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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 2000
SEC REGISTRATION NO. 333-68553
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 6
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ELDORADO ARTESIAN SPRINGS, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
COLORADO 2086 84-0907853
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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:
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<S> <C>
LAURIE P. GLASSCOCK, ESQ. PETER B. SHAEFFER, ESQ.
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
</TABLE>
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
according 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 according 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 according to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE REGISTRATION FEE(4)
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<S> <C> <C> <C> <C>
Units, each consisting of:........................ 1,000,000 $5.10 $5,100,000 $ 1,347
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(a) one share of Series A convertible preferred
stock........................................... 1,000,000 -- -- --
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(b) one warrant to purchase one share of common
stock........................................... 1,000,000 -- -- --
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Common Stock underlying Series A convertible
preferred stock(2).............................. 1,000,000 -- -- --
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Common Stock underlying warrants(3)............... 1,000,000 $6.00 $6,000,000 1,584
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Representative's warrant(5)....................... 100,000 $0.01 1,000 .26
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Series A convertible preferred stock issuable upon
exercise of representative's warrants........... 100,000 $6.00 600,000 158.40
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Warrants issuable upon exercise of
representative's warrants....................... 100,000 $0.12 12,000 3.17
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Common stock issuable upon conversion of preferred
stock issued upon exercise of representative's
warrants........................................ 100,000 -- -- --
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Common stock issuable upon exercise of warrants
included in representative's warrants........... 100,000 $6.00 600,000 158.40
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Total Due......................................... $3,251.23
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Amount Payable Now................................ $1,908.49*
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* Previously paid $1,342.74 in connection with the original filing.
(1)In accordance with Rule 416, there are hereby being registered an
indeterminate number of additional shares of Series A convertible preferred
stock which may be issued as a result of the payment in kind dividend
provisions of the Series A convertible preferred stock and an indeterminate
number of additional shares of common stock which may be issued as a result
of the anti-dilution provisions of the shares of Series A Convertible
Preferred Stock and the warrants.
(2)Registered for resale upon conversion of Series A Convertible Preferred
Stock.
(3)Registered for resale upon exercise of outstanding warrants.
(4)The registration fee that is being paid herewith was calculated in accordance
with Rule 457 (c).
(5)Note that the Representative's Warrant is to purchase the series A and public
warrant at 120%, which equates to a $6.00 price for the preferred and a $0.12
price for the public warrants.
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 ACCORDING TO SAID SECTION 8(A),
MAY DECIDE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE UNITS UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 21, 2000
1,000,000 UNITS
[ELDORADO LOGO HERE]
This is a secondary public offering by Eldorado Artesian Springs, Inc. Each
unit consists of one share of series A convertible preferred stock and one
public warrant to purchase one share of common stock. We expect that the initial
public offering price will be $5.10 per unit, consisting of $5.00 per share of
series A convertible preferred stock and $0.10 per public warrant. The series A
convertible preferred stock and the public warrant will be immediately
detachable and separately transferable from each other at any time commencing
upon the closing of this offering. We have filed an application to list the
units, the series A convertible preferred stock and the public warrants on the
Nasdaq SmallCap Market(SM).
THE OFFERING
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PER
SHARE TOTAL
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Public Price............. $5.10 $5,100,000
Underwriting discounts... $0.51 $ 510,000
Proceeds to Eldorado
(before expenses
payable by Eldorado)... $4.59 $4,590,000
</TABLE>
Eldorado bottles and markets natural artesian springs water from a natural
spring located in the foothills of the Colorado Rocky Mountains. Before this
offering, Eldorado common stock has traded on the OTC Bulletin Board. Upon
completion of this offering, Eldorado expects that the securities will trade on
the Nasdaq SmallCap Market.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK AND THE POSSIBILITY OF
SUBSTANTIAL DILUTION. WE STRONGLY URGE YOU TO READ THE ENTIRE PROSPECTUS. YOU
SHOULD REVIEW THE SECTION TITLED RISK FACTORS, FOR A DESCRIPTION OF THE RISKS
INVOLVED IN ELDORADO'S BUSINESS, BEGINNING ON PAGE 6 AND DILUTION, FOR A
DESCRIPTION OF THE DILUTION TO NEW INVESTORS, ON PAGE 13 BEFORE MAKING ANY
INVESTMENT DECISIONS.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
AMERICAN FRONTEER FINANCIAL CORPORATION
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PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus and may
not contain all 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 shown, assumes no exercise of any outstanding
options or warrants. 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, which are the source for Eldorado's water, 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.
Eldorado has focused on developing and expanding the business of bottling
Eldorado Spring water. Currently, Eldorado's operations consist of its home and
commercial delivery business of five and three gallon bottles. In addition,
Eldorado also bottles and delivers smaller bottles in sizes of .5 liter, 1.0
liter and 1.5 liter. Bottles used for the smaller packaging are made of
polyethylene terephtalate, a premium clear plastic. These bottles are commonly
referred to in the beverage industry as PET bottles.
The demand for bottled water has increased due to concerns with the quality
of municipal tap waters, consumer demands for a natural, healthy beverage, and
the convenience of the PET segment of the bottled water market. In 1999, the
bottled water industry achieved solid growth with wholesale revenues topping
$4.9 billion and bottled water consumption reaching nearly 15.5 gallons a year
for an individual consumer. Through 1999, bottled water sales in the entire
industry were up nearly 14 percent, providing further evidence of the
significant growth remaining in the bottled water market.
Eldorado's goal is to expand its operations based on the continued success
of its PET bottled water products. Eldorado's strategy initially calls for
expanding the distribution of its PET products into new markets that are
geographically near its Colorado operations. By penetrating new markets for its
PET bottled waters, Eldorado expects to solidly increase revenues and earnings.
Once Eldorado has achieved its market share goals, it plans to further expand
distribution in other regions.
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 publicly-traded company, in April 1986.
THIS OFFERING
SECURITIES OFFERED 1,000,000 units
Each unit consists of one share of series A convertible preferred stock and
one public warrant to purchase a share of common stock. The series A convertible
preferred stock and the warrant will be immediately detachable and separately
transferable from each other at any time commencing upon the closing of this
offering.
SERIES A CONVERTIBLE PREFERRED STOCK
Each share of series A convertible preferred stock will be convertible into
one share of our common stock at any time, without further cost. The initial
conversion ratio of one for one is subject to adjustment for stock splits, stock
dividends, recapitalizations, mergers, consolidations and similar events which
affect the common stock. The series A convertible preferred stock will
automatically convert into common stock in the event the common stock price,
adjusted for any stock splits, closes at a bid price of $10.00 or higher for a
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period of 30 consecutive trading days during the first year following the
closing date of this offering, or, after that first year, closes at a bid price
of $12.50 or higher for 30 consecutive trading days. After the fourth
anniversary of the closing date of this offering, we may redeem all the
outstanding series A convertible preferred stock at a price of $6.25 plus all
accrued but unpaid dividends.
We are obligated to pay cumulative, annual dividends on the series A
convertible preferred stock in the amount of 8% of the $5.00 cost of the series
A convertible preferred stock component of the unit in cash, and 7% of that
$5.00 cost in a payment-in-kind dividend of additional shares of series A
preferred stock which will be valued at $5.00 for the purpose of calculating the
amount of the payment-in-kind dividend. The dividends are paid semi-annually,
starting on May 1, 2001 and continuing each November 1 and May 1 thereafter. We
will only pay dividends when declared by our board of directors. However, all
unpaid dividends will accrue at the annual rate as if paid. In addition, we have
established a dividend escrow account which will be funded, from the proceeds of
this offering, in the amount necessary to pay the first year, annual cash
dividend. This amount will be at least $400,000 based upon an assumed public
offering price of $5.10 per unit. The contract governing this escrow account
also requires that we continue to fund the escrow account so that its balance is
at all times equal to the anticipated cash dividends payable for the next year.
In the event we do not declare a semi-annual dividend, or do not pay a dividend
we declare, we will be required to increase the conversion ratio so that after
any default, each share of preferred stock will be convertible into five shares
of common stock without the requirement of any further payment.
The series A convertible preferred stock will not entitle you to vote on
any matters that require shareholder approval.
PUBLIC WARRANTS
The public warrants entitle the holder to purchase one share of common
stock at a price of $6.00 per share, subject to adjustment under certain
circumstances. The warrants are exercisable immediately, and will expire on the
third anniversary of the closing of this offering.
KEY FACTS
Units to be sold.................... 1,000,000
Series A preferred stock outstanding
before offering..................... 0
Public warrants outstanding before
offering............................ 0
Common stock outstanding before
offering............................ 2,995,495
Series A preferred stock outstanding
after offering...................... 1,000,000
Public warrants outstanding after
offering............................ 1,000,000
Common stock outstanding after
offering............................ 2,995,495
Use of proceeds..................... Acquisition of additional water rights,
new offsite facility and equipment,
onsite improvements, marketing
programs, retirement of current debt,
funding of dividend escrow account and
general working capital purposes
Proposed Nasdaq symbols............. ELDOU, ELDOP, ELDOW
The number of shares of series A convertible preferred stock outstanding
after this offering does not include 100,000 shares which may become outstanding
at a cost of $6.00 per share upon the exercise of the preferred stock warrant
component of the representative's warrant. The number of shares of common stock
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does not include an aggregate of 3,238,000 shares of common stock which may
become outstanding as follows:
- 1,000,000 shares upon conversion of the series A convertible preferred
stock for no further payment to us;
- 1,000,000 shares upon exercise of the public warrants at a cost of $6.00
per share;
- 100,000 shares issuable for no further payment to us upon conversion of
the 100,000 shares of series A convertible preferred stock issuable upon
exercise of the preferred stock warrant component of the representative's
warrant;
- 100,000 shares issuable at a cost of $6.00 per share upon exercise of the
warrant to purchase public warrants component of the representative's
warrant;
- 200,000 shares of common stock issuable upon conversion of the 100,000
shares of series A convertible preferred stock and upon exercise of the
100,000 warrants included in the representative's warrant;
- 280,000 shares issuable upon exercise of outstanding warrants to purchase
30,000 shares at $3.30 per share and 250,000 shares at $11.00 per share;
- 558,000 shares issuable upon exercise of stock options outstanding as of
September 30, 2000, with a weighted average exercise price of $2.89.
SUMMARY OF FINANCIAL INFORMATION
The following table highlights some of the financial and operating
information of Eldorado derived from audited financial statements for the fiscal
years ended March 31, 1998, 1999 and 2000 and unaudited statements as of and for
the six months ended September 30, 1999 and 2000. 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.
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<CAPTION>
AS OF AND FOR SIX MONTHS
AS OF AND FOR THE YEAR ENDED MARCH 31 ENDED SEPTEMBER 30
--------------------------------------- ------------------------
1998 1999 2000 1999 2000
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenues................. $3,329,444 $4,036,822 $5,328,938 $2,683,173 $3,185,889
Total operating expenses....... 3,069,859 3,687,682 4,897,002 2,484,691 3,117,789
Operating income............... 259,585 349,140 431,936 198,482 68,100
Earnings before taxes.......... 117,631 217,850 (44,981) 142,475 3,553
Net income..................... 83,228 138,114 (46,007) 92,609 2,309
Earnings per share............... $ .03 $ .05 $ (.02) $ .03 $ .00
Weighted average of number of
shares outstanding............. 2,695,495 2,995,495 2,995,495 2,995,495 2,995,495
Balance sheet data:
Total assets................... $2,456,721 $3,386,374 $3,294,198 $3,586,694 $3,492,713
Total liabilities.............. 1,905,801 2,007,259 1,961,090 2,114,970 2,157,296
Stockholders' equity........... 550,920 1,379,115 1,333,108 1,471,724 1,335,417
</TABLE>
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RISK FACTORS
This investment involves a high degree of risk. You should carefully
consider the following risk factors as well as all the information in this
prospectus before buying shares of Eldorado's preferred stock.
BECAUSE WATER AVAILABLE FOR PRODUCTION MAY BE LIMITED, WE MAY BE UNABLE TO
ACQUIRE ENOUGH WATER TO SATISFY DEMAND FOR OUR PRODUCTS AND TO MEET OUR
EXPANSION GOALS.
We do not have the right to use all the water which flows from our springs.
Persons downstream from us have water rights which must be satisfied in full
before we can use all the water from our springs. If there is not enough water
flow from the stream to satisfy the downstream water rights, we would have to
stop taking water from our springs. Under Colorado law, we can only avoid a
restriction on our use of the water flowing from our springs by acquiring
additional sources of water to meet the demands of downstream users. These
sources would replace the water we use from our springs and would be used to
satisfy the requirements of downstream users. Therefore, unless we are able to
obtain replacement water sources to satisfy downstream water rights, our water
supply from our springs will be limited. Because we would always only bottle
water from our springs and would not use any additional water for our product,
we may not have enough water to meet demand for our products or to support our
plans to expand our business.
