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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-2.
</TABLE>
SweetWater, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-12.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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SWEETWATER, INC.
1140 BOSTON AVENUE, UNIT A
LONGMONT, CO 80501
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 5, 1998
TO THE SHAREHOLDERS OF SWEETWATER, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Meeting") of
Shareholders of SweetWater, Inc., a Delaware corporation (the "Company"), will
be held at 667 Madison Avenue, Suite 2500, New York, New York 10021 at 3:00
p.m. (local time), on February 5, 1998 for the following purposes:
1. To consider and vote upon a proposal to approve (A) the Asset
Purchase Agreement dated as of October 21, 1997 (the "Sale Agreement") between
the Company and Cascade Designs, Inc., a Washington corporation; and (B) the
sale (the "Sale") of substantially all the business, operations and assets of
the Company, as contemplated by the Sale Agreement; and
2. To consider and vote upon a proposal to approve an amendment to the
Company's Certificate of Incorporation to change the name of the Company to
SWWT, Inc., effective upon the consummation of the Sale.
All the above matters are more fully described in the accompanying
Proxy Statement. Under the General Corporation Law of the State of Delaware,
shareholders do not have appraisal rights in connection with the Sale.
The Board of Directors has fixed the close of business on December 18,
1997 as the record date for the determination of the shareholders entitled to
notice of, and to vote at, the Meeting or any adjournment thereof, and only
record holders of Common Stock at the close of business on that day are entitled
to notice of and to vote at the Meeting.
EACH SHAREHOLDER IS CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
TO ASSURE REPRESENTATION AT THE MEETING, HOWEVER, SHAREHOLDERS ARE URGED TO
DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE
POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY SHAREHOLDER ATTENDING
THE MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAD PREVIOUSLY RETURNED A PROXY
CARD.
By Order of the Board of Directors,
PATRICK E. THOMAS
Secretary
Longmont, Colorado
January 12, 1998
<PAGE> 3
SWEETWATER, INC.
1140 BOSTON AVENUE, UNIT A
LONGMONT, CO 80501
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 5, 1998
This Proxy Statement and accompanying form of proxy are being
furnished in connection with the solicitation of proxies by the Board of
Directors of SweetWater, Inc., a Delaware corporation (the "Company"), for use
at the Special Meeting of Shareholders to be held on February 5, 1998, at 3:00
p.m. (local time) at 667 Madison Avenue, Suite 2500, New York, New York 10021
and at any meeting held upon adjournment or postponement thereof (the
"Meeting"). Copies of this Proxy Statement, the attached Notice of Special
Meeting of Shareholders, and the enclosed form of proxy were first mailed to the
Company's shareholders on or about January 12, 1998. The Company's principal
executive offices are located at 1140 Boston Avenue, Unit A, Longmont, Colorado
80501 and its telephone number is (303) 678-0447.
The Proposal. At the Meeting, the Company's shareholders will
consider and vote upon (A) a proposal to approve (i) the Asset Purchase
Agreement dated as of October 21, 1997 (the "Sale Agreement") between the
Company and Cascade Designs, Inc., a Washington corporation ("Cascade" or the
"Buyer"), and (ii) the sale (the "Sale") of substantially all the business,
operations and assets of the Company , as contemplated by the Sale Agreement,
for an amount in cash equal to the amount of the Closing Asset Value (as defined
in the Sale Agreement and as estimated to be approximately $1,200,000 if the
Closing had occurred on December 12, 1997) plus $300,000, plus the assumption of
certain liabilities, and (B) a proposal to approve the amendment (the
"Amendment") to the Company's Certificate of Incorporation to change the name of
the Company to SWWT, Inc., effective upon consummation of the Sale. A copy of
the Sale Agreement is attached to this Proxy Statement as Appendix A and is
incorporated herein by reference. If the Sale is completed, the Company will
have no further operating business and the Board of Directors intends to
concentrate its efforts on exploring opportunities to acquire a new business.
Accordingly, a vote in favor of the Sale will effectively constitute a vote in
favor of selling all of the operating assets of the business and changing the
nature of the business of the Company. Depending on the structure of a future
transaction, if any, the shareholders of the Company may not have an opportunity
to vote upon the proposal to acquire a new business. See "The Sale Transaction -
Conduct of Business Following the Sale; Use of Proceeds."
Approval by the Board. The Company's Board of Directors has
unanimously approved, and recommends that the Company's shareholders approve,
the Sale Agreement and the Sale (collectively, the "Sale Transaction") and the
Amendment.
Voting of Proxies; Revocability of Proxy. A proxy card in the
accompanying form, which is properly executed, duly returned to the Secretary of
the Company and not revoked prior to
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exercise, will be voted in accordance with the instructions indicated in the
proxy card. If no instructions are given with respect to any matter specified in
the Notice of Special Meeting to be acted upon at the Meeting, the proxies named
therein will vote the shares represented thereby in favor of the proposal to
approve the Sale Transaction and in favor of the proposal to approve the
Amendment. Each shareholder who has executed a proxy and returned it to the
Secretary of the Company may revoke the proxy by notice in writing to the
Secretary of the Company, or by attending the Meeting in person and requesting
the return of the proxy, in either case at any time prior to the voting of the
proxy. Presence at the Meeting does not itself revoke the proxy. In addition,
any later dated proxies returned on a timely basis would revoke proxies
submitted prior thereto. A shareholder who attends the Meeting in person, may,
if he or she wishes, vote by ballot at the Meeting, thereby cancelling any proxy
previously given by such shareholder.
Solicitation of Proxies. Proxies are being solicited by and on behalf
of the Company. Accordingly, the costs of the solicitation will be borne by the
Company. In addition to solicitation by the use of mails, proxies may be
solicited by directors, officers and employees of the Company in person or by
telephone, facsimile transmission or other means of communication. Such
directors, officers and employees of the Company will not be additionally
compensated, but will be reimbursed for out-of-pocket expenses in connection
with such solicitation. Arrangements will also be made with brokers and dealers,
custodians, nominees and fiduciaries to assist the Company in the solicitation
of proxies, including for forwarding of proxy materials to beneficial owners of
common stock of the Company, $0.001 par value per share (the "Common Stock"),
held of record by such persons, and the Company will reimburse such brokers,
dealers, custodians, nominees and fiduciaries for reasonable expenses incurred
in connection therewith but will not otherwise compensate such persons.
Record Date. The Board of Directors has fixed the close of business
on December 18, 1997, as the record date (the "Record Date") for the
determination of the shareholders entitled to notice of, and to vote at, the
Meeting.
Quorum; Vote Required. As of the Record Date, there were 3,113,583
shares of Common Stock issued and outstanding and entitled to vote. Each share
of issued and outstanding Common Stock entitles the holder thereof to one vote.
A majority of the shares of Common Stock issued, outstanding and entitled to
vote at the Meeting, present in person or represented by proxy, shall constitute
a quorum at the Meeting. Abstentions and broker non-votes are counted as present
in determining whether the quorum requirement is satisfied. As the affirmative
vote of the majority of the shares of Common Stock entitled to vote will be
necessary for the approval of the Sale Transaction and the approval of the
Amendment, abstentions and broker nonvotes will have the same effect as votes
against the Sale Transaction and against the Amendment. A broker non-vote occurs
when a nominee holding shares for a beneficial owner does not vote on a proposal
because the nominee does not have discretionary voting power and has not
received instructions from the beneficial owner.
No Appraisal Rights. Under the General Corporation Law of the State
of Delaware (the "DGCL"), shareholders of the Company do not have appraisal
rights in connection with the Sale.
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PROPOSAL NO. 1 - THE SALE TRANSACTION
BACKGROUND
The terms of the Sale were the result of arm's-length negotiations
between the Company and Cascade and their respective representatives. The
following is a brief description of the background of the transaction and the
negotiations leading to the execution of the Sale Agreement.
The Company is currently engaged in manufacturing and distributing
portable water filtration and purification devices for outdoor use (the "Outdoor
Business"). 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.
Although the Company and SBC Warburg Dillon Read ("Dillon Read"), the Company's
financial advisor, actively pursued a joint strategic alliance to manufacture
and market the home use product, the Company was unable to locate an industry
partner for this product. Accordingly, the Company suspended its efforts to
manufacture and market the home use product and sold the plans, designs and
technology associated therewith in April 1997. During 1997, the Company reduced
its personnel, discontinued its research and development efforts and initiated a
cost containment program to reduce general and administrative expenses, conserve
its cash resources and enable the Company to concentrate its resources on its
Outdoor Business.
At its meeting on July 18, 1997, the Board of Directors and
management reviewed the financial results for the quarter ended June 30, 1997,
including the improvement in the gross margin for such quarter. The directors
also reviewed the status of the market for the Company's outdoor product, noting
that the overall market had grown at a moderate rate in the 1997 selling season
but that competition within such market had increased and the market share of
Recovery Engineering, Inc., the Company's principal competitor, continued to
increase. The directors then discussed the potential for the Outdoor Business to
generate sufficient revenue to enable the Company to achieve profitability given
the size of such market, the increased competition, the size of the Company's
market share and the difficulty in increasing such market share given the
Company's limited financial, technical and marketing resources. The Board then
authorized Dillon Read, together with members of management, to contact entities
which they believed may have an interest in purchasing the Outdoor Business to
determine the level of interest and the potential purchase price for such
business which would assist the Board in assessing the potential value of the
alternatives for the Company.
Dillon Read and management contacted seven companies which they
believed may be interested in purchasing the assets of the Outdoor Business. By
the end of August, two companies, including Cascade, had expressed an interest
in conducting more extensive due diligence. After execution of confidentiality
agreements, representatives of both companies were given access to the Company
and its management and conducted extensive due diligence reviews. At the end of
August, representatives of both management and Cascade met to discuss Cascade's
interest in acquiring the Outdoor Business and possible valuations which may be
attributed thereto. Cascade indicated that it may be interested in acquiring the
business at book value, which management indicated would not be sufficient given
the other companies expressing an interest in acquiring the Outdoor Business.
In September, an additional company, which management and Dillon Read
had been attempting to contact since July, responded to the Company's inquiries,
expressed an interest
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in conducting due diligence and signed a confidentiality agreement in September
1997. Although management and Dillon Read advised such company that SweetWater
was in the final stages of negotiations with another buyer, such company was
unable to commence its due diligence before the meeting of the Board on
September 10, 1997. Management believed that the delays encountered in
contacting this company resulted, in part, from recent management changes at
such company and the fact that its corporate headquarters had relocated twice.
On September 5, 1997, the Company received a letter of intent from
Cascade which set forth the basic terms upon which Cascade was willing to
purchase the assets of the Outdoor Business including the following: an offer to
purchase such assets for book value, subject to certain adjustments; an
exclusivity provision, which prohibited the Company from pursuing a transaction
with, or responding to inquiries from, other proposed purchasers for the period
of the letter of intent; a non-disclosure provision requiring the Company to
keep the transaction confidential until the parties reached an agreement
regarding publicity, unless otherwise required by law; and a requirement that a
definitive agreement be executed within a specified period after the date of the
letter of intent. Management and Dillon Read then negotiated with Cascade to
increase the purchase price and to remove the exclusivity provisions set forth
in the letter of intent. Immediately prior to the meeting of the Board of
Directors on September 10, 1997, Cascade increased its proposed purchase price
by $300,000 but continued to insist upon the inclusion of the exclusivity
provision. At its meeting on September 10, 1997, the Board reviewed Cascade's
amended offer in detail and reviewed the history of the Company's contacts with
other potential purchasers. After noting that management expected the additional
company which had completed due diligence to submit an offer by the end of
business that day, the directors reviewed the status of negotiations with that
company, the level of its due diligence review and the likelihood of such
company completing a proposed transaction. The directors also reviewed the
history of the Company's contacts with the third company which had requested but
not commenced its due diligence. The directors then reviewed the advantages to
be gained by proceeding with Cascade under the terms set forth in the letter of
intent, which the Board believed was an advantageous valuation for the Outdoor
Business, and the likelihood of Cascade terminating discussions if the Board
rejected the exclusivity provision in the letter of intent or delayed executing
the letter of intent. The Board weighed these advantages against the
disadvantage of restricting the Board's access to other potential purchasers
during the exclusivity period and the likelihood of any other potential
purchaser submitting a higher offer in view of the limited number of interested
purchasers. The Board then determined that it was in the best interests of the
Company to review the terms of the offer, if any, which it expected to receive
by the end of business that day from the company which had conducted its due
diligence review before proceeding with Cascade. The Board also noted that,
given the management and other changes at the third company and the fact that it
had not yet commenced its due diligence review, there was no assurance that such
company would make any offer and, even if such company was interested in
pursuing a transaction, it was unlikely that such company would be in a position
to respond quickly with an offer. Accordingly, the Board determined that it was
not in the Company's best interest to risk losing the offer from Cascade or
delaying a possible transaction, to enable the third company to commence and
complete its due diligence. Accordingly, the Board authorized management to
review the offer which it expected to receive and, if such offer was not as
advantageous as the Cascade offer, to execute the letter of intent with Cascade
and proceed to negotiate definitive agreements.
On September 11, 1997, the Company received the additional offer to
acquire the Outdoor Business for a cash price based, primarily, on book value.
The additional offer was subject to the approval of the Board of Directors of
the offeror and was valued by both the Company's chief financial officer and by
the offeror at a lower valuation than the
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Cascade offer. The offer also contained certain maximum values for the Company's
inventory and fixed assets and was conditioned on the Company attaining certain
gross profit margins which management believed were unattainable. Management
informed representatives of the offeror that the offer was not sufficient and
were informed that the offer could not be raised at that time. After determining
that the other offer was lower than the offer from Cascade and included a
performance condition which management believed would not be met, the Company
determined that the other offer was not as favorable as the Cascade offer and
executed the letter of intent with Cascade.
Management, together with Dillon Read and legal counsel then
proceeded to negotiate the terms of the Sale Agreement, more particularly
described below, including, without limitation, the methods of valuing the
Company's inventory and other assets to be acquired by Cascade, the product
warranty liabilities to be assumed, the conduct of the business prior to the
Closing, the terms of the License Agreement and the Non-Competition Agreements
to be executed at the Closing, and the representations and warranties to be
included in the Sale Agreement. The Board of Directors of the Company met again
on October 17, 1997 and reviewed the terms of the Sale Agreement in detail.
Although representatives of Dillon Read did not make a presentation to the Board
at such meeting, the Board was informed that Dillon Read would deliver an
opinion to the Board to the effect that, the proposed Sale as set forth in the
Sale Agreement was fair to the Company and its shareholders from a financial
point of view. After additional discussion, the Board unanimously voted to
approve the Sale Transaction and to recommend that the shareholders approve the
Sale Transaction at the Meeting. The Sale Agreement, as previously approved, was
executed by the Company and Cascade on October 21, 1997.
REASONS FOR ENGAGING IN THE SALE
The Board of Directors believes that the Sale represents a favorable
valuation for the Outdoor Business which has not previously generated sufficient
revenues to provide a return to the shareholders or to achieve profitability.
The Sale will enable the Company to preserve its cash resources while the Board
of Directors explores opportunities to acquire a new business which may have
greater potential to provide a return to the shareholders of the Company.
