holders, advising each of them that the Company is proceeding with such
registration and offering to include therein all or any portion of any such
Eligible Holder's Warrant Shares, provided that the Company received a written
request to do so from such Eligible Holder within thirty (30) days after receipt
by such Eligible Holder of the Company's notice.
(c) Blue-Sky. In the event of a registration pursuant to the
--------
provisions of this Section 6, the Company shall use its best efforts to cause
the Warrant Shares so registered to be registered or qualified for sale under
the securities or "blue sky" laws of such jurisdictions as the Holder or such
holders may reasonably request; provided, however, that the Company shall not be
required to qualify to do business in any state by reason of this Section 6(c)
in which it is not otherwise required to qualify to do business.
(d) Effective Period. The Company shall keep effective any
-----------------
registration or qualification contemplated by this Section 6 for a period of at
least six (6) months (and for up to an additional three (3) months if requested
by the Majority Holders); provided, however, that, if the Company is required to
keep any such registration or qualification in effect with respect to securities
other than the Warrant Shares beyond such nine (9) month period, the Company
shall keep such registration or qualification in effect as it relates to the
Warrant Shares for so long as such registration or qualification remains or is
required to remain in effect in respect of such other securities.
(e) Copies of Prospectus. In the event of a registration pursuant
--------------------
to the provisions of this Section 9, the Company shall furnish to each Eligible
Holder such reasonable number of copies of the registration statement and of
each amendment and supplement thereto (in each case, including all exhibits),
such reasonable number of copies of each prospectus contained in such
registration statement and each supplement or amendment thereto (including each
preliminary prospectus), all of which shall conform to the requirements of the
Securities Act of 1933 and the rules and regulations thereunder, and such other
documents, as any Eligible Holder may reasonably request to facilitate the
disposition of the Warrant Shares included in such registration.
(f) Prior Exercise. The Majority Holders demanding registration
--------------
pursuant to Section 6(b) hereof shall not be required to exercise the purchase
rights represented by this Representative's Warrant prior to demanding
registration rights hereunder. If, however, the Majority Holders demand such
registration rights and the Company prepares and files a registration statement
or post-effective amendment as a result of such demand and the Majority Holders
5
<PAGE>
thereafter elect not to exercise the purchase rights represented by this
Representative's Warrant during the period that such registration statement or
post-effective amendment is effective, the demand registration right provided by
this Section 6 shall nonetheless have been satisfied by the Company.
(g) Cross-Indemnity. In the event of a registration pursuant to
---------------
the provisions of this Section 6, the Company shall enter into a cross-indemnity
agreement and contribution agreement, each in customary form, with each
underwriter, if any, and, if requested, enter into an underwriting agreement
containing conventional representations, warranties, allocation of expenses and
customary closing conditions, including, without limitation, opinions of counsel
and accountants' cold comfort letters, with any underwriter who acquires any
Warrant Shares.
(h) Current Filings. The Company agrees that until the later of
---------------
(i) the period when all the Warrant Shares have been sold under a registration
statement or pursuant to Rule 144 under the Securities Act of 1933 or (ii) the
date five years after the date on which the last remaining outstanding
Representative's Warrants are exercised, it shall keep current in filing all
reports, statements and other materials required to be filed with the Commission
to permit holders of the Warrant Shares to sell such securities under Rule 144.
(i) Registration on Form S-3. In the event the Company receives from
------------------------
the Majority Holders a request that the Company effect a registration on Form S-
3 with respect to the Warrant Shares and if Form S-3 is available for such
offering by the Majority Holders, the Company shall, as soon as practicable,
effect such registration as would permit or facilitate the sale and distribution
of the Warrant Shares as are specified in the request. All expenses incurred in
connection with the registration pursuant to this Section 6(i) shall be borne by
the Company. Registrations pursuant to this Section 6(i) shall not be counted
as a demand for registration pursuant to Section 6(b) hereof. Holders of other
securities of the Company having registration rights shall have the ability to
be included in the registration on Form S-3.
