<PAGE>
As filed with the Securities and Exchange Commission on December 19, 1996
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HAWAIIAN NATURAL WATER COMPANY, INC.
(Exact name of Registrant as specified in its charter)
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<CAPTION>
Hawaii 5149 99-0314848
<S> <C> <C>
(State or jurisdiction of incorporation (Primary Standard Industrial I.R.S. Employer
or organization) Classification Code Number) Identification Number)
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248 Mokauea Street
Honolulu, Hawaii 96819
(808) 832-4550
(Address and telephone number of principal executive offices)
------------
Marcus Bender, Chief Executive Officer
Hawaiian Natural Water Company, Inc.
248 Mokauea Street
Honolulu, Hawaii 96819
(808) 832-4550
(Name, address, and telephone number of agent for service)
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Copies to:
RICHARD P. MANSON, ESQ. RUBI FINKELSTEIN, ESQ.
Graham & James LLP Orrick, Herrington & Sutcliffe LLP
801 South Figueroa Street 666 Fifth Avenue
Los Angeles, California 90017 New York, New York 10103
(213) 624-2500 (212) 506-5000
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities pursuant to
Rule 462(b) 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 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. [ ]
<PAGE>
Calculation of Registration Fee
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===================================================================================================================================
Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price per aggregate offering Amount of
to be registered registered security price(1) registration fee
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Units consisting of:
(a) Common Stock, no par value (2) (2) $9,200,000 $2,787.88
(b) Common Stock Purchase
Warrants ("Warrants")
Common Stock underlying 2,000,000(3) $6.00(4) $12,000,000 3,636.37
Warrants
Additional Warrants and
Common Stock underlying
Additional Warrants 750,000(3) $6.00(4) $4,500,000 $1,363.64
Total ........................................................................................................... $7,787.89
===================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee.
(2) Omitted pursuant to Rule 457(o).
(3) This Registration Statement covers such currently indeterminable number of
additional shares of Common Stock as may be issuable upon exercise of the
Warrants.
(4) Calculated pursuant to Rule 457(g), based upon the initial exercise price of
the Warrants.
------------
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 this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
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HAWAIIAN NATURAL WATER COMPANY, INC.
Cross Reference Sheet Showing Location in Prospectus
of Information Required by Items of Form SB-2
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Form SB-2 Item Number and Caption Caption or Location in Prospectus
--------------------------------- ----------------------------------
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1. Front of Registration Statement Outside Front Cover Page of
and Outside Front Cover Page of Prospectus
Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back
Pages of Prospectus Cover Pages of Prospectus
3. Summary Information, Risk Factors and Prospectus Summary; The Company;
Ratio of Earnings to Fixed Charges Risk Factors [Inapplicable as to Ratio
of Earnings to Fixed Charges]
4. Use of Proceeds Prospectus Summary; Use of Proceeds;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations
5. Determination of Offering Price Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution Dilution
7. Selling Security Holders Prospectus Summary; Selling
Securityholders
8. Plan of Distribution Outside Front Cover Page of
Prospectus; Underwriting; Selling
Securityholders
9. Legal Proceedings Inapplicable
10. Directors, Executive Officers, Management
Proprietors and Control Persons
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11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Risk Factors; Dividend Policy;
Description of Capital Stock
13. Interests of Named Experts and Legal Matters; Experts
Counsel
14. Disclosure of Commission Position Inapplicable
on Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years The Company; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Certain
Transactions
16. Description of Business Prospectus Summary; The Company;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Principal Stockholders; Certain
Transactions; Financial Statements
17. Management's Discussion and Analysis Use of Proceeds; Management's
or Plan of Operation Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Outside Front Cover Page of
Stockholder Matters Prospectus; Risk Factors; Dividend
Policy; Description of Capital Stock;
Securities Eligible for Future Sale
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements With Inapplicable
Accountants on Accounting and Financial
Disclosure
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 19, 1996
PROSPECTUS
HAWAIIAN NATURAL WATER COMPANY, INC.
2,000,000 Units
Each Unit Consisting of One Share of Common Stock
and
One Redeemable Warrant
This Prospectus relates to an offering (the "Offering") of 2,000,000
Units (the "Units"), each Unit consisting of one share of common stock, no par
value ("Common Stock"), and one redeemable common stock purchase warrant
("Redeemable Warrant") of Hawaiian Natural Water Company, Inc., a Hawaii
corporation (the "Company"). The shares of Common Stock and Redeemable Warrants
comprising the Units will be separately tradeable upon issuance. Each Redeemable
Warrant entitles the registered holder thereof to purchase one share of Common
Stock at an initial exercise price of $ per share [150% of the initial public
offering price per Unit], subject to adjustment, at any time following the date
of issuance until , 2002 [60 months from the date of this Prospectus]. The
Company shall have the right to redeem all, but not less than all, of the
Redeemable Warrants commencing , 1998 [12 months from the date of this
Prospectus] at a price of $.05 per Redeemable Warrant on 30 days' prior written
notice, provided that the Company shall have obtained the consent of Joseph
Stevens & Company, L.P. (the "Underwriter"), and the average closing bid price
of the Common Stock equals or exceeds 150% of the then exercise price per share,
subject to adjustment, for any 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption. See "Description of Capital Stock."
<PAGE>
Prior to the Offering, there has been no public market for the Units,
the Common Stock or the Redeemable Warrants, and there can be no assurance that
such a market will develop after the Offering or, if developed, that it will be
sustained. It is currently anticipated that the initial public offering price
will be $4.00 per Unit. The offering price of the Units and the exercise price
and other terms of the Redeemable Warrants were determined by negotiation
between the Company and the Underwriter and are not necessarily related to the
Company's assets or book value, results of operations or any other established
criteria of value. See "Risk Factors," "Description of Capital Stock" and
"Underwriting." The Company has applied to include the Units, the Common Stock
and the Redeemable Warrants on the Nasdaq SmallCap Market ("Nasdaq") under the
symbols "HNWCU," "HNWC" and "HNWCW", respectively. The Company and the
Underwriter may jointly determine, based upon market conditions, to delist the
Units upon the expiration of the 30 day period commencing on the date of this
Prospectus.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS," COMMENCING ON PAGE 11, AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Discounts1/ Company2/
<S> <C> <C> <C>
Per Unit............. $ $ $
Total 3/............. $ $ $
===================================================================================================================
</TABLE>
1/ Does not include additional compensation payable to the Underwriter in the
form of a non-accountable expense allowance. In addition, see "Underwriting" for
information concerning indemnification and contribution arrangements and other
compensation payable to the Underwriter.
2/ Before deducting expenses of the Offering payable by the Company, estimated
at $550,000, including the Underwriter's non-accountable expense allowance.
3/ The Company has granted the Underwriter an option (the "Over-Allotment
Option"), exercisable for a period of 45 days from the date of this Prospectus,
to purchase up to 300,000 additional Units on the same terms and
- 2 -
<PAGE>
conditions set forth above, solely to cover over-allotments, if any. If the
Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Proceeds to Company will be $ , $ , and
$ ,respectively. See "Underwriting."
The Units are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that
delivery of the Units offered hereby will be made against payment therefor, at
the offices of Joseph Stevens & Company, L.P., New York, New York, on or
about , 1997.
--------------------
JOSEPH STEVENS & COMPANY, L.P.
The date of this Prospectus is , 1997.
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<PAGE>
(continued from cover page)
This Prospectus also relates to 750,000 Redeemable Warrants (the
"Selling Securityholders Warrants") and 750,000 shares of Common Stock (the
"Selling Securityholders Shares") issuable upon exercise of the Selling
Securityholders Warrants. The Selling Securityholders Warrants will be issued at
the consummation of the Offering to certain security holders (the "Selling
Securityholders") upon the automatic conversion of certain warrants (the "Bridge
Warrants") issued to the Selling Securityholders in a private financing
consummated in October 1996 (the "Bridge Financing"). Neither the Selling
Securityholders Warrants nor the Selling Securityholders Shares may be sold for
a period of 18 months following the date of this Prospectus without the prior
written consent of the Underwriter. The Selling Securityholders Warrants and the
Selling Securityholders Shares are not being underwritten in the Offering. The
Company will not receive any proceeds from the sale of the Selling
Securityholders Warrants or the Selling Securityholders Shares by the holders
thereof, although the Company will receive proceeds from the exercise, if any,
of the Selling Securityholders Warrants. See "Management"s Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources," The Company--Recent Bridge Financing" and "Selling Securityholders."
The Company intends to furnish to registered holders of the Units,
Redeemable Warrants and Common Stock annual reports containing financial
statements examined by an independent accounting firm.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
- 4 -
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. In
August 1996, the Company effected a 1,111.428-for-one Common Stock split. In
addition, in October 1996, the holders of the Company's then outstanding
Convertible Preferred Stock converted all outstanding shares of such Convertible
Preferred Stock into an aggregate of 389,000 shares of Common Stock. Except as
otherwise noted, all information in this Prospectus (i) gives retroactive effect
to the aforementioned stock split and conversion of Convertible Preferred Stock,
(ii) assumes no exercise of the Over-Allotment Option, (iii) assumes no exercise
of the Redeemable Warrants or the Selling Securityholders Warrants, and (iv)
assumes no exercise of the Underwriter's Warrants. Investors should carefully
consider the information set forth under the heading "Risk Factors."
The Company
Hawaiian Natural Water Company, Inc. (the "Company") bottles, markets
and distributes "natural" water under the name "Hawaiian Springs(TM)." The
Company draws its water from a well located at the base of the Mauna Loa volcano
in Kea'au on the Big Island of Hawaii. The water is "bottled at the source" in
polyethylene therephthalate ("PET") plastic bottles, which are manufactured at
the Company's bottling facility. This on-site bottle manufacturing operation
enables the Company to reduce its packaging costs while at the same time
improving its quality control, inventory management and delivery scheduling. The
Company markets its water on the basis of superior quality and taste and on the
worldwide reputation of Hawaii.
The Company 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.
The Company began commercial operations in February 1995, selling
initially in the Hawaiian market exclusively. The Company has since expanded its
distribution on a limited basis into the West Coast and Southeastern portion of
the United States, Guam and the Middle East.
Approximately 2.88 billion gallons of bottled water were sold in the
United States in 1995, of which approximately 29.3% were sold in California.
Non-sparkling water accounted for approximately 2.43 billion gallons, or
approximately 84.4%, of total U.S. bottled water
- 5 -
<PAGE>
sales. The fastest growing segment of the non-sparkling bottled water market in
the United States is the retail, premium (bottles of two liters or less are
considered premium), PET market, the market in which the Company currently
competes. This segment, which grew from a total of 335.8 million gallons in 1994
to 426.8 million gallons in 1995 (a 27.1% increase), has grown at double digit
rates since 1992, and is projected to continue growing at an average annual
growth rate of approximately 9.4% through the year 2000.
Most of the Company's product is sold through retail channels such as
convenience stores and supermarkets, although the Company also sells through
food service outlets such as restaurants, bars, airlines, hotels, country clubs
and military installations. The Company distributes its product primarily
through distributors, but also utilizes brokers and in California sells directly
to specialty retail chains.
The Company's objective is to become a leading provider of premium
quality bottled water on a national and international basis. The Company plans
to achieve this objective by expanding its presence in its current markets,
entering new geographic markets and establishing distributor relationships as
well as strategic distribution alliances with other national or international
beverage companies in order to take advantage of their established distribution
networks.
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<PAGE>
The Offering
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Securities offered
by the Company ....................................... 2,000,000 Units, each Unit consisting of one share
of Common Stock and one Redeemable Warrant.
The shares of Common Stock and Redeemable
Warrants comprising the Units will be detachable
and separately tradeable upon issuance. Each
Redeemable Warrant entitles the registered holder
thereof to purchase one share of Common Stock at
an initial exercise price of $ per share [150% of
the initial public offering price per Unit], subject to
adjustment, at any time following the date of
issuance until , 2002 [60 months from the date
of this Prospectus]. The Company shall have the
right to redeem all, but not less than all, of the
Redeemable Warrants commencing , 1998 [12
months from the date of this Prospectus] at a price of
$.05 per Redeemable Warrant on 30 days' prior
written notice, provided that (i) the average closing
bid price of the Common Stock equals or exceeds
150% of the then exercise price per share, subject to
adjustment, for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of
redemption, and (ii) the Company shall have
obtained the consent of the Underwriter. See
"Description of Capital Stock."
Securities offered
by Selling Securityholders............................ 750,000 Redeemable Warrants, which will be issued
to the Selling Securityholders upon the automatic
conversion of the Bridge Warrants, and 750,000
shares of Common Stock issuable upon exercise of
such Redeemable Warrants (the "Concurrent
Offering"). The Concurrent Offering is being
registered at the Company's expense but is not being
underwritten in the Offering. The Selling
Securityholders Warrants and the Selling
Securityholders Shares may be offered for resale at
any time on or after the date hereof by the Selling
Securityholders; provided, however, that the Selling
Securityholders have agreed not to sell such
securities for a period of 18 months following the
</TABLE>
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<PAGE>
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<CAPTION>
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date hereof without the prior written consent of the
Underwriter. The Company will not receive any
proceeds from the sale of the Selling Securityholders
Warrants or the Selling Securityholders Shares by
the holders thereof, although the Company will
receive proceeds from the exercise, if any, of the
Selling Securityholders Warrants. See "Selling
Securityholders."
Common Stock outstanding
before the Offering................................... 1,599,212 shares(1)
Common Stock to be outstanding
after the Offering ................................... 3,599,212 shares(1)
Redeemable Warrants to be
outstanding after the Offering ....................... 2,750,000(2)
Proposed trading symbols on
NASDAQ SmallCap Market................................ Units: "HNWCU"
Common Stock: "HNWC"
Redeemable Warrants: "HNWCW"
Use of Proceeds........................................ The net proceeds of the Offering will be used (i) to
repay indebtedness of approximately $1,550,000,
including accrued interest, incurred in connection
with the Bridge Financing, (ii) to repay other
indebtedness of approximately $642,000, including
accrued interest, owed to stockholders and other
investors, (iii) to pay deferred compensation and
consulting fees of approximately $115,000, (iv) for
improvements to plant and equipment of up to
$1,500,000, (v) for sales and marketing programs of
up to $2,000,000, and (vi) the balance ($843,000)
for working capital and general corporate purposes.
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(1) Excludes (i) warrants to purchase an aggregate of 24,351 shares of
Common Stock at an exercise price of $.000009 per share, (ii) outstanding
options to purchase 200,000 shares of Common Stock at an exercise price of $4.00
per share and (iii) 800,000 shares of Common Stock issuable pursuant to options
which may be granted under the Company's stock option plan.
(2) Includes 750,000 Selling Securityholders Warrants.
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Risk Factors........................................... Investment in the Units offered hereby is highly
speculative. See "Risk Factors."
</TABLE>
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<PAGE>
Summary Financial Information
The following table sets forth summary financial data of the Company
for the period from inception (September 13, 1994) through December 31, 1994,
for the year ended December 31, 1995 (collectively, the "Year-End Data") and for
the nine month periods ended September 30, 1995 and 1996 (the "Nine-Month
Data"). The Year-End Data has been derived from the audited financial statements
of the Company appearing elsewhere herein, which have been audited by Arthur
Andersen LLP. The Nine-Month Data has been derived from the unaudited financial
statements of the Company. In the opinion of management, the Nine-Month Data has
been prepared in accordance with generally accepted accounting principles on a
basis consistent with the Year-End Data and includes all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
Company's financial position and results of operations set forth therein. The
Nine-Month Data may not be indicative of the results expected for a full year or
any other period. The summary financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Financial Statements and notes thereto and other
financial and statistical data appearing elsewhere in this Prospectus.
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Period From
Inception to Year Ended Nine Months Ended
December 31, December 31, September 30,
------------ ------------ ----------------------
1994 1995 1995 1996
---- ---- ---- ----
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Statement of Operations Data:
Net sales $ -- $ 588,920 $ 534,611 $ 748,600
Cost of sales -- 620,593 531,335 698,710
Gross margin -- (31,673) 3,276 49,890
Sales & marketing 10,565 220,651 117,241 137,742
General & administrative 69,862 437,289 294,138 533,464
------ ------- ------- -------
Total operating expenses 80,427 657,940 411,379 671,206
Interest expense, net -- 51,261 36,380 65,498
------ ------- ------- -------
Net loss $(80,427) $(740,874) $(444,483) $(686,814)
====== ======= ======= =======
Net loss per share $ (0.09) $ (0.62) $ (0.42) $ (0.43)
====== ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 861,357 1,202,540 1,070,306 1,599,212
Balance Sheet Data:
December 31, 1995 September 30, 1996
----------------- ------------------------------------------------
Pro Forma
Actual ProForma(1) As Adjusted(2)
------ ----------- --------------
Working capital (deficit) $ (721,336) $(1,603,641) $ (933,509) $ 3,471,776
Total assets 703,272 846,001 2,081,229 5,921,418
Total liabilities 1,104,836 1,948,379 2,996,107 751,392
Stockholders' equity (deficit) (401,564) (1,102,378) (914,878) 5,170,026
</TABLE>
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(1) Gives retroactive effect to the Bridge Financing and the application of the
net proceeds therefrom. See "The Company--Recent Bridge Financing."
(2) Adjusted to give effect to the Offering and the initial application of the
net proceeds therefrom. See "Use of Proceeds."
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<PAGE>
RISK FACTORS
The purchase of Units offered hereby involves substantial risks and
immediate substantial dilution. Prospective investors should carefully consider
the risk factors set forth below in addition to the other information contained
in this Prospectus before purchasing the securities offered hereby.
Limited History of Operations. The Company has been engaged in
commercial operations only since February 1995. The Company generated $588,920
in net sales in the fiscal year ended December 31, 1995, and $748,600 in net
sales in the nine months ended September 30, 1996. Approximately 72% of these
sales occurred in the Hawaiian market. The Company's objective is to become a
leading provider of premium quality bottled water on a national and
international basis. To date, however, the Company has only begun to penetrate
major target markets, such as the Mainland U.S.A., which is far larger than the
Company's local market and will likely have a significant impact on the ultimate
success of the Company's business. While the Company believes that it has a
distinctive product with a basis for acceptance worldwide, to date, the demand
for this product on a national and international level has been largely
untested. See "Business--Distribution."
Working Capital Deficiencies; History of Losses; Accumulated Deficit;
Ability to Continue as a Going Concern. The Company had working capital
deficiencies of $721,336 and $1,603,641 at December 31, 1995 and September 30,
1996, respectively, and a net loss of $740,874 and $686,814 for the fiscal year
and nine months then ended, respectively. As of September 30, 1996, the Company
had an accumulated deficit of $1,544,671. The Company is likely to continue to
generate losses until such time as it achieves higher sales levels. Whether the
Company will achieve these higher sales levels depends upon the acceptance of
its product in larger markets outside Hawaii, which are still substantially
untested. There can be no assurance that the Company will achieve profitability
in the future or, if so, as to the timing or amount thereof. The report of
independent public accountants on the Company's financial statements for the
fiscal year ended December 31, 1995 contains an explanatory fourth paragraph to
the effect that the Company's accumulated deficit, negative cash flows from
operations, significant liabilities and need for additional capital raise
substantial doubt about the Company's ability to continue as a going concern.
See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
notes thereto included herein.
Additional Capital Requirements; Uncertainty of Additional Funding.
Based on its current operating plan, the Company anticipates that its existing
capital resources together with the proceeds of this Offering will be adequate
to satisfy its capital requirements for a period of at least 12 months from the
date of this Prospectus. Thereafter, the Company may require additional capital
in order to expand its business. Historically, the Company has been
substantially dependent upon debt and equity financing and guarantees from its
affiliates. There can be no assurance that the Company's affiliates will
continue to extend or guarantee such
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<PAGE>
financing. A portion of the proceeds of the Offering will be used to repay all
outstanding indebtedness to the Company's affiliates. See "Use of Proceeds,"
"The Company--Recent Bridge Financing" and "Certain Transaction." Additional
financing, if any, may be either equity, debt or a combination of debt and
equity. An equity financing could result in dilution in the Company's net
tangible book value per share of Common Stock. There can be no assurance that
the Company will be able to secure additional debt or equity financing or that
such financing will be available on favorable terms. The Company has agreed not
to sell or offer for sale any of its securities for a period of 18 months
following the date of this Prospectus without the consent of the Underwriter. If
the Company is unable to obtain additional financing, if needed, the Company's
ability to meet its obligations and to maintain or expand its operations as
desired will be materially and adversely affected. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Lease of Key Operating Assets. The Company leases its water source and
bottling facility pursuant to a long-term lease agreement with a principal
stockholder. This lease agreement results in the Company exercising less control
over its operations than if the Company had ownership of these assets. In
addition, the lease agreement requires the Company to make rental payments to
the lessor of the facility, which could be substantial, depending upon the
Company's level of gross sales. See "Business--Facilities."
Dependence on Key Personnel. The Company has been substantially
dependent upon the services of Marcus Bender, its Chief Executive Officer, for
the development and management of its business to date. Loss of the services of
Mr. Bender would have a material adverse effect on the Company. The Company has
entered into an employment agreement with Mr. Bender pursuant to which he will
be employed as the Company's President for a five year term. Pursuant to this
employment agreement, Mr. Bender has agreed not to compete with the Company in
the sale of natural water for a period of two years following termination of the
employment agreement. See "Management--Executive Compensation--Employment
Agreement."
Dependence on Key Customer. In 1995, the Company's Hawaiian
distributor, which was then Eagle Distributors ("Eagle"), the Anheuser-Busch
distributor in Hawaii, accounted for approximately 81% of the Company's
aggregate net sales. Eagle was subsequently acquired by Anheuser-Busch, which
terminated distribution of all non Anheuser-Busch brands. As a result, the
Company entered into a distributorship agreement with Paradise Beverages
("Paradise"). Since the inception of the agreement with Paradise, Paradise has
accounted for a majority of the Company's net sales. The Company's distribution
agreement with Paradise is based upon an oral understanding. Termination of this
distribution agreement for any reason could have a material adverse effect on
the Company.
Governmental Regulation; Quality Control. The bottled water industry is
highly regulated both in the United States and abroad. Various state and Federal
regulations, designed to ensure the quality of the water and the truthfulness of
its marketing claims, require the Company to monitor each aspect of its
production process, including its water source, its bottling
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<PAGE>
operations and its packaging and labeling practices. Government regulations in
foreign jurisdictions are generally similar to, and in certain respects more
stringent than, U.S. regulations. Failure to meet applicable regulations in U.S.
or foreign markets could lead to costly recalls, loss of certification to market
product or, even in the absence of governmental action, loss of revenue as a
result of adverse market reaction to negative publicity. See
"Business--Distribution" and "--Governmental Regulation; Quality Control."
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 levels because of the large marketing and
distribution costs associated with obtaining and maintaining a presence at such
levels. In California, for example, the largest U.S. market, substantial
"slotting fees" are typically required to be paid in order to obtain shelf space
for new and untested products in major supermarket chains, which account for a
significant percentage of bottled water sales. The Company desires to become a
leading provider of premium quality bottled water on a national and
international basis. On both bases, the Company competes primarily with large,
established foreign and domestic companies, all of which have significantly
greater financial and other resources than the Company. The Company's principal
foreign competitors include Great Brands of Europe, a French company which
distributes under the "Evian," "Volvic" and "Dannon Natural Spring Water" names,
and Perrier, S.A., a French company, which distributes through its U.S.
subsidiary, The Perrier Group, under the "Arrowhead" and "Poland Spring" names,
among others. The Company's principal domestic competitors include Crystal
Geyser Water Co., a California company which distributes under the "Crystal
Geyser" name, Nora Beverage Co., a Connecticut company which distributes
Canadian sourced water under the "Naya" name, and Mountain Valley Water Co., an
Arkansas company which distributes under the "Mountain Valley" name. See
"Business--Competition."
