<PAGE> 1
FORM 10-Q/A
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
SWEETWATER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1167603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1140 BOSTON AVENUE, UNIT A, LONGMONT, CO 80501
(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.
<PAGE> 2
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 Condition 10
and Results of Operations
Part II. Other Information 15
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SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
------------- ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 923,627 $1,479,937
Short-term investments -- 440,659
Accounts receivable - net 174,895 132,446
Inventory - net 611,148 690,231
Prepaids and other current assets 35,938 51,288
Total current assets 1,745,608 2,794,561
----------- ----------
Fixed Assets, at cost 462,860 475,000
Less: Accumulated depreciation (168,860) --
----------- ----------
Fixed assets, net 294,000 475,000
----------- ----------
Other Assets:
Deposits and other 6,436 39,921
----------- ----------
TOTAL ASSETS $ 2,046,044 $3,309,482
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets
-2-
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SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable and other accrued liabilities $ 170,761 $ 493,356
Accrued salaries and employee benefits 48,358 92,982
Accrued warranty and other 72,031 30,630
------------ ------------
Total current liabilities 291,150 616,968
------------ ------------
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 (10,679,284) (9,723,971)
------------ ------------
Total stockholders' equity 1,754,894 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 $ 335,570 $ 847,668 $ 1,437,647 $ 1,868,905
----------- ----------- ----------- -----------
COST OF GOODS SOLD 304,237 720,457 1,127,877 1,413,215
----------- ----------- ----------- -----------
GROSS MARGIN 31,333 127,211 309,770 455,690
----------- ----------- ----------- -----------
OPERATING EXPENSES
Sales and Marketing 116,574 353,532 468,804 1,139,929
Research and Development -- 190,962 236,673 703,018
General and Administrative 146,441 241,476 787,082 777,671
----------- ----------- ----------- -----------
Total Operating Expenses 263,015 785,970 1,492,559 2,620,618
----------- ----------- ----------- -----------
INCOME (LOSS) FROM (231,682) (658,759) (1,182,789) (2,164,928)
OPERATIONS
OTHER INCOME, NET 11,348 14,631 227,476 109,778
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (220,334) $ (644,128) $ (955,313) $(2,055,150)
=========== =========== =========== ===========
INCOME (LOSS) PER COMMON
SHARE $ (0.07) $ (0.21) $ (0.31) $ (0.67)
=========== =========== =========== ===========
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
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ (955,313) $(2,055,150)
Net Loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 168,860 327,375
Amortization of deferred compensation -- 12,366
Changes in assets and liabilities:
(Increase) in net accounts receivable (42,449) (289,822)
Decrease in inventory 79,083 143,020
Decrease in prepaids and other current assets 15,350 18,888
Decrease (Increase) in deposits and other assets 33,485 (9,992)
(Increase) in deferred offering costs -- (153,373)
(Decrease) in accounts payable and other accrued liabilities (322,595) (40,323)
(Decrease) in accrued salaries and other current liabilities (3,223) (10,138)
----------- -----------
Net cash used in operating activities (1,026,802) (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 32,500 --
Proceeds from the sales of short term investments 440,659 8,906,708
----------- -----------
Net cash provided by investing activities 452,799 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.
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 $10.7 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 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
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<PAGE> 8
SweetWater, Inc.
Notes to Financial Statements
(Unaudited)
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.
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
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<PAGE> 9
SweetWater, Inc.
Notes to Financial Statements
(Unaudited)
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.
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. INVENTORY
Inventory includes costs of materials, direct labor and manufacturing
overhead. Inventory is priced at the lower cost (using the first-in,
first-out method of valuation) or market. Inventory consists of the
following components:
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
------------- ------------
<S> <C> <C>
Raw Materials $563,463 $669,736
Finished Goods 210,685 225,495
-------- --------
774,148 895,231
Less-Reserve for Obsolescence (163,000) (205,000)
-------- --------
$611,148 $690,231
======== ========
</TABLE>
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<PAGE> 10
SweetWater, Inc.
Notes to Financial Statements
(Unaudited)
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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<PAGE> 11
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 included 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
Net loss decreased by 66% from a loss of $644,000 for the three months
ended September 30, 1996 to a loss of $220,000 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.