OUR ABILITY TO EXPAND OUR BUSINESS IS RESTRICTED BECAUSE WE DO NOT HAVE A
PERMANENT SOURCE OF REPLACEMENT WATER
We do not have a permanent source of additional water to replace the water
we use from our springs in the event additional water is required to satisfy the
water rights of persons downstream from us. We lease rights to additional water
on a year-to-year basis. We believe that the lack of a permanent source of
replacement water will restrict our ability to implement our plans for
increasing our business.
For more details about our permanent replacement plan, see Use of Proceeds
and Eldorado and its Business -- Strategy.
BECAUSE WE ARE SIGNIFICANTLY SMALLER THAN OUR NATIONAL COMPETITORS, WE MAY NOT
HAVE THE FINANCIAL RESOURCES AND NAME RECOGNITION TO CAPTURE ADDITIONAL MARKET
SHARE.
We face significant competition in the bottled water industry from national
brands which can compete on a lower price basis and often are given premium
shelf space from the retailers. The trend in recent years in the bottled water
industry has been toward the development of national brands of natural spring
water. Barriers to entry increase significantly at the national level because of
large marketing and distribution costs associated with getting and maintaining a
presence at such distribution levels. In addition, many companies are now
bottling water exclusively for retailers. As a result, we face significant
hurdles to increasing our market share in the bottled water industry. For more
detailed information about our competitors and our competitive strategy, see
Eldorado and Its Business -- Competition.
OUR INVENTORY LEVELS MAY NOT BE SUFFICIENT TO FILL CUSTOMER ORDERS WHICH COULD
REDUCE REVENUES AND IMPAIR CUSTOMER RELATIONS
We maintain a limited amount of finished product inventory. If an event
caused our facilities to shut down, even for a short period, we might be unable
to fill customer orders, which could reduce revenues and damage customer
relations. For more detailed information, see Eldorado and Its
Business -- Strategy -- Bottling Warehouse and Distribution Facility.
BECAUSE ELDORADO'S CURRENT OFFICERS AND DIRECTORS WILL CONTINUE TO HAVE MAJORITY
CONTROL OF ELDORADO AFTER THIS OFFERING, THEY WILL CONTROL MATTERS SUBMITTED FOR
SHAREHOLDER APPROVAL IF THEY ACT TOGETHER.
Our officers and directors will own approximately 62% of the outstanding
shares of common stock after this offering, assuming the conversion of 1,000,000
shares of series A preferred stock. These shareholders,
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individually and as a group, will be able to influence the outcome of
shareholder votes, including votes concerning the election of directors and the
approval of mergers and other significant corporate transactions. If they act
together, our officers and directors will be in a position to control all
matters requiring shareholder approval after the offering. The series A
convertible preferred stock sold in the offering is non-voting.
FUTURE SALES OF OUR COMMON STOCK MAY REDUCE THE MARKET PRICE OF YOUR UNITS
Sales of substantial amounts of common stock in the public market following
this offering could lower the market price for the common stock into which the
series A convertible preferred stock is convertible and which is issued upon
exercise of the public warrants. It is likely that market sales of large amounts
of our common stock after this offering, or the potential for those sales even
if they do not actually occur, will depress the market price for the series A
convertible preferred stock and the public warrants which are the components of
your unit. We cannot predict the effect that any such sales of common stock
would have on the market price then prevailing for the series A convertible
preferred stock or the public warrants. See Shares Eligible for Future Sale for
a more detailed description of the shares that may be sold into the market in
the future.
THERE IS A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK WHICH CAN BE SOLD IN THE
PUBLIC MARKET
After this offering of units, the series A convertible preferred stock and
the public warrants will be immediately detachable and separately transferable
from each other, and each will be freely tradable into the public market. Each
share of series A convertible preferred stock will be convertible at any time,
without further consideration into a share of common stock, and each public
warrant is immediately exercisable for a share of common stock at a cost of
$6.00. Therefore, after this offering of units, we will have 1,000,000 shares of
series A convertible preferred stock and 1,000,000 public warrants that will be
freely tradable into the public market. We will also have 1,000,000 shares of
common stock reserved for issuance upon the conversion of the series A
convertible preferred stock and an additional 1,000,000 shares of common stock
reserved for issuance upon exercise of the public warrants. Upon issuance, and
assuming a current prospectus, these reserved shares of common stock will be
freely tradable without restriction or further registration, unless issued to
one of our affiliates.
In addition, of our total of 2,995,495 shares of common stock currently
outstanding, 467,591 shares are now freely tradable into the public market. The
remaining 2,527,904 shares of common stock are restricted securities, although
229,497 of those shares have been owned for more than two years, and may become
freely tradable at any time, without being subject to resale volume restrictions
under Rule 144. Of these restricted shares, 2,298,407 may not be sold for one
year after this offering because of an agreement with the underwriter.
YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES OF PREFERRED STOCK OR THE COMMON
STOCK ISSUED UPON CONVERSION OF THE PREFERRED STOCK OR EXERCISE OF THE PUBLIC
WARRANTS, IF WE FAIL TO LIST THE PREFERRED STOCK, PUBLIC WARRANTS OR COMMON
STOCK ON THE NASDAQ SMALLCAP MARKET OR IF THE PREFERRED STOCK OR COMMON STOCK
BECOME SUBJECT TO THE SEC'S PENNY STOCK REGULATIONS.
If we cannot maintain the standards for continued listing on the Nasdaq
SmallCap Market, our common stock, preferred stock and public warrants could be
subject to delisting. Trading, if any, in our common stock, preferred stock or
public warrants would then be conducted in the over-the-counter market on the
OTC Bulletin Board or in what are commonly referred to as the pink sheets. As a
result, you may find it more difficult to sell your preferred stock, public
warrants or common stock issued upon conversion or exercise and to obtain
accurate quotations as to the price of these securities.
In addition, if our common stock or preferred stock were delisted from the
Nasdaq SmallCap Market, they could become subject to the penny stock rules of
the SEC. These rules impose additional sales practice requirements on
broker-dealers before our common stock or preferred stock could be sold to the
customers of the broker-dealers. The additional sales practice requirements
could materially adversely affect the willingness or ability of broker-dealers
to sell our common or preferred stock. This could reduce the market liquidity
for
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our common or preferred stock and therefore adversely affect your ability to
sell shares in the secondary market.
AN EFFECTIVE REGISTRATION STATEMENT WILL BE REQUIRED FOR CONVERSION OF THE
PREFERRED STOCK OR EXERCISE OF THE PUBLIC WARRANTS
We will be able to issue shares of common stock upon the conversion of the
series A convertible preferred stock or the exercise of the public warrants only
if there is a current prospectus under a registration statement for the common
stock which is effective with the Securities and Exchange Commission at the time
of conversion or exercise. Also, the common stock will have to be qualified for
sale or exempt from qualification under the applicable state laws. Although we
have agreed to use our best efforts to maintain these requirements, we cannot
assure you that we will be able to do so. If we do not maintain a current
prospectus under an effective registration statement, the public warrants may
lose all value and the preferred stock may lose substantial value.
BECAUSE THE OFFERING PRICE FOR THE UNITS AND THE EXERCISE PRICE FOR THE PUBLIC
WARRANTS WERE NOT BASED ON THE RECENT MARKET PRICE FOR OUR COMMON STOCK, THE
UNIT PRICE AND THE EXERCISE PRICE MAY NOT INDICATE OUR ACTUAL VALUE.
The public offering price of the units being sold in this offering resulted
from our negotiations with the underwriter and are not necessarily related to
our assets, book value or financial condition. In addition, the exercise price
of the public warrants was not based on selling prices in the public market for
our common stock, but was arbitrarily set. In particular, the price to purchase
our common stock by exercise of the public warrants is substantially higher than
the recent closing price of $2.75 on November 14, 2000.
IMMEDIATE CONVERSION OF PREFERRED STOCK WILL RESULT IN SUBSTANTIAL DILUTION.
If you were to convert the preferred stock immediately upon completion of
this offering, you would experience substantial dilution of approximately $3.57
per share of common stock or 71%, based upon the cost of the unit and our
adjusted net tangible book value as of September 30, 2000.
THERE ARE POTENTIAL FEDERAL INCOME TAX CONSEQUENCES BECAUSE OF THE PAYMENT OF A
DIVIDEND IN THE FORM OF ADDITIONAL SHARES OF PREFERRED STOCK.
We will pay an annual dividend of 7% on the preferred stock in the form of
a payment-in-kind distribution of additional shares of the preferred stock. We
expect that this payment-in-kind distribution will be classified as a dividend
upon which you will be required to pay income tax as ordinary income. The amount
of tax depends upon individual factors which include your other income and
expenses for the year. We expect to distribute the payment-in-kind dividend on a
semi-annual basis within 30 days following its accrual every six months on each
May 1 and November 1. If you decide to or must continue to hold the
payment-in-kind dividend, you may be required to recognize taxable income
without having received cash to pay any resulting income tax.
THERE ARE POTENTIAL ADVERSE EFFECTS IF WE MAKE FUTURE SALES OF PREFERRED STOCK.
Our articles of incorporation, as amended, authorize us to issue up to
10,000,000 shares of preferred stock. In addition to the series A convertible
preferred stock included in the units we are now offering, the board of
directors has been granted the authority to fix and determine the relative
rights and preferences of additional preferred stock. The board of directors may
also authorize the issuance of additional preferred stock without further
shareholder approval. As a result, the board of directors could authorize the
issuance of a series of preferred stock which would grant preferred rights to
our assets upon liquidation, a right to receive dividends before any are
declared on our common stock, and the right to redemption, together with a
premium. Any further issuance of preferred stock, could, under certain
circumstances, have the effect of delaying or preventing a change of control,
and may adversely affect the rights of our common shareholders, the holders of
the series A convertible preferred stock and the market for those securities.
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THERE HAS BEEN NO PRIOR TRADING MARKET FOR THE PREFERRED STOCK OR THE PUBLIC
WARRANTS, AND THE MARKET FOR OUR COMMON STOCK HAS BEEN LIMITED.
There has never been a public market for the preferred stock or the public
warrants, and there can be no assurance that a public trading market will
develop or be maintained in the future. While there currently exists a limited
public trading market for our common stock, there can be no assurance that this
market will improve in the future to provide a market in which any common stock
issued upon conversion of the preferred stock or exercise of the public warrants
can be sold. During the first nine months of 2000, our common stock traded on
only 49 days.
FORWARD-LOOKING INFORMATION AND ASSOCIATED RISKS
This prospectus contains forward-looking statements, and statements
regarding, among other things, our growth strategy, expected 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;
- ability to purchase additional water rights;
- labor and marketing costs;
- operating and packaging costs;
- intensity of competition; and
- legal claims.
Actual results could differ 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.
9
<PAGE> 10
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 considers 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 get 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.
Information contained on our website does not constitute part of this
prospectus.
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 the information included in the registration statement.
Certain parts 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 or copied, without
charge, from:
Public Reference Section
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW, Room 1024
Washington, DC 20549
10
<PAGE> 11
USE OF PROCEEDS
The net proceeds to Eldorado from the sale of the shares offered in this
prospectus will be $4,375,000, assuming a per share offering price of $5.10 and
deducting the underwriting expenses and other expenses of the offering estimated
at $725,000. We expect that we will use the net proceeds of this offering during
the next twelve month period as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DESCRIPTION DOLLAR AMOUNT PERCENT
----------- ------------- -------
<S> <C> <C>
Retire current debt......................................... $1,500,000 34.3%
Dividend escrow account..................................... 400,000 9.1%
Offsite facilities.......................................... 800,000 18.3%
Onsite improvements......................................... 300,000 6.9%
Water rights................................................ 275,000 6.3%
Marketing expenses
Advertising fees and broker commission.................... 320,000 7.3%
Media campaign............................................ 100,000 2.3%
Special events and promotions............................. 100,000 2.3%
Slotting fees and in-store promotions..................... 280,000 6.4%
Other marketing expenses.................................. 100,000 2.3%
Additional working capital.................................. 200,000 4.5%
---------- -----
TOTAL............................................. $4,375,000 100%
</TABLE>
This represents Eldorado's present intention with respect to the use of the
offering proceeds. Capital requirements or business opportunities, which are not
currently expected, 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 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 12 months.
See Eldorado and Its Business -- Strategy for more detailed information
about Eldorado's planned use of proceeds, including specific application of the
amounts described above and the time frame over which Eldorado will use the
proceeds.
DETERMINATION OF THE OFFERING PRICE
The public offering price of the units is based upon the aggregate prices
for the series A preferred stock and the public warrants which comprise the
units. Those prices have been determined 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 and an assessment of Eldorado's
management.