7. Indemnification
---------------
(a) Whenever pursuant to Paragraph 6 a registration statement
relating to the Representative's Warrant or any Shares of Common Stock issued or
issuable upon the exercise of any Representative's Warrants, is filed under the
Act, amended or supplemented, the Company will indemnify and hold harmless each
holder of the securities covered by such registration statement, amendment or
supplement (such holder being hereinafter called the "Distributing Holder"), and
each person, if any, who controls (within the meaning of the Act) the
Distributing Holder, and each underwriter (within the meaning of the Act) of
such securities and each person, if any, who controls (within the meaning of the
Act) any such underwriter, against any losses, claims, damages or liabilities,
joint or several, to which the Distributing Holder, any such controlling person
or any such underwriter may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such registration statement or any
preliminary prospectus or final prospectus constituting a part thereof or any
6
<PAGE>
amendment or supplement thereto, or arise out of or are based upon the omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse the Distributing
Holder and each such controlling person and underwriter for any legal or other
expenses reasonably incurred by the Distributing Holder or such controlling
person or underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action; provided; however, that the Company
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder or any other Distributing
Holder, for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed said registration
statement and such amendments and supplements thereto, each person, if any, who
controls the Company (within the meaning of the Act) against any losses, claims,
damages or liabilities to which the Company or any such director, officer or
controlling person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in said
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement, or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder for use in the preparation thereof; and
will reimburse the Company or any such director, officer or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this Paragraph 7
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Paragraph 7.
(d) In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party, and
under such circumstances, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
7
<PAGE>
8. Anti-Dilution Provisions. The exercise price of the
------------------------
Representative's Warrant and the number of Warrant Shares purchasable upon the
exercise of the Representative's Warrants shall be subject to adjustment from
time to time upon the happening of certain events as follows:
(a) Adjustments of Exercise Prices.
------------------------------
(1) No Consideration or Consideration Less than Fair Market
-------------------------------------------------------
Value. In case the Company shall sell any shares of Common Stock for a
- -----
consideration per share less than the Fair Market Value per share of Common
Stock (as determined pursuant to Section 8(a)(3) hereof), then, in each case,
the exercise price in effect immediately prior to such sale shall be adjusted to
a price determined by multiplying the exercise price in effect immediately prior
to such sale by a fraction the numerator of which shall be the sum of (i) the
total number of shares of Common Stock outstanding immediately prior to such
sale, and (ii) the aggregate consideration, if any, received by the Company upon
such sale divided by the Fair Market Value immediately prior to such sale, and
the denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale; provided, however, that in no event
shall the exercise price be adjusted pursuant to this computation to an amount
in excess of the exercise price in effect immediately prior to such computation.
For purposes of any adjustment to be made in accordance with this Section
8(a)(1), in case of the sale of Common Stock for a consideration part or all of
which shall be cash, the amount of the cash portion of the consideration
therefor deemed to have been received by the Company shall be (i) the
subscription price, if shares of Common Stock are offered by the Company for
subscription, or (ii) the public offering price (before deducting therefrom any
compensation paid or discount allowed in the sale, underwriting or purchase
thereof by underwriter or dealers or others performing similar services), if
such securities are sold to underwriters or dealers for public offering without
a subscription offering, or (iii) the gross amount of cash actually received by
the Company for such securities in any other case, in each case, without
deduction for any expenses incurred by the Company in connection with such
transaction. In case of the sale of shares of Common Stock for consideration
part or all of which shall be in a form other than cash, the value of such
consideration shall be determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error.
