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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
F O R M 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION l3 OR l5(d) OF
THE SECURITIES EXCHANGE ACT OF l934
For the fiscal year ended December 31, 1997 Commission file number 0-25942
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to______________ .
----------------------
SWWT, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1167603
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3492 W. 109th Circle, Westminster, Colorado 80030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 460-8017
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None Not Applicable
Securities registered pursuant to Section l2(g) of the Act:
Common Stock, par value $.001 per share
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant on March 20, 1998, was approximately $1,038,804. On such date, the
last sale price of registrant's common stock was $1.125 per share.
Indicate number of shares outstanding of each of the registrant's
classes of common stock, as of March 20, 1998.
Class Outstanding on March 20, 1998
----- -----------------------------
Common Stock, par value $.001 per share 3,122,254
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the registrant's 1998 Annual Meeting of
Shareholders,which will be filed with the Securities and Exchange Commission not
later than 120 days after the registrant's fiscal year end of December 31, 1997,
are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
General
SWWT, Inc., formerly known as SweetWater, Inc. (the "Company" or
"SWWT"), was incorporated in Colorado in March 1991 and re-incorporated in
Delaware in September 1993. Prior to February 1998, the Company was engaged in
the manufacture and sale of portable water filtration and purification devices.
On February 6, 1998, the Company sold substantially all of its assets to Cascade
Designs, Inc., a Washington corporation ("Cascade"), pursuant to an Asset
Purchase Agreement dated as of October 21, 1997 for a purchase price of
$1,633,425 in cash (the "Sale"). The Company's principal office is located at
3492 W. 109th Circle, Westminster, Colorado 80030 and its telephone number is
303/460-8017.
As a result of the Sale, the Company's only significant asset is cash
and cash equivalents of approximately $1.4 million, after payment of expenses
related to the Sale and management and severance bonuses. The Company has no
further operating business, and has reduced its management and administrative
staff to one part-time employee. 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. The Board of Directors is 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. As the Company competes for
desirable acquisition candidates with a large number of entities with
significantly greater financial resources and technical expertise than the
Company, the Company cannot be assured that it will succeed in its efforts to
conclude a Business Combination. 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 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
acquiring an interest in more than one business.
Depending on the size and nature of the entity, if any, which may be
acquired, the Company may utilize cash, equity, debt or a combination thereof to
increase the amount of capital available for a Business Combination or to
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. If the
Company issues additional equity to raise
2
capital or to acquire a new business, the percentage ownership of the current
shareholders could be reduced and an "ownership change" could occur for tax
purposes. An "ownership change" could adversely affect the Company's ability to
use its net operating loss carryforwards.
Although the Company is subject to regulation under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended,
management believes the Company is not subject to regulation under the
Investment Company Act of 1940, as amended (the "Investment Company Act")
insofar as the Company is not 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 or in the event the Company is unable to consummate a Business
Combination for a substantial period of time, 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, and could incur significant
registration and compliance costs and would be subject to extensive regulation.
Description of Prior Business
Prior to the Sale, the Company was engaged in manufacturing and
distributing portable water filtration and purification devices for outdoor use
(the "Outdoor Business"). Since its inception, the Company engaged primarily in
product development and incurred operating losses resulting in an accumulated
deficit of approximately $11,000,000 as of December 31, 1997. Operating losses
increased in 1996 as a result of the Company's efforts to develop a water
filtration and purification device for the home use market. 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. The
Company's Outdoor Business consisted of three primary devices: two microfilters
(the Guardian and the WalkAbout) and one purifier (the Guardian+Plus). Customers
could continue to use the primary devices by purchasing available recyclable
replacement filter cartridges. Several accessory products were also sold. The
Company's products were sold in the United States and in eight countries around
the world primarily by independent sales representatives to specialty sporting
goods stores that specialized in backpacking, hiking, mountaineering, and
adventure travel outfitting. Over 58% of 1997 sales occurred in the second and
third quarters. Recreational Equipment, Inc., a large retailer, accounted for
37% of 1997 sales; export sales amounted to approximately 10% of the Company's
1997 sales, primarily to Canada. As a result of its cost containment program and
the suspension of its efforts to manufacture and market a home use product, the
Company eliminated its research and development staff and its microbiological
staff in the first half of 1997. The Company's aggregate expenditures for
research and product development for continuing and discontinued operations for
the years ended 1997, 1996, and 1995 were $237,000, $1,029,000, and $624,000
respectively.
3
In July 1997, the Board reviewed the financial results for the quarter
ended June 30, 1997, the moderate growth rate in the market for the Company's
outdoor product in the 1997 selling season, the increased competition within
such market, the increased market share of Recovery Engineering, Inc., the
Company's principal competitor, and the potential for the Outdoor Business to
generate sufficient revenue to enable the Company to achieve profitability. 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. As a result of such process, the Board approved the Sale to
Cascade which was approved by the shareholders and completed in February 1998.
In May 1997, the Company entered into an agreement (the "Management
Agreement") with Eric M. Reynolds, Patrick E. Thomas and Jerry L. Cogdill,
(collectively, "Management") 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. As a result of the Sale, the three members of Management, as a group,
received an aggregate bonus equal to $523,000. As the determination to sell the
Outdoor Business was made prior to December 31, 1997, the right of first refusal
was not available to Management under the terms of the Management Agreement.
Employees
Currently, the Company had no full-time employees and one part-time
employee. At December 31, 1997, the Company had 12 full-time employees, 7 of
whom were involved in manufacturing and assembly, 3 in sales and marketing, and
2 in general and administrative functions. The Company also had 27 independent
sales representatives who covered fifteen North American sales regions. None of
the Company's employees were represented by a labor union or were covered by a
collective bargaining agreement and the Company had not experienced any work
stoppages.
ITEM 2. FACILITIES
The Company's administrative offices are located at 3492 W. 109th
Circle, Westminster, Colorado 80030 in space supplied by the Company's Chief
Executive Officer at no cost to the Company. The Company's lease for 11,500
square feet of office and warehouse space in Longmont, Colorado, which housed
its administrative offices and manufacturing facility, was assigned to, and
assumed by, Cascade in connection with the Sale. The Company's lease on 21,000
square feet of office and warehouse space in Longmont, Colorado was terminated
in August 1997.
ITEM 3. LEGAL PROCEEDINGS
In February 1996, three former employees of the Company filed charges
of age discrimination against the Company with the Equal Employment Opportunity
Commission ("EEOC"). Two of these charges has been disallowed by the EEOC and
the remaining charge is under review. The Company denies such allegations and
intends to vigorously defend against such charge 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.
4
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 does not believe the competitor's patent would be upheld if
judicially tested, given the potential costs associated with patent claims, the
Company elected to redesign the accessory part in a manner which it believes
should avoid potential claims with respect to future products sold by the
Company. Although the Company notified the competitor of its actions and has not
received a response thereto, no assurance can be given that a claim for
infringement will not be made against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a stockholder vote during the last
quarter of the fiscal year ended December 31, 1997. In the first quarter of
1998, the proposals to approve the Sale and to amend the Certificate of
Incorporation to change the Company's name were submitted to, and approved by,
the stockholders of the Company.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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 Company's Common Stock since January 1, 1996 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 Company believes that the number of
beneficial owners was at least 300 as of March 20, 1998.
1997 HIGH LOW
First Quarter 0.75 0.50
Second Quarter 0.75 0.50
Third Quarter 0.25 0.125
Fourth Quarter 0.75 0.10
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
The Company has never paid a dividend and does not anticipate payment
of dividends in the foreseeable future.
5
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended
December 31, 1993 through December 31, 1997 are derived from the financial
statements of the Company, which statements have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. No dividends have been paid for any of the periods presented.