11
<PAGE> 12
PRICE RANGE OF COMMON STOCK
Eldorado's common stock is traded in the over-the-counter market on the OTC
Bulletin Board. The quotations presented below reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions. The following table sets forth for the periods
shown, the quotations for the common stock:
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
CALENDAR 2000
First quarter through March 31, 2000........................ $3.75 $2.00
Second quarter through September 30, 2000................... 4.00 1.38
Third quarter through September 30, 2000.................... 3.81 1.88
Fourth quarter through November 3, 2000..................... 3.25 2.63
CALENDAR 1999
First quarter through March 31, 1999........................ 3.25 0.63
Second quarter through September 30, 1999................... 2.50 1.06
Third quarter through September 30, 1999.................... 5.25 1.25
Fourth quarter through December 31, 1999.................... 4.38 2.00
CALENDAR 1998
First quarter through March 31, 1998........................ 2.64 0.48
Second quarter through September 30, 1998................... 2.50 0.25
Third quarter through September 30, 1998.................... 0.75 0.50
Fourth quarter through December 31, 1998.................... 0.63 0.50
</TABLE>
The latest closing bid quotation of the common stock, as reported by
Nasdaq, was $2.75 per share on November 14, 2000. As of November 14, 2000, there
were 145 record holders of the common stock, which does not reflect shareholders
who own their shares in nominee or street name through their brokers. For the
period through September 30, 2000, only one market maker posted quotes for the
common stock.
Eldorado has not paid cash dividends in the past and does not intend to pay
cash dividends in the future on its common stock. Eldorado presently intends to
keep earnings for use in its business, with any future decision to pay cash
dividends on its common stock dependent upon Eldorado's growth, profitability,
financial condition, and other factors as decided by the board of directors.
Eldorado will pay dividends on the series A convertible preferred stock in the
amount of 8% cash and 7% in shares of series A convertible preferred stock. The
cash dividend of $0.40 per year on the series A preferred stock will be paid in
equal, semi-annual installments. The preferred stock dividend of 0.07 shares per
year on the series A preferred stock, will be paid in equal, semi-annual
issuances of 0.035 shares of preferred stock.
12
<PAGE> 13
DILUTION
Our net tangible book value as of September 30, 2000, was $1,335,417, or
$0.45 per share of common stock. Our net tangible book value is our total assets
minus the sum of our liabilities and intangible assets. Our net tangible book
value per share is our net tangible book value divided by the total number of
shares of common stock outstanding.
As of September 30, 2000, after giving effect to:
- an increase in our total assets of $4,375,000 to reflect our estimated
net proceeds from this offering of units as described under Use of
Proceeds, assuming we issue 1,000,000 units, and
- the addition of 1,000,000 shares of common stock issuable without further
payment to us upon conversion of the 1,000,000 shares of series A
convertible preferred stock issued as a component of the units,
our pro forma adjusted net tangible book value, would be approximately
$5,710,417, or $1.43 per share of common stock.
The table below shows the pro forma as adjusted increase in net tangible
book value of $0.98 per share of common stock and the dilution to investors
purchasing units in this offering on the assumption that all series A
convertible preferred stock issued as a part of the units is converted. This
dilution will equal the difference between the amount of $5.00 which is the cost
to purchase the series A preferred stock which is converted to our common stock
at no further cost, and the net tangible book value per share.
<TABLE>
<S> <C> <C>
Public offering price allocated to series A preferred
shares.................................................... $5.00
Net tangible book value per share as of September 30, 2000
before this offering and pro forma adjustments............ $0.45
Increase per share attributable to investors in this unit
offering assuming immediate conversion of all series A
convertible preferred stock............................... $0.98
-----
Pro forma net tangible book value per share as of September
30, 2000 after this offering and assuming immediate
conversion of all series A convertible preferred stock.... $1.43
-----
Dilution per share to investors in this offering of units
assuming immediate conversion of all series A convertible
preferred stock........................................... $3.57
=====
Dilution per share as a percentage of offering.............. 71%
</TABLE>
13
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of Eldorado as of
September 30, 2000, and as adjusted, to give effect to the receipt of the net
proceeds of this offering based upon the public offering price of $5.10 per
unit.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Long term debt (including current maturities)............... $1,510,897 --
Stockholders' equity
Series A convertible preferred stock; par value $.001 per
share; authorized -- 10,000,000 shares; no shares
issued or outstanding, actual; 1,000,000 shares issued
and outstanding, as adjusted........................... -- 1,000
Common stock, par value $.001 per share; authorized --
50,000,000 shares; issued and outstanding -- 2,995,495
actual and as adjusted................................. 2,995 2,995
Additional paid-in capital................................ 984,656 5,358,656
Retained earnings......................................... 347,766 347,766
---------- ----------
Total stockholders' equity........................ 1,335,417 5,710,417
========== ==========
Total capitalization.............................. $2,846,314 $5,710,417
========== ==========
</TABLE>
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Six Months Ended September 30, 2000 and 1999
Revenues: Net revenues for the six months ended September 30, 2000
increased $502,716 or 18.7% compared to the same period ended September 30,
1999. Five and three gallons product sales increased 8.9% for the six months
ended September 30, 2000 compared to the same period of fiscal 1999. Sales of
the one gallon products increased 32.3% for the six months ended September 30,
2000 compared to the same period of fiscal 1999. Sales of the PET products (1.5
liters and smaller) generated the largest increase in revenues and increased
56.6% for the six months ended September 30, 2000 compared to the same period of
fiscal 1999. Five and three gallon product sales account for 66.5% of net
revenues, PET products account for 20.8% of revenues and one gallon products
account for 9.6% of revenues.
Gross Profit: For the six months ended September 30, 2000 cost of goods
sold was $637,914 compared to $439,467 for the six months ended September 30,
1999. Resulting gross profit was 80.0% of revenues for the six months ended
September 30, 2000 compared with a gross profit of 83.6% for the six months
ended September 30, 1999. Gross profit increased 13.6% from $2,243,706 for the
six months ended September 30, 1999 to $2,547,975 for the six months ended
September 30, 2000. The decrease in gross profit percentage is the result of the
increased revenue associated with the PET products and the one gallon products
as they have a lower gross margin due to additional packaging costs. In
addition, Eldorado was forced to purchase one-gallon containers from an
out-of-state vendor at premium prices while its normal local vendor was
undergoing renovations. Eldorado has resumed local purchasing in July 2000.
Operating Expenses: Operating expenses for the six months ended September
30, 2000 increased 21.3% to $2,479,875 from $2,045,224 for the same period of
fiscal 1999. Salaries and related expenses increased 23.2% for the six months
ended September 30, 2000. Salaries and related expenses were $1,255,713 or 39.4%
of sales for the six months ended September 30, 2000 compared to $1,019,470 or
38.0% of sales for the same period of fiscal 1999. The increase in salaries and
related expenses is due to the increase in revenues for the same period and the
increased wages involved in obtaining and servicing new and existing customers.
The increase in salaries and related expenses is also due to the additional
costs of operating within a limited amount of space. Eldorado has plans to move
the bottling facility at which time management expects more efficient
operations. In addition, Eldorado is incurring additional personnel and
operating expenses as a result of product volume growth straining processing in
the near term as production and delivery requirements increase faster than the
expansion facilities can be completed. While Eldorado is making every effort to
mitigate these effects, it believes additional costs and expenses will be
incurred until the expansion facilities are fully operational in June 2001.
For the six months ended September 30, 2000 advertising and promotional
expenses were $385,861 or 12.1% of sales compared to $343,772 or 12.8% of sales
for the same period of fiscal 1999. Additional advertising expenditures were
incurred during the six months ended September 30, 2000, and management expects
that advertising and promotional expenses will remain at the historical level of
approximately 10% of annual sales. Eldorado incurs a higher portion of their
advertising costs during the first half of the fiscal year due to the summer
months falling during this period.
Delivery expenses increased 24.2% to $179,803 or 5.6% of sales for the six
months ended September 30, 2000 compared to $144,821 or 5.4% of sales for the
same period ended September 30, 1999. Delivery costs increased due to the
increase in revenues and the costs associated with the operation of delivery
vehicles.
General and administrative expenses for the six months ended September 30,
2000 increased 26.1% to $480,026 from $380,550 for the same period of fiscal
1999. The increase in general and administrative expenses is due to the increase
in revenues.
15
<PAGE> 16
Depreciation and amortization increased 14% for the six months ended
September 30, 2000. Eldorado has continued to purchase additional equipment
associated with the increase in additional home and commercial accounts.
Net Income: Eldorado's net income for the first six months of fiscal 2000
was $2,309 compared to $92,609 for the six months ended September 30, 1999. The
effect of operating the business with a limited bottling facility has had a
negative effect on the net income resulting in a 97.5% decrease for the six
months ended September 30, 2000. Eldorado currently has plans to build an
off-site warehouse and bottling facility to allow increased production capacity.
Construction is expected to be completed by June 2001. At that time, operating
expenses and cost of goods are expected to be more consistent with the increase
in revenues resulting in an increase in net income.
Comparison of Fiscal Years Ended March 31, 2000 and 1999
Revenues: Revenues for the year ended March 31, 2000 increased 32.0% from
the previous year to $5,328,938. This increase resulted from increased sales to
Eldorado's existing customer base as well as from sales to new customers. Sales
of the five and three gallon bottles increased 22.7%, smaller package products
(.5, 1.0 and 1.5 liter) increased 87.9% and one gallon products increased 55.0%
from the previous year. The sales increase in each category is due to the
increase in customer base as well as the increase in the market for bottled
water.
Gross Profit: The costs of goods sold increased 69.2% for the year ended
March 31, 2000 compared to a year earlier. This increase in cost is due to the
overall increase in sales volume and a larger increase of sales for the smaller
PET products which have a higher cost of goods. Cost of goods sold represented
17.4% of sales for the year ended March 31, 2000 compared to 13.5% of sales for
the year ended March 31, 1999. Due to the increased demand for water associated
with Y2K, the company had to purchase raw goods at a higher cost in order to
meet the higher demand. The company does not anticipate having to pay these
prices on a regular basis in the future.
Operating Expenses: Operating expenses for the year ended March 31, 2000
increased 26.5%. This overall increase is consistent with the increase in
revenues for the year. Advertising and promotion expenses increased
approximately 63.1% for the year ended March 31, 2000. For the year ended March
31, 2000 advertising and promotion expenses were 10.9% of sales compared to 8.8%
of sales for the year ended March 31, 1999.
General and administrative expenses were $791,779 or 14.9% of sales for the
year ended March 31, 2000, compared to $670,854 or 16.6% of sales for the year
ended March 31, 1999. Delivery expenses increased 11.5% to $289,092 or 5.4% of
sales for the year ended March 31, 2000 compared to $259,240 or 6.4% of sales
for the year ended March 31, 1999. Depreciation and amortization decreased 6.2%
for the year ended March 31, 2000.
Interest Income: Interest income for the year ended March 31, 2000
decreased to $8,197 from $16,242 for the previous year ended March 31, 1999. The
company completed a private placement in April 1998 that generated much of the
interest income for the year ended March 31, 1999. During the year ended March
31, 2000, the company utilized some of the funds and this resulted in a lower
amount of interest income.
Net Loss: For the year ended March 31, 2000, income before taxes decreased
120.6% to a net loss of income before taxes of $44,981. During the year ended
March 31, 2000, Eldorado attempted to complete a secondary stock offering.
Eldorado determined that the offering would not be successful and was forced to
expense costs associated with the offering that had been previously capitalized.
We had to expense $352,653 of the offering costs. Without the effect of the
offering costs, Eldorado would have realized pretax income of $307,672. Pretax
income for the year ended March 31, 2000 would have been an increase of 41.2%
over the year ended March 31, 1999.
16
<PAGE> 17
Comparison of Fiscal Years Ended March 31, 1999 and 1998
Revenues: Revenues for the year ended March 31, 1999 increased 21.3% from
the previous year to $4,036,822. This increase resulted from increased sales 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.
Gross Profit: The costs of goods sold increased 9.1% for the year ended
March 31, 1999 compared to a year earlier. This increase in cost is primarily
due to the overall increase in volume. Cost of goods sold represented 13.6% of
sales for the year ended March 31, 1999 compared to 15.1% of sales for the year
ended March 31, 1998. Eldorado has received more favorable purchasing agreements
because of the ability to buy goods in larger volumes.
Operating Expenses: Operating expenses for the year ended March 31, 1999
increased 22.3%. This overall increase is consistent with the increase in
revenues for the year. Salaries and related expenses increased 17.5% for the
year ended March 31, 1999. This increase is due to the increase in sales for the
year resulting in higher commissions and additional employees. Administrative
and general expenses increased 20.3% for the year ended March 31, 1999
consistent with the increase in revenues. Selling and delivery expenses
increased 45.8% for the year ended March 31, 1999. Much of the increase in
selling and delivery expenses is due to the increased expense for advertising
and promotions. Advertising and promotion expenses increased approximately 56%
for the year ended March 31, 1999. For the year ended March 31, 1999 advertising
and promotion expenses were 8.9% of sales compared to 6.9% of sales for the year
ended March 31, 1998. Depreciation and amortization increased 13.3% for the year
ended March 31, 1999. This increase is due to the purchase of new equipment over
the last year.
Interest Income (Expense): Interest income for the year ended March 31,
1999 increased to $16,242 from $3,720 for the previous year ended March 31,
1998. This increase is primarily due to the interest on the proceeds from the
private placement completed in April 1998. Interest expense increased 3.3% for
the year ended March 31, 1999. The increase in interest expense was due to the
purchase of additional machinery and equipment.
Net Income: For the year ended March 31, 1999, income before taxes
increased 85.2% to $217,850. Income taxes for the year were $79,736, resulting
in net income of $138,114. Net income increased 66.0% from the same period a
year ago.