(2) Options, Rights, Warrants or Convertible Securities. In
---------------------------------------------------
case the Company shall issue rights, options or warrants to subscribe for or
purchase Common Stock (securities convertible into or exchangeable for Common
Stock) at a price per share (or having a conversion price per share, if a
security is convertible into or exchangeable for Common Stock) less than the
Fair Market Value per share of Common Stock (as determined pursuant to Section
8(a)(3) hereof) immediately prior to the earlier of the issuance thereof or the
record date therefor, then, effective immediately following the earlier of the
issuance of such rights, option or warrants or the record date therefor, as the
case may be, in each case, the exercise price shall be adjusted by multiplying
the exercise price in effect immediately prior to such issuance or record date,
as the case may be, by a fraction, the numerator of which shall be the sum of
(i) the total number of shares of Common Stock outstanding on such date, and
(ii) the number of shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so offered (or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such Fair Market Value, and the denominator of which shall be the total
number of shares of
8
<PAGE>
Common Stock outstanding on such date plus the number of additional shares of
Common Stock to be offered for subscription or purchase (or in which the
convertible or exchangeable securities so to be offered are initially
convertible or exchangeable); provided, however, that to the extent the shares
of Common Stock (or securities convertible into or exchangeable for shares of
Common Stock) are not delivered, the exercise price shall be readjusted after
the expiration of such rights, options or warrants (but only with respect to
warrants exercised after such expiration) to the exercise price which would then
be in effect had the adjustments made upon the issuance of such rights, options
or warrants been made upon the basis of the delivery of only the number of
shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) actually issued. In case any subscription price may be
paid for a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error. If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in this Section
8(a)(2), or in the price per share or ratio at which the securities referred to
in this Section 8(a)(2) are convertible or exchangeable (in either case, other
than changes in such prices or ratios arising pursuant to antidilution
adjustments in such options, rights, warrants, convertible or exchangeable
securities or the instruments pursuant to which they were issued, provided that
such options, rights, warrants, convertible or exchangeable securities or
instruments pursuant to which they were issued do not contain antidilution
provisions any more favorable to the holder thereof than those contained
herein), such options, rights, warrants, convertible or exchangeable securities,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(3) Determination of Fair Market Value per share of Common Stock.
------------------------------------------------------------
The Fair Market Value per share of Common Stock on any date shall be deemed to
be the average of the daily closing prices for the thirty (30) consecutive
trading days immediately preceding the date in question. The closing price for
each day shall be the last reported sales price regular way, or, in the case no
such reported sale takes place on such day, the closing bid price regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the highest reported
bid price for the Common Stock as furnished by the National Association of
Securities Dealers, Inc., through NASDAQ or a similar organization if NASDAQ is
no longer reporting such information, provided, that the such price as furnished
by the National Association of Securities Dealers, Inc. shall not be used if the
board of directors of the Company shall determine in good faith that such price
does not reflect a price based upon competition by a sufficient number of
market-makers in a market of sufficient supply and demand. If on any such date
the Common Stock is not listed or admitted to trading on any national securities
exchange and is not quoted by NASDAQ or any similar organization, or the board
of directors shall determine as provided for herein that any such price or
quotation by NASDAQ shall not be used, the board of directors shall, in good
faith, determine the fair value of the shares of Common Stock and such value
shall be the Fair Market Value per share of Common Stock and such amount shall
be conclusive absent manifest error.
9
<PAGE>
(4) Determination of Date of Issue. In case the Company shall take a
------------------------------
record of the holders of any Common Stock for the purpose of entitling them (i)
to receive a dividend or other distribution payable in Common Stock or in
Convertible Securities, or (ii) to subscribe for or purchase Common Stock or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(5) Treasury Shares. For the purpose of this Section 8, shares of
---------------
Common Stock at any relevant time owned or held by, or for the account of, the
Company shall not be deemed outstanding.
(b) Adjustment of Exercise Prices - Stock Dividend, Distribution,
-------------------------------------------------------------
Subdivision or Reclassification. Anything in this Section 8 to the contrary
- -------------------------------
notwithstanding, in case the Company shall at any time (i) issue Common Stock or
Convertible Securities by way of dividend or other distribution on any stock of
the Company or (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the exercise
price of the Representative's Warrant in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall each be adjusted so that it shall equal a
price determined by multiplying the exercise prices by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Notwithstanding anything to the contrary contained in this Representative's
Warrant, in the event an adjustment to the exercise prices of the
Representative's Warrant is effected pursuant to this subsection 8(b) a
corresponding adjustment to the number of Warrant Shares shall be made pursuant
to Section 8(c) below. Adjustment of the exercise prices shall be made
successively whenever any event described herein shall occur.