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 67%, compared to $354,000 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, reduced sales
commissions on lower sales, and reduced advertising and sales aids expenses.
There were no research and development expenses for the three-month
period ended September 30, 1997 as compared to $191,000 for 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 $146,000, a decrease of 40% as compared to $241,000 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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net loss decreased by $1,100,000 from a loss of $2,055,000 for the nine
months ended September 30, 1996 to a loss of $955,000 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.
During the nine-month period ended September 30, 1997, the Company had
sales of $1,438,000, a decrease of 23%, 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'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
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<PAGE> 14
of the year. Historically, the Company's sales tend to be highest in the second
and the third quarters of each year with approximately 68% of its sales
occurring during those quarters in 1996.
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 $469,000, a decrease of 59%, compared to $1,140,000 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, reduced sales commissions on lower sales and reduced
advertising and sales aids expenses.
There were $237,000 research and development expenses for the
nine-month period ended September 30, 1997, a decrease of 66% as compared to
expenses of $703,000 for 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 $787,000, a 1% increase as compared to $778,000 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.
During the nine months ended September 30, 1997, the Company completed
its cost containment program and reduced its personnel to the minimum level
which management believes is necessary to operate its business. Although the
Company expects that operating expenses will be substantially lower in 1998 than
in 1997, given the Company's lower level of operations, the Company cannot be
assured that it will achieve profitability in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short term investments decreased by 52%
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 $10,700,000 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.
-13-
<PAGE> 15
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
(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: December 16, 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 Number Exhibit Description Page(s) of this Form
(27) Financial Data Schedule
(99) Unaudited Pro Forma Financial Information
-16-
<PAGE> 18
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 Balance Sheet gives
effect to the proposed Sale Transaction as if such transaction occurred on
September 30, 1997. The Unaudited Pro Forma 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 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 Financial Statements should
be read in conjunction with the "Financial Statements" appearing elsewhere in
this Form 10-Q.
-17-
<PAGE> 19
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
Short term investments -- -- --
Accounts Receivable-net 174,895 (174,895) B --
Inventory-net 611,148 (611,148) B --
Prepaid and other current assets 35,938 (35,938) B --
------------ ----------
Total current assets 1,745,608 790,405 2,536,013
------------ ---------- ------------
Fixed Assets, at cost 462,860 (462,860) B --
Less accumulated depreciation (168,860) 168,860 B --
------------ ---------- ------------
Fixed Assets, net 294,000 (294,000) --
------------ ---------- ------------
Deposits and other 6,436 (6,436) B --
------------ ---------- ------------
TOTAL ASSETS $ 2,046,044 $ 489,969 $ 2,536,013
============ ============ ============
LIABILITIES AND STOCKHOLDERS EQUITY:
Current Liabilities
Trade accounts payable and other
accrued liabilities $ 170,761 $ -- $ 170,761
Accrued salaries and benefits 48,358 665,000 C 713,358
Accrued warranty and other 72,031 (72,031) B --
------------ ---------- ------------
Total Current Liabilities 291,150 592,969 884,119
------------ ---------- ------------
Stockholders Equity:
Common stock 3,099 3,099
Additional paid in capital 12,431,079 12,431,079
Accumulated deficit (10,679,284) (103,000) (10,782,284)
------------ ---------- ------------
Total Stockholders' Equity 1,754,894 (103,000) 1,651,894
------------ ---------- ------------
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 these financial statements.
-18-
<PAGE> 20
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Pro Forma
September 30, Pro Forma September 30,
1997 Adjustments 1997
-------------- -------------- -------------
<S> <C> <C> <C>
SALES $ 1,437,647 $(1,437,647) $ --
COST OF GOODS SOLD 1,127,877 (1,127,877) --
----------- ----------- ---------
GROSS MARGIN 309,770 (309,770) --
----------- ----------- ---------
OPERATING EXPENSES
Sales and Marketing 468,804 (412,894) 55,910
Research and Development 236,673 -- 236,673
General and Administrative 787,082 (565,575) 221,507
----------- ----------- ---------
Total Operating Expenses 1,492,559 (978,469) 514,090
----------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS (1,182,789) 668,699 (514,090)
OTHER INCOME, NET 227,476 -- 227,476
----------- ----------- ---------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS $ (955,313) $ 668,699 $(286,614)
=========== =========== =========
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of this balance sheet.