The financial data set forth below should be read in conjunction with the
financial information included elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
Statement of Operations Data:
Net Sales ............................ 0 0 0 0 0
Costs and Expenses:
General & Administrative .......... 289 628 249 248 82
Sales & Marketing ................. 56 267 -- -- --
Research & Development ............ 237 908 -- -- --
Operating Income (Loss) .............. (582) (1,803) (249) (248) (82)
Other Income, net .................... 246 128 29 139 25
Net (Loss) from Continuing ........... (336) (1,675) (220) (109) (57)
Operations
Net (Loss) from Continuing ........... $ (0.11) $ (0.55) $ (0.11) $ (0.06) $ (0.05)
Operations per Common
Share - Basic and Diluted
Weighted Average number of
common shares outstanding (1) .... 3,094 3,065 1,949 1,789 1,123
December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Balance Sheet Data:
Working Capital ...................... $ 1,372 $ 2,178 $ 5,847 $ 3,661 $ 853
Total Assets ......................... 1,941 3,309 7,506 5,114 1,660
Long Term Debt ....................... -- -- 208 371 --
Total Liabilities .................... 569 617 616 910 197
Accumulated earnings (deficit) ....... (11,066) (9,724) (5,492) (2,887) (1,244)
Stockholder's equity ................. 1,372 2,693 6,890 4,204 1,463
(1) See Note 2 to financial statements for information with respect to the
calculation of share and per share data.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains, in addition to historical
information, forward-looking statements. The forward-looking statements were
prepared on the basis of certain assumptions which relate, among other things,
to the estimated expenses of the Company. 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 forward-looking
statements including herein.
General
On February 6, 1998, the Company completed the sale of substantially
all of its assets to Cascade. The selected financial data for the years ended
December 31, 1993 through December 31, 1997 have been restated under Accounting
Principles Board Opinion No. 30, as a result of the execution of the Asset
Purchase Agreement and shareholder approval obtained on February 5, 1998.
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Company's Financial
Statements and the Notes thereto included in this Form 10-K.
Results of Operations
1997 Compared to 1996 - Continuing Operations
Net loss from continuing operations decreased by $1,339,000 from a loss
of $1,675,000 or $0.55 per share for the year ended December 31, 1996 to a loss
of $336,000 or $0.11 per share for the year ended December 31, 1997 primarily as
a result of the suspension of the Company's efforts to develop a home use
product and the resulting sale of assets associated with such product in the
second quarter of 1997. Sales and marketing expense decreased 79% from $267,000
to $56,000, research and development expense decreased 74% from $908,000 to
$237,000, and other income increased 92% from $128,000 to $246,000, in the year
ended December 31, 1996 and 1997, respectively. General and administrative
expense decreased 54% from $628,000 to $289,000, in the year ended December 31,
1996 and 1997, respectively.
1997 Compared to 1996 - Discontinued Operations
Loss on discontinued operations decreased 67% from $2,557,000 or $0.83
per share to $849,000 or $0.27 per share for the year ended December 31, 1996
and 1997, respectively, primarily as a result of the cost containment program
implemented in 1997. In addition, a loss on disposal of discontinued operations
of $157,000 was recorded in year ended December 31, 1997 primarily as a result
of a $50,000 estimated loss on discontinued operations through the closing date
of the Sale, and $665,000 accrued transaction costs plus severance and
management value appreciation bonus partially offset by a $558,000 estimated
gain on sale of assets.
During the year ended December 31, 1997, the Company had sales of
$1,638,000, a decrease of 21%, compared to sales in the year ended December 31,
1996 of $2,064,000. This is primarily
7
due to decreased sales of the Guardian partially offset by higher sales of the
WalkAbout. The Company believes that overall sales of portable water filtration
products in the outdoor specialty sporting goods market declined during the
period as a result of the maturation of the market.
The gross margin of $340,000 or 21% of sales for the year ended
December 31, 1997 was higher than the prior year gross margin of $103,000 or 5%
of sales, primarily due to lower manufacturing overhead costs primarily as a
result of the cost containment program implemented in 1997.
Sales and marketing expenses for the year ended December 31, 1997 were
$468,000, a decrease of 57%, compared to $1,079,000 for the year ended December
31, 1996. This decrease was due to reduced staffing costs as a result of the
cost containment program and reduced advertising and sales aids expenses.
There were no research and development expenses related to the portable
outdoor water filtration market for the year ended December 31, 1997, a decrease
of $121,000 compared to the year ended December 31, 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 year ended December 31,
1997 were $771,000 compared to $774,000 for the year ended December 31, 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.
1996 Compared to 1995 - Continuing Operations
Net loss from continuing operations increased from a loss of $220,000
or $0.11 per share, to a loss of $1,675,000 or $0.55 per share in 1995 and 1996,
respectively. The increased loss was primarily due to $908,000 of research and
development expenditures for the home use product and increased investment
banking fees, partially offset by higher interest income on higher cash and
marketable securities balances.
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.
8
1996 Compared to 1995 - Discontinued Operations
Net loss on discontinued operations increased 7% from $2,385,000 or
$1.23 per share in 1995 to $2,557,000 or $0.83 per share in 1996 primarily due
to $686,000 in impairment loss on the value of fixed assets and intangible
assets of the outdoor business, offset by lower research and development
expenses.
Sales decreased 5% from $2,163,000 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 of $232,000 primarily due to lower sales of higher margin Guardian and
accessory products.
Sales and marketing expenses decreased 1% from $1,090,000 in 1995 to
$1,079,000 in 1996 primarily due to decreased trade show costs offset by higher
sales commissions to the sales force for the portable outdoor product line.
Research and development expenses decreased 81% from $624,000 in 1995
to $121,000 in 1996 primarily due to the Company's decreased investment in
research and development associated with products for the portable outdoor water
filtration market.
General and administrative expenses decreased 14% from $903,000 in 1995
to $774,000 in 1996 primarily as a result of lower legal expenses.
Liquidity and Capital Resources
Cash and cash equivalents and short term investments decreased by 50%
from $1,921,000 at December 31, 1996 to $968,000 at December 31, 1997 primarily
due to funding continued operating losses in 1997.
Since its inception, the Company has been engaged primarily in product
development and has incurred operating losses resulting in an accumulated
deficit of approximately $11,000,000 as of December 31, 1997. Operating losses
increased in 1996 as a result of the Company's efforts to develop a water
filtration and purification device for the home use market. The Company
suspended its efforts to manufacture and market this product, reduced its
personnel and initiated a cost containment program designed to reduce general
and administrative costs, and conserve its cash reserves. 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. In February 1998,
the Company sold the Outdoor Business, which represented substantially all of
its assets, to Cascade and
9
realized proceeds of approximately $1,633,425. Immediately after the closing of
the Sale and payment of related and retained liabilities, the Company's assets
were approximately $1.4 million.
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 utilize cash, equity, debt or a
combination thereof to increase the amount of capital available for a Business
Combination or to 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.
10
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
11
SWWT, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-9
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SWWT, Inc.:
We have audited the accompanying balance sheets of SWWT, INC. (formerly
SweetWater, Inc.) (a Delaware corporation) as of December 31, 1997 and 1996, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 SWWT, Inc. as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Denver, Colorado, ARTHUR ANDERSEN LLP
February 24, 1998.
F-2
Page 1 of 2
SWEETWATER, INC.
----------------
BALANCE SHEETS
--------------
December 31,
-----------------
ASSETS 1997 1996
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 968,076 $1,479,937
Short-term investments ........................... -- 440,659
Accounts receivable, less allowance for doubtful
accounts of $35,000 in 1996 ................... -- 132,446
Inventory, net of reserve for obsolescence of
$205,000 in 1996 .............................. -- 690,231
Prepaids and other current assets ................ 2,476 51,288
Net assets of discontinued operations ............ 970,497 --
---------- ----------
Total current assets ................... 1,941,049 2,794,561
---------- ----------
FIXED ASSETS (Note 1):
Equipment, furniture and fixtures ................ -- 475,000
Less- Accumulated depreciation ................... -- --
---------- ----------
Total fixed assets ..................... -- 475,000
---------- ----------
OTHER ASSETS:
Deposits and other, net .......................... -- 39,921
---------- ----------
Total assets ........................... $1,941,049 $3,309,482
========== ==========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
Page 2 of 2
SWEETWATER, INC.
----------------
BALANCE SHEETS
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31,
------------
1997 1996
---- ----
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................... $ 246,464 $ 493,356
Accrued salaries and employee benefits ...................... 165,620 92,982
Accrued warranty costs and other ............................ -- 30,630
Accrued loss for disposal of discontinued operations ........ 156,997 --
----------- ------------
Total liabilities ................................. 569,081 616,968
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 8,000,000 shares authorized;
3,115,918 and 3,067,382 shares issued and outstanding
at December 31, 1997 and 1996, after deducting
128,941 and 126,606 shares held in treasury, respectively .. 3,116 3,068
Deferred compensation ....................................... -- (12,366)
Additional paid-in capital .................................. 12,434,873 12,425,783
Accumulated deficit ......................................... (11,066,021) (9,723,971)
------------ ------------
Total stockholders' equity ........................ 1,371,968 2,692,514
------------ ------------
Total liabilities and stockholders' equity ........ $ 1,941,049 $ 3,309,482
============ ============
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
SWEETWATER, INC.