No Dividends. The Company has never paid any dividends on its Common
Stock and does not currently intend to pay dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain all its earnings, if
any, to finance the development and expansion of its business. It is also likely
that the Company will be required to agree to restrictions on the payment of
dividends in connection with future financings. See "Dividend Policy."
Broad Discretion of Management in Use of Proceeds. Approximately 42.7%
of the estimated net proceeds of the Offering (approximately 50.5% if the
Over-Allotment Option is exercised in full) is to be used for (i) sales and
marketing and (ii) working capital and general corporate purposes in the
discretion of the Company's management, upon whose judgment the public investors
must depend. See "Use of Proceeds."
Repayment of Indebtedness; Benefit to Insiders; Potential Conflicts of
Interest. Approximately $1,660,000 or 25% of the estimated net proceeds of the
Offering, have been allocated for repayment of indebtedness, including repayment
of the Bridge Notes in the outstanding principal amount of $1,500,000, plus
accrued interest. In addition, approximately $532,000 or 8.0% of the net
proceeds of the Offering, have been allocated for repayment of indebtedness owed
to or guaranteed by officers, directors or principal stockholders of the
Company. Accordingly, these insiders will benefit directly to the extent that
the net proceeds of the Offering are used to repay such indebtedness. Conflicts
between the personal interest of these insiders and
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<PAGE>
the Company may be created as a result of such intended repayment. See "Use of
Proceeds," "Management," "Certain Transactions" and "Principal Stockholders."
Possible Control by Insiders. Upon completion of the Offering, the
executive officers and directors will beneficially own approximately 36.65% of
the outstanding Common Stock and may be able to elect all the Company's
directors and thereby direct the policies of the Company. See "Principal
Stockholders" and "Management."
Securities Eligible for Future Sale. Sales of substantial amounts of
Common Stock after the Offering could adversely affect the market price of the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act of
1933, as amended (the "Securities Act"), and by lock-up agreements pursuant to
which the holders of all of the issued and outstanding shares prior to the
Offering have agreed not to sell or otherwise dispose of any of their shares for
a period of 18 months after the date of this Prospectus (the "Lock-up Period")
without the prior written consent of the Underwriter. The Underwriter may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to such lock-up agreements. Although the Underwriter
does not currently intend to release all of such securities from the lock-up
agreements prior to their expiration, it may from time to time release all or a
portion of securities subject thereto depending on a securityholder's individual
circumstances, as market conditions permit. Of the 3,599,212 shares of Common
Stock that will be outstanding after the Offering, the 2,000,000 shares
underlying the Units sold in this Offering will be freely tradeable without
restriction or further registration under the Securities Act, except that shares
owned by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule
144") under the Securities Act ("Affiliates"), may generally only be sold in
compliance with applicable provisions of Rule 144. The remaining 1,599,212
shares of Common Stock will be "restricted securities," as that term is defined
in Rule 144, and in certain circumstances may be sold without registration
pursuant to such rule. Beginning 90 days following the date of this Prospectus,
approximately 1,028,071 of such restricted shares will become eligible for sale
in compliance with Rule 144; however, all of these shares are subject to lock-up
agreements and will be subject to restrictions on sale until the expiration of
the Lock-up Period, unless released therefrom by the Underwriter. In addition,
subject to the consent of the Underwriter, the Company intends to register a
total of up to 1,000,000 shares of Common Stock issued or issuable upon the
exercise of stock options granted or available for grant pursuant to the
Company's stock option plan. There are currently 200,000 shares subject to
outstanding options, none of which are currently exercisable. All of the shares
subject to such exercisable options are subject to lock-up agreements. See
"Management--Stock Option Plan," "Description of Capital Stock," "Securities
Eligible for Future Sale" and "Underwriting."
The Redeemable Warrants and the shares of Common Stock underlying such
Redeemable Warrants, upon exercise thereof, will be freely tradeable without
restriction under the Securities Act, except for any Redeemable Warrants or
shares of Common Stock purchased by Affiliates,
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<PAGE>
which will be subject to the resale limitations of Rule 144. In addition,
750,000 Selling Securityholders Warrants and the Selling Securityholders Shares
underlying same are being registered in the Concurrent Offering. Holders of such
Selling Securityholders Warrants and Selling Securityholders Shares have agreed
not to, directly or indirectly, sell, hypothecate or otherwise transfer such
securities during the Lock-up Period without the prior written consent of the
Underwriter.
Absence of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Stock Price. Prior to this Offering, there has been no
public market for the Units, the Common Stock or the Redeemable Warrants, and
there can be no assurance that any active public market for any such securities
will develop or be sustained after the Offering. The initial public offering
price of the Units has been determined by negotiations among the Company and the
Underwriter and may not necessarily bear any relationship to the assets, book
value, earnings or net worth of the Company or any other recognized criteria and
should not be considered to be an indication of the actual value of the Company.
Accordingly, the initial public offering price may bear no relationship to the
trading prices of the securities offered hereby after the consummation of this
Offering, and there can be no assurance that these prices will not decline below
the initial public offering price. See "Underwriting." The trading prices of the
Units, the Common Stock and the Redeemable Warrants could be subject to wide
fluctuations in response to actual or anticipated quarterly operating results of
the Company, announcements of the Company or its competitors and general market
conditions, as well as other events or factors. In addition, the stock markets
have experienced extreme price and volume trading volatility in recent years.
This volatility has had a substantial effect on the market price of many small
capitalization companies, and has often been unrelated to the operating
performance of those companies. This volatility may adversely affect the market
price of the Units, Common Stock and Redeemable Warrants.
Dilution. Purchasers of the Units at the initial public offering price
will experience immediate and substantial dilution in the net tangible book
value per share of Common Stock of $2.56 or 64% ($2.41 or 60.3%, if the
Over-Allotment Option is exercised in full). See "Dilution."
Underwriter's Lack of Experience; Underwriter's Potential Influence on
the Market. Although the Underwriter commenced operations in May 1994, it does
not have extensive experience as an underwriter of public offerings of
securities. In addition, the Underwriter is a relatively small firm, and no
assurance can be given that the Underwriter will be able to participate as a
market maker for the Units, the Common Stock or the Redeemable Warrants or that
any other broker-dealer will make a market in the Units, the Common Stock or the
Redeemable Warrants. It is anticipated that a significant portion of the Units
offered hereby will be sold to customers of the Underwriter. Although the
Underwriter has advised the Company that it intends to make a market in the
Units, the Common Stock and the Redeemable Warrants, it will have no legal
obligation to do so. The prices and the liquidity of the Units, the Common Stock
and the Redeemable Warrants may be significantly affected by the degree, if any,
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<PAGE>
of the Underwriter's participation in the market. No assurance can be given that
any market activities of the Underwriter, if commenced, will be continued. See
"Underwriting."
Continued Quotation on the Nasdaq SmallCap Market; Potential Penny
Stock Classification. The Company has applied to have the Units, the Common
Stock and the Redeemable Warrants approved for quotation on the Nasdaq SmallCap
Market and believes it will meet the initial listing requirements upon
consummation of this Offering. However, there can be no assurance that a trading
market for these securities will develop, or if developed, that it will be
maintained. In addition, no assurance can be given that the Company will be able
to satisfy the criteria for continued quotation on the Nasdaq SmallCap Market
following this Offering. Failure to meet the maintenance criteria in the future
may result in the Units, the Common Stock and the Redeemable Warrants not being
eligible for quotation.
If the Company were removed from the Nasdaq SmallCap Market, trading,
if any, in the Units, the Common Stock or the Redeemable Warrants would
thereafter have to be conducted in the over-the-counter market in the so-called
"pink sheets" or, if then available, Nasdaq's OTC Bulletin Board. As a result,
holders of the Units, the Common Stock and the Redeemable Warrants would find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, such securities.
In addition, if the Units, the Common Stock or the Redeemable Warrants
are delisted from trading on Nasdaq and the trading price of the Common Stock is
less than $5.00 per share, trading in the Common Stock would also be subject to
the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker-dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the Securities and Exchange Commission (the
"Commission"), any equity security not traded on an exchange or quoted on Nasdaq
that has a market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith. Such requirements could severely limit the market liquidity of Units,
Common Stock and Redeemable Warrants and the ability of purchasers in the
Offering to sell their securities in the secondary market. There can be no
assurance that the Units, Common Stock and Redeemable Warrants will not be
delisted or treated as a penny stock.
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. The Redeemable Warrants issued in the Offering are not
exercisable unless, at the time of exercise, the Company has distributed a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Redeemable Warrants and such shares have been
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<PAGE>
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the holder who wishes to exercise such Redeemable
Warrants. In addition, in the event any Redeemable Warrants are exercised at any
time after nine months from the date of this Prospectus, the Company will be
required to file a post-effective amendment and deliver a current prospectus
before the Redeemable Warrants may be exercised. Although the Company will use
its best efforts to have all such shares so registered or qualified on or before
the exercise date and to maintain a current prospectus relating thereto until
the expiration of such Redeemable Warrants, there is no assurance that it will
be able to do so. Holders of Redeemable Warrants who exercise such Redeemable
Warrants at a time the Company does not have a current prospectus may receive
unregistered and, therefore, restricted shares of Common Stock. Although the
Units will not knowingly be sold to purchasers in jurisdictions in which the
Units are not registered or otherwise qualified for sale, purchasers may buy
Redeemable Warrants in the after market or may move to jurisdictions in which
the shares underlying the Redeemable Warrants are not registered or qualified
during the period that the Redeemable Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Redeemable Warrants unless and until the shares and Redeemable
Warrants could be qualified for sale in the jurisdiction in which such
purchasers reside, or an exemption from such qualification exists in such
jurisdiction, and holders of Redeemable Warrants would have no choice but to
attempt to sell the Redeemable Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised.
Redemption of Redeemable Warrants. Commencing ________________, 1998
[12 months from the date of this Prospectus], the Company shall have the right
to redeem all, but not less than all, of the Redeemable Warrants, at a price of
$.05 per Redeemable Warrant on 30 days' prior written notice, provided that the
Company shall have obtained the consent of the Underwriter, and the average
closing bid price of the Common Stock equals or exceeds 150% of the then
exercise price per share, subject to adjustment, for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event the Company exercises the
right to redeem the Redeemable Warrants, such Redeemable Warrants will be
exercisable until the close of business on the date fixed for redemption in such
notice. If any Redeemable Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be entitled only to
the redemption price.
Reduced Probability of Change of Control. The Company's Articles of
Incorporation contain provisions enabling the Board of Directors to issue
Preferred Stock in one or more series, with such rights, preferences, privileges
and restrictions as the Board of Directors may determine without any further
vote or action by the stockholders. See "Description of Capital Stock--Preferred
Stock." In addition, ss.415-172 of the Hawaii Revised Statutes requires
stockholder approval prior to the consummation of a "control share acquisition"
resulting in beneficial ownership by an acquiring person of in excess of 10% of
the voting power of a public corporation incorporated in Hawaii with at least
100 stockholders and its principal place of business or substantial assets
located in Hawaii. These provisions could reduce the probability
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<PAGE>
of any change of control or acquisition of the Company. While such provisions
are intended to enable the Board of Directors to maximize stockholder value,
they may have the effect of discouraging takeovers which could be in the best
interest of certain stockholders. There is no assurance that such provisions
will not have an adverse effect on the market value of the Company's stock in
the future.
Forward-Looking Information and Associated Risk. This Prospectus
contains various forward-looking statements, including statements regarding,
among other things, (i) the Company's growth strategy, (ii) anticipated trends
in the Company's business, and (iii) the Company's ability to enter into
contracts with distributors and strategic partners. These statements are based
upon management's current beliefs as well as assumptions made by management
based upon information currently available to it. These statements are subject
to various risks and uncertainties, including those described above, as well as
potential changes in economic or regulatory conditions generally which are
largely beyond the Company's control. Should one or more of these risks
materialize or changes occur, or should management's assumptions prove
incorrect, the Company's actual results may vary materially from those
anticipated or projected.
THE COMPANY
The Company was incorporated in Hawaii in September 1994. The principal
executive offices of the Company are located at 248 Mokauea Street, Honolulu,
Hawaii 96819; the Company's telephone number is (808) 832-4550. See
"Business--Facilities." The Company has no subsidiaries and has no ownership
interest in any other company or business.
Recent Bridge Financing. On October 10, 1996, the Company consummated a
bridge financing (the "Bridge Financing") pursuant to which it issued an
aggregate of: (i) $1,500,000 in principal amount of promissory notes (the
"Bridge Notes"), which bear interest at the rate of 10% per annum and are due
and payable upon the earlier of: (a) the closing of the sale of securities or
other financing of the Company from which the Company receives gross proceeds of
at least $2,000,000, or (b) October 10, 1997, and (ii) 750,000 warrants (the
"Bridge Warrants"), each Bridge Warrant entitling the holder to purchase one
share of Common Stock at an initial exercise price of $1.50 per share (subject
to adjustment upon the occurrence of certain events) during the three-year
period commencing October 10, 1997. The net proceeds of approximately $1,122,000
from the Bridge Financing (net of commissions and expenses of such offering
payable by the Company) were used to: (i) repay bank and other indebtedness to
an affiliate in the aggregate amount of approximately $362,000; (ii) create a
reserve in the amount of $250,000 for the payment of fees and expenses of this
Offering; and (iii) for working capital and general corporate purposes. Upon the
consummation of this Offering, each Bridge Warrant will automatically, without
any action by the holder thereof, be converted into a Redeemable Warrant (a
"Selling Securityholders Warrant") having terms identical to those of the
Redeemable Warrants contained in the Units offered hereby. The Selling
Securityholders Warrants and the Selling Securityholders Shares issuable upon
exercise thereof are being
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<PAGE>
registered under the Securities Act pursuant to the Registration Statement of
which this Prospectus is a part (the "Concurrent Offering"). The Company intends
to use a portion of the net proceeds of this Offering to repay the entire
principal amount of, and accrued interest on, the Bridge Notes. See "Use of
Proceeds."
Recapitalization. In August 1996, the Company effected a
recapitalization (the "Recapitalization") without a formal reorganization. As
part of the Recapitalization, the Board of Directors approved a
1,111.428-for-one Common Stock split and negotiated a conversion of all then
outstanding shares of the Company's Convertible Preferred Stock into an
aggregate of 389,000 shares of Common Stock, effective as of the closing of the
Bridge Financing. Upon such conversion, the Board of Directors declared a
dividend on the Convertible Preferred Stock in an amount equal to all accrued
but unpaid dividends thereon from the date of issuance to the date of
conversion. Such dividend, in the aggregate amount of $38,663, was paid in the
form of a promissory note, bearing interest at an annual rate of 8%, due and
payable in full upon the satisfaction of certain financial conditions by the
Company. Such conditions will be met upon consummation of this Offering, and
accordingly the Company will be obligated to pay such promissory notes in full
out of the proceeds of this Offering. See "Use of Proceeds."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered by
the Company hereby, after deduction of estimated underwriting discounts, the
Underwriter's non-accountable expense allowance and other estimated expenses of
the Offering payable by the Company, are expected to aggregate $6,650,000
($7,694,000 if the Over-Allotment Option is exercised in full), assuming an
initial public offering price of $4.00 per Unit.
The Company intends to use the net proceeds as follows: (i)
approximately $1,550,000 to repay the Bridge Notes (plus all accrued interest)
in full; (ii) approximately $532,000 to repay all of the Company's outstanding
indebtedness (plus accrued interest) to stockholders or their affiliates,
including an aggregate of approximately $40,000 of indebtedness (including
accrued interest) declared as a dividend in connection with the conversion of
the Company's previously outstanding Convertible Preferred Stock; (iii)
approximately $110,000 to repay all of the Company's outstanding indebtedness
(plus accrued interest) to an unaffiliated investor; (iv) approximately $115,000
to pay deferred compensation and consulting fees; (v) up to $1,500,000 for
improvements to plant and equipment; (vi) up to $2,000,000 to further develop
and enhance the Company's sales and marketing programs; and (vii) the balance
($843,000) for working capital and general corporate purposes. The following the
table summarizes the Company's estimated use of the net proceeds:
Approximate Approximate
Application of Proceeds Amount Percentage
----------------------- ----------- -----------
Repayment of Bridge Note, plus $1,550,000 23.3%
accrued interest
Repayment of indebtedness to stockholders 532,000 8.0
and their affiliates, plus accrued interest
Repayment of unaffiliated investor 110,000 1.7
loan, plus accrued interest
Payment of deferred compensation 115,000 1.7
and consulting fees
Improvements to plant and equipment 1,500,000 22.6
Sales and marketing 2,000,000 30.0
Working capital and 843,000 12.7
general corporate purposes ---------- -----
Total $6,650,000 100%
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<PAGE>
In the event the Underwriter exercises the Over-Allotment Option in
full, the Company will receive an additional $1,044,000 of net proceeds, after
deduction of estimated underwriting discounts and the Underwriter's
non-accountable expense allowance, and will utilize such additional proceeds for
additional sales and marketing expenses and for general corporate purposes.
The Bridge Notes bear interest at the rate of 10% per annum and mature
on the earlier of: (i) the closing of a sale of securities or other financing of
the Company from which the Company receives gross proceeds of at least
$2,000,000 or (ii) October 10, 1997, one year from the date of issuance. The
proceeds of the Bridge Notes were used (i) to repay bank and other indebtedness
to an affiliate in the aggregate amount of approximately $362,000; (ii) to pay
fees and expenses of this Offering; and (iii) for working capital and other
general corporate purposes. See "The Company--Recent Bridge Financing."
Of the indebtedness owed to stockholders or their affiliates, (i)
$50,000 owed to an affiliate bears interest at the rate of 12% per annum and is
due upon consummation of this Offering; (ii) an aggregate of $407,715, owing to
three stockholders, bears interest at the rate of 12% per annum and is due in
April 1997 or, if earlier, upon consummation of this Offering; and (iii) an
aggregate of $38,663 (plus accrued interest), owing to holders of the Company's
previously outstanding Convertible Preferred Stock, bears interest at the rate
of 8% per annum and is due upon the satisfaction by the Company of certain
financial conditions which will be satisfied upon consummation of this Offering.
An additional $100,000 borrowed from an unaffiliated investor bears interest at
the rate of 12% per annum and is due in May 1997 or, if earlier, upon the
consummation of this Offering.
The Company anticipates that the proceeds from the Offering, together
with projected cash flow from operations, will be sufficient to fund its
operations for at least 12 months from the date of this Prospectus. Thereafter,
the Company may need to raise additional funds. There can be no assurance that
additional financing will be available or if available will be on favorable
terms. If the Company is unable to obtain such additional financing, the
Company's ability to maintain its current level of operations will be materially
and adversely affected. See "Risk Factors--Additional Capital Requirements;
Uncertainty of Additional Funding."
Pending application of the proceeds of the Offering, the Company
intends to invest the net proceeds in certificates of deposit, money market
accounts, United States government obligations or other short-term interest
bearing obligations of investment grade.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock and does
not currently intend to pay dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all its earnings to finance the
development and expansion of its business. It is also likely that the Company
will be required to agree to restrictions on the payment of dividends in
connection with future financings, if any. See "Risk Factors--No Dividends."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
pro forma basis as of September 30, 1996, giving retroactive effect to the
Bridge Financing and the Recapitalization (see "The Company--
Recapitalization"), and pro forma as adjusted to reflect the sale of the Units
offered hereby and the intended application of the net proceeds therefrom
(assuming an initial public offering price of $4.00 per Unit and after deducting
the estimated underwriting discounts and Offering expenses payable by the
Company). This table should be read in conjunction with the Company's financial
statements attached hereto. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
Actual Pro Forma1(1) Pro Forma, As Adjusted
------ ------------- ----------------------
<S> <C> <C> <C>
Loans from related parties....................... $ 507,715 $457,715 $ --
Unsecured advances from related parties ......... 90,272 -- --
Capital lease obligations........................ 140,492 140,492 140,492
Private investor loan............................ 100,000 100,000 --
Bank Loan ....................................... 300,000 -- --
Bridge Notes..................................... -- 1,312,500(2) --
Stockholders' equity
Preferred Stock, $1.00 par value,
5,000,000 shares authorized,
no shares outstanding .................... -- -- --
Common Stock, no par value,
20,000,000 shares authorized,
1,599,212 shares outstanding, actual,
3,599,212 shares, as adjusted(3)............ 442,293 629,793 7,279,793
Accumulated deficit......................... (1,544,671) (1,544,671) (2,109,767)(4)
---------- ---------- ----------
Total stockholders' equity (deficit)... (1,102,378) (914,878) 5,170,026
---------- ---------- ----------
Total capitalization............ $ 36,101 $1,095,829 $5,310,518
========= ========== ==========
</TABLE>
- --------
1/ Reflects the retroactive application of Bridge Loan proceeds to
retire certain liabilities outstanding as of September 30, 1996 as follows:
Bank loan $300,000
Related party loan 50,000
Unsecured advances from related parties 90,272
---------
Total $440,272
=========
2/ Includes $187,500 allocated to the value of the Bridge Warrants.
3/ Excludes (i) warrants to purchase an aggregate of 24,351 shares of Common
Stock at an exercise price of $.000009 per share, (ii) outstanding options to
purchase 200,000 shares of Common Stock at an exercise price of $4.00 per share
and (iii) 800,000 shares of Common Stock issuable pursuant to options which may
be granted under the Company's stock option plan. Includes $187,500 allocated to
the value of the Bridge Warrants.
4/ Includes non-recurring interest expense of $565,096 for the unamortized
portion of the original issue discount ($187,500) and loan costs ($377,596)
relating to the Bridge Notes.
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<PAGE>
DILUTION
"Net tangible book value per share" represents the amount of total tangible
assets of the Company reduced by the amount of total liabilities and divided by
the number of shares of Common Stock outstanding. "Dilution" represents the
difference between the price per share to be paid by new investors for the
shares of Common Stock included in the Units offered hereby, after giving effect
to the Offering, and the pro forma net tangible book value per share as of
September 30, 1996. At September 30, 1996, giving retroactive effect to the
Bridge Financing, the pro forma net tangible book value of the Common Stock was
$(914,878) in the aggregate, or $(0.57) per share of Common Stock. After giving
effect to the sale of the shares of Common Stock included in the Units offered
hereby (at an assumed initial public offering price of $4.00 per share,
resulting in estimated net proceeds of $6,650,000, after deducting estimated
underwriting discounts and Offering expenses payable by the Company and assuming
no value is attributed to the Redeemable Warrants included in the Units), the
pro forma net tangible book value of the Common Stock, as of September 30, 1996,
would have been $5,170,026 in the aggregate, or $1.44 per share. This represents
an immediate increase in net tangible book value of $2.01 per share of Common
Stock to existing stockholders and an immediate dilution per share of $2.56, or
64%, to new investors in the Offering.
