<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number 0-25942
SWEETWATER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1167603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2505 TRADE CENTRE AVENUE, SUITE D, LONGMONT, CO 80503
(Address of principal executive offices) (Zip Code)
(303) 678-0447
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
As of March 31, 1997, 3,082,096 shares of Registrant's Common Stock, par
value $.001 per share, were outstanding.
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SweetWater, Inc.
Table of Contents
<TABLE>
<S> <C>
Part I. Financial Information Page
Item 1. Financial Statements
Balance Sheets-
March 31, 1997 and December 31, 1996 3
Statements of Operations- 5
Three months ended March 31, 1997 and 1996
Statements of Cash Flows 6
Three months ended March 31, 1997 and 1996
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information 13
</TABLE>
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SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
----------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 914,421 $1,479,937
Short-term investments -- 440,659
Accounts receivable - net 389,484 132,446
Inventory 573,601 690,231
Prepaids and other current assets 48,943 51,288
----------- ----------
Total current assets 1,926,449 2,794,561
----------- ----------
Fixed Assets, at cost 495,360 475,000
Less: Accumulated depreciation (59,378) --
----------- ----------
Fixed assets, net 435,982 475,000
----------- ----------
Other Assets:
Deposits and other 28,865 39,921
----------- ----------
TOTAL ASSETS $ 2,391,296 $3,309,482
=========== ==========
</TABLE>
The accompanying notes to financial statements are
an integral part of these financial statements
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SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 332,024 $ 493,356
Accrued salaries and employee benefits 60,834 92,982
Accrued warranty and other 35,294 30,630
------------ ------------
Total current liabilities 428,152 616,968
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 8,000,000 shares
authorized; 3,082,096 and 3,067,382 shares issued and
outstanding at March 31, 1997 and December 31, 1996,
after deducting 111,892 and 126,606 shares held in
treasury, respectively 3,082 3,068
Deferred Compensation -- (12,366)
Additional paid-in capital 12,420,736 12,425,783
Accumulated deficit (10,460,674) (9,723,971)
------------ ------------
Total stockholders' equity $ 1,963,144 2,692,514
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,391,296 $ 3,309,482
============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets
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SWEETWATER, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
SALES $ 490,098 $ 474,519
COST OF GOODS SOLD 484,678 307,464
----------- -----------
GROSS MARGIN (LOSS) 5,420 167,055
OPERATING EXPENSES:
Sales and Marketing 190,265 349,114
Research and Development 236,673 213,703
General Administrative 326,033 254,060
----------- -----------
Total operating expenses 752,971 816,877
----------- -----------
LOSS FROM OPERATIONS (747,551) (649,822)
OTHER INCOME, NET 10,848 54,956
----------- -----------
NET LOSS $ (736,703) $ (594,866)
=========== ===========
LOSS PER COMMON SHARE $ (.24) $ (.19)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,103,025 3,090,363
=========== ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these financial statements
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SWEETWATER, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (736,703) $ (594,866)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 59,378 98,667
Amortization of deferred compensation -- 4,122
Changes in assets and liabilities:
(Increase) in net accounts receivable (257,038) (144,425)
Decrease (increase) in inventory 116,630 (75,078)
Decrease (increase) in prepaids and other current assets 2,345 (74,540)
Decrease (increase) in deposits and other assets 11,056 (4,467)
(Decrease) in accounts payable and accrued liabilities (156,668) (15,349)
(Decrease) in accrued salaries and other current liabilities (32,148) (17,412)
----------- -----------
Net cash used in operating activities (993,148) (823,348)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures and equipment (20,360) (91,184)
Purchases of short-term investments -- (1,086,878)
Proceeds from the sales of short term investments 440,659 2,500,000
----------- -----------
Net cash provided by investing activities 420,299 1,321,938
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net of issuance costs 7,333 (13,000)
Payments on notes payable -- (25,825)
----------- -----------
Net cash provided by (used in) financing activities 7,333 (38,835)
----------- -----------
Net (decrease) increase in Cash and Cash Equivalents (565,516) 459,765
CASH AND CASH EQUIVALENTS, beginning of period 1,479,937 511,331
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 914,421 $ 971,096
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION:
CASH PAID FOR INTEREST
$ 3,536 $ 8,538
=========== ===========
</TABLE>
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SweetWater, Inc.
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited balance sheet,
statements of operations and cash flows contain all adjustments,
consisting only of normal recurring items, necessary to present fairly
the financial position of SweetWater, Inc. (the "Company") as of March
31, 1997 and the results of operations and cash flows for the three
months ended March 31, 1997 and 1996.
The unaudited financial statements presented herein have been prepared
in accordance with Securities and Exchange Commission regulations and do
not include all the information and note disclosures required by
generally accepted accounting principles. These financial statements
should be read in conjunction with the audited financial statements and
notes thereto contained in the Company's annual report on Form 10-K for
the year ending December 31, 1996.
2. BUSINESS
The Company, which was 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 $10.5 million as of March 31, 1997. 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 has sold the plans, designs and technology associated therewith in
April 1997 and realized net proceeds of approximately $210,000. 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 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
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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.
The Company and Messrs. Reynolds, Thomas and Cogdill, members of the
Company's senior management ("Management"), have reached an agreement
pursuant to which the Management have agreed to remain with the Company
through January 31, 1998 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.
Specifically, the agreement provides 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 is 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 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.