LIQUIDITY AND CAPITAL RESOURCES
Trade accounts receivable for the six months ended September 30, 2000 were
25.3% higher than at the year ended March 31, 2000. Days sales outstanding at
September 30, 2000 remained relatively consistent with September 30, 1999, at
approximately 50 days.
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 approximately $690,000 from the private placement. In connection with
the offering, Eldorado issued to Mills Financial Services, Inc. a warrant to
purchase 30,000 shares of common stock at an exercise price of $3.30 per share.
In addition, Eldorado issued a warrant to purchase 250,000 shares to Mills at an
exercise price of $11.00 per share.
On May 19, 1998, Eldorado registered 875,000 shares of common stock
pursuant to the 1997 stock option plan. The plan provides for the grant of stock
options to employees, directors and consultants. As of September 30, 2000,
558,000 options were outstanding, of which 237,100 are fully vested. All of the
options were granted at an option price representing 100% of the fair market
value on the date of the grant as determined by the Board of Directors. 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.
17
<PAGE> 18
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The key criterion for
hedge accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. Management believes
that the adoption of SFAS No. 133 will have no material effect on its financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation (FIN 44), which was effective
July 1, 2000, except that certain conclusions in this interpretation which cover
specific events that occur after either December 15, 1998 or January 12, 2000
are recognized on a prospective basis from July 1, 2000. This interpretation
clarifies the application of APB Opinion 25 for certain issues related to stock
issued to employees. Eldorado believes its existing stock based compensation
policies and procedures are in compliance with FIN 44 and therefore, the
adoption of FIN 44 had no material impact on Eldorado's financial condition,
results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101 which provides guidance on applying generally
accepted accounting principles to selected revenue recognition issues.
Management believes that Eldorado's revenue recognition policies are in
accordance with SAB 101.
18
<PAGE> 19
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 flow from a
unique geologic source. 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 a pure, natural artesian spring.
In 1983, Messrs. Larson, Sipple and Martin bought 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. Currently, Eldorado has
focused on developing and expanding the business of bottling Eldorado Spring
water. Eldorado bottles the water in PET bottles and 3 and 5 gallon bottles.
Eldorado has expanded the business by focusing its marketing efforts on the 3
and 5 gallon delivery business. As this business has grown and gained in
profitability, management has had the chance to introduce the PET bottles to
grocery retailers.
Eldorado has met all FDA requirements for the labeling of its water as a
natural spring water. 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 filtration.
Eldorado's goal is to become a leading provider of premium quality bottled
water. Eldorado's strategy includes:
- increasing sales to existing customers;
- broadening its current customer base;
- expanding its product line;
- establishing distributor relationships;
- establishing strategic distribution alliances with other beverage
companies.
INDUSTRY OVERVIEW
The bottled water industry is considered by many analysts to be the fastest
growing major market in the beverage industry. The bottled water industry has
exhibited consistent annual growth over the last twenty years and the dollar
amount of sales grew at a rate of 14% for 1999. According to a major reporter of
bottled water statistics, bottled water sales increased to a $4.9 billion dollar
business in 1999. Along with sales and volume, per person consumption has
increased to nearly 15.5 gallons, up from 13 gallons in 1998. Driving the
market's growth is the premium PET bottle segment which was up 35% in 1999,
accounting for two-thirds of the market's overall growth. In 1981, bottled water
consumption represented 1.8% of the U.S. consumption of total beverage sales. In
1999, that percentage had increased to 8.0%.
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 90% share of total market volume. Non-sparkling water
gallonage has in fact realized uninterrupted growth every year since statistics
have been kept on the bottled water industry when a major industry analyst began
following this market in 1977.
STRATEGY
Eldorado's goal 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
19
<PAGE> 20
Eldorado's retail products to regional and national markets. Aspects of
Eldorado's strategy, utilizing the proceeds of this offering, include the
following:
Acquire Additional Water Rights. Our current production uses about
4,200,000 gallons from the springs. Because we only sell water bottled from our
springs, we believe that to implement our business plan, it is necessary for us
to acquire water rights, which will permit us to use substantially more water
from our springs. Therefore, we seek to acquire rights to water which also flows
into the same stream system to which our spring water would flow if not bottled
by us. By acquiring rights to this replacement water and obtaining court
approval of a replacement plan, we would increase our right to use our own
spring water by close to an equal amount. We have entered into an agreement that
provides us ten options to buy 10 acre-feet or approximately 3,250,000 gallons
of water under each option that we believe is an acceptable source of
replacement water. If we decide to complete this purchase, it will require an
initial cash payment to the seller of $91,600 for each option. The price of each
options increases by 9% per year after the date of court approval of the
replacement plan. Additional details of this transaction and our other water
rights are discussed in Eldorado and Its Business -- Water Rights.
Build a Bottling Warehouse and Distribution Facility. Eldorado has entered
into a contract to build an off-site warehouse and bottling facility to allow
increased production capacity in order to facilitate expansion into new
geographic markets. We are planning to build in Louisville, CO, 10 miles east of
Eldorado Springs. This new facility will function as the bottling plant,
distribution facility and offices. Phase I will include the construction of
approximately 37,000 square feet of warehouse, bottling, and office space. It
will also include the purchase of 6.6 acres of land. Phase II will complete the
facility to a total of approximately 78,000 square feet. Construction of Phase I
is expected to begin in November 2000 and to be completed by approximately June
2001. Construction costs for Phase I are estimated at $2,800,000 and financing
for the facility will be acquired through traditional real estate loans. If
financing is unavailable, Eldorado will continue to lease offsite facilities.
Complete Onsite Facility Improvements. Eldorado has plans to improve the
onsite facility by adding a fill station to service the vehicles delivering
spring water to the new bottling facility. In addition, Eldorado has plans to
remodel the resort area by modernizing the current facilities and services.
Equip a Plastics Molding Facility. Phase II of the warehouse facility
would be to purchase equipment and molds in order to produce PET bottles. This
facility can operate within the warehouse/distribution facility. This would
provide Eldorado with a more stable supply of the PET bottles and insure
availability of the products in the future.
Increase Marketing Efforts. Eldorado believes that building its brand
awareness and consumer loyalty will allow Eldorado to expand distribution.
Utilizing the proceeds from the offering, Eldorado intends to hire advertising
experts and agencies to establish brand awareness and corporate image through
media campaigns and special events. Proceeds will also be used for slotting fees
and in-store promotions.
Enter New Distribution Channels. Eldorado's chance for growth lies in the
ability of Eldorado to expand into additional distribution channels. This would
involve agreements with distributors in the Colorado area. This will allow
Eldorado to build brand awareness and consumer loyalty by incorporating current
sales strategies with its distributors.
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
beverage which is free of caffeine and sodium, 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 as a
healthy beverage has increased the demand
20
<PAGE> 21
for this product. The bottled water industry is considered by many analysts to
be the fastest growing major market 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 sub-segment of the bottled water market that is now growing at a
30% rate for water in 1.5 liters bottles and smaller.
CONSOLIDATION
The bottled water industry as a whole remains highly fragmented. Recent
consolidation in the industry has created four large bottled water companies
that, when combined, account for roughly 56% of industry sales. These four
companies market an aggregate of over 25 different brands of water with no
single brand accounting for more than 9% of total bottled water sales. Based on
1999 wholesale figures from a major industry analyst, the top 9 companies in the
industry range in sales from $1,507 million for Perrier Group to $57 million for
Glacier Water.
PRODUCTS
Historically, sales of Eldorado's water have been made by selling 5 and 3
gallon bottles of water directly to home and business customers. More recently,
Eldorado began selling its water at wholesale to retail grocery food 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>
PRODUCT TARGET MARKET
------- -------------
<S> <C>
Five gallon bottles and three gallon bottles Home/commercial delivery
One gallon bottles Retail food stores
PET consumer packaging Retail food stores
</TABLE>
DISTRIBUTION CHANNELS
Home/Commercial Delivery Business: The delivery market, generally
consisting of the delivery of 5 and 3 gallon bottles of water to residential and
commercial customers, provided the greatest amount of growth for the industry
throughout the 1970's and the 1980's. 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 5
and 3 gallon containers of water to customers who lease water dispensers from
Eldorado. Eldorado delivers these 5 and 3 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 about 11,000 active
delivery accounts.
PET Packaging/Retail Distribution Business: Sales of bottled water through
retail grocery outlets has become an increasingly important channel of
distribution for bottled water. Historically, retail outlets have sold bottled
water in one and two gallon containers. While the delivery segment of the
bottled water market was the chief driver of bottled water growth in the 1980's,
the 1990's became the decade of the PET bottles sold at retail. 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 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.
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<PAGE> 22
The key retail customers for Eldorado's PET products include Kroger's, the
largest grocery chain in Colorado, and Rainbow Natural Foods, one of the largest
wholesale food distributors in the state. Eldorado's product is also sold to
retail customers at Safeway, Whole Foods, Wild Oats and Albertsons stores.
BOTTLING
Currently, 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 current bottling facilities are located on a portion of about 26
acres of land owned by Eldorado in Eldorado Springs, Colorado. Eldorado's
bottling process uses several quality control precautions built in to keep
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.
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 and
are labeled and date coded. They are then packaged in reshipper cases that are
also date/run coded to assist in disaster recall planning.
With the completion of the new off-site warehouse, Eldorado is planning on
adding approximately $320,000 of additional high speed bottling equipment. After
ozone treatment, the water will be trucked from the source at Eldorado Springs
to the new facility in steel tanker trucks. Once at the plant, the water will be
stored in stainless steel tanks until bottled. By utilizing the new facility,
Eldorado will realize benefits in increased bottling speeds as well as
efficiencies in transporting and storing of raw materials and finished goods.
WATER RIGHTS
When Eldorado's founders bought the property in 1983, included in the
purchase were certain water rights for Eldorado. These water rights were decreed
by the District Court, Water Division No. 1 in Greeley, Colorado, on July 11,
1973. In that decree, the court decided that our water rights would allow us to
withdraw water from several points on our property with priority dates ranging
from December 1901 to December 1960. At that time, the court also decided that
all water from the springs and wells on our property was tributary to the South
Boulder Creek stream system. Under Colorado law, we have the right to
beneficially use all the water physically available from the springs and wells
on our property, if all downstream users with priority dates before ours are
being satisfied with water available in the stream system. In the event these
downstream users are not being satisfied with water in the stream system, we
would have to stop using our water and let it flow downstream, or we could
provide replacement water to the stream from an additional source.
We currently lease water on an annual basis to be available in the event we
needed to provide replacement water for downstream users. Under our lease
agreement, if we needed to replace water for downstream users, the water would
be made available from our lease source to the stream system in sufficient
amounts to replace the water we use from our springs. In 2000, we lease enough
replacement water to permit us to use at least 11,375,000 gallons of water from
our spring to meet our bottling needs. This amount is substantially greater than
we currently need. Our replacement water lease is on an annual basis, and must
be renewed each year.
To remove this year to year uncertainty, we are taking steps to acquire
ownership of our own source of replacement water. On July 11, 2000, we entered
into an agreement with the owner of a reservoir that gets water from and can
return water to the South Boulder Creek stream system, which is the stream
system into
22
<PAGE> 23
which the water from our springs flows. For $10,000, we received ten options.
Each option may be exercised during a ten-year period that starts when we
receive approval from the water court for our proposed replacement water plan.
Each option covers 10 acre-feet of replacement water which may be used by us, if
necessary, in the year we exercise the option, and in 10 acre-feet increments
for each following year thereafter. Therefore, if we were to exercise all ten
options, we would have acquired 100 acre-feet of replacement for our use each
year. In the first year, each option will cost $91,600 to exercise. The options
that are not exercised are subject to a 9% per year increase in the exercise
cost. After paying the cost to exercise an option, the additional yearly cost
for the right to use 10 acre-feet of water, is an annual assessment which is
currently about $160.00 for each ten acre-feet.
The water we would acquire upon exercise of the options, is water that is
contained in a reservoir system. In the event we were to be restricted from
using the water from our own springs, the owner of the reservoir system would
release enough water into the South Boulder Creek stream system to replace the
water we would continue to use from our springs. We expect that the replacement
water would be released from the reservoir system at locations in the stream
system that would allow us to use our spring water in equal volume to the volume
replacement water released on our behalf. We project that our acquisition of
replacement water, if approved by the water court, could enable us to bottle up
to 32 million gallons of our spring water per year without the threat of having
to stop operations. We currently bottle about 4,200,000 gallons per year of the
annual flow of 105,000,000 gallons from our springs.
Our use of this water as a replacement source will also need a decree from
the water court. This process requires that we file a request for such decree
with the court. Other water users then have time for objections. If any issues
or objections remain after negotiations with the objectors, the matter then
proceeds to court where, after trial, a decision is made. It is expected that
this process could take from 12 to 30 months. We expect to file this request
with the water court by the end of December 2000. We anticipate being able to
continue to lease replacement water on a yearly basis until we determine whether
our proposed amendment plan of water replacement is approved by the court.
