<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 September 30, 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
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SWEETWATER, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-1167603
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1140 Boston Avenue, Unit A, Longmont, CO 80501
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(Address of principal executive offices) (Zip Code)
(303) 678-0447
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of September 30, 1997, 3,099,045 shares of Registrant's Common Stock,
par value $.001 per share, were outstanding.
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SweetWater, Inc.
Table of Contents
Part I. Financial Information Page
----
Item 1. Financial Statements
Balance Sheets- 2
September 30, 1997 and December 31, 1996
Statements of Operations- 4
Three and nine months ended September 30, 1997 and 1996
Statements of Cash Flows- 5
Nine months ended September 30, 1997 and 1996
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II. Other Information 15
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SWEETWATER, INC.
BALANCE SHEETS
September 30,
1997 December 31,
(Unaudited) 1996
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 923,627 $1,479,937
Short-term investments -- 440,659
Accounts receivable - net -- 132,446
Inventory - net -- 690,231
Prepaids and other current assets -- 51,288
Assets held for Sale 821,981 --
---------- ----------
Total current assets 1,745,608 2,794,561
---------- ----------
Fixed Assets, at cost -- 475,000
Less: Accumulated depreciation -- --
---------- ----------
Fixed assets, net -- 475,000
---------- ----------
Other Assets:
Other Assets held for sale 300,436 --
Deposits and other -- 39,921
---------- ----------
TOTAL ASSETS $2,046,044 $3,309,482
========== ==========
The accompanying notes to financial statements are an integral part of these
balance sheets
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SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and other accrued liabilities $ 180,315 $ 493,356
Accrued salaries and employee benefits 38,804 92,982
Accrued warranty and other -- 30,630
Accrued loss for disposal of discontinued operations 273,393 --
Liabilities held for sale 72,031 --
------------ ------------
Total current liabilities 564,543 616,968
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STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 8,000,000 shares
authorized; 3,099,045 and 3,067,382 shares issued and
outstanding at September 30, 1997 and December 31, 1996,
after deducting 94,943 and 126,606 shares held in treasury,
respectively 3,099 3,068
Deferred Compensation -- (12,366)
Additional paid-in capital 12,431,079 12,425,783
Accumulated deficit (10,952,677) (9,723,971)
------------ ------------
Total stockholders' equity 1,481,501 2,692,514
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,046,044 $ 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 For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES -- -- -- --
COST OF GOODS SOLD -- -- -- --
---------- ---------- ---------- ----------
GROSS MARGIN -- -- -- --
---------- ---------- ---------- ----------
OPERATING EXPENSES
Sales and Marketing -- 94,166 55,910 177,813
Research and Development -- 190,962 236,673 581,533
General and Administrative 77,308 72,831 221,507 213,387
---------- ---------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS (77,308) (357,959) (514,090) (972,733)
OTHER INCOME, NET 11,348 14,631 227,476 109,778
---------- ---------- ---------- ----------
NET INCOME (LOSS) FROM (65,960) (343,328) (286,614) (862,955)
CONTINUING OPERATIONS
(LOSS) FROM DISCONTINUED
OPERATIONS (154,374) (300,800) (668,699) (1,192,195)
(LOSS) FROM DISPOSAL OF
DISCONTINUED OPERATIONS,
including provision of $170,393 for
operating losses during period prior
to completion of sale (273,393) -- (273,393) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) (493,727) (644,128) (1,228,706) (2,055,150)
========== ========== ========== ==========
INCOME (LOSS) PER COMMON
SHARE ($ 0.16) ($ 0.21) ($ 0.40) ($ 0.67)
========== ========== ========== ==========
INCOME (LOSS) FROM
CONTINUING OPERATIONS
PER COMMON SHARE ($ 0.02) ($ 0.11) ($ 0.09) ($ 0.28)
========== ========== ========== ==========
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 3,095,708 3,067,009 3,087,653 3,065,940
========== ========== ========== ==========
</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 Nine Months Ended
September 30,
----------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,228,706) $(2,055,150)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 174,784 327,375
Amortization of deferred compensation -- 12,366
Accrued loss for disposal of discontinued operations 273,393 --
Changes in assets and liabilities:
Decrease (Increase) in net accounts receivable 132,446 (289,822)
Decrease in inventory 690,231 143,020
Decrease in prepaids and other current assets 51,288 18,888
Decrease (Increase) in deposits and other assets 39,921 (9,992)
(Increase) in deferred offering costs -- (153,373)
(Decrease) in accounts payable and other accrued liabilities (313,041) (40,323)
(Decrease) in accrued salaries and other current liabilities (84,808) (10,138)
(Increase) in assets held for sale, net fixed assets (828,417) --
Increase in liabilities held for sale 72,031 --
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Net cash used in operating activities (1,020,878) (2,057,149)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment (20,360) (354,607)
Purchases of short-term investments -- (5,605,640)
Proceeds form the sale of fixed assets, net of gain recognized 26,576 --
Proceeds from the sales of short term investments 440,659 8,906,708
Net cash provided by investing activities 446,875 2,946,461
CASH FLOWS FROM FINANCING ACTIVITIES
Capital Contributions 17,693 9,297
Payments on notes payable -- (79,514)
----------- -----------
Net cash provided by (used in) financing activities 17,693 (70,217)
----------- -----------
Net increase in Cash and Cash Equivalents (556,310) 819,095
CASH AND CASH EQUIVALENTS, beginning of period 1,479,937 511,331
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 923,627 $ 1,330,426
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION:
CASH PAID FOR INTEREST $ 3,536 $ 23,592
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements
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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 September 30, 1997 and
the results of operations and cash flows for the three and nine months
ended September 30, 1997 and 1996. In addition, the balance sheet as of
September 30, 1997 and the statements of operations for the three and nine
months ended September 30, 1997 and 1996 have been restated under
Accounting Principles Board Opinion No. 30, discontinued operations
treatment, as a result of the execution of an Asset Purchase Agreement on
October 21, 1997. See Note 2.
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 ended
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
$11 million as of September 30, 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 suspended its efforts to
manufacture and market this product, sold the plans, designs and technology
associated therewith in April 1997 and realized net proceeds of
approximately $210,000. The Company had no amounts capitalized related to
this product.
During 1997, the Company reduced its personnel, discontinued its research
and development efforts and initiated a cost containment program designed
to reduce general and
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SweetWater, Inc.
Notes to Financial Statements
(Unaudited)
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 allowed it to remain in operation through 1997, as
a result of streamlining its operations and reducing its costs, the Company
cannot be assured that its losses will not continue or that the Company
will be able to manufacture and sell its products successfully or achieve
profitability. Unless the performance of the Company improves
substantially, the Company cannot be assured that it will achieve positive
cash flow. Accordingly, on October 21, 1997, the Company and Cascade
Design, Inc., a Washington corporation ("Cascade"), executed an Asset
Purchase Agreement pursuant to which substantially all the business
operations and assets of the Company related to the manufacturing and
distribution of portable water filtration and purification products for
outdoor use, will be sold to Cascade (the "Sale Transaction"), subject to
the approval of the shareholders of the Company. If the Sale Transaction is
not consummated, the Company believes that cash and short term investments
will be sufficient to meet working capital requirements and support its
existing operations through 1998. 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. The Company cannot be assured that additional capital
will be pursued or available on terms acceptable to the Company when and if
needed. 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.
As an incentive to maximize cash flow from the outdoor business, to
conserve the Company's cash resources and to retain senior management, in
May 1997, the Company and Eric M. Reynolds (President, Chief Executive
Officer and a director of the Company), Patrick E. Thomas (Vice President
and Chief Financial Officer of the Company), and Jerry L. Cogdill (Chief of
Operations for the Company) (collectively, "Management"), entered into an
agreement (the "Management Agreement") pursuant to which the Management
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
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. Specifically, pursuant to the Management Agreement,
Management will receive a bonus equal to 30% of the excess of the price
paid by Cascade over the "Management Price", as defined in the Management
Agreement. The amount of the bonus will be calculated within five days of
the closing date of the Sale Transaction and is estimated to be
approximately $500,000. As the determination to sell the outdoor business
was made prior to December 31, 1997, the right of first refusal is not
available to Management under the terms of the Management Agreement.
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<PAGE> 9
SweetWater, Inc.
Notes to Financial Statements
(Unaudited)
3. SALE OF ASSETS
On October 21, 1997, the Company and Cascade entered into an Asset Purchase
Agreement (the "Sale Agreement") pursuant to which, subject to the approval
of its shareholders, substantially all of the assets related to the
manufacture and distribution of the Company's portable water filtration and
purification products will be sold to Cascade for a cash payment equal to
the Closing Asset Value plus $300,000, and the assumption of certain
liabilities. A detailed description of the calculation of Closing Asset
Value, the assets to be transferred to and the liabilities to be assumed by
Cascade and the assets and liabilities to be retained by the Company is set
forth under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations - General." Reference is also made to
the Unaudited Pro Forma Financial Information attached hereto as Exhibit 99
for additional information relating to the Sale Transaction.
If the Sale Transaction is approved by the shareholders of the Company,
under the terms of the Sale Agreement, the closing of the sale should occur
within five business days after the shareholders meeting at which the Sale
Transaction is approved. The Company intends to call a special meeting of
shareholders to approve the Sale Transaction as soon as possible.
A loss from disposal of discontinued operations of $273,000 was recorded as
a result of the execution of the Sale Agreement primarily as a result of a
$170,000 projected fourth quarter loss on discontinued operations and
$665,000 accrued severance and management value appreciation bonus
partially offset by a $372,000 gain on sale of assets and a $190,000
reversal of inventory obsolescence and bad debt reserves as part of the
planned Sale Transaction.
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. Net loss per common share from discontinued operations was $0.05
and $0.10 for the three month period ending
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<PAGE> 10
SweetWater, Inc.
Notes to Financial Statements
(Unaudited)
September 30, 1997 and 1996, respectively, and $0.22 and $0.39 for the nine
month periods ending September 30, 1997 and 1996, respectively.
In addition, loss from disposal of discontinued operations was $0.09 and
$0.09 per common share for the three and nine month periods ending
September 30, 1997, respectively.
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.
7. COMMITMENTS AND CONTINGENCIES
In August 1997, the Company entered into a new lease which commences
October 1997 and will continue for a three year period unless cancelled by
the Company between June 1, 1998 and July 15, 1998. Minimum future lease
obligations under the new lease are $6,011 per month for the period from
October 1, 1997 through June 1, 1998. If the Company elects to continue the
lease after June 1, 1998, minimum future lease obligations shall be $6,011
per month through September 30, 1998; $6,191 per month from October 1, 1998
through September 30, 1999; and $6,377 per month from October 1, 1999
through September 30, 2000. If the Sale Transaction is consummated, the
lease will be assigned to, and assumed by, Cascade.
If the Sale is consummated, the Company will retain all liabilities related
to its operations prior to the closing, with the exception of product
warranty liabilities which will be assumed by Cascade. The liabilities to
be retained by the Company include, among others, product liabilities and
any environmental liabilities arising out of the Company's operations prior
to the Sale or its prior leases of facilities. The Company has product and
general liability insurance on an occurrence basis which it believes
provides up to $11 million in coverage.
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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 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 including herein.