Although the Board believes the Sale and the strategy of acquiring a new
business is in the best interests of the shareholders, there are significant
risks inherent in this strategy, which are more particularly described under
"Risk Factors" below.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company believes that the Sale
Transaction is in the best interests of, and is fair to, the Company and its
shareholders. The Board of Directors unanimously approved the Sale Transaction,
and unanimously recommends that the shareholders vote FOR approval of the Sale
Transaction at the Meeting. Although Mr. Reynolds, President, Chief Executive
Officer and a director of the Company, voted in favor of the Sale Transaction,
he may be deemed to have a conflict of interest as he will receive a bonus under
the Management Agreement if the Sale Transaction is consummated. See "Interests
of Certain Persons in the Sale" below.
The terms of the Sale were the result of arm's length negotiations
between the Company and Cascade and their respective representatives. In the
course of reaching their decision to approve the Sale Transaction, the Board of
Directors consulted with Dillon Read as well as with management. In voting upon
the Sale Transaction, the Board considered in detail all the factors they deemed
relevant to their decision, including the amount and nature of the
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consideration to be received for the Outdoor Business, the financial results of
the Company since 1994, the current and historical stock prices for the Common
Stock, the likelihood of the Company achieving profitability if the Outdoor
Business were retained in view of the limited nature of the Company's products
and the difficulties in developing new products with limited financial and
technical resources, the limited size of the current market for the Company's
products, the Company's market share, increased competition and the risks and
costs inherent in attempting to expand the Company's market share or the overall
market for the Company's products to include general sporting goods stores and
mass merchants, the increased exposure to the risks of new technological
developments and increased competition as a result of the reduction of the
Company's research and development efforts, the limited number of companies
which may be interested in acquiring the Outdoor Business and the likelihood of
selling the Outdoor Business to another buyer on more favorable terms, the
advantages of preserving the Company's cash resources and the opportunity to
acquire a new business in an unrelated industry which may have greater potential
for generating a return to the Company's shareholders than the Company's current
business. The Board considered that all of the factors cited above were
supportive of a recommendation to approve the Sale Transaction.
Although the Board also considered the risks inherent in the strategy
to acquire a new unidentified business, such as competition for attractive
acquisition candidates given the Company's limited resources, the risks and
uncertainties of investing in a new business and the dependence on future
management, the Board did not consider these negative factors to be significant
compared with the advantages of proceeding with the Sale Transaction and the
prospects for the Company if the Outdoor Business were retained. For a more
particular description of the risks inherent in the strategy to acquire a new
business, see "Risk Factors" below.
Based on the information available to the Board, the advice of Dillon
Read and the fact that the only other offer received was not as favorable as the
Cascade offer, the Board concluded that no other party was likely to consummate
a transaction on terms more favorable to the Company's shareholders than the
terms offered by Cascade.
After considering these factors (to which the Board did not assign
specific weights) and after consultation with Dillon Read, the Board unanimously
approved the Sale Transaction, and recommends that the shareholders approve the
Sale Transaction at the Meeting. Although Mr. Reynolds, President, Chief
Executive Officer and a director of the Company, voted in favor of the Sale
Transaction, he may be deemed to have a conflict of interest as he will receive
a bonus under the Management Agreement if the Sale Transaction is consummated.
See "Interests of Certain Persons in the Sale" below.
OPINION OF DILLON READ
As described above under "Background," Dillon Read delivered its
written opinion to the effect that, based upon the assumptions made, matters
considered and limits of the review undertaken, as described in the opinion, the
proposed Sale as set forth in the Sale Agreement is fair to the Company and its
shareholders from a financial point of view.
The full text of Dillon Read's written opinion, dated October 21,
1997, is attached hereto as Appendix B. Shareholders are urged to read the
opinion in its entirety including the portions thereof describing the
assumptions made, matters considered and limits of the review undertaken by
Dillon Read. Dillon Read's opinion is directed only to the fairness from a
financial point of view of the cash consideration to be received by the Company
and does not
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constitute a recommendation to any shareholder of the Company as to how the
shareholder should vote on the Sale Transaction. The summary of the opinion of
Dillon Read set forth in this Proxy Statement is qualified in its entirety by
reference to the full text of the opinion. A summary of the terms under which
Dillon Read was retained by the Company is set forth below.
In arriving at its opinion, Dillon Read reviewed (i) publicly
available financial statements of the Company, (ii) management's internal
projections for the Outdoor Business furnished to Dillon Read by the Company,
and (iii) similar financial data and stock market data of other publicly held
companies in businesses similar to that of the Outdoor Business. In addition,
Dillon Read performed such other studies, analyses, inquiries and investigations
as Dillon Read considered appropriate, including several discounted cash flow
analyses of the Outdoor Business. Although Dillon Read reviewed other
transactions and companies in the industry, as it did not believe the
transactions or companies were comparable to the Sale Transaction or the
Company, these analyses were not deemed to be a meaningful method of valuation
and were not completed.
Dillon Read also considered, as risk factors, several issues relating
to management's projections for the Outdoor Business including, the Company's
poor historical financial and operating performance, the Company's actual
performance which was materially less favorable than financial forecasts for the
Outdoor Business, the limited market for the Company's products, the small size
and market share attributed to the Outdoor Business, customer concentration, the
size and capitalization of the Company's competitors, the small number of
potential acquirors for the Outdoor Business, the difficulty in financing a
leveraged transaction, and the Company's considerable customer concentration.
In arriving at its opinion, Dillon Read assumed and relied upon the
accuracy and completeness of the financial and other information furnished to
Dillon Read, or which was publicly available, and did not independently verify
any of such information. Dillon Read's opinion was based upon economic and
market conditions and other circumstances as they existed on, and could be
evaluated as of, the date of Dillon Read's written opinion.
No limitations were imposed on Dillon Read with respect to the scope
of its review, its investigations or its procedures in arriving at its opinion.
Dillon Read did not express an opinion as to the relative merits of the Sale or
any other strategic alternative that might be available to the Company.
Based on and subject to the foregoing, Dillon Read conducted a
discounted cash flow analysis in connection with the rendering of its fairness
opinion which served as a basis for deriving a reference range for the value of
the Outdoor Business.
In its discounted cash flow analysis, Dillon Read used a five-year
estimate, based on a forecast developed by management of the Company, of future
cash flow generated by the Outdoor Business's operations which showed $151,000
of earning before interest in the fifth year. Given the risk factors identified
by Dillon Read and described above, Dillon Read significantly reduced
management's projections of sales and earnings and used discount rates between
15% and 25% for such cash flow analysis that approximate those typically used in
venture capital investing to account for the risks associated with the Company.
The foregoing procedure derived a reference range of $340,000 to $740,000
for the Outdoor Business.
Although Dillon Read reviewed the prices paid in recent acquisitions
of companies in the outdoor industry, Dillon Read did not perform a comparable
transaction analysis as a basis for a valuation of the Outdoor Business as there
were no transactions involving the sale of a
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comparable product line of similar size in the outdoor industry to be compared
with the sale of the Outdoor Business. Similarly, Dillon Read compared the
Outdoor Business to relevant public companies in the outdoor industry, including
Recovery Engineering, Inc, Coleman, Proctor Silex and Culligan. As these
companies are all considerably larger than the Outdoor Business and had been
profitable, whereas the Outdoor Business had incurred losses since its
inception, Dillon Read concluded that these companies were not comparable to the
Company for purposes of serving as a method of valuation. Accordingly, Dillon
Read did not complete or obtain any results from either the comparable
transaction analysis or the comparable company analysis.
After reviewing the results of its discounted cash flow analysis,
which supported the fairness of the Sale Transaction and which Dillon Read
considered the only meaningful analysis, and after considering the current
market and economic environment and the marketing effort undertaken in
connection with the sale of the Outdoor Business, which involved contacting
seven potential acquirors, only three of which expressed any interest in
pursuing additional due diligence, Dillon Read considered the discounted cash
flow analysis as the most meaningful analysis and developed a reference range
for the Outdoor Business of between $340,000 to $740,000. If the Closing had
occurred on December 12, 1997, management of the Company estimates that the
purchase price paid by Cascade would have been approximately $1,500,000.
The foregoing does not purport to be a complete description of Dillon
Read's written opinion or its discussions with members of the Board. Dillon Read
believes that its analyses must be considered as a whole and that selecting
portions of those analyses or the factors considered by Dillon Read, rather than
considering all of the analyses and factors, could create an incomplete view of
the procedures underlying its opinion. The process of preparing a fairness
opinion involves many procedures, analyses and factors and is not readily
susceptible to a partial or summary description. In arriving at its opinion,
Dillon Read made numerous assumptions with respect to industry performance,
business and economic conditions and other matters, many of which are beyond the
Company's control. Dillon Read's analyses, estimates and views as to values
developed in connection with its opinion are not necessarily indicative of
actual values, which may be significantly more or less, and do not purport to be
appraisals or necessarily reflect the prices at which businesses may actually be
sold. The full text of Dillon Read's written opinion is set forth in Appendix B
to the Proxy Statement.
Dillon Read engages in providing financial advisory services, on a
fee basis, primarily to corporations in connection with mergers, acquisitions,
divestitures, leveraged buy-outs, joint ventures, reorganizations,
recapitalizations and other extraordinary corporate transactions. The Company
selected Dillon Read to render its opinion on the basis of its expertise.
The Company retained Dillon Read, under the terms of an agreement
(the "Dillon Read Agreement") dated June 12, 1996 as the Company's exclusive
agent, for a period of one year, to attempt to arrange a joint strategic
alliance, primarily for the development and marketing of the Company's home use
product, or an acquisition of all or a portion of the stock of the Company or
substantially all of its business or assets. Dillon Read was paid a fee of
$150,000 upon execution of the agreement; an additional fee equal to $350,000
plus a percentage of any consideration over $5,000,000 was due upon a closing of
a transaction governed by the Dillon Read Agreement. In January 1997, the Dillon
Read Agreement was amended to provide that, in lieu of any further consideration
which may become payable under the terms of the original agreement, the Company
paid an additional $150,000 to Dillon Read in consideration of its agreement (a)
to continue to attempt to arrange a joint strategic alliance for the development
and marketing of the Company's home use product, (b) to represent the Company
through March 31, 1998, in connection with a proposed sale of the Outdoor
Business and (c) to issue an opinion as to the fairness from a financial point
of view to the Company's shareholders of either or both transactions. No further
fees are due to Dillon Read upon consummation of the Sale Transaction.
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The Company has agreed to indemnify and hold harmless Dillon Read
against any losses, claims, damages or liabilities to which it may become
subject as a result of its rendering of services pursuant to the Dillon Read
Agreement, as amended, and to reimburse Dillon Read for its reasonable
out-of-pocket expenses incurred in connection with its rendering of those
services.
INTERESTS OF CERTAIN PERSONS IN THE SALE
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 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 which would become
effective in the event (i) certain performance targets were met and (ii) the
Company elected to sell such business within a specified period after December
31, 1997. The Company did not elect to sell such business, and was under no
obligation to offer or sell such business to Management or any other party, as a
result of the Management Agreement. Specifically, pursuant to the Management
Agreement, as a result of the Sale Transaction, the three members of Management,
as a group, will receive an aggregate bonus equal to 30% of the excess of the
price paid by Cascade over the "Management Price," which is expected to be a
nominal amount as Management met the performance targets set forth in the
Management Agreement. The amount of the bonus will be calculated within five
days of the Closing Date of the Sale Transaction, is estimated to be
approximately $500,000 and is expected to be divided equally among the three
members of the Management. 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.
CONDUCT OF BUSINESS FOLLOWING THE SALE; USE OF PROCEEDS
If the Sale Transaction is approved, all of the assets associated
with the Company's Outdoor Business will be sold to Cascade, the Company will
have no further operating business, and the management and administrative staff
will be reduced to the minimum required to maintain the Company's investments
and to fulfill its reporting obligations. After the consummation of the Sale
Transaction, the Board of Directors intends to concentrate its efforts on
exploring opportunities to effect an acquisition, whether by merger, exchange or
issuance of capital stock, acquisition of assets or other similar business
combination (a "Business Combination"), with a privately-held business which the
Board believes may have significant growth potential. The Board of Directors has
elected not to liquidate the Company and distribute its cash to the shareholders
upon consummation of the Sale Transaction, as the Board believes that the
acquisition of a business with growth potential has the potential to create a
greater return for the shareholders than the distribution of the Company's cash.
The Company currently estimates that it will realize net proceeds from the Sale
of approximately $850,000 after payment of all transactional expenses and the
Management Bonus described above, and that cash and short-term investments after
the Sale will aggregate approximately $1,500,000.
The Board of Directors may utilize cash, equity, debt or a
combination thereof in effecting a Business Combination. While the Board may,
under certain circumstances, explore possible Business Combinations with more
than one prospective acquisition candidate, in all
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likelihood, unless additional financing is available, the Board expects that the
Company will seek to enter one business, although the Board may seek to acquire
more than one entity in such business over a period of time. As the Company
expects to encounter significant competition in its search for an appropriate
acquisition candidate, the Company cannot be assured that any such transaction
will be effected. No agreements, commitments or understandings have been made
with any candidates for a proposed Business Combination.
After the Sale, the Company plans to use its cash to pay ongoing
general and administrative expenses, which are anticipated to be minimal, and to
seek acquisition candidates. Depending on the size and nature of the entity, if
any, which may be acquired, the Company may borrow funds to increase the amount
of capital available for a Business Combination or otherwise finance the
operation of the acquired business. Although the Company believes additional
capital may be required, the necessity for and the amount and nature of any
future borrowings or other financings by the Company will depend on numerous
considerations including the Company's capital requirements, its perceived
ability to service such debt and prevailing conditions in the financial markets
and the general economy. No assurance can be made that additional capital will
be available on terms acceptable to the Company.
As the Company has not had, and does not expect to have, any earnings
for the foreseeable future, shareholders will receive no dividends for some
time, if at all. Shareholders will not receive any payments as a result of the
Sale Transaction.
Under the terms of the Sale Agreement, the Company has agreed to
change its name upon consummation of the Sale. Accordingly, if the proposed Sale
Transaction is approved, the Company must amend its Certificate of Incorporation
to change the Company's name. The Board of Directors proposes to change the name
of the Company to SWWT, Inc. See "Proposal No. 2 - The Amendment." Upon
consummation of the proposed Sale Transaction, the Company intends to move its
corporate headquarters to 3492 West 109th Circle, Westminster, Colorado 80030.
A vote in favor of the Sale will effectively constitute a vote in
favor of changing the nature of the Company's business. Depending on the
structure of the subsequent Business Combination, if any, the shareholders may
not have an opportunity to vote on the subsequent Business Combination and the
change in the nature of the Company's business. See "Risk Factors" for a
description of certain business risks inherent in changing the Company's
business.
ABSENCE OF DISSENTERS' RIGHTS OF APPRAISAL
The DGCL governs shareholders' rights in connection with the Sale.
Under the applicable provisions of DGCL, the Company's shareholders will have no
right in connection with the Sale to seek appraisal of their shares of Common
Stock.
ACCOUNTING TREATMENT OF SALE
If the Sale Transaction is approved by the shareholders, the Company
will record the proposed and planned disposition under Accounting Principles
Board Opinion No. 30, discontinued operations treatment with a financial
accounting measurement date as
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of the date of shareholder approval. The actual gain or loss will depend on
results of operations through the disposal date, the realization of the
inventory reserve, the calculation of the management bonus and the amount of
severance payments, if any. See "Unaudited Pro Forma Financial Information."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SALE
The Sale should have no direct income tax consequences to the
Company's shareholders. The Sale will be reported as a sale of assets for
federal income tax purposes in 1998. The resulting tax gain from the Sale is not
expected to result in significant federal income tax liability but will reduce
the Company's net operating loss carryforwards.
