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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 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, 1998 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 12, 1999, was approximately $323,911. On such date, the last
sale price of registrant's common stock was $0.28 per share.
Indicate number of shares outstanding of each of the registrant's classes
of common stock, as of March 12, 1999.
Class Outstanding on March 12, 1999
----- -----------------------------
Common Stock, par value $.001 per share 3,122,254
DOCUMENTS INCORPORATED BY REFERENCE:
None
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 $1.2 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 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.
2
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, 1998. 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 which
consisted of three primary devices: two microfilters (the Guardian and the
WalkAbout) and one purifier (the Guardian+Plus) and several accessory products.
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.
3
Employees
At December 31, 1998, the Company had no full-time employees and one
part-time employee.
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.
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 were disallowed by the EEOC and the
remaining charge was withdrawn by the employee in the fourth quarter of 1998.
In 1996, the Company received a communication from a patent holder,
which was 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 did 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 believed
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, 1998.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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 established public trading market will develop or be sustained. 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, 1997 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. The Company believes that the number of
beneficial owners was at least 300 as of March 12, 1999.
4
1998 HIGH LOW
First Quarter 1.37 0.50
Second Quarter 0.50 0.50
Third Quarter 0.72 0.34
Fourth Quarter 0.34 0.31
1997
First Quarter 0.75 0.50
Second Quarter 0.75 0.50
Third Quarter 0.25 0.125
Fourth Quarter 0.75 0.10
The Company has never paid a dividend and does not anticipate payment
of dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended December
31, 1994 through December 31, 1998 are derived from the financial statements of
the Company. 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".
5
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Operations Data:
Net Sales ........................... 0 0 0 0 0
Costs and Expenses:
General & Administrative ......... 203 289 628 249 248
Sales & Marketing ................ -- 56 267 -- --
Research & Development ........... -- 237 908 -- --
Operating Income (Loss) ............. (203) (582) (1,803) (249) (248)
Other Income, net ................... 62 246 128 29 139
Net (Loss) from Continuing Operations (141) (336) (1,675) (220) (109)
Net (Loss) from Continuing .......... $ (0.05) $ (0.11) $ (0.55) $ (0.11) $ (0.06)
Operations per Common
Share - Basic and Diluted
Weighted Average number of .......... 3,122 3,094 3,065 1,949 1,789
common shares outstanding (1)
Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital ..................... $ 1,251 $ 1,372 $ 2,178 $ 5,487 $ 3,661
Total Assets ........................ 1,251 1,941 3,309 7,506 5,114
Long Term Debt ...................... -- -- -- 208 371
Total Liabilities ................... 15 569 617 616 910
Accumulated earnings (deficit) ...... (11,207) (11,066) (9,724) (5,492) (2,887)
Stockholder's equity ................ 1,236 1,372 2,693 6,890 4,204
(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, 1994 through December 31, 1998, 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
1998 Compared to 1997 - Continuing Operations
Net loss from continuing operations decreased from a loss of $336,000
or $0.11 per share, to a loss of $141,000 or $0.05 per share in 1997 and 1998,
respectively. The decreased loss was primarily due to reduced operating expenses
as a result of the sale of substantially all the assets of the Company.
1998 Compared to 1997 - Discontinued Operations
Net loss on discontinued operations decreased 100% from a loss of
$849,000 or $0.27 per share in 1997 to zero in 1998 as a result of the disposal
of discontinued operations in February 1998 and the recognition of a 1998 loss
on disposal of discontinued operations of $157,000 in the year ended December
31, 1997.
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.
7
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 due to decreased sales of the Guardian
partially offset by higher sales of the WalkAbout.
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 expense.
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.
Liquidity and Capital Resources
Cash and cash equivalents and short term investments increased by 29%
from $968,000 at December 31, 1997 to $1,251,000 at December 31, 1998 primarily
due to the proceeds from the sale of assets, net of costs.
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, 1998. 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,
8
which represented substantially all of its assets, to Cascade and 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.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
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, 1998 and 1997, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Denver, Colorado ARTHUR ANDERSEN LLP
March 26, 1999
F-2
SWWT, INC.
----------
BALANCE SHEETS
--------------
December 31,
1998 1997
---- ----
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 1,251,257 $ 968,076
Prepaids and other current assets ............................. -- 2,476
Net assets of discontinued operations ......................... -- 970,497
------------ ------------
Total assets ..................................... $ 1,251,257 $ 1,941,049
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ...................... $ 15,424 $ 246,464
Accrued salaries and employee benefits ........................ -- 165,620
Accrued loss for disposal of discontinued operations .......... -- 156,997
------------ ------------
Total liabilities .................................... $ 15,424 569,081
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 8,000,000 shares authorized;
3,122,254 and 3,115,918 shares issued and outstanding at
December 31, 1998 and 1997, after deducting 71,734 and 78,070
shares held in treasury, respectively ....................... 3,122 3,116
Additional paid-in capital .................................... 12,440,186 12,434,873
Accumulated deficit ........................................... (11,207,475) (11,066,021)
------------ ------------
Total stockholders' equity ......................... 1,235,833 1,371,968
------------ ------------
Total liabilities and stockholders' equity ......... $ 1,251,257 $ 1,941,049
============ ============
The accompanying notes to financial statements are an integral part
of these balance sheets.