General
On October 21, 1997, the Company and Cascade Designs, Inc. ("Cascade")
entered into an Asset Purchase Agreement (the "Sale Agreement") pursuant to
which, subject to the approval of its shareholders, substantially all of the
assets related to the manufacture and distribution of the Company's portable
water filtration and purification products (the "Outdoor Business"), other than
Excluded Assets, will be sold to Cascade for a cash payment equal to the Closing
Asset Value plus $300,000 (the "Purchase Price"), and the assumption of the
Assumed Liabilities.
The Closing Asset Value shall be an amount equal to the sum of: (i)
$294,000, which is the determined value of all equipment included in the
Acquired Assets, plus (ii) an amount (not to exceed $20,000) equal to the actual
cost incurred by the Company in the purchase and installation of any fixed
assets installed in the Facility by the Company after the date of the Sale
Agreement plus (iii) an amount equal to the Inventory Value, plus (iv) an amount
equal to the sum of all accounts receivable attributable to payors with billing
addresses in the United States and Canada, as determined by the Company's
accounts receivable aging report as of the close of business on the day
preceding the Closing Date, discounted to the extent of 0.3%, plus (v) an amount
equal to the sum of certain security deposits, prepaid items and discretionary
expenditures. The Inventory Value is to be determined by multiplying the actual
inventory by the respective values for such inventory as set forth in the
Company's 1997 standard cost inventory valuation report previously delivered by
the Company to Cascade.
The assets to be transferred to Cascade include (i) the Company's
leasehold interests in the real property and facilities located at 1140 Boston
Avenue, Unit A, Longmont, Colorado 80501 (the "Facility"), together with all of
the furniture, fixtures and equipment and located in the Facility; (ii) all
tangible personal property including, but not limited to, all machinery,
equipment, raw materials, work in progress, inventories, tools, and the office
operating and other supplies, such as desk sets, furniture and computers,
currently utilized by the Company's twelve employees; (iii) all of the Company's
common law and statutory rights in, and the goodwill associated with, the name
"SweetWater" and its additional intellectual property; (iv) all trade accounts
receivable of the Outdoor Business attributable to payors with billing addresses
in the United States and Canada; (v) all of the Company's rights and claims
under the contracts relating to the Outdoor Business; (vi)
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<PAGE> 12
all books, records and files of the Company relating to the Outdoor Business;
(vii) to the extent transferable, all licenses, authorizations and permits
issued by any governmental or regulatory agency relating exclusively to the
Outdoor Business, and all applications therefor pending or filed; (viii) EPA
Registration No. 67373-1 and data compensation rights granted the Company under
the Federal Insecticide, Fungicide and Rodenticide Act; (ix) to the extent
transferable, all software licenses and authorizations; and (x) all other assets
owned by the Company and used exclusively in the Outdoor Business in the
ordinary course of business as currently conducted. Excluded Assets consist of
(i) all cash, marketable securities, insurance policies, certain deposits and
prepaid assets and expenses of the Company; (ii) all rights and claims of the
Company with respect to the Excluded Assets or the Excluded Liabilities; (iii)
any and all minute books, stock transfer records, corporate seals, Tax Returns,
and any books or records relating to Tax Returns; (iv) all rights of the Company
under the Sale Agreement and the agreements and instruments delivered to Seller
by Cascade pursuant to the Sale Agreement; (v) all finished goods relating to
products not included in the Company's price list on October 21, 1997, all
components of goods and all raw materials not used in products included in the
Company's price list on October 21, 1997; and (vi) certain computer equipment,
office equipment and supplies and software.
Assumed Liabilities consist of (i) liabilities and obligations that arise
out of the Company's product warranties; and (ii) liabilities and obligations
that arise out of or relate to any event occurring after the closing date in
connection with the operation of the Outdoor Business, the use or ownership of
any of the Acquired Assets or the assumption of the Outdoor Contracts. Excluded
Liabilities consist of (i) all accounts payable and liabilities of the Company
in respect of indebtedness for borrowed money; (ii) all of the Company's
liabilities and obligations in respect of Taxes attributable to taxable years or
periods ending prior to the closing date; (iii) all of the Company's liabilities
for the payment of accrued employee benefits or for severance benefits arising
out of any agreement between the Company and any of its employees or any other
person; (iv) liabilities and obligations arising under environmental laws or
otherwise related to the environment as a result of the Company's operation of
the Outdoor Business prior to the closing date or its prior leases of
facilities; (v) all liabilities of the Company under the Sale Agreement; and
(vi) all other liabilities not specifically included within the definition of
Assumed Liabilities and arising out of events occurring prior to the closing
date.
Each of the Company and Cascade has agreed to indemnify, defend and hold
harmless the other party and its affiliates from and against any and all losses,
liabilities, obligations, payments, damages, costs and expenses up to a maximum
of $500,000 arising out of or due to, directly or indirectly (i) any inaccuracy
in or breach of any of the representations, warranties, covenants, agreements or
undertakings of the indemnifying party contained in the Sale Agreement or in any
agreement, document or instrument executed and delivered pursuant thereto or in
connection therewith; and (ii) any liability either retained or assumed as the
case may be, by the indemnifying party.
The Sale Agreement may be terminated and the transactions contemplated
thereby abandoned at any time prior to the closing date (i) by written consent
of the Company and Cascade, (ii) by Cascade or the Company, if the Closing does
not occur on or before March 31, 1998; provided, however, that the Closing has
not been delayed as a result of a material breach of the representations,
warranties, covenants and agreements by the party seeking termination.
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<PAGE> 13
Results of Operations for the Three Months ended September 30, 1997 and 1996 -
Continuing Operations
Net loss from continuing operations decreased by 81% from a loss of
$343,000 for the three months ended September 30, 1996 to a loss of $66,000 for
the three months ending September 30, 1997 primarily as a result of the
suspension of the Company's efforts to develop a home use product and the
resulting sale of assets associated with such product in the second quarter of
1997. Sales and marketing expense decreased 100% from $94,000 to $0, research
and development expense decreased 100% from $191,000 to $0, and general and
administration expense increased 6% from $73,000 to $77,000 in the three months
ended September 30, 1996 and 1997, respectively.
Results of Operations for the Three Months ended September 30, 1997 and 1996 -
Discontinued Operations
Loss on discontinued operations decreased 49% from $301,000 to $154,000
for the three months ended September 30, 1996 and 1997, respectively, primarily
as a result of the cost containment program implemented in 1997. In addition, a
loss on disposal of discontinued operations of $273,000 was recorded in the
three months ended September 30, 1997 primarily as a result of a $170,000
projected fourth quarter loss on discontinued operations and $665,000 accrued
severance and management value appreciation bonus partially offset by a $372,000
estimated gain on sale of assets and a $190,000 reversal of inventory
obsolescence and bad debt reserves as part of the planned Sale Transaction.
During the three-month period ended September 30, 1997, the Company had
sales of $336,000, a decrease of 60%, compared to sales in the three-month
period ended September 30, 1996 of $848,000. This is primarily due to decreased
sales of the Guardian and Guardian+Plus(TM).
The gross margin of $31,000 or 9% of sales for the three-month period
ended September 30, 1997 was lower than the prior year gross margin of $127,000
or 15% of sales, primarily due to lower sales levels, lower overhead absorption
on lower production levels, partially offset by lower production spending.
Sales and marketing expenses for the three-month period ended September
30, 1997 were $117,000, a decrease of 55%, compared to $259,000 for the
three-month period ended September 30, 1996. This decrease was due to reduced
staffing costs as a result of the cost containment program and reduced
advertising and sales aids expenses.
There were no research and development expenses in the discontinued
operations for either the three-month period ended September 30, 1997 or the
three-month period ended September 30, 1996. This was due to the Company's
suspension of efforts to design new products for the portable outdoor water
filtration market.
General and administrative expenses for the three-month period ended
September 30, 1997 were $69,000, a decrease of 59% as compared to $169,000 for
the three-month period ended September 30, 1996. Lower staffing costs in 1997
were partially offset by the costs associated with terminating contingent lease
obligations, and the allocation of excess manufacturing facilities space to
general and administrative expense.
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<PAGE> 14
Results of Operations for the Nine Months ended September 30, 1997 and 1996 -
Continuing Operations
Net loss from continuing operations decreased by $576,000 from a loss of
$863,000 for the nine months ended September 30, 1996 to a loss of $287,000 for
the nine months ending September 30, 1997 primarily as a result of the
suspension of the Company's efforts to develop a home use product and the
resulting sale of assets associated with such product in the second quarter of
1997. Sales and marketing expense decreased 69% from $178,000 to $56,000,
research and development expense decreased 59% from $582,000 to $237,000, and
other income increased 106% from $110,000 to $227,000 in the nine months ended
September 30, 1996 and 1997, respectively. General and administrative expense
increased 4% from $213,000 to $222,000 in the nine months ended September 30,
1996 and 1997, respectively.
Results of Operations for the Nine Months ended September 30, 1997 and 1996 -
Discontinued Operations
Loss on discontinued operations decreased 44% from $1,192,000 to $669,000
for the nine months ended September 30, 1996 and 1997, respectively, primarily
as a result of the cost containment program implemented in 1997. In addition, a
loss on disposal of discontinued operations of $273,000 was recorded in the nine
months ended September 30, 1997 primarily as a result of a $170,000 projected
fourth quarter loss on discontinued operations and $665,000 accrued severance
and management value appreciation bonus partially offset by a $372,000 estimated
gain on sale of assets and a $190,000 reversal of inventory obsolescence and bad
debt reserves as part of the planned Sale Transaction.
During the nine-month period ended September 30, 1997, the Company had
sales of $1,400,000, a decrease of 25%, compared to sales in the nine-month
period ended September 30, 1996 of $1,869,000. This is primarily due to
decreased sales of the Guardian partially offset by higher sales of the
lower-priced WalkAbout. The Company believes that overall sales of portable
water filtration products in the outdoor specialty sporting goods market
declined during the period as a result of the maturation of the 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, the Company cannot be assured 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 occuring during those quarters in
1996.
The gross margin of $310,000 or 22% of sales for the nine-month period
ended September 30, 1997 was lower than the prior year gross margin of $456,000
or 24% of sales, primarily due to the sales mix changing to sales of lower
margin WalkAbout units partially offset by lower production spending.
Sales and marketing expenses for the nine-month period ended September 30,
1997 were $413,000, a decrease of 57%, compared to $962,000 for the nine-month
period ended September 30, 1996. This decrease was due to reduced staffing costs
as a result of the cost containment program, the suspension of efforts to
manufacture and market a water filtration and purification product for the home
use market, and reduced advertising and sales aids expenses.
- 13 -
<PAGE> 15
There were no research and development expenses related to the portable
outdoor water filtration market for the nine-month period ended September 30,
1997, a decrease of $121,000 compared to the nine-month period ended
September 30, 1996. This decrease was due to the Company's suspension of efforts
to design new products for the portable outdoor water filtration market.
General and administrative expenses for the nine-month period ended
September 30, 1997 were $565,000, no increase as compared to $565,000 for the
nine-month period ended September 30, 1996. Lower staffing costs in 1997 were
offset by severance costs associated with the reduction in personnel, the costs
associated with terminating contingent lease obligations, and the allocation of
excess manufacturing facilities space to general and administrative expense.
Liquidity and Capital Resources
Cash and cash equivalents and short term investments decreased by 38% from
$1,921,000 at December 31, 1996 to $924,000 at September 30, 1997 primarily due
to funding continued operating losses in 1997.