The Company's operations will change from the business of
manufacturing and distributing portable walter filtration and purification
devices for outdoor use to that of an acquisition company after the Sale. This
change in the Company's operations may have an adverse effect on the ability of
the Company to benefit from its net operating loss carryforwards in the future.
THE COMPANY WILL NOT SEEK AN OPINION OF COUNSEL WITH RESPECT TO THE
ANTICIPATED TAX CONSEQUENCES. THE FOREGOING SUMMARY OF CERTAIN FEDERAL INCOME
TAX CONSEQUENCES IS INCLUDED FOR GENERAL INFORMATION ONLY AND DOES NOT
CONSTITUTE LEGAL ADVICE TO ANY SHAREHOLDER. THE COMPANY RECOMMENDS THAT EACH
SHAREHOLDER CONSULT HIS OR HER OWN TAX ADVISER REGARDING THE TAX CONSEQUENCES OF
THE SALE.
CERTAIN INFORMATION CONCERNING CASCADE
Cascade is a Washington corporation engaged in the business of
manufacturing equipment for outdoor recreation and travel. Cascade also
manufactures a line of medical products. Cascade will fund the purchase price
from available working capital. Cascade's principal executive offices are
located at 4000 First Avenue South, Seattle, Washington 98134 and its telephone
number is 206-583-0583.
All information contained in this Proxy Statement relating to Cascade
has been supplied by Cascade to the Company.
RISK FACTORS RELATING TO THE COMPANY'S BUSINESS AFTER THE SALE
IF THE SALE IS CONSUMMATED, THE COMPANY WILL HAVE NO OPERATING
BUSINESS. DEPENDING ON THE STRUCTURE OF THE SUBSEQUENT BUSINESS COMBINATION, IF
ANY, THE SHAREHOLDERS OF THE COMPANY MAY NOT HAVE AN OPPORTUNITY TO VOTE ON ANY
BUSINESS COMBINATION AND THE CHANGE IN THE NATURE OF THE COMPANY'S BUSINESS IN
THE FUTURE. CONSEQUENTLY, THE FOLLOWING RISK FACTORS SHOULD BE TAKEN INTO
CONSIDERATION BY EACH SHAREHOLDER IN DETERMINING WHETHER TO APPROVE THE SALE
TRANSACTION.
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Limited Resources. The Company's only significant asset after the
Sale will be cash and short-term investments which the Company intends to use
for general corporate purposes and to seek acquisition candidates. The success
of the Company, after the Sale Transaction, will be dependent on its ability to
complete a Business Combination with an attractive acquisition candidate and its
ability to finance and develop a future business. Given the Company's limited
resources, the Company cannot be assured that it will succeed in its efforts to
conclude a Business Combination. In addition, since the Company does not know
the type of business, if any, in which it will eventually engage the Company's
ultimate capital needs, or the availability of such capital, cannot be assessed
at this time.
Competition for Business Combination Prospects. The Company will not
be a significant participant in the business of seeking mergers with, and
acquisitions of, small private entities and will have very limited resources to
support an acquisition. The Company will be required to compete for desirable
acquisition candidates with a large number of established and well financed
entities, including venture capital firms, with significantly greater financial
resources and technical expertise than the Company.
Business Risks. If a Business Combination is effected, the success of
the Company will depend to a great extent on the operations, financial
condition, management and prospects of the entity, if any, with which the
Company may merge or which it may acquire. As the Company has no arrangement,
agreement or understanding with a particular business entity, the specific risks
presented by such business cannot be described or assessed at this time. Such
business may involve an unproven product, technology or marketing strategy, the
ultimate success of which cannot be assured and such business may be in
competition with larger, more established firms over which it will have no
competitive advantage. The Company's investment in a new business opportunity
may be highly illiquid and could result in a total loss to the Company if the
opportunity is unsuccessful. Given the Company's limited resources, it is
expected that the Company will not be in a position to diversify this risk by
investing in more than one business.
Dependence on Future Management; No Operating History. If a Business
Combination is effected, the success of the Company's operations may be
dependent, wholly or partly, upon management of the successor firm and numerous
other factors beyond the Company's control. Although the Board of Directors will
seek to effect a Business Combination with a privately held entity with an
established operating history and experienced management, the Company cannot be
assured that it will be successful in locating an acquisition candidate meeting
such criteria. In addition, as the Company may not have any experience, and is
not expected to have any operating history, in its new line of business, which
is yet to be determined, the Company cannot be assured that the Company's
activities will be profitable.
No Dividends Anticipated. At the present time management does not
anticipate that the Company will pay dividends, cash or otherwise, on its Common
Stock in the foreseeable future. Future dividends will depend on earnings, if
any, of the Company, its financial requirements and other factors.
Issuance of Additional Shares; Possible Change of Control.
Approximately 4,239,256 shares of Common Stock and 6,462,500 shares of Preferred
Stock have not yet been issued, or
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reserved for issuance upon exercise of outstanding options and warrants, and
thus are available for issuance in connection with a Business Combination. The
Board of Directors is authorized to approve the issuance of such shares to raise
additional capital or to effect a Business Combination, in some cases, without
the approval of the Company's shareholders. As shareholders do not have
preemptive rights with respect to the issuance of shares of the Common Stock,
any additional issuance by the Company from its authorized but unissued shares
would have the effect of reducing the percentage ownership of the shareholders
and may result in a change of control of the Company. The resulting change in
control of the Company could result in a change in the Company's officers and
directors and a corresponding reduction in their participation in the future
affairs of the Company. In addition, a change in control of the Company could,
under certain circumstances, adversely affect the Company's ability to use the
Company's net operating loss carryforwards.
Regulation. Although the Company will continue to be subject to
regulation under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, after the consummation of the Sale
Transaction, management believes the Company will not be subject to regulation
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") insofar as the Company will not be engaged in the business of investing or
trading in securities. In the event the Company engages in business combinations
which result in the Company holding passive investment interests in a number of
entities, the Company could be subject to regulation under the Investment
Company Act. In such event, the Company would be required to register as an
investment company, could be expected to incur significant registration and
compliance costs and would be subject to extensive regulation. Management has
obtained no formal determination from the Commission as to the status of the
Company following the Sale Transaction under the Investment Company Act and,
consequently, any violation of such Act would subject the Company to material
adverse consequences.
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TERMS OF THE SALE AGREEMENT
Although the following is a summary of all material elements of the
Sale Agreement, it is not complete and is qualified in its entirety by reference
to the copy of the Sale Agreement and related documents attached as Appendix A
to this Proxy Statement, which shareholders are urged to read in its entirety.
Capitalized terms used but not defined herein shall have the respective meanings
set forth in the Sale Agreement.
THE SALE AGREEMENT
General. Pursuant to the terms of the Sale Agreement, in
consideration of the transfer to Cascade of substantially all of the Acquired
Assets relating to the Outdoor Business of the Company, other than Excluded
Assets, Cascade has agreed to pay to the Company an amount in cash equal to the
Closing Asset Value plus $300,000 (the "Purchase Price"), and to assume the
Assumed Liabilities. If the Closing had occurred on December 12, 1997,
management estimates that the Closing Asset Value would have been approximately
$1,200,000.
The Purchase Price is payable at the Closing by bank or certified
check or by wire transfer. The Closing Asset Value is to be calculated by
conducting a physical count of all inventory prior to and as close as
practicable to the Closing Date and in no event later than the second business
day after the date of the Meeting. The calculation of Closing Asset Value is to
be set forth in a statement to be signed by the Company and Cascade at the
Closing which statement shall be final and binding upon both parties for all
purposes. 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 closing of the Sale (the "Closing") is scheduled to occur no
later than the fifth business day following the approval of the Sale Transaction
by the Company's shareholders at the Meeting (the "Closing Date"). The
obligations of the parties to consummate the Sale Transaction are subject to
certain customary conditions such as the accuracy of representations and
warranties in the Sale Agreement, the performance of the covenants set forth
therein and to the absence of certain legal actions or proceedings prohibiting
consummation of any of the transactions contemplated by the Sale Agreement, the
approval of the Sale Transaction by the Company's shareholders at the Meeting,
the execution and delivery of Non-Competition Agreements by Eric W. Reynolds and
Jerry Cogdill, and the execution and delivery of the License Agreement by
Cascade and the Company.
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Assets and Liabilities to be Transferred. The assets to be
transferred to the Buyer 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 Company's interest in
and to all improvements thereon and all of the furniture, fixtures and equipment
owned by the Company 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 the
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 Outdoor Contracts
and all claims, demands, judgments and rights of set-off relating to the Outdoor
Contracts; (vi) 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 (including, without limitation, rights under
any insurance policies of the Company, refunds, tax refunds and claims thereto)
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 (including, without limitation, payroll
records and paid invoices) relating to Tax Returns; (iv) all rights of Seller
under the Sale Agreement and the agreements and instruments delivered to Seller
by Purchaser 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
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prior to the Closing Date, the Company'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 the Company's employees
prior to the Closing Date at the Facility; (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.
Representations and Warranties. The Sale Agreement contains various
representations and warranties of the Company including, among others,
representations and warranties related to corporate organization and similar
corporate matters; authorization and enforceability; non-contravention of
transactions contemplated by the Sale Transaction of the Company's certificate
of incorporation or by-laws, and non-violation of laws and binding agreements;
consents and approvals; compliance with laws, licenses and permits pertaining to
the Outdoor Business; the accuracy of financial statements provided to the
Buyer; accounts receivables and inventories; absence of certain changes since
June 30, 1997; absence of legal proceedings; ownership, condition and title to
assets and properties; taxes and tax returns; contracts; patents, trademarks and
tradenames; environmental matters; absence of brokers; and the accuracy of
information relating to the Company to be contained in this Proxy Statement.
The Sale Agreement contains various representations and warranties of
Cascade including, among others, representations and warranties related to
corporate organization and similar corporate matters; authorization and
enforceability; non-contravention of transactions contemplated by the Sale
Transaction of Cascade's certificate of incorporation or by-laws and
nonviolation of laws or binding agreements; consents and approvals; absence of
brokers; absence of legal proceedings challenging the validity of the Sale
Agreement, and the accuracy of information relating to Buyer to be contained in
this Proxy Statement.
The representations and warranties survive the Closing for a period
of one year from the Closing Date or until expiration of the applicable statutes
of limitations in respect of tax matters and title to the Acquired Assets.
No Solicitation. Pursuant to the Sale Agreement, the Company has
agreed not to 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 the Company and its
directors and officers may furnish information to any other Person who, after
the date of the Sale Agreement, submits a written offer for the stock or assets
of the Company, if the Board of Directors determines, upon advice of counsel to
such effect, that the fulfillment of the fiduciary duties of the Board of
Directors requires that the Company furnish such information.
Covenants. Pursuant to the Sale Agreement, prior to the Closing,
Seller has agreed (i) to conduct the Outdoor Business in the ordinary course,
consistent with past practice, and to use all reasonable efforts to maintain its
relationships with lessors, suppliers, vendors, customers and employees; (ii) to
permit representatives of the Buyer 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; (iii) as soon as reasonably practicable
after the date of the Sale Agreement, to prepare
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for filing and file with the Securities and Exchange Commission this Proxy
Statement in preliminary form to approve the Sale Transaction and such other
matters as may be necessary or desirable to include herein; (iv) to use all
reasonable efforts to call a meeting of the holders of its Common Stock as
promptly as practicable after the date of the Sale Agreement, for the purpose of
obtaining approval of the Sale Transaction and to use all reasonable efforts to
hold such meeting; and (v) subject to the accuracy of the representations and
warranties of Buyer set forth in Article V of the Sale Agreement, through its
Board of Directors, to recommend to the holders of its Common Stock approval of
the Sale Transaction.
Pursuant to the Sale Agreement the Company and the Buyer have agreed
(i) to 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 the Sale Agreement and (ii) from the date of the Sale Agreement
through the Closing Date, that no public release or announcement concerning the
Sale Transaction will 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.
Covenant Not to Compete. The Company has agreed that, for a period of
three years from and after the Closing Date it will not engage, directly or
indirectly, in the business of manufacturing, distributing or selling portable
water filtration and purification devices in the outdoor recreational or the
travel-related markets; provided, however, that the Company will not be
prohibited from owning less than 5% of the outstanding stock of any publicly
traded corporation.
Indemnification. The Company has agreed to indemnify, defend and hold
harmless Buyer and Buyer's affiliates from and against any and all losses,
liabilities, obligations, payments, damages, costs and expenses 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
Company contained in the Sale Agreement or in any agreement, document or
instrument executed and delivered pursuant thereto or in connection therewith;
and (ii) any Excluded Liability.
The Buyer has agreed to indemnify, defend and hold harmless the
Company and the Company's affiliates from and against any and all losses,
damages, costs and expenses 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 Buyer contained in the Sale
Agreement or in any agreement, document or instrument executed and delivered
pursuant thereto in connection therewith; and (ii) any Assumed Liability.
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.
Neither party shall be entitled to assert any claim with respect to
any indemnifiable losses until such time as the aggregate amount of all of such
indemnifiable losses exceed $10,000 (the "Basket Amount"). At such time as such
party's indemnifiable losses exceed, in the aggregate, the Basket Amount, then
such party and its affiliates may assert all of their claims for such
indemnifiable losses up to a maximum of $500,000.
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Expenses and Transfer Taxes. Each party has agreed to bear its own
fees and expenses in respect of the Sale Transaction, except that the Buyer has
agreed to paying all Transfer Taxes payable in connection with the Sale
Transaction.
Termination. 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 the Buyer, (ii) by the Buyer 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.
LICENSE AGREEMENT
Under the terms of the Sale Agreement, at the Closing, Cascade must
execute and deliver a License Agreement which grants to the Company a
royalty-free, exclusive, worldwide, irrevocable and transferrable right and
license (the "License") to use, commercialize, exploit and sublicense a water
treatment process currently under development by the Company (the "Formula") in
connection with the design, manufacture, production and distribution of home use
water filtration and purification products, home health care appliance products,
and laboratory filtration and purification products (collectively, the
"Products"), but excluding portable water filtration and purification products
for outdoor use. The License has a term of seventeen years from the date of the
first public sale of a product utilizing the Formula, and shall be automatically
renewable for successive one-year terms unless the Company sends written notice
to Cascade of its election not to renew the License Agreement. The License is
terminable by either party if the other party (i) is adjudicated bankrupt or
insolvent, or if a receiver is appointed for any substantial portion of such
party's assets or (ii) is in default in the performance of any material term of
the License Agreement and such default continues for a period of 90 days
following receipt of notice from the non-defaulting party of such default.
Upon completion of the Sale Transaction, if the Board determines
that it is advisable to continue development of the Formula, the Company, in
collaboration with Cascade, and through the use of consultants, may continue to
test and develop this process with a view to sublicensing the Formula to
companies that will manufacture Products using the Formula in exchange for a
royalty. As the Formula was developed for use in the Outdoor Business and was in
the early stages of development at the time of the sale of the assets relating
to the Company's home use product in April 1997, the Formula was not included in
such sale at that time. In addition, additional development and testing is
expected to be required before a determination can be made if a home use product
utilizing the Formula is possible.
NON-COMPETITION AGREEMENT
Under the terms of the Sale Agreement, at the Closing, Messrs.
