As filed with the Securities and Exchange Commission on December 8, 1998
SEC Registration No. 33-________
- --------------------------------------------------------------------------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ELDORADO ARTESIAN SPRINGS, INC.
------------------------------------------
(Name of small business issuer in its charter)
Colorado 2086 84-0907853
---------------------- -------------- ------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
P.O. Box 445, Eldorado Springs, Colorado 80025 (303)499-1316
--------------------------------------------------------------
(Address and telephone number of principal executive
offices and principal place of business)
Douglas A. Larson
Eldorado Artesian Springs, Inc.
P.O. Box 445
Eldorado Springs, Colorado 80025
(303) 499-1316
---------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
----------
Laurie P. Glasscock, Esq. Peter B. Shaeffer
Chrisman, Bynum & Johnson, P.C. Suite 1424
1900 Fifteenth Street 135 South LaSalle Street
Boulder, CO 80302 Chicago, IL 60603
(303) 546-1300 (312) 782-5306
- --------------------------------------------------------------------------------
Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] ----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered offering price aggregate registration fee
registered per share offering price
- --------------------------------------------------------------------------------------------------------
Common Stock, 805,000 shares /1/ $6.00 /2/ $4,830,000 $1,342.74
$0.001 par value
- --------------------------------------------------------------------------------------------------------
/1/ Includes 105,000 shares issuable upon exercise of the Underwriter's
over-allotment option.
/2/ The proposed maximum offering price per share and the proposed maximum
aggregate offering price are calculated solely for the purpose of
determining the registration fee pursuant to Rule 457 under the Securities
Act of 1933. These amounts are determined using a price of $6.00 per share
which represents the low end of the range of prices to be determined by the
Company and the underwriter prior to the offering. The trading market for
the Company's common stock is very sporadic.
ELDORADO ARTESIAN SPRINGS, INC.
700,000 SHARES OF COMMON STOCK
Expected Offering Price.....$6.00 to $7.00 per share
Proposed Trading Symbol NASDAQ
SmallCap Market............................. "ELDO"
THE OFFERING Per Share Total/(3)/
---------- ------------
Public Price $6.00 $4,200,000
Underwriting discounts/(1)/ $0.60 $420,000
Proceeds to Eldorado/(2)/ $5.40 $3,780,000
(before expenses)
(1) In addition, the Underwriter will receive: (a) a non-accountable expense
allowance of 3% of the gross proceeds from this offering of the shares; (2) an
Underwriter's Warrant to purchase 70,000 shares based upon 10% of the shares
sold in the public offering at a price of 120% of the public offering price of
the shares and (c) certain other compensation, all as more particularly
described in "Underwriting".
(2) Before deducting expenses payable by Eldorado, estimated at $194,000,
excluding the Underwriter's non-accountable expense allowance.
(3) Eldorado has granted to the Underwriter an option, exercisable within 30
days after the date hereof, to purchase up to 105,000 additional shares of
common stock solely to cover over-allotment, if any. If such option is
exercised in full, the Public Price, Underwriting Discount and Proceeds to
Eldorado at the offering price of $6.00 per share would be $4,830,000, $483,000
and $4,008,100, respectively. See "Underwriting".
Eldorado bottles and markets natural artesian spring water from a natural spring
located in the foothills of the Colorado Rocky Mountains. Prior to this
offering, Eldorado common stock has traded on a very limited basis on the NASDAQ
Bulletin Board. Upon completion of this offering, we anticipate that the
securities will trade on the NASDAQ SmallCap Market.
See "Underwriting" for more information relating to the determination of the
offering price.
--------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK AND POSSIBILITY OF
SUBSTANTIAL DILUTION. WE STRONGLY URGE YOU TO READ THE ENTIRE PROSPECTUS
AND TO CONSIDER"RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION" BEGINNING
ON PAGE 14, BEFORE MAKING ANY INVESTMENT DECISIONS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
--------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. ELDORADO
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SOLICITATION IS NOT PERMITTED.
--------------------------
Mills Financial Services, Inc.
Mills Financial Services, Inc. will underwrite the securities on a "firm
commitment" basis, subject to its acceptance of the common stock and certain
other conditions and legal matters. We expect that delivery of the common stock
will be made against payment in ______________________, on or about ______,
1999. The underwriter will receive an option, exercisable within 30 days after
the date of this prospectus, to purchase up to 105,000 additional shares of
common stock solely to cover an over-allotment.
--------------------------
The date of this prospectus is ________, 1999
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................................................... 5
Eldorado Artesian Springs........................................ 5
The Offering..................................................... 5
Summary Financial and Operating
Information................................................. 6
Risk Factors.......................................................... 7
Use of Proceeds....................................................... 13
Dividend Policy....................................................... 13
Determination of the Offering Price................................... 14
Dilution.............................................................. 14
Capitalization........................................................ 15
Management Discussion and Analysis of
Results of Operations and Financial
Condition........................................................ 16
Eldorado and its Business............................................. 19
Management............................................................ 26
Principal Stockholders................................................ 29
Certain Transactions and Related
Transactions..................................................... 29
Legal Proceedings..................................................... 29
History of Securities Placements...................................... 29
Description of Securities............................................. 30
Shares Eligible for Future Sale....................................... 31
Underwriting.......................................................... 33
Commission Position on Indemnification for
Securities Act Liabilities....................................... 35
Legal Matters......................................................... 35
Experts............................................................... 35
Additional Information................................................ 36
Index to Financial Statements......................................... F-1
2
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. We
strongly urge you to read the entire prospectus which contains more detailed
information and financial statements. All information in this prospectus, unless
otherwise indicated, assumes no exercise of any outstanding options or warrants.
All references to shares of common stock described in this prospectus have been
adjusted to give effect to a twelve (12) for one (1) reverse stock split that
was effective April 1, 1998.
ELDORADO ARTESIAN SPRINGS
Eldorado Artesian Springs, Inc. ("Eldorado") is a Colorado based-company
primarily engaged in the bottling and marketing of "natural" artesian spring
water. Over 90 years ago, the artesian springs were the center of the Eldorado
Springs Resort where prominent people of the day traveled to "take the waters".
Today, the springs, located in the foothills of the Colorado Rocky Mountains,
are surrounded by thousands of acres of state and city park land, assuring a
well protected source.
Eldorado Springs meets the definition of an "extraordinary springs" as
described in H2O - The Guide to Quality Bottled Water because they emanate from
one of the most unique geological sources in the world. The water is naturally
purified as it rises through layers of sandstone under its own artesian
pressure. The water is bottled at the source in its natural state and is not
chemically treated water in any way. Currently, Eldorado's operations consist of
a home/commercial delivery business and a polyethylene terephtalate, a premium
clear plastic ("PET") consumer business sold to retail grocers.
Beverage industry analysts reveal that bottled water is the fastest growing
major category in the entire industry. The bottled water industry as a whole is
a $3.9 billion business and is currently growing at a rate of 9% to 10% per
year. This growth is attributable to healthier lifestyles and questionable
municipal water services. The PET segment of the bottled water industry is
currently a $930 million business and is growing at a much faster rate-an
estimated 20% to 30% per year-than the industry as a whole. Analysts expect just
the PET segment of the industry to reach $3 billion in wholesale sales over the
next ten years, which is an indicated rate of growth of 17% annually.
Eldorado has been successful in packaging its water in consumer PET sizes
for sale through retail grocery stores in the Denver metropolitan area. The
Company's growth strategy consists of four phases targeted to expand the
distribution of the retail PET products to regional and national markets: (1)
acquisition of additional water rights, (2) increasing sales to existing
customers, (3) broadening the current customer base and (4) establishing
distribution alliances with other companies in order to take advantage of their
established distribution networks.
THE OFFERING
Securities Offered.................. 700,000 shares of common stock to be issued and sold by Eldorado
Common Stock Outstanding
Before Offering.............. 2,995,495/1/
Common Stock To Be Outstanding
After Offering............... 3,695,495/1/
Use of Proceeds..................... Acquisition of water rights, expansion of facilities, marketing
programs and general working capital purposes
3
Proposed NASDAQ symbol/2/.............. ELDO
- ---------------
/1/ Unless otherwise indicated, references in this prospectus to Common Stock
Outstanding Before and After this offering do not include (i) issuance of
up to 70,000 shares of common stock issuable upon exercise of the
Underwriter's Warrant (80,500 shares if the over allotment option is
exercised); (ii) 875,000 shares reserved for issuance under Eldorado's 1997
Stock Option Plan; and (iii) up to 280,000 shares of common stock issuable
upon exercise of certain Private Placement Warrants as described below. See
"Description of Securities" for a description of securities issued in
connection with certain prior financings.
/2/ Symbols do not imply that a meaningful or sustained trading market for the
securities will develop.
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table highlights some of the financial and operating
information of Eldorado. More detailed financial and operating information can
be found in the financial statements included as part of this prospectus. See
"Financial Statements."
AS OF AND FOR THE AS OF AND FOR
YEAR ENDED SIX MONTHS ENDED
MARCH 31 SEPTEMBER 30/1//2/
----------------------------------------- -----------------------------
1996 1997 1998 1997 1998
----------------------------------------- -----------------------------
(Unaudited) (Unaudited)
Statement of earnings data:
Total revenues.............. $2,140,629 $2,644,521 $3,329,444 $1,687,171 $2,019,802
Total expenses.............. 1,923,849 2,346,999 3,069,859 1,458,437 1,876,412
Earnings before taxes....... 96,481 187,214 117,631 160,920 79,389
Net income.................. 73,327 124,152 83,228 128,372 61,543
Earnings per share............. .03 .05 .03 .05 .02
Number of shares outstanding /2/ 2,695,412 2,695,412 2,695,495 2,695,495 2,995,495
Balance Sheet Data:
Total assets................ 1,781,763 2,024,414 2,456,721 2,424,157 3,190,270
Total liabilities........... 1,438,223 1,556,722 1,905,801 1,828,094 1,887,726
Stockholder's equity........ 343,540 467,692 550,920 596,063 1,302,544
- ----------------------------
/1/ This prospectus contains unaudited financial statements for the six months
ended September 30, 1997 and 1998 (See "Financial Statements").
/2/ Adjusted to give effect to a twelve (12) for one (1) reverse stock split
that was effective April 1, 1998.
4
RISK FACTORS
This investment involves a high degree of risk. You should carefully
consider, among other things, the following risk factors before making an
investment decision.
GENERAL BUSINESS RISKS
WATER SUPPLY
The District Court, Water Division No. 1 originally decreed Eldorado's
existing water rights on July 11, 1973. Eldorado has the right to beneficially
use all of the water emanating from its points of diversion in accordance with
its decree unless a more senior call occurs on the water. Of the approximate 105
million gallon total physical flow of the springs, Eldorado's current legal
augmented supply of water is 7,820,424 gallons per year while its current
annualized use is 3,209,700 gallons per year. Eldorado's water rights priority
dates, ranging from December 1960 to December 1901, are relatively junior to
other water rights in the South Boulder Creek and South Platte Basins. A senior
call might occur in the winter or when runoff is insufficient to meet the water
needs of more senior water users below Eldorado Springs.
For many years Eldorado has enrolled its water rights in a substitute
supply plan approved by the State Engineer each year. This substitute supply
plan effectively insulates Eldorado's water rights from calls of senior water
rights owners. Although the State Engineer has approved the substitute supply
plan during every year that Eldorado has owned the water rights, the State
Engineer may not continue to do so in the future. Accordingly, management has
taken steps to acquire a water source to replace out-of-priority depletions
attributable to Eldorado's water rights. After sufficient augmentation water has
been acquired, Eldorado will then seek judicial approval of a permanent plan for
augmentation that will also insulate Eldorado's water rights from the calls of
senior water rights owners.
This plan for augmentation will be permanent and will not be subject to the
uncertainties of year-to-year approval as are substitute supply plans approved
by the State Engineer. Management is currently in negotiations to acquire
augmentation water. Based on the progress of current negotiations it appears
likely that management will soon acquire a source of augmentation water and
operational agreements that will allow it to obtain court approval of a
permanent augmentation plan. If Eldorado fails to obtain approval of a permanent
plan for augmentation it will continue to need to seek approval from the State
Engineer for the substitute supply. If the State Engineer denies approval, it
could harm our financial condition and results of operations and hinder our
ability to implement our business plan.
COMPETITION
The bottled water industry is highly competitive. There are numerous
competitors in most major markets, and differentiation among them can be
difficult since the product is often perceived as generic by consumers. Barriers
to entry may be low at certain local levels but increase significantly at the
national and international level because of large marketing and distribution
costs associated with obtaining and maintaining a presence at such distribution
levels.
At the current level of distribution, Eldorado competes on the basis of
customer service, product quality and price. Management believes that our
products have a superior taste, competitive pricing and attractive packaging
which are significant factors in maintaining Eldorado's current competitive
position. However, these factors may not permit Eldorado to be competitive as it
seeks to expand its domestic distribution area and to initiate foreign
distribution of its bottled water. Our competitors domestically and
internationally include more diversified corporations having substantially
greater assets and larger sales organizations than Eldorado, as well as other
small firms.
5
CHANGES IN CONSUMER PREFERENCES
Eldorado believes that the most important factor in the growth of natural
spring water products has been a change in consumer preferences. Consumer
preferences may be influenced, however, by the availability and appeal of
alternative beverages or packaging as well as general economic conditions, among
other things. Consumer demand for natural spring water may not continue to grow
or may diminish in the future.
SEASONALITY OF BUSINESS
Eldorado's business is mildly seasonal, with increased sales during summer
months. An average of 30% of Eldorado's net revenues occur during June, July and
August. Inclement weather may negatively impact Eldorado's business,
particularly summers which are unusually cool or rainy. However, Eldorado
expects concurrent sales into different geographic markets with varying seasons
will moderate the seasonality of the business.
ADDITIONAL CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
Based on management's current operating plan, Eldorado anticipates that our
existing capital resources together with the proceeds of this offering will be
adequate to satisfy our capital requirements for at least 12 months from the
date of this offering. Eldorado may subsequently require further capital in
order to expand our business. Historically, Eldorado has utilized debt
financing. Additional financing, if any, may be either equity, debt or a
combination of debt and equity. Any equity financing could dilute Eldorado's net
tangible book value per share of common stock. Eldorado cannot assure that we
will be able to secure additional debt or equity financing on favorable terms.
If we are unable to obtain additional needed financing, we may be unable to meet
our obligations and to maintain or expand our operations as desired. See
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
GOVERNMENTAL REGULATION
Eldorado's bottling operations are subject to several new regulations
designed to protect the environment and the quality of Eldorado's bottled water,
including the identity, quality, packaging and labeling of its bottled water.