Since its inception, the Company has been engaged primarily in product
development and has incurred operating losses resulting in an accumulated
deficit of approximately $11,000,000 as of September 30, 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 plans, designs and
technology associated with the home use product and realized net proceeds of
approximately $210,000.
Although the cost containment program enabled the Company to remain in
operation through 1997 as a result of streamlining its operations and reducing
its costs, the Company cannot be assured that its' 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(TM), the WalkAbout and their
accessories to cover expenses. If the Sale Transaction is not consummated, the
Company believes that cash and short term investments will be sufficient to meet
working capital requirements and support its existing operations through 1998.
However, if the Company incurs unexpected substantial expenses prior thereto,
the Company would be required to raise additional capital and the Company cannot
be assured that additional capital will be pursued or available on terms
acceptable to the Company when and if needed. Unless the performance of the
Company improves substantially, the Company cannot be assured that it will be
able to achieve profitability. The Company is assessing the effects of its cost
containment program, the profitability of its current business and various
strategic alternatives which may include a stock or asset acquisition, or a
merger, consolidation or similar transaction. Although the Company is
investigating these strategic alternatives, the Company cannot be assured that
any transaction will be consummated.
- 14 -
<PAGE> 16
PART II OTHER INFORMATION
Items 1-2 None
Item 3 None
Item 4 None
Item 5 None
Item 6 Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K - There were no reports filed on Form 8-K for the
quarter ended September 30, 1997.
(B) Exhibits
(10) Material Contracts
(v) Asset Purchase Agreement dated October 21, 1997 between
SweetWater, Inc. and Cascade Designs, Inc.
(27) Financial Data Schedule
(99) Unaudited Pro Forma Financial Information
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SweetWater, Inc.
(Registrant)
Dated: November 10, 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)
- 15 -
<PAGE> 17
EXHIBIT INDEX
Exhibit Exhibit Description Page(s) of this Form
Number
(10) Material Contracts
(v) Asset Purchase Agreement
dated October 21, 1997
between SweetWater, Inc. and
Cascade Designs, Inc.
(27) Financial Data Schedule
(99) Unaudited Pro Forma Financial Information
16
<PAGE> 1
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT
by and between
CASCADE DESIGNS, INC.
("Purchaser")
and
SWEETWATER, INC.
("Seller")
Dated October 21, 1997
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
CERTAIN DEFINITIONS..................................................... A-1
ARTICLE II
PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES.................. A-6
Section 2.1. Purchase and Sale of Assets; Assumption
of Liabilities.................................. A-6
Section 2.2. Purchase Price.................................. A-6
Section 2.3. Determination of Closing Asset Value............ A-6
Section 2.4. Allocation of Purchase Price.................... A-7
ARTICLE III
CLOSING AND RELATED MATTERS............................................. A-7
Section 3.1. Time and Place of Closing....................... A-7
Section 3.2. Purchaser's Deliveries at the Closing........... A-8
Section 3.3. Seller's Deliveries at the Closing.............. A-8
Section 3.4. Non-Assignable Instruments...................... A-9
Section 3.5. Interdependence................................. A-9
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER................................ A-9
Section 4.1. Corporate Organization and Good Standing........ A-9
Section 4.2. Authorization, Execution and Binding
Effect.......................................... A-10
Section 4.3. Noncontravention; Consents and Approvals........ A-10
Section 4.4. Compliance With Laws............................ A-10
Section 4.5. Financial Statements; Accounts
Receivable; Inventories........................ A-11
Section 4.6. Absence of Certain Changes...................... A-11
Section 4.7. Legal Proceedings............................... A-12
Section 4.8. Title to Properties and Related Matters......... A-12
Section 4.9. Taxes and Tax Returns........................... A-13
Section 4.10. Contracts....................................... A-13
Section 4.11. Patents, Trademarks, Trade Names, etc........... A-14
Section 4.12. Condition of Assets............................. A-14
Section 4.13. Environmental Matters........................... A-15
Section 4.14. Finders......................................... A-16
Section 4.15. Proxy Statement Information..................... A-16
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER............................. A-16
Section 5.1. Corporate Organization.......................... A-16
Section 5.2. Authorization, Execution and Binding
Effect.......................................... A-16
Section 5.3. Noncontravention; Consents and Approvals........ A-17
Section 5.4. Finders......................................... A-17
Section 5.5. Legal Proceedings............................... A-17
Section 5.6. Proxy Statement................................. A-18
(i)
<PAGE> 3
ARTICLE VI
COVENANTS............................................................... A-18
Section 6.1. Pre-Closing Covenants........................... A-18
Section 6.2. Post-Closing Covenants.......................... A-20
Section 6.3. Employees....................................... A-21
ARTICLE VII
CONDITIONS TO CLOSING................................................... A-21
Section 7.1. Conditions to Obligation of Purchaser to
Close........................................... A-21
Section 7.2. Conditions to Obligation of Seller to
Close. ........................................ A-22
ARTICLE VIII
SURVIVAL AND INDEMNIFICATION............................................ A-23
Section 8.1. Survival of Representations and
Warranties, etc................................. A-23
Section 8.2. Indemnification................................. A-23
Section 8.3. Procedure for Indemnification................... A-24
Section 8.4. Limitation on Seller's Indemnification.......... A-25
Section 8.5. Limitation on Purchaser's
Indemnification................................. A-25
Section 8.6. Sole Remedy..................................... A-26
ARTICLE IX
MISCELLANEOUS........................................................... A-26
Section 9.1. Headings; Grammatical Usage..................... A-26
Section 9.2. Notices......................................... A-26
Section 9.3. Assignment; Third Parties....................... A-27
Section 9.4. Expenses and Transfer Taxes..................... A-27
Section 9.5. Complete Agreement.............................. A-27
Section 9.6. Amendments and Waivers.......................... A-28
Section 9.7. Termination..................................... A-28
Section 9.8. Counterparts.................................... A-28
Section 9.9. Governing Law................................... A-28
Section 9.10. Severability.................................... A-29
Exhibit A Bill of Sale, Assignment and Assumption Agreement
Exhibit B License Agreement
Exhibit C Registration Transfer Agreement
Exhibit D Data Compensation Rights Transfer Agreement,
Exhibit E Non-Competition Agreements
Exhibit F Seller Officer's Certificate
Exhibit G Purchaser's Officer's Certificate
(ii)
<PAGE> 4
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated October 21, 1997, is entered into by
and between (1) CASCADE DESIGNS, INC., a Washington State corporation
("PURCHASER"), and (2) SWEETWATER, INC., a Delaware corporation ("SELLER").
W I T N E S S E T H:
WHEREAS, Seller is engaged in the business of manufacturing and
distributing portable water filtration and purification devices for outdoor use
(the "OUTDOOR BUSINESS"); and
WHEREAS, the parties desire that Purchaser purchase from Seller, and
that Seller sell to Purchaser, the assets of the Outdoor Business, and that
Purchaser assume certain liabilities of the Outdoor Business, upon the terms and
subject to the conditions hereinafter set forth; and
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, conditions, agreements, and undertakings
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Definitions
The following terms, as used herein, shall have the meanings set
forth below:
(a) "AFFILIATE" shall mean, with respect to any Person, any Person
directly or indirectly controlling, controlled by or under common control with
such other Person.
(b) "AGREEMENT" shall mean this Asset Purchase Agreement, including
the Exhibits and Schedules hereto.
(c) "ACQUIRED ASSETS" shall mean the following properties and assets
of Seller used or held for future use by Seller, in each case as the same shall
exist on the Closing Date, but not including the Excluded Assets:
(i) Seller's leasehold interests in the real property and
facilities located at 1140 Boston Avenue, Unit A, Longmont, Colorado
80501 (the "Facility"), together with all of Seller's interest in
and to all
<PAGE> 5
improvements thereon and all of the furniture, fixtures and
equipment owned by Seller and located in the Facility;
(ii) all tangible personal property including but not limited
to all machinery, equipment, raw materials, work in progress,
inventories, tools, and the office operating and other supplies,
such as desk sets, furniture, and computers, currently utilized by
Seller's twelve employees;
(iii) all of Seller's common law and statutory rights in, and
the goodwill associated with, the trademark and tradename
"SweetWater" and the Intellectual Property;
(iv) all trade accounts receivable of the Outdoor Business
attributable to payors with billing addresses in the United States
and in Canada;
(v) all of Seller's rights and claims under the Outdoor
Contracts and all claims, demands, judgments and rights of set-off
relating to the Outdoor Contracts;
(vi) all books, records and files of Seller relating to the
Outdoor Business;
(vii) to the extent transferable, all licenses, authorizations
and permits issued by any governmental or regulatory agency relating
exclusively to the Outdoor Business and all applications therefor
pending or filed,;
(viii) EPA Registration No. 67373-1 and data compensation
rights granted the Seller under the Federal Insecticide Fungicide
and Rodenticide Act;
(ix) to the extent transferable, all software licenses and
authorizations; and
(x) all other assets owned by Seller and used exclusively in
the Outdoor Business in the ordinary course of business as presently
conducted.
(d) "ASSUMED LIABILITIES" shall mean, collectively,:
(i) liabilities and obligations that arise out of Seller's
product warranties;
(ii) liabilities and obligations that arise out of or relate
to any event occurring after the Closing Date
A-2
<PAGE> 6
in connection with the operation of the Outdoor Business, the use or
ownership of any of the Acquired Assets or the assumption of the
Outdoor Contracts.
(e) "ENVIRONMENTAL LAWS" shall mean all federal, state and local
statutes, regulations, ordinances, and other laws relating to pollution or
protection of the environment, including laws relating to emissions, discharges,
releases, or threatened releases of pollutants, contaminants, chemicals, or
industrial, hazardous, or toxic materials or wastes into the environment
(including, without limitation, ambient air, surface water, ground water, land
surface, or subsurface strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, chemicals, or industrial, hazardous, or
toxic materials or wastes, or any regulation, rule, code, plan, order, decree,
judgment, injunction, notice, or demand letter issued, entered, promulgated, or
approved thereunder.
(f) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
(g) "EXCLUDED ASSETS", collectively, shall mean:
(i) all cash, marketable securities, insurance policies,
deposits and prepaid assets and expenses of Seller;
(ii) all rights and claims (including, without limitation,
rights under any insurance policies of Seller, refunds, Tax refunds
and claims thereto) of Seller with respect to the Excluded Assets or
the Excluded Liabilities;
(iii) any and all minute books, stock transfer records,
corporate seals, Tax Returns, and any books or records (including,
without limitation, payroll records and paid invoices) relating to
Tax Returns;
(iv) all rights of Seller under this Agreement and the
agreements and instruments delivered to Seller by Purchaser pursuant
to this Agreement;
(v) all finished goods not included in Seller's price list on
the date hereof; all components of goods not included in Seller's
price list on the date hereof; and all raw materials not used in
goods included in Seller's price list on the date hereof; and
(vi) all other assets of Seller listed on SCHEDULE 1.1(i)
hereto.