The following table illustrates the dilution per share as described above:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock $4.00
Pro forma net tangible book value per share before Offering $(0.57)
Increase attributable to new investors 2.01
------
Pro forma net tangible book value per share after the Offering 1.44
----
Dilution per share to new investors $2.56
=====
</TABLE>
Based on the foregoing assumptions, the following table set forth, as of
completion of the Offering, the number of shares purchased from the Company, the
total cash consideration paid to the Company and the average price per share
paid by the existing stockholders and by new investors purchasing shares of
Common Stock included in the Units in the Offering (at an assumed initial public
offering price of $4.00 per share and assuming no value is attributed to the
Redeemable Warrants):
<TABLE>
<CAPTION>
Total Average Price
Shares Purchased Consideration Per Share
------------------------ ------------------------ ----------------------
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing stockholders 1,599,212 44.43% $442,293 5.24% $0.28
New Investors 2,000,000 55.57% $8,000,000 94.76% $4.00
--------- ------ ---------- ------
TOTAL 3,599,212 100% $8,442,293 100%
========= === ========== ===
</TABLE>
- 23 -
<PAGE>
The foregoing assumes no exercise of the Over-Allotment Option. If the
Over-Allotment Option is exercised in full, the pro forma net tangible book
value at September 30, 1996, after giving effect to the Offering (assuming no
value is attributed to the Redeemable Warrants included in the Units), would be
approximately $6,214,026 or $1.59 per share, and the dilution per share to new
investors would be approximately $2.41 or 60.3%.
The foregoing also assumes no exercise of any outstanding stock options or
warrants. As of September 30, 1996, there was an outstanding warrant to purchase
an aggregate of 24,351 shares of Common Stock at an exercise price of $.000009
per share. Subsequent to September 30, 1996, the Company granted additional
options to purchase an aggregate of 200,000 shares of Common Stock at an average
exercise price of $4.00 per share, none of which are currently exercisable. The
Company has a total of 1,000,000 shares of Common Stock reserved for issuance
upon the exercise of outstanding stock options and stock options which may be
granted from time to time pursuant to its stock option plan. See
"Management--Executive Compensation--Stock Option Plan." To the extent that any
options or warrants are exercised at a price per share less than the initial
public offering price, there will be further dilution to new investors.
- 24 -
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
the period from inception (September 13, 1994) through December 31, 1995 (the
"Year-End Data") and for the nine month periods ended September 30, 1995 and
1996 (the "Nine Month Data"). The Year-End Data has been derived from the
audited financial statements of the Company appearing elsewhere herein, which
have been audited by Arthur Andersen LLP. The Nine Month Data has been derived
from the unaudited financial statements of the Company. In the opinion of
management, the Nine Month Data has been prepared in accordance with generally
accepted accounting principles on a basis consistent with the Year-End Data and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position and
results of operations set forth therein. The Nine Month Data may not be
indicative of the results expected for a full year or any other period.
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and notes thereto and other financial and
statistical data appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Period From
Inception to Year Ended Nine Months Ended
December 31, December 31, September 30,
------------ ------------ -----------------------
1994 1995 1995 1996
---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C>
Net sales $ -- $ 588,920 $ 534,611 $ 748,600
Cost of sales -- 620,593 531,335 698,710
Gross margin -- (31,673) 3,276 49,890
Sales & marketing 10,565 220,651 117,241 137,742
General & administrative 69,862 437,289 294,138 533,464
------ ------- ------- -------
Total operating expenses 80,427 657,940 411,379 671,206
Interest expense, net -- 51,261 36,380 65,498
------ ------- ------- -------
Net loss $(80,427) $(740,874) $(444,483) $(686,814)
======== ========= ========= =========
Net loss per share $ (0.09) $ (0.62) $ (0.42) $ (0.43)
======== ========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding 861,357 1,202,540 1,070,306 1,599,212
Balance Sheet Data:
December 31, 1995 September 30, 1996
----------------- ------------------
Working capital deficit $ (721,336) $ (1,603,641)
Total assets 703,272 846,001
Total liabilities 1,104,836 1,948,379
Stockholders' deficit (401,564) (1,102,378)
</TABLE>
- 25 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company was formed in September 1994. For the balance of its first
fiscal year (ended December 31, 1994), the Company was primarily engaged in
activities related to the start-up of its operations, including raising its
initial capital, retrofitting and equipping its bottling facility and
establishing relationships with suppliers and distributors. The Company did not
begin commercial operations until February 1995, when it began selling product
on a limited basis. Accordingly, the Company does not believe that its results
of operations for the period from inception through December 31, 1994, are
useful as a basis for evaluating its current or future results or that
comparisons to its results of operations for the corresponding period of fiscal
1995 would be meaningful.
The Company's objective is to become a leading provider of premium quality
bottled water on a national and international basis. To date, however, the
Company has sold its product on only a limited basis, primarily in the local
Hawaiian market, which accounted for approximately 72% of the Company's net
sales through September 30, 1996. Accordingly, the Company's results of
operations through September 30, 1996 are not indicative of those that could be
achieved if the Company were able to expand its sales and distribution on a
national or international basis. There can be no assurance that sales on this
basis will ever be achieved. See "Risk Factors--Limited History of Operations"
and "Business--Distribution."
Through September 30, 1996, the Company had an accumulated deficit of
$1,544,671, a loss of $686,814 and negative cash flow from operations of
$425,497 for the nine months then ended. The Company expects to continue to
generate losses until such time as it achieves higher sales levels. There can be
no assurance that such higher sales levels will be achieved or, if achieved, as
to the timing thereof.
The following accounting policies are applicable to the Company's results:
Revenue Recognition. The Company recognizes revenue on the accrual method
of accounting when title to product transfers to the buyer (upon shipment). In
1996, the Company began granting early payment discounts to certain large
Hawaiian customers in order to encourage prompt payment. Such customers
currently account for a majority of the Company's sales. Discounts are recorded
when the customer makes payment within the discount period. The Company's policy
is to provide a reserve for estimated uncollectible accounts receivable, if any.
Reserve for Returns. The Company grants customers the right to return goods
which are defective or otherwise unsuitable for sale. The Company replaces
returned goods or issues a
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<PAGE>
refund to the customer. The Company's policy is to provide a reserve for
estimated returns and related disposal costs.
Recent Financial Accounting Standards Board Pronouncements. In 1995, the
Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement requires that long-lived assets to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. This statement is
effective for fiscal years beginning after December 15, 1995. The Company
adopted the new standard in 1996. Adoption of the new standard did not have a
material impact on the Company's financial statements.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement established financial
accounting and report standards for stock-based compensation plans, including
all arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. This statement also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably determinable. This
statement is effective for fiscal years beginning after December 15, 1995. The
Company adopted the new standard in 1996.
Results of Operations
Net Sales. Net sales increased to approximately $749,000 for the nine
months ended September 30, 1996 (the "1996 Period") from approximately $535,000
for the nine months ended September 30, 1995 (the "1995 Period"). Since the
Company began commercial operations in February 1995, the Company's results for
the 1995 Period are based upon less than eight full months of operations versus
nine months in the 1996 Period. The increase in net revenues in the 1996 Period
was due primarily to unit sales growth from approximately 64,000 cases in the
1995 Period to approximately 98,000 cases in the 1996 Period. Sales of
approximately $83,000 in the 1995 Period were reversed in the fourth quarter of
1995 due to product returns in Japan. The 1996 Period includes the resale (at
cost) of 6,900 cases of such returned product. See "Business--Distribution."
Sales in the Hawaiian market accounted for approximately 72% of all sales in the
1996 Period compared to approximately 67% in the 1995 Period. Beginning in the
second quarter of 1995, the Company began export sales to Asia and the Pacific
islands. Such sales accounted for approximately 15% of sales in the 1996 Period.
The average sales price per case decreased approximately 9% in the 1996 Period
primarily due to a change in the Company's shipping terms with its major
Hawaiian distributors and the granting of early payment discounts to credit
customers. Under the new shipping arrangement, the distributor assumed
responsibility for
- 27 -
<PAGE>
the cost of shipping the finished product from the Company's production
facility.
Expenses. The Company's cost of sales increased to approximately $699,000
in the 1996 Period from approximately $531,000 in the 1995 Period, primarily due
to unit sales growth. The Company reduced its unit cost in the 1996 Period by
switching from a California bottle supplier to a lower cost Hawaii supplier. Due
to higher volume bottle purchases in the 1996 Period, the Company was able to
receive certain quantity discounts and thereby further reduce unit costs. As a
result, gross margin improved to approximately 7% in the 1996 Period from
approximately 1% in the 1995 Period. In December 1995, the Company entered into
a Blow Molding Agreement with a California bottle supplier, pursuant to which
such supplier has agreed to manufacture bottles for the Company on site, using
equipment owned by the supplier but installed at the Company's bottling
facility. This equipment, which has a maximum capacity of approximately
18,000,000 bottles annually, became fully operational in July 1996. The Company
expects to further reduce its bottling cost through this arrangement thereby
improving gross margins as well as to improve quality control and inventory
scheduling.
Selling and marketing expenses increased to approximately $138,000 in the
1996 Period from approximately $117,000 in the 1995 Period, primarily as a
result an increase in internal promotional activities, including product
giveaways, and the hiring of certain advertising consultants. General and
administrative expenses increased to approximately $533,000 in the 1996 Period
from approximately $294,000 in the 1995 Period. The majority of this increase
resulted from increased compensation to the Company's President, the accrual of
fees owed to a consultant and the cost of the Company's annual audit. See
"Management--Executive Compensation--Consulting Agreement."
Interest Expense, Net. Interest expense, net increased to approximately
$65,000 in the 1996 Period from approximately $36,000 in the 1995 Period due to
reduced interest income in the 1996 Period, increased borrowings under the
Company's bank credit line in the 1996 Period and the incurrence of
approximately $408,000 in loans from related parties in addition to a $100,000
loan from a private investor in the 1996 Period.
Net Loss. Due to the foregoing, the Company incurred a net loss of $686,814
in the 1996 Period compared to a net loss of $444,483 in the 1995 Period.
Liquidity and Capital Resources
Until the completion of the Bridge Financing, the Company was substantially
dependent upon equity investments and loans as well as personal guarantees from
its affiliates in order to meet its capital requirements. The Company was
originally capitalized in September 1994, through the issuance of an aggregate
of $51,000 in Common Stock and $133,334 in Convertible Preferred Stock (the
"Preferred Stock"). In 1995, the Company issued an aggregate of $157,959 in
additional Common Stock and $100,000 in additional Preferred Stock. The Company
also borrowed $100,000 from an affiliated company in May 1995. This loan bears
interest at an
- 28 -
<PAGE>
annual rate of 12% and was originally due in June 1995. In October 1996,
the Company repaid $50,000 in principal, plus all accrued interest
(approximately $12,000) out of the proceeds of the Bridge Financing and agreed
to repay the outstanding balance of this loan, plus all accrued interest, out of
the proceeds of this Offering. The Company has incurred additional borrowings
from its stockholders as follows: In March and April 1996, the Company borrowed
an aggregate of $289,720 from two of its stockholders. In July and August 1996,
the Company borrowed an additional $68,269 from these same stockholders and
$49,726 from a third stockholder. All of these loans bear interest at an annual
rate of 12% and are due in April 1997 or, if earlier, upon consummation of this
Offering. Three stockholders also made additional unsecured, non-interest
bearing advances in the aggregate amount of $100,272 in July, August and
September 1996. See "Certain Transactions." In addition, in May 1996, the
Company obtained a $100,000 subordinated, unsecured loan from an unrelated
private investor. This loan bears interest at an annual rate of 12% and is due
in May 1997 or, if earlier, upon consummation of this Offering. In connection
with such loan, the Company issued to the private investor a warrant to purchase
24,351 shares of Common Stock at an exercise price of $.000009 per share. Upon
completion of this Offering, all outstanding borrowings of the Company from its
stockholders or their affiliates and other private investors will have been
repaid in full. There can be no assurance that the Company's stockholders or
their affiliates or other private investors will make any additional equity
investments in or loans to the Company or agree to personally guarantee any
additional debt of the Company. See "Risk Factors--Additional Capital
Requirements; Uncertainty of Additional Funding."
In March 1995, the Company established a $300,000 credit line with First
Hawaiian Bank ("FHB"), Lihue branch. Borrowings under this line of credit bore
interest at a floating annual rate equal to the rate announced by FHB from time
to time as its prime rate, plus 2%. This line of credit was secured by a
security interest in all of the Company's equipment, accounts receivable,
inventory and general intangibles and is also personally guaranteed by certain
directors and an affiliate of the Company. Outstanding borrowings under this
line increased to $300,000 in May 1995 and remained at the maximum level until
the line was repaid in full out of the proceeds of the Bridge Financing. This
line of credit expired on March 31, 1996 and was not renewed. The Company
currently has no bank credit facility but anticipates establishing such a
facility upon completion of this Offering.
The Company made capital expenditures of approximately $116,000 in 1995
compared to approximately $5,000 in 1996. Capital expenditures in 1995 consisted
primarily of leasehold improvements to the Company's production facility to
prepare the facility for use. The Company has financed certain additional
equipment purchases through a capital lease agreement entered into in March 1995
with First Hawaiian Leasing, Inc., Honolulu, Hawaii. This agreement has a term
of five years and provides for up to $200,000 in equipment purchases. The
depreciated cost of equipment purchased under this agreement was approximately
$146,330 at September 30, 1996. The lease liability was approximately $116,000,
net of current portion, at September 30, 1996. The Company's obligations under
this lease agreement are personally guaranteed by certain directors and an
affiliate of the Company.
- 29 -
<PAGE>
The Company's sources of capital have been sufficient to sustain the
Company's operations on a limited basis but have not been sufficient to enable
the Company to expand in accordance with its business plan. The Company will
require substantial additional capital in order to meet its existing contractual
obligations, including its obligation pursuant to a Blow Molding Agreement and
its facility lease. The Blow Molding Agreement requires the Company to make at
least $750,000 in bottle purchases annually during the three year term of the
agreement. In order to obtain the best price available, the Company placed its
initial order for 10,000,000 bottles, calling for aggregate payments of
$1,825,000 during the first year of the contract. The Company's facility lease
requires the Company to make monthly lease payments of at least $5,000
throughout the 50 year term of the lease. See "Business--Bottling Operations"
and "--Facilities."
The Company consummated the Bridge Financing on October 10, 1996. See "The
Company--Recent Bridge Financing." The Company has been substantially dependent
upon the proceeds of the Bridge Financing to meet its capital requirements since
that time. The Company will repay the Bridge Notes, plus all accrued interest
thereon, in full out of the proceeds of this Offering.
The Company intends to use the net proceeds as follows: (i) approximately
$1,550,000 to repay the Bridge Notes (plus all accrued interest) in full; (ii)
approximately $532,000 to repay all of the Company's outstanding indebtedness to
stockholders or their affiliates (plus accrued interest), including an aggregate
of approximately $40,000 of indebtedness (including accrued interest) declared
as a dividend in connection with the conversion of the Company's previously
outstanding Convertible Preferred Stock; (iii) approximately $110,000 to repay
all of the Company's outstanding indebtedness (plus accrued interest) to an
unaffiliated investor; (iv) approximately $115,000 to pay deferred compensation
and consulting fees; (v) up to $1,500,000 for improvements to plant and
equipment; (vi) up to $2,000,000 to further develop and enhance the Company's
sales and marketing programs and (vii) the balance ($843,000) for working
capital and general corporate purposes.
The Company anticipates that the proceeds from the Offering, together with
projected cash flow from operation, will be sufficient to fund its operations
for at least 12 months from the date of this Prospectus. Thereafter, the Company
may need to raise additional funds. There can be no assurance that additional
financing will be available or if available will be on favorable terms. If the
Company is unable to obtain such additional financing, the Company's ability to
maintain its current level of operations will be materially and adversely
affected. See "Risk Factors -- Future Capital Needs; Uncertainty of Additional
Funding."
Net operating loss carryforwards available to offset future taxable income
were approximately $1,473,000 as of September 30, 1996. Use of these net
operating losses in future years will be limited pursuant to ss.382 of
the Internal Revenue Code because of the ownership change (as defined)
resulting from the proposed IPO.
- 30 -
<PAGE>
Seasonality
The Company believes that its business is subject to seasonal variations.
For obvious reasons, demand for bottled water in any given market tends to be
higher during the summer months than during the winter. However, the Company
expects these seasonal effects to be moderated by concurrent sales into a
variety of different markets worldwide, all of which may not have the same
summer season. Moreover, several of the Company's target markets, such as
California and the Middle East, have hot or mild temperatures throughout the
year.
- 31 -
<PAGE>
BUSINESS
General
The Company bottles, markets and distributes "natural" water under the name
"Hawaiian SpringsTM." The Company draws its water from a well located at the
base of the Mauna Loa volcano in Kea'au on the Big Island of Hawaii ("Source
Kea'au"). The water is "bottled at the source" in PET plastic bottles, which are
manufactured at the Company's bottling facility. This on-site bottle
manufacturing operation enables the Company to reduce its packaging costs while
at the same time improving its quality control, inventory management and
delivery scheduling. The Company markets its water on the basis of superior
quality and taste and on the worldwide reputation of Hawaii.
The Company has met all 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.
The Company began commercial operations in February 1995, selling initially
in the Hawaiian market exclusively. The Company has since expanded its
distribution on a limited basis into the West Coast and Southeastern portion of
the United States, Guam and the Middle East.
Most of the Company's product is sold through retail channels such as
convenience stores and supermarkets, although the Company also sells through
food service outlets such as restaurants, bars, airlines, hotels, country clubs
and military installations. The Company distributes its product primarily
through distributors, but also utilizes brokers and in California sells directly
to specialty retail chains.
The Company's objective is to become a leading provider of premium quality
bottled water on a national and international basis. The Company plans to
achieve this objective by expanding its presence in its current markets,
entering new geographic markets and establishing distributor relationships as
well as strategic distribution alliances with other national or international
beverage companies in order to take advantage of their established distribution
networks.
The Bottled Water Market
Since the mid-1970's the bottled water market has experienced substantial
growth in the United States and most of the industrialized world. Concerns about
municipal water quality combined with increased health awareness and the
availability of light weight convenient packaging, such as plastic bottles, have
made bottled water consumption prevalent among the
- 32 -
<PAGE>
more affluent, educated population in the United States and other industrialized
nations. Currently, bottled water is one of the fastest growing segments of the
beverage industry worldwide. Set forth below is summary data concerning the
demand for bottled water in those territories which the Company considers its
primary target markets.
Hawaii. Based upon internal marketing data provided by the Company's local
distributor, the Company estimates the total bottled water market in Hawaii at
approximately 3.2 million gallons (1,000,000 cases) per year. The Company
believes that, as with the rest of the United States, bottled water sales in
Hawaii are growing at a faster rate than the beverage market generally as
bottled water gains in popularity relative to other beverages.
U.S. Mainland. The primary market for bottled water in the Continental U.S.
is the West Coast, particularly California. California is by far the largest
single state market, accounting for approximately 29.3% of total domestic
bottled water consumption in 1995. The bottled water market in the United States
as a whole has grown from about 300 million gallons in 1976 to approximately
2.88 billion gallons in 1995, with per capita consumption increasing by 10.4% in
1994 and by 11.0% in 1995 (the first double digit increases ever). The largest
segment of the U.S. bottled water market is the non-sparkling water segment,
which accounted for approximately 2.43 billion gallons or approximately 84.4% of
the total 2.88 billion gallons sold in 1995, up from approximately 2.21 billion
gallons in 1994. The total U.S. non-sparkling bottled water market is projected
to grow at an average annual growth rate of approximately 7.1% through the year
2000 to a total of approximately 3.43 billion gallons. The fastest growing
segment of the non-sparkling bottled water market in the United States is the
retail, premium (bottles of two liters or less are considered premium) PET
market, the market in which the Company currently competes. This segment, which
grew from a total of 335.8 million gallons in 1994 to 426.8 million gallons in
1995 (a 27.1% increase), has grown at double digit rates annually since 1992.
This segment is projected to continue growing at an average annual growth rate
of approximately 9.4% through the year 2000.
Asia. The Asian market consists primarily of Japan, Korea, Indonesia,
Taiwan, the Philippines, Guam, Hong Kong, Singapore, Malaysia and the Peoples
Republic of China. Of these, the largest single market is Japan, with total 1995
consumption of approximately 143 million gallons. The more recent growth rate in
the consumption of bottled water in Japan has been substantial, more than
tripling between 1990 and 1994. The recent trend in the Japanese market has been
toward increased demand for imported water. The volume of imported water
increased fifteenfold between 1988 and 1994, and by 1994 constituted over 26% of
the total Japanese bottled water market. In 1993, less than 1% of imported
bottled water sold in Japan was imported from the United States; but in 1994
this percentage grew to over 9%.
A similar pattern is expected to develop in other Asian countries. Korea,
for example, which in 1995 eliminated prohibitions on the sale of imported
bottled water, is seen as a potential high growth market. China, with a
population of over 1.3 billion, does not yet constitute a major bottled water
market, but with increasing affluence and consumer sophistication, the Company
expects China to become a significant market.
- 33 -
<PAGE>
The Water Source
The Company draws its water from a well at the base of Mauna Loa volcano in
Kea'au on the Big Island of Hawaii. The southeastern slopes of Mauna Loa, above
Kea'au, are among the wettest places on earth, experiencing up to 225 inches of
rainfall annually. Rainfall sifts through the porous lava rock of the
mountainside forming large underground reservoirs and rivers that flow back into
the ocean. A 1993 U.S. Geological Survey estimates that groundwater reservoirs
beneath Mauna Loa are recharged by about 2.3 billion gallons of rainfall per
day.
The Company's water source is drilled to a depth of approximately 250 feet.
The source is continuously recharged from rainwater at this level. Water is
pumped from the well at the rate of approximately 250 gallons per minute. This
water flow is more than adequate to satisfy the maximum projected demand for the
Company's product, although the flow rate could be expanded, if desired, through
the use of stronger pumping equipment.
The Company believes that the water from Source Kea'au is one of the purest
natural waters available, because of its low mineral content, which also gives
the water its distinctively light or "young" taste. The entire Big Island of
Hawaii is virtually free of industrial activity. The air above the source is so
clear that the summit of nearby Mauna Kea is generally regarded as among the
best locations in the world for space observation. Thirteen observatories,
including the Keck Observatory, the world's largest, are stationed there.
Rainwater forms in this pristine air, filters through hundreds of feet of porous
lava rock and then collects in underground pools and rivers that flow into the
ocean. This constant movement maintains the purity of the source. The Company is
not aware of any pollutant currently in use in the vicinity of Source Kea'au
which would likely have an adverse impact on the quality of its water.
Bottling Operations
The Company operates its own bottling and packaging facility in a 8,000
square foot renovated concrete building located adjacent to the Company's well
at Source Kea'au. This facility is leased from an affiliate pursuant to a
long-term lease agreement. See "Facilities." The bottling facility is located
within a 14.5 acre tract which is zoned for agricultural use, but has been
approved for various beverage and bottling operations pursuant to a Special Use
Permit granted by the County of Hawaii.
Water from Source Kea'au is pumped directly into the Company's bottling
facility where it is passed through a series of particulate filters and
ultraviolet light, elevated through an ozone tower for sterilization and then
released into the filling line. Bottles are fed onto an automated conveyor
system, labeled with an adhesive label and then rinsed with ozonated water
before entering the filling room. The filling room is a separately enclosed and
pressurized space designed to prevent contamination during the filling process.
Inside the filling room, a high-speed rotary filler dispenses water into the
bottles, caps them and passes them onto an automated conveyor outside the room.