----------------
STATEMENTS OF OPERATIONS
------------------------
For the Years Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
NET SALES ............................................ $ -- $ -- $ --
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing .............................. 55,910 267,332 --
Research and development ......................... 236,673 907,945 --
General and administrative ....................... 289,429 627,794 249,029
----------- ----------- -----------
Total operating expenses ............... 582,012 1,803,071 249,029
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS ........................ (582,012) (1,803,071) (249,029)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of technology and fixed assets ...... 202,497 -- --
Interest income .................................. 46,870 161,222 122,205
Interest expense and other ....................... (3,536) (33,138) (93,344)
----------- ----------- -----------
245,831 128,084 28,861
----------- ----------- -----------
NET (LOSS) FROM CONTINUING
OPERATIONS ....................................... (336,181) (1,674,987) (220,168)
(LOSS) FROM DISCONTINUED OPERATIONS .................. (848,872) (2,557,288) (2,385,000)
(LOSS) FROM DISPOSAL OF DISCONTINUED
OPERATIONS, including provision of $50,000 for
operating losses during period prior to completion
of sale .......................................... (156,997) -- --
----------- ----------- -----------
NET (LOSS) ........................................... $(1,342,050) $(4,232,275) $(2,605,168)
=========== =========== ===========
INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED
Net (loss) .................................... $ (0.43) $ (1.38) $ (1.34)
=========== =========== ===========
(Loss) from continuing operations ............. $ (0.11) $ (0.55) $ (0.11)
=========== =========== ===========
(Loss) from discontinued operations ........... $ (0.27) $ (0.83) $ (1.23)
=========== =========== ===========
(Loss) from disposal of discontinued operations $ (0.05) $ -- $ --
=========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING ...................................... 3,094,330 3,065,311 1,948,946
=========== =========== ===========
Theaccompanying notes to financial statements are an integral part of these
statements.
F-5
Page 1 of 2
SWEETWATER, INC.
----------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
Common Stock Additional
--------------- Deferred Paid-in Accumulated
Shares Amount Compensation Capital Deficit Total
------ ------ ------------ ------- ------- -----
BALANCES, December 31, 1994 ........................... 1,802,786 $ 1,803 $(48,826) $ 7,137,693 $ (2,886,528) $ 4,204,142
Treasury stock purchase on February 28, 1995
from a stockholder, at cost ...................... (34,375) (34) -- (15,950) -- (15,984)
Issuance of treasury stock ........................ 300 -- -- 1,725 -- 1,725
Stock options exercised ........................... 800 1 2,534 (2,163) -- 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 .......... 1,335,078 1,335 -- 5,265,791 -- 5,267,126
Common stock issued to 401(k) plan ................ 5,726 6 -- 22,905 -- 22,911
Treasury stock purchase on December 11, 1995
from a stockholder, at cost ...................... (45,786) (46) -- (2,701) -- (2,747)
Amortization of deferred compensation expense ..... -- -- 17,438 -- -- 17,438
Net loss .......................................... -- -- -- -- (2,605,168) (2,605,168)
----------- -------- -------- ----------- ------------ -----------
BALANCES, December 31, 1995 ........................... 3,064,529 3,065 (28,854) 12,407,300 (5,491,696) 6,889,815
Common stock issued to 401(k) Plan ................ 9,969 10 -- 31,903 -- 31,913
Amortization of deferred compensation expense ..... -- -- 16,488 -- -- 16,488
Treasury stock purchase on September 13, 1996
from a stockholder, at cost ...................... (7,116) (7) -- (420) -- (427)
Common stock issuance cost ........................ -- -- -- (13,000) -- (13,000)
Net loss .......................................... -- -- -- -- (4,232,275) (4,232,275)
----------- -------- -------- ----------- ------------ -----------
BALANCES, December 31, 1996 ........................... 3,067,382 3,068 (12,366) 12,425,783 (9,723,971) 2,692,514
Common stock issued to 401(k) Plan ................ 50,871 50 -- 21,594 -- 21,644
Treasury stock purchase from a stockholder, at cost (2,335) (2) -- (138) -- (140)
Unearned balance of deferred compensation ......... -- -- 12,366 (12,366) -- --
Net loss .......................................... -- -- -- -- (1,342,050) (1,342,050)
----------- -------- -------- ----------- ------------ -----------
BALANCES, December 31, 1997 ........................... 3,115,918 $ 3,116 $ -- $12,434,873 $(11,066,021) $ 1,371,968
The accompanying notes to financial statements are an integral part of these
statements.
F-6
Page 1 of 2
SWEETWATER, INC.
----------------
STATEMENTSOF CASH FLOWS
-----------------------
For the Years Ended
December 31,
---------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $(1,342,050) $(4,232,275) $(2,605,168)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization ....................... 174,783 442,948 353,942
Impairment loss ..................................... -- 685,838 --
Gain on sale of technology and fixed assets ......... (202,497) -- --
Amortization of deferred compensation expense ....... -- 16,488 17,438
Conversion of interest payable to common stock ...... -- -- 15,308
Issuance of treasury stock to 401(k) Plan ........... 21,644 31,913 22,911
Accrued loss for disposal of discontinued operations 156,997 -- --
Changes in assets and liabilities-
Accounts receivable .................................... -- (74,624) 54,824
Inventory - ............................................ 429,832 (518,598)
Prepaids and other current assets ...................... 48,812 54,130 9,896
Deposits and other ..................................... -- (13,762) (31,631)
Accounts payable and accrued liabilities ............... (246,892) 235,191 (47,825)
Accrued salaries and employee benefits ................. 72,638 66,300 (30,612)
Accrued warranty costs and other ....................... -- 15,524 (11,149)
Net change in operating assets of
discontinued operations ............................. 171,294 -- --
----------- ----------- -----------
Net cash used in operating activities ........... (1,145,271) (2,342,497) (2,770,664)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets ................................. -- (379,784) (657,566)
Purchase of fixed assets related to discontinued operations (36,183) -- --
Proceeds from sale of technology .......................... 229,074 -- --
Purchases of short-term investments ....................... -- -- (5,400,577)
Proceeds from sales of short-term investments ............. 440,659 4,020,238 3,621,823
----------- ----------- -----------
Net cash provided by (used in)
investing activities ......................... 633,550 3,640,454 (2,436,320)
----------- ----------- -----------
The accompanying notes to financial statements are an integral part of these
statements.
F-7
Page 2 of 2
SWEETWATER, INC.
----------------
STATEMENTS OF CASH FLOWS
------------------------
For the Years Ended
December 31,
----------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under term loan agreement $ -- $ -- $ 877,708
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
Repurchase of common stock ....................... (140) (427) (18,731)
Sale of treasury stock ........................... -- -- 1,725
Proceeds from exercise of stock options .......... -- -- 372
----------- ----------- -----------
Net cash (used in) provided by financing
activities .......................... (140) (329,351) 5,031,054
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ...................................... (511,861) 968,606 (175,930)
CASH AND CASH EQUIVALENTS, beginning of period ....... 1,479,937 511,331 687,261
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period ............. $ 968,076 $ 1,479,937 $ 511,331
=========== =========== ===========
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 ........................ $ 3,536 $ 29,875 $ 81,045
=========== =========== ===========
Unearned balance of deferred compensation plan $ 12,366 $ -- $ --
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-8
SWEETWATER, INC.
----------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1997
-----------------
(1) BUSINESS, DISCONTINUED OPERATIONS, ASSET
----------------------------------------
IMPAIRMENT AND CONTINUING OPERATIONS
------------------------------------
SWWT, Inc., formerly known as SweetWater, Inc. (the "Company"), has specialized
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 products have
been principally marketed to outdoor supply retailers across the United States.
A significant portion of the Company's revenues have been derived from sales to
one national outdoor supply retailer (Note 6).
Since its inception, the Company has incurred significant operating losses and
cash flow deficits resulting in an accumulated deficit of approximately $11.1
million as of December 31, 1997. Operating losses increased in 1996, as a result
of the Company's efforts to develop a water filtration and purification device
for the home use market. During 1996, the Company actively pursued the
establishment of a joint strategic alliance to manufacture and market the home
use product; however, the Company was not successful in locating an industry
partner to manufacture and market this potential product. Accordingly, the
Company suspended its efforts to manufacture and market this product, sold the
plans, designs and technology associated therewith in April 1997
F-9
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 portable
water filtration and purification products (the "Outdoor Business").