Reynolds and Cogdill must execute and deliver a Non-Competition Agreement
pursuant to which each executive will agree that for a period of three years
from and after the Closing Date (i) he will not, knowingly, directly or
indirectly, as a principal, officer, director, owner, shareholder (other than as
a holder of less than 5% of the outstanding stock of any publicly traded
corporation), partner, employee, agent, or in any other capacity whatsoever,
engage in, be or become associated with, or advise or
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assist any business, firm, partnership, individual, corporation, or any other
entity with regard to the design, development, manufacture or marketing of
portable water purification and filtration devices for the worldwide outdoor
recreational and travel-related markets, (ii) he will not directly or indirectly
solicit for employment any current employee of Cascade, and (iii) he will not
directly or indirectly, solicit business with respect to portable water
filtration and purification systems from persons or entities that have at any
time been customers of Cascade or the Company.
PROPOSAL NO. 2 - THE AMENDMENT
PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE
COMPANY
Under the terms of the Sale Agreement, the Company has agreed to
change its name upon consummation of the Sale. Accordingly, if the proposed Sale
Transaction is approved, the Company must amend its Certificate of Incorporation
to change the Company's name. The Board of Directors proposes to change the name
of the Company to "SWWT, Inc." if the Sale Transaction is approved. By voting to
approve the Amendment, shareholders will authorize the Board of Directors to
amend the Certificate of Incorporation to change the name of the Company if the
Sale Transaction is consummated. If the Sale Transaction is not approved or
consummated, the proposed Amendment will not be filed and the name of the
Company will not be changed. Approval of the proposed amendment to the
Certificate of Incorporation to change the name of the Company requires the
affirmative vote of a majority of the outstanding shares of the Company's Common
Stock. The Company's Board of Directors recommends a vote FOR Proposal No. 2.
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 "Selected Historical and Unaudited Pro Forma
Financial Data" and "Financial Statements" appearing elsewhere in this Proxy
Statement.
19
<PAGE> 22
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 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 $ - C $ 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
Additional paid in capital 12,431,079 3,099
Accumulated deficit (10,679,284) (103,000)C 12,431,079
(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.
20
<PAGE> 23
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)
========== =========== ============
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE $ (0.31) $ (0.09)
========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,087,653 3,087,653
========== ============
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information
are an integral part of this balance sheet.
21
<PAGE> 24
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)
=========== =========== ===========
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE $ (1.38) $ (0.55)
========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,065,311 3,065,311
========== ============
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information
are an integral part of these financial statements.
22
<PAGE> 25
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)
=========== =========== =========
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE $(1.34) $(0.11)
=========== =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,948,946 1,948,946
=========== =========
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information
are an integral part of these financial statements.
23
<PAGE> 26
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)
=========== =========== =========
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER COMMON SHARE $(0.92) $(0.06)
=========== =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,789,142 1,789,142
=========== =========
</TABLE>
The accompanying footnotes to Unaudited Pro Forma Financial Information
are an integral part of these financial statements.
24
<PAGE> 27
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. As of November 30, 1997, the
estimated cash proceeds from the Sale Transaction is $1,466,058, the
estimated net proceeds from the Sale Transaction is $731,058 after payment
of severance and management bonuses aggregating approximately $665,000 and
transaction costs estimated at $70,000. As of November 30, 1997, the
expected gain on sale of assets is $561,878.
B. Note: In the table below the November 30, 1997 balance sheet information,
estimated gross sales proceeds, and estimated gain on sale of assets has
been provided as additional information. 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. The Company expects a loss on
operations from September 30, 1997 to the expected sale date of $172,000
which includes transaction costs of $70,000 but excludes severance and the
management bonus.
<TABLE>
<CAPTION>
September 30, November 30,
1997 1997
------------- ------------
<S> <C> <C>
Accounts Receivable $ 174,895 67,241
Inventory 611,148 574,724
Prepaid Expenses 35,938 17,865
Fixed Assets 294,000 309,323
Deposits and Other 6,436 6,436
---------- ----------
Subtotal Assets to be sold 1,122,417 975,589
Liabilities to be assumed 72,031 71,409
--------- ---------
Net Assets to be sold 1,050,386 904,180
Gross Sales Proceeds 1,612,386 1,466,058
---------- ---------
Gain on Sale of Assets 562,000 561,878
Severance and Management Bonuses 665,000 665,000
Expected Loss on Operations
prior to Sale of Assets 172,000 70,000
Pro Forma Increase in Accumulated
Deficit from Balance Sheet date
to Sales Date $(275,000) $(173,122)
========= =========
</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. Pro Forma Accumulated Deficit increase of $103,000
represents $562,000 gain on sale of assets less $665,000 severance and
Management Value Appreciation Bonus.
D. Pro Forma adjustments for the nine months and years ended September 30, 1997
and December 31, 1996, 1995 and 1994, respectively, represent the sales,
cost of sales, and operating expenses relating to portable water filtration
and purification products for outdoor use. The remaining pro forma financial
statement balances for sales and marketing and research and development
after adjustment represent the operating expenses incurred to develop the
home use water purification technology which was sold in the second quarter
of 1997. The remaining pro forma financial statement balances after
adjustment represent the Company's general and administrative overhead not
attributable to either the portable outdoor or indoor home use products and
technology. Salaries attributable to corporate general and administrative
expenses were $52,500, $70,000, $70,000, and $70,000 for the nine months and
years ended September 30, 1997 and December 31, 1996, 1995, and 1994,
respectively.
25
<PAGE> 28
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The summary below sets forth selected historical financial data and selected
unaudited pro forma financial data. The financial data set forth below should be
read in conjunction with the financial information included elsewhere in this
Proxy Statement and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data presented below for the years ended
December 31, 1996 through December 31, 1992 are derived from the financial
statements of the Company, which statements have been audited by Arthur Andersen
LLP, independent public accountants. The selected historical financial data
presented below for the nine month periods ended September 30, 1997 and 1996 are
unaudited. No dividends have been paid for any of the periods presented.
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED (UNAUDITED)
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ 1,438 $ 1,869 $ 2,064 $ 2,163 $ 1,703 $ 75 $ --
Gross Margin 310 456 103 232 189 30 --
Cost and Expenses:
General & Administrative 787 778 1,402 1,152 806 412 21
Sales & Marketing 469 1,140 1,346 1,090 736 175 3
Research & Development 237 703 1,029 624 428 531 49
Impairment loss 686
Operating Income (Loss) (1,183) (2,165) (4,360) (2,634) (1,781) (1,088) (73)
Other Income (Expenses), net 228 110 128 29 139 25 (5)
Net Loss (955) (2,055) (4,232) (2,605) (1,642) (1,063) (78)
Net Loss per Common Share(2) (.31) (.67) (1.38) (1.34) (.92) (.95) (.07)
Weighted Average number of
common shares outstanding(1) 3,088 3,066 3,065 1,949 1,789 1,123 1,100
</TABLE>
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED (UNAUDITED)
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (deficit) $ 1,454 $ 2,178 $ 5,847 $ 3,661 $ 853 $(105)
Total Assets 2,046 3,309 7,506 5,114 1,660 10
Long Term Debt -- -- 208 371 -- --
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
NINE MONTHS
ENDED (UNAUDITED)
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Liabilities 291 617 616 910 197 114
Accumulated earnings (deficit) (10,679) (9,724) (5,492) (2,887) (1,244) (181)
Stockholder's equity (deficit) 1,755 2,692 6,890 4,204 1,463 (104)
</TABLE>
(1) See notes to financial statements for information with respect to the
calculation of share and per share data.
27
<PAGE> 30
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The selected unaudited pro forma financial data gives effect to the proposed
Sale Transaction, assuming that the Sale Transaction had been effective for all
periods presented. The selected unaudited pro forma financial data do not
necessarily indicate the operating results that would have occurred had the Sale
Transaction been consummated on the dates for which the Sale Transaction are
being given effect, nor do they necessarily indicate future operating results.
See "Unaudited Pro Forma Financial Information."
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING DATA
Net Sales -- -- -- -- -- -- --
Gross Margin -- -- -- -- -- -- --
Cost and Expenses:
Sales & Marketing 56 178 267 -- -- -- --
Research & Development 237 582 908 -- -- -- --
General & Administrative 221 213 628 249 248 82 21
Operating Income (Loss) (514) (973) (1,803) (249) (248) (82) (21)
Other Income (Expenses), net 227 110 128 29 140 25 (5)
Net Income (Loss) from
Continuing Operations (287) (863) (1,675) (220) (108) (57) (26)
</TABLE>
28
<PAGE> 31
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 entered into the Sale Agreement
pursuant to which, subject to the approval of its shareholders at the Meeting,
substantially all of the Company's business, operations and assets will be sold
to Cascade. A description of the Sale Agreement, the assets to be sold and the
liabilities to be retained, is set forth under the heading "The Sale Agreement."
A copy of the Sale Agreement is attached hereto as Appendix A.
The following discussion and analysis of financial condition and
results of operations covers the nine month periods ended September 30, 1997 and
1996 and the years ended December 31, 1996, December 31, 1995 and December 31,
1994 and should be read in conjunction with the Company's Financial Statements
and the Notes thereto included in this Proxy Statement.
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 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.
29
<PAGE> 32
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED 1996, 1995 AND 1994
1996 COMPARED TO 1995
Sales decreased 5% from $2,162,000 in 1995 to $2,064,000 in 1996
primarily due to lower Guardian unit sales partially offset by both a higher
selling price for the Guardian, higher Guardian+Plus unit sales and the
introduction of the new WalkAbout(TM) microfilter. The Company believed that
overall sales of portable water filtration products in the outdoor specialty
sporting goods market declined during the year as a result of the maturation of
such market. The Company believed 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.
Gross margin of $103,000 in 1996 was lower than the prior year gross
margin primarily due to lower sales of higher margin Guardian and accessory
products.
Sales and Marketing expenses increased 23% from $1,090,000 in 1995 to
$1,346,000 in 1996 primarily due to increased market research and staffing costs
in connection
30
<PAGE> 33
with the development of the home drinking water treatment products and sales
commissions to the sales force for the portable outdoor product line.
Research and Development expenses increased 65% from $624,000 in 1995
to $1,029,000 in 1996 primarily due to the Company's increased investment in
research and development associated with new products for the home drinking
water treatment market.
General and Administrative expenses increased 22% from $1,152,000 in
1995 to $1,402,000 in 1996 primarily as a result of higher investment banking
expenses partially offset by lower corporate legal expenses.
Other income increased 32% from $122,000 in 1995 to $161,000 in 1996
primarily due to higher case balances to invest in 1995. Other expense decreased
64% to $33,000 in 1996 due to the Company's repayment of borrowings in 1996.
The Company's operating expenses increased in 1996 as a result of the
research and development associated with the development of a new home use
product. The Company 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 Outdoor Business.
1995 COMPARED TO 1994
Sales increased 27% from $1,703,000 in 1994 to $2,163,000 in 1995
primarily due to the introduction of two new products in April 1995, the
Guardian+Plus and the ViralGuard.
Gross margin of $232,000 in 1995 remained at the same 11% level as a
percentage of sales as in 1994. This was due primarily to the benefit of higher
sales volumes offset by increases in costs from fixed overhead exceeding the
increase in production volume for the year. Additional overhead costs in the
period were primarily associated with higher personnel and occupancy costs plus
product engineering and design of automated and semi-automated assembly methods
for the manufacturing of the Company's products. This equipment was completed on
time, meeting the Company's thruput and capacity objectives, however, the costs
will continue to restrain margins until adequate production volumes are reached
to spread these and other overhead costs.
Operating expenses increased 45% from $1,970,000 in 1994 to $2,866,000
in 1995 as the Company continued to expand its infrastructure to support the
increased level of sales and operations. General and Administrative expenses
increased 43% from $806,000 in 1994 to $1,152,000 in 1995 primarily as a result
of significant additional legal expenses in conjunction with matters relating to
the microbiological study conducted by the University of Arizona at the request
of the Company and increases in the Company's operations and staff. Sales and
Marketing expenses increased 48% from $736,000 in 1994 to $1,090,000 in 1995
primarily due to increased staffing in sales and customer service as well as
increased sales commissions with the use of new sales representatives, the costs
associated with a microbiological study conducted by the University of Arizona
at the request of the Company and increased travel and advertising costs.
Research and Development increased 45% from $429,000 in 1994 to $624,000 in 1995
primarily
31
<PAGE> 34
due to an expansion of the research and development staff, including other costs
associated with the development of new products, primarily prototypes and
testing.
Other income decreased 11% from $136,000 in 1994 to $122,000 in 1995
primarily due to higher cash balances to invest in 1994. Other expense increased
100% to $93,000 in 1995 due to the Company's new borrowings in 1995.
The Company's operating expenses increased as a result of the expansion
of sales and marketing, manufacturing and new product research and development.
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.
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.
32
<PAGE> 35
DESCRIPTION OF CURRENT BUSINESS
GENERAL
SweetWater, Inc. ("SweetWater" or the "Company") is currently a water
technology company specializing in the development of water filtration and
purification devices and technologies to address health concerns resulting from
the microbiological contamination of drinking water. The Company's first
product, the Guardian(TM) Micro-Filtration System ("Guardian"), is a compact,
lightweight, portable water filtration device intended to protect individuals
from waterborne diseases (and their accompanying debilitating symptoms such as
diarrhea, fever and dehydration) by removing protozoa (such as Giardia and
Cryptosporidium), parasites and most bacteria from drinking water. In May 1995,
the Company began marketing the ViralGuard(TM) Cartridge, a portable water
purification device designed to be attached to and used in conjunction with the
Guardian and to convert the Guardian from a "filter" to a "purifier," which is
capable of inactivating viruses in addition to removing bacteria and protozoa.
The Company markets the Guardian and the ViralGuard together as the
"Guardian+Plus(TM)." The Company believes that the Guardian provides outdoorsmen
with a reliable, inexpensive, easy to use, and fast method for treating fresh
water supplies contaminated by micro-organisms. With the Guardian+Plus now
available, the Company may pursue broader markets including tourist and business
travelers and emergency and relief workers who have a need for protection from
waterborne viruses.
Awareness of drinking water contamination has become increasingly
widespread in the United States and internationally. The Company believes that
microbiological contamination of drinking water is a significant and growing
threat to public health in the United States and that unsafe water and poor
sanitation are generally recognized as a leading cause of human illness in the
world. The Federal Center for Disease Control recently estimated that each year
940,000 people become ill and as many as 900 may die from microbiologically
contaminated water. Cryptosporidosis is particularly dangerous to
immune-compromised individuals. The Center for Disease Control estimates that
20% of the U.S. population are specifically identified as an "at risk"
population for Cryptosporidosis; including people over 55 and under 5 years of
age, immune compromised individuals such as those undergoing treatment for
cancer, organ transplant patients, and individuals who are HIV positive. The
Company is committed to, and its products are intended to, address health
concerns resulting from the microbiological contamination of drinking water.
It is estimated that over 90% of the surface waters in the United
States have been found to be contaminated with protozoan parasites, such as
Giardia or Cryptosporidium ("Crypto"), both of which are very resistant to
chemical disinfectants, such as iodine and chlorine. Filtration is the preferred
method for eliminating these pathogens from drinking water. Brochures
distributed by the National Park Service advise visitors to the nation's most
popular parks not to drink untreated or unboiled water.
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. Although the Company
and Dillon Read, the Company's exclusive agent, actively pursued a joint
strategic alliance to manufacture and market the home use product, the Company
was not successful in locating an industry partner to manufacture and market
this potential product. Accordingly, the Company suspended its efforts to
manufacture and market this product and in
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<PAGE> 36
April 1997 sold the plans, designs and technology associated therewith and
realized net proceeds of approximately $210,000. The Company has 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 its Outdoor Business.