An ink-jet dating code is applied to the bottles as they pass to the pack-off
table. Bottles are packed by hand into cardboard cases, which are taped and
- 34 -
<PAGE>
placed onto pallets for shipment. One liter and 1.5 liter bottles are packed 12
to a case, while 0.33 and 0.5 liter bottles are packed in cases of 24. Current
space constraints limit the Company's ability to store finished goods inventory,
but the Company is planning construction of a new warehouse facility which will
enable it to keep large quantities of stock on hand for immediate delivery. See
"Facilities."
The Company bottles its water in 0.33, 0.5, 1.0 and 1.5 liter PET plastic
bottles. All sizes come with standard tamper-proof caps or, in sufficient
volume, may be ordered with an optional sports cap. The Company's bottling
operations initially utilized bottles purchased from manufacturers in California
and Honolulu. In December 1995, the Company entered into a Blow Molding
Agreement with a California bottle supplier, pursuant to which such supplier has
agreed to manufacture bottles for the Company on site, using equipment owned by
the supplier but installed at the Company's bottling facility. This equipment,
which has a maximum capacity of approximately 18,000,000 bottles annually,
became fully operational in July 1996. The Company is obligated to purchase all
of its bottle requirements from this source, with minimum purchases of $750,000
annually. The Company's price for bottles pursuant to this agreement depends
upon the number of bottles purchased and may vary from year to year depending
upon the manufacturer's cost of PET resin. In order to obtain the best price
available the Company has recently placed its initial order for 10,000,000
bottles, calling for aggregate payments of $1,825,000 during the first year of
the contract. Assuming the Company purchases at least 15,000,000 bottles per
year over the three-year term of this agreement (in excess of $2,650,000 per
year), the Company will be entitled to purchase the equipment for $1.00 at the
end of the term. The Company believes that this arrangement has significantly
improved its bottling operations by lowering its cost of bottles while at the
same time improving its quality control, inventory management and delivery
scheduling.
Distribution
The Company currently distributes its product in Hawaii and, on a limited
basis, in the West Coast and Southeastern portion of the United States, Guam and
the Middle East. Most of the Company's product is sold through retail channels
such as convenience stores and supermarkets, although the Company also sells
through food service outlets such as restaurants, bars, airlines, hotels,
country clubs and military installations. The Company's product is currently
distributed on Japan Airlines (flights departing Hawaii), Aloha Island Air
(inter-island flights) and Continental Airlines/Air Micronesia (flights
departing Hawaii and all flight departing the West Coast for the Pacific). The
product is also sold at the Mauna Lani Golf Course and other prestigious golf
courses on the Big Island of Hawaii, as well as military commissaries and
exchanges in Hawaii. The Company has appointed a military distributor and broker
in California and has obtained approval for the distribution of its product in
all military commissaries in California, Arizona, Utah and Nevada.
The Company distributes its product primarily through distributors, but
also utilizes brokers and in California sells directly to specialty retail
chains. The Company is also considering
- 35 -
<PAGE>
strategic distribution alliances with other national and international beverage
companies in order to take advantage of their established distribution networks.
In Hawaii, the Company has appointed Paradise Beverages ("Paradise"), one
of Hawaii's largest beer wholesalers, as its exclusive retail distributor
throughout the State. The Company has also appointed several other distributors
to cover food service markets in Hawaii not normally covered by Paradise. In
addition, the Company recently entered into an exclusive broker agreement with a
beverage broker in Hawaii to support the sales of efforts of the Company's
Hawaiian distributors. See "Risk Factors--Dependence on Key Customer."
The Company began shipping its product into California in July 1995,
concentrating initially on the Los Angeles area. The Company has since expanded
its West Coast presence into other parts of Southern California, the San
Francisco Bay Area and Sacramento as well as into Portland and Seattle. The
Company has also made limited sales in Las Vegas, and in August 1996, entered
into an exclusive distributorship agreement with respect to the southern half of
Nevada (including Las Vegas) with Nevada Beverage Co., the Anheuser-Busch
distributor in this territory. The Company has not utilized distributorship
arrangements to any significant extent in California, relying instead on direct
sales to specialty supermarket chains such as Bristol Farms in Southern
California and Raley's in the Bay Area. The Company has not had the financial
resources to support distribution of its product through the major supermarket
chains in California because of the slotting fees ("Slotting Fees") and
promotional costs normally required to be paid in order to obtain shelf space
for new and untested products in these chains. The Company believes that once
its product has gained market recognition through the specialty retail channels
it is currently utilizing, it will be better able to access these major
supermarket chains. The Company currently ships approximately two mixed
container-loads (1,400 cases) per month into the West Coast market (including
Nevada), but believes that substantially larger sales volumes could be achieved
through entry into the major supermarket network. Approximately 29.3% of the
bottled water sold in the United States in 1995 was sold in California.
In May 1996, the Company entered into an exclusive distributorship
agreement with respect to the Southeastern portion of the United States
(including Texas) with Aloha Products, Ltd. ("Aloha"), a distributor based in
Birmingham, Alabama which specializes in Hawaiian products. To date, the Company
has shipped six container-loads of product pursuant to this agreement. Aloha has
received two purchase orders from Bruno's, a major Southeastern supermarket
chain, totalling approximately 1,600 cases of the Company's product for sale in
all 204 Bruno's stores. In the event that Aloha fails to purchase at least
252,000 cases of the Company's product in 1998, the Company will be entitled to
terminate this agreement. The Company believes that this agreement will help to
establish market recognition for the Company's product on a national basis.
Internationally, the Company has distributed its product in Japan, Korea
and Guam on a limited basis and began shipping product to the Middle East in
July 1996. The Company initially targeted Japan as its primary overseas market
because of Japan's large affluent population,
- 36 -
<PAGE>
growing receptivity to imported bottled water and fascination with Hawaiian
culture and products. As a result, the Company applied for a "Pre-Certification"
from the Japanese Ministry of Health and Welfare (the "Japanese Ministry") prior
to the start of its commercial operations in order to facilitate entry into this
market. The Company was granted this Pre-Certification in March 1995, the first
American company ever to receive such approval. The Company commenced sales to
Japan in June 1995. In October 1995, however, certain impurities were found in
bottled water then being sold by numerous competitors in Japan. In response to a
public outcry, the Japanese Ministry ordered a total recall of all bottled water
then stocked by these competitors. Minor impurities (ultimately determined to be
a fine dust created by the Company's labeller) were also found in a sampling of
the Company's water. The Company immediately reconfigured its bottling line to
eliminate this problem. A representative of the Japanese Ministry subsequently
visited the Company's bottling facility and made no change in the certification
of the Company's product. However, due to the adverse market conditions, the
Company's Japanese distributor refused to accept additional shipments from the
Company, and sales into Japan were temporarily halted. The Company accepted the
return of the product and resold it at cost to various U.S. military bases in
Japan. The Company has recently entered into a representation agreement with
Nihon Valley Corporation, a Japanese corporation, as registered importer and a
Japanese broker as manufacturer's representative of the Company's product in
Japan. The Company has also recently entered into a consulting arrangement with
the Emerald Empire Group, an international food and beverage marketing
consultancy, in order to enhance the marketing of the Company's product in Japan
and other Asian markets. The Company expects to resume sales to Japan in the
near future and ultimately hopes to develop a major presence in this market. The
Company is also negotiating with several major Korean importers concerning an
exclusive agency agreement and expects to begin shipping product to Korea in
1997. The Company also hopes to begin distributing product in other major Asian
markets, such as Taiwan and elsewhere in the Pacific Rim, by the end of 1997.
In January 1996, the Company entered into an exclusive distributorship
agreement with a distributor in Kuwait covering six countries in the Middle
East. The Company shipped one container-load into this territory in July 1996
and a second container-load in November 1996. To date, all of the product
shipped into the Middle East has been sold in Kuwait. However, the Company's
distributor expects to begin selling to Saudi Arabia by the second half of
1997, and thereafter expects to enter other countries within the territory in
stages over the next two years.
All product shipped from Hawaii to the West Coast, Asia and the Middle East
is transported by sea cargo. Product destined for inland portions of the United
States is generally transported by rail from a West Coast port. Although
transportation charges constitute a significant portion of the retail cost of
bottled water, the Company is able to benefit from favorable freight rates
available into the Company's principle target markets. Hawaii imports far more
goods (especially from the West Coast, Japan and Korea) than it exports;
therefore, freight charges on merchandise shipped from Hawaii ("backhaul") are
substantially lower than on merchandise shipped into the Islands. Even
merchandise shipped from Hawaii to inland destinations may benefit from
favorable rates ("through fares") offered by rail carriers which contract with
shippers to supply incremental cargo at a discount. As a result of favorable
freight rates enjoyed
- 37 -
<PAGE>
by the Company, the Company believes that its transportation costs from Hawaii
into other principle markets are often no higher than those incurred by
competitors for shipping their product within their regional markets.
Marketing
To date, the Company's marketing program has concentrated on selling
efforts by its distributors and brokers as well as attendance at trade shows and
outdoor events. Trade shows in Asia and Europe have been particularly successful
in establishing contacts with distributors who have expressed interest in
carrying the Company's product. The Company has also promoted its product
through sales to airlines, hotels, country clubs and other such customers which
enhances the visibility of the product.
The Company has completed a product video, which is used primarily in
presentations to distributors, but which is also shown on in-room video in
Sheraton Hotels in Hawaii. A 30 second commercial has also been cut from this
video, which has aired on local television. The Company is currently being
advised on branding strategy and advertising support by com.com Inc., an
advertising consultancy co-founded by Alexander Brody, one of the Company's
directors. The Company's agreement with com.com Inc. has an initial term of one
year, commencing August 1, 1996, and provides for a fee of $5,000 per month,
plus the award of certain options, in the Company's discretion, in the event of
performance above expectations by com.com. Inc. To date, no such options have
been granted. See "Certain Transactions."
To date, the Company's limited funding has not permitted it incur the
substantial marketing and promotional costs necessary to obtain widespread
distribution in the largest U.S. markets. In California, for example, Slotting
Fees are typically required to be paid in order to obtain shelf space for new
and untested products in major supermarket chains. For this reason, the Company
has chosen to introduce its product in California through smaller, specialty
retail chains, which do not charge these fees. The Company expects to be better
able to access the major supermarket chains once its product has gained market
recognition through the specialty retail channel the Company is currently
utilizing. Even after access to these chains has been obtained, however, the
Company expects to spend large amounts on in-store promotions and coupon
programs in order to maintain shelf space and to enhance the marketing of its
product.
Governmental Regulation; Quality Control
The bottled water industry is highly regulated both in the United States
and abroad. Various state and Federal regulations, designed to ensure the
quality of the product and the truthfulness of its marketing claims, require the
Company to monitor each aspect of its production process, including its water
source, its bottling operations and its packaging and labeling practices. The
Environmental Protection Agency requires a yearly analysis of the Company's
water source by a certified laboratory with respect to a comprehensive list of
contaminants (including herbicides, pesticides, volatile chemicals and trace
metals). In addition, the Hawaii Department of Health requires weekly
microbiological testing of the Company's well water and finished product, as
- 38 -
<PAGE>
well as monthly inspection of its production line. The Food and Drug
Administration (the "FDA") also regulates the Company's packaging and labeling
practices. See "Risk Factors--Governmental Regulation; Quality Control."
Except as described above with respect to Japan (see "Distribution"), to
date, the Company has not experienced any problems with regulatory requirements
concerning the quality of its product. The Company's bottling facility has an
on-site laboratory, where samples of its finished product are visually and
chemically tested daily. In addition, the Company's production line is subject
to constant visual inspection. The Company believes that it meets or exceeds all
applicable regulatory standards concerning the quality of its water. The Company
has met all 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.
In addition to U.S. regulations, the Company must meet the requirements of
foreign regulatory agencies in order to import and sell its product into other
countries. These requirements are generally similar to, and in certain respects
more stringent than, U.S. regulations. The Company believes that it is in
compliance with applicable regulations in all foreign territories where it
currently markets its product.
Failure to meet applicable regulations in U.S. or foreign markets could
lead to costly recalls, loss of certification to market product or, even in the
absence of governmental action, to loss of revenue as a result of adverse market
reaction to negative publicity. See "Distribution."
Competition
The bottled water industry is highly competitive, with numerous competitors
vying to differentiate themselves with respect to a product often perceived as
generic by consumers. Barriers to entry may be low at certain local levels, but
increase significantly at the national and international levels because of the
large marketing and transportation costs associated with obtaining and
maintaining a presence at such levels. See "Risk Factors--Competition."
The principal bases of competition in the industry are price, brand
recognition, water source and packaging. The Company seeks to develop brand
recognition based upon its unique water source. The Company's pricing strategy
is to price its product at or slightly below the price for other premium
international brands.
The Company desires to establish its product on a national and
international level. On both bases, the Company competes primarily with large,
established foreign and domestic companies, all of which have significantly
greater financial and other resources than the Company. The Company's principal
foreign competitors include Great Brands of Europe, a French company
- 39 -
<PAGE>
which distributes under the "Evian," "Volvic" and "Dannon Natural Spring Water"
names, and Perrier, S.A., a French company, which distributes through its U.S.
subsidiary, The Perrier Group, under the "Arrowhead" and "Poland Spring" names,
among others. The Company's principal domestic competitors include Crystal
Geyser Water Co., a California company which distributes under the "Crystal
Geyser" name, Nora Beverage Co., a Connecticut company which distributes
Canadian sourced water under the "Naya" name, and Mountain Valley Water Co., an
Arkansas company which distributes under the "Mountain Valley" name. Most of
these national competitors seek to compete on a price basis.
In the Hawaiian market, the Company competes primarily with Evian, Crystal
Geyser and Menehune, the only other major Hawaiian producer, which sells
"purified" municipal water, not "natural" or "spring" water. The Company is the
only producer of natural water from Hawaii. The Company believes that it is
likely to remain the only such producer, at least for some time, because of
zoning, water use and other restrictions currently in effect which make
development of a competing source difficult.
Employees
The Company has five full-time employees at its executive offices in
Honolulu and one full-time employee in Dana Point, California. The Company also
has ten employees at its bottling facility in Kea'au, including a full-time
plant manager. The other employees at Kea'au are currently employed on a
part-time basis. The Company considers its relations with its employees to be
satisfactory.
Facilities
The Company has a bottling facility in Kea'au on the Big Island of Hawaii
and executive offices in Honolulu. Both of these premises are occupied pursuant
to lease arrangements.
The Company's bottling facility is located on approximately 14.5 acres of
land owned by Hawaii Brewery Development Co., Inc. ("HBDC"), a principal
stockholder of the Company owned by two of the Company's founders, which was
originally formed for the purpose of developing a beer brewing operation on the
Big Island of Hawaii. The property is located within an agricultural zone, but
has been granted a Special Use Permit for water extraction and bottling
operations. The facility itself consists of a 8,000 square foot concrete
structure built in 1943. The building has been retrofitted by the Company for
its current use, which includes the on-site bottle manufacturing operation,
water bottling and packaging line, office and laboratory space and storage space
for raw materials and supplies. The facility also includes a limited amount of
storage space for finished goods inventory.
The Company's bottling facility and surrounding property, including the
water source and pumping equipment, are leased from HBDC pursuant to a long-term
lease agreement (as amended to date, the "Lease"). The Lease provides for an
initial term of 50 years commencing on October 1, 1994, which may be extended at
the option of the Company for an additional 50
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<PAGE>
years. The Lease requires the Company to pay rent to HBDC on a monthly basis at
a rate equal to the greater of (i) a certain base rent (the "Base Rent"), or
(ii) 2% of the Company's net revenues, as defined. The Base Rent will be $5,000
per month during the first five years of the Lease, and will adjust every five
years thereafter based upon changes in the Consumer Price Index in Hawaii (as
defined). The Lease entitles the Company to exclusive use of the water source;
provided, however, that HBDC may draw up to 50% of the water flow for use in
beer brewing or other beverage production, but may not draw water for the sale
of natural water. Since the inception of the Lease, HBDC has not engaged in any
other business activity on the property. See "Risk Factors--Lease of Key
Operating Assets" and "Certain Transactions."
The Company's headquarters are currently located in approximately 5500
square feet of office/warehouse space in Honolulu. The Company leases this space
pursuant to a lease agreement providing for an initial term of three years,
which may be extended, at the option of the Company, for an additional three
years. The Company's rental payments under this lease agreement are
approximately $3,000 per month. The Company sublets a portion of the leased
premises to Hansen Juice Company, an unrelated beverage company. Pursuant to
this sublease, the Company receives rental payments from its sublessee in an
aggregate amount of approximately $250.00 per month.
MANAGEMENT
Directors and Executive Officers
The Company's current directors and executive officers and their ages, as
of September 30, 1996, are as follows:
Name Age Position with Company
- ---- --- ---------------------
Marcus Bender 47 President, Chief
Executive Officer
and Director
Brian Barbata 51 Secretary and Director
Wallace Aoki 59 Chief Financial Officer
Wayne Addison 53 Vice President,
Domestic Sales
Tate Robinson 48 Vice President,
Administration
John Mayo 46 Director
Michael Chagami 44 Director
Nathan Keller 58 Director
Alexander Brody 63 Director
- 41 -
<PAGE>
Mr. Bender has been President, Chief Executive Officer and a director
of the Company since its formation in September 1994. He has also been President
of Hawaii Brewery Development Co., Inc. ("HBDC") since its formation in 1986,
and President and sole owner of Bender Consulting, Inc. ("BCI"), since its
formation in March 1990. BCI provides consulting services with respect to the
import and export of beverage dispensing equipment. Mr. Bender has been involved
in the beverage industry in Hawaii since 1981, where he founded South Pacific
Beverages, Ltd. for the purpose of importing and distributing Hinano Beer from
Tahiti.
Mr. Barbata has been Secretary and a director of the Company since its
formation in September 1994. He has also been Vice President of HBDC since its
formation in 1986. Mr. Barbata is President and a stockholder of Inter Island
Petroleum, Inc., a Hawaii petroleum distributor. Prior to founding Inter Island
Petroleum in 1988, he served in various management capacities for eight years
with Pacific Resources, Inc., a major oil refining and distributing company in
Hawaii. Mr. Barbata is also a director of several other privately held Hawaii
companies.
Mr. Aoki has been Chief Financial Officer of the Company since December
1996. From 1988 until 1996, he was Assistant Controller, Accounts Payable and
Import Manager of Liberty House, Inc., a major department store operator in
Hawaii. Mr. Aoki was also the Deputy Director, Hawaii State Tax Department, from
1979 to 1986, and Deputy Director, Hawaii State Transportation Department,
Administration and Finance, from 1975 to 1979. Mr. Aoki is a certified public
accountant.
Mr. Addison has been Vice President, Domestic Sales of the Company
since June 1996. From 1990 until joining the Company, he was President and sole
stockholder of Addison Sales & Marketing, a consulting firm to the food
industry, which he founded. Mr. Addison has been engaged in sales and marketing
in the food industry since 1970. He has served as President of the Southern
California Food Brokers Association and also assisted in establishing the
Arizona Food Brokers Association, where he was President prior to being assigned
to Southern California.
Mr. Robinson has been Vice President, Administration of the Company
since its formation in September 1994. Mr. Robinson was instrumental in the
design and retrofitting of the Company's bottling facility and, as part of his
duties, supervises overall operations there. Prior to joining the Company, Mr.
Robinson was Vice President--Operations of HBDC and Vice President--Operations
of Hawaiian Water Partners for more than five years.
Mr. Mayo has been a director of the Company since its formation in
September 1994. He has been the President and principal owner of National Tire
of Hawaii, Ltd. (D/B/A Lex Brodie's Tire Company"), a leading tire retailer in
Hawaii, for more than five years. He is also
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<PAGE>
President and sole stockholder of Mayo Water Co., Inc., a holding company which
holds stock in the Company.
Mr. Chagami has been a director of the Company since August 1996. He
has been Treasurer of HSC, Inc., a holding company with interests in automobile
dealerships, shopping centers and financial services in Hawaii, for more than
five years. HSC, Inc. is a principal stockholder of the Company.
Mr. Keller has been a director of the Company since July 1996. He has
been President of West Flo Inc., a California based technical and management
consulting firm to the bottled water industry, since 1989. He has also been
chief financial officer of Bottles Packaging, Inc., a plastic bottle
manufacturer and supplier to the Company, since its formation in July 1995. Mr.
Keller has over 30 years experience in the bottled water industry, including
senior technical positions with Arrowhead Waters and Perrier Group of America.
Mr. Brody has been a director of the Company since August 1996. Mr.
Brody is currently Managing Partner of com.com Inc., an advertising consultancy,
which he co-founded in July 1996. com.com Inc. is advising the Company on
branding strategy and advertising support. See "Business--Marketing." From
January 1993 through December 1995, Mr. Brody was a consultant to Ogilvy &
Mather Worldwide, one of the largest advertising agencies in the world. From
1986 through December 1992, he was President of Ogilvy & Mather Worldwide,
heading all of Ogilvy & Mather offices outside the United States.
The Company's Articles of Incorporation authorize a Board of Directors
consisting of not less than four (4) members, the exact number to be determined
from time to time by the Board of Directors. The number of directors is
currently fixed at six. Directors hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified. Except
as otherwise described above, each current director of the Company was elected
at the Company's last Annual Meeting of Stockholders held on June 5, 1996. All
officers serve at the discretion of the Board of Directors. There are no family
relationships among any of the Company's directors or executive officers.
- 43 -
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth certain
information with respect to the compensation paid or accrued by the Company to
its Chief Executive Officer for services rendered to the Company during the
fiscal year ended December 31, 1995. No other executive officer received
compensation in excess of $100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------ -----------
Securities All other
Underlying Compen-
Name and Principal Position Salary Bonus Options sation
--------------------------- ------ ----- ----------- ---------
<S> <C> <C> <C> <C>
Marcus Bender $120,000(1) -- -- --
President and Chief
Executive Officer
</TABLE>
- ----------
1/ As of August 1, 1995, Mr. Bender's salary was increased from the annual rate
of $60,000 to $120,000.
- 44 -
<PAGE>
Employment Agreement.
In October 1996, the Company entered into an employment agreement with
Marcus Bender, pursuant to which Mr. Bender is employed as the Company's
President and Chief Executive Officer for a five year term. Pursuant to this
employment agreement, Mr. Bender is entitled to receive salary at an initial
annual rate of $150,000, plus up to $100,000 in annual bonus compensation in the
event that the Company meets certain performance goals to be established by the
Board of Directors. The Company has also granted Mr. Bender options to purchase
an aggregate of 150,000 shares of Common Stock at an exercise price equal to
$4.00 per share (subject to adjustment). These options vest at the rate of
50,000 per year over the first three years of the employment term. Mr. Bender
has agreed not to compete with the Company in the sale of natural water for a
period of two years following termination of the employment agreement.
Consulting Agreement.
In October 1995, the Company entered into a consulting agreement (the
"Consulting Agreement") with David R. Shriner, pursuant to which Mr. Shriner was
engaged to evaluate the Company's capital structure and requirements, to
evaluate potential acquisition or joint venture candidates and to provide other
strategic planning services for the Company. Pursuant to the Consulting
Agreement, the Company agreed to pay Mr. Shriner aggregate fees of $120,000,
payable in installments as follows: $45,000 on August 15, 1996, $25,000 on
October 15, 1996, and the balance of $50,000 on January 15, 1997. The
installments due on October 15, 1996 and January 15, 1997 have not yet been
paid.