-19-
<PAGE> 21
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma
December 31, Pro Forma December 31,
1996 Adjustments 1996
----------- ----------- -----------
<S> <C> <C> <C>
SALES $ 2,064,142 $(2,064,142) $ --
COST OF GOODS SOLD 1,961,509 (1,961,509) --
----------- ----------- -----------
GROSS MARGIN 102,633 (102,633) --
----------- ----------- -----------
OPERATING EXPENSES
Sales and Marketing 1,345,989 (1,078,657) 267,332
Research and Development 1,029,430 (121,485) 907,945
General and Administrative 1,401,735 (773,941) 627,794
Impairment Loss 685,838 (685,838) --
----------- ----------- -----------
Total Operating Expenses 4,462,992 (2,659,921) 1,803,071
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (4,360,359) 2,557,288 (1,803,071)
OTHER INCOME, NET 128,084 -- 128,084
----------- ----------- -----------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS $(4,232,275) $ 2,557,288 $(1,674,987)
=========== =========== ===========
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of these financial statements.
-20-
<PAGE> 22
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pro Forma
December 31, Pro Forma December 31,
1995 Adjustments 1995
----------- ----------- -----------
<S> <C> <C> <C>
SALES $ 2,162,666 $(2,162,666) $ --
COST OF GOODS SOLD 1,930,706 (1,930,706) --
----------- ----------- ---------
GROSS MARGIN 231,960 (231,960) --
----------- ----------- ---------
OPERATING EXPENSES
Sales and Marketing 1,090,061 (1,090,061) --
Research and Development 624,322 (624,322) --
General and Administrative 1,151,606 (902,577) 249,029
----------- ----------- ---------
Total Operating Expenses 2,865,989 2,616,960 249,029
----------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS (2,634,029) 2,385,000 (249,029)
OTHER INCOME, NET 28,861 -- 28,861
----------- ----------- ---------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS $(2,605,168) $ 2,385,000 $(220,168)
=========== =========== =========
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of these financial statements.
-21-
<PAGE> 23
SweetWater, Inc.
Unaudited Pro Forma Statements of Operations
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
Pro Forma
December 31, Pro Forma December 31,
1994 Adjustments 1994
------------ ----------- ------------
<S> <C> <C> <C>
SALES $ 1,703,241 $(1,703,241) $ --
COST OF GOODS SOLD 1,514,316 (1,514,316) --
----------- ----------- ---------
GROSS MARGIN 188,925 (188,925) --
----------- ----------- ---------
OPERATING EXPENSES
Sales and Marketing 735,721 (735,721)
Research and Development 428,786 (428,786)
General and Administrative 805,776 (558,216) 247,560
----------- ----------- ---------
Total Operating Expenses 1,970,283 (1,722,723) 247,560
----------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS (1,781,358) 1,533,798 (247,560)
OTHER INCOME, NET 139,304 -- 139,304
----------- ----------- ---------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS $(1,642,054) $ 1,533,798 $(108,256)
=========== =========== =========
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information are an
integral part of these financial statements.
-22-
<PAGE> 24
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 sale of assets 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 approximately $72,000.
<TABLE>
<CAPTION>
September 30,
1997
-------------
<S> <C>
Accounts Receivable $ 174,895
Inventory 611,148
Prepaid Expenses 35,938
Fixed Assets 294,000
Deposits and Other 6,436
----------
Subtotal Assets to be sold 1,122,417
Liabilities to be assumed 72,031
----------
Net Assets to be sold 1,050,386
Gross Sales Proceeds 1,612,386
---------
Gain on Sale of Assets $ 562,000
==========
</TABLE>
C. 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. Accumulated Deficit increase of $103,000 represents
$562,000 gain on sale of assets less $665,000 severance and Management Value
Appreciation Bonus.
-23-
<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> 291,150
<BONDS> 0
0
0
<COMMON> 3,099
<OTHER-SE> 1,751,795
<TOTAL-LIABILITY-AND-EQUITY> 2,046,044
<SALES> 1,437,647
<TOTAL-REVENUES> 1,437,647
<CGS> 1,127,877
<TOTAL-COSTS> 1,492,559
<OTHER-EXPENSES> (227,476)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,536
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (955,313)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (955,313)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