If the court approves the replacement plan, this new source of water for
stream flow replacements could enable us to bottle up to 32 million gallons of
water per year without the threat of having to stop operations. We currently
bottle about 4,200,000 gallons per year of the spring's annual flow rate of
105,000,000 gallons.
MARKETING
Eldorado focuses on three major areas in marketing its products: 3 and 5
gallon sales, small PET package product sales, and brand name recognition.
The 3 and 5 gallon products are sold primarily 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 television advertisements.
The smaller packages sold 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.
Eldorado tries 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 takes 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.
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<PAGE> 24
SEASONALITY OF BUSINESS
Sales tend to be seasonal in the bottled water business. A 10% to 15%
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 Food and
Drug Administration. 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 needed for this operation and water is tested
by independent labs.
Additionally, Eldorado operates the company's public swimming pool which is
regulated by 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 part of the business accounts for about 2 to 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 part of the business
accounts for about 2% of revenues. Neither of these businesses represent a
significant part of Eldorado's results of operations.
EMPLOYEES
Eldorado employs 64 full-time employees, 2 part-time employees and 14
seasonal employees during the summer resort months.
PROPERTIES
Eldorado owns about 26 acres of land in Eldorado Springs, Colorado. In
addition to real property, wells and springs, and water rights, Eldorado owns on
this property 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. Eldorado uses the total production and warehousing space of about 12,000
square feet. Most of the buildings were built in the 1950's and improvements
have been made over the years to keep the buildings up to current standards.
Eldorado also leases 16 delivery trucks for use in its delivery business.
Eldorado's bottling equipment and vehicles are less than ten years old and are
in good working condition.
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<PAGE> 25
MANAGEMENT
The following table includes information about the directors and executive
officers of Eldorado. Directors serve for one year terms.
<TABLE>
<CAPTION>
TENURE AS OFFICER
NAME AGE POSITION(S) OR DIRECTOR
---- --- ----------- -----------------
<S> <C> <C> <C>
Douglas A. Larson*............ 45 President and Director 1986 to present
Kevin M. Sipple............... 45 Vice President, Secretary and 1986 to present
Chairman of the Board
Jeremy S. Martin.............. 45 Vice President and Director 1986 to present
Robert E. Weidler............. 54 Vice President 1998 to present
Cathleen M. Collins........... 32 Chief Financial Officer 1998 to present
George J. Schmitt*............ 68 Director 1998 to present
Don P. Van Winkle*............ 44 Director 1998 to present
</TABLE>
---------------
* Audit Committee members
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. Before his
association with Eldorado, Mr. Larson worked as a stockbroker 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. Before his association
with Eldorado, Mr. Sipple worked for 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 1978.
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 5
gallon sales and service business. In addition, he is also responsible for
special event promotions and public relations. Before 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 and 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.
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 also a
director of Eureka Bottled Water Co. and National Fuel Corporation. Mr. Schmitt
holds a Bachelor of Arts degree from Dartmouth.
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<PAGE> 26
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 including 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
in Denver, Colorado and Fresh Produce Sportswear, Inc. in Boulder, Colorado. 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
as 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. The committee will
also review the results and scope of the audit and other services provided by
Eldorado's independent auditors. In addition, the committee will review
Eldorado's financial statements and review and evaluate Eldorado's internal
control functions.
The board of directors acts as the compensation committee. The compensation
committee assesses the effectiveness and approves the design of compensation
programs within a consistent total compensation framework for the company. The
committee also reviews and approves all salary arrangements and other
remuneration for executives, evaluates executive performance, and considers
related matters.
COMPENSATION OF OUTSIDE DIRECTORS
Each outside director receives compensation totaling $1,000 for each annual
or special meeting of the board he attends in person or by qualified electronic
means. We also reimburse directors for travel and other out-of-pocket expenses
incurred in attending meetings. In addition, each outside director will receive
compensation totaling $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 director remains a director 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 $150 per hour, plus
nominal travel expenses as agreed upon if needed.
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, 1998, 1999 and 2000. No
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, President............................ 2000 $90,866 -- $14,325
1999 77,759 -- 13,107
1998 66,832 -- 9,848
</TABLE>
Other annual compensation in the table above includes, for the fiscal year
ended March 31, 2000, $6,400 for annual health care premiums, $2,725 for a 3%
match for all contributions to the 401(k) plan and $5,200 for a car allowance.
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<PAGE> 27
STOCK OPTION PLAN
On September 10, 1997, Eldorado adopted a stock option plan which set aside
875,000 shares for the grant of stock options. All options will be granted as
incentive stock options or non-statutory stock options at 100% of fair market
value on the date of grant. 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 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 September 30, 2000, 558,000 options were outstanding, of which
237,100 are fully vested. Of the options outstanding, 339,000 were issued on May
26, 1998 and 150,000 were issued on December 7, 1998, with an option price of
$2.75 per share, 8,500 were issued on May 1, 1999, with an option price of $4.25
per share and 60,500 were issued on May 1, 2000 at $3.875 per share which
represents the fair market value at the date of the grant as determined by the
board of directors. Of the remaining 320,900 shares which have not vested,
37,500 vest in fiscal 2001, 84,100 in 2002, 89,300 in 2003, 56,000 in 2004,
25,000 in 2005, 14,000 in 2006 and 15,000 in 2007. 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. Eldorado will not grant
options in excess of 15% of its outstanding shares for the one year period after
the closing of this offering.
PROFIT SHARING PLAN
Eldorado has adopted a 401(k) profit sharing plan for its employees.
Employees become eligible to participate in the plan once they have completed
one year of service and have reached 21 years of age. Contributions by Eldorado
and the employees vest immediately. Eldorado matches 100% of employee
contributions, up to 3% of employee gross pay. Eldorado matched approximately
$34,000 during the year ended March 31, 2000 and $24,000 during the year ended
March 31, 1999. No profit sharing contributions were approved by the board of
directors for the years ended March 31, 2000 and 1999.
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<PAGE> 28
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 as adjusted assuming conversion of 1,000,000 shares of
series A preferred stock. 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 25.5% 19.1%
Douglas A. Larson........................................... 775,273 26.0% 19.4%
Jeremy S. Martin............................................ 771,060 25.7% 20.9%
George J. Schmitt........................................... 25,000 -- --
Don P. Van Winkle........................................... 12,500 -- --
All Officers and Directors as a Group, 7 persons............ 2,463,507 78.8% 59.7%
</TABLE>
Mr. Larson's shares include options to buy 11,600 shares held by his
spouse. The shares owned by all officers and directors as a group include
options to buy 58,000 shares each, held by Ms. Collins and Mr. Weidler. The
percent owned after offering assumes the conversion of 1,000,000 shares of
series A convertible preferred stock. The address of each person in this table
is c/o Eldorado Artesian Springs, Inc., 294 Artesian Drive, Eldorado Springs, CO
80025.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the three years ended March 31, 2000, 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 5% of Eldorado's
stock, or any immediate family member of any of the foregoing persons.
All future material affiliated transactions and loans, and any forgiveness
of loans, must be made or entered into on terms that are no less favorable to
Eldorado than those that can be obtained from unaffiliated third parties. All
future material affiliated transactions and loans, and any forgiveness of loans,
must be approved by a majority of Eldorado's independent directors who do not
have an interest in the transactions and who had access, at Eldorado's expense,
to Eldorado's or independent legal counsel.
LEGAL PROCEEDINGS
Eldorado is not involved in any material legal proceedings.
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<PAGE> 29
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. Before
April 1987, the primary activity of Lexington Funding, Inc. was directed to
organizational efforts and getting 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 the shares of Eldorado through a stock
exchange. According 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 shares of 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. Of the net proceeds, $690,000 was applied to:
- purchase of machinery and equipment -- $250,000;
- PET distribution expenses -- $150,000;
- working capital -- $155,000; and
- expenses for unsuccessful secondary offering -- $135,000.
DESCRIPTION OF SECURITIES
GENERAL
Eldorado is authorized to issue 50,000,000 shares of common stock, $0.001
par value and 10,000,000 shares of preferred 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. As of the date of this prospectus and before
the closing of this offering, there were no shares of preferred stock issued and
outstanding.
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 expected that
dividends
29
<PAGE> 30
will be 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, shareholders are
entitled to receive pro rata all the assets of Eldorado available for
distribution to shareholders, after satisfaction of the liquidation preference
to the holders of series A convertible preferred stock. Shareholders of Eldorado
do not have preemptive rights or other rights to subscribe for or buy any stock,
options, warrants or other securities offered by Eldorado.
SERIES A CONVERTIBLE PREFERRED STOCK
The following summary describes the material terms of the series A
convertible preferred stock we are offering as part of the unit.
AUTHORIZED ISSUANCE
Our board of directors has authorized the issuance of up to 2,000,000
shares of series A convertible preferred stock, including 1,000,000 shares as
part of the units we are offering, and up to 100,000 shares subject to the
representative's warrant. Additional shares of series A convertible preferred
stock are reserved for issuance as dividends on the outstanding shares of series
A convertible preferred stock.
DIVIDENDS
When and if declared by our board of directors and to the extent permitted
under Colorado law, we will pay preferential dividends to the holders of the
series A convertible preferred stock. Dividends will be in the form of cash and
additional shares of series A convertible preferred stock. Cash dividends and
the issuance of series A convertible preferred stock as dividends are payable
semi-annually, starting on May 1, 2001 and continuing each November 1 and May 1
thereafter to shareholders of record. Cash dividends will be payable upon the
conversion of the series A convertible preferred stock on a pro rata basis for
the number of days during the semi-annual period prior to conversion. Cash
dividends on each share of series A convertible preferred stock will be
calculated by accruing on a daily basis at an annual rate of 8% of the $5.00
purchase price allocated to the series A convertible preferred stock component
of the unit. Dividends in the form of additional shares of series A convertible
preferred stock valued at $5.00 per share will be calculated by accruing on a
daily basis at an annual rate of 7% or .07 shares per year for each outstanding
share of series A convertible preferred stock.
We are not required to pay dividends to the holders of the series A
convertible preferred stock. However, although not paid, both cash dividends and
dividends payable in additional shares of series A convertible preferred stock
will be cumulative in that all accrued and unpaid dividends will be fully paid
or declared with funds irrevocably set apart and shares reserved for payment
before any dividend, distribution or payment can be made with respect to our
common stock or any other junior security. In the event that we do not declare a
semi-annual dividend, or do not pay a dividend we declare, we will be required
to increase the conversion ratio so that after any default in the payment of
cash dividends, each share of preferred stock will be convertible into five
shares of common stock without the requirement of any further payment.
DIVIDENDS -- ESCROW ACCOUNT FOR PAYMENT OF CASH DIVIDENDS
At the closing of this offering, we will enter into an escrow agreement
with Bank of Cherry Creek, Boulder, Colorado which provides that we will escrow
$400,000 of the proceeds of this offering to pay the first year annual cash
dividend to the holders of series A preferred stock. In addition, on a
semi-annual basis, we will continue to fund the escrow account with sufficient
funds so that the balance in the escrow account is at all times equal to the
anticipated cash dividends payable for the next year. The account will remain
until all shares of series A preferred stock are converted to common stock or
redeemed by us.
CONVERSION
Holders of series A convertible preferred stock may convert all or any of
their shares of series A convertible preferred stock into shares or our common
stock at any time, without further payment. The initial conversion ratio is one
for one, with the conversion ratio adjusted proportionately for stock splits,
stock dividends, recapitalizations, mergers, consolidations and similar events.
In addition, all shares of series A
30
<PAGE> 31
preferred stock will convert into shares of common stock in the event the common
stock price, adjusted for any stock splits, closes at a bid price of $10.00 or
higher for a period of 30 consecutive trading days during the first year
following the closing, or, after that first year, closes at a bid price of
$12.50 or higher for 30 consecutive trading days. After the fourth anniversary
of the closing of this offering, we may redeem all the outstanding series A
convertible preferred stock at a price per share of $6.25 plus all accrued but
unpaid dividends.
VOTING
The holders of series A convertible preferred stock are not entitled to
vote.
LIQUIDATION PREFERENCE
Upon our liquidation, dissolution or winding up, holders of the series A
convertible preferred stock will be entitle to receive $6.25 per share plus
accrued but unpaid dividends before any payments to the holders of our common
stock or any other securities ranking junior to the series A convertible
preferred stock.
REDEMPTION
After the fourth anniversary of the closing of this offering of units, we
may redeem all the outstanding series A convertible preferred stock at a price
per share of $6.25 plus all accrued but unpaid dividends.
RANKING
The series A convertible preferred stock ranks senior to our common stock.
We may issue preferred stock which ranks senior to the series A convertible
preferred stock as to the payment of dividends and the distribution of assets on
liquidation.
WARRANTS
1998 Warrants
In connection with the 1998 private placement, Eldorado issued to Mills
Financial Services, Inc., for a price of $100, a warrant to buy 250,000 shares
of common stock at an exercise price of $11.00 per share. The warrant will be
exercisable at any time after October 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. It also provides for additional rights to
register the underlying shares on registration statements filed by Eldorado.