A-3
<PAGE> 7
(h) "EXCLUDED LIABILITIES" shall mean the following liabilities of
Seller:
(i) all accounts payable and liabilities of Seller in respect
of indebtedness for borrowed money;
(ii) all liabilities and obligations of Seller in respect of
Taxes attributable to taxable years or periods ending prior to the
Closing Date;
(iii) all liabilities of Seller for the payment of accrued
employee benefits or for severance benefits arising out of any
agreement between Seller and any of its employees or any other
person;
(iii) liabilities and obligations arising under Environmental
Laws or otherwise related to the environment as a result of Seller's
operation of the Outdoor Business prior to the Closing Date,
Seller's lease of the facilities located at 2505 Trade Center
Avenue, Longmont, Colorado 80503 and 4725 Nautilus Court South, #3,
Boulder, Colorado 80301 or as a result of any act of Seller's
employees prior to the Closing Date at the Facility;
(iv) all liabilities of Seller under this Agreement; and
(v) all other liabilities of Seller not specifically included
within the definition of Assumed Liabilities and arising out of
events occurring prior to the Closing Date.
(i) "GAAP" shall mean generally accepted accounting principles,
applied on a basis consistent with past practice.
(j) "KNOWLEDGE" or "BEST KNOWLEDGE", with respect to Seller, shall
mean actual knowledge after due inquiry of Eric Reynolds, Patrick Thomas and
Jerry Cogdill; with respect to Purchaser, shall mean actual knowledge after due
inquiry of Lee Fromson and John Burroughs.
(k) "LICENSE" shall mean a royalty-free, exclusive, worldwide,
irrevocable and transferrable license from Purchaser to Seller as set forth in
the form of License Agreement attached hereto as Exhibit B.
(l) "MATERIAL ADVERSE EFFECT" shall mean, with respect to any
Person, any change(s), effect(s), circumstance(s) or condition(s) that,
individually or in the aggregate, are or may reasonably be expected to be
materially adverse to (i) the assets, business, operations, income or condition
(financial or
A-4
<PAGE> 8
otherwise) of such Person or such Person and its Affiliates taken as a whole, or
the transactions contemplated by this Agreement or (ii) the ability of such
Person to perform its obligations under this Agreement.
(m) "PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, public benefit corporation
or governmental entity (or any department, agency or political subdivision
thereof).
(n) "SEC" shall mean the United States Securities and Exchange
Commission.
(o) "TAXES" shall mean any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
(p) "TAX RETURN" shall mean any return, declaration, report, claim
for refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
(q) "TRANSFER TAXES" shall mean all sales, use, value added,
transfer, and similar taxes or fees imposed by any governmental entity in
connection with the transfers carried out pursuant to this Agreement.
The following additional terms are defined in the Sections of this
Agreement set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
"BASKET AMOUNT" 8.4
"CAP AMOUNT" 8.4
"CLOSING" 3.1
"CLOSING ASSET VALUE" 2.3
"CLOSING DATE" 3.1
"CONTROL" 8.3
"FACILITY" 1.1(c)
"ENCUMBRANCES" 4.8
"INDEMNIFIABLE LOSSES" 8.2
"INDEMNIFYING PARTY" 8.3
"INDEMNITEE" 8.3
</TABLE>
A-5
<PAGE> 9
<TABLE>
<S> <C>
"INTELLECTUAL PROPERTY" 4.11
"OUTDOOR BUSINESS" Recitals
"OUTDOOR CONTRACTS" 4.10
"PERMISSIBLE EXCEPTIONS" 4.8
"PROXY STATEMENT" 6.1
"PURCHASE PRICE" 2.2
"PURCHASER" Preamble
"RCRA" 4.13
"SELLER" Preamble
"STOCKHOLDER PROPOSALS" 6.1
"SUPERFUND" 4.13
"THIRD PARTY CLAIM" 8.3
</TABLE>
ARTICLE II
PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES
Section 2.1. Purchase and Sale of Assets; Assumption of
Liabilities
(a) Upon the terms and subject to the conditions hereof, at the
Closing, (i) Seller shall sell, convey, assign, transfer, and deliver to
Purchaser and Purchaser's successors and assigns forever, all of the Acquired
Assets, free and clear of all Encumbrances other than Permissible Exceptions,
and (ii) Purchaser shall purchase, acquire and accept all of the Acquired
Assets, assume the Assumed Liabilities and execute and deliver the License.
(b) Purchaser shall not assume any of the Excluded Liabilities, and
Seller shall and does hereby retain responsibility for the Excluded Liabilities.
Section 2.2. Purchase Price
The aggregate purchase price for the Acquired Assets shall be equal
to the Closing Asset Value plus $300,000 (the "PURCHASE PRICE"), and shall be
payable at the Closing by Purchaser to Seller by a bank or certified check or by
wire transfer on the Closing Date to an account or accounts in the United States
which is designated in writing by Seller not later than three business days
prior to the Closing Date.
Section 2.3. Determination of Closing Asset Value
(a) To calculate the Closing Asset Value, a physical count of all
inventory shall be conducted by Seller and Purchaser prior to and as close as
practicable to the Closing Date and in no event later than the second business
day after Seller's stockholder meeting.
A-6
<PAGE> 10
(b) The "CLOSING ASSET VALUE" shall be an amount equal to the sum
of: (i) $294,000, which is the determined value for all equipment included in
the Acquired Assets, plus (ii) an amount equal to the actual cost incurred by
Seller in the purchase and installation of any fixed assets installed in the
Facility after the date hereof by Seller, which amount shall not exceed $20,000,
plus (iii) an amount equal to the Inventory Value, plus (iv) an amount equal to
the sum of all accounts receivable attributable to payors with billing addresses
in the United States and in Canada, as determined by Seller's accounts
receivable aging report as of the close of business on the day preceding the
Closing Date, discounted to the extent of 0.3%, plus (v) an amount equal to the
sum of the security deposits, prepaid items and discretionary expenditures set
forth on Schedule 2.3 hereof. For purposes hereof, the "Inventory Value" shall
be determined by multiplying the actual inventory (as determined in accordance
with Section 2.3(b) above) by the respective values for such inventory as set
forth in the 1997 standard cost inventory valuation report delivered by Seller
to Purchaser on September 18, 1997. The calculation of Closing Asset Value shall
be set forth in a statement to be signed by Seller and Purchaser at the Closing
which statement shall be final and binding upon both parties for all purposes.
Section 2.4. Allocation of Purchase Price
Purchaser and Seller agree to allocate the Purchase Price (and all
other capitalizable costs) among the Acquired Assets for all purposes (including
tax purposes) in accordance with a mutually acceptable allocation schedule to be
delivered at the Closing. Purchaser and Seller shall each timely file, or cause
to be filed, an IRS Form 8594 pursuant to the requirements of Internal Revenue
Code Section 1060 and the regulations thereunder reflecting such allocation.
ARTICLE III
CLOSING AND RELATED MATTERS
Section 3.1. Time and Place of Closing
The closing of the transactions contemplated by this Agreement (the
"CLOSING") shall take place at the offices of Zimet, Haines, Friedman & Kaplan,
460 Park Avenue, New York, New York 10022, at 10:00 a.m., local time, on
__________, 1997 (the "CLOSING DATE") or, if later, on the fifth business day
following the date of Seller's stockholder meeting at which approval of the
Stockholder Proposals is obtained. Purchaser shall not be required to have a
representative present at the Closing.
A-7
<PAGE> 11
Section 3.2. Purchaser's Deliveries at the Closing
At the Closing, Purchaser shall deliver to Seller:
(a) the Purchase Price;
(b) a copy of the Bill of Sale, Assignment and Assumption
Agreement substantially in the form of EXHIBIT A hereto, duly
executed by Purchaser;
(c) a duly executed copy of the License, in the form of
EXHIBIT B hereto;
(d) the officer's certificate required under Section 7.2(d);
(e) the Closing Asset Value statement required under Section
2.3 and the Allocation Schedule required under Section 2.4; and
(f) the Registration Transfer Agreement and the Data
Compensation Rights Transfer Agreement, substantially in the forms
of EXHIBIT C and EXHIBIT D hereto, duly executed by Purchaser.
Section 3.3. Seller's Deliveries at the Closing
At the Closing, Seller shall deliver to Purchaser:
(a) a copy of the Bill of Sale, Assignment and Assumption
Agreement substantially in the form of EXHIBIT A hereto, duly
executed by Seller;
(b) all other documents of title, deeds, endorsements,
assignments and other instruments as are reasonably necessary to
vest in Purchaser good and valid title to the Acquired Assets;
(c) the consent of the landlord under the lease to the
Facility described on SCHEDULE 4.3 hereto;
(d) the certificate required under Section 7.1(d);
(e) Non-Competition Agreements, in the form attached hereto as
EXHIBIT E, executed by Messrs. Reynolds and Cogdill;
(f) the Closing Asset Value statement required under Section
2.3 and the Allocation Schedule required under Section 2.4; and
A-8
<PAGE> 12
(g) the Registration Transfer Agreement and the Data
Compensation Rights Transfer Agreement, substantially in the form of
EXHIBIT C and EXHIBIT D hereto, duly executed by Seller.
Section 3.4. Non-Assignable Instruments
Nothing in this Agreement shall be construed as an attempt or
agreement to assign (i) any Outdoor Contract which is nonassignable without the
consent of the other party or parties thereto unless such consent shall have
been given, or (ii) any Outdoor Contract or claim as to which all the remedies
for the enforcement thereof enjoyed by Seller would not pass to Purchaser as an
incident of the assignments provided for by this Agreement. Seller shall
cooperate with Purchaser to obtain the consents of any other party required in
connection with the transfer of any Outdoor Contract requiring such consent and,
to the extent reasonably practicable, shall provide Purchaser with all of the
benefits enjoyed by Seller under any such Outdoor Contract until consent to the
assignment thereof is obtained.
Section 3.5. Interdependence
The transfers and deliveries described in this Article III to take
place at the Closing are mutually interdependent and regarded as occurring
simultaneously as of the close of business on the Closing Date; and, unless
waived by both Purchaser and Seller, no such transfer or delivery shall become
effective unless and until all other transfers and deliveries provided for in
this Article III have also been consummated.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser as follows:
Section 4.1. Corporate Organization and Good Standing
Seller is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware and is qualified to do
business and is in good standing as a foreign corporation in such jurisdictions
where the nature of its business or properties makes such qualification
necessary, except where the failure to so qualify would not have a Material
Adverse Effect on Seller. Seller has all requisite corporate power and authority
and all material governmental licenses, permits, consents and approvals required
to own, operate, and lease its properties and to carry on its businesses as now
being conducted. Seller has heretofore delivered to Purchaser complete and
correct copies of its Certificate of Incorporation and By-
A-9
<PAGE> 13
Laws, each as amended and in effect on the date hereof. Seller has no
subsidiaries.
Section 4.2. Authorization, Execution and Binding Effect
Subject to the approval of the Stockholder Proposals in accordance
with the requirements of the Exchange Act and the Delaware General Corporation
Law, (a) the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Seller; and (b) this Agreement has been duly
executed and delivered by Seller and constitutes the valid and binding agreement
of Seller, enforceable against Seller in accordance with its terms, except to
the extent that enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization, or other similar laws affecting creditors' rights
generally and by general principles of equity.