F-3
SWWT, INC.
----------
STATEMENTS OF OPERATIONS
------------------------
For the Years Ended December 31,
1998 1997 1996
NET SALES ...................................... $ -- $ -- $ --
OPERATING EXPENSES:
Sales and marketing .......................... -- 55,910 267,332
Research and development ..................... -- 236,673 907,945
General and administrative ................... 203,918 289,429 627,794
----------- ----------- -----------
Total operating expenses .............. 203,918 582,012 1,803,071
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS .................. (203,918) (582,012) (1,803,071)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on sale of technology and fixed assets .. -- 202,497 --
Interest income .............................. 62,464 46,870 161,222
Interest expense and other ................... -- (3,536) (33,138)
----------- ----------- -----------
62,464 245,831 128,084
----------- ----------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS ... (141,454) (336,181) (1,674,987)
(LOSS) FROM DISCONTINUED OPERATIONS ............ -- (848,872) (2,557,288)
(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) ..................................... $ (141,454) $(1,342,050) $(4,232,275)
INCOME (LOSS) PER COMMON SHARE-
BASIC AND DILUTED
Net (loss) ............................ $ (.05) $ (0.43) $ (1.38)
(Loss) from continuing operations ..... $ (.05) $ (0.11) $ (0.55)
(Loss) from discontinued operations ... -- $ (0.27) $ (0.83)
(Loss) from disposal of discontinued .. $ -- $ (0.05) $ --
operations .......................... -- -- --
WEIGHTED AVERAGE SHARES OUTSTANDING ............ 3,121,726 3,094,330 3,065,311
The accompanying notes to financial statements are an integral part of
these financial statements.
F-4
SWWT, INC.
----------
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
----------------------------------------------------
Additional
Common Stock Deferred Paid-in
Shares Amount Compensation Capital
------ ------ ------------ -------
BALANCES, December 31, 1995 ............................. 3,064,529 $ 3,065 $ (28,854) $ 12,407,300
Common stock issued to 401(k) Plan ................... 9,969 10 -- 31,903
Amortization of deferred compensation expense ........ -- -- 16,488 --
Treasury stock purchase on September 13, 1996, at cost (7,116) (7) -- (420)
Common stock issuance cost ........................... -- -- -- (13,000)
Net loss ............................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 1996 ............................. 3,067,382 3,068 (12,366) 12,425,783
Common stock issued to 401(k) Plan ................... 50,871 50 -- 21,594
Treasury stock purchase, at cost ..................... (2,335) (2) -- (138)
Unearned balance of deferred compensation ............ -- -- 12,366 (12,366)
Net loss ............................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 1997 ............................. 3,115,918 3,116 -- 12,434,873
Common stock issued to 401(k) Plan ................... 6,336 6 -- 5,313
Net loss ............................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 1998 ............................. 3,122,254 $ 3,122 $ -- $ 12,440,186
============ ============ ============ ============
Accumulated
Deficit Total
------- -----
BALANCES, December 31, 1995 ............................. $ (5,491,696) $ 6,889,815
Common stock issued to 401(k) Plan ................... -- 31,913
Amortization of deferred compensation expense ........ -- 16,488
Treasury stock purchase on September 13, 1996, at cost -- (427)
Common stock issuance cost ........................... -- (13,000)
Net loss ............................................. (4,232,275) (4,232,275)
------------ ------------
BALANCES, December 31, 1996 ............................. (9,723,971) 2,692,514
Common stock issued to 401(k) Plan ................... -- 21,644
Treasury stock purchase, at cost ..................... -- (140)
Unearned balance of deferred compensation ............ -- --
Net loss ............................................. (1,342,050) (1,342,050)
------------ ------------
BALANCES, December 31, 1997 ............................. (11,066,021) 1,371,968
Common stock issued to 401(k) Plan ................... -- 5,319
Net loss ............................................. (141,454) (141,454)
------------ ------------
BALANCES, December 31, 1998 ............................. $(11,207,475) $ 1,235,833
============ ============
The accompanying notes to financial statements are an integral part
of these statements.
F-5
SWWT, INC.