Stock Option Plan.
The Company currently has no formal stock option plan, although the
Board of Directors has reserved 1,000,000 shares of Common Stock for issuance
upon the exercise of stock options which may be granted from time to time to
directors, officers, employees and consultants of the Company. The Company has
granted 150,000 of such options to its Chief Executive Officer in connection
with his employment agreement and an additional 50,000 options to its Chief
Financial Officer. None of such options are currently vested. See "--Employment
Agreement." The Company expects to adopt a formal stock option plan following
the completion of this Offering.
Compensation of Directors.
Directors of the Company do not receive any cash compensation for
service on the Board of Directors or any committee thereof. However, directors
are entitled to be reimbursed by the Company for their expenses in connection
with attendance at Board or committee meetings.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of December 15, 1996, by
(i) each stockholders who is known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, the only class of the Com- pany's
capital stock currently outstanding, (ii) each director and executive officer of
the Company who owns any shares of Common Stock, and (iii) all executive
officers and directors as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the shares listed below have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
Shares of Common Stock
Name and Address(1) Beneficially Owned(2) Percent of Common Stock
- ------------------- ---------------------- -----------------------
Prior to Offering After Offering
----------------- --------------
<S> <C> <C> <C>
Hawaii Brewery 729,264 45.60 20.26
Development Co., Inc.(3)
HSC, Inc.(4) 429,056 26.83 11.92
345 Kekuanoa Street
Hilo, HI 96721
Mayo Water Co., Inc.(5) 160,901 10.06 4.47
701 Queen Street
Honolulu, HI 96813
Jim Ed Norman 160,901 10.06 4.47
20 Music Square East
Nashville, TN 37203-4326
Keijiro Sorimachi 119,090 7.45 3.31
101 Aupuni Street, Suite 1001
Hilo, HI 96720
Marcus Bender(3) 729,264 45.60 20.26
Brian Barbata(3) 729,264 45.60 20.26
Richard Henderson(4) 429,056 26.83 11.92
Michael Chagami(6) 429,056 26.83 11.92
John Mayo(5) 160,901 10.06 4.47
All directors and executive 1,319,221 82.49 36.65
officers as a group (9 persons)
</TABLE>
- --------
1/ Except as otherwise indicated, the address of each stockholder listed above
is c/o Hawaiian Natural Water Company, Inc., 248 Mokauea Street, Honolulu,
Hawaii 96819.
2/ A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise of
any option, warrant or right. Shares of Common Stock subject to options,
warrants or rights that are currently exercisable or exercisable within 60 days
are deemed outstanding for purposes of computing the percentage ownership of the
person holding such options, warrants or rights, but are not deemed outstanding
for purposes of computing the percentage ownership of any other person.
3/ Hawaii Brewery Development Co., Inc. ("HBDC") is owned 50% by Marcus Bender
and 50% by Brian Barbata. Messrs. Bender and Barbata are directors and Mr.
Bender is an executive officer of the Company. Each of Messrs. Bender and
Barbata may be deemed the beneficial owner of the shares held by HBDC. Other
than through HBDC, neither of Messrs. Bender and Barbata owns any capital stock
of the Company.
4/ HSC, Inc. ("HSC") is majority owned by Richard Henderson. Mr. Henderson may
be deemed the beneficial owner of the shares held by HSC. Other than through
HSC, Mr. Henderson does not own any capital stock of the Company.
5/ Mayo Water Co., Inc. ("MWC") is wholly owned by John Mayo, a director of the
Company. Mr. Mayo may be deemed the beneficial owner of the shares held by MWC.
Other than through MWC, Mr. Mayo does not own any capital stock of the Company.
6/ As a director of HSC, Mr. Chagami shares the power to vote and dispose of the
shares of Common Stock held by HSC. Therefore he may be deemed the beneficial
owner of these shares.
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<PAGE>
Selling Securityholders
An aggregate of 750,000 Selling Securityholders Warrants (identical to
the Redeemable Warrants) which will be issued to certain Selling Securityholders
in exchange for the Bridge Warrants, together with 750,000 shares of Common
Stock issuable upon exercise of such Selling Securityholders Warrants, are being
offered hereby, at the expense of the Company, for the account of the Selling
Securityholders. See "Securities Eligible for Future Sale." The Bridge Warrants
were issued as part of the Bridge Financing. Sales of such Selling
Securityholders Warrants and the underlying shares of Common Stock may depress
the price of the Common Stock or Redeemable Warrants in any market that may
develop for such securities.
The following table set forth information with respect to persons for
whom the Company is registering the Selling Securityholders Warrants and the
underlying Selling Securityholders Shares for resale to the public in the
Concurrent Offering. Beneficial ownership of Redeemable Warrants and Common
Stock by such Selling Securityholders after the Offering will depend on the
number of securities sold by each Selling Securityholders in the Concurrent
Offering.
============================================================================
Ownership After the Offering and
Prior to Sales in the Concurrent Offering(1)
- ----------------------------------------------------------------------------
Redeemable Warrants Common Stock
- ----------------------------------------------------------------------------
Selling Number Percent Number Percent
- -------
Securityholders
- ----------------------------------------------------------------------------
Stanley S. Arkin 50,000 1.82% 50,000 1.37%
- ----------------------------------------------------------------------------
Louis A. and 50,000 1.82 50,000 1.37
Madeline Best,
JTWROS
- ----------------------------------------------------------------------------
Delaware Charter 25,000 * 25,000 *
Guarantee & Trust
Co. FBO Laurence
Heller IRA Rollover
- ----------------------------------------------------------------------------
Isaack Dweck 25,000 * 25,000 *
- ----------------------------------------------------------------------------
Jerry Finkelstein 50,000 1.82 50,000 1.37
- ----------------------------------------------------------------------------
Charles Johnston 12,500 * 12,500 *
- ----------------------------------------------------------------------------
Jack Kaster 25,000 * 25,000 *
- ----------------------------------------------------------------------------
Ralph K. Kato 50,000 1.82 50,000 1.37
- ----------------------------------------------------------------------------
J. D. Kosmo 12,500 * 12,500 *
- ----------------------------------------------------------------------------
Daniel R. Lee 100,000 3.64 100,000 2.70
- ----------------------------------------------------------------------------
Barry J. Lind 50,000 1.82 50,000 1.37
Revocable Trust
- ----------------------------------------------------------------------------
Barry J. Lind/Neil G. 50,000 1.82 50,000 1.37
Bluhm, tenants in
common
- ----------------------------------------------------------------------------
Christian Ludwigsen 12,500 * 12,500 *
- ----------------------------------------------------------------------------
Peter Maher and 25,000 * 25,000 *
Patricia Maher,
JTWROS
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<PAGE>
- ----------------------------------------------------------------------------
Daniel and Dianne 12,500 * 12,500 *
Mine, JTWROS
- ----------------------------------------------------------------------------
Frank C. Rathje 25,000 * 25,000 *
- ----------------------------------------------------------------------------
Dawn Roccaro 12,500 * 12,500 *
- ----------------------------------------------------------------------------
Peter G. Roehl 125,000 4.55 125,000 3.36
- ----------------------------------------------------------------------------
Gail Reich 12,500 * 12,500 *
- ----------------------------------------------------------------------------
Richard S. Simms II, 12,500 * 12,500 *
Keogh
- ----------------------------------------------------------------------------
Richard B. Schecter 12,500 * 12,500 *
- ----------------------------------------------------------------------------
TOTAL 750,000 27.27% 750,000 17.24%
======= ======= ======= =======
============================================================================
* Less than one percent (1%)
(1) Assuming no purchase by any Selling Securityholder of Common Stock or
Redeemable Warrants offered in the Offering.
There are no material relationships between any of the Selling
Securityholders and the Company. The securities offered by the Selling
Securityholders are not being underwritten by the Underwriter. The Selling
Securityholders have agreed not to sell or otherwise dispose of any of the
Selling Securityholders Warrants or Selling Securityholders Shares during the
Lock-up Period without the prior consent of the Underwriter. With such consent,
the Selling Securityholders may sell the Selling Securityholders Warrants or the
underlying Selling Securityholders Shares at any time on or after the date
hereof. In addition, the Selling Securityholders have agreed that, for a period
of two years from the date hereof, they will not sell such securities other than
through the Underwriter and that, upon any such sale, they will compensate the
Underwriter in accordance with its customary compensation practices. Subject to
these restrictions, the Company anticipates that sales of the Selling
Securityholders Warrants or the underlying Selling Securityholders Shares may be
effected from time to time in transactions (which may include block
transactions) in the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale, at fixed prices that may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. The
Selling Securityholders may effect such transactions by selling the Selling
Securityholders Warrants or Selling Securityholders Shares directly to
purchasers or through broker-dealers that may act as agent or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders or from the purchasers of the
Selling Securityholders Warrants or the Selling Securityholders Shares for whom
such broker-dealers may act as agents or to whom they sell as principals, or
both (which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The Selling Securityholders and any broker-dealers that act in
connection with the sale of the Selling Securityholders Warrants or Selling
Securityholders Shares as principals may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commission received
by them and any profit on the resale of such securities
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<PAGE>
as principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Securityholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of such securities against certain liabilities arising under the Securities Act.
The Company will not receive any proceeds from the sales of the Selling
Securityholders Warrants or Selling Securityholders Shares by the holders
thereof, although the Company will receive proceeds from any exercise of the
Selling Securityholders Warrants. Sales of the Selling Securityholders Warrants
or Selling Securityholders Shares by the holders thereof, or even the potential
of such sales, could have an adverse effect on the market price of the Units,
the Redeemable Warrants and Common Stock.
At the time a particular offer of Selling Securityholders Warrants or
the Selling Securityholders Share is made, except as herein contemplated, by or
on behalf of a Selling Securityholders, to the extent required, a Prospectus
will be distributed which will set forth the number of Selling Securityholders
Warrants or Selling Securityholders Shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for the securities purchased and
any discounts, commissions or concessions allowed or reallowed or paid to
dealers.
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the securities of the Company offered by this
Prospectus may not simultaneously engage in market-making activities with
respect to such securities of the Company during the applicable "cooling-off"
period (two or nine days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Securityholders will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Rules 10b-6 and 10b-7, in
connection with transactions in such securities, which provision may limit the
timing of purchases and sales of such securities by the Selling Securityholders.
CERTAIN TRANSACTIONS
The Company has been substantially dependent upon equity investments,
loans and guarantees from its stockholders or their affiliates in order to
finance its operations. In May 1995, Inter Island Petroleum, Inc., a company of
which Brian Barbata, a director of the Company, is President and a stockholder,
loaned the Company $100,000. This loan bears interest at the annual rate of 12%
and was originally due in June 1995. The Company repaid $50,000 in principal
plus accrued interest thereon (approximately $12,000) out of the proceeds of the
Bridge Financing and agreed to repay the balance of
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this loan, plus all accrued interest, out of the proceeds of this Offering. See
"Use of Proceeds." Certain directors and an affiliate of the Company are
personal guarantors of this indebtedness and the Company's $200,000 equipment
lease agreement with First Hawaiian Leasing, Inc. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
In July 1995, certain stockholders of the Company made an equity
contribution to the Company in the aggregate amount of $65,800, in exchange for
an aggregate of 237,912 shares of Common Stock. In September 1995, all of the
stockholders of the Company made an additional equity contribution, on a pro
rata basis, in the aggregate amount of $92,159, in exchange for an aggregate of
333,229 shares of Common Stock. In February 1996, Marcus Bender, the Company's
President, loaned the Company $10,000 on an interest free basis in order to meet
certain then current obligations. The Company repaid $4,500 of this loan in
March 1996, and repaid the balance in April 1996. In March 1996, HSC advanced
the Company $40,000 on an interest free basis. In April 1996, HSC loaned the
Company an additional $67,320, and the earlier $40,000 advance was converted
into an interest bearing loan on the same terms. HBDC also loaned the Company
$182,400 in April 1996. These loans bear interest at an annual rate of 12% and
are due in April 1997 or, if earlier, upon consummation of this Offering. In
July and August 1996, HBDC and HSC loaned the Company an additional $42,985 and
$25,284, respectively, and Mayo Water Co., Inc. ("MWC"), a corporation wholly
owned by John Mayo, a director of the Company, loaned the Company $49,726. These
loans also bear interest at an annual rate of 12% and are due in April 1997 or,
if earlier, upon consummation of this Offering. In July, August and September
1996, HSC, MWC and HBDC advanced the Company an aggregate of $90,272 on an
unsecured, non-interest bearing basis. These advances were repaid out of the
proceeds of the Bridge Financing. See "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
The Company leases its bottling facility and rights to use of its water
source pursuant to a long-term lease agreement with HBDC. HBDC is jointly owned
by Marcus Bender and Brian Barbata, two of the Company's directors and executive
officers. See "Risk Factors--Lease of Key Operating Assets" and
"Business--Facilities."
In 1995, the Company purchased certain equipment for use in the
Company's bottling operations from a company wholly owned by Mr. Bender for an
aggregate of $25,000.
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<PAGE>
In December 1995, the Company entered into a Blow Molding Agreement
with Bottles Packaging, Inc. ("BPI"), a California bottle manufacturer. Nathan
Keller, a director of the Company since July 1996, is the chief financial
officer of BPI. See "Business--Bottling Operations."
In July 1996, the Company entered into a one year agreement with
com.com. Inc, pursuant to which com.com Inc. was engaged to advise the Company
on branding strategy and advertising support. This agreement provides for a fee
of $5,000 per month, plus the award of certain stock options, in the Company's
discretion, based upon performance. To date, no such options have been
granted. See "Business--Marketing." Alexander Brody is Managing Partner of
com.com Inc. In August 1996, Mr. Brody was elected a director of the Company.
Management believes that each of the transactions described above was
effected on terms no less favorable to the Company than would have been
available from unaffiliated third parties. All future transactions between the
Company and any of its officers, directors, principal stockholders and their
affiliates, including loan transactions, will be approved by a majority of the
Board of Directors, including a majority of the independent and disinterested
directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000
shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock,
$1.00 par value. As of the date hereof, the Company has outstanding 1,599,212
shares of Common Stock held of record by five stockholders. No shares of
Preferred Stock are outstanding. All outstanding shares of capital stock of the
Company are fully paid and non-assessable.
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of
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<PAGE>
any then outstanding Preferred Stock. Holders of Common Stock have no preemptive
rights and no right to convert their shares into any other securities.
Preferred Stock
The Preferred Stock may be issued in one or more series from time to
time with such designation, rights, preferences and limitations as the Board of
Directors may determine. The rights, preferences and limitations of separate
series of Preferred Stock may differ with respect to such matters as may be
determined by the Board of Directors, including, without limitation, the rate of
dividends, method or nature of payment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions, conversion rights and
voting rights. Such undesignated shares could also be used as an anti-takeover
device by the Company since they could be issued with "super-voting rights" and
placed in the control of parties friendly to the current management. The Company
has no present plans to issue any of the undesignated shares.
The Units
Each Unit consists of one share of Common Stock and one Redeemable
Warrant, which entitles the registered holder thereof to purchase one share of
Common Stock at an initial exercise price of $ per share [150% of the initial
public offering price per Unit], subject to adjustment. The shares of Common
Stock and Redeemable Warrants comprising the Units will be detachable and
separately tradeable upon issuance. The Company and the Underwriter may jointly
determine, based upon market conditions, to delist the Units upon the expiration
of the 30-day period commencing on the date of this Prospectus.
The Redeemable Warrants
The Redeemable Warrants, including the Selling Securityholders
Warrants, will be issued under and subject to the terms of a Warrant Agreement
(the "Warrant Agreement") dated as of the date hereof between the Company and
Continental Stock Transfer & Trust Company, as warrant agent (the "Warrant
Agent"). Set forth below is a summary of certain provisions of the Warrant
Agreement. Such summary does not purport to be complete and is subject to and
qualified in its entirety by reference to all of the provisions of the Warrant
Agreement. A copy of the Warrant Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
General. Each Redeemable Warrant entitles the registered holder thereof
to purchase one share of Common Stock at an initial exercise price of $ per
share [150% of the initial public offering price per Unit], subject to
adjustment, at any time following
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<PAGE>
the date of issuance until 5:00 p.m. New York time, , 2001 [60 months
from the date of this Prospectus] (the "Expiration Date"), unless previously
redeemed. Each Redeemable Warrant will be issued in registered form and will be
transferable from and after the date of issuance and prior to the Expiration
Date. Warrantholders are not entitled, by virtue of being Warrantholders, to
receive dividends or to vote at or receive notice of any meeting of stockholders
or to exercise any other rights whatsoever as stockholders of the Company.
Commencing , 1997 [12 months from the date of this Prospectus], the
Company will have the right to redeem all, but not less than all, of the
Redeemable Warrants at a price of $.05 per Redeemable Warrant on 30 days' prior
written notice, provided that the Company shall have obtained the written
consent of Joseph Stevens & Company, L.P. (the "Underwriter"), and the average
closing bid price of the Common Stock equals or exceeds 150% of the then
exercise price per share, subject to adjustment, for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption.
Adjustments. The exercise price of the Redeemable Warrants and the
number of shares of Common Stock issuable upon exercise thereof are subject to
adjustment in certain events, including stock splits or combinations, stock
dividends, or through a recapitalization resulting from a stock split or
combination. The remaining shares of Common Stock still subject to the Warrant
and the purchase price thereof will be appropriately adjusted by the Company.
Amendments. The Board of Directors of the Company, in its discretion,
may amend the terms of the Redeemable Warrants to, among other things, reduce
the exercise price; provided, however, that no amendment adversely affecting the
rights of the holders of the Redeemable Warrants may be made without the
approval of the holders of not less than a majority of the Redeemable Warrants
then outstanding.
Exercise of Redeemable Warrants. The Redeemable Warrants may be
exercised by surrendering to the Warrant Agent the warrant certificate
evidencing the Warrant, duly executed by the Warrantholder or his duly
authorized agent and indicating such Warrantholder's election to exercise all or
a portion of the Redeemable Warrants evidenced by such warrant certificate.
Surrendered warrant certificates must be accompanied by payment of the aggregate
exercise price of the Redeemable Warrants to be exercised, which payment may be
made, at the Warrantholder's election, in cash or by delivery of a cashier's or
certified check or any combination of the foregoing. A current Prospectus must
be in effect in order for holders of Redeemable Warrants to exercise such
Redeemable Warrants. Pursuant to the terms of the Warrant Agreement, the Company
has agreed to maintain a current Prospectus in effect until the Expiration Date,
subject to certain exceptions.
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<PAGE>
Upon receipt of duly executed Redeemable Warrants and payment of the
exercise price, the Company shall issue and cause to be delivered, to
or upon the written order of exercising Warrantholders, certificates
representing the number of shares of Common Stock so purchased. if fewer than
all of the Redeemable Warrants evidenced by any warrant certificate are
exercised, a new warrant certificate evidencing the Redeemable Warrants
remaining unexercised will be issued to the Warrantholder.
The Company has authorized and will reserve for issuance a number of
shares of Common Stock sufficient to provide for the exercise of all Redeemable
Warrants. When delivered in accordance with the Warrant Agreement, such shares
will be fully paid and non-assessable.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, New York, New York.
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 3,559,212 shares of Common Stock assuming (i) the issuance by the
Company of 2,000,000 shares of Common Stock included in the Units offered
hereby, (ii) no issuance of shares of Common Stock relating to outstanding
warrants to purchase Common Stock, and (iii) no exercise of outstanding options
to purchase Common Stock. Of these shares, the 2,000,000 shares included in the
Units will be freely tradeable without restriction or further registration under
the Securities Act, except for shares held by Affiliates of the Company (whose
sales would be subject to certain limitations and restrictions described below)
and the regulations promulgated thereunder).
The remaining 1,599,212 shares were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
Of these shares, 1,028,071 will become eligible for sale in the public market
under Rule 144 90 days after the date hereof. An additional 237,912 and 333,229
of these shares will first become eligible for sale in the public markets under
Rule 144 on July 1, 1997 and October 1, 1997, respectively.
The Redeemable Warrants underlying the Units offered hereby and the
shares of Common Stock underlying such Redeemable Warrants, upon exercise
thereof, will be
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<PAGE>
freely tradable without restriction under the Securities Act, except for any
Redeemable Warrants or shares of Common Stock purchased by an Affiliate, which
will be subject to the resale limitation of Rule 144 under the Securities Act.
In addition, 750,000 Selling Securityholders Warrants and 750,000 Selling
Securityholders Shares are being registered in the Concurrent Offering. The
Selling Securityholders have agreed not to transfer such securities for a period
of 18 months from the date hereof, without the prior written consent of the
Underwriter. An appropriate legend shall be marked on the face of the
certificates representing such securities.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities during the Lock-up
Period, except pursuant to outstanding options and warrants and pursuant to the
Company's existing option plans and no option shall have an exercise price that
is less than the fair market value per share of Common Stock on the date of
grant. An appropriate legend shall be marked on the face of certificates
representing all such securities.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least two years is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 28,492 shares immediately
after this Offering) or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding such sale, subject to the filing
of a Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been an Affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least three years would
be entitled to sell such shares under Rule 144 without regard to the
requirements described above. To the extent that shares were acquired from an
Affiliate of the Company, such stockholder's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
Affiliate. The Securities and Exchange Commission (the "Commission") has
recently proposed to amend Rule 144 to shorten each of the two-year and
three-year periods by one year.
Sales of substantial amount of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities.
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<PAGE>
UNDERWRITING
Joseph Stevens & Company, L.P. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter, on a firms commitment basis,
all of the Units offered by the Company hereby.
The Company has been advised by the Underwriter that the Underwriter
initially proposes to offer the Units to the public at the public offering price
set forth on the cover page of this Prospectus and that the Underwriter may
allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") concessions not in excess of $_______ per
Unit, of which amount an amount not in excess of $_______ per Unit may in turn
be reallowed by such dealers to other dealers. After the commencement of the
Offering, the public offering price, concessions and reallowances may be
changed. The Underwriter has informed the Company that it does not expect sales
to discretionary accounts by the Underwriter to exceed five percent of the
securities offered by the Company hereby.
The Company has granted to the Underwriter an option, exercisable
within 45 days of the date of this Prospectus, to purchase from the Company at
the offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 300,000 Units on the same terms and
conditions of the Offering for the sole purpose of covering over-allotments, if
any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriter a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Units
underwritten, $25,000 of which has been paid to date.
Upon the exercise of any Redeemable Warrants more than one year after
the date of this Prospectus, which exercise was solicited by the Underwriter,
and to the extent not inconsistent with the guidelines of the NASD and the Rules
and Regulations of the Commission, the Company has agreed to pay the Underwriter
a commission which shall not exceed five percent (5%) of the aggregate exercise
price of such Redeemable Warrants in connection with bona fide services provided
by the Underwriter relating to any warrant solicitation. In addition, the
individual must designate the firm entitled to such warrant solicitation fee.
However, no compensation will be paid to the Underwriter in connection with the
exercise of the Redeemable Warrants if (a) the market price of the Common Stock
is lower that the exercise price of the Redeemable Warrants, (b) the Redeemable
Warrants were held in a discretionary account or (c) the Redeemable Warrants are
exercised in an
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<PAGE>
unsolicited transaction. Unless granted an exemption by the Commission from its
Rule 10b-6 promulgated under the Exchange Act, the Underwriter will be
prohibited from engaging in any market making activities with regard to the
Company's securities for the period from nine business days (or such applicable
periods as Rule 10b-6 may provide) prior to any solicitation of the exercise of
the Redeemable Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive a fee. As a result, the Underwriter may be
unable to continue to provide a market for the Company's Units, Common Stock or
Redeemable Warrants during certain periods while the Redeemable Warrants are
exercisable. If the Underwriter has engaged in any of the activities prohibited
by Rule 10b-6 during the period described above, the Underwriter undertakes to
waive unconditionally its rights to receive a commission on the exercise of such
Redeemable Warrants.