Section 4.3. Noncontravention; Consents and Approvals
Subject to the approval of the Stockholder Proposals in accordance
with the requirements of the Exchange Act and the Delaware General Corporation
Law, neither the execution and delivery by Seller of this Agreement, nor the
consummation by Seller of the transactions contemplated hereby, will (a) violate
or conflict with any provision of the certificate of incorporation or by-laws of
Seller, (b) result in a violation of any order, decree, judgment, law, rule, or
regulation of any court or governmental authority, applicable to Seller, (c)
result in the breach of, or give rise to a right of termination, cancellation or
acceleration of any right or obligation of Seller under, any note, bond,
mortgage, indenture, deed of trust, license, franchise, contract, agreement, or
other instrument or commitment or obligation of Seller which breach,
termination, cancellation, or acceleration would have a Material Adverse Effect
on Seller, or (d) require any consent, approval, or authorization of, or notice
to, or declaration, filing, or registration with, any governmental or regulatory
authority or any other Person, except for such consents, approvals,
authorizations, notices, declarations, filings or registrations which have been
obtained, which are set forth on SCHEDULE 4.3, or the failure of which to obtain
would not have a Material Adverse Effect on the Outdoor Business.
Section 4.4. Compliance With Laws
To the best knowledge of Seller, Seller is in compliance with all
laws, regulations, decrees and orders applicable to the Outdoor Business, except
where noncompliance would not have a Material Adverse Effect on the Outdoor
Business. Seller has duly filed all reports and returns required to be filed by
it with governmental authorities with respect to the
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Outdoor Business and has obtained all governmental permits and licenses and
other governmental consents which are required in connection with the Outdoor
Business, except for such reports, returns, permits, licenses, and consents
which, if not filed or obtained, would not, individually or in the aggregate,
have a Material Adverse Effect on the Outdoor Business. All of such permits,
licenses and consents are in full force and effect, and no proceedings for the
suspension or cancellation of any of them is pending or, to the best knowledge
of Seller, threatened.
Section 4.5. Financial Statements; Accounts Receivable; Inventories
(a) Seller has heretofore delivered to Purchaser copies of its
audited financial statements for the year ended December 31, 1996, and its
unaudited financial statements for the quarter ended June 30, 1997. The
financial statements have been prepared in conformity with GAAP and, taken as a
whole, present fairly the financial position of the Outdoor Business as of the
respective dates of such financial statements and the results of operations of
the Outdoor Business for the periods covered by such Financial Statements.
(b) All accounts receivable reflected on the Seller's accounts
receivable aging report dated as of the date hereof have arisen from bona fide
transactions in the ordinary course of the Outdoor Business's business and have
been collected and, to the best knowledge of Seller, are collectable (subject to
a reserve for bad debts amounting to not more than 0.3% of such accounts
receivable), in the ordinary course of business in the recorded amounts thereon
without valid set-off or counterclaim.
(c) The inventories of the Outdoor Business included in the Acquired
Assets consist only of material in merchantable condition and saleable or usable
in the ordinary course of business.
Section 4.6. Absence of Certain Changes
Except as contemplated by this Agreement or as described on SCHEDULE
4.6 hereto, since June 30, 1997, there has been no Material Adverse Change in
the condition, financial or otherwise, of Seller. Without limiting the
generality of the foregoing, since June 30, 1997 Seller has not, with respect to
the Outdoor Business or the Acquired Assets:
(i) paid, discharged, or satisfied any claim, liability, or
obligation (absolute, accrued, contingent, or otherwise) relating to
the Outdoor Business, other than the payment, discharge, or
satisfaction of claims, liabilities and obligations, in the ordinary
course of business and consistent with
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past practice, and other than payments made in connection with
the termination of Seller's lease for 2505 Trade Center
Avenue, Longmont, Colorado;
(ii) disposed of or permitted to lapse any rights
to the use of any Intellectual Property;
(iii) sold, transferred, or otherwise disposed of
any of the properties or assets of Seller used by the Outdoor
Business, except for the sale of inventory in the ordinary
course of business, and except for the sale of any Excluded
Asset;
(iv) waived or released any rights of material
value relating to the Outdoor Business;
(v) entered into any agreement, whether in
writing or otherwise, to do any of the foregoing; or
(vi) suffered any casualty loss or damage
(whether or not covered by insurance) which affects in any
material respect the Acquired Assets or the conduct of the
Outdoor Business.
Section 4.7. Legal Proceedings
Except as described on SCHEDULE 4.7 hereto, there are no
material claims, actions, suits, inquiries, investigations, or proceedings
pending or, to the best knowledge of Seller, threatened in writing or imminent
before or by any court or governmental body, (i) against Seller relating to the
Acquired Assets or the Outdoor Business, (ii) which question or challenge the
validity of this Agreement or any action taken or to be taken by Seller pursuant
hereto, or (iii) which constitute requests for environmental clean-up actions,
cost reimbursement or contribution by any Federal, state or local agencies or
any private parties with respect to any property leased by Seller and used by
the Outdoor Business. Seller is not subject to any judgment, order or decree, or
to any governmental restriction (other than those applicable generally to
companies engaged in businesses similar to the Outdoor Business) which is likely
to have a Material Adverse Effect on the Outdoor Business.
Section 4.8. Title to Properties and Related Matters
(a) Seller has, and pursuant to this Agreement will convey,
sell, transfer, assign and deliver to Purchaser, good and valid title to all of
the Acquired Assets, except that with respect to Acquired Assets leased by
Seller, Seller has and will convey, sell, transfer, assign and deliver to
Purchaser valid and enforceable leasehold interests therein. Such Acquired
Assets and properties and title thereto are free and clear of all title
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defects and all liens, mortgages, pledges, claims, charges, security interests,
and other encumbrances ("ENCUMBRANCES") except Encumbrances which are disclosed
on SCHEDULE 4.8(a) hereto or which do not, individually or in the aggregate,
impair the current use, occupancy, or value, or the validity of title, of the
property subject thereto (such exceptions being referred to herein as the
"PERMISSIBLE EXCEPTIONS").
(b) Seller has delivered to Purchaser a correct and complete
copy of the lease for the Facility, which lease is legal, valid, binding,
enforceable and is in full force and effect and constitutes the only lease for
real property held by Seller. There are no disputes, oral agreements or
forbearance in effect as to the lease for the Facility and to the best knowledge
of Seller neither party to the lease is in breach or default of the terms
thereof. All rental and other amounts required to be paid under the Lease have
been duly paid.
Section 4.9. Taxes and Tax Returns
Seller has filed all Tax Returns that it was required to file,
and has paid all Taxes shown thereon as owing, except where the failure to file
Tax Returns or to pay Taxes would not have a Material Adverse Effect on the
Outdoor Business. There is no dispute or claim concerning any Taxes either
claimed or raised by any authority in writing.
Section 4.10. Contracts
(a) SCHEDULE 4.10(a) hereto lists all written contracts,
agreements, instruments, arrangements, and leases to which Seller is a party or
is otherwise bound and which relate to the Outdoor Business or the Acquired
Assets, other than any contract which is an Excluded Asset and other than
immaterial contracts (which for purposes of this Agreement shall mean contracts
which (i) do not provide for aggregate payments by or to Seller in excess of
$5,000 and (ii) are not otherwise material to the Outdoor Business)
(collectively, including such immaterial contracts, "OUTDOOR CONTRACTS")). True
and correct copies of all Outdoor Contracts listed on SCHEDULE 4.10(a) have
heretofore been delivered to Purchaser.
(b) Except as set forth and described (including a reference
in each case to the relevant clause of this Section 4.10(b)) on SCHEDULE 4.10(b)
hereto:
(i) to the best knowledge of Seller, all Outdoor
Contracts are valid and in full force and effect and
constitute the legal, valid and binding obligations of Seller
and the other parties thereto;
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(ii) there are no existing material defaults by
Seller under any Outdoor Contract, and to the best knowledge
of Seller, no event, act or omission has occurred which (with
or without notice, lapse of time or the happening or
occurrence of any other event) would result in a material
default thereunder;
(iii) no other party to any Outdoor Contract has
asserted the right, and to the best knowledge of Seller, no
basis exists for the assertion of any right, to renegotiate
the terms or conditions of any such Outdoor Contract; and
(iv) all Outdoor Contracts are assignable by Seller
in connection with the transactions contemplated by this
Agreement, EXCEPT AS NOTED ON SCHEDULE 4.3 HERETO.
Section 4.11. Patents, Trademarks, Trade Names, etc.
(a) SCHEDULE 4.11(a) hereto lists all material patents, patent
applications, common law and registered trademarks, service marks and trade
names, and pending registrations thereof currently owned by or licensed to
Seller and used by or in the Outdoor Business. All of the foregoing, together
with all other trade secrets, copyrights, know-how, processes, and proprietary
information owned by Seller and used by the Outdoor Business which are entitled
to legal protection, are sometimes referred to collectively herein as the
"INTELLECTUAL PROPERTY."
(b) Except as described on SCHEDULE 4.11(b) hereto, Seller has
not received any notice that its current use of any of the Intellectual Property
constitutes infringement of the intellectual property of any third party, and to
the best knowledge of Seller, such current use of the Intellectual Property does
not constitute infringement of the intellectual property of any third party.
Except as described on SCHEDULE 4.11(b), Seller has no knowledge that any third
party is infringing any of the Intellectual Property and none of the
Intellectual Property is subject to any outstanding litigation, administrative
proceeding, order, decree, judgment, stipulation, injunction, or settlement
agreement restricting or seeking to restrict the use thereof by Seller, or
challenging the validity or registration of any of the Intellectual Property.
Section 4.12. Condition of Assets
The material improvements, fixtures and appurtenances on or to
the Facility and the material tangible property included in the Acquired Assets,
or the subject of any lease included in
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the Acquired Assets, are in good operating condition, subject to ordinary wear
and tear.
Section 4.13. Environmental Matters
(a) SCHEDULE 4.13(a) hereto lists all permits, licenses and
other authorizations which have been obtained by Seller and which are required
to be held or obtained by Seller in connection with the Outdoor Business under
all Environmental Laws, except for such permits, licenses and other
authorizations the failure of which to obtain would not, individually or in the
aggregate, have a Material Adverse Effect on the Outdoor Business. Seller is in
substantial compliance with all terms and conditions of such permits, licenses
and authorizations, and to the best knowledge of Seller, with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in the Environmental Laws and
applicable to the Outdoor Business.
(b) To the best knowledge of Seller, there is no pending or,
threatened civil or criminal litigation, notice of violation, or administrative
proceeding relating in any way to the Environmental Laws (including notices,
demand letters, or claims under the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"), the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("SUPERFUND"), and similar
state or local laws) involving the Outdoor Business or any of the Acquired
Assets. To the best knowledge of Seller, there have not been and there are not
any events, conditions, circumstances, activities, practices, incidents,
actions, or plans which may interfere with or prevent continued compliance, or
which may give rise to any common law or legal liability, or otherwise form the
basis of any claim, action, suit, proceeding, hearing, study, or investigation
against Seller relating to the Outdoor Business or the Acquired Assets, based on
or related to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling, or the emission, discharge, release,
or threatened release into the environment, of any pollutant, contaminant,
chemical, industrial, hazardous, or toxic material or waste, including, without
limitation, any liability arising, or any claim, action, demand, suit,
proceeding, hearing, study, or investigation which may be brought, under RCRA,
Superfund, or similar state or local laws.
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Section 4.14. Finders
Neither Seller nor any of its Affiliates has paid or become
obligated to pay any fee or commission to any broker, finder, or intermediary
for or on account of the transactions provided for in this Agreement, other than
Dillon, Read & Co. Inc. Seller agrees to indemnify Purchaser against, and to
hold Purchaser harmless from, any claims for brokerage or similar commission or
other compensation which may be made against Purchaser by any third party in
connection with the transactions contemplated hereby, which claim is based upon
such third party having acted as broker, finder, investment banker, or in any
similar capacity on behalf of Seller or any of its Affiliates.