----------
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ...................................................... $ (141,454) $(1,342,050) $(4,232,275)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization ............................... -- 174,783 442,948
Impairment loss ............................................. -- -- 685,838
Gain on sale of technology and fixed assets ................. -- (202,497) --
Amortization of deferred compensation expense ............... -- -- 16,488
Issuance of treasury stock to 401(k) Plan ................... 5,319 21,644 31,913
Accrued loss for disposal of discontinued operations ........ (156,997) 156,997 --
Changes in assets and liabilities-
Accounts receivable ............................................ -- -- (74,624)
Inventory ...................................................... -- -- 429,832
Prepaids and other current assets .............................. 2,476 48,812 54,130
Deposits and other ............................................. -- -- (13,762)
Accounts payable and accrued liabilities ....................... (231,040) (246,892) 235,191
Accrued salaries and employee benefits ......................... (165,620) 72,638 66,300
Accrued warranty costs and other ............................... -- -- 15,524
Net change in operating assets of discontinued operations ...... -- 171,294 --
----------- ----------- -----------
Net cash used in operating activities ....................... (687,316) (1,145,271) (2,342,497)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets ...................................... -- -- (379,784)
Purchase of fixed assets related to discontinued operations .... -- (36,183) --
Proceeds from sale of technology ............................... -- 229,074 --
Proceeds from sales of short-term investments .................. -- 440,659 4,020,238
Proceeds from sale of assets, net of costs ..................... 970,497 -- --
----------- ----------- -----------
Net cash provided by investing, activities .................. 970,497 633,550 3,640,454
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings under term loan agreement .............. $ -- $ -- $ (315,924)
Proceeds from issuance of common stock, net of stock issuance . -- -- (13,000)
costs
Repurchase of common stock .................................... -- (140) (427)
----------- ----------- -----------
Net cash used in financing activities .................... -- (140) (329,351)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............. 283,181 (511,861) 968,606
CASH AND CASH EQUIVALENTS, BEGINNING of period .................... 968,076 1,479,937 511,331
CASH AND CASH EQUIVALENTS, end of period .......................... $ 1,251,257 $ 968,076 $ 1,479,937
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Cash paid for interest ....................................... $ -- $ 3,536 $ 29,875
=========== =========== ===========
Unearned balance of deferred compensation plan ............... $ -- $ 12,366 $ --
=========== =========== ===========
The accompanying notes to financial statements are an integral part
of these statements.
F-6
SWWT, INC.
----------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1998
-----------------
(1) BUSINESS, DISCONTINUED OPERATIONS, ASSET
----------------------------------------
IMPAIRMENT AND CONTINUING OPERATIONS
------------------------------------
SWWT, Inc., formerly known as SweetWater, Inc. (the "Company"), 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 were principally
marketed to outdoor supply retailers across the United States. A significant
portion of the Company's revenues were 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 $11.2
million as of December 31, 1998. Operating losses increased in 1996, as a result
of the Company's efforts to develop a water filtration and purification device
for the home use market. During 1996, the Company actively pursued the
establishment of a joint strategic alliance to manufacture and market the home
use product; however, the Company was not successful in locating an industry
partner to manufacture and market this potential product. Accordingly, the
Company suspended its efforts to manufacture and market this product, sold the
plans, designs and technology associated therewith in April 1997 and realized
net proceeds of approximately $210,000. The Company had no amounts capitalized
related to this product.
During 1997, the Company reduced its personnel, discontinued its research and
development efforts and initiated a cost containment program designed to reduce
general and administrative costs, conserve its cash reserves and enable the
Company to concentrate its resources on the manufacture and sale of its 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
F-7
Company), and Jerry L. Cogdill (Chief of Operations for the Company)
(collectively, "Management"), entered into an agreement (the "Management
Agreement") pursuant to which Management agreed to remain with the Company
through January 31, 1998, in exchange for certain performance bonuses and a
right of first refusal to purchase the Outdoor Business 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 with respect to its discontinued operations for the
years ended 1998, 1997, and 1996 of approximately $0, $1,638,000, and
$2,064,000, 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
---------------------
Upon closing the Sale Transaction and paying related and retained liabilities,
the Company's assets were limited to cash and cash equivalents. The Company has
no further operating business and its management and administrative staff have
been reduced to a minimum required 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 and 1996,
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 $64,000, $70,000 and $70,000
for the years ended December 31, 1998, 1997, and 1996, respectively.
F-8
(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, 1998, 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.
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, 1998, the Company's cash and cash
equivalents consisted of demand deposits, and money market accounts in banks and
other financial institutions and governmental securities with maturities less
than 90 days, which approximated market value. Governmental Securities
classified as Cash Equivalents as of December 31, 1998 were $1,218,830 and
matured at January 7, 1999 for $1,220,000.
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:
1997
----
Raw materials $382,371
Finished goods 436,729
819,000
Less-Reserve for obsolescence (185,000)
$634,100
========
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.
F-9
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 (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.
Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income", effective January 1, 1998. This statement
establishes standards for the reporting and display of comprehensive income (net
income plus all other changes in net assets from non-owner sources) and its
components in financial statements. For the years ended December 31, 1998 and
1997, the Company had no other comprehensive income items, therefore,
comprehensive income is net income.