The Company believes that the agreement provides an incentive to
Management to maximize cash flow from the Outdoor Business and to
conserve the Company's cash resources. While the Company assesses the
effects of its cost containment program and the profitability of its
Outdoor Business, the Company may also assess various strategic
alternatives which may include a stock or asset acquisition, or a
merger, consolidation or similar transaction. Although the Company
intends to investigate these alternatives, no assurance can be given
that any transaction will be consummated.
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3. INVENTORY
Inventory includes costs of materials, direct labor and manufacturing
overhead. Inventory is priced at the lower of cost (using the first-in,
first-out method of valuation) or market.
Inventory consists of the following components:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
-------- --------
<S> <C> <C>
Raw materials $618,604 $669,736
Finished Goods 160,997 225,495
-------- --------
779,601 895,231
Less-Reserve for Obsolescence (206,000) (205,000)
-------- --------
$573,601 $690,231
======== ========
</TABLE>
4. INCOME TAXES
SFAS No. 109 requires recognition of deferred tax assets for the
expected future effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for the amount of
any tax benefits which, more likely than not, based on current
circumstances, are not expected to be realized. The Company has
determined that under SFAS 109, any previously unrecognized tax benefits
do not satisfy the realization criteria set forth therein. Therefore, a
valuation allowance has been recorded against the entire net deferred
tax asset.
5. NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during
each period presented. At March 31, 1997 and 1996, options on 25,834 and
25,834 shares, respectively, have been treated as outstanding common
stock equivalents.
6. PROFIT SHARING PLAN AND TRUST
Pursuant to the Company's 401(k) Profit Sharing Plan and Trust (the
"401(k) Plan"), which was established effective January 1, 1995, the
Company has agreed to contribute matching contributions in the form of
Company common stock at the rate of 50% of the first 8% of employees
salary deferral. Under the 401(k) Plan, the Company may also elect to
make discretionary contributions. Employees vest in Company
contributions over six years of service with the Company. Forfeitures of
the unvested prorated portion are allocated to the remaining employees
in the plan proportionately, based upon current years compensation.
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7. 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, were
as follows:
<TABLE>
<S> <C> <C>
1997 $169,115
1998 173,250
1999 173,250
2000 7,220
Thereafter --
--------
Total $522,835
</TABLE>
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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 for the three months ended March 31, 1997 and 1996
During the three-month period ended March 31, 1997, the Company had
sales of $490,000, an increase of 3%, compared to sales in the three-month
period ended March 31, 1996 of $474,500. This is due to increased sales of the
WalkAbout, offset by lower sales of the Guardian. The Company believes that
overall sales of portable water filtration products in the outdoor specialty
sporting goods market have declined 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 products in the warmer months of the year. Historically, the Company's
sales tend to be highest in the second and third quarters of each year.
The gross margin of $5,000 or 1% of sales for the three month period
ended March 31, 1997 was lower than the prior year gross margin of $167,000 or
35% of sales, primarily due to the sales mix changing to sales of lower margin
WalkAbout units, a lower effective sales price for the WalkAbout and lower
overhead absorption on lower production levels, partially offset by lower
production spending.
Sales and marketing expenses for the three-month period ended March 31,
1997 were $190,000, a decrease of 46%, compared to $349,000 for the three-month
period ended March 31, 1996. This decrease was due to reduced staffing costs as
a result of the cost containment program and the suspension of efforts to
manufacture and market a water filtration and purification product for the home
use market.
Research and development expenses for the three month period ended March
31, 1997 were $237,000, an increase of 11% compared to $214,000 for the three
month period ended March
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31, 1996. The costs incurred in the first quarter of 1997 were associated with
final research and development of the new home use product which was sold in
April 1997.
General and administrative expenses for the three-month period ended
March 31, 1997 were $326,000, an increase of 28% compared to $254,000 for the
three-month period ended March 31, 1996. The increase in costs was the result of
severance costs associated with the reduction in personnel implemented as a
result of the Company's cost containment program.
Other income for the three-month period ended March 31, 1997 was $10,000
compared to $55,000 for the three-month period ended March 31, 1996 as a result
of lower cash balances available to invest in 1997.
Liquidity and Capital Resources
Cash and cash equivalents and short term investments decreased by 40%
from $1,921,000 at December 31, 1996 to $914,000 at March 31, 1997 primarily due
to operating losses, additional accounts receivable of $257,000 and a decrease
in payables and accruals of $189,000, partially offset by a net reduction of
inventory of $117,000.
Since its inception, the Company has been engaged primarily in product
development and has incurred operating losses resulting in an accumulated
deficit of approximately $10,461,000 as of March 31, 1997. 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. The Company
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. In April 1997, the Company sold the assets associated
with its proposed home use product and realized net proceeds of approximately
$210,000, after deducting direct selling expenses.
Although the Company believes that the cost containment program will
enable 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(R), the
Guardian+Plus(R), 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.
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PART II OTHER INFORMATION
Items 1-2 None
Item 3 None
Item 4 None
Item 5. Other Information
The Company and Messrs. Reynolds, Thomas and Cogdill, members of the
Company's senior management ("Management"), have reached an agreement pursuant
to which the Management have agreed to remain with the Company through January
31, 1998 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.
Specifically, the agreement provides 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 is 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 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.
