FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to____________________________
Commission file number 0-25942________________________
SWEETWATER, INC._____________________________
(Exact name of registrant as specified in its charter)
Delaware 84-1167603_____________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2505 Trade Centre Avenue, Suite D, Longmont, CO 80503___________
(Address of principal executive offices) (Zip Code)
(303) 678-0447_____________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of September 30, 1996, 3,061,632 shares of Registrant's
Common Stock, par value $.001 per share, were outstanding.
<PAGE>
SweetWater, Inc.
Table of Contents
Page
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets- 2
September 30, 1996 and December 31, 1995
Statements of Operations- 4
Three and nine months ended
September 30, 1996 and 1995
Statements of Cash Flows 5
Nine months ended
September 30, 1996 and 1995
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information 12
<PAGE>
<TABLE>
SWEETWATER, INC.
BALANCE SHEETS
<CAPTION>
September 30,
1996 December 31,
(Unaudited) 1995
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,330,426 $ 511,331
Short-term investments 1,159,829 4,460,897
Accounts receivable - net 347,644 57,822
Inventory 977,043 1,120,063
Prepaids and other current assets 86,530 105,418
Total current assets 3,901,472 6,255,531
Fixed Assets, at cost 2,183,959 1,829,352
Less: Accumulated depreciation (984,630) (661,564)
Fixed assets, net 1,199,329 1,167,788
Other Assets:
Deposits and other 241,428 82,373
TOTAL ASSETS $5,342,229 $7,505,692
The accompanying notes to financial statements are an integral
part of these financial statements
</TABLE>
<PAGE>
<TABLE>
SWEETWATER, INC.
BALANCE SHEETS
<CAPTION>
September 30,
1996 December 31,
(Unaudited) 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable and
other accrued liabilities $ 217,842 $ 258,165
Accrued salaries 5,815 26,682
Accrued warranty 25,835 15,106
Current portion of term
loan payable 117,300 108,125
Total current liabilities 366,792 408,078
LONG TERM DEBT 119,110 207,799
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value;
8,000,000 shares authorized;
3,061,632 and 3,064,529 shares
issued and outstanding at
September 30, 1996 and December
31, 1995, after deducting
132,356 and 129,459 shares held
in treasury, respectively 3,062 3,065
Deferred Compensation (16,488) (28,854)
Additional paid-in capital 12,416,600 12,407,300
Accumulated deficit (7,546,847) (5,491,696)
Total stockholders' equity 4,856,327 6,889,815
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,342,229 $ 7,505,692
The accompanying notes to financial statements are an integral
part of these balance sheets
</TABLE>
<PAGE>
<TABLE>
SWEETWATER, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
SALES $ 847,668 $ 671,005 $1,868,905 $1,976,116
COST OF GOODS SOLD 720,457 624,208 1,413,215 1,631,358
GROSS MARGIN 127,211 46,797 455,690 344,758
OPERATING EXPENSES
Sales and Marketing 353,532 245,581 1,139,929 911,679
Research and
Development 190,962 104,779 703,018 395,389
General and
Administrative 241,476 272,067 777,671 879,072
Total operating
expenses 785,970 622,427 2,620,618 2,186,140
LOSS FROM OPERATIONS (658,759) (575,630) (2,164,928)(1,841,382)
OTHER (EXPENSE)/INCOME,
NET 14,631 (9,735) 109,778 15,440
NET LOSS ($644,128) ($585,365) ($2,055,150)($1,825,942)
LOSS PER COMMON SHARE ($0.21) ($0.33) ($0.67) ($1.01)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,067,009 1,797,204 3,065,940 1,804,039
The accompanying notes to financial statements are an integral
part of these statements
</TABLE>
<PAGE>
<TABLE>
SWEETWATER, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($2,055,150) ($1,825,942)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 327,375 248,957
Amortization of deferred
compensation 12,366 13,317
Changes in assets and liabilities:
Increase in net accounts receivable (289,822) (66,572)
Decrease (increase) in inventory 143,020 (584,772)
Decrease (increase) in prepaids
and other current assets 18,888 (20,195)
Increase in deposits and other assets (9,992) (12,658)
Increase in deferred offering costs (153,373) ---