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
F-10
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 (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
-------------------
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-11
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 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.
In February 1998, the Board granted each of Messrs. Bailey, Barnds, Barron,
Effron, Gilson and Hack an option entitling him to purchase 60,000 shares of
Common Stock at an exercise price of $1.3125 per share, which option is fully
vested but is not exercisable until February 5, 2000.
Number of Shares
-----------------------------
Officers Employees
and and Per Share
Directors Others Exercise Price
--------- ------ --------------
Balance, December 31, 1995 .......... 481,916 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
-------- -------- -------------
Cancelled .................... (483,250) (31,089) $ .50-$8.125
Granted ...................... 360,000 -- $ 1.3125
-------- -------- -------------
Balance, December 31, 1998 .......... 360,000 -- $ 1.3125
======== ======== =============
Exercisable at December 31, 1998 .... -- --
======== ========
The Company accounts for its stock-based compensation plan and non-plan options
under APB No. 25, under which no compensation expense is recognized for options
granted with an exercise price equal to the fair value of the Company's common
stock on the date of grant. The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123") for disclosure purposes in 1996. For SFAS 123
F-12
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,
-----------------------
1998 1997 1996
---- ---- ----
Risk-free interest rate ............ 5.41% 5.36% 5.96%
Dividend rate ...................... 0.0% 0.0% 0.0%
Expected volatility ................ 18.95% 116.26% 116.26%
Expected Life ...................... 3.0 years 3.0 years 3.0 years
Using these assumptions, the fair value of the stock options granted in 1998,
1997 and 1996 was approximately $0 or $0 per option, $9,401 or $0.37 per option,
and $263,575 or $2.55 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,
-----------------------
1998 1997 1996
---- ---- ----
Net loss:
As reported .................. $ (141) $ (1,342) $ (4,232)
Pro forma .................... $ (141) $ (1,607) $ (4,476)
Net loss per common share:
As reported .................. $ (0.05) $ (0.43) $ (1.38)
Pro forma .................... $ (0.05) $ (.52) $ (1.46)
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.
F-13
(6) MAJOR CUSTOMERS AND SUPPLIERS-DISCONTINUED OPERATIONS
-----------------------------------------------------
During 1998, 1997 and 1996 sales to one customer represented approximately 0%,
37%, and 31% of total sales for those years, respectively.
(7) INCOME TAXES
------------
As of December 31, 1998 and 1997, the Company had net operating loss ("NOL")
carryforwards for tax purposes of approximately $9,700,000 and $9,600,000
respectively. Based on an effective tax rate of 38%, the Company's related
deferred tax assets were approximately $3,700,000 and $3,600,000 as of December
31, 1998 and 1997, respectively. The NOL carryovers expire from the year 2006
through the year 2011. The Tax Reform Act of 1986 contains provisions which may
limit the net operating loss and credit carryovers available to be used in any
given year upon the occurrence of certain events, including significant changes
in ownership interests.
The Company has determined that approximately $3,700,000 and $3,600,000 of net
deferred tax assets as of December 31, 1998 and 1997, 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, 1998 and 1997,
were as follows:
1998 1997
---- ----
Net operating loss carry forward $3,700,000 $3,600,000
Capitalization of organization and
Start up costs for tax purposes - 42,000
Depreciation - 14,000
Accruals not deducted for tax purposes - 148,000
Asset impairment - 261,000
Loss on disposal for discontinued options - 60,000
Less-Valuation allowance (3,700,000) (4,125,000)
----------- -----------
$ - $ -
============= ===========
(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
of the unvested portion are allocated to the remaining employees in the plan
proportionately, based upon current year compensation. During 1998, 1997 and
1996, the Company issued 6,336, 50,871 and 9,969, respectively, shares of common
stock to the 401(k) plan. The 401(k) Plan was terminated in 1998.
F-14
(9) COMMITMENTS AND CONTINGENCIES
-----------------------------
In August 1997, the Company entered into a new lease which commenced October
1997. Upon consummation of the Sale Transaction, the lease was assigned to, and
assumed by, Cascade. 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.
(10) PRO FORMA FINANCIAL INFORMATION
In the table below the February 6, 1998 balance sheet information, 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.
February 6, 1998
----------------------
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
Gross sales proceeds 1,528,500
---------
Gain on sale of assets 558,003
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)
=========
Trade payables and other accrued expense in the ordinary course of business
remained liabilities of the Company.