All of the holders of the issued and outstanding shares of Common Stock
prior to the Offering have agreed (i) not to transfer any securities issued by
the Company, including shares of Common Stock or securities convertible into or
exchangeable or exercisable for or evidencing any right to purchase of subscribe
for any shares of Common Stock during the Lock-up Period, without the prior
written consent of the Underwriter and (ii) that, for 24 months following the
effective date of the Registration Statement, any sales of the Company's
securities shall be made through the Underwriter in accordance with its
customary brokerage practices either on a principal of agency basis. An
appropriate legend shall be marked on the face of certificates representing all
such securities.
In connection with the Offering, the Company has agreed to issue and
sell to the Underwriter and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, the Underwriter's Warrants to purchase
200,000 Units. The Underwriter's Warrants are exercisable at any time during a
period of four years commencing at the beginning of the second year after their
issuance and sale at a price of $________ [120% of the public offering price of
the Units] per Unit. The shares of Common Stock, Redeemable Warrants, and shares
of Common Stock underlying the Redeemable Warrants, and shares of Common Stock
underlying the Redeemable Warrants issuable upon the exercise of the
Underwriter's Warrant are identical to those offered to the public. The
Underwriter's Warrants contain anti-dilution provisions providing for adjustment
of the number of warrants and exercise price under certain circumstances. The
Underwriter's Warrants grant to the holders thereof and to the holders of the
underlying securities certain rights of registration, at the Company's expense,
with respect to the securities underlying the Underwriter's Warrants.
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<PAGE>
In connection with the Bridge Financing, the Company paid to the
Underwriter, as placement agent, $150,000 in cash as commissions and a
non-accountable expense allowance of $45,000. The Company also issued to the
Placement Agent warrants (the "Placement Agent Warrants") to purchase 150,000
shares of Common Stock at an exercise price of $1.50 per share commencing
October 10, 1997. The Placement Agent Warrants will be canceled prior to the
consummation of this Offering.
The Company has agreed that for five years from the effective date of
the Registration Statement, the Underwriter may designate one person for
election to the Company's Board of Directors (the "Designation Right"). In the
event that the Underwriter elects not to exercise its Designation Right, then it
may designate one person to attend all meetings of the Company's Board of
Directors for a period of five years. The Company has agreed to reimburse the
Underwriter's designee for all out-of-pocket expenses incurred in connection
with the designee's attendance at meetings of the Board of Directors. The
Company has also agreed to retain the Underwriter as the Company's financial
consultant for a period of 24 months from the date hereof and to pay the
Underwriter a monthly retainer of $2,000, all of which is payable in advance on
the closing date set forth in the Underwriting Agreement. The Underwriting
Agreement also provides that the Underwriter has a right of first refusal for a
period of three years from the date of this Prospectus with respect to any sale
of securities by the Company or any of its present or future subsidiaries.
Prior to this Offering, there has been no public market for the Units,
the Common Stock, or the Redeemable Warrants. Accordingly, the initial public
offering price of the Units and the terms of the Redeemable Warrants were
determined by negotiation between the Company and the Underwriter. The factors
considered in determining such prices and terms, in addition to the prevailing
market conditions, included the history of and the prospects for the industry in
which the Company competes, an assessment of the Company's management, the
prospects of the Company, its capital structure and such other factors that were
deemed relevant. The offering price does not necessarily bear any relationship
to the assets, results of operations or net worth of the Company.
The Underwriter commenced operations in May 1994 and therefore does not
have extensive expertise as an underwriter of public offerings of securities. In
addition, the Underwriter is a relatively small firm and no assurance can be
given that the Underwriter will be able to participate as a market maker in the
Units, the Common Stock or in the Redeemable Warrants, and no assurance can be
given that any broker-dealer will make a market in the Units, the Common Stock
or the Redeemable Warrants. See "Risk Factors--Underwriter's Lack of
Experience; Underwriter's Potential Influence on the Market."
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such
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agreement which are filed as exhibits to the Registration Statement. See
"Available Information."
LEGAL MATTERS
The validity of the Units offered hereby have been passed upon for the
Company by Graham & James LLP, Los Angeles, California. Orrick, Herrington &
Sutcliffe LLP, New York, New York, has acted as counsel for the Underwriter in
connection with the Offering.
EXPERTS
The financial statements included in this prospectus and elsewhere in
the Registration Statement, to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said report. Reference is made to said report which
includes an explanatory paragraph which states that there is substantial doubt
about the Company's ability to continue as a going concern.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2, including amendments thereto, relating to the Units offered hereby,
the Common Stock and Redeemable Warrants included therein, the Selling
Securityholders Warrants, the Common Stock underlying each of the Redeemable
Warrants and the Selling Securityholders Shares. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete;
however, all material information with respect to such contracts and documents
are disclosed in this Prospectus. In each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
For further information with respect to the Company and the securities
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and will also be available for inspection and copying at the regional offices of
the Commission located at 7 World Trade Center, New York, New York 10048 and at
Citicorp Atrium Center, 500 West Madison Street,
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<PAGE>
Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may also
be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. As a result of the Offering, the Company will be
subject to the informational requirements of the Exchange Act. So long as the
Company is subject to the periodic reporting requirements of the Exchange Act,
it will furnish the reports and other information required thereby to the
Commission. The Company intends to furnish holders of the Units, the Common
Stock and the Redeemable Warrants with annual reports containing, among other
information, audited financial statements certified by an independent accounting
firm. The Company also intends to furnish such other reports as it may determine
or as may be required by law.
- 60 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheet -- December 31, 1995 F-4
Statement of Operations For the Period From Inception (September 13, 1994) to
December 31, 1994 and the Year Ended December 31, 1994 F-6
Statement of Stockholders' Deficit for the Period From Inception (September 13,
1994) to December 31, 1994 and the Year Ended December 31, 1995 F-7
Statements of Cash Flows for the Period From Inception (September 13, 1994 to
December 31, 1994) and the Year Ended December 31, 1995 F-8
Notes to Financial Statements F-10
Supplemental Schedules I and II: Balance Sheet -- March 31, 1996 (Unaudited) F-23, F-24
Supplemental Schedule III: Statement of Operations for the Three Months Ended
March 31, 1995 and 1996 (Unaudited) F-25
Supplemental Schedule IV: Statement of Stockholders' Deficit for the
Three-Month Period Ended March 31, 1996 (Unaudited) F-26
Supplemental Scheduel V: Statement of Cash Flows for the Three Months Ended
March 31, 1995 and 1996 (Unaudited) F-27
Supplemental Schedule VI: Notes to Financial Statements For the Three Months
Ended March 31, 1995 and 1996 (Unaudited) F-28
Balance Sheet -- September 30, 1996 (Unaudited) F-29
Statement of Operations for the Nine Months Ended September 30, 1995 and 1996
(Unaudited) F-31
Statement of Changes in Stockholders' Deficit for the Nine-Month Period Ended
September 30, 1996 (Unaudited) F-32
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1996
(Unaudited) F-33
Notes to Financial Statements For the Nine Months Ended September 30, 1995 and
1996 (Unaudited) F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Hawaiian Natural Water Company, Inc.
We have audited the accompanying balance sheet of HAWAIIAN NATURAL WATER
COMPANY, INC.,(a Hawaii corporation) as of December 31, 1995, and the related
statements of operations, stockholders' deficit and cash flows for the period
from inception (September 13, 1994) to December 31, 1994 and the year ended
December 31, 1995. 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 Hawaiian Natural Water Company,
Inc. as of December 31, 1995, and the results of its operations and its cash
flows for the period from inception (September 13, 1994) to December 31, 1994
and the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying financial
statements, the accumulated deficit, negative cash flows from operations,
significant liabilities and the need for additional capital raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
F-2
<PAGE>
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The balance sheet as of March 31, 1996 and the
related statements of operations and cash flows for the three-month periods
ended March 31, 1995 and 1996, and the statement of stockholders' deficit for
the three-month period ended March 31, 1996 included as Supplemental Schedules I
through VI herein, are presented for purposes of additional analysis and are not
a required part of the basic financial statements. The information contained in
these schedules has not been subjected to the auditing procedures applied in our
audit of the basic financial statements and, accordingly, we express no opinion
on it.
/s/ Arthur Andersen LLP
Honolulu, Hawaii
September 5, 1996
F-3
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET - DECEMBER 31, 1995
ASSETS
CURRENT ASSETS:
Inventories $ 178,860
Trade Accounts Receivable 69,267
Prepaid Expenses 7,698
-----------
Total Current Assets 255,825
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $49,846 437,803
DEPOSITS 6,262
ORGANIZATIONAL COSTS, net of accumulated amortization of $1,127 3,382
-----------
Total Assets $ 703,272
===========
The accompanying notes are an integral part of this balance sheet.
F-4
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET - DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank Overdraft $ 28,578
Accounts Payable 346,662
Loan Payable to Related Party 100,000
Bank Loan 300,000
Accrued Expenses and Other Current Liabilities 120,451
Dividends Payable 22,556
Unearned Revenue 13,990
Deferred Compensation 12,500
Capital Lease Obligation -- Current Portion 32,424
-----------
Total Current Liabilities 977,161
CAPITAL LEASE OBLIGATION -- Net of Current Portion 127,675
-----------
Total Liabilities 1,104,836
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT:
Preferred Stock, 8% cumulative, convertible;
$666.67 par value; 500 authorized; 350 shares
issued and outstanding (convertible into an
aggregate of 389,000 shares of common stock) 233,334
Common Stock, no par; 20,000,000 authorized;
1,210,212 shares issued and outstanding 208,959
Accumulated Deficit (843,857)
-----------
Total Stockholders' Deficit (401,564)
-----------
Total Liabilities and Stockholders' Deficit $ 703,272
===========
The accompanying notes are an integral part of this balance sheet.
F-5
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 13, 1994) TO
DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1995
Period From
Inception to Year Ended
December 31, December 31,
1994 1995
----------- -----------
NET SALES $ - $ 588,920
COST OF SALES - 620,593
----------- -----------
Gross Margin - (31,673)
----------- -----------
EXPENSES:
General and Administrative 69,862 437,289
Selling and Marketing 10,565 220,651
----------- -----------
80,427 657,940
----------- -----------
OTHER INCOME (EXPENSE):
Interest Income - 2,179
Interest Expense - (53,440)
----------- -----------
- (51,261)
----------- -----------
Net Loss $ (80,427) $ (740,874)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------------- ---------------------------
Stock Total
Number of Number of Subscriptions Accumulated Stockholders'
Shares Amount Shares Amount Receivable Deficit Deficit
------------- ------------ ----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF SHARES - SEPTEMBER 13,
1994 639,071 $ 51,000 200 $ 133,334 $ - $ - $ 184,334
Subscription of stock - - - 100,000 (100,000) - -
Preferred dividends - - - - - (3,889) (3,889)
Net loss - - - - - (80,427) (80,427)
----------- ----------- -------- ----------- ------------ ---------- ------------
BALANCE AT DECEMBER 31, 1994 639,071 51,000 200 233,334 (100,000) (84,316) 100,018
Issuance of shares - July 1, 1995 237,912 65,800 - - - - 65,800
Issuance of shares - October 1, 1995 333,229 92,159 - - - - 92,159
Collection of stock subscriptions
receivable - March 1, 1995 - - 150 - 100,000 - 100,000
Preferred dividends - - - - - (18,667) (18,667)
Net loss - - - - - (740,874) (740,874)
----------- ----------- -------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1995 1,210,212 $ 208,959 350 $ 233,334 $ - $ (843,857) $ (401,564)
=========== =========== ======== =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-7
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 13, 1994) TO
DECEMBER 31, 1994 AND THE YEAR ENDED DECEMBER 31, 1995
Period From
Inception to Year Ended
December 31, December 31,
1994 1995
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (80,427) $ (740,874)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 290 50,682
Net increase in current assets (701) (255,124)
Net increase in current
liabilities 32,856 489,195
Increase in organizational
cost (4,509) -
Increase in deposits (1,758) (4,504)
----------- -----------
Net cash used in
operating activities (54,249) (460,625)
----------- -----------
CASH USED IN INVESTING ACTIVITIES --
Purchase of property and equipment (131,291) (162,002)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 51,000 157,959
Proceeds from sale of preferred
stock 133,334 100,000
Proceeds from bank loan 20,000 280,000
Proceeds from loan payable to
related party - 100,000
Repayment of principal on capital
leases - (34,126)
----------- -----------
Net cash provided by
financing activities 204,334 603,833
----------- -----------
NET INCREASE (DECREASE) IN CASH 18,794 (18,794)
CASH, beginning of period - 18,794
----------- ---------
CASH, end of period $ 18,794 $ -
=========== =========
(Continued)
F-8
<PAGE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Period From
Inception to Year Ended
December 31, December 31,
1994 1995
-------------- ------------
Acquisition of equipment under
capital leases $ 175,795 $ 18,430
============ ==========
Note receivable for subscription of
preferred stock $ 100,000 $ -
============ ===========
Preferred dividends $ 3,889 $ 18,667
============ ===========
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
1. Summary of Significant Accounting Policies and Risk Factors
a. Organization
Hawaiian Natural Water Company, Inc. (the "Company") was incorporated
in the state of Hawaii on September 13, 1994. The Company was formed
for the purpose of bottling, marketing and distributing Hawaiian
natural water in the United States and foreign markets. As of December
31, 1995, the Company was in the initial stage of its operations with
marketing and distribution arrangements being formulated and
established. The Company's initial product introduction occurred in the
first quarter of 1995.
b. Basis of Accounting
The Company's accounting policies are in accordance with generally
accepted accounting principles in the United States.
c. Going Concern and Risk Factors
As of December 31, 1995, the Company had an accumulated deficit,
negative cash flows from operations and significant liabilities, some
of which were past due. The Company also needs to raise additional
capital to sustain and expand its operations. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As more fully discussed in Note 13, the Company is planning a private
placement offering to raise gross proceeds of $1.5 million from
Accredited Investors, as defined. In addition, as more fully discussed
in Note 13, the Company also plans an initial public offering for the
purpose of raising gross proceeds of approximately $5 million of
capital in order to implement its planned expansion.
There can be no assurances, however, that these offerings will succeed.
Additionally, should the Company require additional financing
subsequent to these offerings, there can be no assurance that the
required additional financing will be available.
F-10
<PAGE>
The following are other significant risk factors:
o The Company has been engaged in commercial operations since
February 1995. The Company generated $588,920 in net sales in the
fiscal year ended December 31, 1995 and $202,405 in net sales in
the fiscal quarter ended March 31, 1996. Approximately 77 percent
of these sales occurred in the Hawaiian market. The Company's
objective is to become a leading provider of premium quality
bottled water on a national and international basis. To date,
however, the Company has only begun to penetrate some of these
major target markets, such as the mainland United States, which is
far larger than the Company's local market and will likely have a
significant impact on the ultimate success of the Company's
business. While the Company believes that is has a distinctive
product with a basis for worldwide acceptance, to date demand for
the product on a national and international level has been largely
untested.
o The industry in which the Company plans to market its products is
highly competitive, including established companies with
significantly greater financial resources than the Company.
Accordingly, even if the Company is successful in obtaining the
financing it needs, it will be necessary for the Company to
succeed in its efforts to market its products to the public.
o The Company leases its key operating assets, including the water
source, which results in the Company exercising less control over
its operations than if the Company had ownership of these assets.
In addition, the lease agreement requires the Company to make
rental payments to the lessor which could be substantial,
depending upon the Company's level of gross sales.
o The Company depends upon the services of its President for
development and management of the business to date. Loss of the
services of this individual could have an adverse effect on the
Company.
o The Company currently depends upon a Hawaii distributor for the
majority of the Company's sales. Termination of this oral
distribution agreement could have a material adverse impact on the
Company.
o The Company's operations are subject to regulation by various
governmental agencies. Failure of the Company to meet applicable
regulations both in the United States and in foreign markets could
lead to costly recalls, loss of certification to market the
product or loss of revenue resulting from negative publicity.
F-11
<PAGE>
c. Property and Equipment
Property and equipment are stated at cost, which includes the cost of
labor used to install equipment and perform major leasehold
improvements. Maintenance, repairs and minor renewals are expensed as
incurred. Depreciation and amortization are provided by the straight
line method over the following estimated useful lives:
Leasehold improvements The shorter of the useful
life or the lease term
Machinery and equipment and
assets under capital lease 7 years
d. Revenue Recognition
The Company recognizes revenue on the accrual method of accounting when
title transfers upon shipment. The Company also grants customers the
right to return goods which are defective or otherwise unsuitable for
sale. The Company issues refunds to customers or replaces goods which
are rejected.
The Company's policy is to provide a reserve for estimated
uncollectible trade accounts receivable, if any. The Company also
provides a reserve for estimated sales returns and related disposal
costs. Net sales revenue reflects the reduction for the reserve for
sales returns, discounts and freight-out.
e. Advertising
The Company charges the cost of advertising to expense as incurred. The
Company had no advertising expense in the period from inception to
December 31, 1994. The Company incurred approximately $48,000 of
advertising expense during the year ended December 31, 1995, which is
reflected in Selling and Marketing Expenses in the accompanying
financial statements.
f. New Accounting Pronouncements
Long-Lived Assets
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement requires that long-lived
assets to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. This statement is effective
for fiscal years beginning after December 15, 1995. The Company will
adopt the new standard in 1996. Management does not expect that the new
standard will have a material impact on the Company's financial
statements.
F-12
<PAGE>
Stock-Based Compensation
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based
compensation plans, including all arrangements by which employees
receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the
price of the employer's stock. This statement also applies to
transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must
be accounted for based on the fair value of the consideration received
or the fair value of the equity instruments issued, whichever is more
reliably determinable. This statement is effective for fiscal years
beginning after December 15, 1995. The Company will adopt the new
standard in 1996. Management has not yet determined the impact that
this new standard will have on the Company's financial statements.
g. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
h. Organizational Costs
Costs incurred in organizing the Company are being amortized over a
five year period.
i. Fair Value of Financial Instruments
Because of the Company's deteriorating financial condition the fair
value may be significantly less than the amounts at which the notes
payable are carried.
j. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this statement, income tax
liabilities and assets are recognized at enacted tax rates for the
expected future tax consequences of temporary differences between
carrying amounts and the tax basis of assets and liabilities. A reserve
is provided to reduce the tax effect of deferred tax assets to
estimated realizable value.
k. 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 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.
F-13
<PAGE>
2. Inventories
As of December 31, 1995, inventories were comprised of the following:
Raw materials $ 99,394
Finished goods 79,466
--------
$178,860
========
Raw materials inventory consists of empty bottles, caps, labels and
various packaging and shipping materials. Inventory cost as of December
31, 1995, consists of the approximate cost of purchased direct
materials.
3. Property and Equipment
Property and equipment is summarized as follows:
Leasehold improvements $144,855
Assets under capital lease 194,225
Machinery and equipment 148,569
--------
487,649
Less: Accumulated depreciation and
amortization (49,846)
--------
$437,803
========
Depreciation and amortization expense for the period from inception to
December 31, 1994 was insignificant. Depreciation expense for the year
ended December 31, 1995 was $49,780 and is reflected in General and
Administrative Expenses in the accompanying financial statements.
4. Related Party Transactions
In May 1995, the Company executed a $100,000 unsecured promissory note
(the "Loan") due to a business in which the Company's
Secretary/Treasurer is the president and a stockholder. The interest
rate on the Loan is 12 percent, interest is due monthly and principal
was originally due on June 24, 1995. The loan is currently past due and
a demand for payment has been made. The Loan is guaranteed by certain
of the Company's directors and an affiliate. The Company plans to repay
$50,000 of the principal and accrued interest to date on the Loan with
proceeds from a planned private placement. The balance will be retired
with the proceeds from a planned initial public offering (see Notes 1
and 13).
In 1995, the Company purchased water purification machinery for $25,000
from a business controlled by the Company's President.
F-14
<PAGE>
The Company's President and Secretary/Treasurer are owners of a
principal stockholder of the Company. The Company paid total salaries
to these individuals of approximately $28,000 and $102,000 in 1994 and
1995, respectively. These expenses are reflected in General and
Administrative Expenses in the accompanying financial statements. In
August 1995, the Company's Secretary/Treasurer orally agreed to defer
payment of his salary, until the Company achieves breakeven, as
defined. This is reflected as Deferred Compensation in the accompanying
balance sheet.
The Company subleases a portion of its office space to a stockholder
and another business owned by the Company's President. The Company
leases the space under a month-to-month lease agreement, calling for
monthly rental payments of approximately $1,760. The Company receives
rental payments of approximately $400 per month from its sublessees.
The Company leases its bottling facility and surrounding property,
including the water source and pumping equipment from a principal
stockholder, under a 50 year lease (see Note 8.b.).
5. Bank Loan
The Company's bank loan consists of a revolving line of credit with a
bank bearing interest at the bank's prime rate (as defined) plus 2
percent (10.5 percent at December 31, 1995) and was due March 1996. The
line is secured by accounts receivable, inventory and equipment of the
Company and is guaranteed by certain of the Company's directors and an
affiliate. As of December 31, 1995 the Company had drawn all available
amounts under this line. On June 10, 1996, the bank demanded full
repayment of the line. The Company intends to use a portion of the
proceeds from the private placement (see Notes 1 and 13) to pay the
outstanding balance.
The Company paid and expensed no interest in 1994 and expensed
approximately $53,000 of interest in 1995. The Company paid
approximately $46,000 of interest in 1995.
6. Current Liabilities
Unearned revenue represents cash collected from a foreign distributor
for a sale which had not yet been shipped at December 31, 1995.
Approximately $320,000 of the Company's accounts payable were past due
as of December 31, 1995.
7. Income Taxes
Certain items of expense are recognized in different periods for income
tax purposes than for financial reporting purposes.
As of December 31, 1995, the Company had approximately $795,000 of net
operating loss (NOL) carryforwards available to reduce future taxable
income. These NOL carryforwards begin to expire in 2010. The major
temporary differences as of December 31, 1995, primarily relate to
certain accrued liabilities not currently deductible for tax purposes.
F-15
<PAGE>
The deferred tax asset as of December 31, 1995 consisted of the
following:
Net operating loss carryforward $318,000
Accrued liabilities not deductible for tax purposes 11,000
---------
329,000
Valuation allowance (329,000)
--------
Net deferred tax asset $ -
========
Due to the uncertainty of its future realization, the net deferred tax
asset has been fully reserved. The Company recorded valuation
allowances of $32,000 and $297,000 for the period from inception to
December 31, 1994 and for the year ended December 31, 1995,
respectively. Upon the close of the planned initial public offering,
the Company will be subject to Internal Revenue Code Section 382 which
will limit the Company's ability to utilize net operating losses
generated prior to the closing.
The Company paid no taxes and had no net deferred or current tax
provision/benefit for the period from inception to December 31, 1994
and the year ended December 31, 1995.