Section 4.15. Proxy Statement Information
Seller's Proxy Statement will not, at the respective time such
Proxy Statement is filed with the SEC or mailed to the Seller's stockholders,
and on the date of the Seller's stockholders' meeting, contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary in order (i) to make the statement therein, in light
of the circumstances under which they were made, not misleading or (ii) to
correct any statement in any earlier communication with respect to the
solicitation of proxies or otherwise. The representations and warranties
contained in this Section 4.15 will not apply to statements included in or
omissions from the Seller's Proxy Statement based upon information furnished to
Seller by Purchaser specifically for use therein.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
Section 5.1. Corporate Organization
Purchaser is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Washington. Purchaser has
all requisite corporate power and authority to own, operate, and lease its
properties and to carry on its business as now being conducted.
Section 5.2. Authorization, Execution and Binding Effect
The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Purchaser. This Agreement has
been duly executed and delivered by Purchaser and constitutes the valid and
binding agreement of
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Purchaser, enforceable against Purchaser in accordance with its terms, except to
the extent that enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization, or other similar laws affecting creditors' rights
generally and by general principles of equity.
Section 5.3. Noncontravention; Consents and Approvals
Neither the execution and delivery by Purchaser of this
Agreement, nor the consummation by Purchaser of the transactions contemplated
hereby, nor compliance by Purchaser with any of the provisions hereof will (i)
violate or conflict with any provision of the certificate of incorporation or
by-laws of Purchaser, (ii) result in a violation of any order, writ, injunction,
decree, judgment, ruling, law, rule, or regulation of any court or governmental
authority, applicable to Purchaser, (iii) result in the breach of any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit, contract,
agreement, or other instrument or commitment or obligation of Purchaser which
breach would have a Material Adverse Effect on Purchaser, (iv) require any
consent, approval, or authorization of, or notice to, or declaration, filing, or
registration with, any governmental or regulatory authority or any other Person,
except for such consents, approvals, authorizations, notices, declarations,
filings or registrations which have been obtained, which are set forth on
SCHEDULE 5.3, or the failure of which to obtain would not have a Material
Adverse Effect on Purchaser.
Section 5.4. Finders
Neither Purchaser nor any of its Affiliates has paid or become
obligated to pay any fee or commission to any broker, finder, or intermediary,
for or on account of the transactions provided for in this Agreement. Purchaser
agrees to indemnify Seller against, and to hold Seller harmless from, any claims
for brokerage or similar commission or other compensation which may be made
against Seller by any third party in connection with the transactions
contemplated hereby, which claim is based upon such third party having acted as
broker, finder, investment banker, or in any similar capacity on behalf of
Purchaser or any of its Affiliates.
Section 5.5. Legal Proceedings
There are no material claims, actions, suits, inquiries,
investigations or proceeding pending, or to the best knowledge of Purchaser,
threatened in writing or imminent, against Purchaser before or by any court or
governmental body which question or challenge the validity of this Agreement or
any action taken or to be taken by Purchaser pursuant hereto.
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Section 5.6. Proxy Statement
None of the information with respect to Purchaser that will be
included in the Seller's Proxy Statement that is based upon and consistent with
information provided to Seller by Purchaser specifically for use therein will,
at the respective times, such Proxy Statement is filed with the SEC or mailed to
the Seller's stockholders or on the date of the Seller's stockholders' meeting
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary in order (i) to make the statement
therein, in light of the circumstances under which they were made, not
misleading or (ii) to correct any statement in any earlier communication with
respect to the solicitation of proxies or otherwise.
ARTICLE VI
COVENANTS
Section 6.1. Pre-Closing Covenants
(a) General. Prior to the Closing, Purchaser and Seller will
each use all reasonable efforts to take all action and to do all things
necessary in order to consummate and make effective the transactions
contemplated by this Agreement.
(b) Operation of Business. Prior to the Closing, Seller will
conduct the Outdoor Business in the ordinary course, consistent with past
practice, and will use all reasonable efforts to maintain its relationships with
lessors, suppliers, vendors, customers and employees. Without limiting the
foregoing, Seller shall not (i) become a party to any plan, contract, guarantee,
agreement or arrangement that would frustrate the purpose of, or would
materially adversely affect Purchaser's rights under, this Agreement; (ii) sell,
mortgage, pledge or encumber or agree to sell, mortgage, pledge or encumber any
of the Acquired Assets, except that Seller may sell its inventory in the
ordinary course of business; or (iii) purchase, acquire, transfer, or convey,
any material Acquired Assets or enter into any transaction or make or enter into
any contract or commitment except in the ordinary course of business. Prior to
the Closing, Seller will transfer any inventory currently located in Canada to
Seller's Facility in Longmont, Colorado.
(c) Full Access. Prior to the Closing, Seller will permit
representatives of Purchaser to have full access at all reasonable times, and in
a manner so as not to interfere with its normal business operations, to all
premises, properties, personnel, books, records, contracts, and documents of or
pertaining to the Outdoor Business. Purchaser and its Affiliates
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and representatives will treat and hold such information it receives from Seller
as confidential, will not use any of the information except in connection with
this Agreement, and will not disclose such information to any third party until
the transaction contemplated by this Agreement is consummated. If this Agreement
is terminated for any reason whatsoever and Seller sends a written request for
the return of such information within thirty (30) days of such termination,
Purchaser will return to Seller all tangible embodiments (and all copies) of the
information which are in its possession.
(d) Exclusivity. Seller will not solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of the Acquired Assets or any substantial portion thereof;
provided, however, that Seller and its directors and officers may furnish
information to any Person who, after the date hereof, submits a written offer
for the stock or assets of Seller, if the Board of Directors of Seller
determines, upon advice of counsel to such effect, that the fulfillment of the
fiduciary duties of the Board of Directors requires that Seller furnish such
information.
(e) Seller's Stockholder Meeting. (i) As soon as reasonably
practicable after the date hereof, Seller shall prepare for filing and file with
the SEC a proxy statement (as amended or supplemented from time to time, the
"Proxy Statement") in preliminary form to approve the sale of the Acquired
Assets and the Outdoor Business on the terms and conditions set forth herein, a
change of Seller's corporate name and such other matters as may be necessary or
desirable to include therein (collectively, the "STOCKHOLDER PROPOSALS"). Seller
shall respond to comments and requests from the SEC, use its best efforts to
promptly respond to any comments received from the SEC, file such document in
definitive form with the SEC, mail such document to its stockholders entitled
thereto, and solicit proxies with respect thereto to obtain the Stockholder
Approval. Seller shall promptly deliver to Purchaser copies of any comments or
requests with respect to the Proxy Statement that it receives from the SEC.
Purchaser and Seller will consult and cooperate with each other in preparing and
filing such document and responding to such comments and requests, and Seller
shall not file with the SEC or mail to its stockholders the Proxy Statement or
any amendment or supplement thereto, or respond to such comments or requests,
without the prior approval of Purchaser, which approval will not be unreasonably
withheld. All documents that Seller is responsible for filing with the SEC in
connection with the transaction contemplated herein will comply as to form and
substance in all material respects with the applicable requirements of the
Exchange Act and the rules and regulations thereunder.
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(ii) Seller shall use all reasonable efforts to call a meeting
of the holders of its Common Stock as promptly as practicable after the date
hereof, for the purpose of obtaining approval of the Stockholder Proposals and
shall use all reasonable efforts to hold such meeting. Seller will use its best
efforts to obtain necessary stockholder approval of the Stockholder Proposals
and will otherwise comply with all legal requirements applicable to the
stockholders meeting. If the Stockholder Proposals are approved, prior to the
Closing, Seller shall file a Certificate of Amendment to its Certificate of
Incorporation to change its corporate name.
(iii) Subject to the accuracy of the representations and
warranties of Purchaser set forth in Article V, Seller will, through its Board
of Directors, recommend to the holders of its Common Stock approval of this
Agreement and the transaction contemplated hereby.
(f) Publicity. Purchaser and Seller agree that, from the date
hereof through the Closing Date, no public release or announcement concerning
the transaction contemplated hereby shall be issued by either party without the
prior consent of the other party (which consent shall not be unreasonably
withheld), except as such release or announcement may, in the opinion of counsel
to the disclosing party, be required by applicable law.
Section 6.2. Post-Closing Covenants.
(a) General. In case at any time after the Closing any further
action is necessary to carry out the purposes of this Agreement, Purchaser and
Seller agree to take such further action (including the execution and delivery
of such further instruments and documents) as the other party reasonably may
request, at the sole cost and expense of the requesting party (unless the
requesting Party is entitled to indemnification therefor under Article VIII
below).
(b) Covenant Not to Compete. For a period of three years from
and after the Closing Date, Seller will not engage directly or indirectly in the
business of manufacturing, distributing or selling portable water filtration and
purification devices in the outdoor recreational and the travel-related markets;
provided, however, that nothing contained herein shall prohibit Seller from
owning less than 5% of the outstanding stock of any publicly traded corporation.
If the final judgment of a court of competent jurisdiction declares that any
term or provision of this Section 6.2(b) is invalid or unenforceable, Purchaser
and Seller agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or area of
the term or provision, to delete specific words or phrases, or to replace any
invalid or unenforceable term or provision with a term or
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provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
(c) Access. For a period of one year after the Closing, or for
such shorter period as Purchaser may elect, Seller's paid invoice records shall
be stored at the Facility and both Purchaser and Seller shall have access
thereto. At the expiration of such period, Seller shall notify Purchaser of the
location to which such records shall be forwarded and Purchaser shall forward
such records to such address, at Seller's expense. After the Closing, upon
reasonable written notice, Purchaser and Seller each agree to furnish or cause
to be furnished to the other party and its representatives, employees, counsel
and accountants reasonable access, during normal business hours, to such
additional information and additional records pertinent to the Outdoor Business
and assistance (relating to the Outdoor Business), as are reasonably necessary
for financial reporting, benefits administration and accounting matters, the
preparation and filing of any Tax Returns or other filings required to be made
with any governmental entity or the defense of any Tax claim or assessment or
other claim; provided, however, that such access shall not unreasonably disrupt
the normal operations of either Purchaser or Seller. Neither Purchaser nor
Seller shall destroy any books, records or files delivered or obtained, as the
case may be, without first offering to turn over possession thereof to the other
party by written notice least 30 days prior to the proposed date of such
disposition or destruction.
Section 6.3. Employees
Purchaser shall have the right, but not the obligation, to
offer employment to any of Seller's employees, at the salary levels and on other
terms and conditions to be determined in Purchaser's sole discretion.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1. Conditions to Obligation of Purchaser to Close.
The obligation of Purchaser to consummate the transactions to
be performed by it in connection with the Closing is subject to satisfaction of
the following conditions:
(a) the representations and warranties set forth in
Article 4 above shall be true and correct in all material
respects at and as of the Closing Date;
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(b) Seller shall have performed and complied with
all of its covenants hereunder in all material respects
to the Closing Date;
(c) there shall not be any injunction, judgment,
order, decree, ruling, or charge in effect prohibiting
consummation of any of the transactions contemplated by this
Agreement;
(d) Each of Messrs. Reynolds and Cogdill shall have
executed a Non-Competition Agreement in the form attached
hereto as EXHIBIT E;
(e) Seller shall have delivered to Purchaser a
certificate of Seller's chief executive officer or chief
financial officer in the form attached hereto as EXHIBIT F;
and
(f) the Stockholder Proposals shall have been
approved by the holders of a majority of Seller's outstanding
shares of Common Stock.