In connection with the 1998 private placement, Eldorado issued to Mills
Financial Services, Inc. for a price of $100, a warrant to buy 30,000 shares of
common stock at an exercise price of $3.30 per share. The warrant will be
exercisable at any time after October 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. It also provides for additional rights to
register the underlying shares on registration statements filed by Eldorado.
Public Warrants
The following summary describes the material terms of the public warrants
we are offering as part of the unit.
AUTHORIZED ISSUANCE
Our board of directors has authorized the issuance of up to 1,100,000
public warrants, including 1,000,000 public warrants as a part of the units we
are offering, and up to 100,000 public warrants subject to the representative's
warrant.
31
<PAGE> 32
TERMS
The terms of the public warrant are provided for in the warrant agreement.
The holder of a public warrant is entitled to purchase one share of our common
stock at an exercise price of $6.00 per share. The exercise price of the public
warrant is subject to adjustment upon certain events such as stock splits,
dividends on our common stock in the form of additional shares of common stock
and similar transactions. The public warrants are exercisable immediately upon
the closing of our unit offering. The exercise period for the public warrants
expires at 5:00 p.m., Mountain time on the date that is three years from the
date of this prospectus. We may at any time and from time to time extend the
period during which the public warrants may be exercised, provided that we give
written notice to the registered holders of the public warrants prior to the
expiration date. We do not currently contemplate any extension of the exercise
period for the public warrants.
The public warrants may be transferred separately from the unit immediately
upon the closing of this unit offering. We will issue certificates representing
the public warrants. Subject to compliance with applicable securities laws, the
certificates may be transferred or exchanged for new certificates of different
denominations at the offices of our warrant agent. The public warrants do not
permit the holder to vote, receive dividends or to exercise any of the rights of
a holder of our common stock.
EXERCISE -- REQUIREMENT OF CURRENT REGISTRATION STATEMENT
In order to exercise the public warrants, there must be a current
registration statement for the common stock underlying the public warrants in
effect with the Securities and Exchange Commission and the applicable state
securities authorities. We have undertaken, and intend to maintain a current
registration statement as required to permit the exercise of the public
warrants. However, maintaining a current registration statement could result in
substantial expense and we cannot be assured that we will be able to maintain a
current registration statement. In the event we do not maintain a current
registration statement for the common stock to be issued upon exercise of the
public warrants, they may be exercised only if there is an exemption from
registration for the issuance of the common stock upon exercise. We, and our
counsel, will make the sole determination of whether an exemption from
registration is available. If we do not maintain a current registration
statement or the underlying shares are not registered or qualified in your state
of residence, the public warrants will likely have little or no value.
EXERCISE -- PROCEDURES
The public warrants may be exercised only upon surrender of the public
warrant certificate at the offices of our transfer agent with the form on the
reverse side of the public warrant completed and signed, accompanied by payment
of the full exercise price for the number of public warrants being exercised.
Upon completion of this process, we will issue one share of common stock for
each public warrant properly exercised, subject to adjustment as required by the
warrant agreement.
NO REDEMPTION
The public warrants may not be redeemed by Eldorado, and we cannot require
that the public warrants be exercised.
Representative's Warrant
Eldorado has agreed to issue to American Fronteer Financial Corporation,
for $1,000, a representative's warrant comprised of a warrant to purchase up to
100,000 shares of series A convertible preferred stock at $6.00 per share, and a
warrant to purchase up to 100,000 public warrants at $0.12 per public warrant.
The representative's warrant is exercisable for a period of four years beginning
one year after 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 American
Fronteer Financial Corporation, other underwriters or their officers. The
representative's warrants will contain anti-dilution
32
<PAGE> 33
provisions for appropriate adjustments of the exercise price of the
representative's warrant to purchase public warrants upon the occurrence of
certain events.
The representative's warrants, the series A convertible preferred stock and
public warrant components of the representative's warrants, as well as the
common stock reserved for issuance upon the conversion of the series A
convertible preferred stock and the exercise of the public warrants issuable
upon exercise of representative's warrants, are being registered on the
registration statement for this offering. Eldorado has agreed to maintain an
effective registration statement with respect to these securities to permit
their resale at all times during the period in which the representative's
warrant is exercisable or the subject securities remain outstanding or issuable.
In the event that Eldorado does not maintain the effectiveness of the
registration statement, the representative's warrant provides for a single
demand right of registration for all or a part of the securities.
TRANSFER AGENT AND WARRANT AGENT
Corporate Stock Transfer, Inc. has been appointed registrar and transfer
agent for the units and the warrant agent for the warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering of units, and assuming that the series A
convertible preferred stock and the public warrants are immediately detached and
separately issued, Eldorado will have 2,995,495 shares of common stock,
1,000,000 shares of preferred stock and 1,000,000 public warrants to purchase
common stock issued and outstanding. Of these securities, 467,591 shares of
common stock, 1,000,000 shares of preferred stock and 1,000,000 public warrants
will be freely-tradable unless held by affiliates of Eldorado. All the remaining
2,527,904 shares of common stock will be restricted securities as that term is
defined in Rule 144 published 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 published thereunder.
In general, under Rule 144 a person who has beneficially owned his shares
for one year, may sell in the open market within any three-month period a
limited number of shares. The shares sold may not exceed the greater of 1% of
the outstanding shares of Eldorado's common stock, or the average weekly trading
volume in the common stock during the four calendar weeks before such sale. One
percent of the outstanding shares will be about 29,954 shares. 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 who is considered not to be an affiliate of Eldorado and who has
beneficially owned his shares for at least two years, may sell such shares in
the public market under Rule 144(k). Rule 144(k) provides that shares may be
sold without regard to the volume limitations or certain other restrictions of
Rule 144. 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 2,527,904 restricted shares currently outstanding, a total of
2,298,407 shares are held by officers and directors of Eldorado. These officers
and directors have entered into agreements with the representative of the
underwriter that they will not sell these shares or any shares acquired when
they exercise options for a period of one year following the date of this
prospectus. Shares may be sold according to privately negotiated transactions or
by the exercise of stock options. The underwriter has no plans, proposals,
arrangements or understanding regarding waiver of the lock up agreements. The
officers and directors are further subject to the volume limitations of Rule
144(e)(1) with respect to any such sales. Of the restricted shares outstanding,
229,497 shares were acquired from Eldorado by non-affiliates more than two years
before the date of this prospectus.
Additionally, 875,000 shares of Eldorado's common stock are reserved for
issuance under Eldorado's stock option plan, of which 558,000 are outstanding.
Of the 558,000 options outstanding, 72,000 options are immediately exercisable
and saleable and 165,100 options are subject to lockup agreements with the
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<PAGE> 34
representative for sale for one year after the completion of this offering and
320,900 are not immediately exercisable.
Future sales of substantial amounts of preferred 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.
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
we have agreed to sell to the underwriters named below, for whom American
Fronteer Financial Corporation is acting as representative, the number of units
set forth opposite each name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
------------ ---------
<S> <C>
American Fronteer Financial Corporation..................
---------
Total.......................................... 1,000,000
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the units in this offering if any are purchased.
The underwriters propose to offer the units initially at the public
offering price on the cover page of this prospectus and to selling group members
at that price less a concession of $ per unit. After the initial public
offering, the public offering price and concession to selling group members may
be changed by the representative. The representative has informed us that the
underwriters do not intend to sell any of the units to accounts over which any
underwriter exercises discretionary authority.
EXPENSES
Underwriting compensation will consist of the underwriting discount and
reimbursement of expenses described below. The underwriting discount consists of
the difference between the amount paid by the underwriters to purchase the units
from us and the offering price of the units to the public. The underwriting
discount will be 10% of the public offering price per unit. The following table
summarized the underwriting discount to be paid by us to the underwriters in
connection with this offering.
<TABLE>
<S> <C>
Per Unit................................................. $ 0.51
Total.......................................... $510,000
</TABLE>
We have agreed to pay American Fronteer Financial Corporation a
non-accountable expense allowance of $75,000. A total of $33,000 has been paid
as of the date of this prospectus. If American Fronteer Financial Corporation
does not complete this offering, it is required to repay us all funds advanced,
except for out-of-pocket expenses actually incurred for the offering.
At the closing of this offering, and subject to the terms and conditions of
the underwriting agreement, we have agreed to sell to American Fronteer
Financial Corporation for $1,000, the representative's warrant giving American
Fronteer Financial Corporation the right to purchase up to 100,000 shares of
Series A preferred stock at $6.00 and a warrant to purchase up to 100,000 public
warrants at $0.12 per warrant. The representative's warrant is exercisable for a
period of four years commencing one year from the date of this prospectus. For a
period of one year from the date of this prospectus, the representative's
warrants will be restricted from sale, transfer, assignment or hypothecation,
except to officers of American Fronteer Financial Corporation, other
underwriters or members of the selling group, and/or their officers. The
representative's warrants will contain anti-dilution provisions regarding
adjustments of the exercise prices of the representative's warrants as well as
the conversion or exercise prices of the securities acquired upon exercise of
the representative's warrants, upon the occurrence of specific events, including
stock dividends, stock splits and recapitalizations.
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<PAGE> 35
The representative's warrant, the series A preferred stock and the public
warrants issuable upon exercise of the representative's warrant, as well as the
common stock reserved for issuance upon conversion of the series A preferred
stock and the exercise of the public warrants, are being registered on the
registration statement for this offering. We have agreed to maintain an
effective registration statement with respect to these securities to permit
resale at all times during the period in which the representative's warrant is
exercisable. In the event that we do not maintain an effective registration
statement for these securities, the representative's warrant contains demand and
piggyback registration rights relating to the series A preferred stock and the
public warrants issuable upon exercise of the representative's warrant, and the
common stock issuable upon conversion or exercise of these securities. As a
result, for the life of the representative's warrant, the holders will have the
opportunity to profit from a rise in the market for our securities. In addition,
our agreement to maintain an effective registration statement and, in the event
we do not, to provide the demand and piggyback registration rights, may make it
more difficult for us to raise additional capital.
LOCK-UP AGREEMENTS
Our executive officers and directors have, for a period of one year from
the date of this prospectus, agreed not to offer to sell, contract to sell or
otherwise dispose of, loan, pledge or grant any rights with respect to any
shares of common stock, preferred stock, any options or warrants to purchase any
shares of common stock or any securities convertible into or exchangeable for
shares of common stock or preferred stock without the prior written consent of
American Fronteer Financial Corporation. However, during this one year, we will
not require the consent of American Fronteer Financial Corporation to effect the
issuance of the series A preferred stock or the public warrants which are the
components of the units we are offering to the public. Nor during this period
will we require the consent of American Fronteer Financial Corporation for the
issuance of common stock upon the conversion of the Series A preferred stock or
exercise of the public warrants which we are issuing as components of the units
we are offering to the public. We may also issue common stock upon the exercise
of employee stock options and third party warrants which are outstanding on the
date of this prospectus.
INDEMNIFICATION
We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933, or contribute to payments, which the underwriters may be
required to make in that respect.
LISTING
We have applied for listing of our common stock, the units we are offering
and the series A preferred stock and public warrants which are the components of
units on the Nasdaq SmallCap Market.
PUBLIC OFFERING PRICE
Before this offering, there has been only a sporadic public market for our
common stock, and there has been no public market for the units, series A
convertible preferred stock or the public warrants. Consequently, the public
offering price for the units was decided by negotiation between us and American
Fronteer Financial Corporation. Among the factors considered in determining the
public offering price for the units were:
- prevailing market conditions;
- the terms and conditions of the series A convertible preferred stock;
- our results of operations in recent periods;
- the present stage of our development;
- estimates of our business potential;
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<PAGE> 36
- an assessment of our management; and
- the current state of the bottle water industry.
STABILIZATION
The underwriter may engage in stabilizing transactions and penalty bids in
accordance with Regulation M under the Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as stabilizing bids do not exceed a specified maximum.
- Penalty bids permit the underwriters to reclaim a selling concession from
a syndicate member when the unit originally sold by that syndicate member
is purchased in a stabilizing transaction.
These stabilizing transactions and penalty bids may cause the price of the unit
to be higher than it would otherwise be in the absence of these transactions.
These transactions, if commenced, may be discontinued at any time.
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
according 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. If 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.
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, 2000 and for the years
ended March 31, 2000 and 1999 have been included in reliance upon the report of
Ehrhardt Keefe Steiner & Hottman, P.C., independent certified public
accountants, as given upon the authority of said firm as experts in accounting
and auditing. With respect to the unaudited interim financial information for
the six months ended September 30, 2000 and 1999, 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.
36
<PAGE> 37
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-7
</TABLE>
F-1
<PAGE> 38
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, 2000, and the related statements of operations,
stockholders' equity and cash flows for the years ended March 31, 2000 and 1999.
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, 2000, and the results of its operations and its cash flows for
the years ended March 31, 2000 and 1999 in conformity with generally accepted
accounting principles.