F-15
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 during 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table set forth certain information regarding the directors and
executive officer of the Company:
Name Position With the Company Age Director Since
- - ---- ------------------------- --- --------------
Peter W. Gilson Chairman of the Board 59 1993
Thomas Barnds Director 30 1998
Clarke H. Bailey Director 44 1998
Thomas A. Barron Director 47 1993
Blair W. Effron Director 36 1995
Randall A. Hack Director 51 1995
J. Merrick Taggart Director 48 1998
Patrick E. Thomas Chief Executive Officer 44 N/A
Peter W. Gilson has served as a director since June 1993 and as Chairman of
the Board since February 1998. Mr. Gilson served as President and Chief
Executive Officer of Physician Support Systems, Inc. a company specializing in
the management of physician and hospital practices, from 1991 through December
1997. From 1989 to the present, Mr. Gilson has also served as Chief Executive
Officer of the Warrington Group, Inc., a manufacturer of safety products which
was previously a division of The Timberland Company. From 1987 to 1988, he
served as Chief Operating Officer of The Timberland Company, a manufacturer of
footwear and outdoor clothing. From 1978 to 1986, he served as President of the
Gortex Fabrics Division of W. L. Gore Associates. Mr. Gilson is a director and
Chairman of Swiss Army Brands, Inc. and a director of Glenayre Technologies,
Inc. and of New Hope Foundation.
Thomas C. Barnds has served as a director since February 1998. Since
October 1998, Mr. Barnds has served as a Managing Director at Nassau Capital
L.L.C., which manages a $2 billion portfolio of investments in private companies
and assets on behalf of Princeton University's endowment. From August 1996 to
October 1998, Mr. Barnds served as an Associate at Nassau Capital L.L.C. Prior
to joining Nassau Capital, Mr. Barnds was the manager of new business
development for McGaw, Inc., a healthcare company, and a financial analyst at
Alex. Brown & Sons, an investment banking firm. Mr. Barnds received a B.A. from
Princeton University in 1990 and an M.B.A. from Stanford University in 1996.
Clarke H. Bailey has served as a director of the Company since February
1998. Mr. Bailey has served as Chairman, Chief Executive Officer and a director
of National Fulfillment, Inc., a leading provider of literature fulfillment and
other marketing services, since January 1999. Since February 1995, Mr. Bailey
has served as Co-Chairman of the Board and a director of Hudson River Capital
LLC, a private equity firm specializing in middle market acquisitions,
recapitalizations and expansion capital investments. Mr. Bailey also served as
Chairman, Chief Executive Officer and a director of Arcus
10
Technology Services, Inc., the leading national provider of secure off-site
computer data storage and related disaster recovery services as well as
information technology staffing solutions, from February 1995 until its merger
with Iron Mountain Incorporated in January 1998. He served as Chief Executive
Officer and a director of Glenayre Technologies, Inc., a paging and messaging
infrastructure technology firm, from December 1990 until March 1994 and as its
Vice Chairman of the Board from November 1992 to July 1996. Mr. Bailey is also a
director of Swiss Army Brands, Inc., Iron Mountain Incorporated and Connectivity
Technologies, Inc.
Thomas A. Barron has served as a director since June 1993. From November
1995 until February 1998, he served as Chairman of the Board of the Company. Mr.
Barron is an author and has been Chairman of Evergreen Management Corp., a
private investment firm, since January 1990. From November 1983 through November
1989, Mr. Barron was President, Chief Operating Officer and a director of The
Prospect Group, Inc., a publicly held New York based holding company that
conducted its major operations through subsidiaries and affiliates engaged in
the railroads and specialized consumer products industries. Prior to that he
served as a general partner of Sierra Ventures, a venture capital limited
partnership. Mr. Barron also serves as a director of Swiss Army Brands, Inc. Mr.
Barron, a Rhodes Scholar, has served as a Trustee of Princeton University, and
on national and regional boards of The Wilderness Society and The Nature
Conservancy.
Blair W. Effron has served as a director since November 1995. Mr. Effron
joined Dillon Read & Co., Inc., a New York based investment bank now known as
SBC Warburg Dillon Read, in 1987 and currently serves as a Managing Director.
Since 1993, Mr. Effron has been head of the firm's consumer products group,
where he has responsibility for several clients including Anheuser-Busch
Companies, Inc., General Mills, Inc., H. J. Heinz Company, and Playtex Products
Inc. Mr. Effron also heads the Financial Sponsor Group. Mr. Effron has been a
founding investor in several consumer products related enterprises including USA
Detergents, Inc. and American Value Brands, Inc. a processor and marketer of
value brand food products for mass merchandisers. Mr. Effron received a B.A.
from Princeton University in 1984 and an M.B.A. from Columbia University in
1987.
Randall A. Hack has served as a director since November 1995. Since January
1995, Mr. Hack has served as a senior managing director of Nassau Capital
L.L.C., an investment firm which he founded. Nassau Capital manages a $2 billion
portfolio of investments in private companies and real estate assets on behalf
of Princeton University's endowment. From 1990 to January 1995, Mr. Hack served
as President and Chief Executive Officer of the Princeton University Investment
Company, which has overall management responsibility for Princeton's $5.5
billion endowment fund. From 1988 to 1990, Mr. Hack was the President and Chief
Executive Officer of Capstone Equities, Inc. and, from 1979 to 1988, President
and Chief Executive Officer of Matrix Development Company, a commercial and
industrial real estate development firm in New Jersey, which he founded. Mr.