Section 7.2. Conditions to Obligation of Seller to Close.
The obligation of Seller to consummate the transactions to be
performed by it in connection with the Closing is subject to satisfaction of the
following conditions:
(a) the representations and warranties set forth in
Article 5 above shall be true and correct in all material
respects at and as of the Closing Date;
(b) Purchaser shall have performed and complied with
all of its covenants hereunder in all material respects up to
the Closing Date;
(c) there shall not be any injunction, judgment,
order, decree, ruling, or charge in effect prohibiting
consummation of any of the transactions contemplated by this
Agreement;
(d) Purchaser shall have delivered to Seller a
certificate of Purchaser's chief executive officer or chief
financial officer in the form attached hereto as EXHIBIT G;
and
(e) the Stockholder Proposals shall have been
approved by the holders of a majority of Seller's outstanding
shares of Common Stock.
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ARTICLE VIII
SURVIVAL AND INDEMNIFICATION
Section 8.1. Survival of Representations and Warranties, etc.
Except as otherwise expressly provided by this Agreement, all
representations and warranties, covenants, agreements and other undertakings of
the parties contained in this Agreement or in any writing delivered pursuant
hereto, shall survive the Closing and shall remain in full force and effect,
regardless of any investigation made by or on behalf of any party hereto, for a
period of one (1) year following the Closing Date; provided, however, that all
representations and warranties of Seller which relate to Taxes and title to the
Acquired Assets, shall survive until the expiration of all applicable statutes
of limitation; and provided further, that the expiration of any representation
or warranty shall not affect any claim made prior to the date of such
expiration.
Section 8.2. Indemnification
(a) Subject to the limitations set forth in this Article VIII,
Seller shall indemnify, defend, and hold harmless Purchaser and Purchaser's
Affiliates from and against any and all losses, liabilities, damages,
obligations, payments, costs and expenses (including reasonable attorneys' fees
incurred by Purchaser and Purchaser's Affiliates in connection therewith) of
Purchaser and Purchaser's Affiliates, arising out of or due to, any claim,
action or proceeding asserted by a person or entity who is not a party to this
Agreement (a "THIRD PARTY CLAIM") that arises out of, is due to or concerns,
directly or indirectly
(i) any inaccuracy in or breach of any of the
representations, warranties, covenants, agreements or
undertakings of Seller contained in this Agreement or in any
agreement, document or instrument executed and delivered
pursuant hereto or in connection herewith; or
(ii) any Excluded Liability.
(b) Subject to the limitations set forth in this Article VIII,
Purchaser shall indemnify, defend, and hold harmless Seller and Seller's
Affiliates from and against any and all losses, liabilities, damages,
obligations, payments, costs and expenses (including reasonable attorneys' fees
incurred by Seller and Seller's Affiliates in connection therewith) of Seller
and Seller's Affiliates, arising out of or due to Third Party Claim that arises
out of, is due to or concerns, directly or indirectly
(i) any inaccuracy in or breach of any of the
representations, warranties, covenants, agreements or
undertakings of Purchaser contained in this Agreement
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or in any agreement, document or instrument executed and
delivered pursuant hereto in connection herewith; or
(ii) any Assumed Liability.
(c) The matters to which the indemnification obligations of
Section 8.2(a) and 8.2(b) apply shall be referred to collectively as
"INDEMNIFIABLE LOSSES" and each shall be referred to as an "INDEMNIFIABLE LOSS."
The amount of any Indemnifiable Loss shall be net of any amounts actually
recovered by the indemnified party under insurance policies with respect to such
Indemnifiable Loss.
Section 8.3. Procedure for Indemnification
(a) If a party entitled to indemnification pursuant to Section
8.2 (the "INDEMNITEE") receives notice of the assertion of a Third Party Claim
with respect to which another party to this Agreement (the "INDEMNIFYING PARTY")
is obligated to provide indemnification, the Indemnitee shall give the
Indemnifying Party notice thereof within thirty (30) days after becoming aware
of such Third Party Claim. Such notice shall describe the Third Party Claim in
reasonable detail, and shall indicate the amount (estimated if necessary) of the
Indemnifiable Loss that has been or may be sustained by the Indemnitee. With
respect to any Third Party Claim, the Indemnifying Party may elect to compromise
or defend, at such Indemnifying Party's own expense and by such Indemnifying
Party's own counsel, any Third Party Claim; provided, however, that without the
consent of the Indemnitee, which consent shall not unreasonably be withheld or
delayed, the Indemnifying Party shall not settle or compromise any claim unless
such settlement or compromise (i) is for money damages only, which damages are
paid solely by the Indemnifying Party, (ii) includes a release of the
Indemnitee, and (iii) does not involve an admission of liability or fault on the
part of the Indemnitee. If the Indemnifying Party elects to compromise or defend
such Third Party Claim, it shall within thirty (30) days of such election (or
sooner if the nature of the Third Party Claim so requires) notify the Indemnitee
of its intent to do so, and the Indemnitee shall cooperate, at the expense of
the Indemnifying Party, in the compromise of, or defense against, such Third
Party Claim. If the Indemnifying Party elects not to compromise or defend
against the Third Party Claim, or fails to notify the Indemnitee of its election
as herein provided, the Indemnitee may defend such Third Party Claim without
waiving its claim for indemnification hereunder; provided, however, that the
Indemnitee shall not settle or compromise any such claim without the consent of
the Indemnifying Party, which consent shall not unreasonably be withheld or
delayed. In any event, the Indemnitee and the Indemnifying Party may each
participate, at its own expense, in the defense of such Third Party claim, it
A-24
<PAGE> 28
being understood that the Indemnifying Party may, if it so elects, control such
defense. "CONTROL" of the defense, as used herein, includes, without limitation,
the selection of counsel and the determination of tactics and strategy
applicable to litigation and settlement, subject to the other provisions of this
Section 8.3. If the Indemnifying Party chooses to defend any claim, the
Indemnitee shall make available on a reasonable basis to the Indemnifying Party
any personnel or any books, records, or other documents within its control that
are necessary for such defense.
(b) Any claim for indemnity between the parties other than
with respect to a Third Party Claim shall be asserted by written notice given by
the Indemnitee to the Indemnifying Party, setting forth in reasonable detail the
basis for such claim. The Indemnifying Party shall have a period of 45 days
within which to respond thereto. If the Indemnifying Party does not respond
within such 45-day period, the Indemnifying Party shall be deemed to have
accepted responsibility to make payment, and shall have no further right to
contest the validity of such claim. If the Indemnifying Party does respond
within such 45-day period and rejects such claim in whole or in part, the
Indemnitee shall, subject to the limitations as to liability and otherwise as
set forth in this Article VIII, be free to pursue such remedies as may be
available to such party by applicable law.
Section 8.4. Limitation on Seller's Indemnification
The indemnification rights provided by this Article VIII shall
be subject to the following limitations:
(a) Purchaser and its Affiliates shall not be entitled to
assert any indemnification right or claim until such time as the aggregate
amount of such rights and claims exceeds Ten Thousand Dollars ($10,000) (the
"BASKET AMOUNT").
(b) At such time as Purchaser's and its Affiliates
indemnification rights and claims exceed, in the aggregate, the Basket Amount,
then Purchaser and its Affiliates may assert such rights and claims up to a
maximum of Five Hundred Thousand Dollars ($500,000) (the "CAP AMOUNT").
Section 8.5. Limitation on Purchaser's Indemnification
Seller and its Affiliates shall not be entitled to assert any
indemnification right or claim such time as the aggregate amount of such rights
and claims of Seller and its Affiliates exceeds the Basket Amount. At such time
as Seller's and its Affiliates' indemnification rights and claims exceed, in the
aggregate, the Basket Amount, then Seller and its Affiliates may assert such
rights and claims up to a maximum of the Cap Amount.
A-25
<PAGE> 29
Section 8.6. Sole Remedy
Except as otherwise expressly provided by this Agreement, the
indemnification provisions of this Article VIII shall from and after the Closing
be the sole remedy for indemnification for any Third Party Claims or for any
breach or alleged breach of any the representations, warranties or covenants
contained in this Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1. Headings; Grammatical Usage
The descriptive headings of the several Articles and Sections
of this Agreement are inserted for convenience only and do not constitute a part
of this Agreement. In construing this Agreement, feminine or neuter pronouns
shall be substituted for those masculine in form and vice versa, and plural
terms shall be substituted for singular terms and vice versa, in any place in
which the context so requires.
Section 9.2. Notices
Any notices or other communications required or permitted
hereunder shall be given in writing and shall be sufficient if delivered
personally or sent by certified or registered mail, postage prepaid, or by
reputable overnight carrier, addressed as follows:
If to Seller, to:
SweetWater, Inc.
1140 Boston Avenue, Unit A
Longmont, Colorado 80501
Attention: Eric M. Reynolds
with a copy to:
Zimet, Haines, Friedman & Kaplan
460 Park Avenue
New York, NY 10022
Attention: Isabel J. Wacker, Esq.
If to Purchaser, to:
Cascade Designs, Inc.
4000 First Avenue South
Seattle, Washington 98134
Attn: Lee Fromson
A-26
<PAGE> 30
with a copy to:
Davis Wright Tremaine
1501 Fourth Avenue -- Suite 2600
Seattle, Washington 98101
Attn: LaVerne Woods, Esq.
or to such other address as shall be furnished in writing by such party, and any
such notice or communication shall be effective and be deemed to have been given
when so personally delivered, or if mailed, three days after mailing, or if sent
by overnight courier, on the following business day; provided, that any notice
or communications changing any of the addresses set forth above shall be
effective and deemed given only upon its receipt.
Section 9.3. Assignment; Third Parties
This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interest, or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties. Neither
this Agreement nor any other agreement contemplated hereby shall be deemed to
confer upon any Person not a party hereto or thereto any rights or remedies.
Section 9.4. Expenses and Transfer Taxes
(a) Except as provided to the contrary in paragraph (b) of
this Section, all fees and expenses incurred by Seller in connection with this
Agreement shall be borne by Seller, and all fees and expenses incurred by
Purchaser in connection with this Agreement shall be borne by Purchaser.
(b) Purchaser shall pay all Transfer Taxes, which may be
payable in connection with the transactions contemplated by this Agreement.
Section 9.5. Complete Agreement
This Agreement, which includes each of the Exhibits and
Schedules hereto, contains the entire understanding of the parties with respect
to the transactions contemplated hereby and supersedes all prior arrangements or
understandings with respect thereto (including without limitation the Letter of
Intent dated September 9, 1997 by Purchaser and executed by Seller on September
12, 1997). There are no restrictions, agreements, promises, warranties,
covenants, or undertakings other than those expressly set forth herein or
therein.
A-27
<PAGE> 31
Section 9.6. Amendments and Waivers
This Agreement may be amended or modified, and the terms
hereof may be waived, only by a written instrument signed by the parties hereto
or, in the case of a waiver, by the party waiving compliance. No delay on the
part of any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
Section 9.7. Termination.