The Company believes that the agreement provides an incentive to
Management to maximize cash flow from the Outdoor Business and to conserve the
Company's cash resources. While the Company assesses the effects of its cost
containment program and the profitability of its Outdoor Business, the Company
may also assess various strategic alternatives which may include a stock or
asset acquisition, or a merger, consolidation or similar transaction. Although
the Company intends to investigate these alternatives, no assurance can be given
that any transaction will be consummated.
Item 6 Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K - There were no reports filed on Form 8-K for
the quarter ended March 31, 1997.
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(B) Exhibits
(10) Material Contracts
(r) Letter Agreement dated April 17, 1997 by and between
SweetWater, Inc. and American Standard Inc.
(s) Agreement dated as of May 9, 1997 by and among
SweetWater, Inc. and Eric M. Reynolds, Patrick Thomas
and Jerry Cogdill
(27) Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SweetWater, Inc.
(Registrant)
Dated: May 15, 1997 By:/s/ Patrick E. Thomas
---------------------
Patrick E. Thomas
Vice President of Finance and
Administration, Chief Financial
Officer (principal financial
officer and chief accounting
officer)
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<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page(s) of this Form
- ------ ------------------- --------------------
<S> <C> <C>
(10) Material Contracts
(r)Letter Agreement dated April 17, 1997 by
and between SweetWater, Inc. and
American Standard Inc.
(s)Agreement dated as of May 9, 1997 by
and among SweetWater, Inc. and Eric M.
Reynolds, Patrick Thomas and Jerry
Cogdill
(27) Financial Data Schedule
</TABLE>
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<PAGE> 1
April 17, 1997
SweetWater Inc.
2505 Trade Center Avenue
Suite D
Longmont, CO 80503
Attention: Mr. Eric M. Reynolds
President & CEO
RE: AGREEMENT CONCERNING CERTAIN SWEETWATER
INTELLECTUAL PROPERTY AND OTHER ASSETS
Dear Mr. Reynolds:
Further to the letter of intent dated March 14, 1997 between
SweetWater Inc., a Delaware corporation whose principal offices are at 2505
Trade Center Avenue, Suite D, Longmont, Colorado 80503, and its Affiliates (as
defined in paragraph 10 below), successors and/or assigns (hereinafter
collectively "SweetWater") and American Standard Inc., a Delaware corporation
whose principal offices are at One Centennial Avenue, Piscataway, New Jersey
08855, and its Affiliates (as defined in paragraph 10 below), successors and/or
assigns (hereinafter collectively "ASI"), the parties hereby agree as follows:
1) SweetWater has developed certain technical know-how related to
the design, manufacture, production, distribution and service of the proposed
water filtration and purification products listed in Exhibit A-1 (hereinafter
"Know-How"), which products are designed for use exclusively in the home,
household or office and exclusively for individual indoor use (hereinafter
<PAGE> 2
the "Home Products"). The parties agree that the definition of Home Products
shall not include any of the products listed and described on Exhibit A-2 or any
subsequent improvement to such products.
2) Under the terms of this Agreement, SweetWater hereby assigns and
transfers to ASI and ASI hereby acquires from SweetWater all of SweetWater's
worldwide rights to the Know-How; ASI hereby grants to SweetWater a
royalty-free, exclusive, irrevocable and transferable license to use the
Know-How (i) in connection with the design, modification, improvement,
enhancement, manufacture, production, distribution and service of portable water
filtration and purification products for outdoor use as listed and described on
Exhibit A-2;
3) SweetWater hereby grants to ASI a royalty-free, non-exclusive,
irrevocable and transferable license to practice the inventions claimed in the
patents listed on Exhibit B (the "Outdoor Patents") which license shall include
the right to make, have made, use, import, export, sale and offer for sale the
inventions claimed in the Outdoor Patents for the full term of the respective
Outdoor Patent, provided, however, that such license shall not include any such
rights with respect to water filtration and purification products for outdoor
use as listed and described on Exhibit A-2. Notwithstanding anything to the
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<PAGE> 3
foregoing contained herein, SweetWater shall be under no obligation to maintain
or to defend any of the Outdoor Patents;
4) SweetWater shall not use the Know-How transferred to ASI under
the terms of this Agreement, or any portion thereof, to manufacture, produce, or
distribute, directly or indirectly, any of the products listed on Exhibit A-1.
ASI agrees that it shall not use the Know-How in connection with water
filtration and purification products for outdoor use as listed and described on
Exhibit A-2.
5) ASI may desire to employ one or more of the individuals listed on
Exhibit C hereto who were former employees of SweetWater. At ASI's request,
SweetWater agrees to release any and all such individuals listed on Exhibit C
hereto from any obligations to SweetWater which would restrict such individuals
from becoming employed by ASI or using or disclosing confidential or proprietary
information of Sweetwater related to the Home Products to ASI or using such
confidential or proprietary information in connection with their employment by
ASI to develop Home Products. SweetWater hereby waives any claims against ASI
relating to the employment of any such individual;
6) SweetWater makes no representations and warranties to ASI
relating to the ability or right to make, use or sell
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<PAGE> 4
products embodying the Know-How or the ability to patent, obtain or perfect the
rights to inventions and disclosures and improvements related to the Know-How.