Hack received a B.A. degree summa cum laude from Princeton University in 1969
and an M.B.A. from Harvard University in 1972. He serves as a Director of
OmniCell Technologies, Inc., KMC Telecom Inc., Crown Castle International
Corporation, Cornerstone Properties, and Acacia Capital Corp.
J. Merrick Taggart has served as a director of the Company since May 1998.
Mr. Taggart has served as a director and as President of Swiss Army Brands,
Inc., the exclusive United States and Canadian importer and distributor of
Victorinox Original Swiss Army Knives and professional cutlery as well as other
products, since December 1995. From 1993 to November 1995, Mr. Taggart was
President of Duofold, Inc., a sports apparel company, and Pringle of Scotland
U.S.A., an apparel company. From 1990 to November 1992, Mr. Taggart was
President of O'Brien International, a manufacturer and marketer of water sports
equipment. Prior to that, Mr. Taggart was Senior Vice President of Product
Development for the Timberland Company. Mr. Hart is also a director of Swiss
Army Brands, Inc.
11
Patrick E. Thomas, CPA has served as President and Chief Executive Officer
of the Company since February 1998 and as Vice President and Chief Financial
Officer since November 1994. Mr. Thomas has served as President and Managing
Member of Total Beverage LLC, a private limited liability company specializing
in retail beverage sales, since April 1998. Mr. Thomas was Chief Financial
Officer for Bird Medical Technologies, Inc., a $50 million publicly traded
medical products manufacturer from 1990 to 1993. From 1993 to 1994 he held
positions as Vice President of Finance for Head Sports USA, Inc. a $50 million
sporting goods manufacturer and distributor, and then Chief Accounting Officer
and Controller for Synergen, Inc., a 600 employee publicly traded biotechnology
pharmaceutical development company. Mr. Thomas also served as Chief Financial
Officer and Director for LIFECARE International, Inc., a privately owned $20
million international medical products manufacturer from 1984 to 1990. Mr.
Thomas received his B.S. in Accounting from University of Illinois in 1976. Mr.
Thomas is a director of Great Trango Holdings, Co. and MT Ideas, LLC.
Directors of the Company are elected annually to serve until the next
annual meeting of shareholders or until their successors are duly elected.
Hudson River Capital LLC. and Nassau Capital Partners L.P. each have the right
to nominate one person to serve on the Company's Board of Directors, and the
Company has agreed to use its best efforts to secure the election of each such
nominee to the Board of Directors. Clarke H. Bailey and Randall A. Hack were
nominated by Hudson River Capital LLC. and Nassau Capital Partners, L.P.,
respectively, pursuant to such arrangements. The Company knows of no other
arrangements or understandings between a director or nominee and any other
person pursuant to which he has been selected as a director or nominee. There
are no family relationships between any of the directors or the executive
officer of the Company. The Company's only executive officer serves at the
discretion of the Board of Directors.
12
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
by the Company to its Chief Executive Officers for the years ended December 31,
1998, 1997 and 1996 and to the additional executive officers who received in
excess of $100,000 in compensation for 1998 :
Long Term Compensation
-----------------------------------------------------------------------
Annual Compensation Awards Payouts
----------------------------------- ----------------------- -----------
Other All other
Annual Restricted compen-
Salary Compen- Stock Options/ LTIP sation
Name & Principal Position Year ($)(1) Bonus ($) sation ($) Award ($) SARs ($) Payouts ($) ($)(2)
- - ------------------------- ---- ------ --------- ---------- --------- -------- ----------- ------
ERIC M. REYNOLDS 1998 $53,330 $136,188(3) -0- -0- -0- -0- $ 804
Chief Executive Officer
until February 1998
1997 $95,000 $38,000(4) -0- -0- -0- -0- $3,800
1996 $95,000 -0- -0- -0- -0- -0- $3,106
PATRICK E. THOMAS 1998 $116,924 $136,188(3) -0- -0- -0- -0- $1,053
Chief Executive Officer
since February 1998; Vice
President - Finance prior
thereto
1997 $85,000 $38,000(4) -0- -0- -0- -0- $3,400
1996 $85,000 -0- -0- -0- -0- -0- $3,400
JERRY COGDILL 1998 $57,874 $136,188(3) -0- -0- -0- -0- $ 708
Chief of Operations
1997 $85,000 $38,000(4) -0- -0- -0- -0- $3,400
1996 $85,000 -0- -0- -0- -0- -0- $3,400
(1) Amounts reported for 1998 include three months of severance plus
accrued vacation pay. The amount set forth below for Mr. Thomas for 1998 also
includes $64,000, or $6,000 per month, paid to Mr. Thomas in his capacity as
President and Chief Executive Officer.
