<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
F O R M 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-25942
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________.
______________________
SWEETWATER, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1167603
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2505 TRADE CENTRE AVENUE, #D, LONGMONT, COLORADO 80503
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 678-0447
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
<S> <C>
NONE NOT APPLICABLE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION L2(G) OF THE ACT:
NONE
___________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant on March 24, 1997, was approximately $861,521. On such date, the
last sale price of registrant's common stock was $1.00 per share.
Indicate number of shares outstanding of each of the registrant's classes
of common stock, as of March 24, 1997.
<TABLE>
<CAPTION>
CLASS OUTSTANDING ON MARCH 24, 1997
--------------------------------------- -----------------------------
<S> <C>
Common Stock, par value $.001 per share 3,064,529
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the registrant's 1997 Annual Meeting of
Shareholders,which will be filed with the Securities and Exchange Commission
not later than 120 days after the registrant's fiscal year end of December 31,
1996, are incorporated by reference into Part III.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
SweetWater, Inc. ("SweetWater" or the "Company") is a water technology
company specializing in the development of water filtration and purification
devices and technologies to address health concerns resulting from the
microbiological contamination of drinking water. The Company's first product,
the Guardian(TM) Micro-Filtration System ("Guardian"), is a compact,
lightweight, portable water filtration device intended to protect individuals
from waterborne diseases (and their accompanying debilitating symptoms such as
diarrhea, fever and dehydration) by removing protozoa (such as Giardia and
Cryptosporidium), parasites and most bacteria from drinking water. In May
1995, the Company began marketing the ViralGuard(TM) Cartridge, a portable
water purification device designed to be attached to and used in conjunction
with the Guardian and to convert the Guardian from a "filter" to a "purifier,"
which is capable of inactivating viruses in addition to removing bacteria and
protozoa. The Company markets the Guardian and the ViralGuard together as the
"Guardian+Plus(TM)". The Company believes that the Guardian provides
outdoorsmen with a reliable, inexpensive, easy to use, and fast method for
treating fresh water supplies contaminated by micro-organisms. With the
Guardian+Plus now available, the Company may pursue broader markets including
tourist and business travelers and emergency and relief workers who have a need
for protection from waterborne viruses.
Awareness of drinking water contamination has become increasingly
widespread in the United States and internationally. The Company believes that
microbiological contamination of drinking water is a significant and growing
threat to public health in the United States and that unsafe water and poor
sanitation are generally recognized as a leading cause of human illness in the
world. The Federal Center for Disease Control recently estimated that each
year 940,000 people become ill and as many as 900 may die from
microbiologically contaminated water. Cryptosporidosis is particularly
dangerous to immune-compromised individuals. The Center for Disease Control
estimates that 20% of the U.S. population are specifically identified as an "at
risk" population for Cryptosporidosis; including people over 55 and under 5
years of age, immune compromised individuals such as those undergoing treatment
for cancer, organ transplant patients, and individuals who are HIV positive.The
Company is committed to, and its products are intended to, address health
concerns resulting from the microbiological contamination of drinking water.
It is estimated that over 90% of the surface waters in the United States
have been found to be contaminated with protozoan parasites, such as Giardia or
Cryptosporidium ("Crypto"), both of which are very resistant to chemical
disinfectants, such as iodine and chlorine. Filtration is the preferred method
for eliminating these pathogens from drinking water. Brochures distributed by
the National Park Service advise visitors to the nation's most popular parks
not to drink untreated or unboiled water.
The Company seeks to achieve a competitive advantage by producing
reliable, efficient products at a low cost. The Company believes that its
products can provide outdoorsmen, tourists and business travelers, military
troops, emergency and relief workers and others with a reliable,
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inexpensive, easy to use, compact, and fast method for treating fresh water
supplies contaminated by micro-organisms.
Since its inception, the Company has been engaged primarily in product
development and has incurred operating losses resulting in an accumulated
deficit of approximately $9,724,000 as of December 31, 1996. Operating losses
increased in 1996 as a result of the Company's efforts to develop a water
filtration and purification device for the home use market. Although the
Company and Dillon, Read & Co., Inc., the Company's exclusive agent, actively
pursued a joint strategic alliance to manufacture and market the home use
product, the Company was not successful in locating an industry partner to
manufacture and market this potential product. Accordingly, the Company has
suspended its efforts to manufacture and market this product and has been
seeking a buyer for the plans, designs and technology associated therewith.
The Company has no amounts capitalized related to this product.
The Company has also reduced its personnel and initiated a cost
containment program designed to reduce general and administrative costs,
conserve its cash resources and enable the Company to concentrate its resources
on its current portable water filtration and purification products. Although
the Company has adopted a plan that it believes will allow it to remain in
operation at least through 1997 as a result of streamlining its operations and
reducing its costs, there can be no assurance the Company's losses will not
continue or that the Company will be able to generate sufficient revenue from
sales of the Guardian, the ViralGuard, the Guardian+Plus, the WalkAbout and
their accessories to cover expenses. Unless the performance of the Company
improves substantially, no assurance can be given that the Company will achieve
positive cash flow. The Company believes that cash and short term investments
will be sufficient to meet working capital requirements and support its
existing operations through 1997. If the Company does not achieve positive
cash flow during that period, or if the Company incurs unexpected substantial
expenses prior thereto, the Company would be required to raise additional
capital. There can be no assurance that additional capital will be pursued or
available on terms acceptable to the Company when and if needed.
The Company and Messrs. Reynolds, Thomas and Cogdill, members of the
Company's senior management ("Management"), have reached an agreement in
principle pursuant to which the Management would agree to remain with the
Company through December 31, 1997 in exchange for certain performance bonuses
and a right of first refusal to purchase the Company's portable water
filtration and purification business (the "Outdoor Business") in the event
certain performance targets are met and the Company elects to sell such
business within a specified period after December 31, 1997. The Company has
not determined to sell the Outdoor Business and will have no obligation to sell
the Outdoor Business to Management or to a third party at any time. The
Company believes that the agreement in principal will provide an incentive to
Management to maximize cash flow from the Outdoor Business and to conserve the
Company's cash resources.
Specifically, this agreement in principle contemplates that, Management,
as a group, under certain circumstances, shall be entitled to receive a
Performance Bonus equal to 50% of the amount by which cash and cash equivalents
as set forth on the Company's audited balance sheet as of December 31, 1997,
subject to certain adjustments ("Year End Cash") exceeds $1,000,000. In
addition, in the event Year End Cash exceeds a specified target (which will be
lower than $1,000,000), Management shall have a right of first refusal in the
event the Company elects to sell the Outdoor Business to a third party. If
such right is not exercised, Management, as a group, shall
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be entitled to receive a Value Enhancement Bonus equal to 30% of
the excess of the third party purchase price over the Management Price (as
defined below) less the amount of the Performance Bonus, if any. In the event
the Company elects to sell the Outdoor Business to Management, Management shall
have the right to purchase the Outdoor Business for a specified price (the
"Management Price") and the assumption of the Outdoor Business liabilities.
The Management Price shall be subject to certain adjustments, and shall be
reduced by the amount by which Year End Cash exceeds the target amount. If
Year End Cash equals or exceeds $1,000,000, the Management Price shall be a
nominal amount. As the Company and Management are negotiating the terms and
structure of a proposed agreement, the final terms and structure may differ
substantially from the terms described herein. In addition, if the Company and
Management do not execute a final agreement, one or more of the members of
Management may elect to pursue other opportunities which could have a material
adverse effect on the Company.
The Company was incorporated in Colorado in March 1991 and re-incorporated
in Delaware in September 1993. In January 1994, the Company effected its
initial public offering. The Company's principal office is located at 2505
Trade Centre Avenue, #D, Longmont, CO 80503 and its telephone number is
303/678-0447.
PRODUCTS
The Company's current product line is comprised of three primary devices:
two microfilters (the Guardian and the WalkAbout) and one purifier (the
Guardian+Plus). Customers can continue to use the primary devices by purchasing
available recyclable replacement Filter Cartridges. Several accessory products
are also sold that enhance the product line.
The Guardian Micro-Filtration System: The Company's first product, The
Guardian Micro-Filtration System, continues to be the Company's best-known,
best selling product at a suggested retail price of $59.95. Designed to help
protect individuals from waterborne diseases by removing protozoa, bacteria,
sediments, and foul tastes from drinking water, the Guardian is designed to
effectively filter out organisms as small as .2 microns in size. It is
effective at eliminating Cryptosporidium and Giardia, two protozoa varying in
size from 3 to 12 microns and commonly found in surface water. The Guardian's
recyclable replacement Filter Cartridge, which filters up to approximately 200
gallons of clear water and a lesser amount of sediment water, was designed to
be simple to remove, clean, and replace. A patented pre-filter, a water bottle
adapter, two long hoses (one for intake and one for output) and a brush for
cleaning all come as part of the Guardian package and all contribute to its
ease of use and superior design. While the Guardian is a "water filter", not a
"purifier", it does exceed the U.S. EPA Water Purifier Guide Standard removal
minimums for protozoa and bacteria, which are 99.9% and 99.9999% respectively.
WalkAbout: The WalkAbout, a "micro-filter" that removes bacteria and
protozoa, was introduced in May 1996 and is currently offered at a suggested
retail price of $34.95. The WalkAbout was developed to provide casual hikers
and campers with a product that delivers the same health protection as the
Guardian (99.9% removal of protozoa, and 99.9999% removal of bacteria) and is
marketed with the same water bottle adapter and patented pre-filter as the
Guardian and its two hoses, both 33 inches long, are also comparable to the
Guardian's.