Various state and federal regulations, designed to ensure the quality of the
water and the truthfulness of our marketing claims, require Eldorado to monitor
each aspect of our production process, including our water source, bottling
operations and packaging and labeling practices. Government regulations in
foreign jurisdictions are generally similar to, and in certain respects more
stringent than U.S. regulations. These laws and regulations and their
interpretation and enforcement are subject to change.
Eldorado cannot guarantee that our operations will not be subject to
additional or more stringent requirements in the future. If Eldorado fails to
comply with applicable laws and regulations, we could face fines, a temporary
shutdown of production, product recalls, loss of certification to market our
products or, even in the absence of governmental action, loss of revenue as a
result of adverse market reaction to negative publicity. Any of these
consequences could significantly and negatively impact our results of operations
and financial condition.
SUCCESS DEPENDENT ON OFFICERS AND KEY EMPLOYEES
The success of Eldorado depends on the services and active participation of
our officers and key employees. The loss of such services could adversely affect
Eldorado's business and the likelihood of profitable operations. Eldorado has
$250,000 of key man life insurance on Messrs. Larson and Sipple and $180,000 of
key man life insurance on Mr. Martin.
6
Eldorado cannot assure that we will be able to attract and retain
additional qualified personnel that may be needed.
DEPENDENCE ON KEY SUPPLIERS
The majority of Eldorado's natural spring water products are offered in
premium PET bottles. PET bottles are manufactured by a limited number of
suppliers. While Eldorado believes that its relationships with its suppliers are
good, we cannot assure that we will be able to obtain PET bottles from suppliers
on commercially reasonable terms, particularly at periods of peak demand.
Failure to obtain the necessary packaging materials for our products could have
a material adverse effect on our results of operations and financial position.
LIMITED ABILITY TO RAISE PRICES
Due to the wide range of beverages available to consumers, including
bottled water products, Eldorado has limited ability to raise prices for our
products. From time to time, Eldorado has been affected by higher prices for raw
materials, including PET resin and corrugated boxes. In the past, Eldorado
generally has not passed such higher costs on to our customers and we generally
would be unlikely to do so in connection with any future price increases. As a
result, Eldorado's future profitability may be adversely affected by future
increases in raw material prices.
POTENTIAL FOR PRODUCT LIABILITY
The bottling and distribution of bottled water products entails a risk of
product liability, including liability due to the presence of harmful
contaminants in products. Eldorado maintains insurance coverage against the risk
of products liability and product recall. However, the amount of the insurance
we carry is limited and the policies are subject to certain exclusions and may
or may not be adequate. In addition to direct losses, Eldorado may suffer
adverse publicity and damage to our reputation in the event of contamination
which could damage sales and profitability.
LACK OF INVENTORY
Eldorado maintains a limited amount of finished product inventory. If an
event caused our facilities to shut down, even for a short period, we would be
unable to fill customer orders which could substantially reduce revenues and
damage customer relations.
DISASTER PLAN
In the event of a disaster, fire, flood, or other disaster, Eldorado has
made arrangements to have bulk artesian spring water delivered to Denver area
bottled water companies in order to continue production of all sizes currently
produced at our facility. We cannot guarantee that these companies will be able
to meet the requirements of production.
RISKS RELATING TO REGISTRATION RIGHTS OF CERTAIN SHAREHOLDERS AND WARRANT
HOLDERS
During fiscal 1998, Eldorado issued 300,000 shares of restricted common
stock and warrants to purchase 30,000 shares at $3.30 and 250,000 shares at
$11.00 per share. The subsequent sales of these shares could have a depressive
effect upon the public market price for the securities in this offering. The
shares underlying the warrants have certain registration rights that allow the
holders to require Eldorado to register the shares one time and to "piggy-back"
the shares in another public offering by Eldorado. See "Description of
Securities" and "Shares Eligible for Future Sale."
7
DILUTION
At September 30, 1998, after giving effect to a 12 for 1 reverse stock
split, Eldorado had net tangible book value of $1,277,045 or $0.43 per share
based upon 2,995,495 shares of common stock outstanding. Net tangible book value
per share is determined by dividing the number of outstanding shares of common
stock into net tangible book value (total assets less total liabilities and
intangible assets). After giving effect to the receipt of the net proceeds from
this offering, the adjusted net tangible book value at September 30, 1998, would
have been $4,737,045 or $1.28 per share. This represents an immediate increase
of $0.85 per share to current shareholders and an immediate dilution of $4.72
per share or 78.7% to the investors in this offering.
FORWARD-LOOKING INFORMATION AND ASSOCIATED RISKS
This prospectus contains forward-looking statements, including statements
regarding, among other things, our growth strategy, anticipated trends in the
industry in which we operate, water availability, and our ability to enter into
contracts with distributors. These forward-looking statements are based largely
on Eldorado's expectations and are subject to a number of risks and
uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of the factors
described in this prospectus, including, among others, regulatory or economic
influences. In light of these risks and uncertainties, we cannot assure that the
forward-looking statements in this prospectus will in fact transpire or prove to
be accurate.
DIVIDEND POLICY
Eldorado does not contemplate or anticipate paying any dividends upon
shares of common stock in the foreseeable future. We anticipate that earnings,
if any, will be used to finance business expansion.
NATURE OF EXISTING MARKET FOR PUBLIC SHARES OF ELDORADO
There is an extremely limited and very sporadic public market for
Eldorado's common stock available for sale without registration or exempt from
registration. Although Eldorado is and intends to remain current in our required
filings with the Securities and Exchange Commission, we cannot assure that a
public market of depth and liquidity will develop or, if developed, will be
maintained.
POTENTIAL EXPENSES ARISING FROM INDEMNIFICATION OF OFFICERS AND DIRECTORS
Eldorado's Articles of Incorporation and Bylaws provide for indemnification
of current or former directors and officers, or of any person who may serve at
our request as a director or officer of another corporation in which we own
securities or are a creditor. These provisions eliminate, with certain
exceptions, the personal liability of these individuals to Eldorado and our
stockholders for monetary damages as a result of a breach of fiduciary duty.
This makes it more difficult to assert a claim and obtain damages arising out of
a breach of fiduciary duty. Eldorado will indemnify these persons against
reasonable costs and expenses incurred in connection with any action, suit or
proceeding to which they were made a party by reason of their position as a
director or officer. Eldorado will not be required to indemnify, however, any
officers or directors found liable for negligence or misconduct in his or her
corporate duties. As of the date of this prospectus, Eldorado is not aware of
any existing or pending litigation involving a director or officer requiring
indemnification by Eldorado. To the extent Eldorado is required to expend funds
to indemnify officers and directors, it could negatively impact our financial
condition.
8
Notwithstanding these indemnification provisions, in the opinion of the
Securities and Exchange Commission, indemnification for liabilities arising
under the Securities Act is against public policy and is therefore
unenforceable. See "Commission Position on Indemnification for Securities Act
Liabilities."
ARBITRARY DETERMINATION OF OFFERING PRICE
The public offering price of the securities has been arbitrarily determined
by negotiations between Eldorado and the underwriter and was not based on the
price of transactions in the limited and sporadic public market for Eldorado's
common stock. In particular, Eldorado believes the offering price is higher than
the price of the last public transaction of which Eldorado is aware. Among the
factors considered in determining the offering price were Eldorado's financial
condition and prospects, market prices of similar securities of comparable
publicly traded companies, certain financial and operating information of
similar businesses and the general condition of the securities market. The
offering price does not necessarily bear any relationship to Eldorado's assets,
book value, earnings, or any other established criterion of value. See
"Underwriting."
STOCK OPTION PLAN
Eldorado has reserved and has filed a registration statement on Form S-8 to
register 875,000 shares of our common stock for issuance upon exercise of stock
options pursuant to our Stock Option Plan. As of September 30, 1998, we have
granted 345,500 options under the Plan at $2.75 per share. Of that amount,
113,500 vested immediately. Exercise of outstanding stock options will reduce
the percentage of common stock held by the public stockholders and thus dilute
the market value for those shares. Furthermore, Eldorado may find it more
difficult to obtain additional capital during the life of the stock options on
favorable terms because the holders of the stock options would likely exercise
their options if Eldorado were able to obtain equity capital on terms more
favorable than those in the stock options. See "Management-Stock Option Plan."
POSSIBLE RESALES UNDER RULE 144
After the consummation of the offering, 2,707,404 shares of common stock
held by our present stockholders will not have been registered under the Act,
but may, under certain circumstances, be available for public sale by means of
ordinary brokerage transactions in the open market if sold according to Rule
144, promulgated under the Act. In general, under Rule 144, a person (or persons
whose shares are aggregated) who has satisfied a one-year holding period may,
under certain circumstances, sell within any three-month period a number of
securities which cannot exceed the greater of: (1) 1% of the then outstanding
shares of common stock, or (2) the average weekly trading volume of the class
during the four calendar weeks prior to the sale. Rule 144 also permits, under
certain circumstances, the sale of securities, without any limitation, by a
person who is not an affiliate of Eldorado and who has held his or her shares
for at least two years.
9
The possibility of a sale under Rule 144 may reduce the market price of
Eldorado's securities. In addition, warrant holders, the holders of shares
issuable upon exercise of stock options granted pursuant to the Stock Option
Plan and shares issued with respect to a private placement completed in 1998,
have certain registration rights under the Act, which would permit the future
public sale of the underlying shares of common stock. See "Shares Eligible for
Future Sale."
LACK OF UNDERWRITING HISTORY
Mills Financial Services, Inc., the underwriter of the securities, has
previously participated as an underwriter on a firm commitment basis in one
initial public offering completed in 1998. Investors should consider the limited
experience of Mills Financial Services, Inc. in evaluating an investment in the
common stock. See "Underwriting."
YEAR 2000 COMPLIANCE
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date code field, and were not
designed to account for the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless corrected
so that they can process data related to the year 2000. Eldorado relies on
computer systems, applications and devices in operating and monitoring major
aspects of our business, including financial systems (such as general ledger,
accounts payable and accounts receivable modules), inventory, customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and end products. We also rely, directly and indirectly, on systems of
external business enterprises such as distributors, suppliers, creditors,
financial organizations, and of governmental entities, for accurate exchange of
data.
Eldorado is aware of the issues associated with the programming code in
existing computer systems as the millennium approaches and is the process of
developing and finalizing plans to address the Year 2000 issue. Eldorado
presently believes that the Year 2000 problem will not pose significant
operational problems for us after we upgrade existing software and possibly
replace some software. However, if the upgrades and replacement software are not
completed timely or effectively, the Year 2000 problem could have a material
impact on our operations. Eldorado could also be affected through disruptions in
sales or business operations due to the inability of our customers and suppliers
to timely address the Year 2000 problem. Management expects to incur internal
staff and external consulting costs in addition to the costs of software
upgrades and replacement. However, until our plans for Year 2000 compliance are
finalized, we are unable to reasonably estimate the total cost of Year 2000
compliance or of the related potential effect on Eldorado's operations or on our
suppliers and customers.
10
USE OF PROCEEDS
The net proceeds to Eldorado from the sale of the shares offered in this
prospectus will be $3,460,000, assuming a per share offering price of $6.00 and
deducting underwriting discounts, the underwriter's non-accountable expense
allowance and other expenses of the offering estimated at $740,000. If the
underwriter exercises its overallotment option in full, the expenses of the
offering will be approximately $822,000 and Eldorado's net proceeds from this
offering will be $4,008,000. Management anticipates that the net proceeds of
this offering will be applied with the following priority during the next twelve
month period:
APPROXIMATE DOLLAR
DESCRIPTION AMOUNT
- -------------------------------------------------------- ----------------------
Water Rights/1/........................................ $ 680,000
Plastics Molding Facility/2/........................... 600,000
Molds/2/.............................................. 150,000
Additional Facilities & Improvements/3/................. 600,000
Marketing/4/.......................................... 1,250,000
Additional Working Capital/5/.......................... 180,000
----------------------
TOTAL $3,460,000
- -------------------------------
/1/ The principal goal of Eldorado's water rights augmentation program is
to acquire additional water rights in order to provide for anticipated
growth in water sales. Water rights in Colorado are generally a
valuable asset that historically have appreciated in value over time.
Eldorado believes that it is important to purchase additional water
rights upon completion of the proposed financing. Doing so, would
provide sufficient additional water rights to increase revenues even
under low flow conditions when a senior call on water is likely to
occur. See "Business".
/2/ Eldorado intends to enter in an agreement with a plastics facility to
manufacture the PET bottles through construction of a plastics
facility in the Denver area or a joint venture with an existing
manufacturer of the PET bottles. This would permit Eldorado to produce
the bottles at a much lower cost and potentially avoid problems with
supplies of the bottles in the future. No such agreements are in place
at this time.
/3/ Eldorado intends to lease or construct a warehouse/distribution
facility in the Denver, Colorado area. The proposed facility would be
approximately 30,000 square feet and have the capacity for expansion.
All of Eldorado's distribution will be based out of this facility. The
water will still continue to be bottled at the source. In addition,
improvements to the existing bottling plant will be made to fully and
efficiently utilize the current bottling facilities.
/4/ In order to meet expansion objectives, Eldorado intends to pursue
distribution agreements with distributors of bottled water. Management
believes that Eldorado may be required to pay a distribution fee to a
distributor in order to obtain such a relationship. However, no
assurance can be made that such a distribution agreement can be
obtained by Eldorado at a reasonable cost. The proceeds will be
utilized to pursue such a relationship, or in the event that such a
distribution agreement is unobtainable, to expand Eldorado's internal
sales and distribution capabilities.
/5/ The balance of the net proceeds, if any, will be used for working
capital and general corporate purposes.
While the foregoing represents Eldorado's present intention with respect to
the use of the offering proceeds, capital requirements or business
opportunities, none of which are currently anticipated, could cause Management
to elect to use proceeds for other general corporate purposes and for other
purposes not contemplated at this time. Pending the use of the net proceeds,
Eldorado will invest them in money market accounts and short-term certificates
of deposit. Management believes that cash flow from operations, together with
the net proceeds of this offering, will meet Eldorado's cash requirements for at
least the next twelve (12) months.
DIVIDEND POLICY
Eldorado has never declared or paid a dividend on its common stock, and
management expects that a substantial portion of Eldorado's earnings, if any,
for the foreseeable future will be used to expand Eldorado's business. The
decision to pay dividends, if any, in the future is within the discretion of the
Board of Directors and
11
will depend upon Eldorado's earnings, its capital requirements, financial
condition and other relevant factors such as loan covenants or other contractual
obligations. See "Risk Factors - Dividend Policy."
DETERMINATION OF THE OFFERING PRICE
The public offering price of the shares has been determined by negotiations
between Eldorado and the underwriter. Among the factors Eldorado and
representatives of the underwriter considered in determining the secondary
public offering price of the shares, in addition to prevailing market
conditions, were Eldorado's historical performance, estimates of the business
potential and earnings prospects of Eldorado, an assessment of Eldorado's
management and the consideration of the above factors in relation to market
valuations of companies in related businesses.