(c) Adjustment of the Number of Shares of Common Stock Issuable upon
----------------------------------------------------------------
Exercise of Representative's Warrants. Whenever the exercise price of the
- -------------------------------------
Representative's Warrant is adjusted pursuant to subsection 8(a) above, the
number of Warrant Shares purchasable upon exercise of this Representative's
Warrant shall simultaneously be adjusted by multiplying the number of Warrant
Shares initially issuable upon exercise of this Representative's Warrant by the
exercise price in effect immediately prior to the referenced adjustment and
dividing the product so obtained by the exercise price as adjusted.
(d) No Adjustment For Small Amounts. Anything in this Section 8
-------------------------------
to the contrary notwithstanding, the Company shall not be required to give
effect to any adjustment in an exercise price unless and until the net effect of
one or more adjustments, determined as above provided, shall have required an
adjustment by at least five cents ($.05), but when the cumulative net effect of
more than one adjustment so determined shall be to change the actual exercise
price by at least five cents ($.05), such change in the exercise price shall
thereupon be given effect.
10
<PAGE>
(e) Computations and Notifications. Whenever any exercise price is
------------------------------
adjusted as provided for herein, the Company shall promptly but no later than
ten (10) days after any written request for such adjustment by Holder, cause a
notice setting forth the adjusted exercise price and adjusted number of Warrant
Shares to be issued upon exercise and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to Holder, at the
addresses set forth herein, and shall cause a certified copy thereof to be
mailed to the warrant agent of the Company. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Section 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(f) Notices to Represenative's Warrant Holders. So long as this
------------------------------------------
Representative's Warrant shall be outstanding and unexercised (i) if the Company
shall pay any dividend or make any distribution upon the Common Stock or (ii) if
the Company shall offer to the holders of Common Stock for subscription or
purchase by them any shares of stock of any class or any other rights or (iii)
if any capital reorganization of the Company, reclassification of the capital
stock of the Company, consolidation or merger of the Company with or into
another corporation, sale, lease or transfer of all or substantially all of the
property and assets of the Company to another corporation, or voluntary or
involuntary dissolution, liquidation or winding up of the Company shall be
effected, then, in any such case, the Company shall cause to be delivered to the
Holder, at least ten days prior to the date specified in (x) or (y) below, as
the case may be, a notice containing a brief description of the proposed action
and stating the date on which (x) a record is to be taken for the purpose of
such dividend, distribution or rights, or (y) such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date, if any, is to be fixed,
as of which the place and date, if any, is to be fixed, as of which the holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(g) Reclassification, Reorganization or Merger. In case of any
------------------------------------------
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of a
subdivision or combination), or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of
thisRepresentative's Warrant or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, the Company shall cause effective provision to be made so that the
holder shall have the right thereafter, by exercising this Representative's
Warrant, to purchase the kind and amount of shares of stock and other securities
and property receivable upon such reclassification, capital reorganization or
other change, consolidation, merger, sale or conveyance. Any such provision
shall include provision for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Representative's
Warrant. The foregoing provisions of this Section (i) shall similarly
11
<PAGE>
apply to successive reclassification, capital reorganizations and changes of
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances. In the event that in any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for or of a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (f)(i) hereof with the amount of the
consideration received upon the issue thereof being determined by the Board of
Directors of the Company, such determination to be final and binding on the
holder.
(h) Spin-Offs. In the event the Company spins-off a subsidiary by
---------
distributing to the shareholders of the Company as a dividend or otherwise the
stock of the subsidiary, the Company shall reserve for the life of the
Representative's Warrant shares of the subsidiary to be delivered to the holders
of the Representative's Warrants upon exercise to the same extent as if they
were owners of record of the Warrant Stock on the record date for payment of the
shares of the subsidiary.