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<PAGE> 5
The Guardian+Plus System: The Company offers consumers a "water purifier"
that goes one step beyond the Guardian by killing or deactivating viruses in
addition to eliminating bacteria and protozoa and reducing tastes and odors.
The Guardian+Plus at a suggested retail price of $79.95, consists of a Guardian
with a ViralGuard Cartridge attached. The ViralGuard, at a suggested retail
price of $24.95, is a small cartridge that attaches to the base of the Guardian
and has a 90 gallon maximum capacity and adds approximately 2 inches to the
Guardian. It plugs in to the base of the Guardian and the input hose attaches
to its base. The Guardian+Plus meets the requirements of the "U.S. EPA Guide
Standard Protocol for Evaluation of Microbiological Water Purifiers" by killing
or deactivating 99.99% of waterborne viruses. Viruses are inactivated by
contact with the iodinated resin bed of the Guardian+Plus and through the
residual iodine concentration remaining in the water from passing through the
Guardian's filter. Management believes that the Guardian+Plus provides
consumers with a cost effective and versatile purifier. The Guardian+Plus
provides the Company with a product that it can market to overseas travelers
(who encounter virus infested water more often than hikers in the U.S.) and as
an emergency preparedness device.
Although the ViralGuard has been registered with the California EPA, the
Company has not submitted to California the packaging and labeling materials
required to obtain California EPA registration for the Guardian+Plus in that
state. Until such registration is issued, the Company has implemented a
point-of-purchase display for California retailers that encourages consumers to
purchase the ViralGuard accessory in order to upgrade their Guardian into a
Guardian+Plus.
Replacement Cartridges: The Guardian, Guardian+Plus and WalkAbout are
designed to enable the consumer to continue to use these products by purchasing
recyclable replacement Filter Cartridges. Consequently, in addition to sales to
new customers, the Company expects to service the needs of a growing base of
"installed inventory", some percentage of which will require replacement Filter
Cartridges to continue to use the Company's primary products. The Company
believes that this opportunity, a fundamental attribute of all water filtration
products, will result in an ongoing demand for replacement Filter Cartridges.
The Guardian's Filter Cartridge, at a suggested retail price of $24.95, filters
up to approximately 200 gallons of clear water and a lesser amount of sediment
water and is designed to be simple to remove, clean, and replace. Consumers who
currently own a Guardian may purchase ViralGuard Cartridges as an upgrading
accessory at a suggested retail price of $24.95. In addition, the Company
markets the WalkAbout with a replacement Filter Cartridge at a suggested retail
price of $12.50.
Accessories: In addition to the Guardian, the Guardian+Plus, the
WalkAbout, the ViralGuard Cartridge and the replacement Filter Cartridge for
the Guardian and WalkAbout, the Company also manufactures six accessories. In
March 1996, the Company began shipping a new and improved Silt Stopper II,
which extends the useful life of any brand of filter or purifier in muddy
water. The Pre-filter has also undergone design improvements and management
believes it continues to be the most effective pre-filter in rushing water or
still pools. The Universal Water Bottle Adapter fits most water bottles on the
market and allows for spill free filling. A Carry Bag, replacement filter
cleaning brushes, and replacement hoses are also available as accessories. In
addition to selling these six products as accessories to the Guardian,
Guardian+Plus, and WalkAbout, the Company plans to aggressively position them
as compatible with and improving the performance of competitive products.
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SALES
The Company's products are sold in the United States and in eight
countries around the world primarily to specialty sporting goods stores that
specialize in backpacking, hiking, mountaineering, and adventure travel
outfitting. Sales of the Company's products are seasonal with increased demand
for the Company's products in the warmer months of the year. Approximately 68%
of the Company's annual sales for 1996 occurred in the second and third
quarters. In addition, one customer, Recreational Equipment, Inc., a leading
retailer, accounted for approximately 31% of the Company's annual sales for
1996. In late 1995, the Company hired an independent sales representative
force to cover fourteen North American sales regions (nine in the U.S. and 5 in
Canada). The sales representatives are managed by an in-house sales manager and
the Company intends to continue marketing its products through the use of
independent sales representatives. Export sales amounted to 11% of the
Company's sales in 1996, primarily to Canada.
MARKETING
The Company's future success will depend, in part, upon its ability to
market its current products to existing users of portable water filtration and
purification products and to expand the market for water filtration and
purification products, domestically and internationally. The Company markets
its products through point-of-purchase displays, updated consumer brochures,
and training manuals filled with product information, newsletters, and
technical briefs, which are distributed to retailers. In 1996, the Company
supplemented these materials by broader media coverage through the use of an
independent media consultant, a new advertising campaign which appeared in both
trade and consumer publication throughout the spring and summer of 1996, and a
web-site on the Internet (which was established in February 1996).
The Company continues to work with Swiss Army Brands Inc. ("Swiss Army
Brands"), concerning methods of gaining access to a number of market segments
where Swiss Army Brands has a strong presence as the sole North American
distributor of Victorinox(R) Original Swiss Army(TM) Knives and Swiss Army(R)
Brand Watches and other products. Swiss Army Brands has provided warehouse and
shipping facilities to assist the Company in distributing its products in
Canada. Although the Company anticipates that Swiss Army Brands will continue
to assist the Company regarding marketing and/or distribution, Swiss Army
Brands has no obligation to assist the Company and there can be no assurance
that it will do so.
As the Company believes that the outdoor specialty sporting goods market
for the Company's products has matured, any future sales growth for the
Company's products will depend on the ability of the Company and other
manufacturers to expand the market and to develop larger distribution channels,
such as general sporting goods stores and mass merchants. As general sporting
goods stores and mass merchants have only recently begun to sell the product
category, there can be no assurance that the market for such products will
expand.
MANUFACTURING AND QUALITY ASSURANCE
The Company has invested heavily in the design, acquisition and
implementation of manufacturing systems which permit the automated and
semi-automated assembly of the Guardian,
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ViralGuard and the WalkAbout and enable the Company to test the efficiency of
100% of the Guardian Filter Cartridges by automated means. In addition, the
Company performs microbiological test audits on a small sample of its
production of ViralGuards on a periodic basis as a quality control measure.
Management believes that its automation of the assembly processes provides it
with the ability to manufacture superior products at low cost, thus providing
greater margin opportunities. Automation has also allowed the Company to offer
"Just-In-Time" product delivery, a benefit particularly appreciated and
required by mail-order catalog retailers and mass-merchants.
Manufacturing of all the Company's products is done from the Longmont,
Colorado facilities. Manufacturing represents 7 persons or 54% of the
Company's full time employees including its Chief Operating Officer.
RAW MATERIALS; SUPPLIERS
The Company purchases raw materials and components used in the Company's
products from a number of different suppliers both foreign and domestic. The
Company owns the molds and metal tooling for the Guardian, Guardian+Plus, and
ViralGuard components but uses injection molders and metal fabrication shops to
manufacture the components to the Company's specifications.
The Company's products involve proprietary filter technology. The Company
purchases its filter tubes from one specialized third party manufacturer
pursuant to an agreement which provides that the manufacturer will not sell
such filters to other manufacturers of portable water filtration devices for a
period equal to the greater of three years or the length of a binding purchase
order contract between the Company and such third party manufacturer. The
Company believes that is has a sufficient supply of filter tubes in inventory
and could develop an additional supplier if necessary.
The Company currently has one supplier for the iodinated resin in the
ViralGuard. The Company has purchase commitments with this supplier, as well
as a large inventory supply, and does not have any reason to believe that
sufficient supplies of the iodinated resin will not be available. The Company
is investigating alternate sources of supply for this resin.
RESEARCH, DEVELOPMENT AND TECHNICAL RESOURCES
As a result of its cost containment program and the suspension of its
efforts to manufacture and market a home use product, the Company has
eliminated its research and development staff and reduced its microbiological
staff to one person. The Company may employ consultants from time to time to
engage in research and development relating to its current products, if
required. The Company expects to enter into formal consulting agreements which
require such consultants to execute confidentiality agreements. The Company's
expenditures for research and product development for the years ended 1996,
1995, and 1994 were $1,029,000, $624,000 and $429,000 respectively.
The water filtration and purification markets in which the Company
competes are subject to technological changes. Although the Company has
invested significant amounts in the development of the Guardian and
Guardian+Plus and is strongly committed to aggressive investment in the
development of new products, there can be no assurance that future
technological developments will
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not render the Company's products uneconomical and/or obsolete. The limited
nature of the Company's products could also increase its vulnerability to
technological developments and competition.
COMPETITION
As the water treatment market is still developing, the Company cannot
predict the potential size of the market when it matures or which companies may
ultimately emerge as its principal competitors. A number of companies with
substantially greater resources than the Company currently sell products for
household water treatment, and if these companies were to expand into the
portable water treatment market, such companies could provide substantial
competition in the future.
The Company believes that health protection, efficiency, size, weight,
durability and price will be important considerations to the potential buyer of
a portable water filter or water purifier. Although the Company believes that
the Guardian capitalizes on these criteria, there can be no assurance that the
Company's competitors, some of whom may have substantially greater resources,
will not re-configure their products or introduce new products which would have
an adverse effect on the Company's ability to compete. Although the suggested
retail price of the Guardian, Guardian+Plus, and WalkAbout are currently lower
than or equal to products which the Company believes are comparable, there are
a number of products which the Company believes are not comparable in
performance which have significantly lower suggested retail prices.
The Company currently competes with several companies in the manufacture
of portable water filters and water purifiers including Recovery Engineering,
Inc. ("REIN"), General Ecology, Inc., Katadyn U.S. A., Inc., Mountain Safety
Research, Inc., WTC Industries, Inc., Basic Designs, Inc., and Timberline, Inc.