DILUTION
At September 30, 1998, Eldorado had outstanding an aggregate of 2,995,495
shares of common stock having an aggregate net tangible book value of $1,277,045
or approximately $0.43 per share. Net tangible book value per share consists of
total assets less intangible assets and liabilities, divided by the total number
of shares of common stock outstanding.
After giving effect to the sale of 700,000 shares of common stock at an
assumed public offering price of $6.00 per share and receipt of the net proceeds
therefrom, the pro forma net tangible book value of the common stock at
September 30, 1998 would be $4,737,045, or approximately $1.28 per share. This
represents an immediate increase in pro forma net tangible book value of $0.85
per share to the present shareholders and an immediate dilution of $4.72 per
share to the public purchasers. The following table illustrates the dilution
which investors participating in this offering will incur and the benefit to
current shareholders as a result of this offering:
Assumed public offering price per share/1/...................................... $6.00
Net tangible book value per share before Offering/2/....................... $0.43
Increase per share attributable to shares offered hereby................... 0.85
-------
Pro forma net tangible book value per share after offering...................... 1.28
-------
Dilution of net tangible book value per share to purchasers in this offering.... $4.72
=======
- ------------------------------
/1/ Represents the public offering price per share of common stock before
deductions of underwriting discounts and commissions and estimated expenses
of the offering.
/2/ Assumes no exercise of warrants or the underwriter's overallotment option.
See "Description of Securities" and "Underwriting."
The foregoing table gives effect to the sale of the Shares offered hereby
and does not give effect to the exercise of the underwriter's over-allotment
option or any outstanding warrants.
CAPITALIZATION
The following table sets forth the capitalization of Eldorado as of
September 30, 1998 to give effect to the receipt and anticipated use of the net
proceeds of this offering based upon the assumed public offering price of $6.00
per share.
SEPTEMBER 30, 1998
------------------------------
ACTUAL AS ADJUSTED
------------ --------------
Long Term Debt (including current maturities) $1,602,663 $1,602,663
------------ --------------
Stockholders' Equity
Common Stock, $0.001 par value; authorized-50,000,000 shares; issued 2,995 3,695
and outstanding- 2,995,495 actual; and 3,695,495 as adjusted...........
Additional Paid-In Capital 984,656 4,443,956
Retained Earnings......................................................... 314,893 314,893
Total Stockholders' Equity............................................. $1,302,544 $4,762,544
------------ --------------
Total Capitalization................................................... $2,905,207 $6,365,207
============ ==============
13
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This filing contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. These forward-
looking statements include the plans and objectives of management for future
operations, including plans and objectives relating to services offered by and
future economic performance of the Company.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties that might adversely affect the
Company's operating results in the future in a material way. Such risks and
uncertainties include but are not limited to the following: availability of debt
and equity financing, interest rate fluctuations, effects of regional economic
and market conditions, ability to obtain additional water rights, labor and
marketing costs, operating costs, packaging costs, intensity of competition,
legal claims and the contingencies associated with year 2000 compliance.
OVERVIEW
Eldorado Artesian Springs, Inc. is a Colorado based company that is
primarily involved in the bottling and marketing of "natural" artesian spring
water. The springs are located in the foothills of the Colorado Rocky Mountains
and are surrounded by thousands of acres of state and city park land, assuring a
well protected source. The artesian springs located on Eldorado's property,
emanate from one of the most unique geologic sources in the world. The water is
naturally purified as it rises up through layers of sandstone under its own
artesian pressure. Eldorado Artesian Spring water is bottled at the source in
its natural state and is not chemically treated in any way. Currently,
Eldorado's operations consist of its home/commercial delivery business (3 and 5
gallon bottles) and the PET (polyethylene terephtalate, a premium clear plastic)
consumer business.
Beverage industry analysts reveal that bottled water is the fastest growing
major category in the entire industry. The bottled water industry as whole is a
$3.9 billion business and is currently growing at a rate of 9% to 10% per year.
The PET segment of the bottled water industry is currently a $930 million
business and is growing at a much faster rate (at an estimated 20% to 30% per
year) than the industry as a whole. Analysts expect just the PET segment of the
industry to reach $3 billion in wholesale sales over the next ten years, which
is an indicated rate of growth of 17% annually.
RESULTS OF OPERATIONS
Comparison of Six Months Ended September 30, 1998 and 1997
- ----------------------------------------------------------
Revenues. Revenues for the six months ended September 30, 1998 increased
19.7% to $2,019,802 versus $1,687,171 for the same period in 1997. A substantial
portion of the increase in sales is due to increased volume to existing
customers as well as from sales to new customers. Sales of five gallon products
increased by 17%, one gallon products increased by 24% and sales of the smaller
PET packages increased by 48%. Five gallon products generated the majority of
the increase in overall revenues. Revenues for the five gallon products
increased $224,790 to $1,524,377 for the period ending September 30, 1998 versus
$1,299,587 for the period ending September 30, 1997.
Gross Profit. For the first six months of fiscal 1998, cost of goods sold
was $285,044 compared to $259,391 in fiscal year 1997 resulting in gross profits
of $1,734,758, or 85.9% of sales, and $1,427,780, or 84.6% of sales,
respectively. For the three months ended September 1998, cost of goods sold was
$161,207 in 1998 compared to $140,525 in 1997 resulting in gross profits of
$945,903, or 85.4% of sales, and $777,792, or 84.7% of sales, respectively. This
percentage increase in gross profit for the respective six and three month
periods was due to an increase in sales volume of five gallon product which has
a higher profit margin.
Operating Expenses. For the first six months of fiscal year 1998 compared
to the corresponding period in fiscal year 1997, total operating expenses were
$1,591,368 and $1,199,046, respectively, an increase of $392,322 or 32.7%.
Salaries and related expense were $788,242 for the period ending September 30,
1998, an increase of 19.7% over the same period of fiscal 1997 which was
primarily attributable to the increase in sales. Selling, general and
administrative expenses increased by $216,314 or 50.7%. Advertising and
promotional expenses increased by 46% for the six month period in 1998 compared
to the corresponding period of fiscal 1997. Advertising and promotional expenses
are associated with both the home and office delivery as well as the retail-size
category. The increase in advertising and promotional expenses was due to the
increased expenses associated with increased market penetration and brand
awareness. The Company plans to continue to spend significant
14
amounts in the future for advertising and promotions to develop brand
recognition and higher sales. Deprecation and amortization increased 69.0% and
40.7% for the three month and six months ended September 30, 1998, which was
attributable to recent machinery and equipment purchases.
Other Income (Expenses). Interest expense increased $3,214 for the first
six months of 1998. The increase in interest expense was a result of increased
borrowing to finance additional machinery and equipment.
Net Income and Comprehensive Income. The Company's net and comprehensive
income for the first six months of 1998 was $61,543 compared to net income of
$83,228 for the year ended March 31, 1998. Net income for the three months ended
September 30, 1998 was $44,258.
Comparison of Fiscal Years Ended March 31, 1998 and 1997
- --------------------------------------------------------
Revenues. Revenues increased 25.9% to $3,329,444 for the year ended
March 31, 1998 from $2,644,521 for the same period in fiscal 1997. This increase
is primarily due to the increased volume of the five gallon products to existing
customers as well as sales to new customers. Industry averages in the bottled
water market were up between 10% and 11% in 1997 by trade analysts.
Gross Profit. Costs of goods sold increased 20.7% from $415,263 in fiscal
1997 to $501,288 in fiscal 1998. This resulted in gross profits of $2,828,156
for fiscal 1998 versus $2,229,258 for fiscal 1997. As a percent of sales, gross
profit increased to 84.9% in fiscal 1998 from 84.3% in fiscal 1997. This
increase is primarily due to the increased sales of the five gallon product with
higher profit margins and the addition of more efficient bottling equipment.
Operating Expenses. For the fiscal year ended March 31, 1998 and 1997 total
operating expenses were $2,568,571 and $1,931,736, respectively, an increase of
$636,835 or 33.0%. As a percent of sales, operating expenses increased to 77.2%
in fiscal 1998 from 73.1% in 1997. This is primarily due to the increase in
advertising and promotional expenses for obtaining additional accounts as well
as establishing brand name awareness in the highly competitive industry.
Increases in wages and salaries were 32.7% for the year ended March 31, 1998.
This increase is due in part to the additional commissions for the new revenues
generated. Part of the increase is also due to an across the board pay increase
for all employees that became effective January 1998.
Other Income (Expenses). Interest expense increased $31,495 for the year
ended March 31, 1998. The increase in interest expense was a result of increased
levels of debt acquired to finance additional machinery and equipment.
Net Income and Comprehensive Income. The Company's net and comprehensive
income decreased from $124,152 in fiscal 1997 to $83,228 in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Eldorado has traditionally financed operations with debt. With the
restructuring of debt in June 1997, the new debt structure provided a $1,200,000
loan secured by the Company's property, a $300,000 loan for new equipment and a
plant reconstruction, and a $100,000 working capital revolving line of credit.
Accounts receivable increased 18.7% to $597,830 for the six months ended
September 30,1998. This represents a total of 53.5 days sales in receivables.
This increase in accounts receivable is a concern for management and more
assertive efforts have been made to bring this back to the Company's goal or
target number of 38 days sales in receivables.
15
On April 22, 1998, the Company completed a private placement of 300,000
shares of common stock at $2.75 per share. The Company received proceeds net of
offering costs of $688,750 from the private placement of which $150,000 was
placed in a joint account with Mills Financial Services, Inc. for a potential
additional secondary stock offering. The intention for the use of proceeds of
the private placement included replacing a five gallon bottling line to increase
capacity from 160 bottles to 600 bottles per hour. By the end of September 1998,
100% of the bottling equipment was installed and being utilized. In addition,
the Company is actively looking to lease or construct a warehouse/distribution
facility in the Denver, Colorado area in order to add additional warehouse
space.
On May 19, 1998, Eldorado registered 875,000 shares of common stock of
Eldorado pursuant to the 1997 Stock Option Plan (the "Plan"). The Plan provides
for the grant of stock options to employees, directors and consultants of
Eldorado.
Management has implemented a water rights augmentation program to acquire
additional water rights in order to provide for a forecasted increase in water
sales. Management is currently in negotiations to acquire additional water
rights. The acquisition of these water rights will be at a significant cost to
Eldorado and there can be no assurance that such water rights can be obtained.
The failure to augment Eldorado's water rights could have an adverse effect on
Eldorado's financial condition and results of operations.
Eldorado also plans to lease or purchase a plastics molding facility and
the necessary molds to produce their own supply of PET bottles and to sell the
bottles to other companies. In order to handle the increase in business,
Eldorado will need to acquire additional off-site warehouse space. Eldorado is
looking to either lease or construct space in order to store raw materials and
finished goods. In addition, Eldorado will be improving the existing bottling
and office facilities.
Eldorado is poised to achieve significant growth via the expansion of its
retail PET business into new geographic markets. The PET segment of the bottled
water business is the fastest growing segment of the bottled water market. In
order to accomplish broader distribution of the PET products, Eldorado will need
additional working capital for marketing investments for such things as slotting
fees and marketing promotions. As Eldorado grows and expands its retail
distribution there will be a need to add an additional brand marketing
executive.
YEAR 2000 COMPLIANCE
Eldorado is in the process of developing and finalizing plans to address
the Year 2000 computer problem and to begin converting its computer systems to
be Year 2000 compliant. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
Eldorado presently believes that with upgrades to existing software and possibly
some replacement, the Year 2000 problem will not pose significant operational
problems for their computer systems. However, if such upgrades and replacements
are not completed timely or effectively implemented, the Year 2000 problem could
have a material impact on Eldorado's operations. Eldorado expects to incur
internal staff and external consulting costs, as well as the cost of the
software upgrades and replacement as a part of this effort. Eldorado does not
expect the amount of such costs to be material to its business, operating
results and financial condition. However, there can be no assurance that the
systems or networks of its key suppliers and customers will not be affected by
Year 2000 issues, which could have a material adverse effect on Eldorado's
business, operating results and financial condition. Until Eldorado's plans are
finalized, management is not able to reasonably estimate the costs of achieving
Year 2000 compliance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the year ended March 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
No. 128). SFAS 128 established new definitions for calculating and disclosing
basic and diluted earnings per share. Basic earnings per share is based upon
the weighted average number of shares outstanding as defined in SFAS 128. No
diluted earnings per share is presented as there are no potential dilutive
common shares. As required by SFAS 128, disclosure of subsequent events which
would have had an effect on the number of shares outstanding is reflected in
this prospectus.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. Currently the Company's
only component, which would comprise comprehensive income, is its results of
operations. SFAS 130 is effective for financial statements for periods
beginning after December 15, 1997, and requires comparative information for
earlier periods to be restated. SFAS No. 130 is required to be adopted for the
Company's 1999 fiscal year end financial statements and, as a reporting
standard, SFAS No. 130 will have no impact on the Company's financial position
or results of operations.
In June 1997, FASB issued Statement of Financial Accounting Standards, No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS No.
131), effective for years beginning after December 15, 1997. Statement No. 131
establishes standards for reporting information about operating segments and the
methods by which such segments were determined. Currently, the Company only has
one significant operating segment. Therefore, this pronouncement poses no
significant changes in the Company's reporting methods.
16
ELDORADO AND ITS BUSINESS
Eldorado Artesian Springs, Inc. bottles, markets and distributes non-
sparkling "natural" spring water to regional and national customers. Eldorado
(and the spring) are located at the base of a six hundred foot deep canyon in
Eldorado Springs, Colorado. The history of Eldorado Springs dates back
generations. The property was initially developed over 90 years ago (in 1905) as
a Colorado resort that attracted famous guests from across the country.
The artesian springs which are located on Eldorado's property emanate from
one of the most unique geologic sources in the world. The source of Eldorado's
water is rain and snow which has fallen on the Continental Divide in the Rocky
Mountains and which then passes through multiple geologic formations and
aquifers before finally reaching the surface at Eldorado. Due to this
circulation process, the resulting spring water is renowned as being from one of
the purest natural artesian springs in the world.
Eldorado was formed in 1983 when the current senior management team
purchased the Eldorado Springs property from the founders of the resort.
Eldorado has focused on developing and expanding the business of bottling
Eldorado Spring water. Eldorado bottles the water at the source in polyethylene
therephthalate ("PET") plastic bottles and 3 and 5 gallon polycarbonate bottles.
Since inception, Eldorado has expanded the business by focusing its marketing
efforts on the five gallon delivery business. As this business has grown and
gained in profitability, management has had the opportunity to introduce the PET
products to the grocery retailers and these products have gained significant
market shares among the large retail grocery chains. Current retail market
shares for Eldorado's PET products range from 6% to 34%.