9. Governing Law. This Representative's Warrant shall be governed by
-------------
and in accordance with the laws of the State of Illinois.
IN WITNESS WHEREOF, Eldorado Artesian Springs, Inc. has caused this
Representative's Warrant to be signed by its duly authorized officer
under its corporate seal on this ____ day of ________, 1999.
ELDORADO ARTESIAN SPRINGS, INC.
By: ________________________________
Douglas A. Larson, President
[Seal]
Attest:
______________________________
Secretary
12
<PAGE>
PURCHASE FORM
-------------
(To be completed only upon exercise of Representative's Warrant)
Dated: ________________, 20___
The undersigned, the Holder of the foregoing Representative's Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Representative's Warrant to the extent of purchasing ________ Shares of Common
Stock and hereby makes payment of $____________ (either in Cash or pursuant to
the Cashless Exercise Right provided for in the Representative's Warrant) in
payment of the actual exercise price thereof.
______________________________
(Signature)
______________________________
(Please print or type name)
___________________________________
INSTRUCTIONS FOR REGISTRATION OF COMMON STOCK
----------------------------------------------
Name: _____________________________________________________
(Please print or type name)
Address: _____________________________
_____________________________
_____________________________
13
<PAGE>
ASSIGNMENT FORM
---------------
(To be completed only upon assignment of Representative's Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
Name:_______________________________________________________
(Please type or print name)
Address: _____________________________
_____________________________
_____________________________
the right to purchase Shares of Common Stock represented by the
foregoing Representative's Warrant to the extent of ___________ Shares of Common
Stock, and does hereby irrevocably constitute
and appoint ________________________________________________ attorney, to
transfer the Representative's Warrant on the books of the Company with full
power of substitution in the premises.
Dated: __________________, _____
______________________________
(Signature)
______________________________
(Please print or type name)
14
<PAGE>
Exhibit 10.4
AGREEMENT
THIS AGREEMENT dated this 8/th/day of December, 1998, between
the [deletion] and Eldorado Artesian Springs, Inc. ("Eldorado") is as
follows.
WHEREAS, Eldorado desires to acquire a reliable source of
replacement water which is suitable for the purpose of replacing
depletions attributable to uses of water in Eldorado's operations in
Eldorado Springs, Colorado; and
WHEREAS, [deletion] has facilities and rights which are suitable
for storing, exchanging, and effectuating the delivery of such
replacement water to replace depletions arising from Eldorado's
operations; and
WHEREAS, [deletion] is presently negotiating an agreement with
the [deletion] through which [deletion] anticipates that it will acquire
one unit of the [deletion] from the [deletion];
NOW, THEREFORE, in consideration of an initial payment by
Eldorado to [deletion] of $[deletion], the mutual promises set forth
below and other good and valuable consideration, receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows;
1. [deletion] will conclude its negotiations with the [deletion]
through which [deletion] anticipates it will be entitled to acquire the
[deletion] Unit (equating up to 100
<PAGE>
acre-feet of fully consumable water) and the right to deliver the [deletion]
Unit water through an existing pipeline and a proposed new pipeline spur into
[deletion] Reservoir.
2. Any such agreement between [deletion] and the [deletion] must be
concluded within ninety (90) days of this Agreement, unless such time period is
extended by mutual agreement of the parties. The terms of the [deletion]
Agreement must be fully acceptable to Eldorado; or the [deletion] initial
payment will be refunded to Eldorado and this Agreement will terminate.
3. Upon execution of an acceptable [deletion] Agreement, Eldorado shall
secure the funds for the payment of [deletion] to the [deletion] pursuant to the
terms of the [deletion] Agreement. Such payment shall be made at the time of the
conveyance of the [deletion] Unit after entry of an acceptable decree as
described in paragraph 5., below. The said [deletion] shall be consideration for
the [deletion] Unit and consideration for [deletion] right to use the new
delivery pipeline to deliver water attributable to the [deletion] Unit into
[deletion] for the benefit of Eldorado.