REIN, a publicly traded company which markets its products under the trade
name, PUR, maintains the largest market share of all competitors in the
portable water filtration and purification category.
PATENTS AND TRADEMARKS
The Company's success will depend, in part, upon its ability to obtain and
enforce intellectual property protection for its technology in the United
States and in foreign countries. The Company has maintained the practice,
where possible, to obtain patent protection on its products and processes. As
of March 1997, the Company has five United States patents issued and is
pursuing patent applications in certain foreign jurisdictions.
The Company believes that it owns, or has the right to use all the
proprietary technology currently embodied in its products, although the Company
has not conducted a formal infringement search or obtained an infringement
opinion. There can be no assurance that infringement claims will not be made
in the future or that the validity of a patent issued to the Company will be
sustained if judicially tested. The cost of defending a patent infringement
claim, or prosecuting a claim of infringement against others, may be
substantial and there can be no assurance that the Company will have the
resources necessary to successfully defend or prosecute a patent infringement
claim.
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The Company may elect to retain a patentable invention as a trade secret
or, if patent protection is not available, the Company will be required to rely
on a combination of trade secret laws, non-disclosure and confidentiality
agreements with its officers, employees, consultants and vendors to protect its
proprietary technology. Although these agreements prohibit the unauthorized
use or disclosure of the Company's proprietary information both during and
after the individual's service to the Company, there can be no assurance that
the Company would have adequate remedies if these agreements were breached. In
addition, third parties may independently develop and patent technologies that
are substantially equivalent or superior to the Company's technology.
In 1995, the Company acquired, by assignment, the permanent and exclusive
use of the "SweetWater" trademark for use with filters for domestic use for
purifying potable water. The Company also holds five issued registered
trademarks for "SiltStopper(R)", "Tap-Adapt(R)", "ViralGuard(R)", "TravelGuard"
and "Guardian+Plus" and has one allowed (soon to be issued) trademark for
"WalkAbout". The Company also uses the name "Guardian". No assurances can be
given that the Company will be able to successfully maintain exclusive use of
any of these names or that it will not be prevented from using one or more of
them.
GOVERNMENT REGULATION
The Guardian as presently marketed does not require registration by the
U.S. Environmental Protection Agency (EPA). The EPA regulates the
manufacturing, marketing, advertising and distribution of microbiological water
purification devices containing active ingredients, such as iodine, pursuant to
the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), as amended.
Under a revised protocol issued by the EPA in 1987 (the "Protocol"), a device
must remove, kill or deactivate all types of disease-causing microorganisms
from water, including bacteria, viruses, and protozoan cysts, to be registered
as a "microbiological water purifier." While the Guardian alone does not
require registration, the Guardian+Plus (the Guardian packaged together with
the ViralGuard Cartridge) and the ViralGuard Cartridge (when sold separately as
an accessory) cannot be sold without EPA registration numbers on their
packaging. The ViralGuard Cartridge and the Guardian+Plus received its EPA
Registration number on April 14, 1995. The EPA evaluates these devices as
"emergency" devices because they are not intended for use as continuous
drinking water sources.
Microbiological water purifiers must also be registered prior to sale in
California and Iowa under state regulations similar to those enacted by the
EPA. The Company has received California EPA approval for the ViralGuard
Cartridge and has begun the registration process on the Guardian+Plus. The
Company has not yet registered the ViralGuard Cartridge and the Guardian+Plus
in Iowa which requires registration of water filters and purifiers prior to
sale.
The Company is also subject to regulation with respect to the handling and
disposal of the iodinated resin used during the manufacture of the ViralGuard.
The Company believes that it is in compliance with such regulations. The
Company advises consumers, through its labeling, that small amounts of iodine
may be present in the water treated by the Company's ViralGuard and that
persons with thyroid problems and pregnant women should consult their doctors
before using such products.
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EMPLOYEES
At March 24, 1997, the Company had 13 full-time employees of whom 7
employees were involved in manufacturing and assembly, 2 employees in sales and
marketing, 1 employee in microbiology, and 3 employees in general and
administrative functions. The Company also has 29 independent sales
representatives who cover fourteen North American sales regions. None of the
Company's employees are represented by a labor union or are covered by a
collective bargaining agreement and the Company has not experienced any work
stoppages.
ITEM 2. FACILITIES
The Company's administrative offices and those related to marketing, sales
and manufacturing are located in 21,000 square feet of leased office and
warehouse space in Longmont, Colorado, which is leased through January 2000
with two five year options to renew at market rates and a first right of
refusal on the adjacent 17,070 square feet of space in the same building. The
Company is currently seeking to sublet all or a portion of the space through
the term of the Company's commitment to further reduce overhead costs.
ITEM 3. LEGAL PROCEEDINGS
In February 1996, three former employees of the Company filed charges of
age discrimination against the Company with the Equal Employment Opportunity
Commission ("EEOC"). One of the charges has been disallowed by the EEOC and
the remaining two charges are under review. The Company denies such
allegations and intends to vigorously defend against such charges of
discrimination. While the outcome of litigation in general is always
uncertain, the Company does not believe that these charges will have an adverse
effect on the Company's results of operations or financial condition.
In 1996, the Company received a communication from a patent holder, which
is a competitor of the Company, offering to license such patent to the Company
with respect to an accessory part of the Guardian and the Guardian+Plus.
Although the Company believes the competitor's patent might not be upheld
if judicially tested, given the potential costs associated with patent claims,
the Company elected to redesign the accessory part in a manner which it
believes should avoid potential claims with respect to future products sold by
the Company. Although the Company notified the competitor of its actions and
has not received a response thereto, no assurance can be given that a claim for
infringement will not be made against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a stockholder vote during the last
quarter of the fiscal year ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is currently traded on the NASDAQ - Small Cap stock
exchange under the symbol "SWWT", although the Company expects that its Common
Stock will be delisted from such market as the Company no longer has two active
market makers. In such event, the Company's Common Stock will trade on the OTC
Bulletin Board. The following table sets forth for the periods indicated the
range of high and low bid quotations for the Company's Common Stock since
January 1, 1995. These quotations represent inter-dealer prices, without
retail mark-up, mark-down or commissions and do not necessarily represent
actual transactions. The high and low bid quotations are as reported by NASDAQ
with the exception of the period from June 22, 1995 through March 1, 1996, when
SweetWater's Common Stock was delisted from the Nasdaq SmallCap Market as it
had fewer than 300 stockholders. During such period, quotations for the Common
Stock were available from dealers appearing as market makers on the OTC
Bulletin Board. As trading in SweetWater Common Stock has been sporadic and in
small volumes since its initial public offering in January 1994, there can be
no assurance that an active public trading market will develop or be sustained.
The Company believes that the number of beneficial owners was at least 300 as
of March 1, 1997.
The Company has never paid a dividend and does not anticipate payment of
dividends in the foreseeable future.
<TABLE>
<CAPTION>
1996 HIGH LOW
<S> <C> <C>
First Quarter 3.75 2.50
Second Quarter 3.32 3.00
Third Quarter 3.00 2.00
Fourth Quarter 2.48 0.32
1995
First Quarter 7.00 5.75
Second Quarter 6.50 5.00
Third Quarter 5.00 2.00
Fourth Quarter 3.75 3.75
</TABLE>
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended December
31, 1992 through December 31, 1996 are derived from the financial statements of
the Company, which statements have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
herein. No dividends have been paid for any of the periods presented. The
financial data set forth below should be read in conjunction with the financial
information included elsewhere herein and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales 2,064 $ 2,163 $ 1,703 $ 75 $ -
Gross Margin 103 232 189 30 -
Costs and Expenses:
General & Administrative 1,402 1,152 806 412 21
Sales & Marketing 1,346 1,090 736 175 3
Research & Development 1,029 624 429 530 49
Impairment loss 686
Operating Income (Loss) (4,360) (2,634) (1,781) (1,088) (73)
Other Income (Expenses), net 128 29 139 25 (5)
Net Loss (4,232) (2,605) (1,642) (1,063) (78)
Net Loss per Common Share (1) (1.38) (1.34) (.92) (.95) (.07)
Weighted Average number of
common shares outstanding (1) 3,065 1,949 1,789 1,123 1,100
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994 1993 1992
-------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (deficit) $ 2,178 $ 5,847 $ 3,661 $ 853 $(105)
Total Assets 3,309 7,506 5,114 1,660 10
Long Term Debt - 208 371 - -
Total Liabilities 617 616 910 197 114
Accumulated earnings (deficit) (9,724) (5,492) (2,887) (1,244) (181)
Stockholder's equity (deficit) 2,693 6,890 4,204 1,463 (104)
</TABLE>
(1) See note 2 to financial statements for information with respect to the
calculation of share and per share data.
12
<PAGE> 13
ITEM 7. 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 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
1996 COMPARED TO 1995
Sales decreased 5% from $2,162,000 in 1995 to $2,064,000 in 1996 primarily
due to lower Guardian unit sales partially offset by both a higher selling
price for the Guardian, higher Guardian+Plus unit sales and the introduction of
the new WalkAbout(TM) microfilter. The Company believes that overall sales of
portable water filtration products in the outdoor specialty sporting goods
market has declined during the year as a result of the maturation of such
market. The Company believes that any future sales growth for these products
will depend on the ability of the Company and other manufacturers to expand the
market and to develop larger distribution channels, such as general sporting
goods stores and mass merchants. As general sporting goods stores and mass
merchants have only recently begun to sell the product category, there can be
no assurance that the market for such products will expand.