Eldorado has met all Food and Drug Administration ("FDA") requirements for
the labeling of its water as "bottled at the source" and "natural". "Bottled at
the source" signifies that the water is pumped directly from the source to the
bottling facility, thereby eliminating handling and transportation procedures
which might lead to contamination. "Natural" signifies that the chemical
composition and mineral content of the bottled water are the same as those at
the source. This contrasts with "purified" water from which certain chemicals
and minerals are removed by means of filtration.
Eldorado's objective is to become a leading provider of premium quality
bottled water on a national level. Eldorado's strategy includes increasing sales
to existing customers, broadening its current customer base, expanding its
product line and establishing distributor relationships as well as strategic
distribution alliances with other national beverage companies in order to take
advantage of their established distribution networks.
Industry Overview
- -----------------
The bottled water industry is considered by many analysts to be the fastest
growing major category in the beverage industry. The bottled water industry has
exhibited consistent annual growth over the last twenty years and grew at a rate
of 9% for 1997. According to Beverage Marketing Corp. bottled water sales
increased to a $3.9 billion dollar business. Along with sales and volume, per
capita consumption has increased to nearly 13 gallons, up from 11.7 in 1996.
Driving the category's growth is the premium retail PET segment which was up 30%
in 1997, accounting for two-thirds of the category's overall growth. Industry
analysts predict that premium retail PET will drive growth by 6 to 8 percent in
1998. In 1981, bottled water consumption represented 1.8% of the U.S.
consumption of total beverage sales. In 1997, that percentage had increased to
6.9%. Non-sparkling water comprises over 87% of the U.S. bottled water market
and generated $3.4 billion of wholesale sales in 1997. PET bottled water sales
in 1997 reached $930 million and the segment is expected to double in 3 years.
The bottled water industry is generally broken down into two segments:
sparkling and non-sparkling waters. Non-sparkling waters dominate the industry
with an estimated 87% share of total category volume. Non-sparkling water
gallonage has in fact realized uninterrupted growth every year since statistics
have been kept
17
on the bottled water industry (dating back to 1976 when Beverage Marketing
Corporations began following this market).
Strategy
- --------
The Company's objective is to expand its operations based on the continued
success of its PET bottled water products. The Company's plan consists of
multiple phases that ultimately are targeted to expand distribution of the
Company's retail PET products to regional and national markets. Aspects of the
Company's strategy include the following:
Water Rights Augmentation. When the Company purchased the resort property
in 1983, included in the purchase price were certain water rights for Eldorado.
The Company realized substantial growth in its water bottling business since
that date and the Company is on the verge of its sales volume exceeding its
water rights capacity. Of the approximate 105 million gallon total physical flow
of the springs, Eldorado's current legal augmented supply of water is 7,820,424
gallons per year while its current annualized use is 3,209,700 gallons per year.
The principal goal of the Company's water rights augmentation program is to
acquire additional water rights in order to provide for the forecast increase in
water sales resulting from the implementation of the Company's strategy.
The Company believes that it is important to purchase additional water
rights upon completion of the proposed financing. Doing so would provide
sufficient access to water to implement the Company's business plan even under
low flow conditions when a senior call on water is likely to occur. Management
currently estimates the cost of these rights to be approximately $680,000.
Additional Facilities and Improvements. The Company has plans to improve
its production facilities and increase its production capacity in order to
facilitate expansion into new geographic markets. The Company's plans initially
call for remodeling the warehouse and adding additional office space. Additional
improvements would include the area surrounding the warehouse to remodel and
modernize current facilities and services.
Warehouse and Distribution Facility. The Company will require additional
off-site warehouse facilities in order to store raw materials and finished goods
awaiting delivery to the regional warehouses of its customers. The Company plans
to purchase or construct a warehouse in the Denver, Colorado area and relocate
the distribution operations to that facility. The water would continue to be
bottled at the source. This would provide the Company with the additional
warehouse space to accommodate the future growth of the delivery and retail
business.
Plastics Molding Facility-Molds. The second phase of the warehouse facility
would be to operate a plastics facility for the smaller PET bottles. This would
include the equipment and the molds for the Eldorado brand. This facility can be
incorporated into the warehouse/distribution facility or into the existing
warehouse facility. This would provide Eldorado with a more stable supply of the
PET products and insure availability of the products in the future.
Marketing. The Company believes that building the Eldorado brand and
consumer loyalty will allow the Company to expand distribution. The Company's
success to date has been driven by several factors. The pure quality of Eldorado
water is one reason why the Company's PET bottled water has achieved significant
market share in a short period of time in the retail stores where it has already
been introduced. The Company also believes its attractive label and unique
source of the water is a key factor in building brand awareness. In addition,
Eldorado has positioned its bottled products in the retail market as a premium
water because it is bottled at the source, it is not chemically treated and is
naturally low in total dissolved solids.
18
Enter New Distribution Channels. Eldorado believes that the opportunity for
growth lies in the ability of the Company to expand into additional distribution
channels. This would involve agreements with additional distributors in the
Colorado area. In addition, the Company is planning a strategy to acquire other
companies currently involved in the 5 gallon distribution business. This will
allow the Company to build brand awareness and consumer loyalty by incorporating
current operating procedures and sales strategies into the acquired companies.
Any acquisitions will require additional debt or equity financing.
Consumer Trends
- ---------------
Much of the demand for bottled water is driven by consumer demand for pure
quality bottled water. The growth in consumption of non-sparkling water is
attributed to consumer trends including increased health and fitness awareness,
concerns for municipal tap water quality and demand for convenience and
innovative packaging. Generally, bottled water is perceived as being a natural,
caffeine and sodium free beverage at a time when more and more consumers are
health conscious. These attributes and the increased availability of convenient
packaging for natural spring water have contributed to the increase in bottled
water consumption. The perception of bottled water has driven the demand for
this product among many consumers. The bottled water industry is considered by
many analysts to be the fastest growing major category in the beverage industry.
The introduction of bottled water in convenience packaging has recently
driven the explosive growth of the PET segment of the bottled water market. This
market has been driven by manufacturers who have begun bottling their water in
smaller, more portable sizes, which are sold at retail and which are intended to
fit the active lifestyles of bottled water consumers. In doing so, manufacturers
have created a new subsegment of the bottled water market that is now growing at
a 30% rate for water in sizes of 1.5 liters and under.
Distribution Channels
- ---------------------
The traditional channels of distribution for bottled water are home
delivery, commercial delivery, grocery outlets, restaurants and vending
machines. The delivery market generally has consisted of the delivery of five
gallon bottles of water to residential and commercial customers. This segment of
the bottled water industry provided the greatest amount of growth for the
industry throughout the 1970's and the 1980's.
Sales of bottled water through retail outlets (grocery outlets) has become
an increasingly important channel of distribution for bottled water. Retail
outlets have historically sold bottled water in one and two gallon containers.
Increasingly though, the retail segment of the bottled water market is defined
by the new, convenient PET products which are sold in portable 1.5 liter, 1.0
liter and 0.5 liter sizes.
While the delivery segment of the bottled water market was the principal
driver of bottled water growth in the 1980's, the 1990's is the decade of the
PET products sold at retail. Industry analysts forecast that in ten years, water
bottled in PET products and sold at retail will, on its own, be a $3 billion
revenue segment of the bottled water market. This represents an annual
compounded growth rate of 17% for the PET segment of the bottled water market
over the course of the next ten years. Since 1992, the retail PET segment of the
bottled water category continues to grow at a healthy double-digit pace.
Consolidation
- -------------
The bottled water industry as a whole remains highly fragmented with over
780 companies in the industry. Recent consolidation in the industry has however
created six large bottled water companies that when combined account for roughly
50% of industry sales. These six companies are composed of over 25 different
brands of water with no single brand accounting for more that 7.5% of total
bottled water sales. The top 10 companies in the industry range in sales from
$780 million for Perrier Group to $75 million for Sammons.
19
Products
- --------
Sales of Eldorado's water have historically been made by selling five
gallon bottles of water directly to home and business customers. More recently,
Eldorado began selling its water at wholesale to retail food stores (grocery
chains) with Eldorado's water packaged in smaller, more convenient sizes which
are suitable for retail distribution. The products offered by Eldorado and their
respective target markets are listed below:
Product Target Market
------- -------------
Five Gallon Bottles and Three Gallon Bottles Home/Commercial Delivery
One Gallon Bottles Retail Food Stores
PET Consumer Packaging Retail Food Stores
(1.5 liter, 1.0 liter,
and 0.5 liter)
Home/Commercial Delivery Business
- ---------------------------------
Direct delivery of bottled water to homes and businesses has historically
been the focus of Eldorado's business. Eldorado's bottled water delivery
business primarily consists of the sale of five gallon containers of water to
customers who lease water dispensers from Eldorado. Eldorado delivers these five
gallon bottles directly to customers using its own fleet of trucks. Delivery
sales are made primarily in the Denver/Boulder metropolitan area, but also
include selected other cities along the front range in Colorado. Currently,
Eldorado has approximately ten thousand (10,000) active delivery accounts and
the delivery business currently accounts for approximately 79.5% of Eldorado's
revenues.
PET Packaging/Retail Distribution Business
- ------------------------------------------
In 1994, Eldorado introduced its water packaged in convenient
consumer-sized bottles made of polyethylene teratheylate ("PET"). The first PET
product introduced was the 1.5 liter bottle. This product was followed in 1995
with 1.0 liter and 0.5 liter bottles.
The sale of Eldorado's artesian spring water in PET bottles consists
principally of the wholesale distribution of PET products to grocery store
chains for retail sales in grocery stores located primarily in the State of
Colorado. Eldorado uses its own trucks to deliver its PET water products to
grocery chain warehouses in the Denver metropolitan area. From there, Eldorado's
water is shipped to grocery stores throughout Colorado. In addition, because
some of the grocery chains distribution extends beyond the State of Colorado,
some of Eldorado's product is sold in grocery stores which are located in New
Mexico, Wyoming, Kansas, Oklahoma and Texas.
The key retail customers for Eldorado's PET products include the largest
grocery chain in Colorado (Krogers) and one of the largest wholesale food
distributors (Rainbow Natural Foods) in the state. Eldorado's product is also
sold to retail customers at Safeway and Albertsons stores.
Bottling
- --------
Eldorado's artesian spring water is bottled naturally at Eldorado's
bottling facilities located at the source. Eldorado does not chemically treat
the water and no chlorine, fluoride, calcium or other minerals or chemicals are
added to, and nothing is removed from, the water during the bottling process.
20
Eldorado's bottling facilities are located on a portion of approximately 26
acres of land owned by Eldorado in Eldorado Springs, Colorado. Eldorado's
bottling process utilizes a tightly controlled closed system with several
quality control precautions built in to preserve product integrity. The spring
water flows from an artesian well(s), located just a few feet from the spring.
Through an entirely closed system, it travels 70 feet to the bottling plant. The
source spring water is bacteria free as it emanates from the earth due to the
fact that the water is naturally lightly carbonated. Once at the plant, the
water passes through a protective filter and an ultra-violet light which is
required by local government regulations to safeguard against any contamination.
The water is then ozonated for further protection.
The bottling process is conducted in a separate, sanitized fill room, where
the water is poured into the bottles utilizing a closed system. While still in
the fill room, the bottles travel a few inches to the capper where they are
sealed with a tamper evident plastic closure. The sealed bottles then exit the
fill room where they are labeled and date coded. They are then packaged in
reshipper cases that are also date/run coded to assist in disaster recall
planning. At no time in the bottling process is anything added to or removed
from the water so that Eldorado's product is "bottled naturally at the source".
With regard to the bottling process and Eldorado's facilities, it should
also be noted that Eldorado recently added significant pieces of new equipment
that will increase Eldorado's production efficiencies. Specifically, Eldorado
added new filler/capper, case packer, bottle rinser, 3 and 5 gallon and bottle
stacker/racker, and bottle sorter equipment to its production line. By adding
this equipment, Eldorado anticipates that it will realize significant labor
savings over its previous production cost structure.
Water Rights
- ------------
Eldorado's existing water rights were originally decreed by the District
Court, Water Division No. 1, on July 11, 1973. Eldorado's water rights have
decreed priority dates ranging from December 1960 to December 1901. These
priority dates are relatively junior to other water rights in the South Boulder
Creek and South Platte Basins. Eldorado has the right to beneficially use all of
the water which emanates from its points of diversion in accordance with its
decree unless there is as more senior call on the water. A senior call might
occur in the winter or when runoff is low and insufficient to meet the water
needs of more senior water users below Eldorado Springs. For many years Eldorado
has enrolled its water rights in a substitute supply plan approved by the State
Engineer. This substitute supply plan effectively insulates Eldorado's water
rights from calls of senior water rights owners. Although the State Engineer has
approved the substitute supply plan during every year that Eldorado has owned
the water rights, there is no assurance that the State Engineer will continue to
do so in the future. Accordingly, management has taken steps to acquire a source
of water to replace out-of-priority depletions attributable to Eldorado's water
rights. After sufficient augmentation water has been acquired, Eldorado will
then seek judicial approval of a permanent plan for augmentation that will also
insulate Eldorado's water rights from the calls of senior water rights owners.
This plan for augmentation will be permanent and will not be subject to the
uncertainties of year-to-year approval as are substitute supply plans approved
by the State Engineer. Management is currently in negotiations to acquire
augmentation water. Based on the progress of current negotiations, it appears
likely that management will soon acquire a source of augmentation water and
operational agreements that will allow it to obtain court approval of a
permanent augmentation plan. The failure to augment Eldorado's water rights
could have an adverse affect on Eldorado's financial condition and results of
operations and its ability to implement its business plan in the event that the
State Engineer fails to approve the substitute supply plan in any year.
21
Marketing
- ---------
Eldorado focuses on three major areas in marketing its products: three and
five gallon sales, small package product sales, and brand name recognition.
The five gallon products are primarily sold through the acquisition of new
accounts attracted by personal sales representatives strategically located
throughout the area at local events. The efforts of this staff are augmented by
yellow pages, radio, and occasional television advertisements.
The smaller packages that are sold principally through retail chain stores
are effectively marketed by using point of purchase inducements to gain new
trial, usually in the form of discounts in price in conjunction with signage.
Eldorado attempts to build brand name awareness by sponsoring or
participating in many local events. Eldorado Artesian Springs has sponsored the
Boulder, Colorado July 4th Fireworks celebration, the Eldorado Springs Cancer
Research Run, and participates in part in many other local events.