Although the Company 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. 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.
Pursuant to the terms of the Management Agreement, Messrs. Reynolds,
Thomas and Cogdill agreed to remain with the Company through January 31, 1998 in
exchange for certain performance bonuses and a right of first refusal to
purchase the Company's portable water filtration and purification business (the
"Outdoor Business") in the event certain performance targets are met and the
Company elects to sell such business during the period commencing January 1998
and ending on July 1, 1998. If the Sale Transaction is not consummated, and the
Company elects to sell the Outdoor Business prior to July 1, 1998, under the
terms of the Management Agreement, Messrs. Reynolds, Thomas and Cogdill would
have a right of first refusal with respect to such sale. If the Sale Transaction
is consummated, Messrs. Reynolds, Thomas and Cogdill shall be entitled to
receive a bonus, which is more particularly described under "The Sale
Transaction - Interests of Certain Persons in the Sale."
The Company was incorporated in Colorado in March 1991 and
re-incorporated in Delaware in September 1993. In January 1994, the Company
effected its initial public offering. The Company's principal office is located
at 1140 Boston Avenue, Unit A, Longmont, CO 80501 and its telephone number is
(303) 678-0447.
PRODUCTS
The Company's current product line is comprised of three primary
devices: two microfilters (the Guardian and the WalkAbout) and one purifier (the
Guardian+Plus). Customers can continue to use the primary devices by purchasing
available recyclable replacement Filter Cartridges. Several accessory products
are also sold that enhance the product line.
The Guardian Micro-Filtration System: The Company's first product, The
Guardian Micro-Filtration System, continues to be the Company's best-known, best
selling product at a suggested retail price of $49.95. Designed to help protect
individuals from waterborne diseases by removing protozoa, bacteria, sediments,
and foul tastes from drinking water, the Guardian is designed to effectively
filter out organisms as small as .2 microns in size. It is effective at
eliminating Cryptosporidium and Giardia, two protozoa varying in size from 3 to
12 microns and commonly found in surface water. The Guardian's recyclable
replacement Filter Cartridge,
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<PAGE> 37
which filters up to approximately 200 gallons of clear water and a lesser amount
of sediment water, was designed to be simple to remove, clean, and replace. A
patented pre-filter, a water bottle adapter, two long hoses (one for intake and
one for output) and a brush for cleaning all come as part of the Guardian
package and all contribute to its ease of use and superior design. While the
Guardian is a "water filter", not a "purifier", it does exceed the U.S. EPA
Water Purifier Guide Standard removal minimums for protozoa and bacteria, which
are 99.9% and 99.9999% respectively.
WalkAbout: The WalkAbout, a "micro-filter" that removes bacteria and
protozoa, was introduced in May 1996 and is currently offered at a suggested
retail price of $39.95. The WalkAbout was developed to provide casual hikers and
campers with a product that delivers the same health protection as the Guardian
(99.9% removal of protozoa, and 99.9999% removal of bacteria) and is marketed
with the same water bottle adapter and patented pre-filter as the Guardian and
its two hoses, both 33 inches long, are also comparable to the Guardian's.
The Guardian+Plus System: The Company offers consumers a "water
purifier" that goes one step beyond the Guardian by killing or deactivating
viruses in addition to eliminating bacteria and protozoa and reducing tastes and
odors. The Guardian+Plus at a suggested retail price of $69.95, consists of a
Guardian with a ViralGuard Cartridge attached. The ViralGuard, at a suggested
retail price of $24.95, is a small cartridge that attaches to the base of the
Guardian and has a 90 gallon maximum capacity and adds approximately 2 inches to
the Guardian. It plugs in to the base of the Guardian and the input hose
attaches to its base. The Guardian+Plus meets the requirements of the "U.S. EPA
Guide Standard Protocol for Evaluation of Microbiological Water Purifiers" by
killing or deactivating 99.99% of waterborne viruses. Viruses are inactivated by
contact with the iodinated resin bed of the Guardian+Plus and through the
residual iodine concentration remaining in the water from passing through the
Guardian's filter. Management believes that the Guardian+Plus provides consumers
with a cost effective and versatile purifier. The Guardian+Plus provides the
Company with a product that it can market to overseas travelers (who encounter
virus infested water more often than hikers in the U.S.) and as an emergency
preparedness device.
Replacement Cartridges: The Guardian, Guardian+Plus and WalkAbout are
designed to enable the consumer to continue to use these products by purchasing
recyclable replacement Filter Cartridges. Consequently, in addition to sales to
new customers, the Company expects to service the needs of a growing base of
"installed inventory", some percentage of which will require replacement Filter
Cartridges to continue to use the Company's primary products. The Company
believes that this opportunity, a fundamental attribute of all water filtration
products, will result in an ongoing demand for replacement Filter Cartridges.
The Guardian's Filter Cartridge, at a suggested retail price of $29.95, filters
up to approximately 200 gallons of clear water and a lesser amount of sediment
water and is designed to be simple to remove, clean, and replace. Consumers who
currently own a Guardian may purchase ViralGuard Cartridges as an upgrading
accessory at a suggested retail price of $24.95. In addition, the Company
markets the WalkAbout with a replacement Filter Cartridge at a suggested retail
price of $17.95.
Accessories: In addition to the Guardian, the Guardian+Plus, the
WalkAbout, the ViralGuard Cartridge and the replacement Filter Cartridge for the
Guardian and WalkAbout, the Company also manufactures six accessories. In March
1996, the Company began shipping a new and improved Silt Stopper II, which
extends the useful life of any brand of filter or purifier in muddy water. The
Pre-filter has also undergone design improvements and management believes it
continues to be the most effective pre-filter in rushing water or still pools.
The Universal Water Bottle Adapter fits most water bottles on the market and
allows for spill free
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<PAGE> 38
filling. A Carry Bag, replacement filter cleaning brushes, and replacement hoses
are also available as accessories. In addition to selling these six products as
accessories to the Guardian, Guardian+Plus, and WalkAbout, the Company markets
these accessories as compatible with and improving the performance of
competitive products.
SALES
The Company's products are sold in the United States and in eight
countries around the world primarily to specialty sporting goods stores that
specialize in backpacking, hiking, mountaineering, and adventure travel
outfitting. Sales of the Company's products are seasonal with increased demand
for the Company's products in the warmer months of the year. Approximately 68%
of the Company's annual sales for 1996 occurred in the second and third
quarters. In addition, one customer, Recreational Equipment, Inc., a leading
retailer, accounted for approximately 31% of the Company's annual sales for
1996. In late 1995, the Company hired an independent sales representative force
to cover fourteen North American sales regions (nine in the U.S. and 5 in
Canada). The sales representatives are managed by an in-house sales manager and,
if the Sale Transaction is not approved, the Company intends to continue
marketing its products through the use of independent sales representatives.
Export sales amounted to 11% of the Company's sales in 1996, primarily to
Canada.
MARKETING
If the Sale Transaction is not approved, the Company's future success
will depend, in part, upon its ability to market its current products to
existing users of portable water filtration and purification products and to
expand the market for water filtration and purification products, domestically
and internationally. As the Company believes that the outdoor specialty sporting
goods market for the Company's products has matured, any future sales growth for
the Company's products will depend on the ability of the Company and other
manufacturers to expand the market and to develop larger distribution channels,
such as general sporting goods stores and mass merchants. As general sporting
goods stores and mass merchants have only recently begun to sell the product
category, the Company cannot be assured that the market for such products will
expand.
The Company markets its products through point-of-purchase displays,
updated consumer brochures, and training manuals filled with product
information, newsletters, and technical briefs, which are distributed to
retailers. In 1996, the Company supplemented these materials by broader media
coverage through the use of an independent media consultant, a new advertising
campaign which appeared in both trade and consumer publication throughout the
spring and summer of 1996, and a web-site on the Internet (which was established
in February 1996).
Swiss Army Brands, Inc. ("Swiss Army Brands"), has provided
warehouse and shipping facilities to assist the Company in distributing its
products in Canada. If the Sale Transaction is not approved, the Company
anticipates that Swiss Army Brands will continue to assist the Company regarding
marketing and/or distribution, although Swiss Army Brands has no obligation to
assist the Company and the Company cannot be assured that it will do so.
MANUFACTURING AND QUALITY ASSURANCE
The Company has invested heavily in the design, acquisition and
implementation of manufacturing systems which permit the automated and
semi-automated assembly of the
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<PAGE> 39
Guardian, ViralGuard and the WalkAbout and enable the Company to test the
efficiency of 100% of the Guardian Filter Cartridges by automated means. In
addition, the Company performs microbiological test audits on a small sample of
its production of ViralGuards on a periodic basis as a quality control measure.
Management believes that its automation of the assembly processes provides it
with the ability to manufacture superior products at low cost, thus providing
greater margin opportunities. Automation has also allowed the Company to offer
"Just-In-Time" product delivery, a benefit particularly appreciated and required
by mail-order catalog retailers and mass-merchants.
Manufacturing of all the Company's products is done from the Longmont,
Colorado facilities. Manufacturing represents 7 persons or 58% of the Company's
full time employees including its Chief Operating Officer.
RAW MATERIALS; SUPPLIERS
The Company purchases raw materials and components used in the
Company's products from a number of different suppliers both foreign and
domestic. The Company owns the molds and metal tooling for the Guardian,
Guardian+Plus, and ViralGuard components but uses injection molders and metal
fabrication shops to manufacture the components to the Company's specifications.
The Company's products involve proprietary filter technology. The
Company purchases its filter tubes from one specialized third party manufacturer
pursuant to an agreement which provides that the manufacturer will not sell such
filters to other manufacturers of portable water filtration devices for a period
equal to the greater of three years or the length of a binding purchase order
contract between the Company and such third party manufacturer. The Company
believes that is has a sufficient supply of filter tubes in inventory and could
develop an additional supplier if necessary.
The Company currently has one supplier for the iodinated resin in the
ViralGuard. The Company has purchase commitments with this supplier, as well as
a large inventory supply, and does not have any reason to believe that
sufficient supplies of the iodinated resin will not be available. The Company is
investigating alternate sources of supply for this resin.
RESEARCH, DEVELOPMENT AND TECHNICAL RESOURCES
As a result of its cost containment program and the suspension of its
efforts to manufacture and market a home use product, the Company has eliminated
its research and development staff and its microbiological staff. The Company
may employ consultants from time to time to engage in research and development
relating to its current products, if required. In such event, the Company
expects to enter into formal consulting agreements which require such
consultants to execute confidentiality agreements. The Company's expenditures
for research and product development for the years ended 1996, 1995, and 1994
were $1,029,000, $624,000 and $429,000 respectively.
The water filtration and purification markets in which the Company
competes are subject to technological changes. Although the Company has invested
significant amounts in the development of the Guardian and Guardian+Plus, the
Company cannot be assured that future technological developments will not render
the Company's products uneconomical and/or obsolete. The limited nature of the
Company's products could also increase its vulnerability to technological
developments and competition.
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COMPETITION
As the water treatment market is still developing, the Company cannot
predict the potential size of the market when it matures or which companies may
ultimately emerge as its principal competitors. A number of companies with
substantially greater resources than the Company currently sell products for
household water treatment, and if these companies were to expand into the
portable water treatment market, such companies could provide substantial
competition in the future.
The Company believes that health protection, efficiency, size, weight,
durability and price will be important considerations to the potential buyer of
a portable water filter or water purifier. Although the Company believes that
the Guardian capitalizes on these criteria, the Company cannot be assured that
the Company's competitors, some of whom may have substantially greater
resources, will not re-configure their products or introduce new products which
would have an adverse effect on the Company's ability to compete. Although the
suggested retail price of the Guardian, Guardian+Plus, and WalkAbout are
currently lower than or equal to products which the Company believes are
comparable, there are a number of products which the Company believes are not
comparable in performance which have significantly lower suggested retail
prices.
The Company currently competes with several companies in the
manufacture of portable water filters and water purifiers including Recovery
Engineering, Inc. ("REIN"), General Ecology, Inc., Katadyn U.S. A., Inc.,
Mountain Safety Research, Inc., WTC Industries, Inc., Basic Designs, Inc., and
Timberline, Inc. REIN, a publicly traded company which markets its products
under the trade name, PUR, maintains the largest market share of all competitors
in the portable water filtration and purification category.
PATENTS AND TRADEMARKS
The Company's success will depend, in part, upon its ability to obtain
and enforce intellectual property protection for its technology in the United
States and in foreign countries. The Company has maintained the practice, where
possible, to obtain patent protection on its products and processes. As of March
1997, the Company has five United States patents and three international patents
issued.
The Company believes that it owns, or has the right to use all the
proprietary technology currently embodied in its products, although the Company
has not conducted a formal infringement search or obtained an infringement
opinion. The Company cannot be assured that infringement claims will not be made
in the future or that the validity of a patent issued to the Company will be
sustained if judicially tested. The cost of defending a patent infringement
claim, or prosecuting a claim of infringement against others, may be substantial
and the Company cannot be assured that it will have the resources necessary to
successfully defend or prosecute a patent infringement claim.
The Company may elect to retain a patentable invention as a trade
secret or, if patent protection is not available, the Company will be required
to rely on a combination of trade secret laws, non-disclosure and
confidentiality agreements with its officers, employees, consultants and vendors
to protect its proprietary technology. Although these agreements prohibit the
unauthorized use or disclosure of the Company's proprietary information both
during and after the individual's service to the Company, the Company cannot be
assured that it would have adequate remedies if these agreements were breached.
In addition, third parties
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<PAGE> 41
may independently develop and patent technologies that are substantially
equivalent or superior to the Company's technology.
In 1995, the Company acquired, by assignment, the permanent and
exclusive use of the "SweetWater(R)" trademark for use with filters for domestic
use for purifying potable water. The Company also holds issued registered
trademarks for "SweetWater" from Benelux, Canada, France, Italy, Japan, Mexico,
New Zealand, and the United Kingdom. The Company also holds six United States
issued registered trademarks for "SiltStopper(R)", "Tap-Adapt(R)",
"ViralGuard(R)", "TravelGuard(R)," "Guardian+Plus(R)" and "WalkAbout(R)." The
Company also uses the name "Guardian." The Company cannot be assured that it
will be able to successfully maintain exclusive use of any of these marks or
that it will not be prevented from using one or more of them.
GOVERNMENT REGULATION
The Guardian as presently marketed does not require registration by the
U.S. Environmental Protection Agency (EPA). The EPA regulates the manufacturing,
marketing, advertising and distribution of microbiological water purification
devices containing active ingredients, such as iodine, pursuant to the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA"), as amended. Under a
revised protocol issued by the EPA in 1987 (the "Protocol"), a device must
remove, kill or deactivate all types of disease-causing microorganisms from
water, including bacteria, viruses, and protozoan cysts, to be registered as a
"microbiological water purifier." While the Guardian alone does not require
registration, the Guardian+Plus (the Guardian packaged together with the
ViralGuard Cartridge) and the ViralGuard Cartridge (when sold separately as an
accessory) cannot be sold without EPA registration numbers on their packaging.
The ViralGuard Cartridge and the Guardian+Plus received its EPA Registration
number on April 14, 1995. The EPA evaluates these devices as "emergency" devices
because they are not intended for use as continuous drinking water sources.