SweetWater agrees to cooperate with ASI and to cause its employees to cooperate
with ASI in obtaining and perfecting rights to invention disclosures and
improvements related to the Know-How provided that ASI reimburses SweetWater for
any costs incurred in connection with such cooperation and provided that
SweetWater shall be under no obligation to employ or to continue to employ any
persons to fulfill this agreement;
7) SweetWater covenants that ASI has the unfettered right, free of
any and all claims of SweetWater and/or potential claims of SweetWater, to
develop and exploit the Know-How in accordance with the terms of this agreement;
8) SweetWater agrees to cooperate with respect to the transfer of,
and to relinquish its rights to, all engineering software installed on the
hardware sold to ASI including three (3) seats of Pro-Engineering CAD/CAM
software which are licensed to SweetWater, and to sell to ASI the hardware,
including related office equipment, as described in Exhibit D hereto and any
other software included therein which is owned by SweetWater;
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<PAGE> 5
9) In consideration for the undertakings of SweetWater listed in
Paragraphs (1) through (9) hereof, ASI agrees to pay to SweetWater the sum of
two hundred forty thousand United States Dollars (USD 240,000) by bank wire
transfer within five (5) working days following the signing of this Agreement.
This Agreement does not and is not intended to transfer or result in the
transfer of any liabilities of SweetWater to ASI;
10) This Agreement shall be interpreted in accordance with the laws
of the State of New York. The term "Affiliate" shall mean any corporation or
other entity controlled by the entity to which such term refers.
If you agree to the foregoing, please sign and date at the spaces
indicated below.
Very truly yours,
SweetWater Inc. American Standard Inc.
By:_______________________________ By:________________________________
Title:____________________________ Title:_____________________________
Date:_____________________________ Date:______________________________
- 5 -
<PAGE> 1
AGREEMENT
This Agreement executed as of the 9th day of May, 1997 by and among
SweetWater, Inc. (the "Company") and Eric M. Reynolds, Patrick Thomas and Jerry
Cogdill (individually, a "Management Party" and collectively, the "Management
Parties").
WHEREAS, the Management Parties constitute the top level management
of the Company's business including its "Outdoor Business" (as defined below);
and
WHEREAS, the Company desires to maintain and increase
the cash flow from the Outdoor Business; and
WHEREAS, the Management Parties are intimately familiar with the
Outdoor Business and the Company believes that cash flow from the Outdoor
Business can be maximized only while the Outdoor Business is managed by the
Management Parties; and
WHEREAS, in furtherance of its objectives the Company desires the
Management Parties to agree to continue in their present positions to and
including December 31, 1997; and
WHEREAS, the commitment on the part of the Management Parties to
remain in their present positions may cause them to forego valuable
opportunities for other employment; and
<PAGE> 2
WHEREAS, the Company desires to provide compensation and incentive
to induce the Management Parties to remain in their present positions and to
maximize cash flow to the Company.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained the parties hereto agree as follows:
1. AGREEMENT TO SERVE. (a) Each of the Management Parties will
continue to serve in his present position with the Company to and including
January 31, 1998 for the benefit of the Company and its shareholders; will
continue to perform the executive and technical functions on behalf of the
Company which such executive has been performing and such additional functions
as shall be requested by the Board (as defined below); and will report regularly
and accurately to the Board in respect of the affairs of the Company.
(b) During the course of their employment hereunder, the
Management Parties shall operate the Outdoor Business in a manner intended to
maximize cash flow, provided, however, that the consent of the Board shall be
required for any borrowing, for capital expenditures in excess of $25,000 in the
aggregate, or for sales of assets, excluding inventory, in excess of $10,000 in
the aggregate, during the term of this Agreement.
2
<PAGE> 3
(c) By entering into this Agreement, none of the Management
Parties are guaranteeing any level of results for the operation of the Company.
2. CERTAIN DEFINITIONS. For purposes of this Agreement the following
definitions shall apply:
(a) The term "Adjusted Year End Cash" shall mean the Year End Cash
plus (I) any costs paid in connection with an acquisition of a business or asset
not included in the Outdoor Business, including without limitation, any legal,
accounting or investment banker or other fees related thereto, plus (II) the net
total of the items listed on Schedule 2(a) (which may be a positive or negative
number).
(b) The term "Board" shall mean the Board of Directors of the
Company and any duly authorized committee thereof as the same shall exist at the
time in question.
(c) The term "Cause" means (i) neglect, refusal or failure (other
than by reason of illness, accident or other physical or mental incapacity), in
any material respect, to attend to the Management Party's duties as reasonably
assigned by the Company and consistent with past practice; (ii) failure to
follow the established, reasonable and material policies, standards, and
regulations of the Company; (iii) engagement in
3
<PAGE> 4
deliberate misconduct injurious to the Company or to any of its affiliates; or
(iv) conviction in a court of law of, or pleading of guilty or nolo contendere
to, any crime that constitutes a felony in the jurisdiction involved.
(d) The term "Management Sale" shall have the meaning set forth in
Section 5(c) hereof.
(e) The term "Management Sale Price" shall mean $475,000 minus the
excess, if any, of (I) the sum of the Adjusted Year End Cash over (II) the
Target Amount; provided, however, that the Management Sale Price shall not be
reduced below $1.00.
(f) The term "Non-Management Sale" shall have the meaning set forth
in Section 5(b) hereof.
(g) The term "Outdoor Business" shall mean the Acquired Assets, as
listed and defined on Exhibit 2(g), which are intended to include all of the
assets of the Company related to the manufacture, sale and distribution of
portable water filtration and purification devices and accessories thereto,
other than Excluded Assets, as defined on such schedule.