According to industry sources, the bottled water industry is a $3.9 billion
business which is currently growing at a rate of 9-10% per year. The PET segment
of the bottled water industry is currently a $930 million business which is
growing at a much faster rate (at an estimate 20% to 30% per year). According to
industry analysts, the PET segment of this industry is expected to reach $3
billion in wholesale sales over the next ten years, which is an indicated growth
rate of 17% annually. Management believes that Eldorado is poised to
significantly expand its operations based on the continued success of its PET
bottled water products. Expansion plans include expanding distribution of
Eldorado's PET products into new markets that are geographically contiguous to
its Colorado operations. Management expects to grow Eldorado's market share of
the retail grocery distribution channel in the southwestern United States over
the next few years. Once Eldorado has achieved this market share objective,
management plans to further expand distribution into other regions of the
country. Ultimately, management plans to distribute Eldorado's PET waters on a
national basis.
Supplies
- --------
Water bottled by Eldorado comes from springs located on Eldorado's property
which have been flowing for many years. Eldorado does not foresee any disruption
of its operations as a result of supply problems. Suppliers of the bottles do
experience seasonal shortages resulting from resin shortages which may increase
prices. These shortages must be anticipated by management and inventory safety
stocks must be sufficient so as not to interrupt production. See also "Risk
Factors - Water Supply."
Seasonality of Business
- -----------------------
Sales tend to be mildly seasonal in the bottled water business. A ten to
fifteen percent differential in sales is normally experienced between the peak
summer months and the low winter months.
Competition
- -----------
There is active competition in the bottled water market. Eldorado's
competitors include more diversified corporations having substantially greater
assets and larger sales organizations than Eldorado, as well as other small
firms. Eldorado competes on the basis of customer service, product quality and
price. Management believes that the products' superior taste, competitive
pricing and unique packaging are significant factors in maintaining Eldorado's
competitive position.
22
Environment
- -----------
Eldorado's bottling operations are subject to regulation by the Food and
Drug Administration of the federal government. These regulations are
administered by the Colorado Department of Public Health and Environment
Consumer Protection Division. Weekly product and source bacteriological tests
are required and annual inspections are performed.
Eldorado is also subject to regulation under the Colorado Primary Drinking
Water Regulations and the United States Safe Drinking Water Act. These
regulations pertain to the operation of the water utility system owned by
Eldorado that services the town of Eldorado Springs. These regulations are also
administered by the State of Colorado Health Department Drinking Water Division.
Regular periodic testing is also required for this operation.
Additionally, Eldorado operates the springs swimming pool which is also
subject to regulation by the State of Colorado. These regulations are
administered by the Boulder County Health Department and require periodic daily
testing and agency inspections.
Other Businesses
- ----------------
Eldorado's principal business is bottling and selling Artesian Spring
Water. Eldorado also owns and operates a resort/spa on its property during the
summer months. This portion of the business accounts for approximately 2-3% of
total revenues. Eldorado also owns rental units on the property and supplies
water to some of the residential homes in Eldorado Springs. This portion of the
business accounts for approximately 2% of revenues. Neither of these businesses
represent a significant portion of Eldorado's results of operations.
Employees
- ---------
Eldorado employs 47 full-time employees and 14 seasonal employees during
the summer resort months.
Properties
- ----------
Eldorado owns approximately 26 acres of land in Eldorado Springs,
Colorado. In addition to real property and the wells and springs thereon, and
water rights, Eldorado owns a bottling plant (including building and bottling
equipment), delivery trucks, associated containers and equipment, resort
buildings, a mobile home park, and an outdoor swimming pool which are located on
the property. Total production and warehousing space is approximately 12,000
square feet.
23
MANAGEMENT
The following table sets forth information with respect to directors and
executive officers of Eldorado. Directors serve for one year terms. Each
director is also a nominee for election to the Board of Directors.
Tenure as Officer
Name Age Position(s) or Director
---- --- ----------- -----------------
Douglas A. Larson 43 President, Treasurer and Director 1983 to present
Kevin M. Sipple 43 Vice President, Secretary and 1983 to present
Director
Jeremy S. Martin 43 Vice President and Director 1983 to present
Robert E. Weidler 53 Vice President 1998 to present
Cathleen M. Collins 30 Chief Financial Officer 1998 to present
George J. Schmitt Director 1998 to present
Don P. Van Winkle 42 Director 1998 to present
Douglas A. Larson was a co-founder of Eldorado Artesian Springs, Inc. in
1983 and has been President of Eldorado since 1991. Mr. Larson's
responsibilities include corporate strategy and administration of all operating
activities at Eldorado. Prior to his association with Eldorado, Mr. Larson was
employed as a stock broker with Richey-Frankel and Co. from 1981 to 1983 and
with B.J. Leonard, Inc. from 1980 to 1981. Mr. Larson holds a Bachelor of
Science Degree in Business Finance from the University of Colorado.
Kevin M. Sipple was a co-founder of Eldorado Artesian Springs, Inc. in
1983 and has served as Vice President and Secretary of Eldorado since 1991. Mr.
Sipple's responsibilities include management of the wholesale products division.
In addition, he is also responsible for quality control, testing, source
protection and is a licensed Water Plant operator and manages the utility
productions. Prior to his association with Eldorado, Mr. Sipple was employed by
King Soopers, Inc. from 1972 to 1983, serving in a variety of positions
including inventory ordering and control. Mr. Sipple attended the University of
Colorado from 1973 to 1977.
Jeremy S. Martin was a co-founder of Eldorado Artesian Springs, Inc. in
1983 and has served as Vice President since 1985. Mr. Martin's responsibilities
include management of the five gallon sales and service business. In addition,
he is also responsible for special event promotions and public relations. Prior
to his association with Eldorado, Mr. Martin was an independent distributor for
Sunasu International, a nutritional products manufacturer. Mr. Martin holds a
Bachelor of Science Degree in Business from the University of Colorado.
Robert E. Weidler joined Eldorado in 1990 and has served as Production
Manager from 1991 to 1998. Currently, Mr. Weidler is Vice President and his
responsibilities include inventory management, daily operations for finished
goods and conforming to safety standards, health department standards and other
governmental requirements. Mr. Weidler holds a Bachelor of Science Degree in
Sociology from Michigan State University.
Cathleen M. Collins joined Eldorado in 1990 and has served as Assistant
Treasurer from 1991 to 1998. Currently, Ms. Collins is Chief Financial Officer
and her responsibilities include the procurement of financing for growth of
operations of the Company as well as overseeing the accounting functions for
Eldorado including the annual audit and corporate reporting. Ms. Collins holds a
Bachelor of Science Degree in Economics and a Masters of Business Administration
from the University of Colorado.
George J. Schmitt has been a director of the Company since 1998. Mr.
Schmitt has over forty years of experience in the bottled water business. From
1968 to 1996, Mr. Schmitt was CEO and President of Hinckley & Schmitt Bottled
Water Group. He built an old family business from a small local company in
Chicago, Illinois with revenues of less than one million dollar to a two hundred
million dollar highly profitable industry leader. Mr. Schmitt was a founding
member of the American Bottled Water Association (now called the International
Bottled Water Association) in 1959 and was inducted into the Industry Hall of
Fame in 1991. Mr. Schmitt is a director of Eureka Bottled Water Co. and National
Fuel Corporation. Mr. Schmitt hold a Bachelor of Arts Degree from Dartmouth
College.
Don P. Van Winkle has been a director of the Company since 1998. From
1996 to the present, Mr. Van Winkle has served as President and CEO of Van
Winkle's IGA, a family owned six store retail supermarket chain in New Mexico.
From 1991 to 1996, he resided in Colorado where he provided Contract Chief
Financial Officer and Advisory Services to a wide range of industries which
included the Company. From 1980 to 1996, Mr. Van Winkle was a corporate banker
with the two largest Colorado based bank holding companies (formerly United
Banks and First National Bancorporation). Mr. Van Winkle is a director of The
Great Divide Brewing Company (Denver, CO) and Fresh Produce Sportswear, Inc.
(Boulder, CO). He holds a Bachelor of Science Degree in Finance from New Mexico
State University.
24
Directors are elected at each annual meeting of stockholders and serve until
the next annual meeting. Executive officers are elected at each annual meeting
of the Board of Directors.
Committee of the Board of Directors
The Board of Directors will elect an Audit Committee at each annual meeting.
Among other functions, the Audit Committee will make recommendations to the
Board of Directors regarding the selection of independent auditors, review the
results and scope of the audit and other services provided by the Company's
independent auditors, review the Company's financial statements and review and
evaluate the Company's internal control functions.
Compensation of Outside Directors
Each outside director receives compensation in the amount of one thousand
dollars ($1,000) for each annual or special meeting of the Board he attends in
person or by qualified electronic means. In addition, each outside director
will receive compensation in the amount of five hundred dollars ($500) for each
committee meeting he attends in person or by electronic means. The Company
also grants each outside director, on his term commencement date, a ten year
non-qualified stock option with the right and option to purchase 50,000 shares
of common stock of the Company which is exercisable at $2.75 per share.
Assuming the outside director remains a director of the Company, the options
vest at the rate of 25% each year beginning one year after the date of grant.
In addition, if the Company engages an outside director as an independent
consultant, for such duties and responsibilities as the President determines
("Consulting Services"), the outside director will be compensated at the rate of
one hundred fifty dollars ($150) per hour, plus nominal travel expenses as
agreed upon when necessary. The outside director has the option, at the
beginning of each year, of electing to receive all of the compensation for
Consulting Services in the form of non-qualified options for shares of the
Company's common stock, at the rate of 50 shares per hour, such options vesting
quarterly, or in cash to be paid monthly.
There are no family relationships between any directors or executive officers
of Eldorado.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation of Eldorado's President,
Douglas A. Larson, for the fiscal years ended March 31, 1996, 1997 and 1998. No
other executive officer receives annual compensation in excess of $100,000 per
year.
ANNUAL COMPENSATION
Other Annual
------------
Name and Principal Position Year Salary Bonus Compensation/1/
--------------------------- ---- ------ ----- ---------------
Douglas A. Larson 1998 $ 66,832.00 -- $11,440
1997/2/ 71,524.00 -- 6,282
1996/2/ 102,618.00 -- 6,282
- ---------------------------
/1/ Includes $4,690 annual health care premiums; a 3% Company match for all
contributions to the 401(k) plan, the annual premium cost for key man life
insurance of $1,592, and a car allowance of $5,158 per year.
/2/ In 1992, Eldorado went through a restructuring of Company debt. The lender
offering the debt would not assume all corporate debt outstanding. A portion
of Eldorado's debt was replaced by Mr. Larson, who assumed this obligation
personally and his salary was increased to cover the cost of the note.
STOCK OPTION PLAN
On September 10, 1997 Eldorado adopted a Stock Option Plan which reserves
875,000 shares for the grant of non-qualified stock options ("Non-Qualified
Options"), and incentive stock options ("Incentive Options"). The Plan is
administered by the Board of Directors.
All salaried officers and key employees of Eldorado and any subsidiaries are
eligible to receive options under the Plan. The Plan will terminate by its terms
on September 10, 2007, and also may be terminated at any time by the exercise of
all outstanding options.
Options granted may be exercisable for up to ten years. If any options
granted under the Plan expire, terminate or are canceled for any reason without
having been exercised in full, the corresponding number of unpurchased shares
reserved for issuance upon exercise thereof will again be available for the
purposes of the Plan. The purchase price of the Common Stock under each option
shall not be less than the fair market value of the Common Stock on the date on
which the option is granted. The option price is payable either in cash, by the
delivery of shares of Eldorado's common stock, or a combination of cash and
shares.
Options will be exercisable immediately, after a period of time or in
installments. Options will terminate not later than the expiration of ten years
from the date of grant, subject to earlier termination due to termination of
service. Except under certain circumstances where termination of service is due
to retirement or death, in which event options may be exercised for an
additional period of time following such termination of service, the option may
be exercised only while the optionee remains in the employ of Eldorado or one of
its subsidiaries.
25
As of September 30, 1998, there were options to purchase an aggregate of
345,500 shares of common stock outstanding of which 113,500 immediately vested.
None of these options were granted to executive officers of Eldorado. All of the
options were granted at $2.75 per share, representing 100% of fair market value
on the date of grant.
26
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Eldorado
regarding beneficial ownership of Eldorado's Common Stock at the date of this
Prospectus, as adjusted to reflect the sale of the Common Stock offered hereby,
by (i) each person known by Eldorado to beneficially own more than 5% of
Eldorado's Common Stock, (ii) Eldorado's directors, and (iii) the officers and
directors of Eldorado beneficially owning such Common Stock.
Percent Owned
-----------------------------------------------
Number of Before After
Name and Address of Beneficial Owners Shares Offering Offering
- --------------------------------------------- -------------- -------------- -------------
Kevin M. Sipple............................. 763,674 24.9% 20.3%
43 Fowler Lane
Eldorado Springs, CO 80025
Douglas A. Larson............................ 770,673/1/ 25.1% 20.5%
12 Baldwin Circle
Eldorado Springs, CO 80025
Jeremy S. Martin............................. 771,060 25.1% 20.5%
2707 - 4th Street
Boulder, CO 80302
George J. Schmitt............................ 0 - -
11 Castle Pines N.
Castle Rock, CO 80104
John P. VanWinkle............................ 0 - -
1600 Indian Wells
Alamogordo, NM 88310
All Officers and Directors as a Group (seven
persons)..................................... 2,375,407/1/ 77.4% 63.0%
- -------------------------------
/1/ Includes options to purchase 7,000 shares held by Mr. Larson's spouse which
are currently exercise and options to purchase 35,000 shares each held by
Ms. Collins and Mr. Weidler which are currently vested.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the three years ended March 31, 1998, there were no transactions in
which the amount involved exceeded $60,000 between Eldorado and any director or
executive officer or any security holder known to own more than five percent of
Eldorado's stock, or any immediate family member of any of the foregoing persons
except as follows:
During the fiscal year ended March 31, 1996, proceeds from a bank loan were
used to pay off the note payable of $158,000 to a relative of a shareholder. The
relative of the shareholder used the payment received on the note to gift
$90,485 back to the shareholder to pay off notes due to Eldorado. Additionally,
the relative purchased 15,000 shares of Eldorado's common stock.
No other related transactions are currently proposed.
LEGAL PROCEEDINGS
Eldorado is not involved in any material legal proceedings.
HISTORY OF SECURITY PLACEMENTS
12 FOR 1 REVERSE STOCK SPLIT
In February 1998, Eldorado's Board of Directors approved a 12 for 1 reverse
stock split. This reverse stock split was submitted to shareholder vote in March
1998, and was effective on April 1, 1998.
27
HISTORICAL STOCK ISSUANCES
Eldorado was formed under the laws of the State of Colorado on April 15,
1986, under the name Lexington Funding, Inc. ("Lexington"). Lexington was
organized for the primary purpose of seeking selected mergers or acquisitions
with a small number of business entities expected to be private companies,
partnerships, or sole proprietorships. Prior to April 1987, the primary activity
of Eldorado was directed to organizational efforts and obtaining initial
financing. Eldorado sold 208,333 shares of its $.001 par value common stock at
$1.20 per share for total proceeds of $250,000 in a public offering which closed
on December 17, 1986.