The Company's business is seasonal and its quarterly results of operations
reflect seasonal trends resulting from increased demand for the Company's
portable products in the warmer months of the year. Historically, the
Company's sales tend to be highest in the second and the third quarters of each
year with approximately 68% of its sales occurring during those quarters in
1996.
Gross margin of $103,000 in 1996 was lower than the prior year gross
margin primarily due to lower sales of higher margin Guardian and accessory
products.
Sales and Marketing expenses increased 23% from $1,090,000 in 1995 to
$1,346,000 in 1996 primarily 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 increased 65% from $624,000 in 1995 to
$1,029,000 in 1996 primarily due 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 increased 22% from $1,152,000 in 1995
to $1,402,000 in 1996 primarily as a result of higher investment banking
expenses partially offset by lower corporate legal expenses.
Other income increased 32% from $122,000 in 1995 to $161,000 in 1996
primarily due to higher case balances to invest in 1995. Other expense
decreased 64% to $33,000 in 1996 due to the Company's repayment of borrowings
in 1996.
The Company's operating expenses increased in 1996 as a result of the
research and development associated with the development of a new home use
product. The Company has suspended its efforts to manufacture and market this
product, reduced its personnel and initiated a cost containment program
designed to reduce general and administrative costs, conserve its cash reserves
13
<PAGE> 14
and enable the Company to concentrate its resources on its current portable
water filtration and purification products.
1995 COMPARED TO 1994
Sales increased 27% from $1,703,000 in 1994 to $2,163,000 in 1995
primarily due to the introduction of two new products in April 1995, the
Guardian+Plus and the ViralGuard.
The Company's business is seasonal and its quarterly results of operations
reflect seasonal trends resulting from increased demand for the Company's
portable products in the warmer months of the year. Historically, the
Company's sales tend to be highest in the second and the third quarters of each
year with approximately 72% of its sales occurring during those quarters.
Gross margin of $232,000 in 1995 remained at the same 11% level as a
percentage of sales as in 1994. This was due primarily to the benefit of
higher sales volumes offset by increases in costs from fixed overhead exceeding
the increase in production volume for the year. Additional overhead costs in
the period were primarily associated with higher personnel and occupancy costs
plus product engineering and design of automated and semi-automated assembly
methods for the manufacturing of the Company's products. This equipment was
completed on time, meeting the Company's thruput and capacity objectives,
however, the costs will continue to restrain margins until adequate production
volumes are reached to spread these and other overhead costs.
Operating expenses increased 45% from $1,970,000 in 1994 to $2,866,000 in
1995 as the Company continued to expand its infrastructure to support the
increased level of sales and operations. General and Administrative expenses
increased 43% from $806,000 in 1994 to $1,152,000 in 1995 primarily as a result
of significant additional legal expenses in conjunction with matters relating
to the microbiological study conducted by the University of Arizona and
increases in the Company's operations and staff. Sales and Marketing expenses
increased 48% from $736,000 in 1994 to $1,090,000 in 1995 primarily due to
increased staffing in sales and customer service as well as increased sales
commissions with the use of new sales representatives, the costs associated
with a microbiological study conducted by the University of Arizona and
increased travel and advertising costs. Research and Development increased 45%
from $429,000 in 1994 to $624,000 in 1995 primarily due to an expansion of the
research and development staff, including other costs associated with the
development of new products, primarily prototypes and testing.
Other income decreased 11% from $136,000 in 1994 to $122,000 in 1995
primarily due to higher cash balances to invest in 1994. Other expense
increased 100% to $93,000 in 1995 due to the Company's new borrowings in 1995.
The Company's operating expenses increased as a result of the expansion of
sales and marketing, manufacturing and new product research and development.
This may continue to result in operating losses until the Company generates
sufficient revenue from sales of the Guardian, the ViralGuard, the
Guardian+Plus, and the WalkAbout, and their accessories to cover expenses. As
the attainment of positive cash flow will depend on numerous factors, many of
which are difficult to predict, the Company may continue to incur operating
losses.
14
<PAGE> 15
1994 COMPARED TO 1993
Sales increased from $75,000 in 1993 to $1,703,000 in 1994 due to higher
unit sales of portable water filtration and purification devices representing a
full year availability of the Company's first product. Gross margin of $30,000
or 40% in 1993 increased on higher sales volume to $189,000 but decreased as a
percentage of sales to 11% in 1994. This was due to a higher production
overhead rate per unit as the Company expanded manufacturing, higher rework and
warranty costs per unit because of minor production engineering changes
implemented during the year, and additional overhead costs associated with the
design and acquisition of automated assembly equipment.
Operating expenses during the period increased as the Company expanded its
infrastructure and operations in order to support its conversion from a
development stage Company to an operating entity. General and Administrative
expenses increased from $412,000 in 1993 to $806,000 in 1994 due to the effect
of full year staffing costs in 1994 versus a partial year in 1993, the purchase
of Directors' & Officers' liability insurance in January 1994, and the
accelerated depreciation of leaseholds as a result of a commitment made to move
to new facilities. Sales and Marketing increased from $175,000 in 1993 to
$736,000 in 1994 due to advertising sales aids and promotions to support the
sales of a new product and full year staffing costs in 1994. The Company
commenced its marketing activities in late 1993. Research and Development
decreased from $530,000 to $429,000 due to the reduction in product development
parts and materials usage, and a reduction in staffing costs associated with
product engineering which was transferred to manufacturing overhead after the
introduction of the new product in the fourth quarter of 1993.
In January 1994, the Company raised $4.4 million through the sale of its
common stock in its Initial Public Offering ("IPO"). Interest income of
$136,000 in 1994 versus $25,000 in 1993 represents the investment of the funds
in low interest bearing cash equivalents. Inflation had a negligible impact on
operations in 1994 and the prior two years. The Company adopted, as of the
end of December 1994, all relevant Statements of Financial Accounting Standards
that would impact the Company's financial position and results of operations.
1993 COMPARED TO 1992
From its inception in March 1991 to the introduction of its first product
in the fourth quarter of 1993, the Company was in the development stage and
had no significant revenues from operations. For the year ended 1993, net
sales of $75,000 represented the entire increase over 1992 due to the initial
unit sales of portable water filtration and purification devices in the fourth
quarter of 1993. Gross margin of $30,000 was 40% of sales.
Operating expenses during 1993 increased as the Company built
infrastructure and new operations in order to support the introduction of its
new product. General and Administrative expenses increased from $21,000 in 1992
to $412,000 in 1993 as the Company moved into new office space and added an
executive, accounting and finance staff. Sales and Marketing increased from
$3,000 in 1992 to $175,000 in 1993 representing salaries, new product
introduction and pre-sales marketing costs. Research and Development increased
from $49,000 in 1992 to $530,000 in 1993 due to the development costs incurred
in developing and bringing the Company's new product into production.
15
<PAGE> 16
In May and June 1993, the Company raised $2.4 million in a private
placement to expand and develop its business. Interest income of $25,000 in
1993 versus none in 1992 represents the investment of a portion of the funds
raised for less than half the year invested in low interest bearing cash
equivalents.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased 61% from $4,972,000 at December 31,
1995 to $1,921,000 at December 31, 1996 primarily as a result of operating
losses, purchases of property and equipment of $380,000, payments on borrowings
of $316,000, and additional accounts receivable of $75,000 partially offset by
a net reduction of inventory of $430,000 and increases in accounts payable and
accrued liabilities of $235,000.
The Company has no material commitments or contingencies with the
exception of its lease which will continue until the year 2000. Minimum future
lease obligations as of December 31, 1996 are $169,115 for 1997, $173,250 for
1998, $173,250 for 1999, and $7,220 for 2000.
The Company had a term loan facility with a bank for a maximum borrowing
of $350,000 at an interest rate of 10.97%. The Company repaid all amounts
outstanding on this facility in December 1996.
The Company's operating expenses increased in 1996 as a result of the
research and development associated with the development of a new home use
product. The Company has suspended its efforts to manufacture and market this
product, reduced its personnel and initiated a cost containment program
designed to reduce general and administrative costs, conserve its cash reserves
and enable the Company to concentrate its resources on its current portable
water filtration and purification products. Although the Company has adopted a
plan that it believes will allow it to remain in operation at least through
1997 as a result of streamlining its operations and reducing its costs, there
can be no assurance the Company's losses will not continue or that the Company
will be able to generate sufficient revenue from sales of the Guardian, the
ViralGuard, the Guardian+Plus, the WalkAbout and their accessories to cover
expenses. Unless the performance of the Company improves substantially, no
assurance can be given that the Company will achieve positive cash flow. The
Company believes that cash and short term investments will be sufficient to
meet working capital requirements and support its existing operations through
1997. If the Company does not achieve positive cash flow during that period or
if the Company incurs unexpected substantial expenses prior thereto, the
Company would be required to raise additional capital. There can be no
assurance that additional capital will be pursued or available on terms
acceptable to the Company when and if needed.
16
<PAGE> 17
SWEETWATER, INC.
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1996 AND 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
<PAGE> 18
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-8
Notes to Financial Statements F-10
</TABLE>
F-1
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SweetWater, Inc.:
We have audited the accompanying balance sheets of SWEETWATER, INC. (a Delaware
corporation) as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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 SweetWater, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Denver, Colorado, ARTHUR ANDERSEN LLP
March 28, 1997.