Discontinued Operations
-----------------------
On October 21, 1997, the Company and Cascade Design, Inc. ("Cascade") executed
an Asset Purchase Agreement (the "Sale Agreement") pursuant to which the Company
agreed to sell substantially all the operations and operating assets of the
Company related to the manufacture and distribution of portable water filtration
and purification products for outdoor use, to Cascade (the "Sale Transaction"),
for cash. The Sale Transaction was approved by the shareholders of the Company
on February 5, 1998 and closing of the sale occurred on February 6, 1998. The
effect of the sale is detailed in the Pro Forma Balance Sheet information
included in Note 10. Upon closing, the Company changed its name to SWWT, Inc.
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
F-10
performance bonuses and a right of first refusal to purchase the Outdoor
Business under certain conditions. The right of first refusal did not occur.
Management received a bonus, based on the price paid by Cascade, of
approximately $523,000, of which approximately $114,000 was earned and accrued
at December 31, 1997, and the remainder is factored into the "accrued loss for
disposal of discontinued operations."
The Company had net sales for the years ended 1997, 1996 and 1995 of
approximately $1,638,000, $2,064,000 and $2,163,000, respectively.
Impairment Loss Recognized in 1996
----------------------------------
Long-lived assets held and used in the Company's portable water filtration and
purification business, including certain manufacturing equipment and related
intangible assets, were reviewed for possible impairment because events or
changes in the Company's circumstances, as described above, indicated that their
carrying amounts may not be recoverable. An impairment loss was recognized and
the net book value of such assets was reduced based on the Company's estimate of
the fair market value of such assets. The Company's estimate of fair market
value was based on third party estimates as well as the Company's estimate of
future cash flows to be generated from the use of such assets. As a result,
during 1996, the Company recorded an impairment loss of $685,838. The related
assets were reflected in the accompanying balance sheets at their estimated fair
market value of $475,000 as of December 31, 1996.
Continuing Operations
---------------------
Immediately after closing the Sale Transaction and paying related and retained
liabilities, the Company's assets will be limited to approximately $1.4 million
in cash and cash equivalents. The Company has no further operating business and
its management and administrative staff have been reduced to a minimum required
F-11
to maintain and to fulfill its reporting obligations. The Board of Directors is
exploring opportunities to effect an acquisition, whether by merger, exchange or
issuance of capital stock, acquisition of assets or other similar business
combination, with a privately-held business which the Board believes may have
significant growth potential.
In the statements of operations for the years ending December 31, 1997, 1996 and
1995, the remaining financial statement balances for sales and marketing and
research and development represent the operating expenses incurred to develop
the home use water purification technology which was sold in the second quarter
of 1997. The remaining financial statement balances represent the Company's
general and administrative overhead not attributable to either the portable
Outdoor Business or the indoor home use products and technology. Salaries
attributable to corporate general and administrative expenses were $70,000,
$70,000 and $70,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
---------------------
The balance sheet as of December 31, 1997 and the statements of operations for
the three years ending December 31, 1997 have been restated under Accounting
Principles Board Opinion No. 30 as a result of the execution of the Sale
Agreement and shareholder approval obtained on February 5, 1998.
F-12
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, 1997, 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, these
securities had an amortized cost basis of $440,659 , which approximated fair
value. No such securities were held as of December 31, 1997.
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, included in net assets of discontinued operations at
December 31, 1997, consists of the following at December 31, 1997 and 1996.
F-13
1997 1996
---- ----
Raw materials .................. $ 382,371 $ 669,736
Finished goods ................. 436,729 225,495
------- -------
819,100 895,231
Less- Reserve for obsolescence (185,000) (205,000)
-------- --------
$ 634,100 $ 690,231
========= =========
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.
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 (Note7).
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.
Loss Per Share
In February 1997, the Financial Accounting Standards Board (FASB), issued
Statement of Financial Accounting Standards No.128, Earnings Per Share. This
statement establishes new standards for computing and presenting earnings per
share and, as required, has been adopted retroactively by the Company in the
accompanying financial statements. Adoption of the standard had no material
impact on reported earnings per share and required financial statement
disclosures. Outstanding options and warrants for the Companys common stock have
been excluded from the computations of earnings per share as they are
antidilutive for the periods presented.
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.
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 (SFASNo. 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 recorded an impairment loss of
$685,838 for the year ended December 31, 1996 related to its equipment used in
operations and intangible assets. The impairment charge is included in the loss
from discontinued operations for 1996.
(3) STOCKHOLDERS EQUITY
Private Placement Offering
In November 1995, the Company completed a private placement of its common stock.
In connection with the offering, 1,335,078 shares of common stock were sold at a
price of $4 per share, providing net proceeds to the Company of approximately
$5,267,100. This included the conversion of a $1,500,000 Convertible
Subordinated Promissory Note issued in September 1995 to an existing shareholder
of the Company and accrued interest of $15,308 at $4 per share of common stock
(Note5).
Preferred Stock
The Company is 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.
(4) 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 Companys 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. The purchase price of shares subject to incentive
stock options is the fair market value of the Companys common stock on the date
of grant. 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 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
July13, 1994; an additional 3,000 shares became exercisable on April25, 1995,
and on each subsequent anniversary thereof. On November7, 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 directors 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.
In conjunction with the Sale Transaction, all unexercised stock options held by
employees, directors and consultants expired on February6, 1998. No stock
options were exercised subsequent to yearend.
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.
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
F-14
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 (Note 7).
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.
Loss Per Share
- ---------------
In February 1997, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This
statement establishes new standards for computing and presenting earnings per
share and, as required, has been adopted retroactively by the Company in the
accompanying financial statements. Adoption of the standard had no material
impact on reported earnings per share and required financial statement
disclosures. Outstanding options and warrants for the Company's common stock
have been excluded from the computations of earnings per share as they are
antidilutive for the periods presented.
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
F-15
date of the financial statements, and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
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 recorded an impairment loss of
$685,838 for the year ended December 31, 1996 related to its equipment used in
operations and intangible assets. The impairment charge is included in the loss
from discontinued operations for 1996.
(3) STOCKHOLDERS' EQUITY
- ------------------------
Private Placement Offering
- -----------------------------
In November 1995, the Company completed a private
placement of its common stock. In connection with the offering, 1,335,078 shares
of common stock were sold at a price of $4 per share, providing net proceeds to
the Company of approximately $5,267,100. This included the conversion of a
$1,500,000 Convertible Subordinated Promissory Note issued in September 1995 to
an existing shareholder of the Company and accrued interest of $15,308 at $4 per
share of common stock (Note 5).
F-16
Preferred Stock
- ---------------
The Company is 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.
(4) 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. The purchase price of shares subject to
incentive stock options is the fair market value of the Company's common stock
on the date of grant. 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
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.
F-17
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 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.
In conjunction with the Sale Transaction, all unexercised stock options held by
employees, directors and consultants expired on February 6, 1998. No stock
options were exercised subsequent to yearend.
F-18
Number of Shares
----------------
Officers Employees
and and Per Share
Directors Others Exercise Price
--------- ------ --------------
Balance, December 31, 1994 166,667 37,916 $ .47- $8.125
Granted 360,250 52,277 $ 1.00- $4.00
Exercised - (800) $ .47
Canceled (45,000) (867) $ .47- $8.125
---------- ---------- ---------------
Balance, December 31, 1995 481,917 88,526 $ .47- $8.125
Granted 50,000 53,400 $4.00
Exercised - - -
Canceled (31,000) (5,776) $4.00
---------- ---------- --------------
Balance, December 31, 1996 500,917 136,150 $ .47- $8.125
Granted 25,000 500 $ .50- $4.00
Exercised - - -
Canceled (42,667) (105,561) $ .47- $8.125
---------- ---------- -------------
Balance, December 31, 1997 483,250 31,089 $ .50- $8.125
======= ======== =============
Exercisable at December 31, 1997 306,462 22,227 $ .50- $8.125
======= ======== =============
The exercise prices for the options to purchase 514,339 shares of common stock
include 25,000 shares at $0.50, 2,000 shares at $1.00, 447,339 shares at $4.00
and 40,000 shares at $8.125. The exercise prices for the exercisable options to
purchase 328,689 shares of common stock include 25,000 shares at $0.50, 1,000
shares at $1.00, 262,689 shares at $4.00 and 40,000 shares at $8.125.