Effective April 10, 1987, Eldorado acquired all of the shares of Eldorado
Artesian Springs, Inc. ("Eldorado") of Eldorado Springs, Colorado. Eldorado, a
Colorado corporation, was formed in 1983. The acquisition was accomplished by
the exchange of Company stock for all of the outstanding shares of Eldorado from
its shareholders. Pursuant to the acquisition of Eldorado, Eldorado shareholders
received an aggregate of 2,340,000 shares of Eldorado's Common Stock,
representing 90% of outstanding shares of Eldorado after the acquisition. The
number of Company shares of stock exchanged in the acquisition was determined
through arms-length negotiations. In June 1988, Eldorado was merged into
Lexington pursuant to a statutory merger, and Lexington changed its name to
Eldorado Artesian Springs, Inc.
1997 PRIVATE PLACEMENT
In April 1998, Eldorado closed on a private placement of 300,000 shares of
its Common Stock at $2.75 per share to accredited investors through Mills
Financial Services, Inc. under Regulation D of the Securities Act of 1933. Gross
proceeds from the Private Placement were $825,000. The net proceeds of that
offering of $662,000 were applied to (i) purchase of machinery and equipment
($250,000); (ii) PET distribution expenses ($150,000); (iii) working capital
($112,000) and (iv) an escrow for public offering expenses ($150,000).
DESCRIPTION OF SECURITIES
GENERAL
Eldorado is authorized to issue 50,000,000 shares of Common stock, $0.001
par value. As of the date hereof, and before consummation of this offering,
2,995,495 shares of Common Stock were issued and outstanding. The outstanding
Common Stock is fully paid and non-assessable.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share. No
cumulative voting is required or permitted. Therefore, the holders of a majority
of shares voting for the election of directors can elect all directors, and the
remaining holders will not be able to elect any directors.
Holders of Common Stock are entitled to receive such dividends, if any, as
the Board of Directors may from time to time declare out of funds Eldorado has
legally available for the payment of dividends. Holders of the Common Stock are
entitled to share pro rata in any dividends declared. It is not anticipated that
dividends will be paid in the near future. Future dividend policy will depend
upon conditions existing at that time, including Eldorado's earnings and
financial condition.
Upon liquidation, dissolution or winding-up of Eldorado, Common Stock
stockholders are entitled to receive pro rata all of the assets of Eldorado
available for distribution to stockholders. Stockholders of
28
Eldorado do not have preemptive rights or other rights to subscribe for or
purchase any stock, options, warrants or other securities offered by Eldorado.
The 300,000 shares issued in the private placement in 1997 have certain
registration rights which provide for a single demand right of registration for
the shares and additional "piggyback" rights on registration statements filed by
Eldorado, including the registration statement of which this is a part.
WARRANTS
1997 Warrants
In connection with the 1997 Private Placement, Eldorado issued to Mills
Financial Services, Inc. for a price of $100.00, a warrant to purchase 250,000
shares of Common Stock at an exercise price of $11.00. The warrant will be
exercisable at any time after April 22, 1999, but no later than April 22, 2003.
The Warrant provides for a single demand right of registration for the shares
underlying the warrant and provides for additional rights to "piggyback" the
underlying shares on registration statements filed by Eldorado, including the
registration statement of which this Prospectus is a part.
In connection with the 1997 Private Placement, Eldorado issued to Mills
Financial Services, Inc. for a price of $100.00, a warrant to purchase 30,000
shares of Common Stock at an exercise price of $3.30 per share. The warrant will
be exercisable at any time after April 22, 1999, but no later than April 22,
2003. The Warrant provides for a single demand right of registration for the
shares underlying the warrant and provides for additional rights to "piggyback"
the underlying shares on registration statements filed by Eldorado, including
the registration statement of which this Prospectus is a part.
Underwriter's Warrant
Eldorado has agreed to issue for $700 an Underwriter's Warrant entitling
the Underwriter to purchase Shares of Eldorado's common stock in an amount equal
to ten percent (10%) of the Shares sold in this offering (not including any
Shares sold pursuant to the over-allotment option), at an exercise price of one
hundred twenty percent (120%) of the Public Offering price exercisable any time,
in whole or in part, between the first and fifth anniversary dates of the
effective date of this offering. At any time during the exercise term, the
holders of a majority of these securities shall have the right to require
Eldorado to prepare and file one (1) post-effective amendment to the
registration statement relating to this offering, or a separate registration
statement, if then required under applicable law, covering all or any portion of
the securities. In addition, for a period of five (5) years after the effective
date of the registration statement relating to this offering, the holders of
these securities shall have unlimited "piggyback" registration rights.
TRANSFER AGENT AND WARRANT AGENT
Corporate Stock Transfer, Inc. has been appointed registrar and transfer
agent for the Common Stock and the warrant agent for the Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the offering, Eldorado will have 3,695,495 shares of
Common Stock outstanding (3,800,495 if the over-allotment option is exercised in
full). Of these shares, 988,091 (1,093,091 if the over-allotment option is
exercised in full) will be freely tradeable without restriction or registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless held
by affiliates of Eldorado. All of the remaining 2,707,404 shares will be
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act and may only be sold in the public market if such shares are
registered under the Securities Act or sold in accordance with Rule 144
promulgated thereunder.
29
In general, under Rule 144 a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned his shares for
one year, may sell in the open market within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the outstanding shares of
Eldorado's Common Stock (approximately 36,955 shares or approximately 38,005
shares if the over-allotment option is exercised in full), or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
limitations on the manner of sale, notice requirements and availability of
current public information about Eldorado. A person (or persons whose shares are
aggregated) who is deemed not to be an "affiliate" or a recent "affiliate" of
Eldorado and who has beneficially owned his shares for at least two (2) years,
may sell such shares in the public market under Rule 144(k) without regard to
the volume limitations, manner of sale provisions, notice requirements or
availability of current information provisions referred to above. Restricted
shares properly sold in reliance upon Rule 144 are thereafter freely tradeable
without restrictions or registration under the Act, unless thereafter held by an
"affiliate" of Eldorado.
Of the 2,707,404 restricted shares currently outstanding, a total of
2,298,407 shares are held by Douglas A. Larson, Kevin M. Sipple, and Jeremy S.
Martin, officers and directors of Eldorado or their affiliates. Messrs. Larson,
Sipple and Martin have entered into agreements not to sell any shares for a
period of six months following the date of this Prospectus (except pursuant to
privately negotiated transactions or by exercise of stock options). As
affiliates of Eldorado, Messrs. Larson, Sipple and Martin will be further
subject to the volume limitations of Rule 144(e)(1) with respect to any such
sales. Of the restricted shares outstanding, 108,997 shares were acquired from
Eldorado by non-affiliates more than two (2) years prior to the date of this
Prospectus. The balance of 300,000 of the restricted shares were acquired from
Eldorado by non-affiliates in April 1998, and are therefore eligible for sale
under Rule 144(e)(2) subject to certain volume restrictions commencing April
1999. The Underwriter has no plans, proposals, arrangements or understanding
regarding waiver of the lock up agreements. Additionally, 875,000 shares of
Eldorado's common stock are reserved for issuance under Eldorado's Stock Option
Plan, of which 345,500 have been granted. Of the 345,500 options granted,
113,500 options are immediately exerciseable and saleable.
Future sales of substantial amounts of Common Stock in the public market,
or the availability of such shares for future sale, could impair Eldorado's
ability to raise capital through an offering of securities and may adversely
affect the then-prevailing market prices for Eldorado's stock.
30
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for whom Mills Financial Services, Inc.
is acting as the Representative, have severally agreed to purchase from
Eldorado, and Eldorado has agreed to sell to the Underwriters named below, the
aggregate number of shares of common stock set forth opposite their respective
names in the table below at the initial offering price less the underwriting
discount set forth on the cover page to this Prospectus. The shares of common
stock are being sold on a firm commitment basis. The Underwriting Agreement
provides, however, that the obligations of the Underwriters to pay for and
accept delivery of the shares of common stock are subject to certain conditions
precedent, and that the Underwriters are committed to purchase all of the shares
of common stock, if any are purchased.
NUMBER
UNDERWRITERS OF SHARES
Mills Financial Services, Inc.
........................................................ ________
Total .....................................................
________
The Representative has advised Eldorado that the Underwriters initially
propose to offer the shares of common stock to the public on the terms set forth
on the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $0.35 per share. After, but not prior to,
the completion of this offering, the offering price and the concession to
selected dealers may be changed by the Representative. The shares of common
stock are offered subject to receipt and acceptance by the Underwriters and to
certain conditions, including the right to reject orders in whole or in part.
Eldorado has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
105,000 additional shares of common stock to cover over-allotments, if any, at
the same price per share as the initial 700,000 shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
Eldorado has agreed to pay the Representative a non-accountable expense
allowance of 3% of the gross proceeds received by Eldorado from the sale of the
shares of common stock, of which $ 25,000 has been paid as of the date of this
Prospectus. In addition to the underwriting discount and the non-accountable
expense allowance, Eldorado is required to pay the costs of qualifying the
shares of common stock under federal and state securities laws, together with
legal and accounting fees, printing and other costs incurred by Eldorado in
connection with this offering. Eldorado estimates that the total offering
expenses, other than the underwriting discount and the non-accountable expense
allowance, will be $194,000.
At the closing of this offering, and subject to the terms and conditions of
the Underwriting Agreement between Eldorado and the Representative, Eldorado has
agreed to sell to the Representative, the Representatives Warrant for an
aggregate purchase price of $700 as additional compensation in connection with
this offering. The Representatives Warrant grants to the Representative the
right to purchase up to 70,000 shares of common stock at a price equal to
120% of the initial public offering price. Eldorado may not redeem the
Representatives Warrant under any circumstances.
The Representatives Warrant may be exercised for a four-year period
beginning one year from the date of this Prospectus. For a period of one year
from the date of this Prospectus, the Representatives Warrant will be restricted
from sale, transfer, assignment or hypothecation, except to officers of the
Representative, other Underwriters or their officers. The Representatives
Warrant will also contain anti-dilution provisions providing for appropriate
adjustment of the exercise price and number of shares which may be purchased
upon exercise, upon the occurrence of certain events. The Representatives
Warrant also provides for a one-time demand registration right (at the expense
of Eldorado), and piggy-back registration rights, each of which rights will be
exercisable during the four-year period commencing one year from the date of
this Prospectus and terminating five years from the date of this Prospectus.
Eldorado has also agreed that the Representative shall have the right of
first refusal for three years from the date of this Prospectus to manage,
underwrite or purchase for its own account any securities sold by Eldorado or
its subsidiaries or successors or, subject to certain exceptions, sold by
shareholders owning more than ten percent (10%) of the outstanding common stock.
Eldorado and each shareholder owning in excess of ten percent (10%) of the
outstanding common stock, have agreed that, without the prior written consent of
the Representative, they will not, with certain limited exceptions, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of common stock or any option to purchase or
otherwise dispose of any shares of common stock or any securities convertible
into or exercisable or exchangeable for shares of common stock or, in any manner
transfer all or a portion of the economic consequences associated with ownership
of the common stock, for a period of 180 days after the effective date of the
registration statement of which this Prospectus is a part, other than the shares
of common stock offered hereby by Eldorado.
The Representative has previously participated in one initial public
offering on a firm commitment basis. This initial public offering was completed
in May 1998. Prospective purchasers should consider this limited experience in
evaluating the shares of common stock offered hereby.
In April 1998, the Representative acted as placement agent in connection
with the offer and sale by Eldorado of 300,000 shares of common stock. As
compensation for its service as placement agent, the Representative received (i)
$82,500 in commissions, (ii) a non-accountable expense allowance of $24,750; and
(iii) an Agent Warrant to purchase 30,000 shares of Eldorado common stock at
$3.30 per share, subject to adjustment under certain circumstances. In addition,
on April 22, 1998, the Representative purchased from Eldorado for $100.00, a
warrant to purchase 250,000 shares of common stock at $11.00 per share, subject
to adjustment under certain circumstances. This warrant is exercisable at any
time during the four-year period commencing on April 22, 1999 and contains
certain rights of registration. Also, in connection with a Consulting Agreement
dated September 10, 1997, the Representative received $25,000 on April 22, 1998
as compensation for the provision of investment banking services to Eldorado.
Eldorado has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in connection with those
liabilities. It is the opinion of the Securities and Exchange Commission that
such indemnification is contrary to public policy and unenforceable.
The foregoing is not a complete statement of the terms and conditions of
the Underwriting Agreement, the Representatives Warrant or related documents.
Copies of these documents are on file at the office of the Representative,
Eldorado and forms of which were filed as exhibits to the Registration Statement
of which this Prospectus forms a part.
Prior to this offering, there has been only a sporadic public market for
Eldorado's common stock. Consequently, the offering price will be determined by
negotiation between Eldorado and the Representative and will not necessarily
bear any relationship to a price in the public market for the stock, Eldorados
book value, assets, past operating results, financial condition, or other
established criteria of value. Factors to be considered in determining the
public offering price, which will also be used as the basis for the exercise
price for the Representatives Warrant, include the nature of Eldorados business,
its history and present state of development, an assessment of Eldorados recent
financial results and current financial condition, Eldorados future prospects,
the qualifications of the management of Eldorado, market valuations of companies
engaged in the same or similar business as Eldorado, the current condition of
the bottled water industry and the general condition of the securities markets
and the general economy at the time of the offering.
In connection with this offering, certain Underwriters and selected dealers
may engage in transactions that stabilize, maintain or otherwise affect the
market price for the common stock. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M under the
Securities Exchange Act of 1934, pursuant to which such persons may bid for or
purchase shares of common stock for the purpose of pegging, fixing or
maintaining the price of the common shares. The Underwriters also may create a
short position for the account of the Underwriters by selling more shares of
common stock in connection with this offering than they are committed to
purchase from Eldorado. The Underwriters may elect to cover any such short
position by purchasing shares of common stock in the open market or by
exercising the over-allotment option granted to the Representative. In addition,
the Representative, on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements with the other Underwriters whereby it may
reclaim from an Underwriter (or selected dealer) for the account of the other
Underwriters, the selling concession with respect to shares of common stock that
are distributed in this offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the common stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, may be discontinued at any time.
The Representative has advised Eldorado that the Underwriters (and any
selected dealers) do not expect to sell any common stock to any accounts over
which they have discretionary authority.
The Representative does not intend to make a market in the common stock
after the conclusion of this offering. There can be no assurance that a public
market of depth and liquidity will develop after the conclusion of this offering
or, if developed, will be maintained.