F-2
<PAGE> 20
Page 1 of 2
SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1996 1995
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,479,937 $511,331
Short-term investments 440,659 4,460,897
Accounts receivable, less allowance for doubtful
accounts of approximately $35,000 and $39,000, respectively 132,446 57,822
Inventory, net of reserve for obsolescence of $205,000 and
$33,000, respectively 690,231 1,120,063
Prepaids and other current assets 51,288 105,418
------------ ------------
Total current assets 2,794,561 6,255,531
------------ ------------
FIXED ASSETS (Note 1):
Equipment, furniture and fixtures 475,000 1,829,352
Less- Accumulated depreciation - (661,564)
------------ ------------
Total fixed assets 475,000 1,167,788
------------ ------------
OTHER ASSETS:
Deposits and other, net 39,921 82,373
------------ ------------
Total assets $3,309,482 $7,505,692
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE> 21
Page 2 of 2
SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ -------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $493,356 $258,165
Accrued salaries and employee benefits 92,982 26,682
Accrued warranty costs 30,630 15,106
Current portion of term loan payable - 108,125
-------------- -------------
Total current liabilities 616,968 408,078
LONG-TERM DEBT - 207,799
-------------- -------------
Total liabilities 616,968 615,877
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 8,000,000 shares authorized;
3,067,382 and 3,064,529 shares issued and outstanding at
December 31, 1996 and 1995, after deducting
126,606 and 129,459 shares held in treasury, respectively 3,068 3,065
Deferred compensation (12,366) (28,854)
Additional paid-in capital 12,425,783 12,407,300
Accumulated deficit (9,723,971) (5,491,696)
-------------- -------------
Total stockholders' equity 2,692,514 6,889,815
-------------- --------------
Total liabilities and stockholders' equity $3,309,482 $7,505,692
============== ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
<PAGE> 22
SWEETWATER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
NET SALES $2,064,142 $2,162,666 $1,703,241
COST OF GOODS SOLD 1,961,509 1,930,706 1,514,316
------------- ------------- -------------
GROSS MARGIN 102,633 231,960 188,925
------------- ------------- -------------
OPERATING EXPENSES:
General and administrative 1,401,735 1,151,606 805,776
Sales and marketing 1,345,989 1,090,061 735,721
Research and development 1,029,430 624,322 428,786
Impairment loss (Note 1) 685,838 - -
------------- ------------- -------------
Total operating expenses 4,462,992 2,865,989 1,970,283
------------- ------------- -------------
LOSS FROM OPERATIONS (4,360,359) (2,634,029) (1,781,358)
OTHER INCOME (EXPENSE):
Rental and other income - - 3,741
Interest income 161,222 122,205 135,703
Interest expense and other (33,138) (93,344) (140)
------------- ------------- -------------
128,084 28,861 139,304
------------- ------------- -------------
NET LOSS $(4,232,275) $(2,605,168) $(1,642,054)
============= ============= =============
NET LOSS PER COMMON SHARE $(1.38) $(1.34) $(.92)
============= ============= =============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 3,065,311 1,948,946 1,789,142
============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 23
Page 1 of 2
SWEETWATER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
------------------- --------------- Deferred Paid-In
Shares Amount Shares Amount Compensation Capital
------ ------ ------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 537,499 $538 547,579 $548 $(66,586) $2,772,639
Common stock issued on January 21, 1994,
in initial public offering for cash, at $7.00
per share, net of offering costs of
approximately $665,000 - - 718,750 718 - 4,365,054
Common stock issued on January 21, 1994,
for conversion of Series A preferred
stock to common stock (537,499) (538) 537,499 538 - -
Treasury stock purchase on March 15,
1994 from a stockholder, at cost - - (1,042) (1) - -
Amortization of deferred compensation
expense - - - - 17,760 -
Net loss - - - - - -
---------- ----- ------------ ------- ---------- --------------
BALANCES, December 31, 1994 - - 1,802,786 1,803 (48,826) 7,137,693
Treasury stock purchase on February 28,
1995 from a stockholder, at cost - - (34,375) (34) - (15,950)
Issuance of treasury stock - - 300 - - 1,725
Stock options exercised - - 800 1 2,534 (2,163)
Common stock issued in November
1995 in a private placement offering,
at $4.00 per share, net of offering costs
of approximately $73,000 - - 1,335,078 1,335 - 5,265,791
Common stock issued to 401(k) plan - - 5,726 6 - 22,905
Treasury stock purchase on December 11,
1995 from a stockholder, at cost - - (45,786) (46) - (2,701)
Amortization of deferred compensation
expense - - - - 17,438 -
Net loss - - - - - -
----------- ----- ------------ ------- ---------- --------------
BALANCES, December 31, 1995 - $- 3,064,529 $3,065 $(28,854) $12,407,300
</TABLE>
<TABLE>
<CAPTION> Accumulated
Deficit Total
------------- ---------
<S> <C> <C>
BALANCES, December 31, 1993 $(1,244,474) $1,462,665
Common stock issued on January 21, 1994,
in initial public offering for cash, at $7.00
per share, net of offering costs of
approximately $665,000 - 4,365,772
Common stock issued on January 21, 1994,
for conversion of Series A preferred
stock to common stock - -
Treasury stock purchase on March 15,
1994 from a stockholder, at cost - (1)
Amortization of deferred compensation
expense - 17,760
Net loss (1,642,054) (1,642,054)
-------------- -------------
BALANCES, December 31, 1994 (2,886,528) 4,204,142
Treasury stock purchase on February 28,
1995 from a stockholder, at cost - (15,984)
Issuance of treasury stock - 1,725
Stock options exercised - 372
Common stock issued in November
1995 in a private placement offering,
at $4.00 per share, net of offering costs
of approximately $73,000 - 5,267,126
Common stock issued to 401(k) plan - 22,911
Treasury stock purchase on December 11,
1995 from a stockholder, at cost - (2,747)
Amortization of deferred compensation
expense - 17,438
Net loss (2,605,168) (2,605,168)
------------- ------------
BALANCES, December 31, 1995 $(5,491,696) $6,889,815
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 24
Page 2 of 2
SWEETWATER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
------------------- --------------- Deferred Paid-In
Shares Amount Shares Amount Compensation Capital
------ ------ ------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 - $- 3,064,529 $3,065 $(28,854) $12,407,300
Common stock issued to 401(k) Plan - - 9,969 10 - 31,903
Amortization of deferred compensation
expense - - - - 16,488 -
Treasury stock purchase on September 13,
1996 from a stockholder at cost - - (7,116) (7) - (420)
1995 common stock offering costs - - - - - (13,000)
Net loss - - - - - -
----- ----- ------------ ------- ---------- --------------
BALANCES, December 31, 1996 - $- 3,067,382 $3,068 $(12,366) $12,425,783
===== ===== ============ ======= ========== ==============
</TABLE>
<TABLE>
<CAPTION> Accumulated
Deficit Total
------------- ---------
<S> <C> <C>
BALANCES, December 31, 1995 $(5,491,696) $6,889,815
Common stock issued to 401(k) Plan - 31,913
Amortization of deferred compensation
expense - 16,488
Treasury stock purchase on September 13,
1996 from a stockholder at cost - (427)
1995 common stock offering costs - (13,000)
Net loss (4,232,275) (4,232,275)
----------- -----------
BALANCES, December 31, 1996 $(9,723,971) $2,692,514
============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE> 25
Page 1 of 2
SWEETWATER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------
1996 1995 1994
---------- ------------ ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,232,275) $(2,605,168) $(1,642,054)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization 442,948 353,942 382,309
Impairment loss 685,838 - -
Amortization of deferred compensation expense 16,488 17,438 17,760
Conversion of interest payable to common stock - 15,308 -
Issuance of treasury stock to 401(K) Plan 31,913 22,911 -
Changes in assets and liabilities-
Decrease (increase) in accounts receivable (74,624) 54,824 (41,096)
Decrease (increase) in inventory 429,832 (518,598) (523,146)
Decrease (increase) in prepaids and other current 54,130 9,896 (91,281)
Increase in deposits and other (13,762) (31,631) (26,054)
Increase (decrease)in accounts payable and
accrued liabilities 235,191 (47,825) 132,852
Increase (decrease) in accrued salaries and
employee benefits 66,300 (30,612) 33,217
Increase (decrease) in accrued warranty costs 15,524 (11,149) 26,255
------------- ------------- -------------
Net cash used in operating activities (2,342,497) (2,770,664) (1,731,238)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of note receivable - - 15,000
Purchases of fixed assets (379,784) (657,566) (837,175)
Purchases of short-term investments - (5,400,577) (4,947,331)
Proceeds from sales of short-term investments 4,020,238 3,621,823 2,265,188
------------- ------------- -------------
Net cash provided by (used in)
investing activities 3,640,454 (2,436,320) (3,504,318)
------------- ------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-8
<PAGE> 26
Page 2 of 2
SWEETWATER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------
1996 1995 1994
---------- ------------ ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under term loan agreement $- $877,708 $520,054
Payments on borrowings under term loan agreement (315,924) (1,081,838) -
Proceeds from convertible note payable - 1,500,000 -
Proceeds from issuance of common stock,
net of stock issuance costs (13,000) 3,751,818 4,365,772
Repurchase of common stock (427) (18,731) (1)
Sale of treasury stock - 1,725 -
Proceeds from exercise of stock options - 372 -
Deferred offering costs - - 161,174
------------- ------------- -------------
Net cash (used in) provided by financing
activities (329,351) 5,031,054 5,046,999
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 968,606 (175,930) (188,557)
CASH AND CASH EQUIVALENTS, beginning of period 511,331 687,261 875,818
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $1,479,937 $511,331 $687,261
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of interest payable to common stock $- $15,308 $-
============= ============= =============
Conversion of notes payable to common stock $- $1,500,000 $-
============= ============= =============
Cash paid for interest $29,875 $81,045 $-
============= ============= =============
Conversion of Series A preferred stock to
common stock $- $- $2,383,831
============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-9
<PAGE> 27
SWEETWATER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) BUSINESS AND ASSET IMPAIRMENT
SweetWater, Inc. (the "Company"), incorporated in the state of Colorado in
1991, is a water technology company specializing in the development, marketing
and sale of water filtration and purification devices and technologies to
address health concerns resulting from the microbiological contamination of
drinking water. The Company's existing products are principally marketed to
outdoor supply retailers across the United States. A substantial portion of
the Company's revenues are currently derived from sales to one national outdoor
supply retailer.