(2) Represents the Company's Contribution to the executive officer's
401(k) account.
(3) Represents the balance of the performance bonus paid under the
terms of the Management Agreement described below under the heading "Certain
Relationships and Related Transactions." This bonus, together with the accrued
bonus of $38,000, was paid to each executive officer in February 1998.
(4) Represents the performance bonus accrued at December 31, 1997 under
the terms of the Management Agreement described below under the heading "Certain
Relationships and Related Transactions." This accrued bonus, together with the
additional bonus of $136,188 earned under such agreement as a result of the sale
of substantially all of the assets of the Company, was paid to each executive
officer in February 1998.
Option/SAR Grants in Last Fiscal Year; Aggregated Option/SAR Exercises in Last
Fiscal Year and Fiscal Year-End Option/SAR Values
No stock options were granted to, or exercised by, executive officers
in 1997. As a result of the Sale to Cascade, all unexercised outstanding stock
options to executive officers, directors and employees were terminated.
Accordingly, as of the end of the Company's 1998 fiscal year, there were no
outstanding stock options held by the Company's executive officer.
SWWT, Inc. Profit Sharing Plan and Trust
Pursuant to the SweetWater, Inc. 401(k) Profit Sharing Plan and Trust
(the "401(k) Plan"), which was established effective January 1, 1995, the
Company contributed 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)
13
Plan, the Company could also elect to make discretionary contributions.
Employees vested in Company contributions over six years of service with the
Company. Forfeitures of the unvested portion were allocated to the remaining
employees in the plan proportionately based upon current year compensation. The
Company terminated the 401(k) Plan in 1998.
Director's Compensation Fees
In 1998, Directors of the Company did not receive fees for attending
board meetings or committee meetings. Directors were reimbursed for their
out-of-pocket expenses, including travel, incurred in the performance of their
duties as directors. As a result of the Sale to Cascade, all outstanding stock
options, including options issued to directors of the Company, expired on
February 6, 1998. In February 1998, the Board granted each of Messrs. Bailey,
Barnds, Barron, Effron, Gilson and Hack an option entitling them to purchase
60,000 shares of Common Stock at an exercise price of $1.3125 per share, which
option is fully vested but is not exercisable until February 5, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth information regarding the beneficial ownership
of the Company's Common Stock as of March 1, 1999 by (i) each person who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) each director and the executive officer of the Company, and (iii)
all directors and the executive officer as a group. Except as otherwise noted,
the Company knows of no agreements among its shareholders which relate to voting
or investment power over its Common Stock.
14
Beneficial Owner Shares Beneficially Owned(1)
---------------- ----------------------------
Number Percent
------ -------
Directors:
Clarke H. Bailey 28,000 *
Thomas Barnds 621,845(2) 19.9%
Thomas A. Barron 34,583 1.1%
Blair W. Effron 18,750 *
Peter W. Gilson 7,792 *
Randall A. Hack 635,799(3) 20.4%
J. Merrick Taggart - -
Executive Officer 12,942 *
Executive officer & directors as a
group (includes 8 persons)
738,113 23.6%
Other 5% Shareholders:
Nassau Capital Partners L.P. 621,598 19.9%
22 Chambers Street
Princeton, NJ 08542
Equities Enterprises, Inc. 609,150(4) 19.5%
160 Madison Avenue
Third Floor
New York, New York 10016
Hudson River Capital LLC 420,536(5) 13.1%
667 Madison Avenue
Suite 2500
New York, NY 10021
Charles Elsener 197,500 6.3%
CH-6438
Ibach, Switzerland
* Less than 1%
(1) Unless otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable. With respect to information regarding 5% shareholders, the
Company has relied on information provided in publicly-filed documents
and, in certain cases, on supplementary information provided by the
shareholder.
(2) Includes 621,598 shares held by Nassau Capital Partners L.P. and 247
shares which represent Mr. Barnds' interest in shares directly or
indirectly held by NAS Partners I L.L.C., a limited liability company
in which he is a member. Mr. Barnds is an employee of Nassau Capital
L.L.C., which serves as the sole general partner of Nassau Capital
Partners L.P. Mr. Barnds disclaims beneficial ownership of shares held
by Nassau Capital Partners L.P.
(3) Includes 621,598 shares held by Nassau Capital Partners L.P. and 1,701
shares which represent Mr. Hack's interest in shares held directly or
indirectly by NAS Partners I L.L.C., a limited liability company in
which he is a member. Mr. Hack is one of four members of Nassau Capital
L.L.C. which serves as the sole general partner of Nassau Capital
Partners, L.P. Mr. Hack disclaims beneficial ownership of shares held
by Nassau Capital Partners L.P.
(4) Shares are held by Equities Holdings LLC, a wholly-owned subsidiary
of Equities Enterprises, Inc.