Shareholders owning in excess of 10% of Eldorado common stock have entered
into Lock-up Agreements in which they agreed not to sell or grant any option for
sale or otherwise dispose of, directly or indirectly, any shares of common stock
for a period of six months after the date this offering consummates, without the
prior written consent of the underwriter. This Lock-up Agreement does not apply
to the shares of common stock Eldorado will sell to the underwriter in this
offering or to the grant of options to purchase shares of common stock under
Eldorado's Stock Option Plan, or the issuance of shares under these options.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement and related documents, copies of which
are on file at the offices of the underwriter, Eldorado and the Securities and
Exchange Commission.
Prior to this offering, there has been a sporadic public market for
Eldorado's common stock. Consequently, the offering price has been determined
through negotiation between Eldorado and the underwriter. The price was based on
a number of factors, including, but not limited to: estimates of the business
potential and earnings prospects of Eldorado, the present state of Eldorado's
development, an assessment of Eldorado's management, the consideration of these
factors in relation to market valuations of companies engaged in the same or
similar business, and the current condition of the bottled water industry and
the economy as a whole.
The underwriter has advised Eldorado that the underwriter does not intend
to confirm sales to any account over which it exercises discretionary authority
without the prior, specific written approval of the customer.
COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to its bylaws, or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
LEGAL MATTERS
The legality of the shares offered hereby will be passed upon for Eldorado
by Chrisman, Bynum & Johnson, P.C. Certain legal matters will be passed upon for
the Underwriter by Peter B. Shaeffer, Esq.
EXPERTS
The financial statements of Eldorado as of March 31, 1998 and the years
ended March 31, 1998 and 1997 have been included herein in reliance upon the
report of Ehrhardt Keefe Steiner & Hottman, P.C., independent certified public
accountants, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing. With respect to the unaudited interim
financial information for the six months ended September 30, 1998 and 1997, the
independent certified public accountants, have not reviewed or audited such
financial information and have not expressed an opinion or any other form of
assurance with respect to such financial information.
33
ADDITIONAL INFORMATION
Eldorado is subject to the reporting requirements of the Securities
Exchange Act of 1934 and files quarterly and annual reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Eldorado intends to furnish its shareholders with annual reports
containing audited financial statements and such other periodic reports as
Eldorado deems appropriate or as may be required by law. You may read and copy
any materials Eldorado files with the Commission at the Commissions Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission. The address of
the site is http://www.sec.gov. Eldorado maintains an Internet site at
http://www.eldoradosprings.com.
Eldorado has filed a Registration Statement on Form SB-2 with the Office of
the Commission in accordance with the provisions of the Securities Act with
respect to the offered securities. This prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to Eldorado and the offered securities,
refer to the Registration Statement and the accompanying exhibits. Statements in
this prospectus concerning the provisions of any document are not necessarily
complete and, in each instance, you should refer to the copy of the document
filed as an exhibit to the Registration Statement. The Registration Statement
and the exhibits may be inspected, without charge at, or copies thereof obtained
at prescribed rates from, the Public Reference Section of the Commission at Room
1024 at its principal office, Judiciary Plaza, 450 Fifth Street, NW, Washington,
DC 20549; or the Public Reference Section of the Midwest Regional Office at Room
1400, 500 West Madison Avenue, Chicago, Illinois 60661-251 1.
34
ELDORADO ARTESIAN SPRINGS, INC.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
-----
Independent Auditors' Report.............. F - 2
Financial Statements
Balance Sheets..................... F - 3
Statements of Operations........... F - 4
Statement of Stockholders' Equity.. F - 5
Statements of Cash Flows........... F - 6
Notes to Financial Statements............. F - 8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Eldorado Artesian Springs, Inc.
Eldorado Springs, Colorado
We have audited the accompanying balance sheet of Eldorado Artesian Springs,
Inc. as of March 31, 1998, and the related statements of operations,
stockholders' equity and cash flows for the years ended March 31, 1998 and 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 Eldorado Artesian Springs, Inc.
at March 31, 1998, and the results of its operations and its cash flows for the
years ended March 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
May 8, 1998 (except for Note 7
as to which the date is May 19, 1998)
Denver, Colorado
F-2
ELDORADO ARTESIAN SPRINGS, INC.
Balance Sheets
March 31, September 30,
1998 1998
---------------------- -----------------------
(Unaudited)
ASSETS
Current assets (Notes 3 and 4)
Cash $ 70,166 $ 322,611
Accounts receivable (Note 2)
Trade - net 498,320 590,469
Other 5,506 7,361
Inventories 122,701 128,992
Prepaid expenses and other 48,313 16,080
Deferred income taxes (Note 5) 16,829 4,633
---------- ----------
Total current assets 761,835 1,070,146
---------- ----------
Property, plant and equipment - net (Notes 2, 3 and 4) 1,525,370 1,802,353
---------- ----------
Other assets (Notes 3 and 4)
Water rights net (Note 2) 114,618 112,374
Restricted cash - 125,000
Deferred offering costs - 25,499
Other 54,898 54,898
---------- ----------
Total other assets 169,516 317,771
---------- ----------
$2,456,721 $3,190,270
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 129,747 $ 124,885
Accrued expenses (Note 2) 79,130 67,760
Line-of-credit (Note 4) 40,000 -
Deposits 49,178 45,407
Current maturities of long-term debt (Note 3) 123,005 162,755
---------- ----------
Total current liabilities 421,060 400,807
Long-term liabilities
Long-term debt (Note 3) 1,431,820 1,439,908
Deferred income taxes (Note 5) 52,921 47,011
---------- ----------
Total liabilities 1,905,801 1,887,726
---------- ----------
Commitments (Notes 3, 4 and 6)
Stockholders' equity (Note 7)
Common stock, par value $.001 per share; 50,000,000 shares
authorized; 2,695,495 (March 31, 1998) and 2,995,495 (September 30,
1998) issued and outstanding 2,695 2,995
Additional paid-in capital 294,875 984,656
Retained earnings 253,350 314,893
---------- ----------
550,920 1,302,544
---------- ----------
$2,456,721 $3,190,270
========== ==========
See notes to financial statements.
F-3
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENTS OF OPERATIONS
Years Ended For the Six Months Ended
March 31, September 30,
------------------------------------ --------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -------------------
(Unaudited)
Revenue
Water and related $3,211,807 $2,521,642 $1,913,422 $1,587,893
Rentals 49,288 47,460 83,030 68,388
Pool 68,349 75,419 23,350 30,890
---------- ---------- ---------- ----------
Net revenue 3,329,444 2,644,521 2,019,802 1,687,171
Cost of goods sold exclusive of
depreciation and amortization 501,288 415,263 285,044 259,391
---------- ---------- ---------- ----------
Gross profit 2,828,156 2,229,258 1,734,758 1,427,780
---------- ---------- ---------- ----------
Operating expenses
Salaries and related 1,310,303 987,703 788,242 658,655
Administrative and general 557,892 437,375 365,706 229,806
Selling and delivery 422,462 288,681 277,043 196,629
Depreciation and amortization 277,914 217,977 160,377 113,956
---------- ---------- ---------- ----------
2,568,571 1,931,736 1,591,368 1,199,046
---------- ---------- ---------- ----------
Operating income 259,585 297,522 143,390 228,734
---------- ---------- ---------- ----------
Other income (expense)
Interest income 3,720 1,000 9,994 2,967
Interest expense (142,803) (111,308) (73,995) (70,781)
Loss on sale of assets (2,871) - - -
---------- ---------- ---------- ----------
(141,954) (110,308) (64,001) (67,814)
---------- ---------- ---------- ----------
Income before income taxes 117,631 187,214 79,389 160,920
---------- ---------- ---------- ----------
Provision for income taxes (Note 5) 34,403 63,062 17,846 32,548
---------- ---------- ---------- ----------
Net income and comprehensive income $ 83,228 $ 124,152 $ 61,543 $ 128,372
========== ========== ========== ==========
Basic and diluted earnings per share $0.03 $0.05 $0.02 $0.05
========== ========== ========== ==========
Weighted average number of shares
outstanding 2,695,495 2,695,495 2,961,069 2,695,495
========== ========== ========== ==========
See notes to financial statements.
F-4
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998 AND 1997
Common Stock Additional
-------------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------------- --------------- --------------- ---------------- ---------------
Balance - March 31, 1997 2,695,495 2,695 294,875 170,122 467,692
Net income for the year - - - 83,228 83,228
--------- ------ -------- -------- ----------
Balance - March 31, 1998 2,695,495 2,695 294,875 253,350 550,920
--------- ------ -------- -------- ----------
Sale of common stock (Note
7) 300,000 300 689,781 - 690,081
Net income for the period
April 1, 1998 to
September 30, 1998
(unaudited) - - - 61,543 61,543
--------- ------ -------- -------- ----------
Balance - September 30,
1998 (unaudited) 2,995,495 $2,995 $984,656 $314,893 $1,302,544
========= ====== ======== ======== ==========
See notes to financial statements.
F-5
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENTS OF CASH FLOWS
Years Ended For the Six Months Ended
March 31, September 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------------------ ---------------- ----------------- -----------------
(Unaudited)
Cash flows from operating activities
Net income $ 83,228 $ 124,152 $ 61,543 $ 128,372
----------- --------- --------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 277,914 217,977 160,377 113,956
Loss on sale of asset 2,871 - - -
Deferred income taxes 14,720 16,929 6,286 -
Changes in certain assets and liabilities -
Accounts receivable (221,480) (42,994) (94,004) (165,356)
Inventories (30,153) 3,662 (6,291) (31,058)
Prepaid expenses and other (37,420) 5,890 32,233 1,126
Accounts payable 31,944 44,205 (4,862) 34,073
Accrued expenses (10,765) 8,942 (11,370) (27,347)
Deposits 15,620 9,695 (3,771) (2,524)
----------- --------- --------- -----------
43,251 264,306 78,598 (77,130)
----------- --------- --------- -----------
Net cash provided by operating
activities 126,479 388,458 140,141 51,242
----------- --------- --------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (535,578) (176,207) (330,041) (236,327)
Proceeds from sale of asset 2,750 - - -
----------- --------- --------- -----------
Net cash flows used in investing
activities (532,828) (176,207) (330,041) (236,327)
----------- --------- --------- -----------
Cash flows from financing activities
Net proceeds from line-of-credit 40,000 - - -
Proceeds from additions to long-term debt 1,500,000 - - 1,500,000
Loan fees and origination cost (19,776) - - (18,196)
Payments on line-of-credit - - (40,000) -
Payments on long-term debt (1,288,474) (56,775) (57,237) (1,232,830)
Proceeds from sale of common stock - - 825,000 -
Costs related to issuance of common stock - - (134,919) -
Deferred offering cost - - (25,499) -
Restricted cash - - (125,000) -
----------- --------- --------- -----------
Net cash flows provided by (used in)
financing activities ----------- --------- --------- -----------
231,750 (56,775) 442,345 248,974
----------- --------- --------- -----------
Net (decrease) increase in cash (174,599) 155,476 252,445 63,889
Cash - beginning of year 244,765 89,289 70,166 244,765
----------- --------- --------- -----------
Cash - end of year $ 70,166 $ 244,765 $ 322,611 $ 308,654
=========== ========= ========= ===========
Continued on next page.
See notes to financial statements.
F-6
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENTS OF CASH FLOWS
Continued from previous page.
Supplemental disclosures of cash flow information:
Cash paid during the year for interest was $142,803 and $111,308 (March 31,
1998 and 1997, respectively) and $73,995 and $70,781 (September 30, 1998
and 1997, respectively).
Cash paid during the year for income taxes was $33,844 and $44,445 (March
31, 1998 and 1997, respectively) and $14,011 and $10,132 (September 30,
1998 and 1997, respectively).
Supplemental disclosure of noncash investing activity:
During the year ended March 31, 1998 and six months ended September 30,
1998, equipment was acquired through a capital lease for $41,050 and
$105,075, respectively.
See notes to financial statements.
F-7
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Organization
- ------------
Eldorado Artesian Springs Inc. (the "Company") is a Colorado corporation which
primarily sells bottled artesian spring water and rents water dispensers. The
Company also rents housing, and during the summer months, it operates a natural
artesian spring pool. The Company grants credit to its customers, substantially
all of whom are located in Colorado.
Interim Financial Statements
- ----------------------------
In the opinion of the Company's management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company at
September 30, 1998 and the results of its operations and changes in cash flows
for the six months ended September 30, 1997 and 1998. The results of operations
for the six months ended September 30, 1998 are not necessarily indicative of
the results to be expected for the full year.
Inventories
- -----------
Inventories consist primarily of water bottles and packaging and are stated at
the lower of cost or market, on a first-in, first-out basis.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. Machinery, equipment,
furniture and fixtures are depreciated using various methods over their
estimated useful lives which range from three to seven years. Buildings and
improvements are depreciated using the straight-line method over their estimated
useful lives which range from fifteen to thirty-nine years.
Other Assets
- ------------
Other assets consisting of water rights, customer list, loan fees, slotting fees
and plate costs are carried at cost and are being amortized on the straight-line
basis over five to forty years.
Deposits
- --------
Deposits consist primarily of deposits on bottles.
Deferred Offering Costs
- -----------------------
Deferred offering costs represent amounts paid in connection with a future stock
offering. Such amounts are capitalized upon a successful offering or expensed
if the offer is never consummated.
F-8
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
Revenue and Expense
- -------------------
Revenue is recognized on the sale of its products as customer shipments are
made. Returns are recognized when the product is received. Rental revenue is
recognized on a monthly basis upon commencement of the lease agreement.
Basic Earnings Per Share
- ------------------------
During the year ended March 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
No. 128). SFAS 128 established new definitions for calculating and disclosing
basic and diluted earnings per share. Basic earnings per share is based upon
the weighted average number of shares outstanding as defined in SFAS 128. No
diluted earnings per share is presented as no there are no potential dilutive
common shares.
Reclassifications
- -----------------
Certain amounts for the year ended March 31, 1997 and six months ended September
30, 1997, have been reclassified to conform with the 1998 presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of financial instruments including cash, accounts
receivable, line-of-credit, accounts payable, deposits and accrued expenses
approximated fair value as of March 31, 1998 and September 30, 1998 because of
the relatively short maturity of these instruments.
Due to rates currently available to the Company for debt which are similar to
terms on the remaining maturities, the fair value of existing debt approximates
carrying value.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred.