(Decrease) in accounts payable
and accrued liabilities (40,323) (111,437)
(Decrease) increase in accrued
salaries and other current
liabilities (10,138) 4,153
Net cash used in operating activities (2,057,149) (2,355,149)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture, fixtures
and equipment (354,607) (535,856)
Purchases of short-term investments (5,605,640) (1,925,721)
Proceeds from the sales of
short term investments 8,906,708 3,621,823
Repurchase of Treasury Stock -- (15,984)
Sale of Treasury Stock -- 2,097
Net cash provided by (used in) investing
activities 2,946,461 1,146,359
CASH FLOWS FROM FINANCING ACTIVITIES
Capital Contributions/401 (k) Stock 9,297 14,228
Increase in notes payable -- 237,898
Increase in Subordinated Notes
Payable to Stockholder -- 1,500,000
Payments on notes payable (79,514) (118,143)
Net cash (used in) provided by financing
activities (70,217) 1,633,983
Net increase in Cash and Cash Equivalents 819,095 425,193
CASH AND CASH EQUIVALENTS,
beginning of period 511,331 687,261
CASH AND CASH EQUIVALENTS, end of period $1,330,426 $1,112,454
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $23,592 $47,081
The accompanying notes to financial statements are an integral
part of these statements
</TABLE>
<PAGE>
SweetWater, Inc.
Notes To Financial Statements
(Unaudited)
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited balance
sheets, statements of operations and cash flows contain all
adjustments, consisting only of normal recurring items, necessary
to present fairly the financial position of SweetWater, Inc. (the
"Company") as of September 30, 1996 and the results of operations
and cash flows for the three and nine-months ended September 30,
1996 and 1995.
The unaudited financial statements presented herein have been
prepared in accordance with Securities and Exchange Commission
regulations and do not include all the information and note
disclosures required by generally accepted accounting principles.
These financial statements should be read in conjunction with the
audited financial statements and notes thereto contained in the
Company's annual report on Form 10 - K for the year ending
December 31, 1995.
INVENTORY
Inventory includes costs of materials, direct labor and
manufacturing overhead. Inventory is priced at the lower of cost
(using the first-in, first-out method of valuation) or market.
Inventory consists of the following components:
September 30,
1996 December 31,
(Unaudited) 1995
Raw materials $448,226 $ 388,686
Work in Process 230,706 --
Finished goods 298,111 731,377
$977,043 $1,120,063
<PAGE>
SweetWater, Inc.
Notes To Financial Statements
(Unaudited)
INCOME TAXES
SFAS No. 109 requires recognition of deferred tax assets for the
expected future effects of all deductible temporary differences,
loss carryforwards and tax credit carryforwards. Deferred tax
assets are then reduced, if deemed necessary, by a valuation
allowance for the amount of any tax benefits which, more likely
than not, based on current circumstances, are not expected to be
realized. The Company has determined that under SFAS 109, any
previously unrecognized tax benefits do not satisfy the
realization criteria set forth therein. Therefore, a valuation
allowance has been recorded against the entire net deferred tax
asset.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding
during each period presented. At September 30, 1996 and 1995,
options on 25,834 and 27,501 shares, respectively, have been
treated as outstanding common stock equivalents.
5. PROFIT SHARING PLAN AND TRUST
Pursuant to the Company's 401(k) Profit Sharing Plan and Trust
(the "401(k) Plan"), which was established effective January 1,
1995, the Company has agreed to contribute matching contributions
in the form of Company common stock at the rate of 50% of the
first 8% of employees salary deferral. Under the 401(K) Plan,
the Company may also elect to make discretionary contributions.
Employees vest in Company contributions over six years of service
with the Company. Forfeitures of the unvested prorated portion
are allocated to the remaining employees in the plan
proportionately, based upon current years compensation.