Since its inception, the Company has incurred significant operating losses and
cash flow deficits resulting in an accumulated deficit of approximately $9.7
million as of December 31, 1996. Operating losses increased in 1996, as a
result of the Company's efforts to develop a water filtration and purification
device for the home use market. During 1996, the Company actively pursued the
establishment of a joint strategic alliance to manufacture and market the home
use product, however, the Company was not successful in locating an industry
partner to manufacture and market this potential product. Accordingly, the
Company has suspended its efforts to manufacture and market this product and is
seeking a buyer for the plans, designs and technology associated therewith.
The Company has no amounts capitalized related to this product.
F-10
<PAGE> 28
The Company has also reduced its personnel and initiated a cost containment
program designed to reduce general and administrative costs, conserve its cash
reserves and enable the Company to concentrate its resources on the manufacture
and sale of its current portable water filtration and purification products.
Although the Company has adopted a plan that it believes will allow it to
remain in operation through at least 1997, as a result of streamlining its
operations and reduce its costs, there can be no assurance the Company's losses
will not continue or that the Company will be able to manufacture and sell its
products successfully or achieve profitability. In addition, as a new business
in an emerging industry with a limited number of products, the Company may
encounter unforeseen difficulties, some of which may be beyond the Company's
ability to control, related to marketing, product development, manufacturing,
regulation and proprietary technology.
Long-lived assets to be held and used in the Company's portable water
filtration and purification business, including certain manufacturing equipment
and related intangible assets, have been reviewed for possible impairment
because events or changes in the Company's circumstances, as described above,
have indicated that their carrying amounts may not be recoverable. Where
appropriate, under Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS No. 121") an impairment loss has been recognized and
the net book value of such assets has been reduced based on the Company's
estimate of the fair market value of such assets. The Company's estimate of
fair market value is based on third party estimates as well as the Company's
estimate of future operating results generated from the use of such assets. As
a result, during 1996, the Company recorded an impairment loss of $685,838
which has been reflected in the accompanying
F-11
<PAGE> 29
Statements of Operations. The related assets have been reflected in the
accompanying balance sheets at their estimated fair market value of $475,000.
The Company and certain member of senior management ("Management"), have
reached an agreement in principle pursuant to which the Management will agree
to remain with the Company through December 31, 1997 in exchange for certain
performance bonuses and a right of first refusal to purchase the Company's
portable water filtration and purification business (the "Outdoor Business") in
the event certain performance targets are met and the Company elects to sell
such business within a specified period after December 31, 1997. The Company
has not reached a decision as to whether or not it will elect to consider the
sale of its Outdoor Business. Specifically, the agreement in principle
contemplates that Management, as a group, will be entitled to receive a
performance bonus equal to 50% of the amount by which cash and cash equivalents
as set forth on the Company's balance sheet as of December 31, 1997, subject to
certain adjustments ("Year End Cash") exceeds $1,000,000. In addition, in the
event Year End Cash exceeds a specified target (which will be lower than
$1,000,000), Management will have a right of first refusal in the event the
Company elects to sell the Outdoor Business to a third party. If such right is
not exercised, Management will be entitled to receive a value enhancement bonus
equal to 30% of the excess of the third party purchase price over the
Management Price (as defined below) less the amount of the performance bonus ,
if any. In the event the Company elects to sell the Outdoor Business to
Management, Management would have the right to purchase the Outdoor Business
for a specified price (the "Management Price") including associated
liabilities, as defined, as of March 1997, subject to certain adjustments, less
the amount by which Year End Cash exceeds the target amount. The Company has
no obligation to sell the Outdoor Business to Management or to a third party at
any time. As the Company and Management are negotiating the terms and
F-12
<PAGE> 30
structure of a proposed agreement, the final terms and structure may differ
substantially from the terms described above. In addition, if the Company and
Management do not execute a final agreement, one or more of the members of the
Management may elect to pursue other opportunities which could have a material
adverse effect on the Company.
Based upon its current plans as described above, the Company believes that it
will have sufficient cash flows to remain in operation through 1997 and that
its assets are realizable.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash
and highly liquid investments with an original maturity of three months or less
to be cash equivalents. As of December 31, 1996, the Company's cash and cash
equivalents consisted of demand deposits and money market accounts in banks and
other financial institutions, which approximated market value.
Short-Term Investments
Short-term investments consist of U.S. Federal Government, Federal Government
Agency-backed securities and corporate notes with maturities of less than one
year. These securities are classified as "held-to-maturity" investments as
defined by Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." At December 31, 1996 and
1995 respectively, these securities had an amortized cost basis of $440,659,
and $4,460,897, which approximates fair value.
F-13
<PAGE> 31
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market, and
consists primarily of component parts, including filter accessories and pump
assemblies. Finished goods include material costs, labor and manufacturing
overhead. Inventory consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Raw materials $669,736 $421,686
Finished goods 225,495 731,377
----------- ------------
895,231 1,153,063
Less- Reserve for obsolescence (205,000) (33,000)
----------- ------------
$690,231 $1,120,063
=========== ============
</TABLE>
Fixed Assets
Depreciation of fixed assets is computed on a straight-line basis over a period
of one to three years. Replacements, renewals and improvements are capitalized
and costs for repairs and maintenance are expensed as incurred.
Revenue Recognition
Revenue is generally recorded upon passage of title when the product is
shipped.
Research and Development
Research and development costs are expensed as incurred and consist primarily
of salaries, supplies, depreciation and contract services.
F-14
<PAGE> 32
Income Taxes
The Company accounts for income taxes according to the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences of temporary
differences between the financial reporting and tax bases of assets and
liabilities and carryforwards. Such deferred income tax assets and liabilities
are based on enacted tax laws. 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 (see Note 8).
Treasury Stock
Treasury stock purchases are accounted for at cost, and are reflected as a
reduction of common stock and additional paid-in capital in the accompanying
balance sheets.
Net Loss Per Common Share
Net loss per common share for all periods presented is computed using the sum
of the weighted average number of shares of common stock and common stock
equivalent shares from common stock options and warrants. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock and common stock equivalent shares issued by the Company at prices
significantly below the assumed public offering price during the twelve month
period prior to the initial public offering date (using the treasury stock
method and the initial offering price of $7.00 per share), have been included
in the calculation as if they were outstanding for all periods
F-15
<PAGE> 33
presented regardless of whether they are antidilutive. Options and warrants
for the Company's common stock issued other than in the one-year period have
been excluded as they are antidilutive. Subsequent to the initial offering
date, the Company has reported earnings per share in accordance with Accounting
Principles Board Opinion No. 15, "Earnings per Share."
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts for fiscal year 1995 and 1994 have been reclassified to conform
with 1996 reporting classifications.
Asset Impairment
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). The Company reviews its assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For assets which are held and used in operations, the asset
would be impaired if the undiscounted future cash flows related to the asset
did not exceed the net book value. As discussed more fully in Note 1, the
Company reviewed its long-lived assets for impairment and
F-16
<PAGE> 34
recorded an impairment loss of $685,838 for the year ended December 31, 1996
related to its equipment used in operations and intangible assets.
(3) LONG-TERM DEBT
In August 1995, the Company modified its existing term loan facility agreement
to reduce the maximum borrowing to $350,000. As of December 31, 1995, the
Company had outstanding borrowings of $315,924 under this facility, which bear
interest at 10.97%. This loan was fully repaid in December 1996. The term
loan facility agreement expires in March 1997.
The Company, under the terms of its term loan and revolving debt agreements,
was required to meet certain financial and other covenants. As of December 31,
1995, the Company failed to meet a requirement limiting quarterly losses to a
maximum of $600,000. The Company received a waiver from the bank regarding
this covenant as of December 31, 1995. As there were no loans outstanding as
of December 31, 1996, the Company was not required to meet certain financial
and other covenants.
(4) STOCKHOLDERS' EQUITY
Initial Public Offering
On January 21, 1994, the Company completed the initial public offering of its
common stock. In connection with the offering, 718,750 shares, including the
underwriter's 15% overallotment of 93,750 shares, of previously unissued common
shares were sold at a price of $7 per share, providing proceeds to the Company
of approximately $5,031,000, less $666,000 in offering costs.
F-17
<PAGE> 35
Private Placement Offering
In November 1995, in order to fund existing and anticipated future cash needs,
the Company completed a private placement of its common stock. In connection
with the offering, 1,335,078 shares of previously unissued common shares were
sold at a price of $4 per share, providing net proceeds to the Company of
approximately $5,267,100. This amount includes the conversion of a $1,500,000
Convertible Subordinated Promissory Note issued in September 1995 to an
existing shareholder of the Company at $4 per share of common stock.
Preferred Stock
The Company is currently authorized to issue 6,462,500 shares of $.001 par
value, preferred stock. Shares of preferred stock may be issued from time to
time in one or more series, with the rights and powers of each series set by
the Board of Directors. Concurrently with the initial public offering,
holders of 537,500 shares previously designated and issued as Series A
preferred stock converted such shares on a one-for-one basis to common stock.