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
F-19
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:
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
Risk-free interest rate 5.36% 5.96% 5.57%
Dividend rate 0% 0% 0%
Expected volatility 116.26% 116.26% 82.51%
Expected life 3.0 years 4.0 years 3.0 years
Using these assumptions, the fair value of the stock options granted in 1997,
1996 and 1995 was approximately $9,401 or $0.37 per option, $263,575 or $2.55
per option and $757,232 or $1.84 per option, 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).
Year Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
Net loss:
As reported $ (1,342) $(4,232) $(2,605)
Pro forma $ (1,607) $(4,476) $(2,641)
Net loss per common share:
As reported $ (0.43) $(1.38) $(1.34)
Pro forma $ (.52) $(1.46) $(1.36)
F-20
In September 1995, the Company issued a warrant for the purchase of 88,435
shares of common stock in connection with the issuance of the $1,500,000
Convertible Promissory Note (Note 5).
(5) RELATED PARTY TRANSACTIONS
--------------------------
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 of this financial advisor. Amounts paid
to this financial advisor during 1996 totaled approximately $350,000.
(6) MAJOR CUSTOMERS AND SUPPLIERS
-----------------------------
During 1997, 1996 and 1995 sales to one customer represented approximately 37%,
31% and 36% of total sales for those years, respectively.
(7) INCOME TAXES
------------
As of December 31, 1997 and 1996, the Company had net operating loss ("NOL")
carryforwards for tax purposes of approximately $9,600,000 and $8,200,000,
respectively. Based on an effective tax rate of 38%, the Company's related
deferred tax assets were approximately $3,600,000 and $3,100,000 as of December
31, 1997 and 1996, respectively. The NOL carryovers expire from the year 2006
F-21
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 $4,125,000 and $3,633,000 of net
deferred tax assets as of December 31, 1997 and 1996, respectively, 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 to fully offset these net
deferred tax assets.
The components of the net deferred tax assets as of December 31, 1997 and 1996,
were as follows:
1997 1996
---- ----
Net operating loss carryforwards ........ $ 3,600,000 $ 3,100,000
Capitalization of organization and
start up costs for tax purposes ......... 42,000 86,000
Depreciation ............................ 14,000 6,000
Accruals not deducted for tax purposes .. 148,000 180,000
Asset impairment ........................ 261,000 261,000
Loss on disposal for discontinued options 60,000 --
Less- Valuation allowance ............... (4,125,000) (3,633,000)
---------- ----------
$ - $ -
========== ==========
(8) 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
F-22
of the unvested portion are allocated to the remaining employees in the plan
proportionately, based upon current year compensation. During 1997, 1996, and
1995, 50,871 and 9,969 and 5,726 respectively, shares of common stock were
issued to the 401(k) plan.
(9) COMMITMENTS AND CONTINGENCIES
-----------------------------
In August 1997, the Company entered into a new lease which commenced October
1997, and will continue for a three year period unless canceled between June 1,
1998 and July 15, 1998. Upon consummation of the Sale Transaction, the lease was
assigned to, and assumed by, Cascade. Minimum future lease obligations under the
new lease would have been $6,011 per month for the period from October 1, 1997
through June 1, 1998, and, if the lease continued, after June 1, 1998, minimum
future lease obligations would have been $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. The Company's
new Corporate headquarters is 3492 West 109th Circle, Westminster, Colorado
80030.
The Company retained all liabilities related to its operations prior to the
closing of the Sale Transaction, with the exception of product warranty
liabilities, which were assumed by Cascade. The liabilities 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 provides up to $11 million in coverage
for occurrences up to the date of the Sale Transaction and $1 million for
occurrence after the date of the Sale Transaction. The Company has not incurred
any product liabilities since its inception.
F-23
(10) PRO FORMA FINANCIAL INFORMATION
-------------------------------
The following pro forma financial information gives effect to the Sale of Assets
to Cascade Designs, Inc. on February 6, 1998 ("Sale Transaction"). The Pro Forma
Balance Sheet gives effect to the Sale Transaction as if it had occurred on
December 31, 1997.
Pro Forma
December 31, Pro Forma December 31,
1997 Adjustments 1997
---- ----------- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............... $ 968,076 $ 1,528,500 $ 2,496,576
Prepaids and other current assets ....... 2,476 -- 2,476
Assets held for sale .................... 970,497 (970,497) --
----------- ----------- -----------
Total current assets .......... 1,941,049 558,003 2,499,052
----------- ----------- -----------
TOTAL ASSETS ................................ $ 1,941,049 $ 558,003 $ 2,499,052
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and other accrued
liabilities .......................... $ 246,464 $ -- $ 246,464
Accrued salaries and benefits ........... 165,620 665,000 830,620
Accrued loss for disposal of discontinued
operations ........................... 156,997 (106,997) 50,000
----------- ----------- -----------
Total current liabilities ..... 569,081 558,003 1,127,084
----------- ----------- -----------
STOCKHOLDERS' EQUITY ........................ 1,371,968 -- 1,371,968
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY .................................. $ 1,941,049 $ 558,003 $ 2,499,052
=========== =========== ===========
F-24
Cash and cash equivalents represent the December 31, 1997 pro forma projected
gross cash proceeds received on sale of assets as if the sale took place on
December 31, 1997. Actual gross cash proceeds from the Sale Transaction will
differ due to changes in the Closing Asset Value between December 31, 1997 and
the Closing Date, February 6, 1998.
In the table below the December 31, 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 were sold
at book value as of February 6, 1998, plus $300,000. Liabilities assumed include
equipment leases and product warranties. The Company expects a loss on
operations from December 31, 1997 to the expected sale date of approximately
$50,000 and transaction costs plus severance and the management bonuses of
approximately $107,000, net of gain on sale of assets.
December 31, 1997
-----------------
Accounts receivable $ 77,386
Inventory 634,100
Prepaid expenses 7,172
Fixed assets 309,823
Deposits and other 6,436
------------
Subtotal assets to be sold 1,034,917
Liabilities to be assumed 64,420
------------
Net assets to be sold 970,497
Pro forma gross sales proceeds 1,528,500
------------
Estimated gain on sale of assets 558,003
Estimated severance, management bonuses and
transaction costs 665,000
Expected loss on operations prior to sale of assets 50,000
------------
December 31, 1997 accrued loss for disposal of
discontinued operations $ (156,997)
==========
F-25
Trade payables and other accrued expense in the ordinary course of business
remain liabilities of the Company. Pro forma adjustments included are severance
payments and management bonuses due under the Management Agreement.
F-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with the Company and its independent
accountants on any matter of accounting principles or practice or financial
statement disclosure since the Company's inception.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
AND REPORTS ON FORM 8-K
Documents filed as part of this Report:
- ---------------------------------------
Financial Statements and Financial Statement Schedules - See Index to
Financial Statements and Financial Statement Schedules at Item 8 of this
report.
All other financial statement schedules are omitted because they are not
required, are inapplicable or the information has been included elsewhere
in the financial statements or notes thereto.
Reports on Form 8-K:
A Report on Form 8-K was filed on November 5, 1997. A Report on Form 8-K
was also filed on February 23, 1998.
12
Exhibits:
---------
Reference is made to the accompanying Index of Exhibits.
PART V
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SweetWater, Inc.
(Registrant)
/s/ Patrick E. Thomas
---------------------
Patrick E. Thomas
President and Chief Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Patrick Thomas March 30, 1998
- ------------------
Patrick Thomas
Chief Executive Officer, President,
Chief Financial Officer
(Principal Financial Officer)
- ------------------- March __, 1998
Clarke H. Bailey
Director
/s/ Thomas Barnds March 30, 1998
- -----------------
Thomas Barnds
Director
/s/ Thomas A. Barron March 30, 1998
- --------------------
Thomas A. Barron
Director
13
- ----------------------- March __, 1998
Blair W. Effron
Director
/s/ Peter Gilson March 30, 1998
- ----------------
Peter Gilson
Chairman of the Board
Director
/s/ Randall A. Hack March 30, 1998
- -------------------
Randall A. Hack
Director
/s/ M. Leo Hart March 30, 1998
- ---------------
M. Leo Hart
Director
14
INDEX OF EXHIBITS
No. Exhibit Document Exhibit No.