Microbiological water purifiers must also be registered prior to sale
in California and Iowa under state regulations similar to those enacted by the
EPA. The Company has received California EPA approval for the ViralGuard
Cartridge and has begun the registration process on the Guardian+Plus. The
Company has not yet registered the ViralGuard Cartridge and the Guardian+Plus in
Iowa which requires registration of water filters and purifiers prior to sale.
The Company is also subject to regulation with respect to the handling
and disposal of the iodinated resin used during the manufacture of the
ViralGuard. The Company believes that it is in compliance with such regulations.
The Company advises consumers, through its labeling, that small amounts of
iodine may be present in the water treated by the Company's ViralGuard and that
persons with thyroid problems and pregnant women should consult their doctors
before using such products.
EMPLOYEES
At October 21, 1997, the Company had 12 full-time employees of whom 7
employees were involved in manufacturing and assembly, 3 employees in sales and
marketing, and 2 employees in general and administrative functions. The Company
also has 27 independent sales representatives who cover fifteen North American
sales regions. None of the Company's employees are represented by a labor union
or are covered by a collective bargaining agreement and the Company has not
experienced any work stoppages.
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PROPERTY
The Company's administrative offices and those related to marketing,
sales and manufacturing are located in 11,500 square feet of leased office and
warehouse space in Longmont, Colorado, which is leased for a three year period
unless cancelled by the Company between June 1, 1998 and July 15, 1998. If the
Sale Transaction is consummated, this lease will be assigned to, and assumed by,
Cascade.
LEGAL PROCEEDINGS
Other than as described below, there are no pending material legal
proceeding to which the Company is a party or to which its property is subject.
In February 1996, three former employees of the Company filed charges
of age discrimination against the Company with the Equal Employment Opportunity
Commission ("EEOC"). One of the charges has been disallowed by the EEOC and the
remaining two charges are under review. The Company denies such allegations and
intends to vigorously defend against such charges of discrimination. While the
outcome of litigation in general is always uncertain, the Company does not
believe that these charges will have an adverse effect on the Company's results
of operations or financial condition.
In 1996, the Company received a communication from a patent holder,
which is a competitor of the Company, offering to license such patent to the
Company with respect to an accessory part of the Guardian and the Guardian+Plus.
Although the Company believes the competitor's patent might not be upheld if
judicially tested, given the potential costs associated with patent claims, the
Company elected to redesign the accessory part in a manner which it believes
should avoid potential claims with respect to future products sold by the
Company. Although the Company notified the competitor of its actions and has not
received a response thereto, the Company cannot be assured that a claim for
infringement will not be made against the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the Record Date, the beneficial
ownership of shares of Common Stock by (i) each person who is known by the
Company to own more than 5% of the outstanding shares of Common Stock, (ii) each
director and Named Executive Officer of the Company and (iii) all of the
Company's executive officers and directors as a group: The term "Named Executive
Officer" means any person who either (i) served as the Chief Executive Officer
during the fiscal year ended December 31, 1996 or (ii) was one of the Company's
four most highly compensated officers (other than the Chief Executive Officer)
serving as an officer at December 31, 1996 and whose salary and bonus during
1996 exceeded $100,000.
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<TABLE>
<CAPTION>
NAME OF
BENEFICIAL OWNER SHARES BENEFICIALLY OWNED
Number(1) Percent(2)
--------- ----------
<S> <C> <C>
Directors and Named Executive Officers:
- ---------------------------------------
A. Clinton Allen(3) 15,000 *
Thomas A. Barron(4) 132,583 4.1%
Blair W. Effron (3) 33,750 1.1%
Peter W. Gilson(5) 35,792 1.1%
Randall A. Hack (6) 650,799 20.8%
Keith R. Lively (3) 15,000 *
Eric M. Reynolds(7) 155,466 4.9%
Ralph Z. Sorenson(5) 32,083 1.0%
All executive officers & directors
as a group (includes 10 persons)(8) 1,117,124 32.8%
Other 5% Shareholders:
Nassau Capital Partners L.P.
22 Chambers Street
Princeton, NJ 08542 621,598 20.0%
Swiss Army Brands, Inc.
One Research Drive
Shelton, CT 06484 611,000 19.6%
Hudson River Capital LLC
667 Madison Avenue
Suite 2500
New York, NY 10021 420,536(9) 13.2%
Charles Elsener
CH-6438
Ibach, Switzerland 269,500 8.7%
Juan A. Rodriguez(10) 172,666 5.5%
4517 Navajo Place
Boulder, Colorado 80303
</TABLE>
* Less than 1%
(1) Unless otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable. The shares of Common Stock shown as beneficially owned
include stock options exercisable on or within 60 days following the
Record Date. With respect to information regarding 5% shareholders, the
Company has relied on information provided in publicly-filed documents
and, in certain cases, on supplementary information provided by the
shareholder.
(2) Based on 3,113,584 shares of Common Stock issued and outstanding on the
Record Date. In addition, recorded as outstanding for the purpose of
computing the percentage ownership of each director or
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<PAGE> 44
Named Executive Officer and of all executive officers and directors as
a group are shares issuable to such individual or group upon exercise
of currently exercisable options or warrants.
(3) Includes 15,000 shares of Common Stock issuable upon exercise of vested
stock options.
(4) Includes 98,000 shares of Common Stock issuable upon exercise of vested
stock options.
(5) Includes 28,000 shares of Common Stock issuable upon exercise of vested
stock options.
(6) Includes 15,000 shares of Common Stock issuable upon exercise of vested
stock options. 621,598 shares held by Nassau Capital Partners L.P. and
1,701 shares held by NAS Partners I L.L.C., which represents 50% of the
shares held by NAS Partners I L.L.C. Mr. Hack is one of two members of,
and has a 50% interest in, NAS Partners I L.L.C. and is one of four
members of Nassau Capital L.L.C. which serves as the sole general
partner of Nassau Capital Partners, L.P. Mr. Hack disclaims beneficial
ownership of shares held by Nassau Capital Partners L.P.
(7) Includes 30,466 shares of Common Stock issuable upon exercise of vested
stock options.
(8) Includes an aggregate of 290,518 shares issuable upon exercise of
vested stock options.
(9) Includes 79,591 shares issuable upon exercise of a common stock
purchase warrant.
(10) Includes 23,000 shares of Common Stock issuable upon exercise of vested
stock options; also includes 41,666 shares held by an irrevocable trust
for the benefit of Mr. Rodriguez's children. Mr. Rodriguez's wife
serves as the trustee of the trust.
MARKET PRICE OF AN DIVIDENDS ON COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Market Information. The Common Stock has been trading in the
over-the-counter market under the symbol "SWWT" since May 14, 1997. Prior
thereto, the Common Stock was trading on the NASDAQ Small Cap Market, with the
exception of the period from June 22, 1995 through March 1, 1996, when the
Common Stock was delisted from such market as the Company had fewer than 300
shareholders. The following table sets forth for the periods indicated the range
of high and low bid quotations for the Common Stock since January 1, 1995 as
reported by NASDAQ for the period in which the Common Stock traded thereon and
as reported by dealers appearing as market makers on the OTC Bulletin Board for
the periods in which the Common Stock traded on the over-the-counter market.
These quotations represent inter-dealer prices, without retail mark-up,
mark-down or commissions and do not necessarily represent actual transactions.
As trading in the Common Stock has been sporadic and in small volumes since its
initial public offering in January 1994, the Company cannot be assured that an
active public trading market will develop or be sustained. The range of the high
and low bid quotations per share of Common Stock on October 20, 1997 (the date
preceding the date of the Sale Agreement) was $.25 and $.125, respectively.
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<TABLE>
<CAPTION>
1997 HIGH LOW
<S> <C> <C>
First Quarter .75 .50
Second Quarter .75 .50
Third Quarter .25 .125
1996
First Quarter 3.75 2.50
Second Quarter 3.32 3.00
Third Quarter 3.00 2.00
Fourth Quarter 2.48 0.32
1995
First Quarter 7.00 5.75
Second Quarter 6.50 5.00
Third Quarter 5.00 2.00
Fourth Quarter 3.75 3.75
</TABLE>
(b) Holders. As of the Record Date, 3,113,584 shares of Common Stock
were issued and outstanding and were held of record by approximately 150
persons, including several holders who are nominees for an undetermined number
of beneficial owners. The Company believes that as of the Record Date there were
approximately 300 beneficial owners of Common Stock.
(c) Dividends. The Company has never paid a dividend and does not
anticipate payment of dividends in the foreseeable future.
AUDITORS
Arthur Andersen LLP, independent certified public accountants, have
been appointed by the Board of Directors, as independent auditors for the
Company to examine and report on its financial statements for the 1997 fiscal
year. Representatives of Arthur Andersen LLP are not expected to be present at
the Meeting.
DEADLINE FOR SHAREHOLDER PROPOSALS
The Company presently anticipates that its 1998 Annual Meeting of
Shareholders will be held in May of 1998. Any proposal by a shareholder of the
Company intended to be presented at the 1998 Annual Meeting of Shareholders is
required to be received by the Company at its principal executive office not
later than January 31, 1998 for inclusion in the Company's Proxy Statement and
form of proxy relating to that meeting. Such proposals should be addressed to
the Company's Secretary.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and
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<PAGE> 46
other information filed by the Company with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New
York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
OTHER BUSINESS
Management does not know of any other matters to be brought before
the Meeting except those set forth in the notice thereof. If other business is
presented properly for consideration at the Meeting, it is intended that the
proxies will be voted by the persons named therein in accordance with their
judgment on such matters.
By order of the Board of Directors,
PATRICK E. THOMAS
Secretary
January 12, 1998
44
<PAGE> 47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets - September 30, 1997 and December 31, 1996.............. F-2
Statements of Operations - Three and nine months ended
September 30, 1997 and 1996............................................ F-4
Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996............................................ F-5
Notes to Financial Statements.......................................... F-6
Report of Independent Public Accountants.............................. F-10
Balance Sheets December 31, 1996 and December 31, 1995................ F-11
Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994................................................... F-13
Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994...................................... F-14
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994...................................... F-16
Notes to Consolidated Financial Statements............................ F-18
F-1
<PAGE> 48
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
-F-2-
<PAGE> 49
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
-F-3-
<PAGE> 50
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
-F-4-
<PAGE> 51
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
-F-5-
<PAGE> 52
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
-F-6-
<PAGE> 53
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
-F-7-
<PAGE> 54
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>
-F-8-
<PAGE> 55
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.
-F-9-
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SweetWater, Inc.:
We have audited the accompanying balance sheets of SWEETWATER, INC. (a Delaware
corporation) as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SweetWater, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Denver, Colorado, ARTHUR ANDERSEN LLP
March 28, 1997.
F-10
<PAGE> 57
Page 1 of 2
SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1996 1995
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,479,937 $511,331
Short-term investments 440,659 4,460,897
Accounts receivable, less allowance for doubtful
accounts of approximately $35,000 and $39,000, respectively 132,446 57,822
Inventory, net of reserve for obsolescence of $205,000 and
$33,000, respectively 690,231 1,120,063
Prepaids and other current assets 51,288 105,418
------------ ------------
Total current assets 2,794,561 6,255,531
------------ ------------
FIXED ASSETS (Note 1):
Equipment, furniture and fixtures 475,000 1,829,352
Less- Accumulated depreciation - (661,564)
------------ ------------
Total fixed assets 475,000 1,167,788
------------ ------------
OTHER ASSETS:
Deposits and other, net 39,921 82,373
------------ ------------
Total assets $3,309,482 $7,505,692
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-11
<PAGE> 58
Page 2 of 2
SWEETWATER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ -------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $493,356 $258,165
Accrued salaries and employee benefits 92,982 26,682
Accrued warranty costs 30,630 15,106
Current portion of term loan payable - 108,125
-------------- -------------
Total current liabilities 616,968 408,078
LONG-TERM DEBT - 207,799
-------------- -------------
Total liabilities 616,968 615,877
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 8,000,000 shares authorized;
3,067,382 and 3,064,529 shares issued and outstanding at
December 31, 1996 and 1995, after deducting
126,606 and 129,459 shares held in treasury, respectively 3,068 3,065
Deferred compensation (12,366) (28,854)
Additional paid-in capital 12,425,783 12,407,300
Accumulated deficit (9,723,971) (5,491,696)
-------------- -------------
Total stockholders' equity 2,692,514 6,889,815
-------------- --------------
Total liabilities and stockholders' equity $3,309,482 $7,505,692
============== ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-12
<PAGE> 59
SWEETWATER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
NET SALES $2,064,142 $2,162,666 $1,703,241
COST OF GOODS SOLD 1,961,509 1,930,706 1,514,316
------------- ------------- -------------
GROSS MARGIN 102,633 231,960 188,925
------------- ------------- -------------
OPERATING EXPENSES:
General and administrative 1,401,735 1,151,606 805,776
Sales and marketing 1,345,989 1,090,061 735,721
Research and development 1,029,430 624,322 428,786
Impairment loss (Note 1) 685,838 - -
------------- ------------- -------------
Total operating expenses 4,462,992 2,865,989 1,970,283
------------- ------------- -------------
LOSS FROM OPERATIONS (4,360,359) (2,634,029) (1,781,358)
OTHER INCOME (EXPENSE):
Rental and other income - - 3,741
Interest income 161,222 122,205 135,703
Interest expense and other (33,138) (93,344) (140)
------------- ------------- -------------
128,084 28,861 139,304
------------- ------------- -------------
NET LOSS $(4,232,275) $(2,605,168) $(1,642,054)
============= ============= =============
NET LOSS PER COMMON SHARE $(1.38) $(1.34) $(.92)
============= ============= =============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 3,065,311 1,948,946 1,789,142
============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-13
<PAGE> 60
Page 1 of 2
SWEETWATER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
------------------- --------------- Deferred Paid-In
Shares Amount Shares Amount Compensation Capital
------ ------ ------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 537,499 $538 547,579 $548 $(66,586) $2,772,639
Common stock issued on January 21, 1994,
in initial public offering for cash, at $7.00
per share, net of offering costs of
approximately $665,000 - - 718,750 718 - 4,365,054
Common stock issued on January 21, 1994,
for conversion of Series A preferred
stock to common stock (537,499) (538) 537,499 538 - -
Treasury stock purchase on March 15,
1994 from a stockholder, at cost - - (1,042) (1) - -
Amortization of deferred compensation
expense - - - - 17,760 -
Net loss - - - - - -
---------- ----- ------------ ------- ---------- --------------
BALANCES, December 31, 1994 - - 1,802,786 1,803 (48,826) 7,137,693
Treasury stock purchase on February 28,
1995 from a stockholder, at cost - - (34,375) (34) - (15,950)
Issuance of treasury stock - - 300 - - 1,725
Stock options exercised - - 800 1 2,534 (2,163)
Common stock issued in November
1995 in a private placement offering,
at $4.00 per share, net of offering costs
of approximately $73,000 - - 1,335,078 1,335 - 5,265,791
Common stock issued to 401(k) plan - - 5,726 6 - 22,905
Treasury stock purchase on December 11,
1995 from a stockholder, at cost - - (45,786) (46) - (2,701)
Amortization of deferred compensation
expense - - - - 17,438 -
Net loss - - - - - -
----------- ----- ------------ ------- ---------- --------------
BALANCES, December 31, 1995 - $- 3,064,529 $3,065 $(28,854) $12,407,300
</TABLE>
<TABLE>
<CAPTION> Accumulated
Deficit Total
------------- ---------
<S> <C> <C>
BALANCES, December 31, 1993 $(1,244,474) $1,462,665
Common stock issued on January 21, 1994,
in initial public offering for cash, at $7.00
per share, net of offering costs of
approximately $665,000 - 4,365,772
Common stock issued on January 21, 1994,
for conversion of Series A preferred
stock to common stock - -
Treasury stock purchase on March 15,
1994 from a stockholder, at cost - (1)
Amortization of deferred compensation
expense - 17,760
Net loss (1,642,054) (1,642,054)
-------------- -------------
BALANCES, December 31, 1994 (2,886,528) 4,204,142
Treasury stock purchase on February 28,
1995 from a stockholder, at cost - (15,984)
Issuance of treasury stock - 1,725
Stock options exercised - 372
Common stock issued in November
1995 in a private placement offering,
at $4.00 per share, net of offering costs
of approximately $73,000 - 5,267,126
Common stock issued to 401(k) plan - 22,911
Treasury stock purchase on December 11,
1995 from a stockholder, at cost - (2,747)
Amortization of deferred compensation
expense - 17,438