Anything contained herein to the contrary notwithstanding,
this Agreement may be terminated and the transactions contemplated hereby
abandoned at any time prior to the Closing Date (a) by mutual written consent of
Purchaser and Seller; or (b) by either party hereto, if the Closing does not
occur on or prior to March 31, 1998; provided, however, that the Closing has not
been delayed as a result of a material breach of the representations,
warranties, covenants and agreements contained herein by the party seeking
termination. Upon such termination, this Agreement shall be of no further force
and effect, except for the provisions of Section 6.1(c) relating to
confidentiality, (ii) Section 6.1(f) relating to publicity, (iii) this Section
8.7, (iv) Section 2.4(f) and 9.4 relating to expenses, (v) Sections 4.14 and 5.4
relating to finder's fees and broker's fees and (vi) Sections 9.2 and 9.9
relating to notices and governing law, respectively.
Section 9.8. Counterparts
This Agreement may be executed in counterparts, all of which
shall be considered one and the same Agreement and each of which shall be deemed
an original.
Section 9.9. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington applicable to contracts made
and to be performed entirely within such state. Seller and Seller's Affiliates
agree to submit irrevocably, at Purchaser and Purchaser's Affiliates election,
to the personal jurisdiction and venue of the Superior Court of the State of
Washington for the City of Seattle in the County of King (in which case Seller
and Seller's Affiliates) waive any right of removal) or to the personal
jurisdiction and venue of the United States District Court for the Western
District of Washington in any action for emergency injunctive relief or to
enforce the provisions of this Agreement.
A-28
<PAGE> 32
Section 9.10. Severability
This Agreement shall be deemed severable; the invalidity or
unenforceability of any term or provision of this Agreement shall not affect the
validity or enforceability of this Agreement or of any other term hereof.
IN WITNESS WHEREOF, each of the parties hereto has executed
this Agreement as of the day and year first above written.
PURCHASER: SELLER:
CASCADE DESIGNS, INC. SWEETWATER, INC.
By:/s/ Lee A. Fromson By:/s/ Eric M. Reynolds
Name: Lee A. Fromson Name: Eric M. Reynolds
Title: Vice President Title: Chief Executive
and Chief Officer and
Financial President
Officer
A-29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 923,627
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,745,608
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,046,044
<CURRENT-LIABILITIES> 564,543
<BONDS> 0
0
0
<COMMON> 3,099
<OTHER-SE> 1,478,402
<TOTAL-LIABILITY-AND-EQUITY> 2,046,044
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 514,090
<OTHER-EXPENSES> (227,476)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,536
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (286,614)
<DISCONTINUED> (942,092)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,228,706)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
<PAGE> 1
Exhibit 99
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the proposed Sale Transaction. The Unaudited Pro Forma Consolidated Balance
Sheet gives effect to the proposed Sale Transaction as if such transaction
occurred on September 30, 1997. The Unaudited Pro Forma Consolidated Statements
of Operations for the nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively, give effect to the proposed Sale
Transaction as if it occurred on January 1, 1994. The Unaudited Pro Forma
Consolidated Statements of Operations are presented for comparative purposes
only and do not purport to indicate the results which may be attained in the
future and do not reflect any adjustments which may be made in the future to the
Company's general and administrative expenses and other income. The Unaudited
Pro Forma Consolidated Financial Statements should be read in conjunction with
the "Selected Financial Data" and "Financial Statements" appearing elsewhere in
this Proxy Statement.
<PAGE> 2
SweetWater, Inc.
Unaudited Pro Forma Balance Sheet
As of September 30, 1997
<TABLE>
<CAPTION>
Pro Forma
September 30, Pro Forma September 30,
1997 Adjustments 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents 923,627 1,612,386 A 2,536,013
Assets held for sale 821,981 (821,981) B --
----------- ----------- - -----------
Total current assets 1,745,608 790,405 2,536,013
----------- ----------- -----------
Other Assets:
Assets held for sale 300,436 (300,436) B --
----------- ----------- - -----------
TOTAL ASSETS 2,046,044 489,969 2,536,013
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS EQUITY:
Current Liabilities
Trade accounts payable and other
accrued liabilities 180,315 -- 180,315
Accrued salaries and benefits 38,804 665,000 D 703,804
Accrued loss for disposal of
discontinued operations 273,393 (103,000) C 170,393
Liabilities held for Sale 72,031 (72,031) B --
----------- ----------- - -----------
Total Current Liabilities 564,543 489,969 1,054,512
----------- ----------- -----------
Stockholders Equity:
Common stock 3,099 -- 3,099
Additional paid in capital 12,431,079 -- 12,431,079
Accumulated deficit (10,952,677) -- (10,952,677)
----------- ----------- -----------
Total Stockholders' Equity 1,481,501 -- 1,481,501
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY 2,046,044 489,969 2,536,013
=========== =========== ===========
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of this balance sheet.
<PAGE> 3
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Nine Months Ended September 30, 1997
Pro Forma
September 30, Pro Forma September 30,
1997 Adjustments 1997
---------- ---------- ----------
SALES -- -- --
COST OF GOODS SOLD -- -- --
---------- ---------- ----------
GROSS MARGIN -- -- --
---------- ---------- ----------
OPERATING EXPENSES
Sales and Marketing 55,910 -- 55,910
Research and Development 236,673 -- 236,673
General and Administrative 221,507 -- 221,507
---------- ---------- ----------
Total Operating Expenses 514,090 -- 514,090
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (514,090) -- (514,090)
OTHER INCOME, NET 227,476 227,476
---------- ---------- ----------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS (286,614) -- (286,614)
(LOSS) FROM DISCONTINUED
OPERATIONS (668,699) 668,699 --
(LOSS) FROM DISPOSAL OF
DISCONTINUED OPERATIONS (273,393) 273,393 --
---------- ---------- ----------
NET INCOME (LOSS) (1,228,706) 942,092 (286,614)
========== ========== ==========
INCOME (LOSS) PER COMMON
SHARE ($ 0.40) ($ 0.09)
========== ==========
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE ($ 0.09) ($ 0.09)
========== ==========
WEIGHTED AVERAGES SHARES
OUTSTANDING 3,087,653 3,087,653
========== ==========
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of these financial statements.
<PAGE> 4
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Year Ended December 31, 1996
Pro Forma
September 30, Pro Forma September 30,
1996 Adjustments 1996
---------- ---------- ----------
SALES -- -- --
COST OF GOODS SOLD -- -- --
---------- ---------- ----------
GROSS MARGIN -- -- --
---------- ---------- ----------
OPERATING EXPENSES
Sales and Marketing 267,332 -- 267,332
Research and Development 907,945 -- 907,945
General and Administrative 627,794 -- 627,794
---------- ---------- ----------
Total Operating Expenses 1,803,071 -- 1,803,071
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,803,071) -- (1,803,071)
OTHER INCOME, NET 128,084 -- 128,084
---------- ---------- ----------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS (1,674,987) -- (1,674,987)
(LOSS) FROM DISCONTINUED
OPERATIONS (2,557,288) 2,557,288 --
---------- ---------- ----------
NET INCOME (LOSS) (4,232,275) 2,557,288 (1,674,987)
========== ========== ==========
INCOME (LOSS) PER COMMON ($ 1.38) ($ 0.55)
SHARE ========== ==========
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE ($ 0.55) ($ 0.55)
========== ==========
WEIGHTED AVERAGES SHARES
OUTSTANDING 3,065,311 3,065,311
========== ==========
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of these financial statements.
<PAGE> 5
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Year Ended December 31, 1995
Pro Forma
September 30, Pro Forma September 30,
1995 Adjustments 1995
---------- ---------- ----------
SALES -- -- --
COST OF GOODS SOLD -- -- --
---------- ---------- ----------
GROSS MARGIN -- -- --
---------- ---------- ----------
OPERATING EXPENSES
General and Administrative 249,029 -- 249,029
---------- ---------- ----------
Total Operating Expenses 249,029 -- 249,029
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (249,029) -- (249,029)
OTHER INCOME, NET 28,861 -- 28,861
---------- ---------- ----------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS (220,168) -- (220,168)
(LOSS) FROM DISCONTINUED
OPERATIONS (2,385,000) 2,385,000 --
---------- ---------- ----------
NET INCOME (LOSS) (2,605,168) 2,385,000 (220,168)
========== ========== ==========
INCOME (LOSS) PER COMMON ($ 1.31) ($ 0.11)
SHARE ========== ==========
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE ($ 0.11) ($ 0.11)
========== ==========
WEIGHTED AVERAGES SHARES
OUTSTANDING 1,984,946 1,948,946
========== ==========
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of these financial statements.
<PAGE> 6
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Year Ended December 31, 1994
Pro Forma
September 30, Pro Forma September 30,
1994 Adjustments 1994
---------- ---------- ----------
SALES -- -- --
COST OF GOODS SOLD -- -- --
---------- ---------- ----------
GROSS MARGIN -- -- --
---------- ---------- ----------
OPERATING EXPENSES
General and Administrative 247,560 -- 247,560
---------- ---------- ----------
Total Operating Expenses
247,560 -- 247,560
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (247,560) -- (247,560)
OTHER INCOME, NET 139,304 -- 139,304
---------- ---------- ----------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS (108,256) -- (108,256)
(LOSS) FROM DISCONTINUED
OPERATIONS (1,533,798) 1,533,798 --
---------- ---------- ----------
NET INCOME (LOSS) (1,642,054) 1,533,798 (108,256)
========== ========== ==========
INCOME (LOSS) PER COMMON ($ 0.92) ($ 0.06)
SHARE ========== ==========
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE ($ 0.06) ($ 0.06)
========== ==========
WEIGHTED AVERAGES SHARES
OUTSTANDING 1,789,142 1,789,142
========== ==========
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of these financial statements.
<PAGE> 7
Footnotes to Unaudited Pro Forma Financial Information
A. Cash and cash equivalents represent the September 30, 1997 pro forma
projected gross cash proceeds received on disposal of discontinued operations
as if the sale took place on September 30, 1997. Actual gross cash proceeds
from the Sale Transaction will differ due to changes in the Closing Asset
Value between September 30, 1997 and the Closing Date.
B. Under the Sale Agreement, accounts receivable, inventories, prepaid expenses,
deposits, fixed assets, and other assets are sold at book value plus
$300,000. Liabilities assumed include equipment leases and product warranties
with a book liability of $72,000.
September 30,
1997
-------------
Accounts Receivable 174,895
Inventory 611,148
Prepaid Expenses 35,938
Fixed Assets 294,000
Deposits and Other 6,436
----------
Subtotal Assets Held for Sale $1,122,417
Liabilities Held for Sale 72,031
----------
Net Assets Held for Sale 1,050,386
Reversal of Book Reserves 190,000
Gross Sales Proceeds 1,612,386
----------
Gain on Sale of Assets 372,000
==========
C. Accrued loss for disposal of discontinued operations includes the following:
Gain on Sale of Assets (Note B) $372,000
Reversal of Reserves on Sale of Discontinued Operations 190,000
Less Projected Fourth Quarter loss on Discontinued Operations (170,393)
Less Severance and Management Value Appreciation Bonus (665,000)
----------
Total Accrued Loss for Disposal of Discontinued Operations ($273,393)
==========
Remaining pro forma accrued loss for disposal of discontinued operations
represents the estimated fourth quarter loss on discontinued operations of
$170,393.
D. Trade payables and other accrued expenses in the ordinary course of business
remain liabilities of the Company. Pro Forma Adjustments included are
valuation appreciation bonuses and severance payments due under the
Management Agreement.