8. Commitments and Contingencies
a. Capital Lease Obligations
The Company leases machinery and equipment under capital leases which
expire on various dates through April 2000. As of December 31, 1995,
future minimum payments were as follows:
1996 $ 49,998
1997 49,998
1998 49,998
1999 46,231
2000 1,198
--------
Total Future Minimum Payments 197,423
Less -- Amount Representing Interest 37,324
--------
Total Capital Lease Obligations 160,099
Less -- Current Portion 32,424
--------
Noncurrent Portion $127,675
========
These capital leases are guaranteed by certain of the Company's
directors and an affiliate.
b. Operating Lease Obligations
The Company leases its bottling facility and surrounding property,
including the water source and pumping equipment from a principal
stockholder, under a 50 year lease. The lease can be renewed at the
Company's option for an additional 50 years.
F-16
<PAGE>
In July 1996, the lease was amended to establish base rent at $2,000
per month and percentage rent at two percent of net annual sales, as
defined, provided that net sales are at least $1,700,000. Other
significant provisions of the lease unaffected by the amendment
include:
o Provision to allow lessor to draw up to 50 percent of the water
flow from the well.
o Provision to require the Company to relocate on six months
advance written notice (this provision was subsequently removed
by the July 1996 amendment described below).
o The Company is required to maintain adequate levels of
insurance for the property.
Based on the terms of the amended lease the future minimum lease
payments as of December 31, 1995 were as follows:
1996 $24,000
1997 24,000
1998 24,000
1999 24,000
2000 24,000
Thereafter 1,050,000
----------
$1,170,000
==========
The Company paid approximately $6,000 and $23,000 in lease payments in
1994 and 1995, respectively, which is reflected in General and
Administrative Expenses in the accompanying financial statements.
In July 1996, the lease was further amended to include the following
provisions, effective concurrent with the closing of the proposed
private placement (see Note 13):
o Rent is the greater of $5,000 per month (Base Rent), adjusted
every five years based upon changes in the consumer price index in
Hawaii, as defined, or two percent of the Company's gross revenue,
as defined.
o The lease entitles the Company to exclusive use of the water
source, except that the lessor may draw up to 50 percent of the
water flow for use in beverage production other than the sale of
natural water.
c. Insurance
The Company maintains the following insurance coverages:
o General Liability - $2,000,000 aggregate and $1,000,000 each
occurrence.
o Property - all risk of physical damage and loss, excluding
earthquake and flood up to $706,000 ($35,000 deductible).
F-17
<PAGE>
The Company also maintains minimum worker's compensation coverage and
ocean marine cargo insurance written on the value of each shipment. The
Company has an equipment floater policy. The Company does not maintain
coverages for foreign liability, business interruption, earthquake and
flood, or mechanical breakdown.
9. Significant Customers and Suppliers
During 1995, approximately 81 percent of the Company's sales were made
through a Hawaiian distribution company (the "Distributor"). In 1996,
the Distributor sold the distributorship to a new company that decided
not to carry the Company's product. The Company has since negotiated an
oral agreement with a new distribution company in Hawaii. As such,
management does not expect the loss of the Distributor to have a
material adverse impact on the Company's sales.
During 1995, the Company imported all of its bottles from a
single-source supplier. In December 1995, the Company entered into a
three-year Blow Molding Agreement (the "Agreement") with a bottle
vendor (the "Vendor") to install and operate a bottle-making machine at
the Company's production facility. The machine was installed, tested
and became fully operational in July 1996. The Company is committed to
purchase a minimum of $750,000 of bottles, as defined, each year from
the Vendor. The Agreement automatically renews for a one year term,
unless terminated.
In July 1996, an officer of the Vendor was appointed a director of the
Company.
10. Sales Returns
During 1995, the Company sold approximately $133,000 (13,000 cases) of
product to a Japanese importer (the "Importer"). A portion of this
shipment was rejected by the Importer due to dust particle
contamination from labels, the cause of which the Company subsequently
identified and corrected. The Importer returned 8,000 cases in 1995 to
the Company and the Company reversed approximately $83,000 of sales and
credited the customer for the returned product. The Company resold the
majority of the product in the first quarter of 1996 at the Company's
approximate cost of $43,000. In connection with the return of these
goods, the Company was required to pay various freight, storage and
customs charges related to these shipments totaling approximately
$67,000. This amount is recorded in Accrued Expenses and Other Current
Liabilities in the accompanying financial statements. In July 1996, the
Company received a credit of approximately $26,000 from the
manufacturer of its labels in settlement of the dust particle
contamination issue. This credit was applied to past due accounts
payable to the manufacturer.
11. Foreign Sales
The Company sells its product directly to foreign distributors. All
sales are made in U.S. dollars. There were no export sales for the
period from inception to December 31, 1994. Export sales to Asia and
the Pacific Islands for the year ended December 31, 1995 (net of Japan
sales returns of approximately $83,000 as discussed above) were
approximately $80,000.
F-18
<PAGE>
12. Consulting Agreements
a. Financial Advisor
In October 1995, the Company entered into a consulting agreement with a
financial advisor (the "Advisor") for a 12 month term. The Advisor was
engaged to evaluate the Company's capital structure and requirements,
to evaluate potential acquisition or joint venture candidates and to
provide other strategic planning services to the Company. The Advisor's
fee will be $120,000 for the term of the agreement, payable in
installments, as defined, through January 1997. The Company recorded
$20,000 of consulting expense during 1995 which is reflected in Accrued
Expenses and Other Current Liabilities and General and Administrative
Expenses in the accompanying financial statements.
b. Sales Representative
In 1995, the Company entered into an agreement with an individual to be
the Company's exclusive sales agent (the "Agent") for the Western
Region of the United States. The Company paid the Agent a fee of $2,000
per month in 1995, commencing June 1995. In June 1996, the Agent became
a Vice President of the Company.
c. Marketing Consultant
In July 1996, the Company engaged an outside marketing consultant to
develop a marketing plan for the Company. The marketing consultant's
fee will be approximately $25,000.
13. Subsequent Events
a. Financing Arrangements
In anticipation of the following financial arrangements, in June 1996,
the Company increased the authorized shares of its common stock to
20,000,000 shares. In August 1996, the Company effected a 1,111.428 for
1 common stock split.
Private Placement - In September 1996, the Company is planning to offer
for sale to persons who qualify as "accredited investors," as defined,
a total of thirty Units (the "Offering"), each Unit (the "Unit")
consisting of (i) an unsecured promissory note of the Company in the
principal amount of $50,000 bearing interest at the rate of 10 percent
per annum (the principal balance and accrued interest of which is due
and payable on the earlier of (a) the closing of the sale of securities
or other financing of the Company from which the Company receives gross
proceeds of at least $2 million or (b) one year from the date of
issuance), and (ii) 25,000 warrants (the "Warrants") of the Company,
each Warrant exercisable to purchase one share of common stock of the
Company, no par value (the "Common Stock"), at an exercise price of
$1.50 per share, subject to adjustment under certain circumstances,
during the thirty-six month period commencing one year from the date
the Warrants are issued. The Warrants will not confer upon the holders
thereof any voting or other rights of a stockholder of the Company. In
F-19
<PAGE>
the event that the Company consummates an initial public offering of
its securities (the "IPO") prior to the last day on which the Warrants
may be exercised and such IPO includes warrants (the "Public Warrants")
to purchase shares of Common Stock, each Warrant which is then
unexercised will automatically, without any action by the holder
thereof be converted into a new warrant exercisable to purchase the
same number of shares of Common Stock as are then purchasable pursuant
to the Warrant but otherwise having terms identical to those of the
Public Warrants, including, but not limited to, the anti-dilution
provisions and the exercise price thereof which, in all likelihood,
will be higher than the exercise price of the Warrants.
The Units will be offered through a placement agent (the "Placement
Agent") on an exclusive basis. In consideration for placing the Units,
the Placement Agent will receive, upon the closing of the offering, a
sales commission equal to 10 percent of the aggregate subscription
price of the Units sold plus an expense allowance equal to three
percent of the aggregate subscription price. The Placement Agent will
also be entitled to receive 150,000 Warrants and reimbursements for
legal fees not to exceed $50,000.
Initial Public Offering - In May 1996, the Company received a Letter of
Intent from an underwriter (the "Underwriter") to act as the Managing
Underwriter in connection with the proposed IPO of units ("IPO Units")
each consisting of one share of Common Stock and one Public Warrant
issued by the Company. It is contemplated that the Underwriter shall
underwrite, on a firm commitment basis, such number of IPO Units
resulting in gross proceeds of approximately $5 million in an initial
public offering.
Private Investor Borrowing - In May 1996, the Company entered into a
$100,000 subordinated, unsecured note agreement (the "Borrowing") with
a private investor (the "Lender"). The Borrowing bears interest at 12
percent per annum and is due in one year. Concurrent with the
Borrowing, the Lender also received a common stock purchase warrant
(the "Investor Warrant") to purchase 24,351 shares of the common stock
of the Company at a total exercise price of approximately $.22. The
Investor Warrant is exercisable at any time during a period of five
years commencing May 1996.
Stockholder Loans - Subsequent to year-end, three stockholders
collectively loaned the Company $407,715 on an unsecured basis, bearing
interest at 12 percent and due in 1997.
Increase in Authorized Preferred Stock - Concurrent with the closing of
the Offering, the Company plans to increase the number of authorized
preferred shares to 5,000,000 and change the par value to $1.
F-20
<PAGE>
Conversion of Preferred Stock To Common Stock - The holders of the
preferred stock have agreed to convert all shares of preferred stock
held by them to common stock concurrent with the closing of the
Offering. Each share of preferred stock will be converted to one share
of common stock on a pre-split basis (or 1,111.428 shares post-split).
The cumulative dividend payable to preferred stockholders
(approximately $23,000 at December 31, 1995 and $32,000 at June 30,
1996) will be declared at the time of the conversion and will be
payable in the form of promissory notes.
Proforma Stockholders' Deficit Information at March 31, 1996
(Unaudited) - The following schedule reflects the proforma
stockholders' deficit as of March 31, 1996, including the planned
increase in authorized preferred stock and the planned conversion of
preferred stock to common stock (as discussed above). These
transactions are expected to occur concurrent with the closing of the
Offering. The information in this schedule has not been audited.
Proforma
As of March 31,
1996
--------------
Preferred stock, $1 par value, 5,000,000
shares authorized, no shares issued
or outstanding $ -
Common stock, no par value, 20,000,000
shares authorized, 1,599,212 shares
issued and outstanding 442,293
Accumulated deficit (1,043,318)
----------
Total stockholders' deficit $ (601,025)
==========
b. Purchase Order
In June 1996, the Company amended the Blow Molding Agreement by
increasing its purchase order to $1,825,000 for 10,000,000 bottles for
the period from July 1, 1996 to June 30,1997 in order to receive more
favorable pricing.
c. Advertising Consultant
On July 31, 1996 the Company entered into a one year agreement with an
advertising consultant (the "Consultant"). The Consultant's fee is
$5,000 per month. The agreement also provides that the Company, at its
discretion, may grant the Consultant stock options. The amount,
exercise price, expiration date and other attributes of options to be
granted are at the Company's discretion. No options have been granted
to the Consultant to date. In August 1996, the Consultant was appointed
a director of the Company.
F-21
<PAGE>
d. Employment Agreement
In August 1996, the Company entered into a 5-year employment agreement
(the "Employment Agreement") with its President. The Employment
Agreement is subject to automatic renewal for successive one-year
periods thereafter unless terminated by either party upon written
notice, as defined. The major provisions of the Employment Agreement
are as follows:
o Annual salary of $150,000.
o Bonus of up to $100,000 based upon the attainment of certain
performance goals to be determined by the Board of Directors.
o Options to purchase 150,000 shares of the Company's stock
(post-split) granted immediately prior to the closing of the
Offering at an exercise price equal to the initial public offering
price, subject to certain adjustments as defined. One-third of
these options will become vested on each of the first, second and
third anniversaries of the date of the Employment Agreement,
provided the Employment Agreement is still in effect.
o Covenant not to compete with the Company in the sale of natural
water for a period of one year following termination of the
Employment Agreement.
F-22
<PAGE>
SUPPLEMENTAL SCHEDULE I
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET - MARCH 31, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 5,322
Inventories 98,256
Trade Accounts Receivable 17,110
Prepaid Expenses 6,720
-----------
Total Current Assets 127,408
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $68,016 424,458
DEPOSITS 6,262
ORGANIZATIONAL COSTS, net of accumulated amortization of $1,352 3,157
-----------
Total Assets $ 561,285
===========
See Notes to Financial Statements.
F-23
<PAGE>
SUPPLEMENTAL SCHEDULE II
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET - MARCH 31, 1996
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $ 339,528
Loan Payable to Related Party 100,000
Bank Loan 300,000
Accrued Expenses and Other Current Liabilities 172,661
Unsecured Advances From Related Parties 45,500
Dividends Payable 27,222
Deferred Compensation 20,000
Capital Lease Obligation -- Current Portion 32,424
-----------
Total Current Liabilities 1,037,335
CAPITAL LEASE OBLIGATION -- Net of Current Portion 124,975
-----------
Total Liabilities 1,162,310
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT:
Preferred Stock, 8% cumulative, convertible;
$666.67 par value; 500 authorized; 350 shares
issued and outstanding (convertible into an
aggregate of 389,000 shares of common stock) 233,334
Common Stock, no par; 20,000,000 authorized;
1,210,212 shares issued and outstanding 208,959
Accumulated Deficit (1,043,318)
-----------
Total Stockholders' Deficit (601,025)
-----------
Total Liabilities and Stockholders' Deficit $ 561,285
===========
See Notes to Financial Statements.
F-24
<PAGE>
SUPPLEMENTAL SCHEDULE III
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,1995 AND 1996
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1996
------------ ------------
NET SALES $ 45,374 $ 202,405
COST OF SALES 50,939 196,371
------------ ------------
Gross Margin (5,565) 6,034
EXPENSES:
General and Administrative 99,341 140,384
Selling and Marketing 48,564 45,041
------------ ------------
147,905 185,425
OTHER INCOME (EXPENSE):
Interest Income 2,175 -
Interest Expense (9,185) (15,404)
------------ ------------
(7,010) (15,404)
------------ ------------
Net Loss $ (160,480) $ (194,795)
============ ============
See Notes to Financial Statements.
F-25
<PAGE>
SUPPLEMENTAL SCHEDULE IV
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 13, 1994) TO MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- ---------------------
Total
Number of Number of Accumulated Stockholders'
Shares Amount Shares Amount Deficit Deficit
------------ --------- ---------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 1,210,212 $208,959 350 $233,334 $(843,857) $(401,564)
Preferred cumulative dividends --
January 1 - March 31, 1996 - - - - (4,666) (4,666)
Net loss - January 1 - March
31, 1996 - - - - (194,795) (194,795)
------------ --------- --------- --------- ------------- ------------
BALANCE AT MARCH 31, 1996 1,210,212 $208,959 350 $233,334 $ (1,043,318) $ (601,025)
============ ========= ========= ========= ============= ============
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE>
SUPPLEMENTAL SCHEDULE V
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,1995 AND 1996
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(160,480) $ (194,795)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 10,973 18,397
Net (increase) decrease in
current assets (92,639) 133,738
Net increase (decrease) in
current liabilities 33,145 10,008
Increase in organizational costs - -
Increase in deposits (3,767) -
---------- ------------
Net cash used in
operating activities (212,768) (32,652)
---------- ------------
CASH USED IN INVESTING ACTIVITIES --
Purchase of property and equipment (115,524) (4,827)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - -
Proceeds from sale of preferred
stock 100,000 -
Proceeds from bank loan 220,000 -
Proceeds from unsecured advances from
related parties - 50,000
Repayment of unsecured advances from
related parties - (4,500)
Repayment of principal on capital
leases (10,502) (2,699)
---------- ------------
Net cash provided by
financing activities 309,498 42,801
---------- ------------
NET INCREASE (DECREASE) IN CASH (18,794) 5,322
CASH, beginning of period 18,794 -
---------- ------------
CASH, end of period $ - $ 5,322
========== ============
See Notes to Financial Statements.
F-27
<PAGE>
SUPPLEMENTAL SCHEDULE VI
HAWAIIAN NATURAL WATER COMPANY, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
1. General
The interim unaudited operating results for the three months ended March 31,
1996 have been prepared on the same basis as the audited financial statements
and, in the opinion of management, include all adjustments (consisting only of
normal recurring accruals) necessary in order to make the financial statements
not misleading. The results of operations for interim periods are not
necessarily indicative of results to be achieved for full fiscal years. Refer to
the December 31, 1995 notes to financial statements for further information.
2. Inventories
As of March 31, 1996, inventories were comprised of the following:
Raw materials $74,220
Finished goods 24,036
-------
$98,256
=======
F-28
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET - SEPTEMBER 30, 1996
(UNAUDITED)
Although the following unaudited financial statements for the nine months ended
September 30, 1996 have not been audited by Arthur Andersen LLP, Arthur Andersen
LLP, has informed the Company that, if the uncertainty described in Note 1
continues to exist at the time of their audit of the financial statements for
the year ended December 31, 1996, their report on those statements will include
an explanatory fourth paragraph describing the uncertainty.
ASSETS
CURRENT ASSETS:
Cash $ 10,890
Restricted Cash 100,000
Inventories 46,572
Trade Accounts Receivable 60,694
Prepaid Expenses 10,840
-----------
Total Current Assets 228,996
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $94,551 435,092
DEPOSITS 6,262
ORGANIZATIONAL COSTS, net of accumulated amortization of $1,804 2,705
DEFERRED CHARGES AND OTHER 172,946
-----------
Total Assets $ 846,001
===========
See Notes to Financial Statements.
F-29
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET - SEPTEMBER 30, 1996
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable $ 566,905
Loans Payable to Related Parties 507,715
Loans Payable 400,000
Accrued Expenses and Other Current Liabilities 171,439
Unsecured Advances From Related Parties 90,272
Dividends Payable 36,556
Deferred Compensation 35,000
Capital Lease Obligation -- Current Portion 24,750
------------
Total Current Liabilities 1,832,637
CAPITAL LEASE OBLIGATION -- Net of Current Portion 115,742
------------
Total Liabilities 1,948,379
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT:
Preferred Stock, 8% cumulative, convertible;
$666.67 par value; 500 authorized; 350 shares
issued and outstanding (convertible into an
aggregate of 389,000 shares of common stock) 233,334
Common Stock, no par; 20,000,000 authorized;
1,210,212 shares issued and outstanding 208,959
Accumulated Deficit (1,544,671)
------------
Total Stockholders' Deficit (1,102,378)
------------
Total Liabilities and Stockholders' Deficit $ 846,001
============
See Notes to Financial Statements.
F-30
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996
--------- ---------
NET SALES $ 534,611 $ 748,600
COST OF SALES 531,335 698,710
--------- ---------
Gross Margin 3,276 49,890
EXPENSES:
General and Administrative 294,138 533,464
Selling and Marketing 117,241 137,742
--------- ---------
411,379 671,206
0THER INCOME (EXPENSE):
Interest Income 2,179 --
Interest Expense (38,559) (65,498)
--------- ---------
(36,380) (65,498)
--------- ---------
Net Loss $(444,483) $(686,814)
========= =========
See Notes to Financial Statements.
F-31
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------------- ----------------------
Total
Number of Number of Accumulated Stockholders'
Shares Amount Shares Amount Deficit Deficit
----------- ------------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 1,210,212 $ 208,959 350 $ 233,334 $ (843,857) $ (401,564)
Preferred cumulative dividends --
January 1 - September 30, 1996 -- -- -- -- (14,000) (14,000)
Net loss - January 1 - September
30, 1996 -- -- -- -- (686,814) (686,814)
----------- ----------- ------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1996 1,210,212 $ 208,959 350 $ 233,334 $(1,544,671) $(1,102,378)
=========== =========== ======= =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-32
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,1995 AND 1996
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (444,483) $ (686,814)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 35,653 45,381
Net increase in current assets (300,294) (35,227)
Net increase in current liabilities 264,626 251,163
Increase in deposits (6,378) -
----------- -----------
Net cash used in operating activities (450,876) (425,497)
----------- -----------
CASH USED IN INVESTING ACTIVITIES --
Purchase of property and equipment, net (160,009) (41,993)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 121,388 -
Proceeds from sale of preferred stock 100,000 -
Proceeds from bank loan 278,370 -
Proceeds from private investor loan - 100,000
Proceeds from loans payable to related parties 100,000 407,715
Proceeds from unsecured advances from
related parties - 100,272
Repayment of unsecured advances from
related parties - (10,000)
Repayment of principal on capital leases (7,667) (19,607)
----------- -----------
Net cash provided by financing
activities 592,091 578,380
----------- -----------
(Continued)
See Notes to Financial Statements.
F-33
<PAGE>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996
--------------- -------------
NET INCREASE (DECREASE) IN CASH (18,794) 110,890
CASH, beginning of period 18,794 -
------------- -----------
CASH, end of period $ - $ 110,890
============= ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY:
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996
--------------- -------------
Preferred dividends $ 14,000 $ 14,000
============= =================
See Notes to Financial Statements.
F-34
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
1. General
The interim unaudited operating results for the nine months ended September 30,
1996 and 1995 have been prepared in accordance with generally accepted
accounting principles consistent with the audited financial statements and, in
the opinion of management, include all adjustments (consisting only of normal
recurring accruals) necessary in order to make the financial statements not
misleading. The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years. Due to the
accumulated deficit, negative cash flow from operations and significant
liabilities, some of which are past due as of September 30, 1996 and for the
nine months then ended, there continues to be substantial doubt about the
Company's abilities to continue as a going concern. Managements plans in regard
to this matter as well as certain othere risk factors are more fully described
in Note 1 to the December 31, 1995 audited financial statements. Refer to the
December 31, 1995 notes to financial statements on page F-10 of this document
for further information.
2. Restricted Cash
Restricted cash consists of a bank certificate of deposit to provide additional
security for the repayment of a $300,000 past-due bank loan. This bank loan was
repaid in October 1996 (see Note 9).
3. Inventories
As of September 30, 1996, inventories were comprised of the following:
Raw materials $23,585
Finished goods 22,987
-------
$46,572
=======
4. Significant Customers and Suppliers
In 1995, approximately 81 percent of the Company's sales were made through a
Hawaiian distribution company (the "Distributor"). In 1996, the Distributor sold
the distributorship to a new company that decided not to carry the Company's
product after May 1996. In June 1996, the Company negotiated an oral agreement
with a new distribution company in Hawaii. For the nine months ended September
30, 1996, approximately 67 percent of the Company's sales were made through
these two Hawaiian distributors.
Prior to July 1996, the Company imported all of its bottles from a single-source
supplier. Subsequent to July 1996, the Company began to purchase bottles from a
vendor who operates a bottle-making machine at the Company's production
facility. The Company is committed to purchase a minimum of $750,000 of bottles
per year, as defined, for three years. The Agreement automatically renews for a
one year term, unless terminated. In June 1996, the Company amended the Blow
Molding Agreement by increasing its purchase order to $1,825,000 for 10,000,000
bottles
F-35
<PAGE>
for the period from July 1, 1996 to June 30,1997 in order to receive more
favorable pricing.