Net loss (2,605,168) (2,605,168)
------------- ------------
BALANCES, December 31, 1995 $(5,491,696) $6,889,815
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-14
<PAGE> 61
Page 2 of 2
SWEETWATER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
------------------- --------------- Deferred Paid-In
Shares Amount Shares Amount Compensation Capital
------ ------ ------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 - $- 3,064,529 $3,065 $(28,854) $12,407,300
Common stock issued to 401(k) Plan - - 9,969 10 - 31,903
Amortization of deferred compensation
expense - - - - 16,488 -
Treasury stock purchase on September 13,
1996 from a stockholder at cost - - (7,116) (7) - (420)
1995 common stock offering costs - - - - - (13,000)
Net loss - - - - - -
----- ----- ------------ ------- ---------- --------------
BALANCES, December 31, 1996 - $- 3,067,382 $3,068 $(12,366) $12,425,783
===== ===== ============ ======= ========== ==============
</TABLE>
<TABLE>
<CAPTION> Accumulated
Deficit Total
------------- ---------
<S> <C> <C>
BALANCES, December 31, 1995 $(5,491,696) $6,889,815
Common stock issued to 401(k) Plan - 31,913
Amortization of deferred compensation
expense - 16,488
Treasury stock purchase on September 13,
1996 from a stockholder at cost - (427)
1995 common stock offering costs - (13,000)
Net loss (4,232,275) (4,232,275)
----------- -----------
BALANCES, December 31, 1996 $(9,723,971) $2,692,514
============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-15
<PAGE> 62
Page 1 of 2
SWEETWATER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------
1996 1995 1994
---------- ------------ ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,232,275) $(2,605,168) $(1,642,054)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization 442,948 353,942 382,309
Impairment loss 685,838 - -
Amortization of deferred compensation expense 16,488 17,438 17,760
Conversion of interest payable to common stock - 15,308 -
Issuance of treasury stock to 401(K) Plan 31,913 22,911 -
Changes in assets and liabilities-
Decrease (increase) in accounts receivable (74,624) 54,824 (41,096)
Decrease (increase) in inventory 429,832 (518,598) (523,146)
Decrease (increase) in prepaids and other current 54,130 9,896 (91,281)
Increase in deposits and other (13,762) (31,631) (26,054)
Increase (decrease)in accounts payable and
accrued liabilities 235,191 (47,825) 132,852
Increase (decrease) in accrued salaries and
employee benefits 66,300 (30,612) 33,217
Increase (decrease) in accrued warranty costs 15,524 (11,149) 26,255
------------- ------------- -------------
Net cash used in operating activities (2,342,497) (2,770,664) (1,731,238)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of note receivable - - 15,000
Purchases of fixed assets (379,784) (657,566) (837,175)
Purchases of short-term investments - (5,400,577) (4,947,331)
Proceeds from sales of short-term investments 4,020,238 3,621,823 2,265,188
------------- ------------- -------------
Net cash provided by (used in)
investing activities 3,640,454 (2,436,320) (3,504,318)
------------- ------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-16
<PAGE> 63
Page 2 of 2
SWEETWATER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------
1996 1995 1994
---------- ------------ ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under term loan agreement $- $877,708 $520,054
Payments on borrowings under term loan agreement (315,924) (1,081,838) -
Proceeds from convertible note payable - 1,500,000 -
Proceeds from issuance of common stock,
net of stock issuance costs (13,000) 3,751,818 4,365,772
Repurchase of common stock (427) (18,731) (1)
Sale of treasury stock - 1,725 -
Proceeds from exercise of stock options - 372 -
Deferred offering costs - - 161,174
------------- ------------- -------------
Net cash (used in) provided by financing
activities (329,351) 5,031,054 5,046,999
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 968,606 (175,930) (188,557)
CASH AND CASH EQUIVALENTS, beginning of period 511,331 687,261 875,818
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $1,479,937 $511,331 $687,261
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of interest payable to common stock $- $15,308 $-
============= ============= =============
Conversion of notes payable to common stock $- $1,500,000 $-
============= ============= =============
Cash paid for interest $29,875 $81,045 $-
============= ============= =============
Conversion of Series A preferred stock to
common stock $- $- $2,383,831
============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-17
<PAGE> 64
SWEETWATER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) BUSINESS AND ASSET IMPAIRMENT
SweetWater, Inc. (the "Company"), incorporated in the state of Colorado in
1991, is a water technology company specializing in the development, marketing
and sale of water filtration and purification devices and technologies to
address health concerns resulting from the microbiological contamination of
drinking water. The Company's existing products are principally marketed to
outdoor supply retailers across the United States. A substantial portion of
the Company's revenues are currently derived from sales to one national outdoor
supply retailer.
Since its inception, the Company has incurred significant operating losses and
cash flow deficits resulting in an accumulated deficit of approximately $9.7
million as of December 31, 1996. Operating losses increased in 1996, as a
result of the Company's efforts to develop a water filtration and purification
device for the home use market. During 1996, the Company actively pursued the
establishment of a joint strategic alliance to manufacture and market the home
use product, however, the Company was not successful in locating an industry
partner to manufacture and market this potential product. Accordingly, the
Company has suspended its efforts to manufacture and market this product and is
seeking a buyer for the plans, designs and technology associated therewith.
The Company has no amounts capitalized related to this product.
F-18
<PAGE> 65
The Company has also reduced its personnel and initiated a cost containment
program designed to reduce general and administrative costs, conserve its cash
reserves and enable the Company to concentrate its resources on the manufacture
and sale of its current portable water filtration and purification products.
Although the Company has adopted a plan that it believes will allow it to
remain in operation through at least 1997, as a result of streamlining its
operations and reduce its costs, there can be no assurance the Company's losses
will not continue or that the Company will be able to manufacture and sell its
products successfully or achieve profitability. In addition, as a new business
in an emerging industry with a limited number of products, the Company may
encounter unforeseen difficulties, some of which may be beyond the Company's
ability to control, related to marketing, product development, manufacturing,
regulation and proprietary technology.
Long-lived assets to be held and used in the Company's portable water
filtration and purification business, including certain manufacturing equipment
and related intangible assets, have been reviewed for possible impairment
because events or changes in the Company's circumstances, as described above,
have indicated that their carrying amounts may not be recoverable. Where
appropriate, under Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS No. 121") an impairment loss has been recognized and
the net book value of such assets has been reduced based on the Company's
estimate of the fair market value of such assets. The Company's estimate of
fair market value is based on third party estimates as well as the Company's
estimate of future operating results generated from the use of such assets. As
a result, during 1996, the Company recorded an impairment loss of $685,838
which has been reflected in the accompanying
F-19
<PAGE> 66
Statements of Operations. The related assets have been reflected in the
accompanying balance sheets at their estimated fair market value of $475,000.
The Company and certain member of senior management ("Management"), have
reached an agreement in principle pursuant to which the Management will agree
to remain with the Company through December 31, 1997 in exchange for certain
performance bonuses and a right of first refusal to purchase the Company's
portable water filtration and purification business (the "Outdoor Business") in
the event certain performance targets are met and the Company elects to sell
such business within a specified period after December 31, 1997. The Company
has not reached a decision as to whether or not it will elect to consider the
sale of its Outdoor Business. Specifically, the agreement in principle
contemplates that Management, as a group, will be entitled to receive a
performance bonus equal to 50% of the amount by which cash and cash equivalents
as set forth on the Company's balance sheet as of December 31, 1997, subject to
certain adjustments ("Year End Cash") exceeds $1,000,000. In addition, in the
event Year End Cash exceeds a specified target (which will be lower than
$1,000,000), Management will have a right of first refusal in the event the
Company elects to sell the Outdoor Business to a third party. If such right is
not exercised, Management will be entitled to receive a value enhancement bonus
equal to 30% of the excess of the third party purchase price over the
Management Price (as defined below) less the amount of the performance bonus ,
if any. In the event the Company elects to sell the Outdoor Business to
Management, Management would have the right to purchase the Outdoor Business
for a specified price (the "Management Price") including associated
liabilities, as defined, as of March 1997, subject to certain adjustments, less
the amount by which Year End Cash exceeds the target amount. The Company has
no obligation to sell the Outdoor Business to Management or to a third party at
any time. As the Company and Management are negotiating the terms and
F-20
<PAGE> 67
structure of a proposed agreement, the final terms and structure may differ
substantially from the terms described above. In addition, if the Company and
Management do not execute a final agreement, one or more of the members of the
Management may elect to pursue other opportunities which could have a material
adverse effect on the Company.
Based upon its current plans as described above, the Company believes that it
will have sufficient cash flows to remain in operation through 1997 and that
its assets are realizable.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash
and highly liquid investments with an original maturity of three months or less
to be cash equivalents. As of December 31, 1996, the Company's cash and cash
equivalents consisted of demand deposits and money market accounts in banks and
other financial institutions, which approximated market value.
Short-Term Investments
Short-term investments consist of U.S. Federal Government, Federal Government
Agency-backed securities and corporate notes with maturities of less than one
year. These securities are classified as "held-to-maturity" investments as
defined by Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." At December 31, 1996 and
1995 respectively, these securities had an amortized cost basis of $440,659,
and $4,460,897, which approximates fair value.
F-21
<PAGE> 68
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market, and
consists primarily of component parts, including filter accessories and pump
assemblies. Finished goods include material costs, labor and manufacturing
overhead. Inventory consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Raw materials $669,736 $421,686
Finished goods 225,495 731,377
----------- ------------
895,231 1,153,063
Less- Reserve for obsolescence (205,000) (33,000)
----------- ------------
$690,231 $1,120,063
=========== ============
</TABLE>
Fixed Assets
Depreciation of fixed assets is computed on a straight-line basis over a period
of one to three years. Replacements, renewals and improvements are capitalized
and costs for repairs and maintenance are expensed as incurred.
Revenue Recognition
Revenue is generally recorded upon passage of title when the product is
shipped.
Research and Development
Research and development costs are expensed as incurred and consist primarily
of salaries, supplies, depreciation and contract services.
F-22
<PAGE> 69
Income Taxes
The Company accounts for income taxes according to the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences of temporary
differences between the financial reporting and tax bases of assets and
liabilities and carryforwards. Such deferred income tax assets and liabilities
are based on enacted tax laws. SFAS No. 109 requires recognition of deferred
tax assets for the expected future effects of all deductible temporary
differences, loss carryforwards and tax credit carryforwards. Deferred tax
assets are then reduced, if deemed necessary, by a valuation allowance for the
amount of any tax benefits which, more likely than not, based on current
circumstances, are not expected to be realized (see Note 8).
Treasury Stock
Treasury stock purchases are accounted for at cost, and are reflected as a
reduction of common stock and additional paid-in capital in the accompanying
balance sheets.
Net Loss Per Common Share
Net loss per common share for all periods presented is computed using the sum
of the weighted average number of shares of common stock and common stock
equivalent shares from common stock options and warrants. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock and common stock equivalent shares issued by the Company at prices
significantly below the assumed public offering price during the twelve month
period prior to the initial public offering date (using the treasury stock
method and the initial offering price of $7.00 per share), have been included
in the calculation as if they were outstanding for all periods
F-23
<PAGE> 70
presented regardless of whether they are antidilutive. Options and warrants
for the Company's common stock issued other than in the one-year period have
been excluded as they are antidilutive. Subsequent to the initial offering
date, the Company has reported earnings per share in accordance with Accounting
Principles Board Opinion No. 15, "Earnings per Share."
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts for fiscal year 1995 and 1994 have been reclassified to conform
with 1996 reporting classifications.
Asset Impairment
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). The Company reviews its assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For assets which are held and used in operations, the asset
would be impaired if the undiscounted future cash flows related to the asset
did not exceed the net book value. As discussed more fully in Note 1, the
Company reviewed its long-lived assets for impairment and
F-24
<PAGE> 71
recorded an impairment loss of $685,838 for the year ended December 31, 1996
related to its equipment used in operations and intangible assets.
(3) LONG-TERM DEBT
In August 1995, the Company modified its existing term loan facility agreement
to reduce the maximum borrowing to $350,000. As of December 31, 1995, the
Company had outstanding borrowings of $315,924 under this facility, which bear
interest at 10.97%. This loan was fully repaid in December 1996. The term
loan facility agreement expires in March 1997.
The Company, under the terms of its term loan and revolving debt agreements,
was required to meet certain financial and other covenants. As of December 31,
1995, the Company failed to meet a requirement limiting quarterly losses to a
maximum of $600,000. The Company received a waiver from the bank regarding
this covenant as of December 31, 1995. As there were no loans outstanding as
of December 31, 1996, the Company was not required to meet certain financial
and other covenants.
(4) STOCKHOLDERS' EQUITY
Initial Public Offering
On January 21, 1994, the Company completed the initial public offering of its
common stock. In connection with the offering, 718,750 shares, including the
underwriter's 15% overallotment of 93,750 shares, of previously unissued common
shares were sold at a price of $7 per share, providing proceeds to the Company
of approximately $5,031,000, less $666,000 in offering costs.
F-25
<PAGE> 72
Private Placement Offering
In November 1995, in order to fund existing and anticipated future cash needs,
the Company completed a private placement of its common stock. In connection
with the offering, 1,335,078 shares of previously unissued common shares were
sold at a price of $4 per share, providing net proceeds to the Company of
approximately $5,267,100. This amount includes the conversion of a $1,500,000
Convertible Subordinated Promissory Note issued in September 1995 to an
existing shareholder of the Company at $4 per share of common stock.
Preferred Stock
The Company is currently authorized to issue 6,462,500 shares of $.001 par
value, preferred stock. Shares of preferred stock may be issued from time to
time in one or more series, with the rights and powers of each series set by
the Board of Directors. Concurrently with the initial public offering,
holders of 537,500 shares previously designated and issued as Series A
preferred stock converted such shares on a one-for-one basis to common stock.
(5) STOCK OPTIONS AND WARRANT
In October 1993, the Company adopted a Stock Option Plan (the "Plan") to
provide directors, officers, employees and consultants options to purchase up
to 250,000 shares of the Company's common stock. Under the terms of the Plan,
the Board of Directors may grant either "nonqualified" or "incentive stock
options" as defined by the Internal Revenue Service. Under the terms of the
Plan, the purchase price of the shares subject to an incentive stock option is
the fair market value of the Company's common stock on the date the option is
granted. The purchase price of a nonqualified option must not be less than the
par value of the stock. If the grantee owns more than 10% of the total
combined voting power or value of all classes of stock on the date of
F-26
<PAGE> 73
grant, the purchase price of an incentive stock option must be at least 110% of
the fair market value at the date of grant and the exercise term cannot exceed
five years from the date of grant. All other options granted under the Plan
are exercisable up to 10 years from the date of grant. The Board of Directors
has determined that the options outstanding will vest 25% over the first year
with the remaining 75% vesting on a straight-line basis over the remaining 36
months. If the employment of a participant is terminated for any reason other
than death or disability, any stock options then held by the participant which
are currently exercisable shall remain exercisable after the termination of
employment for a period of three months, but no later than the specified
expiration date.