EHRHARDT KEEFE STEINER & HOTTMAN PC
May 12, 2000
Denver, Colorado
F-2
<PAGE> 39
ELDORADO ARTESIAN SPRINGS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
---------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 360,644 $ 266,049
Accounts receivable
Trade -- net........................................... 680,122 852,163
Other.................................................. 37,633 37,920
Inventories............................................... 198,781 234,154
Prepaid expenses and other................................ 43,604 21,574
Deferred income taxes..................................... 18,165 18,165
---------- ----------
Total current assets.............................. 1,338,949 1,430,025
---------- ----------
Property, plant & equipment -- net.......................... 1,798,744 1,827,857
---------- ----------
Other assets
Water rights -- net....................................... 105,642 103,398
Other -- net.............................................. 50,863 131,433
---------- ----------
Total other assets................................ 156,505 234,831
---------- ----------
$3,294,198 $3,492,713
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 140,327 $ 322,200
Accrued expenses.......................................... 109,921 123,797
Customer deposits......................................... 114,337 124,244
Current maturities of long-term debt...................... 244,489 277,349
---------- ----------
Total current liabilities......................... 609,074 847,590
Long-term liabilities
Long-term debt............................................ 1,275,858 1,233,548
Deferred income taxes..................................... 76,158 76,158
---------- ----------
Total liabilities................................. 1,961,090 2,157,296
---------- ----------
Commitments
Stockholders' equity
Preferred stock, par value $.001 per share; 10,000,000
shares authorized July, 2000; 0 shares issued and
outstanding............................................ -- --
Common stock, par value $.001 per share; 50,000,000 shares
authorized; 2,995,495 issued and outstanding........... 2,995 2,995
Additional paid-in capital................................ 984,656 984,656
Retained earnings......................................... 345,457 347,766
---------- ----------
1,333,108 1,335,417
---------- ----------
$3,294,198 $3,492,713
========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 40
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
----------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue
Water and related.......................... $5,142,552 $3,888,443 $3,077,047 $2,589,732
Pool....................................... 127,186 99,435 83,042 68,641
Rentals.................................... 59,200 48,944 25,800 24,800
---------- ---------- ---------- ----------
Net revenue........................ 5,328,938 4,036,822 3,185,889 2,683,173
Cost of goods sold........................... 925,378 546,900 637,914 439,467
---------- ---------- ---------- ----------
Gross profit................................. 4,403,560 3,489,922 2,547,975 2,243,706
---------- ---------- ---------- ----------
Operating expenses
Salaries and related....................... 2,013,670 1,539,275 1,255,713 1,019,470
Administrative and general................. 791,779 670,854 480,026 380,550
Delivery................................... 289,092 259,240 179,803 144,821
Advertising and promotion.................. 581,767 356,613 385,861 343,772
Depreciation and amortization.............. 295,316 314,800 178,472 156,611
---------- ---------- ---------- ----------
3,971,624 3,140,782 2,479,875 2,045,224
---------- ---------- ---------- ----------
Operating income............................. 431,936 349,140 68,100 198,482
---------- ---------- ---------- ----------
Other income (expense)
Interest income............................ 8,197 16,242 5,318 3,360
Interest expense........................... (125,929) (147,532) (69,865) (59,367)
Loss on sale of asset...................... (6,532) -- -- --
Stock offering costs....................... (352,653) -- -- --
---------- ---------- ---------- ----------
(476,917) (131,290) (64,547) (56,007)
---------- ---------- ---------- ----------
(Loss) income before income taxes............ (44,981) 217,850 3,553 142,475
Provision for income taxes................... 1,026 79,736 1,244 49,866
---------- ---------- ---------- ----------
Net (loss) income............................ $ (46,007) $ 138,114 $ 2,309 $ 92,609
========== ========== ========== ==========
Basic (loss) earnings per common share....... $ (0.02) $ 0.05 $ 0.00 $ 0.03
========== ========== ========== ==========
Weighted average number of shares
outstanding................................ 2,995,495 2,995,495 2,995,495 2,995,495
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 41
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
AND THE SIX MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance -- March 31, 1998............... 2,695,495 $2,695 $294,875 $253,350 $ 550,920
Sale of common stock.................... 300,000 300 689,781 -- 690,081
Net income.............................. -- -- -- 138,114 138,114
--------- ------ -------- -------- ----------
Balance -- March 31, 1999............... 2,995,495 2,995 984,656 391,464 1,379,115
Net loss for the year................... -- -- -- (46,007) (46,007)
--------- ------ -------- -------- ----------
Balance -- March 31, 2000............... 2,995,495 2,995 984,656 345,457 1,333,108
Net income for the period April 1, 2000
to September 30, 2000 (unaudited)..... -- -- -- 2,309 2,309
--------- ------ -------- -------- ----------
Balance -- September 30, 2000
(unaudited)........................... 2,995,495 $2,995 $984,656 $347,766 $1,335,417
========= ====== ======== ======== ==========
</TABLE>
See notes to financial statements
F-5
<PAGE> 42
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED ENDED
MARCH 31, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net (loss) income......................................... $ (46,007) $ 138,114 $ 2,309 $ 92,609
--------- --------- --------- ---------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................... 295,316 314,800 178,472 156,611
Stock offering costs.................................... 352,653 -- -- --
Loss on sale of asset................................... 6,532 -- -- --
Deferred income taxes................................... 14,943 6,958 -- --
Changes in certain assets and liabilities:
Accounts receivable................................... (85,460) (128,469) (172,328) (86,366)
Inventories........................................... 6,483 (82,563) (35,373) (19,042)
Prepaid expenses and other............................ (10,498) 15,207 22,030 (11,165)
Accounts payable...................................... (12,230) 22,810 181,873 36,744
Accrued expenses...................................... (24,084) 54,875 13,876 16,466
Customer deposits..................................... 39,580 25,579 9,907 21,929
--------- --------- --------- ---------
583,235 229,197 198,457 115,177
--------- --------- --------- ---------
Net cash provided by operating activities........... 537,228 367,311 200,766 207,786
--------- --------- --------- ---------
Cash flows from investing activities
Proceeds from sale of equipment........................... 1,575 -- -- --
Purchase of property, plant and equipment................. (158,421) (388,161) (90,649) (112,309)
Purchase of other assets.................................. (3,348) (4,221) (83,472) (10,414)
--------- --------- --------- ---------
Net cash flows used in investing activities......... (160,194) (392,382) (174,121) (122,723)
--------- --------- --------- ---------
Cash flows from financing activities
Net payments on line-of-credit............................ -- (40,000) -- --
Payments on long-term debt................................ (224,503) (134,410) (121,240) (34,162)
Proceeds from sale of common stock........................ -- 825,000 -- --
Costs related to issuance of common stock................. -- (134,919) -- --
Stock offering costs...................................... (153,326) (199,327) -- (66,212)
--------- --------- --------- ---------
Net cash flows (used in) provided by financing
activities........................................ (377,829) 316,344 (121,240) (100,374)
--------- --------- --------- ---------
Net (decrease) increase in cash............................. (795) 291,273 (94,595) (15,311)
Cash -- beginning of period................................. 361,439 70,166 360,644 361,439
--------- --------- --------- ---------
Cash -- end of period....................................... $ 360,644 $ 361,439 $ 266,049 $ 346,128
========= ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest was $125,929 and $147,532 (March
31, 2000 and 1999, respectively) and $69,865 and $59,367
(September 30, 2000 and 1999, respectively). Cash paid
for income taxes was $59,094 and $34,426 (March 31, 2000
and 1999, respectively).
Supplemental disclosures of non-cash investing and financing
activities:
Equipment acquired through capital leases was $160,129 and
$164,306 (March 31, 2000 and 1999, respectively) and
$111,790 and $66,734 (September 30, 2000 and 1999,
respectively.
</TABLE>
See notes to financial statements.
F-6
<PAGE> 43
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 who 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
September 30, 2000, and the results of its operations and changes in cash flows
for the six months ended September 30, 2000 and 1999. The results of operations
for the six months ended September 30, 2000, 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 lists, loan fees and
other costs are carried at cost and are being amortized on the straight-line
basis over five to forty years.
Customer deposits
Customer deposits consist primarily of deposits on bottles.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, accounts payable, deposits and accrued expenses approximated fair
value 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.
Concentration of Credit Risk
The Company maintains cash in bank accounts, which, at times may exceed
FDIC insurance limits. Financial instruments, which potentially subject the
Company to concentrations of credit risk consist primarily of accounts
receivable. The Company grants credit to customers located primarily in
Colorado. The Company periodically performs credit analysis and monitors the
financial condition of its clients in order to minimize credit risk.
F-7
<PAGE> 44
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 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.
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.
Advertising Costs
Advertising costs are expensed as incurred.
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-8
<PAGE> 45
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
----------- -------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable
Trade..................................................... $ 730,122 $ 934,163
Less allowance for doubtful accounts...................... (50,000) (82,000)
----------- -----------
$ 680,122 $ 852,163
=========== ===========
Property, plant and equipment
Land...................................................... $ 225,194 $ 225,194
Buildings and improvements................................ 1,208,072 1,229,212
Machinery and equipment................................... 2,362,933 2,508,812
Vehicles.................................................. 11,971 11,971
Office furniture and fixtures............................. 181,530 216,951
----------- -----------
3,989,700 4,192,140
Less accumulated depreciation............................. (2,190,956) (2,364,283)
----------- -----------
$ 1,798,744 $ 1,827,857
=========== ===========
Water rights................................................ $ 179,500 $ 179,500
Less accumulated amortization............................... (73,858) (76,102)
----------- -----------
$ 105,642 $ 103,398
=========== ===========
Other assets
Customer lists, loan fees and other....................... $ 74,240 $ 157,711
Less accumulated amortization............................. (23,377) (26,278)
----------- -----------
$ 50,863 $ 131,433
=========== ===========
Accrued expenses
Property taxes............................................ $ 20,538 $ 11,298
Sales tax................................................. 15,492 11,917
Payroll and payroll taxes................................. 73,891 83,916
Other..................................................... -- 16,666
----------- -----------
$ 109,921 $ 123,797
=========== ===========
</TABLE>
F-9
<PAGE> 46
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
---------- -------------
(UNAUDITED)
<S> <C> <C>
NOTES PAYABLE
Note payable to bank due June 20, 2012, interest at bank
prime (9% at March 31, 2000) adjusted bi-annually. Monthly
principal and interest payments of $12,244 with all unpaid
principal and interest due at maturity.
Cross-collateralized by substantially all assets of the
Company................................................... $1,062,971 $1,032,465
Note payable to bank due June 20, 2002, interest at bank
prime plus 1.25% (10.25% at March 31, 2000). Monthly
principal and interest payments of $6,346 with all unpaid
principal and interest due at maturity. Cross-
collateralized by substantially all assets of the
Company................................................... 151,397 120,758
CAPITAL LEASES
Capital lease for equipment. Interest rate approximates 11%
with monthly minimum lease payments of $3,159, due April
1, 2002................................................... 85,940 68,341
Capital leases for equipment. Interest rates approximate 11%
with combined monthly minimum lease payments of
approximately $12,200, maturing over various dates from
June 2001 through August 2003............................. 220,039 289,333
---------- ----------
$1,520,347 $1,510,897
========== ==========
</TABLE>
The cost of equipment under capital lease at March 31, 2000 and September
30, 2000 was $445,000 and $520,000 with accumulated depreciation of
approximately $125,000 and $165,000, respectively.
Future maturities of long-term debt at March 31, 2000 are:
<TABLE>
<CAPTION>
NOTES CAPITAL
YEAR ENDING MARCH 31, PAYABLE LEASES TOTAL
--------------------- ---------- --------- ----------
<S> <C> <C> <C>
2001.............................................. $ 116,340 $ 154,132 $ 270,472
2002.............................................. 127,778 136,409 264,187
2003.............................................. 78,973 55,695 134,668
2004.............................................. 68,289 -- 68,289
2005.............................................. 74,695 -- 74,695
Thereafter........................................ 748,293 -- 748,293
---------- --------- ----------
1,214,368 346,236 1,560,604
Less amount representing interest................. -- (40,257) (40,257)
---------- --------- ----------
Total principal................................... 1,214,368 305,979 1,520,347
Less current portion.............................. (116,340) (128,149) (244,489)
---------- --------- ----------
$1,098,028 $ 177,830 $1,275,858
========== ========= ==========
</TABLE>
NOTE 4 -- LINE-OF-CREDIT
The Company entered into an agreement with a bank for a line-of-credit of
$500,000 due June 2001. The interest rate is calculated at prime plus 0.5%,
which was 9.5% at March 31, 1999. Interest is payable monthly and the line is
cross-collateralized by substantially all of the assets of the Company. There
was no outstanding balance at March 31, 2000 or September 30, 2000.
F-10
<PAGE> 47
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
The net current and long-term deferred tax in the accompanying balance
sheet includes the following deferred tax assets and liabilities.