4. Immediately upon execution of this Agreement, [deletion] and Eldorado
will cooperate in obtaining any necessary approvals, authorizations from, and
inclusions into the [delete] and the Municipal Subdistrict which will enable use
of the [deletion] Unit by Eldorado for replacement purposes.
5. Prior to final action on inclusion of Eldorado into the [delete] and
Municipal Subdistrict, the parties shall jointly seek the consent of the
[delete] to the filing of an application by Eldorado in the District Court,
Water Division No. 1, whereby injurious out-of-
<PAGE>
priority depletions attributable to Eldorado's uses of water will be fully
replaced by exchange or direct release of water stored pursuant to the
[deletion] Unit in [deletion]. If such consent is not forthcoming, such
application will be withdrawn and all amounts paid by Eldorado to [deletion]
shall be returned. Eldorado will be the sole applicant in the case, but the
parties will cooperate in all significant case management decisions and on the
terms and conditions included in any proposed decree submitted to the Court for
consideration.
6. Within thirty (30) days after obtaining a final decree approving a
mutually acceptable plan for augmentation:
A. [deletion] or Eldorado shall exercise the option to purchase
the [deletion] Unit pursuant to the terms of the [deletion], Eldorado
shall make the [deletion] payment described in paragraph 3 to [deletion]
and [deletion] shall pay [deletion] to [deletion];
B. Eldorado shall pay [deletion], payable as follows: [deletion]
down and the balance of [deletion] payable in ten (10) equal annual
installments, including principal and interest at the rate of nine
percent (9%) per annum. This amount shall include consideration for the
operation of the exchange of water within the [deletion] System so as to
make water attributable to the [deletion] Unit available at the
headworks of the Community Canal at Eldorado Springs, Colorado and/or to
make direct releases of such water from [deletion] to replace otherwise
out-of-priority depletions attributable to Eldorado's use of water at
Eldorado Springs, Colorado, pursuant to the terms and conditions set
forth in the decree described in paragraph 5., above.
7. [deletion] agrees that it will operate its system so as to make water
available at the headworks of the Community Canal at Eldorado Springs, Colorado
and/or to make direct
<PAGE>
releases of such water from [deletion] to replace otherwise out-of-priority
depletions attributable to Eldorado's use of water at Eldorado Springs,
Colorado, pursuant to the terms and conditions set forth in the decree described
in paragraph 5., above.
8. [deletion] and Eldorado further agree that if Eldorado's future
augmentation requirements shall extend beyond the 100 acre-feet of water, which
is the subject of this Agreement, the parties will negotiate in good faith for
additional water which may be added to the Eldorado augmentation plan pursuant
to terms and conditions similar to those set forth herein.
Dated the day and date above written.
<PAGE>
[deletion] ELDORADO ARTESIAN
SPRINGS, INC.
By:_______________________________ By:____________________________
_______________________, President ____________________, President
STATE OF COLORADO )
) ss.
COUNTY OF ________ )
The foregoing instrument was acknowledged before me this 8/th/ day
of December, 1998, by _________________, President, [deletion].
WITNESS my hand and official seal.
My Commission Expires:_________________________
________________________
NOTARY PUBLIC
________________________
________________________
Telephone:______________
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF _________ )
The foregoing instrument was acknowledged before me this 8/th/ day
of December, 1998, by Doug Larson, President, Eldorado Artesian Springs, Inc..
WITNESS my hand and official seal.
My Commission Expires:______________________
_______________________
NOTARY PUBLIC
_______________________
_______________________
Telephone:_____________
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion, in this Registration Statement on Form SB-2, of our
report dated May 8, 1998 (except for Note 7 as to which the date is May 19,
1998), on our audit of the financial statements of Eldorado Artesian Springs,
Inc. We also consent to the reference to our firm under the caption "Experts".
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 9, 1999
Denver, Colorado