In addition to the Stock Option Plan, the Company has issued non-plan options
to certain directors, officers, employees and consultants since 1993. As part
of the Form S-8 Registration Statement filed in April 1996, the Company
registered an aggregate 382,915 shares reserved for issuance pursuant to
non-plan option agreements with certain named individuals as well as the
250,000 shares of the Plan. The non-plan options primarily vest over a four
year period with an approximate 20% to 60% vesting on the date of grant with
the remaining vesting on a straight-line basis.
In April 1994, the Company granted an option to purchase 17,000 shares of
common stock at a purchase price of $8.125 per share to each of its five
non-employee directors. Each option became exercisable with respect to 5,000
shares on July 13, 1994; an additional 3,000 shares became exercisable on April
25, 1995, and on each subsequent anniversary thereof. On November 7, 1995, the
Company canceled all non-exercisable options (9,000 options per non-employee
director) and issued 240,000 additional options to purchase shares of common
stock at $4.00 per share. A
F-27
<PAGE> 74
director's ability to exercise the option is limited in the event he ceases to
be a director. No options have been exercised under the non-employee director
stock option plan to date.
<TABLE>
<CAPTION>
Number of Shares
----------------------
Officers Employees
and and Per Share
Directors Others Exercise Price
--------- --------- --------------
<S> <C> <C> <C>
Balance, December 31, 1993 21,667 32,916 $.47-$6.30
Granted 145,000 5,000 $6.25-$8.125
Exercised - - -
---------- --------- --------------
Balance, December 31, 1994 166,667 37,916 $.47-$8.125
Granted 360,250 52,277 $4.00
Exercised (800) $.47
Canceled (45,000) (867) $.47-$8.125
---------- --------- --------------
Balance, December 31, 1995 481,917 88,526 $.47-$8.125
Granted 100,000 3,400 $4.00
Exercised - - -
Canceled (31,000) (5,776) $4.00
---------- --------- --------------
Balance, December 31, 1996 550,917 86,150 $.47-$8.125
========== ========= ==============
Exercisable at December 31, 1996 228,161 34,619 $.47-$8.125
========== ========= ==============
</TABLE>
The Company accounts for its stock-based compensation plan and non-plan options
under APB No. 25, under which no compensation expense is recognized for options
granted with an exercise price equal to the fair value of the Company's common
stock on the date of grant. The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123") for disclosure purposes in 1996. For SFAS 123 purposes, the fair value
of each option grant and stock purchase right has been estimated as of the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
F-28
<PAGE> 75
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Risk-free interest rate 5.96% 5.57%
Dividend rate 0% 0%
Expected volatility 116.26% 82.51%
Expected life 4.0 years 3.0 years
</TABLE>
Using these assumptions, the fair value of the stock options granted in 1996
and 1995 was approximately $263,575 or $2.55 per common share and $757,232 or
$1.84 per common share, respectively, which would be amortized as compensation
expense over the vesting period of the options. Had compensation cost been
determined consistent with SFAS 123, utilizing the assumptions detailed above,
the Company's net loss and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- ------------------
<S> <C> <C>
Net loss:
As reported $(4,232) $(2,605)
Pro forma (4,476) $(2,641)
Net loss per common share:
As reported $(1.38) $(1.34)
Pro forma $(1.46) $(1.35)
</TABLE>
In September 1995, in connection with the issuance of the $1,500,000
Convertible Promissory Note (Note 4) the Company issued a warrant to the
existing stockholder, entitling the stockholder to purchase 88,435 shares of
common stock at $4 per share, the fair market value of the common stock at the
date of issuance. The warrant expires in September 2000.
F-29
<PAGE> 76
(6) RELATED PARTY TRANSACTIONS
The Company has engaged a consulting firm controlled by a stockholder for
services. Such services amounted to approximately $30,200 and $37,500 for the
years ended December 31, 1995 and 1994, respectively.
In September 1995, a stockholder purchased a $1,500,000 Convertible
Subordinated Promissory Note and a Warrant to purchase 88,435 shares of common
stock at $4 per share for a total purchase price of $1,500,000. In November
1995, the note and related interest accrued at the prime rate were converted
into 378,828 shares of common stock in connection with the private placement of
common stock. The warrant has not been exercised and expires in September
2000.
In 1996, the Company retained a financial advisor as its exclusive agent to
pursue certain financial and strategic objectives of the Company. A director
of the Company is also a managing director this financial advisor. Amounts
paid to this financial advisor during 1996 totaled approximately $350,000.
(7) MAJOR CUSTOMERS AND SUPPLIERS
During 1996, 1995 and 1994 sales to one customer represented approximately 31%,
36% and 36% of total sales for those years, respectively. In addition, a
substantial portion of the Company's inventory was purchased from a single
vendor in 1995 and 1994 accounting for 25% and 37%, respectively. However, in
1996 no individual vendor accounted for more than 25% of inventory purchased.
F-30
<PAGE> 77
During 1996, the Company entered into non-standard terms with a customer for a
purchase of approximately $106,000. The terms require payment on June 30,
1997. This amount is shown as part of accounts receivable at year end.
(8) INCOME TAXES
As of December 31, 1996, the Company had an accumulated deficit for tax
purposes of approximately $8,200,000. Based on an effective tax rate of 38%
percent, the Company had approximately $3,100,000 of net operating loss ("NOL")
carryforwards for tax purposes. The NOL carryovers expire from the year 2006
through the year 2011. The Tax Reform Act of 1986 contains provisions which
may limit the net operating loss and credit carryovers available to be used in
any given year upon the occurrence of certain events, including significant
changes in ownership interests.
The Company has determined that approximately $3,355,000 of deferred tax
benefits as of December 31, 1996, do not satisfy the realization criteria set
forth in SFAS No. 109. Recognition of these benefits requires future taxable
income, the attainment of which is uncertain. Accordingly, a valuation
allowance has been recorded against the entire net deferred tax asset.
F-31
<PAGE> 78
The components of the net deferred income tax asset as of December 31, 1996 and
1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $3,100,000 $1,750,000
Capitalization of organization and
start up costs for tax purposes 88,000 130,000
Depreciation (12,000) -
Capitalized overhead (1,000) 28,000
Accruals not deducted for tax purposes 180,000 143,000
Less- Valuation allowance (3,355,000) (2,051,000)
------------- -------------
$ - $ -
============= =============
</TABLE>
(9) 401(K) PROFIT SHARING PLAN AND TRUST
Pursuant to the Company's 401(K) Profit Sharing Plan and Trust (the "401(K)
Plan"), which was established effective January 1, 1995, the Company has agreed
to contribute matching contributions in the form of Company common stock at the
rate of 50% of the first 8% of employee salary deferral. Under the 401(K)
Plan, the Company may also elect to make discretionary contributions.
Employees vest in Company contributions over six years of service with the
Company. Forfeitures of the unvested portion are allocated to the remaining
employees in the plan proportionately, based upon current year compensation.
During 1996 and 1995 respectively, 9,969 and 5,726 shares of common stock were
issued to the 401(K) plan.
F-32
<PAGE> 79
(10) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into various noncancelable lease agreements for office
space. These leases terminate on various dates. Minimum future lease
obligations under these agreements as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $169,115
1998 173,250
1999 173,250
2000 7,220
Thereafter -
----------
Total $522,835
</TABLE>
In January 1995, the Company relocated its manufacturing facility to Longmont,
Colorado. The prior facility was subleased at a rate approximating the future
minimum lease payments due; thus no liability for the future minimum lease
payments on the prior facility was recorded.
Rent expense for the periods ended December 31, 1996, 1995 and 1994, was
approximately $163,800, $170,000 and $70,000, respectively.
F-33
<PAGE> 80
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT
by and between
CASCADE DESIGNS, INC.
("Purchaser")
and
SWEETWATER, INC.
("Seller")
Dated October 21, 1997
<PAGE> 81
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> 82
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> 83
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> 84
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
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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.
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(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
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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> 88
<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.
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(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.
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<PAGE> 90
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
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(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-
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<PAGE> 92
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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<PAGE> 93
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
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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.
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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
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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.
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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.
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<PAGE> 111
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
<PAGE> 112
SBC Warburg Dillon Read SBC Warburg Dillon Read
535 Madison Avenue
New York 10022
Tel. 212-906-7000
Blair W. Effron
Tel. 212-906-7742
Fax 212-644-6956
e-mail [email protected]
The Board of Directors
SweetWater Inc.
1140 Boston Avenue, Unit A
Longmont, CO 80501 Corporate Finance
October 21, 1997
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, of the consideration to be received by SweetWater Inc. ("SweetWater" or
the "Company") in connection with the proposed acquisition (the "Sale
Transaction") of the assets of the Outdoor Product Line ("OPL") by Cascade
Designs, Inc. ("Cascade").
We understand that SweetWater and Cascade are entering into an agreement (the
"Agreement") in which Cascade will purchase OPL for book value plus $300,000
(the "Consideration"). Under the terms of the Agreement, Cascade will purchase
all of the assets and properties of the OPL and will be required to assume a
portion of the liabilities related to OPL (as set forth in the Agreement).
In arriving at our opinion, we have reviewed the publicly available financial
statements of the Company, as well as management's internal projections for the
Company's Outdoor Product Line. We have considered these financial data as well
as similar financial and stock market data with respect to publicly held
companies in businesses similar to that of OPL, and we have performed such other
studies, analyses, inquiries and investigations as we considered appropriate,
including, but not limited to, several discounted cash flow analyses of OPL.
We have also considered several issues relating to management projections for
the Outdoor Product Line. The issues include: poor historical financial and
operating performance (lack of profitability at OPL since its founding in 1991);
actual performance which was materially less favorable than financial forecasts
for OPL (operating loss was 12% larger than plan in 1996); a limited market for
OPL products (the overall market is estimated to be $15 million); small size and
market share of OPL (the Company estimates it has $1.5 - 2.0 million in sales
and a 12-15% market share); well-capitalized, substantially larger competitors;
limited universe of potential available strategic acquirors; difficulty in
financing a leveraged transaction; and considerable customer concentration
(OPL's largest customer represents approximately 30% of sales). As such, SBC
Warburg Dillon Read Inc. is a subsidiary of Swiss Bank Corporation and a member
of the New York Stock Exchange.
B-1
<PAGE> 113
we have significantly reduced management's projections of sales and earnings and
used discount rates for our cash flow analysis that approximate those typically
used in venture capital investing to account for the risk of the enterprise.
In our review and analysis and in formulating our opinion, we have assumed and
relied upon the accuracy and completeness of all the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independently verifying any of such information. We have
assumed, with your consent, that the financial forecasts and projections
provided to us by the Company were prepared in good faith and on bases
reflecting the best currently available judgments and estimates of the Company's
management. In addition, while we have visited the OPL facility, we have not
assumed any responsibility for conducting a physical inspection of the
properties or facilities of the Company or OPL for purposes of this opinion. Our
opinion is necessarily based on economic and market conditions and other
circumstances as they exist and can be evaluated by us as of the date hereof.
We have performed various investment banking services for the Company in the
past and have received customary fees for the rendering of such services. In the
ordinary course of our business we may trade the equity securities of the
Company for our own and our customer's accounts and, accordingly may hold a long
or short position in such securities.
It is understood that this letter is solely for the benefit and use of the Board
of Directors of the Company in its consideration of the Agreement and may not be
relied upon by any other person, used for any other purpose or reproduced,
disseminated, quoted, or referred to at any time, in any manner or for any
purpose without our prior written consent. This letter does not constitute a
recommendation to any shareholder with respect to whether to vote in favor of
any shareholder proposal related to the Agreement, and should not be relied upon
by any shareholder as such.
Based upon and subject to the foregoing, including the various assumptions,
risks, and limitations set forth herein, it is our opinion that, as of the date
hereof, the Consideration to be received by the Company in the Sale Transaction
is fair from a financial point of view to the Company.
Very truly yours,
SBC Warburg Dillon Read Inc.
B-2
<PAGE> 114
APPENDIX C
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
SWEETWATER, INC.
Pursuant to Section 242 of the
General Corporation Law
SweetWater, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies as follows:
FIRST: Article FIRST of the Certificate of Incorporation is hereby
amended to read in its entirety as follows:
"FIRST. The name of the Corporation is SWWT, Inc."
SECOND: The foregoing amendment has been duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware and was approved by a majority of the issued and outstanding shares
entitled to vote thereon at a Special Meeting of Stockholders of the Corporation
held on February 5, 1998.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
this day of February, 1998.
---------------------------
Eric M. Reynolds
President
<PAGE> 115
SWEETWATER, INC.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Special Meeting of Shareholders, February 5, 1998
The undersigned shareholder of Sweetwater, Inc., a Delaware
corporation (the "Company") hereby acknowledges receipt of the Notice and Proxy
Statement dated January 12, 1998 and appoints Eric M. Reynolds and Patrick
E. Thomas, or any of them, voting singly in the absence of the other, attorneys
and proxies, with full power of substitution and revocation, to vote, as
designated below, all shares of Common Stock of the Company which the
undersigned is entitled to vote at the Special Meeting of Shareholders of the
Company to be held at 667 Madison Avenue, Suite 2500, New York, New York 10021
on February 5, 1998 AT 3:00 P.M. (local time) or any adjournment thereof,
in accordance with the following instructions:
<TABLE>
<S> <C> <C>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER Please mark /X/
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION your vote as
IS MADE, THE PROXY WILL BE VOTED "FOR" PROPOSAL NO. 1 AND indicated in
"FOR" PROPOSAL NO. 2. this example
</TABLE>
1. PROPOSAL NO. 1 - to approve (A) the Asset Purchase Agreement dated
as of October 21, 1997 (the "Sale Agreement") between the Company and Cascade
Designs, Inc., a Washington corporation; (B) the sale (the "Sale") of
substantially all the business, operations and assets of the Company, as
contemplated by the Sale Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSAL NO. 2 - TO APPROVE THE AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY TO SWWT, INC.,
EFFECTIVE UPON CONSUMMATION OF THE SALE.
[ ] FOR [ ] AGAINST [ ] ABSTAIN (6)
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON.
Date:___________________________________, (7) 1998
________________________________________
Signature
________________________________________
Signature if held jointly
When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such, if a corporation, please sign in full corporate name by an authorized
officer. If a partnership, please sign in partnership name by an authorized
person.
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY PROMPTLY USING ENCLOSED ENVELOPE.
<PAGE> 116
- -------------------- DELETIONS --------------------
(1) December 17, 1997
(2) November
(3) December 17, 1997 at 9
(4) related to the manufacturing and distribution of portable water filtration
and purification devices for outdoor use
(5) and (C) the amendment to the Company's Certificate of Incorporation to
change the name of the Company to SWWT, Inc., effective upon consummation of the
Sale
(6) In their discretion, the proxies are authorized to vote upon such other
business as may properly be brought before the meeting or any adjournment
thereof.
(7) 1997