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
--------- -------------
(UNAUDITED)
<S> <C> <C>
Current deferred tax asset.................................. $18,165 $18,165
Current deferred tax liability.............................. -- --
------- -------
Net current deferred tax asset.............................. $18,165 $18,165
======= =======
Long-term deferred tax asset................................ $76,158 $76,158
Long-term deferred tax liability............................ -- --
------- -------
Net long-term deferred tax liability........................ $76,158 $76,158
======= =======
</TABLE>
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
-------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current........................................ $(13,917) $72,778 $1,244 $49,866
Deferred....................................... 14,943 6,958 -- --
-------- ------- ------ -------
$ 1,026 $79,736 $1,244 $49,866
======== ======= ====== =======
</TABLE>
The following is a reconciliation of income taxes at the Federal Statutory
rate with income taxes recorded by the Company.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------------- ------------------
2000 1999 2000 1999
-------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed income taxes at statutory rate -- net of
surtax.......................................... $(6,900) $73,036 $1,100 $17,430
State income taxes, net of Federal income tax
benefit and other............................... 7,926 6,700 144 1,000
------- ------- ------ -------
$ 1,026 $79,736 $1,244 $18,430
======= ======= ====== =======
</TABLE>
F-11
<PAGE> 48
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities. Temporary differences and
carryforwards, which give rise to a significant portion of deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
--------- -------------
(UNAUDITED)
<S> <C> <C>
Differences related to fixed assets......................... $(68,050) $(68,050)
Differences related to other assets......................... (8,108) (8,108)
Allowance for doubtful accounts............................. 18,165 18,165
-------- --------
$(57,993) $(57,993)
======== ========
</TABLE>
NOTE 6 -- COMMITMENTS
The Company has various long-term leases for delivery trucks, vehicles,
equipment and property. The following is a schedule by year of approximate
future minimum lease payments as of March 31, 2000.
<TABLE>
<CAPTION>
FOR THE YEAR ENDING MARCH 31,
-----------------------------
<S> <C>
2001................................................ $192,474
2002................................................ 153,658
2003................................................ 143,700
2004................................................ 133,932
2005................................................ 130,764
Thereafter.......................................... 40,575
--------
$795,103
========
</TABLE>
Total rental expense for the fiscal years ended March 31, 2000 and 1999 was
approximately $251,000 and $222,000, respectively. Total rent expense for the
six months ended September 30, 2000 and 1999 was approximately $170,000 and
$100,000, respectively.
NOTE 7 -- STOCKHOLDERS' EQUITY
Stock Offering Costs
During the fourth quarter of the fiscal year ended March 31, 2000, the
Company aborted an attempt to complete a secondary public offering of common
stock. Prior to the fourth quarter, expenses related to this offering were being
capitalized as an asset and accounted for as deferred offering costs. Since the
offering was never consummated, such costs were expensed and are shown as
$352,653 of stock offering costs on the statement of operations.
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.
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 until expiration on April 22,
2003.
F-12
<PAGE> 49
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 September 30, 2000, 558,000 options were outstanding, of which
237,100 are fully vested. Of the options outstanding, 339,000 were issued on May
26, 1998, and 150,000 were issued on December 7, 1998, with an option price of
$2.75 per share; 8,500 options were issued on May 1, 1999, with an option price
of $4.25 per share; 60,500 options were issued on May 1, 2000, with an option
price of $3.875 per share. All options were granted with an option price equal
to fair market value at the date of grant. The 320,900 unvested options vest in
accordance with the following schedule:
<TABLE>
<CAPTION>
FISCAL
YEAR END NUMBER OF
OPTIONS VEST OPTIONS
------------ ---------
<S> <C>
2001..................................................... 37,500
2002..................................................... 84,100
2003..................................................... 89,300
2004..................................................... 56,000
2005..................................................... 25,000
2006..................................................... 14,000
2007..................................................... 15,000
-------
320,900
=======
</TABLE>
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 YEARS ENDED FOR THE SIX MONTHS
MARCH 31, ENDED SEPTEMBER 30,
-------------------- -------------------
2000 1999 2000 1999
--------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net (loss) income -- as reported............... (39,170) 138,114 1,244 49,866
Net (loss) income -- pro forma................. (131,019) 16,470 (64,318) (10,903)
Basic (loss) income per share -- as reported... (.01) .05 .00 .02
Basic (loss) income per share -- pro forma..... (.04) .01 (.02) .00
</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
assumption: dividend yield of 0%; expected volatility of 1%; discount rate of
5.0% and expected lives of 10 years.
F-13
<PAGE> 50
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options and Warrants
The weighted average exercise price and remaining contractual life of the
options and warrants at September 30, 2000 was 74 months. No options were
exercised during the years ended March 31, 2000 and 1999. The following is a
summary of options and warrants granted and forfeited:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE OF
WEIGHTED AVERAGE OPTIONS AND
EXERCISE PRICE OF CURRENTLY WARRANTS --
OPTIONS AND OPTIONS AND EXERCISABLE OPTIONS CURRENTLY
WARRANTS WARRANTS AND WARRANTS EXERCISABLE
----------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Outstanding March 31,
1998................... -- $ -- -- $ --
Granted................ 778,000 $5.42
Forfeited.............. (5,000) $2.75
-------
Outstanding March 31,
1999................... 773,000 $5.44 391,000 $8.07
Granted................ 11,000 $4.25
Forfeited.............. (3,500) $3.39
-------
Outstanding March 31,
2000................... 780,500 $5.43 467,200 $7.78
Granted (unaudited).... 61,000 $3.88
Forfeited
(unaudited)......... (3,500) $3.34
-------
Outstanding September 30,
2000 (unaudited)....... 838,000 $5.33 517,100 $6.84
=======
</TABLE>
NOTE 8 -- PROFIT SHARING PLAN
The Company has adopted a 401(k) profit sharing plan for its employees.
Employees become eligible to participate in the plan once they have completed
one year of service and have reached 21 years of age. Contributions by the
Company and employees vest immediately. The Company matches 100% of employees'
contributions up to 3% of the employees gross pay. During the years ended March
31, 2000 and 1999, the Company matched approximately $34,000 and $24,000,
respectively. During the six months ended September 30, 2000 and 1999, the
Company matched approximately $14,000 and $11,000, respectively. No profit
sharing contributions were approved by the Board of Directors for the years
ended March 31, 2000 and 1999, or during the six months ended September 30, 2000
and 1999.
F-14
<PAGE> 51
------------------------------------------------------
------------------------------------------------------
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......................... 3
Eldorado Artesian Springs................ 3
This Offering............................ 3
Key Facts................................ 4
Summary of Financial Information......... 5
Risk Factors............................... 6
Forward-Looking Information and Associated
Risks.................................... 9
Additional Information..................... 10
Use of Proceeds............................ 11
Determination of the Offering Price........ 11
Price Range of Common Stock................ 12
Dilution................................... 13
Capitalization............................. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 15
Eldorado and its Business.................. 19
Management................................. 25
Principal Stockholders..................... 28
Certain Relationships and Related
Transactions............................. 28
Legal Proceedings.......................... 28
History of Security Placements............. 29
Description of Securities.................. 29
Shares Eligible for Future Sale............ 33
Underwriting............................... 34
Commission Position on Indemnification for
Securities Act Liabilities............... 36
Legal Matters.............................. 36
Experts.................................... 36
Index to Financial Statements.............. F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000. 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.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,000,000 UNITS
[ELDORADO LOGO]
ELDORADO ARTESIAN
SPRINGS, INC.
---------------------
PROSPECTUS
---------------------
AMERICAN FRONTEER
FINANCIAL CORPORATION
, 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 52
ELDORADO ARTESIAN SPRINGS, INC.
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 caused 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 before the date such provision was added.
Eldorado has acquired directors and officers liability insurance.
See the second and third paragraphs of Item 28 on page II-2 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>
<S> <C>
Registration Fee......................................... $ 1,908
National Association of Securities Dealers, Inc. Fee..... 10,000
Non-Accountable Expense Allowance........................ 75,000
Legal Fees and Expenses*................................. 42,000
Accounting Fees and Expenses*............................ 25,000
Printing and Engraving Expenses*......................... 45,000
Blue Sky Fees and Expenses*.............................. 15,000
Transfer Agent's and Registrar's Fees*................... 500
Other*................................................... 592
Total.......................................... $215,000
</TABLE>
---------------
*Estimated
II-1
<PAGE> 53
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) because 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>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 -- Form of Underwriting Agreement between Eldorado and the
Representative
1.2 -- Form of Representative's Warrant Agreement
3.1 -- Amended and Restated Articles of Incorporation dated
August 31, 2000
3.2 -- Proposed Certificate of Designation of Series A
Convertible Preferred Stock
3.3 -- Amended and Restated Bylaws of Eldorado, incorporated by
reference to Exhibit 3.2 filed with Amendment No. 2 to
Registration Statement No. 333-68553
4.1 -- Form of certificate for units
4.2 -- Form of Warrant Agreement with form of Certificate for
Class A Warrant attached
5.1 -- Opinion of Chrisman, Bynum & Johnson, P.C.
10.1 -- Eldorado Artesian Springs, Inc. 1997 Stock Option Plan,
as amended July 1, 1999, incorporated by reference to
Exhibit 10.1 filed with Amendment No. 2 to Registration
Statement No. 333-68553
10.2 -- Promissory Note with First National Bank of Boulder
County dated June 27, 1997, incorporated by reference to
Exhibit 10.2 filed with Registration Statement No.
333-68553
10.3 -- Deed of Trust to secure a loan from First National Bank
of Boulder County dated June 27, 1997, incorporated by
reference to Exhibit 10.3 filed with Registration
Statement No. 333-68553
10.4 -- Water Augmentation Agreement dated December 8, 1998,
incorporated by reference to Exhibit 10.4 filed with
Amendment No. 2 to Registration Statement No. 333-68553
10.5 -- Extension Agreement dated May 19, 1999, incorporated by
reference to Exhibit 10.5 filed with Amendment No. 2 to
Registration Statement No. 333-68553
10.6 -- Dividend Escrow Agreement with Bank of Cherry Creek*
10.7 -- First Amendment to 1998 Agreement dated July 11, 2000,
between the Company and Farmers Reservoir and Irrigation
Company
10.8 -- Contract to Buy and Sell Real Estate (Commercial) between
the Company and The Park at CTC, LLC*
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>
---------------
*To be filed by amendment.
II-2
<PAGE> 54
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer will provide to the underwriter at
the closing named 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 according 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.
If 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.
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 according 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> 55
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
the requirements of filing on Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boulder, Colorado, on the 16th day of November, 2000.
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>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS A. LARSON President, Chief Executive November 16, 2000
----------------------------------------------------- Officer, Director
Douglas A. Larson (Principal Executive
Officer)
/s/ DOUGLAS A. LARSON, POA Vice President and November 16, 2000
----------------------------------------------------- Secretary, Chairman of the
Kevin M. Sipple Board
/s/ DOUGLAS A. LARSON, POA Vice President and Director November 16, 2000
-----------------------------------------------------
Jeremy S. Martin
/s/ CATHLEEN M. COLLINS Chief Financial Officer November 16, 2000
----------------------------------------------------- (Principal Accounting
Cathleen M. Collins Officer)
/s/ DOUGLAS A. LARSON, POA Director November 16, 2000
-----------------------------------------------------
George V. Schmidt
/s/ DOUGLAS A. LARSON, POA Director November 16, 2000
-----------------------------------------------------
Don P. Van Winkle
</TABLE>
II-4
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 -- Form of Underwriting Agreement between Eldorado and the
Representative
1.2 -- Form of Representative's Warrant Agreement
3.1 -- Amended and Restated Articles of Incorporation dated
August 31, 2000
3.2 -- Proposed Certificate of Designation of Series A
Convertible Preferred Stock
3.3 -- Amended and Restated Bylaws of Eldorado, incorporated by
reference to Exhibit 3.2 filed with Amendment No. 2 to
Registration Statement No. 333-68553
4.1 -- Form of certificate for units
4.2 -- Form of Warrant Agreement with form of Certificate for
Class A Warrant attached
5.1 -- Opinion of Chrisman, Bynum & Johnson, P.C.
10.1 -- Eldorado Artesian Springs, Inc. 1997 Stock Option Plan,
as amended July 1, 1999, incorporated by reference to
Exhibit 10.1 filed with Amendment No. 2 to Registration
Statement No. 333-68553
10.2 -- Promissory Note with First National Bank of Boulder
County dated June 27, 1997, incorporated by reference to
Exhibit 10.2 filed with Registration Statement No.
333-68553
10.3 -- Deed of Trust to secure a loan from First National Bank
of Boulder County dated June 27, 1997, incorporated by
reference to Exhibit 10.3 filed with Registration
Statement No. 333-68553
10.4 -- Water Augmentation Agreement dated December 8, 1998,
incorporated by reference to Exhibit 10.4 filed with
Amendment No. 2 to Registration Statement No. 333-68553
10.5 -- Extension Agreement dated May 19, 1999, incorporated by
reference to Exhibit 10.5 filed with Amendment No. 2 to
Registration Statement No. 333-68553
10.6 -- Dividend Escrow Agreement with Bank of Cherry Creek*
10.7 -- First Amendment to 1998 Agreement dated July 11, 2000,
between the Company and Farmers Reservoir and Irrigation
Company
10.8 -- Contract to Buy and Sell Real Estate (Commercial) between
the Company and The Park at CTC, LLC*
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>
---------------
* To be filed by amendment.