(h) The term "Outdoor Business Liabilities" shall mean the Assumed
Liabilities, as listed and defined on Schedule 2(h), other than Excluded
Liabilities, as defined on such schedule.
4
<PAGE> 5
(i) The term "Performance Bonus" shall have the meaning set forth in
Section 3(a) hereof.
(j) The term "Sale" shall include any Management Sale or
Non-Management Sale.
(k) The term "Target Amount" shall mean $525,000 and the "Target"
shall be deemed satisfied if the sum of the Adjusted Year End Cash equals or
exceeds the Target Amount.
(l) The term "Year End Balance Sheet" shall mean (i) the audited
balance sheet of the Company as of December 31, 1997 prepared on an
unconsolidated basis, if the Company has subsidiaries as of such date, or (ii)
if the Company does not have subsidiaries as of such date but has acquired a
business or asset after the date hereof, the audited balance sheet as of
December 31, 1997 reflecting the assets and liabilities of the Company as if the
Outdoor Business were the Company's only operating business, which balance sheet
shall exclude any assets or liabilities of any business or asset acquired after
the date hereof.
(m) The term "Year End Cash " shall mean cash, certificates of
deposit and similar cash equivalents as set forth on the Year End Balance Sheet.
5
<PAGE> 6
(n) The term "Value Appreciation Bonus" shall have the meaning set
forth in Section 4(b) hereof.
(o) The term "Withholding Tax Obligation" shall mean any amount of
tax which the Company is required to withhold under applicable federal, state or
local laws.
3. PERFORMANCE BONUS. (a) If the Adjusted Year End Cash exceeds
$1,000,000, regardless of whether the Management Parties or any other parties
purchase the Outdoor Business, the Management Parties, as a group, shall be
entitled to a bonus in the aggregate equal to 50% of the amount of such excess
(the "Performance Bonus"), provided, however, that if the Board reasonably
determines, that the increase in Adjusted Year End Cash has not resulted from
the operation of the business in the ordinary course, the Board may determine
that the Performance Bonus shall not be paid, in whole or in part.
(b) One-third of the Performance Bonus, less any Withholding
Tax Obligation, shall be paid in cash to each of the Management Parties
individually, within 30 days after the sooner to occur of: (i) the receipt of
the Company's Year End Balance Sheet; or (ii) March 31, 1998.
(c) In the event this Agreement is terminated as
a result of a Sale on or prior to December 31, 1997, a
6
<PAGE> 7
computation shall be made, to the satisfaction of the Board, as of the date
which is five business days prior to the closing of any such sale, to determine
if a Performance Bonus has been earned and, in such event, the Performance Bonus
earned shall be paid at such closing.
4. VALUE APPRECIATION BONUS. (a) It is recognized that the efforts
of the Management Parties may result in a substantial appreciation of the value
of the Outdoor Business as evidenced by the sale of the Outdoor Business in a
Non-Management Sale.
(b) Therefore, the Management Parties shall be entitled to a
"Value Appreciation Bonus" if all of the following conditions are met:
(i) the Target shall have been met and this Agreement shall
not have been terminated under Section 6(a), (b) or (c); and
(ii) On or before July 1, 1998, the Board determines to
effectuate a Non-Management Sale and such sale is consummated for a
purchase price (the "Non-Management Sales Price") in excess of the
Management Sale Price. Any consideration other than cash payable in
a Non-Management Sale shall be valued at fair market
7
<PAGE> 8
value as reasonably determined by the Board after consultation with
its advisors.
(c) The Value Appreciation Bonus shall be equal to (i) 30% of
the amount by which the Non-Management Sales Price exceeds the Management Sale
Price, less (ii) the amount of any Performance Bonus. If the Performance Bonus
is larger than the amount set forth in (i) above, no Value Appreciation Bonus
shall be payable hereunder.
(d) One-third of the Value Appreciation Bonus, if any, less
any Withholding Tax Obligation, shall be paid to each Management Party no later
than 30 days following the receipt by the Company of the Non-Management Sale
Price.
(e) In the event this Agreement is terminated as a result of a
Non-Management Sale on or prior to December 31, 1997, a computation shall be
made, to the satisfaction of the Board, as of the date which is five business
days prior to the closing of any such sale, to determine if a Value Appreciation
Bonus (as computed in Section 4(b) above) has been earned and, in such event,
the Value Appreciation Bonus earned shall be paid at such closing.
5. RIGHT OF FIRST REFUSAL. (a) If this Agreement has not been
terminated, the Target has been met, and, during the
8
<PAGE> 9
period commencing with January 1, 1998 and ending on July 1, 1998, the Board
determines to effectuate a Sale, the Company shall give the Management Parties
ten (10) business days written notice (the "Sale Notice") of its desire to
effectuate a Sale of the Outdoor Business in accordance with the terms of this
Section 5. Notwithstanding anything herein to the contrary, a Sale shall not be
deemed to have taken place as a result of a merger, consolidation or similar
transaction and this Agreement shall not restrict the Company from entering into
any such transaction at any time. The Board will use its best efforts to
commence its evaluation of the Outdoor Business as early as possible and to
notify the Management Parties by January 15, 1998 as to the likelihood of a Sale
of the Outdoor Business to the Management Parties.