6. LONG TERM DEBT
Under the Loan and Security Agreement dated November 23,
1994, as amended, (the "Loan Agreement"), by and between the
Company and Silicon Valley Bank (the "Bank"), the Company may
borrow up to $1,000,000 under a revolving credit loan facility,
and $350,000 under a term loan facility, as long as the Company
is in compliance with certain covenants including, among others,
a covenant that the Company maintain a net worth a $4,000,000.
The revolving credit facility matures in April 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains, in addition to
historical information, forward-looking statements. The forward-
looking statements were prepared on the basis of certain
assumptions which relate, among other things, to the demand for
and cost of producing and marketing the Company's current and
future products; the retail prices at which such products may be
sold; seasonal selling trends, and the Company's anticipated
market share. Even if the assumptions on which the projections
are based prove accurate and appropriate, the actual results of
the Company's operations in the future may vary widely from the
financial projections due to technological change, increased
competition, additional government regulation or intervention in
the water purification and filtration industries, and other
factors not yet known or anticipated. Accordingly, the actual
results of the Company's operations in the future may vary widely
from the forward looking statements included herein.
Results of Operations for the three months ended September 30,
1996 and 1995
During the three-month period ended September 30, 1996, the
Company had sales of $848,000, an increase of 26%, compared to
sales in the three-month period ended September 30, 1995 of
$671,000. The increase in sales is due to a large, end of season
order placed by a new customer.
The gross margin of $127,000 or 15% of sales for the three
month period ended September 30, 1996 was higher than the prior
year gross margin of $48,000 or 7% of sales, primarily due to
higher sales volume, and greater overhead absorption on higher
production levels, partially offset by higher production
spending.
Sales and marketing expenses for the three-month period
ended September 30, 1996 were $354,000, an increase of 44%,
compared to $246,000 for the three-month period ended September
30, 1995. This increase was due to increased market research and
staffing costs in connection with the development of the home
drinking water treatment products and sales commissions to the
sales force for the portable outdoor product line.
Research and development expenses for the three-month period
ended September 30, 1996 were $191,000, an increase of 82%
compared to $105,000 for the three-month period ended September
30, 1995. This increase was due primarily to the Company's
increased investment in research and development associated with
new products for the home drinking water treatment market.
General and administrative expenses for the three-month
period ended September 30, 1996 were $241,000, a decrease of 11%
compared to $272,000 for the three-month period ended September
30, 1995, which was primarily the result of lower corporate legal
expenses.
Other income and expense for the three month period ended
September 30, 1996 was $15,000 in income compared to $10,000 of
expense for the three month period ended September 30, 1995 as a
result of higher cash balances available to invest in 1996, and
lower interest expense resulting from a lower outstanding balance
than in 1995 on the Company's indebtedness.
Results of Operations for the nine months ended September 30,
1996 and 1995
During the nine-month period ended September 30, 1996, the
Company had sales of $1,869,000, a decrease of 5%, compared to
sales in the nine-month period ended September 30, 1995 of
$1,976,000. The decrease in sales was due to lower Guardian and
ViralGuard unit sales partially offset both by a higher selling
price for the Guardian and additional sales of the Guardian+Plus
and the WalkAbout introduced in May 1996.
The gross margin of $456,000 or 24% of sales for the nine-
month period ended September 30, 1996 was higher than the prior
year gross margin of $345,000 or 17% of sales, primarily due to
a higher Guardian selling price, higher Guardian+Plus unit sales
volume, and lower production spending offset by a lower Guardian
unit sales volume.
Sales and marketing expenses for the nine-month period ended
September 30, 1996 were $1,140,000, an increase of 25%, compared
to $912,000 for the nine-month period ended September 30, 1996.
This increase was due to increased market research and staffing
costs in connection with the development of the home drinking
water treatment products and sales commissions to the sales force
for the portable outdoor product line.