(5) STOCK OPTIONS AND WARRANT
In October 1993, the Company adopted a Stock Option Plan (the "Plan") to
provide directors, officers, employees and consultants options to purchase up
to 250,000 shares of the Company's common stock. Under the terms of the Plan,
the Board of Directors may grant either "nonqualified" or "incentive stock
options" as defined by the Internal Revenue Service. Under the terms of the
Plan, the purchase price of the shares subject to an incentive stock option is
the fair market value of the Company's common stock on the date the option is
granted. The purchase price of a nonqualified option must not be less than the
par value of the stock. If the grantee owns more than 10% of the total
combined voting power or value of all classes of stock on the date of
F-18
<PAGE> 36
grant, the purchase price of an incentive stock option must be at least 110% of
the fair market value at the date of grant and the exercise term cannot exceed
five years from the date of grant. All other options granted under the Plan
are exercisable up to 10 years from the date of grant. The Board of Directors
has determined that the options outstanding will vest 25% over the first year
with the remaining 75% vesting on a straight-line basis over the remaining 36
months. If the employment of a participant is terminated for any reason other
than death or disability, any stock options then held by the participant which
are currently exercisable shall remain exercisable after the termination of
employment for a period of three months, but no later than the specified
expiration date.
In addition to the Stock Option Plan, the Company has issued non-plan options
to certain directors, officers, employees and consultants since 1993. As part
of the Form S-8 Registration Statement filed in April 1996, the Company
registered an aggregate 382,915 shares reserved for issuance pursuant to
non-plan option agreements with certain named individuals as well as the
250,000 shares of the Plan. The non-plan options primarily vest over a four
year period with an approximate 20% to 60% vesting on the date of grant with
the remaining vesting on a straight-line basis.
In April 1994, the Company granted an option to purchase 17,000 shares of
common stock at a purchase price of $8.125 per share to each of its five
non-employee directors. Each option became exercisable with respect to 5,000
shares on July 13, 1994; an additional 3,000 shares became exercisable on April
25, 1995, and on each subsequent anniversary thereof. On November 7, 1995, the
Company canceled all non-exercisable options (9,000 options per non-employee
director) and issued 240,000 additional options to purchase shares of common
stock at $4.00 per share. A
F-19
<PAGE> 37
director's ability to exercise the option is limited in the event he ceases to
be a director. No options have been exercised under the non-employee director
stock option plan to date.
<TABLE>
<CAPTION>
Number of Shares
----------------------
Officers Employees
and and Per Share
Directors Others Exercise Price
--------- --------- --------------
<S> <C> <C> <C>
Balance, December 31, 1993 21,667 32,916 $.47-$6.30
Granted 145,000 5,000 $6.25-$8.125
Exercised - - -
---------- --------- --------------
Balance, December 31, 1994 166,667 37,916 $.47-$8.125
Granted 360,250 52,277 $4.00
Exercised (800) $.47
Canceled (45,000) (867) $.47-$8.125
---------- --------- --------------
Balance, December 31, 1995 481,917 88,526 $.47-$8.125
Granted 100,000 3,400 $4.00
Exercised - - -
Canceled (31,000) (5,776) $4.00
---------- --------- --------------
Balance, December 31, 1996 550,917 86,150 $.47-$8.125
========== ========= ==============
Exercisable at December 31, 1996 228,161 34,619 $.47-$8.125
========== ========= ==============
</TABLE>
The Company accounts for its stock-based compensation plan and non-plan options
under APB No. 25, under which no compensation expense is recognized for options
granted with an exercise price equal to the fair value of the Company's common
stock on the date of grant. The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123") for disclosure purposes in 1996. For SFAS 123 purposes, the fair value
of each option grant and stock purchase right has been estimated as of the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
F-20
<PAGE> 38
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Risk-free interest rate 5.96% 5.57%
Dividend rate 0% 0%
Expected volatility 116.26% 82.51%
Expected life 4.0 years 3.0 years
</TABLE>
Using these assumptions, the fair value of the stock options granted in 1996
and 1995 was approximately $263,575 or $2.55 per common share and $757,232 or
$1.84 per common share, respectively, which would be amortized as compensation
expense over the vesting period of the options. Had compensation cost been
determined consistent with SFAS 123, utilizing the assumptions detailed above,
the Company's net loss and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- ------------------
<S> <C> <C>
Net loss:
As reported $(4,232) $(2,605)
Pro forma (4,476) $(2,641)
Net loss per common share:
As reported $(1.38) $(1.34)
Pro forma $(1.46) $(1.35)
</TABLE>
In September 1995, in connection with the issuance of the $1,500,000
Convertible Promissory Note (Note 4) the Company issued a warrant to the
existing stockholder, entitling the stockholder to purchase 88,435 shares of
common stock at $4 per share, the fair market value of the common stock at the
date of issuance. The warrant expires in September 2000.
F-21
<PAGE> 39
(6) RELATED PARTY TRANSACTIONS
The Company has engaged a consulting firm controlled by a stockholder for
services. Such services amounted to approximately $30,200 and $37,500 for the
years ended December 31, 1995 and 1994, respectively.
In September 1995, a stockholder purchased a $1,500,000 Convertible
Subordinated Promissory Note and a Warrant to purchase 88,435 shares of common
stock at $4 per share for a total purchase price of $1,500,000. In November
1995, the note and related interest accrued at the prime rate were converted
into 378,828 shares of common stock in connection with the private placement of
common stock. The warrant has not been exercised and expires in September
2000.
In 1996, the Company retained a financial advisor as its exclusive agent to
pursue certain financial and strategic objectives of the Company. A director
of the Company is also a managing director this financial advisor. Amounts
paid to this financial advisor during 1996 totaled approximately $350,000.
(7) MAJOR CUSTOMERS AND SUPPLIERS
During 1996, 1995 and 1994 sales to one customer represented approximately 31%,
36% and 36% of total sales for those years, respectively. In addition, a
substantial portion of the Company's inventory was purchased from a single
vendor in 1995 and 1994 accounting for 25% and 37%, respectively. However, in
1996 no individual vendor accounted for more than 25% of inventory purchased.
F-22
<PAGE> 40
During 1996, the Company entered into non-standard terms with a customer for a
purchase of approximately $106,000. The terms require payment on June 30,
1997. This amount is shown as part of accounts receivable at year end.
(8) INCOME TAXES
As of December 31, 1996, the Company had an accumulated deficit for tax
purposes of approximately $8,200,000. Based on an effective tax rate of 38%
percent, the Company had approximately $3,100,000 of net operating loss ("NOL")
carryforwards for tax purposes. The NOL carryovers expire from the year 2006
through the year 2011. The Tax Reform Act of 1986 contains provisions which
may limit the net operating loss and credit carryovers available to be used in
any given year upon the occurrence of certain events, including significant
changes in ownership interests.
The Company has determined that approximately $3,355,000 of deferred tax
benefits as of December 31, 1996, do not satisfy the realization criteria set
forth in SFAS No. 109. Recognition of these benefits requires future taxable
income, the attainment of which is uncertain. Accordingly, a valuation
allowance has been recorded against the entire net deferred tax asset.
F-23
<PAGE> 41
The components of the net deferred income tax asset as of December 31, 1996 and
1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $3,100,000 $1,750,000
Capitalization of organization and
start up costs for tax purposes 88,000 130,000
Depreciation (12,000) -
Capitalized overhead (1,000) 28,000
Accruals not deducted for tax purposes 180,000 143,000
Less- Valuation allowance (3,355,000) (2,051,000)
------------- -------------
$ - $ -
============= =============
</TABLE>
(9) 401(K) 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 employee 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 portion are allocated to the remaining
employees in the plan proportionately, based upon current year compensation.
During 1996 and 1995 respectively, 9,969 and 5,726 shares of common stock were
issued to the 401(K) plan.
F-24
<PAGE> 42
(10) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into various noncancelable lease agreements for office
space. These leases terminate on various dates. Minimum future lease
obligations under these agreements as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $169,115
1998 173,250
1999 173,250
2000 7,220
Thereafter -
----------
Total $522,835
</TABLE>
In January 1995, the Company relocated its manufacturing facility to Longmont,
Colorado. The prior facility was subleased at a rate approximating the future
minimum lease payments due; thus no liability for the future minimum lease
payments on the prior facility was recorded.
Rent expense for the periods ended December 31, 1996, 1995 and 1994, was
approximately $163,800, $170,000 and $70,000, respectively.
F-25
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with the Company and its independent
accountants on any matter of accounting principles or practice or financial
statement disclosure since the Company's inception.
18
<PAGE> 44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's 1997 Proxy Statement.
19
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON AND REPORTS
ON FORM 8-K
Documents filed as part of this Report:
- --------------------------------------
Financial Statements and Financial Statement Schedules - See Index to
Financial Statements and Financial Statement Schedules at Item 8 of this
report.