(b) Non-Management Sale. If the Company desires to effect a Sale of
the Outdoor Business to a party or parties other than the Management Parties (a
"Non-Management Sale"), the Sale Notice shall include the purchase price and the
terms and conditions of the proposed Non-Management Sale. If, within ten (10)
business days from the date of the Sale Notice, the Management Parties notify
the Company that they wish to purchase the Outdoor Business on the same terms
and conditions stated in the Sale Notice (including, without limitation, the
assumption of any liabilities of the Company which the non-management purchaser
intends to assume) and demonstrate to the satisfaction of the
9
<PAGE> 10
Board their financial ability to do so, the Outdoor Business shall be sold to
the Management Parties under the terms and conditions so stated. In such event,
the Company and the Management Parties shall execute a document reasonably
satisfactory to such parties providing for the sale of the Outdoor Business to
the Management Parties on the terms and conditions set forth in the Sale Notice.
The closing in respect of such Non-Management Sale shall take place at a time
and place designated by the Company within ten (10) business days after the
receipt of notification to the Company that the Management Parties wish to
purchase such business under such terms and conditions. If the Management
Parties elect to purchase the Outdoor Business, they may designate an entity
solely owned by them or members of their immediate family to effect such
purchase. If the Management Parties do not so notify the Company within such ten
(10) day period of their intention to purchase the Outdoor Business, the Company
shall be free for a period of thirty (30) business days after the expiration of
such ten (10) day period, to sell the Outdoor Business to the party named in the
notice for the purchase price stated in the notice to the Management Parties. In
the event there is a material decrease in the purchase price stated in the
notice, the Company shall comply again with the right of first refusal set forth
herein. Subject to the foregoing right of first refusal, the Company shall be
free at any time to sell the business to any party.
10
<PAGE> 11
(c) Management Sale. If the Company desires to effect a Sale of the
Outdoor Business to the Management Parties (a"Management Sale"), the Sale Notice
shall include the Company's calculation of the Management Sale Price. In such
event, the Management Parties shall have the right to purchase the Outdoor
Business in consideration of the payment of the Management Sale Price and the
assumption of the Outdoor Business Liabilities. The Management Parties shall
have ten (10) business days from the date of the Sale Notice to notify the
Company that they wish to purchase the Outdoor Business on the terms and
conditions stated in the Sale Notice and to demonstrate to the satisfaction of
the Board their financial ability to do so. In such event, the Company and the
Management Parties shall execute a document reasonably satisfactory to such
parties (an "Asset Purchase Agreement") providing for the sale of the Outdoor
Business to the Management Parties for the price set forth in the Sale Notice,
the assumption of the Outdoor Business Liabilities by the Management Parties,
the indemnification of the Company against loss, claims or expenses resulting
from the Outdoor Business Liabilities, the indemnification of the Management
Parties against loss, claims or expenses resulting from liabilities retained by
the Company, the payment by the Management Parties of Withholding Tax
Obligations, if any, which may result from the Management Sale, and such other
terms and conditions as are customarily included in asset purchase agreements
and which are reasonably acceptable to the parties. The closing in respect of
11
<PAGE> 12
such Management Sale shall take place at a time and place designated by the
Company within 10 business days after the receipt of notification to the Company
that the Management Parties wish to purchase such business under such terms and
conditions. At the closing, the Management Parties shall pay the Management Sale
Price to the Company and shall execute the Asset Purchase Agreement, if not
previously executed, and shall deliver such other documents and payments as may
be specified therein. In the event the Management Parties do not elect to
purchase the Outdoor Business, within ten (10) business days after receipt of
notice from the Company, the right of first refusal set forth herein shall
terminate. If the Management Parties elect to purchase the Outdoor Business,
they may designate an entity solely owned by them or members of their immediate
family to effect such purchase.
6. TERMINATION. The term of this Agreement shall commence on the day
and year first above written and shall end on the date of its termination
pursuant to the following provisions. This Agreement may be terminated:
(a) By the Company in the event that (i) any of the Management
Parties are discharged for Cause, or (ii) two of the Management Parties
voluntarily leave the employment of the Company, or (iii) one of the Management
Parties voluntarily leaves the employment of the Company and, in the case of
(iii)
12
<PAGE> 13
only, the Board reasonably determines, that the departure of such Management
Party constitutes a material adverse change in the business, financial condition
or prospects of the Company. Notwithstanding anything to the foregoing set forth
herein, (i) a Management Party shall not be deemed to have left the employment
of the Company if, with the consent of the Board, such party works part-time for
the Company, and (ii) in the event a Management Party leaves the employment of
the Company, such party shall be entitled to a severance payment, payable in
cash, equal to such party's monthly base salary multiplied by three.
(b) By the Company, in the event the Board reasonably determines,
that there has been a material adverse change in the business, financial
condition or prospects of the Company including, without limitation, a
significant reduction in the Company's cash position.
(c) By the Management Parties at any time after January 31, 1998.
(d) Automatically upon the closing of a Sale, provided that all
amounts required to be paid hereunder by the Company or the Management Parties
shall have been paid.
13
<PAGE> 14
(e) Notwithstanding the foregoing, the provisions of Section 7 and 8
shall survive for the periods stated in such Sections.
7. CONFIDENTIALITY. By executing this Agreement, each of the
Management Parties hereby agrees that the terms of the Assignment and Agreement
Concerning Non-Disclosure of Proprietary Information attached hereto as Exhibit
A are expressly incorporated into this Agreement and shall apply to such
Management Party during the continuance of the Management Party's employment by
the Company and thereafter in accordance with the terms set forth in such
agreement as if such terms were set forth herein, provided however that, the
provisions of the such Agreement shall terminate with respect to any Management
Party who participates in the purchase of the Outdoor Business by the Management
Parties pursuant hereto.