- --- ---------------- -----------
(2) Not Applicable
(3) Articles of Incorporation and by-laws
(A) Certificate of Incorporation, as amended 3(A)
(B) By-laws(1)
(4) Instruments defining the rights of security holders,
including indentures
(A) Excerpts from the Certificate of Incorporation,
as amended 4(A)
(B) Excerpts from the By-laws(1)
(C) Specimen stock certificate(2)
(9) Not Applicable
(10) Material Contracts
(a) Form of Stock Purchase Agreement by and between the Company and
The Forschner Group, Inc.(now known as Swiss Army Brands, Inc.)(1)
(b) Form of Stock Purchase Agreement by and between the Company and
certain purchasers of Series A Preferred Stock(1)
(c) 1993 Stock Option Plan, as amended(2),(11)
(d) Form of Non-Incentive Stock Option Agreement for options which were
not issued under the 1993 Stock Option Plan(2),(11)
(e) Lease Agreement dated December 12, 1994 between the Company and Pratt
Land Limited Liability Company(3)
(f) Note and Warrant Agreement dated September 26, 1995(6)
(g) Common Stock Purchase Warrant issued to Forschner Enterprises, Inc.
(now known as Hudson River Capital LLC)(6)
15
(h) Subscription Agreement by and between the Company and Nassau Capital
Partners in connection with the 1995 private placement of shares of
Common Stock;(7)
(i) Form of Subscription Agreement executed by the Company and certain
investors in connection with the 1995 private placement of shares of
Common Stock.(7)
(j) Form of Director's Stock Option Agreement.(7)
(k) Letter Agreement dated April 17, 1997 by and between SweetWater, Inc.
and American Standard Inc.(8)
(l) Agreement dated as of May 9, 1997 by and among SweetWater, Inc. and
Eric M. Reynolds, Patrick Thomas and Jerry Cogdill(8)
(m) Termination of Lease Agreement dated May 29, 1997 by and between
SweetWater, Inc. and Pratt Land Company, LLC.(9)
(n) Lease agreement dated August 1, 1997 by and between SweetWater, Inc.
and Edwin Kanemoto, Dale Kanemoto and Karen K. Wood.(9)
(o) Asset Purchase Agreement dated as of October 21, 1997 (the "Asset
Purchase Agreement") by and between SweetWater, Inc., a Delaware
corporation, and Cascade Designs, Inc., a Washington corporation
("Purchaser"). (A list of exhibits and schedules to the Purchase
Agreement is attached thereto. The Registrant agrees to furnish to the
Commission supplementally, upon request, a copy of any such exhibits
or schedules not otherwise filed herewith.)(10)
(11.1) Not Applicable
(12) Not Applicable
(13) Not Applicable
(16) Not Applicable
(18) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Consent of experts and counsel 23
(24) Not Applicable
(27) Financial Data Schedule 27
16
(28) Not Applicable
(99) Not Applicable
(1) These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1, Registration No. 33-71036, as filed on October 29, 1993,
and are incorporated herein by reference.
(2) These exhibits were filed as exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration No. 33-71036, as
filed on December 13, 1993, and are incorporated herein by reference.
(3) These exhibits were filed as exhibits to the Company's Form 10-K for
the year ended December 31, 1994, as filed on March 30, 1995, and are
incorporated herein by reference.
(4) These exhibits were filed as exhibits to the Company's Form 10-Q for
the quarter ended March 31, 1995, as filed on May 12, 1995, and are incorporated
herein by reference.
(5) These exhibits were filed as exhibits to the Company's Form 10-Q for
the quarter ended June 30, 1995, as filed on August 12, 1995, and are
incorporated herein by reference.
(6) These exhibits were filed as exhibits to the Company's Form 8-K as
filed on October 2, 1995, and are incorporated herein by reference.
(7) These exhibits were filed as exhibits to the Company's Form 10-K for
the year ended December 31, 1995, as filed in March 29, 1996, and are
incorporated herein by reference.
(8) These exhibits were filed as exhibits to the Company's Form 10-Q for
the quarter ended March 31, 1997, as filed on May 16, 1997, and are incorporated
herein by reference.
(9) These exhibits were filed as exhibits to the Company's Form 10-Q for
the quarter ended June 30, 1997, as filed on August 11 1997, and are
incorporated herein by reference.
(10) These exhibits were filed as exhibits to the Company's Form 8-K, as
filed on February 23, 1998, and are incorporated herein by reference.
(11) Constitutes a "management contract or compensatory plan or
arrangement" required to be filed pursuant to Item 14 (c) of the Form 10-K.
17
Exhibit 3(A)
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 6th day of February, 1998.
/s/ Patrick E. Thomas
---------------------
Patrick E. Thomas
President and Chief
Executive Officer
CERTIFICATE OF INCORPORATION
SWEETWATER, INC.
FIRST. The name of the corporation is:
SWEETWATER, INC.
SECOND. The address of the registered office of the
corporation in the State of Delaware is 15 E. North Street, City of Dover,
County of Kent, Delaware 19901, and the name of its registered agent at that
address is Incorporating Services, Ltd.
THIRD. The purpose of the corporation is to engage
in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of stock which the
corporation is authorized to issue is fifteen million (15,000,000) shares, of
which eight million (8,000,000) shares of the par value of $.001 each are Common
Stock and seven million (7,000,000) shares of the par value of $.001 each are
Preferred Stock.
Shares of Preferred Stock may be issued from time to time in
one or more series. The Board of Directors of the corporation is authorized to
fix or alter the rights, powers, preferences and privileges, and the
qualifications, limitations or restrictions thereof, of any series of preferred
stock, including but not limited to dividend rights, dividend rate, conversion
rights, voting rights, and liquidation preferences; and to fix the number of
shares constituting any such series and the designation thereof; and to increase
or decrease the number of shares of any such series (but not below the number of
shares thereof then outstanding).
Of the Preferred Stock, 6,450,000 shares shall be designated
Series A Preferred Stock ("Series A Preferred") with the rights and preferences
set forth below.
A. Issuance: The series of Series A Shares shall
consist of 6,450,000 shares.
B. Voting Rights: The holder of each share of Series
A Preferred shall be entitled to the number of votes equal to
the number of shares of Common Stock into which each share of
Series A Preferred could be converted and, except as otherwise
required by law,
shall have voting rights and powers equal to the voting rights
and powers of the Common Stock.
C. Dividends. The holders of Series A Shares shall be
entitled, when and if declared by the Board of Directors of
the corporation, to annual dividends out of retained earnings
of the corporation, provided, however, that no dividend or
distribution may be declared or paid on any share of Common
Stock unless at the same time an equivalent dividend or
distribution is declared or paid on each outstanding share of
Series A Preferred. Each share of Series A Preferred
outstanding shall be deemed converted into Common Stock as
provided in Section E below for purposes of determining the
dividend or distribution payable on shares of Series A
Preferred. The right to such dividends on shares of Series A
Preferred shall not be cumulative, and no right shall accrue
to holders of Series A Preferred by reason of the fact that
dividends on said shares are not declared in any prior period.
D. Rights on Liquidation, Dissolution and
Winding Up.
Liquidation. In the event of any
liquidation, dissolution or winding up of the corporation,
whether voluntary or involuntary, the assets of the
corporation available for distribution to shareholders shall
be distributed as follows:
a) Holders of Series A Preferred shall first
be entitled to receive prorata an amount equal to
$.3876 per share of Series A Preferred ("Series A
Original Purchase Price"), plus any declared and
unpaid dividends thereon (said aggregate per share
amount being referred to herein as the "Series A
Preferred Liquidation Preference".)
b) After the payment referred to in
subsection (a) above shall have been made in full to
the holders of Series A Preferred, holders of Common
Stock shall then be entitled to receive prorata an
amount per share equal to the Series A Preferred
Liquidation Preference.
c) After the payments referred to in
subsections (a) and (b) above have been made in full,
holders of Series A Preferred and holders of Common
Stock shall be entitled to participate prorata on a
share for share basis in the distribution of any
additional assets of the corporation, holders of
Series A Preferred being treated on an as-converted
basis for this purpose.
-2-
E. Conversion. The holders of Series A Preferred
shall have conversion rights as follows:
1. Right to Convert. Each share of Series A
Preferred shall be convertible, at the option of the holder
thereof, at any time after issuance, at the office of the
corporation or any transfer agent for the Series A Preferred,
into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Series A
Original Purchase Price by the Series A Conversation Price in
effect at the time of conversion. The Series A Conversion
Price shall initially be $.3876 and shall be subject to
adjustment as hereinafter provided.
2. Mechanics of Conversion. Before any
holder of Series A Preferred shall be entitled to convert the
same into shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the
office of the corporation or of any transfer agent for the
Series A Preferred, and shall give written notice to the
corporation at such office that he elects to convert the same.
The corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Series A
Preferred a certificate or certificates for the number of
shares of Common Stock to which he shall be entitled as
aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred to be converted,
and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated
for all purposes as the record holder or holders of such
shares of Common Stock on such date.
3. Fractional Shares. No fractional shares
of Common Stock shall be issued upon conversion of the Series
A Preferred. Fractional shares shall not be issued and in lieu
of any fractional share to which the holder would otherwise be
entitled, the corporation shall pay cash equal to such
fraction multiplied by the then applicable Series A Conversion
Price.
4. Adjustment of Series A Conversion Price.
The Series A Conversion Price for each Series A Share, whether
or not issued, shall be subject to adjustment from time to
time as follows:
a) If the number of shares of Common Stock
outstanding at any time after the date hereof is
increased by a stock dividend payable in shares of
-3-
Common Stock or by a subdivision or split-up of
shares of Common Stock, then on the date such payment
is made or such change is effective, the Series A
Conversion Price shall be appropriately decreased so
that the number of shares of Common Stock issuable
upon conversion of any share of Series A Preferred
shall be increased in proportion to such increase of
outstanding shares.
b) If the number of shares of Common Stock
outstanding at any time after the date hereof is
decreased by a combination of the outstanding shares
of Common Stock, then on the effective date of such
combination, the Series A Conversion Price shall be
appropriately increased so that the number of shares
of Common Stock issuable upon conversion of any share
of Series A Preferred shall be decreased in
proportion to such decrease of outstanding shares.
(c) If at any time after the date hereof
there occurs any capital reorganization, or any
reclassification of any stock of the corporation
(other than a change in par value or as a result of a
stock dividend or subdivision, split-up or
combination of shares), or the consolidation or the
merger of the corporation with or into another person
(other than a consolidation or merger in which the
corporation is the continuing entity and which does
not result in any change in the Common Stock), or the
sale or other disposition of all or substantially all
of the properties and assets of the corporation as an
entity to any other person, the shares of the Series
A Preferred shall, after such reorganization,
reclassification, consolidation, merger, sale or
other disposition, be convertible into the kind and
number of shares of stock or other securities or
property of the corporation or of the entity
resulting from such consolidation or surviving such
merger or to which such properties and assets shall
have been sold or otherwise disposed of to which such
holder would have been entitled if, immediately
prior to such reorganization, reclassification,
consolidation, merger, sale or other disposition,
he had converted his shares of Series A Preferred
into Common Stock. The provisions of this Subsection
(c) shall similarly apply to successive reorganiza-
tions, reclassification, consolidations, mergers,
sales or other dispositions.
-4-
F. No Impairment. The corporation shall not
by amendment to its Articles of Incorporation or
through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or
seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by
the corporation, but shall at all times in good faith
assist in the carrying out of all of the provisions
of Section E and in the taking of all such action as
may be necessary or appropriate in order to protect
the conversion rights of the holders of Series A
Preferred against impairment.
G. Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the
Series A Conversion Price pursuant to Section E, the
corporation at its expense shall promptly compute
such adjustment or readjustment in accordance with
the terms hereof and prepare and furnish to each
holder of affected Series A Preferred a certificate,
which shall be certified by the corporation's
accountants if required by such holder, setting forth
such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment
is based. The corporation shall, upon written request
at any time of any holder of Series A Preferred,
furnish or cause to be furnished to such holder a
like certificate setting forth (a) such adjustments
or readjustments, (b) the Series A Conversion Price
in effect, and (c) the number of shares of Common
Stock and the amount, if any, of other property that
at the time would be received upon the conversion of
the Series A Preferred.
H. Notice of Record Date. In the event of
any taking by the corporation of a record of the
holders of any class of securities for the purpose of
determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or
other distribution, the corporation shall mail to
each holder of Series A Preferred, at least twenty
(20) days prior to the date specified herein, a
notice specifying the date on which any such record
is to be taken for the purpose of such dividend or
distribution.
I. Reservation of Stock Issuable Upon
Conversion. The corporation shall at all times
reserve and keep available out of its authorized but
-5-
unissued shares of Common Stock solely for the
purpose of effecting the conversion of the shares of
Series A Preferred such number of its shares of
Common Stock as shall form time to time be sufficient
to effect the conversion of all outstanding shares
the Series A Preferred; and if at any time the number
of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of
the then outstanding shares of Series A Preferred,
the corporation shall take such corporate action as
may in the opinion of its counsel be necessary to
increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient
for such purpose.
J. Notices. Any notice required to be given
to the holder of shares of Series A Preferred shall
be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder
of record at his address appearing on the books of
the corporation.
K. Amendments and Changes. As long as any
of the Series A Preferred shall be issued and
outstanding, the corporation shall not, without
first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at
least a majority of the total number of shares of
Series A Preferred then outstanding:
1. Increase the number of authorized
shares of Series A Preferred.
2. Create any new class or series of
shares having rights on a parity with or
superior to the rights of the Series A
Preferred.
3. Amend or change the Company's
Articles of Incorporation or Bylaws.
4. Merge, or consolidate with or
into any other corporation, except into or
with a wholly-owned subsidiary corporation
with the requisite shareholder approval.
5. Sell, convey, or otherwise
dispose of any material license,
intellectual property right, patent, or
trade secret, or all or substantially all of
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the property or business of the corporation,
whether in one transaction or in a series of
transactions.
6. Materially or adversely alter or
change the preferences, rights, privileges,
powers, or the restrictions provided for the
benefit of the Series A Shares.
7. Amend this Section K.
L. No Reissuance of Preferred Stock. No share or
shares of Series A Preferred acquired by the corporation by
reason of redemption, purchase, conversion or otherwise shall
be reissued, and all such shares shall be cancelled, retired
and eliminated from the shares that the corporation shall be
authorized to issue.
FIFTH. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
repeal, alter, amend and rescind the Bylaws of the corporation.
SIXTH. The names and mailing addresses of the persons who are
to serve as directors of the corporation until the first annual meeting of
stockholders or until their successors are elected and qualify are:
Name Address
---- -------
Eric Reynolds 4725 Nautilus Court S.
Boulder, CO 80301
Sanford Platter 4725 Nautilus Court S.
Boulder, CO 80301
Juan Rodriguez 4517 Navajo Place
Boulder, CO 80303
Tom Barron 545 Pearl Street
Boulder, CO 80302
James Kennedy The Forschner Group,Inc.
151 Long Hill Cross Roads
P.O. Box 874
Shelton, CT 06484
Ralph Sorenson 603 Spruce Street
Boulder, CO 80302
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Peter Gilson Physician's Support
Services, Inc.
P.O. Box 127
Landisville, PA 17538
SEVENTH. To the fullest extent permitted by the Delaware
General Corporation Law, as the same exists or may hereafter be amended, a
director of the corporation shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
EIGHTH. The corporation expressly elects not to be
governed by Section 203 of the Delaware General Corporation Law.
NINTH. The name and mailing address of the
incorporator of the corporation is:
Name Address
---- -------
David J. Cook 1401 Walnut Street
Suite 500
Boulder, CO 80302
THE UNDERSIGNED, being the incorporator hereinbefore named,
for the purpose of forming a corporation to do business both within and without
the State of Delaware and in pursuance of the Delaware General Corporation Law,
does make and file this Certificate hereby declaring and certifying that the
facts herein stated are true, and accordingly has hereunto set his hand and seal
this 16th day of September, 1993.
/s/ David J. Cook
-----------------
David J. Cook
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Exhibit 4(A)
EXCERPTS FROM
CERTIFICATE OF INCORPORATION
OF
SWEETWATER, INC.
"FOURTH. The total number of shares of stock which the
corporation is authorized to issue is fifteen million (15,000,000) shares, of
which eight million (8,000,000) shares of the par value of $.001 each are Common
Stock and seven million (7,000,000) shares of the par value of $.001 each are
Preferred Stock.
Shares of Preferred Stock may be issued from time to time in
one or more series. The Board of Directors of the corporation is authorized to
fix or alter the rights, powers, preferences and privileges, and the
qualifications, limitations or restrictions thereof, of any series of preferred
stock, including but not limited to dividend rights, dividend rate, conversion
rights, voting rights, and liquidation preferences; and to fix the number of
shares constituting any such series and the designation thereof; and to increase
or decrease the number of shares of any such series (but not below the number of
shares thereof then outstanding).
Of the Preferred Stock, 6,450,000 shares shall be designated
Series A Preferred Stock ("Series A Preferred") with the rights and preferences
set forth below.