All other financial statement schedules are omitted because they are not
required, are inapplicable or the information has been included elsewhere in
the financial statements or notes thereto.
a) Reports on Form 8-K:
--------------------
No reports on Form 8-K were filed in the fourth quarter of 1996.
b) Exhibits:
---------
The following documents are filed as exhibits or, where indicated, are
incorporated by reference:
No. Exhibit Document
- --- ----------------
(2) Not Applicable
(3) Articles of Incorporation and by-laws
(A) Certificate of Incorporation, as amended1
(B) By-laws1
(4) Instruments defining the rights of security holders, including
indentures
(A) Excerpts from the certificate of Incorporation, as amended1
(B) Excerpts from the By-laws1
(C) Specimen stock certificate2
(9) Not Applicable
20
<PAGE> 46
(10) Material Contracts
(a) Form of Stock Purchase Agreement by and between the Company
and The Forschner Group, Inc.1
(b) Form of Stock Purchase Agreement by and between the Company and
certain purchasers of Series A Preferred Stock1
(c) Form of Assignment and Agreement Concerning Non-Disclosure of
Proprietary Information1
(d) Form of Non-Competition Agreement by and between the Company and
Messrs. Reynolds1
(e) Form of Employee Stock Restriction Agreement dated May 14, 19931,8
(f) 1993 Stock Option Plan, as amended8
(g) Form of Incentive Stock Option Agreement2,8
(h) Form of Non-Incentive Stock Option Agreement for options which were
not issued under the 1993 Stock Option Plan2,8
(i) Employee Stock Restriction Agreement dated December 6, 1993 between
the Company and Jeffrey Aldred2,8
(j) Form of Vendor/Distributor Non -Disclosure Agreement2
(k) Lease Agreement dated December 12, 1994 between the Company and
Pratt Land Limited Liability Company3
(l) Note and Warrant Agreement dated September 26, 19956
(m) Convertible Subordinated Promissory Note issued to Forschner
Enterprises, Inc. (now known as Hudson River Capital LLC)6
(n) Common Stock Purchase Warrant issued to Forschner Enterprises, Inc.
(now known as Hudson River Capital LLC)6
(o) Subscription Agreement by and between the Company and Nassau Capital
Partners in connection with the 1995 private placement of shares of
Common Stock;7
(p) Form of Subscription Agreement executed by the Company and
certain investors in connection with the 1995 private placement of
shares of Common Stock.7
(q) Form of Director's Stock Option Agreement.7
21
<PAGE> 47
(11.1) Not Applicable
(12) Not Applicable
(13) Not Applicable
(16) Not Applicable
(18) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Consent of experts and counsel
(24) Not Applicable
(27) Financial Data Schedule
(28) Not Applicable
(99) Not Applicable
1 These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1, Registration No. 33-71036, as filed on October 29, 1993,
and are incorporated herein by reference.
2 These exhibits were filed as exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration No. 33-71036, as
filed on December 13, 1993, and are incorporated herein by reference.
3 These exhibits were filed as exhibits to the Company's Form 10-K for the
year ended December 31, 1994, as filed on March 30, 1995, and are incorporated
herein by reference.
4 These exhibits were filed as exhibits to the Company's Form 10-Q for the
quarter ended March 31, 1995, as filed on May 12, 1995, and are incorporated
herein by reference.
5 These exhibits were filed as exhibits to the Company's Form 10-Q for the
quarter ended June 30, 1995, as filed on August 12, 1995, and are incorporated
herein by reference.
6 These exhibits were filed as exhibits to the Company's Form 8-K as filed
on October 2, 1995, and are incorporated herein by reference.
7 These exhibits were filed as exhibits to the Company's Form 10-K for the
year ended December 31, 1995, as filed on March 29, 1996, and are incorporated
herein by reference.
8 Constitutes a "management contract or compensatory plan or arrangement"
required to be filed pursuant to Item 14 (c) of the Form 10-K.
22
<PAGE> 48
PART V
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SweetWater, Inc.
(Registrant)
/s/ Eric M. Reynolds
------------------------------------
Eric M. Reynolds
President and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Eric M. Reynolds March 28, 1997
- -----------------------------
Eric M. Reynolds
Chief Executive Officer
Director
/s/ Patrick Thomas March 28, 1997
- -----------------------------
Patrick Thomas
Vice President
Chief Financial Officer
(Principal Financial Officer)
23
<PAGE> 49
/s/ A. Clinton Allen March 28, 1997
- -----------------------------
A. Clinton Allen
Director
/s/ Thomas A. Barron March 28, 1997
- -----------------------------
Thomas A. Barron
Chairman of the Board
Director
- -----------------------------
Blair W. Effron
Director
/s/ Peter Gilson March 28, 1997
- -------------------
Peter Gilson
Director
/s/ Randall A. Hack March 28, 1997
- -------------------
Randall A. Hack
Director
/s/ Keith Lively March 28, 1997
- -------------------
Keith Lively
Director
- -------------------
Juan Rodriguez
Director
/s/ Ralph Sorenson March 28, 1997
- ---------------------------
Ralph Sorenson
Director
24
<PAGE> 50
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
No. Exhibit Document Exhibit No.
- --------- ---------------- --------------
<S> <C> <C>
(2) Not Applicable
(3) Articles of Incorporation and by-laws
(A) Certificate of Incorporation, as amended1
(B) By-laws1
(4) Instruments defining the rights of security
holders, including indentures
(A) Excerpts from the certificate of Incorporation,
as amended1
(B) Excerpts from the By-laws1
(C) Specimen stock certificate2
(9) Not Applicable
(10) Material Contracts
(a) Form of Stock Purchase Agreement by and between
the Company and The Forschner Group, Inc.1
(b) Form of Stock Purchase Agreement by and between
the Company and certain purchasers of Series A
Preferred Stock1
(c) Form of Assignment and Agreement Concerning
Non-Disclosure of Proprietary Information1
(d) Form of Non-Competition Agreement by and
between the Company and Messrs. Reynolds1
(e) Form of Employee Stock Restriction Agreement
dated May 14, 19931,8
(f) 1993 Stock Option Plan, as amended8
(g) Form of Incentive Stock Option Agreement2,8
</TABLE>
25
<PAGE> 51
<TABLE>
<CAPTION>
No. Exhibit Document Exhibit No.
- --------- ---------------- --------------
<S> <C> <C>
(h) Form of Non-Incentive Stock Option Agreement
for options which were not issued under the
1993 Stock Option Plan2,7
(i) Employee Stock Restriction Agreement dated
December 6, 1993 between the Company and Jeffrey
Aldred2,7
(j) Form of Vendor/Distributor Non -Disclosure
Agreement2
(k) Lease Agreement dated December 12, 1994
between the Company and Pratt Land Limited
Liability Company3
(l) Note and Warrant Agreement dated September 26, 19956
(m) Convertible Subordinated Promissory Note issued to
Forschner Enterprises, Inc. (now known as Hudson River
Capital LLC)6
(n) Common Stock Purchase Warrant issued to Forschner
Enterprises, Inc. (now known as Hudson River Capital LLC)6
(o) Subscription Agreement by and between the Company and
Nassau Capital Partners in connection with the 1995 private
placement of shares of Common Stock;7
(p) Form of Subscription Agreement executed by the Company and
certain investors in connection with the 1995 private placement of
shares of Common Stock.7
(q) Form of Director's Stock Option Agreement.7
(11.1) Not Applicable
(12) Not Applicable
(13) Not Applicable
(16) Not Applicable
(18) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Consent of experts and counsel 23
(24) Not Applicable
</TABLE>
26
<PAGE> 52
<TABLE>
<CAPTION>
No. Exhibit Document Exhibit No.
- --------- ---------------- --------------
<S> <C> <C>
(27) Financial Data Schedule 27
(28) Not Applicable
(99) Not Applicable
</TABLE>
- -----------------
1 These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1, Registration No. 33-71036, as filed on October 29, 1993,
and are incorporated herein by reference.
2 These exhibits were filed as exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration No. 33-71036, as
filed on December 13, 1993, and are incorporated herein by reference.
3 These exhibits were filed as exhibits to the Company's Form 10-K for the
year ended December 31, 1994, as filed on March 30, 1995, and are incorporated
herein by reference.
4 These exhibits were filed as exhibits to the Company's Form 10-Q for the
quarter ended March 31, 1995, as filed on May 12, 1995, and are incorporated
herein by reference.
5 These exhibits were filed as exhibits to the Company's Form 10-Q for the
quarter ended June 30, 1995, as filed on August 12, 1995, and are incorporated
herein by reference.
6 These exhibits were filed as exhibits to the Company's Form 8-K as filed
on October 2, 1995, and are incorporated herein by reference.
7 These exhibits were filed as exhibits to the Company's Form 10-K for the
year ended December 31, 1995, as filed in March 29, 1996, and are incorporated
herein by reference.
8 Constitutes a "management contract or compensatory plan or arrangement"
required to be filed pursuant to Item 14 (c) of the Form 10-K.
27
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 28, 1997 included in this Form 10-K, into the
Company's previously filed Registration Statement File No. 33-33704 and to all
references to our firm included in this Form 10-K.
Denver, Colorado ARTHUR ANDERSEN LLP
March 28, 1997
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extacted from SweetWater,
Inc. balance sheet as of December 31, 1996 and statements of operations and cash
flows for the twelve months ended December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,479,937
<SECURITIES> 440,659
<RECEIVABLES> 167,446
<ALLOWANCES> 35,000
<INVENTORY> 690,231
<CURRENT-ASSETS> 2,794,561
<PP&E> 475,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,309,482
<CURRENT-LIABILITIES> 616,968
<BONDS> 0
0
0
<COMMON> 3,068
<OTHER-SE> 2,689,446
<TOTAL-LIABILITY-AND-EQUITY> 3,309,482
<SALES> 2,064,142
<TOTAL-REVENUES> 2,064,142
<CGS> 1,961,509
<TOTAL-COSTS> 4,462,992
<OTHER-EXPENSES> (128,084)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,138
<INCOME-PRETAX> (4,232,275)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,232,275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,232,275)
<EPS-PRIMARY> (1.38)
<EPS-DILUTED> (1.38)
</TABLE>