8. NON-COMPETITION. By executing this Agreement, each of the
Management Parties hereby agrees that the terms of the Non-Competition Agreement
attached hereto as Exhibit B are expressly incorporated into this Agreement and
shall apply to such Management Party during the continuance of the Management
Party's employment by the Company and thereafter in accordance with the terms
set forth in such agreement as if such terms were set forth herein, provided
however that, the provisions of the Non-Competition Agreement shall terminate
with respect to any
14
<PAGE> 15
Management Party who participates in the purchase of the Outdoor Business by the
Management Parties pursuant hereto.
9. MISCELLANEOUS. (a) Management Party Agent. The Management Parties
irrevocably appoint Mr. Patrick Thomas as the Agent for all of the Management
Parties and their heirs, successors and assigns for all purposes relevant to
this Agreement. Any notices or other communications required or permitted to be
sent to the Management Parties shall be duly given if given to Mr. Thomas in
accordance with section 9(g) below. The Company shall be entitled to act on
requests and notices by Mr. Thomas as if they were the requests and notices sent
separately by each of the Management Parties regardless of notices to the
contrary by individual parties. The Company shall have no responsibility in
respect of the division among the Management Parties of any monies required or
permitted to be sent hereunder, which monies shall be duly delivered to the
Management Parties if delivered to Mr. Thomas and the Company shall have no
responsibility in respect of transaction among or between Management Parties.
(b) No Third Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any person or entity other than the Company, the
Management Parties and their respective successors and permitted assigns.
15
<PAGE> 16
(c) Entire Agreement; Governing Law. This Agreement (including the
documents referred to herein) constitutes the entire agreement among the Company
and the Management Parties and supersedes any prior understandings, agreements,
or representations by or among the parties, written or oral, to the extent they
have related in any way to the subject matter hereof. This Agreement shall be
governed by the laws of the state of New York applicable to contracts made and
to be performed entirely in such state.
(d) Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Company and its respective successors and
assigns. This Agreement may not be assigned by any of the Management Parties
without the prior written approval of the Company and the other Management
Parties.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
16
<PAGE> 17
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if it is personally
delivered or sent by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the intended recipient as set forth below:
<TABLE>
<CAPTION>
If to the Company: Copy to:
- ------------------ --------
<S> <C>
SweetWater, Inc. Herbert M. Friedman
c/o Thomas A. Barron Zimet, Haines, Friedman & Kaplan
Evergreen Management Corporation 460 Park Avenue
545 Pearl Street New York, New York 10022
Boulder, CO 80302
If to the Management Parties: Copies to:
Mr. Patrick Thomas Mr. Eric M. Reynolds
SweetWater, Inc. SweetWater, Inc.
2505 Trade Center Avenue, #D 2505 Trade Center Avenue, #D
Longmont, CO 80503 Longmont, CO 80503
Mr. Jerry Cogdill
SweetWater, Inc.
2505 Trade Center Avenue, #D
Longmont, CO 80503
</TABLE>
Any party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
parties notice in the manner herein set forth.
(h) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Company and the Management Parties. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder,
17
<PAGE> 18
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(i) General. Each of the parties will use its best efforts to take
all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement.
(j) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
18
<PAGE> 19
(l) Incorporation of Exhibits, Annexes, and Schedules. The Exhibits
and Schedules identified in this Agreement are incorporated herein by reference
and made a part hereof.
IN WITNESS WHEREOF, the parties thereto have duly executed this
Agreement or, in the case of the Company have caused this Agreement to be duly
executed by its officer thereunto duly authorized.
SWEETWATER, INC.
By:________________________________
MANAGEMENT PARTIES
________________________________
Eric M. Reynolds
________________________________
Patrick Thomas
________________________________
Jerry Cogdill
19
<PAGE> 20
Schedule 2(a)
The net total of the following items will be used to calculate the adjustment to
"Adjusted Year End Cash" as set forth in Section 2(a)(II):
1. legal, accounting, or investment banking fees or disbursements
(not related to an acquisition described in Section 2(a)(I) above) in excess of
$32,500 for the period commencing on the date hereof and ending on December 31,
1997 will be added;
2. the difference between $32,000 and the actual severance costs for
the Management Parties, if any, will be subtracted;
3. investor relations and Board fees and expenses in excess of
$10,000 will be added;
4. $50,000, which is intended to defray insurance costs related to
the Assumed Liabilities, will be added.