15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, the Company and Messrs. Reynolds, Thomas and Cogdill,
members of the Company's senior management ("Management"), entered into an
agreement (the "Management Agreement") pursuant to which the Management agreed
to remain with the Company through January 31, 1998 in exchange for certain
performance bonuses and a right of first refusal to purchase the Company's
Outdoor Business in the event certain performance targets were met and the
Company elected to sell such business within a specified period after December
31, 1997. Specifically, the Management Agreement provided that, Management, as a
group, under certain circumstances, would receive a Performance Bonus equal to
50% of the amount by which cash and cash equivalents as set forth on the
Company's audited balance sheet as of December 31, 1997, subject to certain
adjustments ("Year End Cash") exceeded $1,000,000. In addition, in the event
Year End Cash exceeded a specified target (which was lower than $1,000,000),
Management had a right of first refusal in the event the Company elected to sell
the Outdoor Business to a third party. If such right was not exercised,
Management, as a group, would receive a Value Enhancement Bonus equal to 30% of
the excess of the third party purchase price over the Management Price (as
defined below) less the amount of the Performance Bonus, if any. In the event
the Company elected to sell the Outdoor Business to Management, Management had
the right to purchase the Outdoor Business for a specified price (the
"Management Price") and the assumption of the Outdoor Business liabilities. The
Management Price was subject to certain adjustments, and would have been reduced
by the amount by which Year End Cash exceeded the target amount. If Year End
Cash equaled or exceeded $1,000,000, the Management Price would have been a
nominal amount.
Under the terms of the Management Agreement, Management, as a group,
earned a Performance Bonus equal to $114,000 and a Value Enhancement Bonus of
$408,563, as a result of the sale of the Outdoor Business to Cascade Designs,
Inc., which amounts were paid upon the completion of such sale in February 1998.
In 1996, the Company retained Dillon, Read & Co., Inc., now known as
SBC Warburg Dillon Read, as its exclusive agent to arrange a joint strategic
alliance involving either a new equity investment or the acquisition of stock or
assets of the Company. Mr. Effron, a director of the Company, is a Managing
Director of SBC Warburg Dillon Read.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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.
a) Reports on Form 8-K:
--------------------
No reports on Form 8-K were filed in the fourth quarter of fiscal 1998.
b) 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.
SWWT, Inc.
(Registrant)
/s/ Patrick E. Thomas
------------------------
Patrick E. Thomas
President and Chief Executive Officer
Date: March 31, 1999
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 E. Thomas March 31, 1999
- - ------------------------------------
Patrick E. Thomas
Chief Executive Officer, President,
Chief Financial Officer
(Principal Financial Officer)
/s/ Clarke H. Bailey March 31, 1999
- - ------------------------------------
Clarke H. Bailey
Director
/s/ Thomas Barnds
- - ------------------------------------ March 29, 1999
Thomas Barnds
Director
/s/ Thomas A. Barron March 31, 1999
- - ------------------------------------
Thomas A. Barron
Director
/s/ Blair W. Effron March 31, 1999
- - ------------------------------------
Blair W. Effron
Director
/s/ Peter Gilson March 31, 1999
- - ------------------------------------
Peter Gilson
Chairman of the Board
Director
17
/s/ Randall A. Hack
- - ------------------------------------ March 31, 1999
Randall A. Hack
Director
- - ------------------------------------ March __, 1999
J. Merrick Taggart
Director
18
INDEX OF EXHIBITS
No. Exhibit Document Exhibit No.
- - --- ---------------- -----------
(2) Not Applicable
(3) Articles of Incorporation and by-laws
(A) Certificate of Incorporation, as amended12
(B) By-laws1
(4) Instruments defining the rights of security holders, including
indentures
(A) Excerpts from the Certificate of Incorporation, as amended12
(B) Excerpts from the By-laws1
(C) Specimen stock certificate2
(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 Stock1
(c) 1993 Stock Option Plan, as amended2,11
(d) Form of Non-Incentive Stock Option Agreement for options
which were not issued under the 1993 Stock Option Plan2,11
(e) Lease Agreement dated December 12, 1994 between the
Company and Pratt Land Limited Liability Company3
(f) Note and Warrant Agreement dated September 26, 19956
(g) Common Stock Purchase Warrant issued to Forschner
Enterprises, Inc. (now known as Hudson River Capital LLC)6
(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 Cogdill8
(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
19
(16) Not Applicable
(18) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23)
23 Consent of experts and counsel
(24) Not Applicable
(27)
27 Financial Data Schedule
(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 19, 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.
12 These exhibits were filed as exhibits to the Company's Form 10-K, as
filed on March 31, 1998, and are incorporated herein by reference.
20
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated March 26, 1999 included in this
Form 10-K, into the Company's previously filed Registration Statement File No.
33-33704 and to all references to our firm included in this Form 10-K.
Denver, Colorado ARTHUR ANDERSEN LLP
March 26, 1999