F-9
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SELECTED BALANCE SHEET INFORMATION
- -------------------------------------------
March 31, September 30,
1998 1998
-------------------- ----------------------
(Unaudited)
Accounts receivable
Trade $ 508,320 $ 600,469
Less allowance for doubtful accounts (10,000) (10,000)
----------- -----------
$ 498,320 $ 590,469
=========== ===========
Property, plant and equipment
Land $ 225,194 $ 225,194
Buildings and improvements 1,101,748 1,140,020
Machinery and equipment 1,706,460 2,042,658
Vehicles 19,831 19,831
Office furniture and fixtures 84,250 141,995
----------- -----------
3,137,483 3,569,698
Less accumulated depreciation (1,612,113) (1,767,345)
----------- -----------
$ 1,525,370 $ 1,802,353
=========== ===========
Other assets
Water rights $ 179,500 $ 179,500
Less accumulated amortization (64,882) (67,126)
----------- -----------
$ 114,618 $ 112,374
=========== ===========
Accrued expenses
Property taxes $ 20,973 $ 8,978
Sales tax 9,408 10,380
Income taxes 16,597 2,586
Payroll and payroll taxes 32,152 45,816
----------- -----------
$ 79,130 $ 67,760
=========== ===========
F-10
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT
- -----------------------
Note Payable to Bank March 31, September 30,
- -------------------- 1998 1998
------------------- --------------------
(Unaudited)
Note payable to bank due June 20, 2012, interest at bank
prime plus .5% (9% at March 31, 1998 and September 30,
1998). Monthly principal and interest payments of $12,244
with all unpaid principal and interest due at maturity.
Collateralized by substantially all assets of the Company
and assignment of rents. $1,167,692 $1,150,838
Note payable to bank due June 20, 2002, interest at 9.75%,
monthly principal and interest payments of $6,346 with all
unpaid principal and interest due at maturity.
Collateralized by substantially all assets of the Company
and assignment of rents. 263,797 238,109
Capital Lease
- -------------
Capital lease for equipment. Monthly minimum lease payments
of $3,159, due April 1, 2002. 82,286 119,275
Capital lease for equipment. Monthly minimum lease payments
of $3,274, due April 25, 2001. 41,050 94,440
---------- ----------
$1,554,825 $1,602,662
========== ==========
The cost of equipment under capital lease at March 31, 1998 and September 30,
1998 was $143,305 and $190,060 with accumulated depreciation of $25,404 and
$35,443, respectively.
F-11
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT (CONTINUED)
- -----------------------------------
Future maturities of long-term debt:
Capital
Notes
Year Ending March 31, 1998 Payable Leases Total
- -------------------------- ------------------ ------------------ ------------------
1999 $96,448 $38,803 $135,251
2000 103,756 40,157 143,913
2001 114,122 40,157 154,279
2002 125,525 25,263 150,788
2003 79,087 15,286 94,373
Thereafter 912,551 - 912,551
------- ------- -------
1,431,489 159,666 1,591,155
Less amount representing interest
- (36,330) (36,330)
------- ------- -------
Total principal 1,431,489 123,336 1,554,825
Less current portion (96,448) (26,557) (123,005)
------- ------- --------
$1,335,041 $96,779 $1,431,820
========== ======= ==========
NOTE 4 - LINE-OF-CREDIT
- -----------------------
The Company entered into an agreement with a bank for a line-of-credit of
$100,000 due June 20, 1998. The interest rate is calculated at prime plus 1%
which was 9.5% at March 31, 1998. Interest is payable monthly and the line is
collateralized by substantially all of the assets of the Company. The
outstanding balance at March 31, 1998 and September 30, 1998 was $40,000 and $0,
respectively.
NOTE 5 - INCOME TAXES
- ---------------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
F-12
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (CONTINUED)
- ---------------------------------
The net current and long-term deferred tax in the accompanying balance sheet
includes the following deferred tax assets and liabilities.
March 31, September 30,
1998 1998
--------------------- ---------------------
(Unaudited)
Current deferred tax asset
$ 16,829 $ 4,633
Current deferred tax liability - -
--------------------- ---------------------
Net current deferred tax asset $ 16,829 $ 4,633
===================== =====================
Long-term deferred tax asset $ - $ -
Long-term deferred tax liability 52,921 47,011
--------------------- ---------------------
Net long-term deferred tax liability $ 52,921 $ 47,011
===================== =====================
The provision for income taxes is summarized as follows:
For the Years Ended For the Six Months Ended
March 31, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(Unaudited)
Current
$19,683 $46,133 $11,559 $22,784
Deferred
14,720 16,929 6,287 9,764
------ ------ ----- -----
Total
$34,403 $63,062 $17,846 $32,548
======= ======= ======= =======
F-13
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (CONTINUED)
- ---------------------------------
The following is a reconciliation of income taxes at the Federal Statutory rate
with income taxes recorded by the Company.
For the Years Ended For the Six Months Ended
March 31, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(Unaudited)
Computed income taxes at statutory rate
- net of surtax
$31,503 $57,862 $15,246 $27,248
State income taxes, net of Federal
income tax benefit and other 2,900 5,200 2,600 5,300
----- ----- ----- -----
$34,403 $63,062 $17,846 $32,548
======= ======= ======= =======
Income tax amounts for unaudited periods are calculated using estimates based on
projected year end income.
Deferred taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
March 31, September 30,
1998 1998
------------------- -------------------
(Unaudited)
Differences related to fixed assets
$(43,366) $(50,891)
Differences related to other assets
(9,555) (8,316)
Allowance for doubtful accounts
3,633 3,633
Alternative minimum tax and ITC credit carryforward
13,196 13,196
------ ------
$(36,092) $(42,378)
======== ========
F-14
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS
- --------------------
The Company has various long-term leases for delivery trucks and equipment. The
following is a schedule by year of future minimum lease payments as of March 31,
1998.
March 31
Year Ending March 31, 1998
- --------------------- ---------------------
1999 $131,739
2000 112,314
2001 63,668
2002 38,086
2003 8,268
Thereafter -
---------------------
$354,075
=====================
Total rental expense for the years ended March 31, 1998 and 1997 was $133,948
and $96,800, respectively. Total rent expense for the six months ended
September 30, 1998 and 1997 was $81,984 and $60,987, respectively.
NOTE 7 STOCKHOLDERS' EQUITY
- ----------------------------
Reverse Stock Split
- -------------------
On April 1, 1998, the Company filed with the state to amend its articles of
incorporation to reflect a 12 to 1 reverse stock split that was previously
approved by a vote of the shareholders. Accordingly, all weighted average share
and per share information throughout the financial statements has been restated
for periods prior to the reverse split.
Private Placement
- -----------------
On April 22, 1998, the Company completed a private placement of 300,000 shares
of common stock at $2.75 per share. The Company received proceeds net of
offering costs of approximately $690,000 from the private placement of which
$150,000 was placed in a joint account with the placement agent for a potential
secondary public offering.
In connection with the private placement, the Company issued a warrant to
purchase 30,000 and 250,000 shares of common stock at $3.30 and $11.00 per
share, respectively. The warrants will be exercisable at any time after
April 22, 1999, but no later than April 22, 2003.
F-15
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------
Stock Option Plan
- -----------------
On May 19, 1998, the Company registered 875,000 shares of common stock of the
Company pursuant to the 1997 stock option plan (the Plan). The Plan provides
for the grant of stock options to employees, directors and consultants of the
Company. From time to time, the board may grant options to advance the interest
of the Company.
As of September 30, 1998, 345,500 options were issued to employees. 113,500 of
these shares were granted to employees that vest immediately. Such options
expire on September 10, 2007. Of the remaining 232,000 shares, 31,200 vest in
1999, 34,400 in 2000, 37,600 in 2001, 41,800 in 2002, 45,000 in 2003, 13,000 in
2004, 14,000 in 2005 and 15,000 in 2006. All of the options were issued with an
option price of $2.75 per share, fair market value at the date of grant. Options
will terminate no later than the expiration of ten years from the date of the
grant, subject to earlier termination due to termination of service. The Plan
will terminate by its terms on September 10, 2007, and also may be terminated at
any time by the exercise of all outstanding options.
F-16
================================================================================
NO DEALER, SALES PERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING. YOU MAY NOT RELY ON SUCH
INFORMATION OR REPRESENTATIONS AS HAVING BEEN GIVEN OR MADE BY ELDORADO OR ANY
UNDERWRITER. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SECURITIES IN ANY STATE WHERE SUCH OFFER OR SOLICITATION IS NOT
PERMITTED. DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THE SECURITIES IS NOT AN
INDICATION THAT ELDORADO'S BUSINESS HAS NOT CHANGED SINCE THE DATE OF THIS
PROSPECTUS OR THAT INFORMATION IN THE PROSPECTUS IS CORRECT AS OF ANY TIME AFTER
THE DATE OF THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary............................................................ 5
Eldorado Artesian Springs................................................... 5
The Offering................................................................ 5
Summary Financial and Operating
Information................................................................ 6
Risk Factors.................................................................. 7
Use of Proceeds...............................................................13
Dividend Policy...............................................................13
Determination of the Offering Price...........................................14
Dilution......................................................................14
Capitalization................................................................15
Management Discussion and Analysis of
Results of Operations and Financial
Condition...................................................................16
Eldorado and its Business.....................................................19
Management....................................................................26
Principal Stockholders........................................................29
Certain Transactions and Related
Transactions................................................................29
Legal Proceedings.............................................................29
History of Securities Placements..............................................29
Description of Securities.....................................................30
Shares Eligible for Future Sale...............................................31
Underwriting..................................................................33
Commission Position on Indemnification for
Securities Act Liabilities..................................................35
Legal Matters.................................................................35
Experts.......................................................................35
Additional Information........................................................36
Index to Financial Statements................................................F-1
---------------
DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL ______, 1998, ALL DEALERS EFFECTING
TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS AS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
700,000 SHARES
OF
COMMON STOCK
ELDORADO ARTESIAN
SPRINGS, INC.
----------------
PROSPECTUS
----------------
MILLS FINANCIAL SERVICES, INC.
_______, 1998
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and Bylaws of Eldorado provide that Eldorado
shall indemnify to the fullest extent permitted by Colorado law any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, by reason of the fact that he
or she is or was a director or officer of Eldorado or is or was serving at the
request of Eldorado in any capacity and in any other corporation, partnership,
joint venture, trust or other enterprise. The Colorado Business Corporation Act
(the "Colorado Act") permits Eldorado to indemnify an officer or director who
was or is a party or is threatened to be made a party to any proceeding because
of his or her position, if the officer or director acted in good faith and in a
manner he or she reasonably believed to be in the best interests of Eldorado or,
if such officer or director was not acting in an official capacity for Eldorado,
he or she reasonably believed the conduct was not opposed to the best interests
of Eldorado. Indemnification is mandatory if the officer or director was wholly
successful, on the merits or otherwise, in defending such proceeding. Such
indemnification (other than as ordered by a court) shall be made by Eldorado
only upon a determination that indemnification is proper in the circumstances
because the individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination shall
be made by a majority vote of a quorum consisting of disinterested directors or
of a committee of at least two disinterested directors, or by independent legal
counsel or by the shareholders.
In addition, the Articles of Incorporation provide for the elimination, to
the extent permitted by Colorado law, of personal liability of directors to
Eldorado and its shareholders for monetary damages for breach of fiduciary duty
as directors. The Colorado Act provides for the elimination of personal
liability of directors for damages occasioned by breach of fiduciary duty,
except for liability based on the director's duty of loyalty to Eldorado,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
improper dividends, liability based on violations of state securities laws, and
liability for acts occurring prior to the date such provision was added.
Eldorado is currently obtaining quotes on directors and officers liability
insurance.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect to
the effect of any indemnification for liabilities arising under the Securities
Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be borne
by Eldorado in connection with the offering described in the Registration
Statement, other than underwriting Commissions and discounts.
Registration Fee........................................... $ 1,342
National Association of Securities Dealers, Inc. Fee....... 750
Non-Accountable Expense Allowance.......................... 126,000
Legal Fees and Expenses.................................... 75,000
Accounting Fees and Expenses............................... 40,000
Printing and Engraving Expenses............................ 50,000
Blue Sky Fees and Expenses................................. 15,000
Transfer Agent's and Registrar' s Fees..................... 1,000
Market Listing Fees........................................ 10,000
Miscellaneous 908
-------
Total..................................................... 320,000
=======
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant sold the following unregistered securities during the past
three years.
(1) On April 22, 1998, Eldorado sold 300,000 shares of its Common Stock to
accredited investors through Mills Financial Services, Inc. for the
aggregate offering price of $825,000. Eldorado believes such transaction was
private in nature and was exempt from the registration requirements of
Section 5 of the Securities Act of 1933 (the "Securities Act") by virtue of
the exemption contained in Section 4(2) of the Securities Act and Rules 505
and 506 of Regulation D.
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
----------------------
1.1 Form of Underwriting Agreement between Eldorado and the Underwriter.
1.2 Form of warrant to be issued to the Underwriter.*
3.1 Articles of Incorporation, as amended, incorporated by reference to
Exhibit 3.1 filed with Eldorado's Form 10-KSB for the fiscal year ended
March 31, 1998
3.2 Bylaws of Eldorado, incorporated by reference to Exhibit No. 3 to the
Registration Statement (No. 33-6738-D)
4.1 Form of certificate for shares of Common Stock.*
5.1 Opinion of Chrisman, Bynum & Johnson, P.C.
10.1 Eldorado Artesian Springs, Inc. 1997 Stock Option Plan
10.2 Promissory Note with First National Bank of Boulder County dated June 27,
1997
10.3 Deed of Trust to secure a loan from First National Bank of Boulder County
dated June 27, 1997
23.1 Consent of Ehrhart Keefe Steiner & Hottman PC
23.2 Consent of Chrisman, Bynum & Johnson, P.C. (included in its opinion filed
as Exhibit 5.1)
24.1 Power of Attorney (included in signature page of original filing)
_________________________
*To be filed by amendment
II-2
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer will provide to the Underwriter at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer pursuant to Rule 424(b)(1), or
(4) or 497(h) under the Securities Act as part of this registration statement
as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boulder State of Colorado, on the 1st day of
December, 1998.
ELDORADO ARTESIAN SPRINGS, INC.
By: /s/ Douglas A. Larson
-------------------------------------------
Douglas A. Larson, Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas A. Larson his true and lawful
attorney-in-fact and agent, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, including post-effective
amendments, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all his said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
- ---- ----- ----
/s/ Douglas A. Larson President, Chief Executive Officer, December 1, 1998
- ----------------------- Director
Douglas A. Larson
/s/ Kevin M. Sipple Vice President and Secretary December 1, 1998
- ----------------------- Director
Kevin M. Sipple
/s/ Jeremy S. Martin Vice President, Director December 1, 1998
- -----------------------
Jeremy S. Martin
/s/ Cathleen M. Collins Chief Financial Officer (Principal
- ----------------------- Financial Officer) December 1, 1998
Cathleen M. Collins
Director December _, 1998
- -----------------------
George V. Schmitt
Director December _, 1998
- -----------------------
Don P. VanWinkle
II-4