20
<PAGE> 21
Schedule 2(g)
Acquired Assets. All the assets and properties of the Company of
every kind and description in current use or held for future use related to the
manufacturing, marketing and sale of the Company's portable water filtration and
purification products and accessories thereto or related to the microbiological
laboratory, wherever located and whether tangible or intangible or real,
personal or mixed, as the same shall exist on the date such assets are
transferred, other than Excluded Assets (as defined below), including, without
limitation, all right, title and interest of the Company in, to and under the
following assets, except to the extent that any such assets are Excluded Assets:
(a) all leases of real property and all other interests in
real property of the Company, together with all improvements,
fixtures and all other appurtenances thereto;
(b) all accounts receivable and indebtedness owed to the
Company with respect to the Acquired Assets and all inventories,
deferred items, machinery, equipment, supplies, computer hardware,
office furniture and other assets of the Outdoor Business;
(c) all right, title and interest of the Company in and to all
patents, patent applications, copyrights (registered or
unregistered), trademarks (registered or unregistered), trademark
registrations, trademark registration applications, service marks
(registered or unregistered) and trade names used or employed by the
Company in or associated with the Acquired Assets or the Outdoor
Business, and all license and other rights of the Company associated
with, used or employed by the Company, together with the goodwill of
such business;
(d) all inventions, discoveries, processes, formulae,
specifications, data, computer software, trade secrets, know-how and
proprietary information of the Outdoor Business;
(e) all sales and promotional literature and other selling
material owned, associated with, used or employed in or by the
Company in the Outdoor Business;
(f) all books of account, records, files, invoices, customers'
lists, suppliers' lists, mailing lists and other data owned,
associated with, used or employed by the Company in connection with
the Outdoor Business;
21
<PAGE> 22
(g) all rights of the Company under all contracts, agreements,
licenses, leases (whether as lessee or lessor), commitments, and
sales and purchase orders relating to the Acquired Assets or the
Outdoor Business and under all commitments, bids and offers and all
rights and claims (including, without limitation, refunds and claims
thereto) with respect to all Assumed Liabilities (as defined on
Schedule 2(h));
(h) all prepaid expenses and security deposits relating to
the Acquired Assets or the Outdoor Business;
(i) all rights, claims and causes of action relating to the
Acquired Assets or the Outdoor Business including all rights to
indemnification under any agreement pursuant to which the Company
acquired any of the Acquired Assets and all rights under any
insurance policies of the Company with respect to the Acquired
Assets; and
(j) all assets of, under or held in connection with any
employee benefit plan maintained, or contributed to, by the Company
for the benefit of any employees of the Company.
Excluded Assets. The term "Excluded Assets" means,
collectively, the following:
(a) the business and all assets and properties of the Company
not related to the Outdoor Business including, without limitation,
any business, assets or intellectual property (including, without
limitation, any items set forth in (c) or (d) under the definition
of Acquired Assets above) related to the development of, or which
the Company has elected to sell in connection with a sale of, its
water filtration and purification product for the home use market
(the "Home Use Product");
(b) any and all minute books, stock transfer records,
corporate seals and records of taxes, including without limitation
all tax returns and related files (including without limitation
payroll records and paid invoices) and backup documentation with
respect to taxes of the Company and all corporate and other records
and files located at the Company's corporate headquarters at 2505
Trade Centre Avenue, Suite D, Longmont, CO 80503 ("Corporate
Headquarters");
(c) all cash in banks and all marketable securities held by
the Company;
22
<PAGE> 23
(d) all rights under any insurance policies covering
Excluded Liabilities of the Company; and
(e) all computer equipment, computer software, supplies,
records, historical documents and other assets located at the
Company's Corporate Headquarters which the Board reasonably
determines should be retained for the continued operation of the
Company as a public entity.
23
<PAGE> 24
Schedule 2(h)
Assumed Liabilities. All liabilities and obligations of the Company
(other than Excluded Liabilities, as defined below) arising out of or related to
the Acquired Assets or the Outdoor Business, whether known or unknown, fixed or
contingent, including without limitation the following:
(a) all liabilities and obligations that arise or have arisen
in connection with the Acquired Assets or the operation of the
Outdoor Business regardless of whether such liabilities or
obligations relate to periods prior to the transfer of such Acquired
Assets and regardless of whether such liabilities or obligations are
reflected or reserved for on the Year End Balance Sheet;
(b) all liabilities and obligations arising out of or related
to any litigation or claims with respect to the Acquired Assets or
the Outdoor Business, including without limitation the existing EEOC
claims and any such claims which may arise in the future;
(c) all liabilities and obligations arising out of or related
to any contract, agreement or lease comprising part of the Acquired
Assets or the Outdoor Business;
(d) all liabilities and obligations arising out of or related
to any environmental law or regulation or otherwise relating to the
environment;
(e) all liabilities and obligations arising out of or related
to any event occurring after the transfer of the Acquired Assets in
connection with the operation of the Outdoor Business or the use or
ownership of any of the Acquired Assets;
(f) all pension or similar liabilities and obligations of the
Company to any employee or retired employee of the Company under any
pension or similar employee benefit plan or medical, life or
long-term disability program or plan maintained, or contributed to,
by the Company for the benefit of any employees of the Company; and
(g) all liabilities and obligations for workers compensation
or medical insurance for any event or occurrence either before or
after the transfer of the Acquired Assets.
Excluded Liabilities. The term "Excluded Liabilities" means,
collectively, the following liabilities and obligations:
24
<PAGE> 25
(a) all liabilities and obligations arising out of or related
to any of the Excluded Assets; and
(b) all liabilities and obligations of a type recorded by the
Company on their books of account or related records as a
"corporate" or intercompany liability, including federal and state
income tax liability relating to periods prior to the sale,
shareholder litigation or other litigation arising from the
Company's status as a public company or the filing requirements of
the Securities and Exchange Commission and the National Association
of Securities Dealers, Inc.; legal, investment banker, audit,
accounting and tax compliance costs; or broker fees and premiums
payable to any insurance company except, in each case, to the extent
that the Board determines, in its sole discretion, that any such
liabilities are directly related to the Outdoor Business, the
Acquired Assets or the Assumed Liabilities.
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 914,421
<SECURITIES> 0
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0
0
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<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