A. Issuance: The series of Series A Shares shall
consist of 6,450,000 shares.
B. Voting Rights: The holder of each share of Series A
Preferred shall be entitled to the number of votes equal to the number of shares
of Common Stock into which each share of Series A Preferred could be converted
and, except as otherwise required by law, shall have voting rights and powers
equal to the voting rights and powers of the Common Stock.
C. Dividends. The holders of Series A Shares shall be
entitled, when and if declared by the Board of Directors of the corporation, to
annual dividends out of retained earnings of the corporation, provided, however,
that no dividend or distribution may be declared or paid on any share of Common
Stock unless at the same time an equivalent dividend or distribution is declared
or paid on each outstanding share of Series A Preferred. Each share of Series A
Preferred outstanding shall be deemed converted into Common Stock as provided in
Section E below for purposes of determining the dividend or distribution payable
on shares of Series A Preferred. The right to such dividends on shares of Series
A Preferred shall not be cumulative, and no
right shall accrue to holders of Series A Preferred by reason of the fact that
dividends on said shares are not declared in any prior period.
D. Rights on Liquidation, Dissolution and Winding Up.
Liquidation. In the event of any liquidation,
dissolution or winding up of the corporation, whether voluntary or involuntary,
the assets of the corporation available for distribution to shareholders shall
be distributed as follows:
a) Holders of Series A Preferred shall first be
entitled to receive prorata an amount equal to $.3876 per
share of Series A Preferred ("Series A Original Purchase
Price"), plus any declared and unpaid dividends thereon (said
aggregate per share amount being referred to herein as the
"Series A Preferred Liquidation Preference".)
b) After the payment referred to in subsection (a)
above shall have been made in full to the holders of Series A
Preferred, holders of Common Stock shall then be entitled to
receive prorata an amount per share equal to the Series A
Preferred Liquidation Preference.
c) After the payments referred to in subsections (a)
and (b) above have been made in full, holders of Series A
Preferred and holders of Common Stock shall be entitled to
participate prorata on a share for share basis in the
distribution of any additional assets of the corporation,
holders of Series A Preferred being treated on an as-converted
basis for this purpose.
E. Conversion. The holders of Series A Preferred shall have
conversion rights as follows:
1. Right to Convert. Each share of Series A
Preferred shall be convertible, at the option of the holder
thereof, at any time after issuance, at the office of the
corporation or any transfer agent for the Series A
Preferred, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing the
Series A Original Purchase Price by the Series A
Conversation Price in effect at the time of conversion. The
Series A Conversion Price shall initially be $.3876 and
shall be subject to adjustment as hereinafter provided.
2. Mechanics of Conversion. Before any
holder of Series A Preferred shall be entitled to convert the
same into shares of Common Stock, he shall surrender the
certificate or certificates therefor,
-2-
duly endorsed, at the office of the corporation or of any
transfer agent for the Series A Preferred, and shall give
written notice to the corporation at such office that he
elects to convert the same. The corporation shall, as soon
as practicable thereafter, issue and deliver at such office
to such holder of Series A Preferred a certificate or
certificates for the number of shares of Common Stock to
which he shall be entitled as aforesaid. Such conversion
shall be deemed to have been made immediately prior to the
close of business on the date of such surrender of the
shares of Series A Preferred to be converted, and the person
or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of
Common Stock on such date.
3. Fractional Shares. No fractional shares
of Common Stock shall be issued upon conversion of the Series
A Preferred. Fractional shares shall not be issued and in lieu
of any fractional share to which the holder would otherwise be
entitled, the corporation shall pay cash equal to such
fraction multiplied by the then applicable Series A Conversion
Price.
4. Adjustment of Series A Conversion Price.
The Series A Conversion Price for each Series A Share, whether
or not issued, shall be subject to adjustment from time to
time as follows:
a) If the number of shares of Common Stock
outstanding at any time after the date hereof is
increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of
shares of Common Stock, then on the date such payment
is made or such change is effective, the Series A
Conversion Price shall be appropriately decreased so
that the number of shares of Common Stock issuable
upon conversion of any share of
Series A Preferred shall be increased in proportion
to such increase of outstanding shares.
b) If the number of shares of Common Stock
outstanding at any time after the date hereof is
decreased by a combination of the outstanding shares
of Common Stock, then on the effective date of such
combination, the Series A Conversion Price shall be
appropriately increased so that the number of shares
of Common Stock issuable upon conversion of any share
of Series A Preferred shall be decreased in
proportion to such decrease of outstanding shares.
-3-
(c) If at any time after the date hereof
there occurs any capital reorganization, or any
reclassification of any stock of the corporation
(other than a change in par value or as a result of a
stock dividend or subdivision, split-up or
combination of shares), or the consolidation or the
merger of the corporation with or into another person
(other than a consolidation or merger in which the
corporation is the continuing entity and which does
not result in any change in the Common Stock), or the
sale or other disposition of all or substantially all
of the properties and assets of the corporation as an
entity to any other person, the shares of the Series
A Preferred shall, after such reorganization,
reclassification, consolidation, merger, sale or
other disposition, be convertible into the kind and
number of shares of stock or other securities or
property of the corporation or of the entity
resulting from such consolidation or surviving such
merger or to which such properties and assets shall
have been sold or otherwise disposed of to which such
holder would have been entitled if, immediately prior
to such reorganization, reclassification,
consolidation, merger, sale or other disposition, he
had converted his shares of Series A Preferred into
Common Stock. The provisions of this Subsection (c)
shall similarly apply to successive reorganizations,
reclassification, consolidations, mergers, sales or
other dispositions.
F. No Impairment. The corporation shall not by
amendment to its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
corporation, but shall at all times in good faith assist in the carrying out of
all of the provisions of Section E and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of the
holders of Series A Preferred against impairment.
G. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Price pursuant to Section
E, the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of affected Series A Preferred a certificate, which shall be certified by
the corporation's accountants if required by such holder, setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is
-4-
based. The corporation shall, upon written request at any time of any holder of
Series A Preferred, furnish or cause to be furnished to such holder a like
certificate setting forth (a) such adjustments or readjustments, (b) the Series
A Conversion Price in effect, and (c) the number of shares of Common Stock and
the amount, if any, of other property that at the time would be received upon
the conversion of the Series A Preferred.
H. Notice of Record Date. In the event of any taking by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the corporation
shall mail to each holder of Series A Preferred, at least twenty (20) days prior
to the date specified herein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution.
I. Reservation of Stock Issuable Upon Conversion.
The corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of Series A Preferred such number of its
shares of Common Stock as shall form time to time be sufficient to effect the
conversion of all outstanding shares the Series A Preferred; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the then outstanding shares of Series A
Preferred, the corporation shall take such corporate action as may in the
opinion of its counsel be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
J. Notices. Any notice required to be given to the holder of
shares of Series A Preferred shall be deemed given if deposited in the United
States mail, postage prepaid, and addressed to each holder of record at his
address appearing on the books of the corporation.
K. Amendments and Changes.
As long as any of the Series A Preferred shall be issued and outstanding, the
corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at least a majority of the total
number of shares of Series A Preferred then outstanding:
1. Increase the number of authorized shares of Series
A Preferred.
2. Create any new class or series of shares having
rights on a parity with or superior to the rights of the
Series A Preferred.
-5-
3. Amend or change the Company's Articles of
Incorporation or Bylaws.
4. Merge, or consolidate with or into any other
corporation, except into or with a wholly-owned subsidiary
corporation with the requisite shareholder approval.
5. Sell, convey, or otherwise dispose of any material
license, intellectual property right, patent, or trade secret,
or all or substantially all of the property or business of the
corporation, whether in one transaction or in a series of
transactions.
6. Materially or adversely alter or change the
preferences, rights, privileges, powers, or the restrictions
provided for the benefit of the Series A Shares.
7. Amend this Section K.
L. No Reissuance of Preferred Stock. No share or shares of
Series A Preferred acquired by the corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be cancelled, retired and eliminated from the shares that the corporation shall
be authorized to issue."
*****
"FIFTH. In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors is expressly
authorized to make, repeal, alter, amend and rescind the Bylaws
of the corporation."
*****
"SEVENTH. To the fullest extent permitted by the
Delaware General Corporation Law, as the same exists or may
hereafter be amended, a director of the corporation shall not be
liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director."
*****
"EIGHTH. The corporation expressly elects not to be
governed by Section 203 of the Delaware General Corporation Law."
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