Research and development expenses for the nine-month period
ended September 30, 1996 were $703,000, an increase of 78%
compared to $395,000 for the nine-month period ended September
30, 1995. This increase was due primarily to the Company's
increased investment in research and development associated with
new products for the home drinking water treatment market.
General and administrative expenses for the nine-month
period ended September 30, 1996 were $778,000, a decrease of 11%
compared to $879,000 for the nine-month period ended September
30, 1995, which was primarily the result of decreased corporate
legal expenses.
Other income for the nine-month period ended September 30,
1996 was $110,000 compared to $15,000 for the nine- month period
ended September 30, 1995 as a result of higher cash balances
available to invest in 1996, and lower interest expense than in
1995 on the Company's indebtedness based on a lower outstanding
balance.
The Company's operating expenses have increased as a result
of the expansion of sales and marketing, manufacturing and new
product research and development. The Company expects to
continue to incur operating losses until the Company generates
sufficient revenue from sales of existing products and new home
drinking water treatment products and their accessories to cover
expenses. The attainment of positive cashflow will depend on
numerous factors, many of which are difficult to predict. No
assurances can be given that this will be achieved.
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents, and short term investments decreased
by 50% from $4,972,000 at December 31, 1995 to $2,490,000 at
September 30, 1996 primarily due to operating losses, purchases
of property and equipment of $355,000, additional accounts
receivable of $290,000 and an increase in other assets, partially
offset by a net reduction of inventory of $143,000.
Although the Company is currently in compliance with the net
worth covenant, as amended, if the Company continues to incur
operating losses and is not successful in completing a strategic
alliance or otherwise obtaining additional capital, the Company
may not be in compliance with the net worth covenant at December
31, 1996. If the Company is not in compliance with this or other
financial covenants in the future and cannot obtain a waiver from
the Bank, the Bank would be entitled to require immediate payment
of the outstanding indebtedness (currently approximately
$236,000), to refuse further advances and to exercise various
rights against the Company and its assets at any time. In such
event, the Company would repay the outstanding indebtedness out
of its cash and the proceeds of its short-term investments, which
would reduce amounts available to finance its operations in the
future.
The Company believes that cash and short term investments
will be sufficient to meet working capital requirements and
support its existing operations for the next six (6) months.
Additional funds will be required to manufacture and market its
new home use product and to support its operations after the
expiration of such six month period. The Company has retained
Dillon, Read & Co. as its exclusive agent to arrange a joint
strategic alliance which may involve new equity investments in
the Company or the acquisition of stock or assets of the Company.
There can be no assurance that the Company will be successful in
completing any such alliance or otherwise obtaining the
additional capital which will be required to support its existing
and planned operations.
<PAGE>
PART II OTHER INFORMATION
Items 1-2 None
Item 3 None
Item 4 None
Item 5 None
Item 6 Exhibits and Reports on Form 8 - K
A) Reports on Form 8 - K - There were no reports filed on
Form 8 - K for the quarter ended September 30, 1996
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SweetWater, Inc.
(Registrant)
Dated: November 13, 1996 By:/s/ Patrick E.Thomas
Patrick E. Thomas
Vice President of Finance and
Administration, Chief Financial
Officer (principal financial
officer and chief accounting
officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,330,426
<SECURITIES> 1,159,829
<RECEIVABLES> 347,644
<ALLOWANCES> 0
<INVENTORY> 977,043
<CURRENT-ASSETS> 3,901,472
<PP&E> 2,183,959
<DEPRECIATION> 984,630
<TOTAL-ASSETS> 5,342,229
<CURRENT-LIABILITIES> 366,792
<BONDS> 0
0
0
<COMMON> 3,062
<OTHER-SE> 4,853,265
<TOTAL-LIABILITY-AND-EQUITY> 5,342,229
<SALES> 1,868,905
<TOTAL-REVENUES> 1,868,905
<CGS> 1,413,215
<TOTAL-COSTS> 1,413,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,592
<INCOME-PRETAX> (2,055,150)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,055,150)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
</TABLE>