5. Sales Returns
Prior to September 1995, the Company sold approximately $133,000 (13,000 cases)
of product to a Japanese importer (the "Importer"). In November 1995, a portion
of this shipment was rejected by the Importer due to dust particle contamination
from labels, the cause of which the Company subsequently identified and
corrected. The Importer returned 8,000 cases in the fourth quarter of 1995 to
the Company and the Company reversed approximately $83,000 of sales and credited
the customer for the returned product. The Company resold the majority of the
product in the first quarter of 1996 at the Company's approximate cost of
$43,000. In connection with the return of these goods, the Company was required
to pay various freight, storage and customs charges related to these shipments
totaling approximately $67,000. This amount was also recorded in the fourth
quarter of 1995. In July 1996, the Company received a credit of approximately
$26,000 from the manufacturer of its labels in settlement of the dust particle
contamination issue. This credit was applied to past due accounts payable to the
manufacturer.
6. Foreign Sales
The Company sells its product directly to foreign distributors. All sales are
made in U.S. dollars. Export sales to Asia and the Pacific Islands for the nine
months ended September 30, 1996 and 1995 (net of Japan sales returns of
approximately $83,000 in 1995 as discussed above) were approximately $116,000
and 80,000, respectively.
7. Past Due Liabilities
The following liabilities were past due as of September 30, 1996:
Loan payable to related party $100,000
Loan payable to bank 300,000
Accrued interest payable 12,000
Accounts payable 358,000
--------
$770,000
========
8. Subsequent Event - Office Lease Commitment
In October 1996 the Company vacated its former office space and entered into a
3-year lease for new office and warehouse space in Honolulu. Monthly minimum
rental payments are $3,000 for the term of the lease.
9. Subsequent Event - $1.5 Million Bridge Loan
On October 7, 1996 the Company successfully completed a bridge financing (the
"Bridge Financing"), consisting of (i) an aggregate of $1.5 million of unsecured
promissory notes of the Company bearing interest at the rate of 10 percent per
annum (the principal balance and accrued interest of which is due and payable on
the earlier of (a) the closing of the
F-36
<PAGE>
sale of securities or other financing of the Company from which the Company
receives gross proceeds of at least $2 million or (b) one year from the date of
issuance), and (ii) an aggregate of 750,000 warrants (the "Warrants") of the
Company, each Warrant exercisable to purchase one share of common stock of the
Company, no par value (the "Common Stock"), at an exercise price of $1.50 per
share, subject to adjustment under certain circumstances, during the thirty-six
month period commencing October 10, 1997. The Warrants will not confer upon the
holders thereof any voting or other rights of a stockholder of the Company. In
the event that the Company consummates an initial public offering of its
securities (the "IPO") prior to the last day on which the Warrants may be
exercised and such IPO includes warrants (the "Public Warrants") to purchase
shares of Common Stock, each Warrant which is then unexercised will
automatically, without any action by the holder thereof be converted into a new
warrant exercisable to purchase the same number of shares of Common Stock as are
then purchasable pursuant to the Warrant but otherwise having terms identical to
those of the Public Warrants, including, but not limited to, the anti-dilution
provisions and the exercise price thereof which, in all likelihood, will be
higher than the exercise price of the Warrants. The Warrants were valued by the
Company at $187,500 in the aggregate and will be recorded as original issue
discount in October 1996.
In connection with the Bridge Financing, the Company also issued 150,000
warrants to the placement agent (the "Placement Agent Warrants"), each Warrant
exercisable to purchase one share of Common Stock at an exercise price of $1.50
per share, subject to adjustment under certain circumstances, and expiring on
October 10, 2001. In the event that the Company successfully completes an IPO
within one year of the date of the Bridge Financing and uses the same placement
agent for the IPO as for the Bridge Financing, the Placement Agent Warrants will
be canceled. The Company anticipates completing an IPO in early 1997 and expects
to use a portion of the IPO proceeds to repay the Bridge Financing.
Direct costs of completing the Bridge Loan totaled approximately $378,000. Costs
incurred through September 30, 1996 of approximately $158,000 were accrued and
are reflected as Deferred Charges and Other in the accompanying balance sheet.
The remaining costs will be recorded in October 1996 upon the closing of the
Bridge Loan.
The net proceeds of the bridge loan were used as follows:
Repayment of past-due bank loan $ 300,000
Partial repayment of past-due
loan from affiliate 50,000
Repayment of past-due interest 12,000
Reserve for IPO costs 250,000
General working capital needs 510,000
----------
Total net proceeds $1,122,000
==========
F-37
<PAGE>
10. Proforma Stockholders' Deficit Information at September 30 , 1996
(Unaudited)
The following schedule reflects the proforma stockholders' deficit as of
September 30, 1996, including the increase in authorized preferred stock and the
conversion of preferred stock to common stock which occurred concurrent with the
closing of the Bridge Financing. See the December 31, 1995 financial statement
footnotes for more information.
Proforma as
of September 30,
1996
------------
Preferred stock, $1 par value, 5,000,000
shares authorized, no shares issued
or outstanding $ -
Common stock, no par value, 20,000,000
shares authorized, 1,599,212 shares
issued and outstanding 442,293
Accumulated deficit (1,043,318)
----------
Total stockholders' deficit $ (601,025)
==========
11. Initial Public Offering
In May 1996, the Company received a Letter of Intent from an underwriter (the
"Underwriter") to act as the Managing Underwriter in connection with the
proposed IPO of units ("IPO Units") each consisting of one share of Common Stock
and one Public Warrant issued by the Company. It is contemplated that the
Underwriter shall underwrite, on a firm commitment basis, 2,000,000 IPO Units
resulting in gross proceeds of $8 million in an initial public offering. The
Underwriter also has the option to purchase all or part of an additional fifteen
percent of the securities to be offered from the Company to cover any
over-allotments for a period of forty-five days from the date of the
Registration Statement.
Each Public Warrant is expected to be exercisable to purchase one share of
Common Stock at a price per share equal to 150 percent of the IPO price per
Unit, subject to adjustment, and will expire 5 years after the date of issuance.
Commencing 12 months after the effective date of the proposed IPO, with the
consent of the Underwriter, the Company shall have the right to redeem all, but
not less than all, of the Public
F-38
<PAGE>
Warrants at a price equal to five cents per Public Warrant, subject to certain
conditions.
Upon the closing of the proposed offering, the Company plans to issue and sell
to the Underwriter 5-year warrants to purchase such number of Units as shall
equal ten percent of the number of Units to be offered (excluding
over-allotments) at a price of $.0001 per warrant. Each warrant may be exercised
at any time during a period of four years commencing at the beginning of the
second year after their issuance and sale, to purchase one Unit at an exercise
price of 120 percent of the IPO price per Unit.
12. Stock Options
In October and December 1996, the Company granted an aggregate of 200,000
options to purchase the Company's Common Stock at $4.00 per share to the
Company's President and Chief Financial Officer.
F-39
<PAGE>
No underwriter, dealer, sales representative, or any other person has been
authorized to give any information or to make any representation in connection
with this Offering other than those contained in this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company, any Selling Securityholder or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby by any
person in any jurisdiction where such offer or solicitation is not authorized or
in which the person making such offer or solicitation is not qualified to do so
or to anyone to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date hereof.
---------------------
TABLE OF CONTENTS
---------------------
Prospectus Summary....................................5
Risk Factors..........................................11
The Company...........................................18
Use of Proceeds.......................................20
Dividend Policy.......................................21
Capitalization........................................22
Dilution..............................................23
Selected Financial Data...............................25
Management's Discussion and Analysis of
Financial Condition and Results of Operations......26
Business..............................................32
Management............................................41
Principal Stockholders................................46
Selling Securityholders...............................47
Certain Transactions..................................49
Description of Capital Stock..........................51
Securities Eligible for Future Sale...................54
Underwriting..........................................56
Legal Matters.........................................59
Experts...............................................59
Available Information.................................59
Index to Financial Statements........................F-1
--------------------
Until _________, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
2,000,000 Units
HAWAIIAN NATURAL WATER COMPANY, INC.
------------
PROSPECTUS
------------
JOSEPH STEVENS & COMPANY, L.P.
_____________, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article IX of the Registrant's Articles of Incorporation provides as
follows:
"Each director or officer, or former director or officer of this
corporation, and his legal representatives, shall be indemnified by the
corporation against liabilities, expenses, counsel fees and costs
reasonably incurred by him or his estate in connection with, or arising
out of, any action, suit, proceeding or claim in which he is made a
party by reason of his being or having been such a director or officer;
and any person who, at the request of this corporation, serves as
director or officer of another corporation in which this corporation
owned corporate stock, and his legal representative, shall in like
manner be indemnified by this corporation; provided, that in neither
case shall the corporation indemnify such director or officer with
respect to any matter as to which he shall be finally adjudged liable
for negligence or misconduct in the performance of this duty to the
corporation unless and only to the extent that the Court in which such
action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all circumstances
of the case, such person is fairly and reasonably entitled to indemnity
for such expenses which such Court shall deem proper, and shall further
be indemnified as to any compromise or settlement of any such action,
suit or proceeding or claim asserted against such director or officer
(including expenses, counsel fees and costs reasonably incurred in
connection therewith), provided the Board of Directors shall have first
approved such proposed compromise settlement and determined the officer
or director involved was not guilty of negligence or misconduct; but,
in taking such action, any director involved shall not be qualified to
vote thereon, and if for this reason a quorum of the Board cannot be
obtained to vote on such matter, it shall be determined by a committee
of three (3) persons appointed by the shareholders at a duly called
special meeting or a regular meeting. In determining whether or not a
director or officer was guilty of negligence or misconduct in relation
to any such matter, the Board of Directors or committee appointed by
the shareholders, as the case may be, may rely conclusively upon an
opinion of independent counsel selected by such Board or Committee. The
right to indemnification herein provided shall not be exclusive of any
other right to which such director or officer may be lawfully entitled.
The Registrant maintains liability insurance on behalf of its officers
and directors. The Registrant has not entered into any indemnity agreements, and
has no indemnification arrangements, with any of its officers and directors
except as described above.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the various estimated expenses in
connection with the sale and distribution of the securities registered hereby,
other than sales commissions and the non-accountable expense allowance payable
to the Underwriter:
Registration Fee $ 7,787.89
NASD Fee 3,070.00
NASDAQ Listing Fee 10,000.00
Legal Fees and Expenses 85,000.00
Blue Sky Fees and Expenses 45,000.00
Accounting Fees and Expenses 45,000.00
Printing and Engraving Expenses 60,000.00
Insurance Premium re Securities Act *
Liabilities
Transfer Agent's Fees and Expenses 2,500.00
Miscellaneous Expenses *
----------
TOTAL $310,000.00
----------
All of the foregoing expenses will be borne by the Registrant. The
Selling Securityholders will not bear any of such expenses.
- ------
* To be filed by amendment
Item 26. Recent Sales of Unregistered Securities
The Registrant was initially capitalized in September 1994 through the
issuance of an aggregate of (i) 639,071 shares of Common Stock, no par value
("Common Stock"), to two investors in exchange for an aggregate of $51,000 in
cash and certain leasehold rights to the Registrant's bottling facility as
described in the Prospectus constituting Part I of this Registration Statement
(the "Prospectus") under the heading "Business--Facilities," and (ii) 350 shares
of Convertible Preferred Stock, par value $666.67 per share ("Convertible
Preferred Stock"), of which 200 shares were purchased by one investor in
exchange for $133,334 in cash and the remaining 150 shares were purchased by
another investor in exchange for a promissory note in the amount of $100,000,
which was paid in full in March 1995. In October 1995, all 350 shares of
Convertible Preferred Stock then outstanding were converted into an aggregate of
389,000 shares of Common Stock. The foregoing transactions were exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Section 4(2) thereof and the rules and regulations thereunder
("Section 4(2)").
II-2
<PAGE>
Reference is made to the information contained in the Prospectus under
the heading "Certain Transactions," with respect to subsequent issuances of
additional debt and equity securities by the Registrant to its stockholders,
which information is incorporated herein by reference. All of such issuances
were exempt from registration under the Securities Act pursuant to Section 4(2).
In May 1996, the Registrant issued a promissory note for $100,000,
together with warrants to purchase an aggregate of 24,351 shares of Common Stock
at an exercise price of $.000009 per share, to one investor in exchange for
$100,000 in cash. Such issuance was exempt from registration under the
Securities Act pursuant to Section 4(2).
Reference is made to the information contained in the Prospectus under
the heading "The Company--Recent Bridge Financing," with respect to a $1,500,000
Bridge Financing (as defined therein) consummated by the Registrant in October
1996, which information is incorporated herein by reference. The Bridge
Financing was exempt from registration under the Securities Act pursuant to
Section 4(2).
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ ------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation, as amended, of the Registrant*
3.2 By-Laws, as amended, of the Registrant*
4.1 Specimen Stock Certificate for the Registrant's Common Stock*
4.2 Form of Warrant Agreement between the Registrant and Continental Stock
Transfer and Trust Company, as Warrant Agent
4.3 Form of Underwriter's Warrant Agreement between the Registrant and Joseph
Stevens & Company, L.P, including form of Underwriter's Warrant Certificate
4.4 Specimen Redeemable Warrant Certificate*
4.5 Form of Bridge Warrant*
5.1 Opinion of Graham & James*
</TABLE>
- --------
* To be filed by amendment.
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.1 Lease Agreement dated October 3, 1994, as amended, between the Registrant as
Lessee and Hawaii Brewery Development Co., Inc. as Lessor*
10.2 Blow Molding Agreement dated December 1, 1995, between the Registrant and
Bottles Packaging, Inc.*
10.3 Financing Agreement dated March 31, 1995, between the Registrant and First
Hawaiian Bank*
10.4 Master Lease Agreement No. A2500, dated December 8, 1994 between the
Registrant and First Hawaiian Leasing and related agreements*
10.5 Employment Agreement, dated October 10, 1996, between the Registrant and
Marcus Bender*
10.6 Stock Option Agreement, dated October 10, 1996, between the Registrant and
Marcus Bender*
10.7 Form of Financial Advisory and Consulting Agreement between the
Registrant and Joseph Stevens & Company, L.P.
10.8 Form of Bridge Note*
10.9 Form of Promissory Note evidencing an aggregate of $407,715 in principal amount
of inbebtedness of the Registant to certain of its affiliates*
10.10 Promissory Note dated May 24, 1995 in the original principal amount of
$100,000 payable by the Registant to Inter Island Petroleum, Inc.*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Graham & James (Included in Exhibit 5.1 hereto)*
24.1 Power of Attorney (See page II-6 of the Registration Statement)
</TABLE>
- --------
* To be filed by amendment.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
pursuant to Rule 415 under the Securities Act, a post-effective amendment to
this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in the total dollar value of
securities offered, if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities and
Exchange Commission (the "Commission") pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
II-4
<PAGE>
(iii) To include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The Registrant will provide to the underwriter for the offering 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 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the 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 Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
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 Registrant 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 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 Registrant 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 Registrant under Rule 424(b)(1), or (4) or 497(h) under
the 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 the offering of the securities at that time as the initial bona fide
offering of those securities.
II-5
<PAGE>
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 authorized this registration
statement to be signed on its behalf by the undersigned in the City of Honolulu,
State of Hawaii on December 18, 1996.
HAWAIIAN NATURAL WATER COMPANY, INC.
By: /s/ MARCUS BENDER
------------------------------------
Marcus Bender
President & Chief Executive Officer
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Marcus Bender and Wallace Aoki, and each
of them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign (i) any amendments to this registration
statement, (ii) any other registration statement relating to the offering
registered hereby that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act of 1933, or (iii) any amendment to such other
registration statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
II-6
<PAGE>
In accordance with 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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ MARCUS BENDER President and Chief Executive Dec. 18, 1996
- --------------------- Officer and Director (Principal
Marcus Bender (Executive Officer)
/s/WALLACE AOKI Chief Financial Officer Dec. 18, 1996
- --------------------- (Principal Financial and
Wallace Aoki Accounting Officer)
/s/ BRIAN BARBATA Director Dec. 18, 1996
- ---------------------
Brian Barbata
/s/ JOHN MAYO Director Dec. 18, 1996
- ---------------------
John Mayo
/s/ MICHAEL CHAGAMI Director Dec. 18, 1996
- ---------------------
Michael Chagami
/s/ NATHAN KELLER Director Dec. 18, 1996
- ---------------------
Nathan Keller
/s/ ALEXANDER BRODY Director Dec. 18, 1996
- ---------------------
Alexander Brody
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation, as amended, of the Registrant*
3.2 By-Laws, as amended, of the Registrant*
4.1 Specimen Stock Certificate for the Registrant's Common Stock*
4.2 Form of Warrant Agreement between the Registrant and Continental Stock
Transfer and Trust Company, as Warrant Agent
4.3 Form of Underwriter's Warrant Agreement between the Registrant and Joseph
Stevens & Company, L.P, including form of Underwriter's Warrant Certificate
4.4 Specimen Redeemable Warrant Certificate*
4.5 Form of Bridge Warrant*
5.1 Opinion of Graham & James*
10.1 Lease Agreement dated October 3, 1994, as amended, between the Registrant as
Lessee and Hawaii Brewery Development Co., Inc. as Lessor*
10.2 Blow Molding Agreement dated December 1, 1995, between the Registrant and
Bottles Packaging, Inc.*
10.3 Financing Agreement dated March 31, 1995, between the Registrant and First
Hawaiian Bank*
10.4 Master Lease Agreement No. A2500, dated December 8, 1994 between the
Registrant and First Hawaiian Leasing and related agreements*
10.5 Employment Agreement, dated October 10, 1996, between the Registrant and
Marcus Bender*
10.6 Stock Option Agreement, dated October 10, 1996, between the Registrant and
Marcus Bender*
10.7 Form of Financial Advisory and Consulting Agreement between the
Registrant and Joseph Stevens & Company, L.P.
10.8 Form of Bridge Note*
10.9 Form of Promissory Note evidencing an aggregate of $407,715 in principal amount
of inbebtedness of the Registant to certain of its affiliates*
10.10 Promissory Note dated May 24, 1995 in the original principal amount of
$100,000 payable by the Registant to Inter Island Petroleum, Inc.*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Graham & James (Included in Exhibit 5.1 hereto)*
24.1 Power of Attorney (See page II-6 of the Registration Statement)
</TABLE>
- ----------
*To be filed by amendment.
<PAGE>
2,000,000 Units, Each
Unit Consisting of One Share of
Common Stock and One Redeemable Warrant
HAWAIIAN NATURAL WATER COMPANY, INC.
UNDERWRITING AGREEMENT
New York, New York
____________, 1997
JOSEPH STEVENS & COMPANY, L.P.
33 Maiden Lane, 8th Floor
New York, New York 10038
Ladies and Gentlemen:
Hawaiian Natural Water Company, Inc., a Hawaii corporation
(the "Company"), confirms its agreement with Joseph Stevens & Company, L.P.
(hereinafter referred to as "you" or the "Underwriter"), with respect to the
sale by the Company and the purchase by the Underwriter of 2,000,000 units (the
"Units"), each Unit consisting of one (1) share of common stock, no par value
(the "Common Stock") and one (1) redeemable warrant (the "Redeemable Warrants").
Each Redeemable Warrant is exercisable for one share of Common Stock. The Common
Stock and Redeemable Warrants will be separately tradeable upon issuance and are
hereinafter referred to as the "Firm Units." The Redeemable Warrants are
exercisable commencing [______________], 1997 [the date of the Prospectus] until
[_____________], 2002 [60 months from the effective date of the Registration
Statement], unless previously redeemed by the Company, at an initial exercise
price equal to $[____] [150% of the initial public offering price per Unit] per
share, subject to adjustment. The Redeemable Warrants may be redeemed by the
Company, in whole, and not in part, at a redemption price of five cents ($.05)
per Redeemable Warrant at any time commencing [____________], 1998 [12 months
after the date of the Prospectus] on 30 days' prior written notice provided that
the average closing bid price (or sale price) of the Common Stock equals or
exceeds 150% of the then exercise price per share (subject to adjustment) for
any twenty (20) trading days within a period of thirty (30) consecutive trading
days ending on the fifth (5th) trading day prior to the date of the notice of
redemption and the Company shall have obtained the prior written consent of the
Underwriter. Upon the Underwriter's request, as provided in Section 2(b) of this
Agreement, the Company shall also issue and sell to the Underwriter up to an
additional 300,000 Units for the purpose of covering over-allotments, if any.
Such 300,000 Units are hereinafter collectively referred to as the
<PAGE>
"Option Units." The Company also proposes to issue and sell to the Underwriter
or its designees warrants (the "Underwriter's Warrants"), pursuant to the
Underwriter's Warrant Agreement (the "Underwriter's Warrant Agreement"), for the
purchase of an additional 200,000 Units (the "Underwriter's Units"). The
Underwriter's Units, the shares of Common Stock and the Redeemable Warrants
underlying the Underwriter's Units and the shares of Common Stock issuable upon
exercise of the Redeemable Warrants underlying the Underwriter's Units are
hereinafter collectively referred to as the "Underwriter's Securities." The
shares of Common Stock issuable upon exercise of the Redeemable Warrants,
including the Redeemable Warrants underlying the Underwriter's Units, are
hereinafter referred to as the "Warrant Shares." Further, an additional 750,000
Redeemable Warrants (the "Selling Securityholder Warrants") and 750,000 shares
of Common Stock underlying the Selling Securityholder Warrants (the "Selling
Securityholder Shares"), are being registered for the account of certain selling
security holders in connection with this offering which are not being
underwritten by the Underwriter. The Selling Securityholder Warrants and the
Selling Securityholder Shares are hereinafter collectively referred to as the
"Selling Securityholder Securities." The Firm Units, the Option Units, the
Underwriter's Warrants, the Underwriter's Units, the Selling Securityholder
Securities and the Warrant Shares are hereinafter collectively referred to as
the "Securities" and are more fully described in the Registration Statement and
the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and covenants and agrees with, the Underwriter as of
the date hereof, and as of the Closing Date (hereinafter defined) and the Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and amendments
thereto, on Form SB-2 (Registration No. 333-[_____]), including any related
preliminary prospectus or prospectuses (each a "Preliminary Prospectus"), for
the registration of the Securities, under the Securities Act of 1933, as amended
(the "Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
rules and regulations of the Commission under the Act. The Company will not file
any other amendment to such registration statement which the Underwriter shall
have objected to in writing after having been furnished with a copy thereof.
Except as the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time it becomes effective (including
the prospectus, financial statements, schedules, exhibits and all other
documents filed as a part thereof or incorporated therein (including, but not
limited to, those documents or that information incorporated by reference
therein) and all information deemed to be a part thereof as of such time
pursuant to paragraph (b) of Rule 430A of the rules and regulations under the
Act), is hereinafter called the "Registration Statement," and the form of
prospectus in the form first filed with the Commission pursuant to Rule 424(b)
of the rules and regulations under the Act is hereinafter called the
"Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus or any part of any
2
<PAGE>
thereof and no proceedings for a stop order suspending the effectiveness of the
Registration Statement or any of the Company's securities have been instituted
or are pending or threatened. Each of the Preliminary Prospectus and the
Registration Statement and the Prospectus, at the time of filing thereof,
conformed in all material respects with the requirements of the Act and the
Rules and Regulations, and none of the Preliminary Prospectus, the Registration
Statement nor the Prospectus, at the time of filing thereof, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
this representation and warranty does not apply to statements made or statements
omitted in reliance upon and in conformity with written information furnished to
the Company with respect to the Underwriter and its proposed method of
distribution of the Units by or on behalf of the Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or the Prospectus;
provided that such written information or omissions only pertain to disclosures
in the Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto directly relating to the transactions
effected by the Underwriter in connection with this Offering. The Company
acknowledges that the statements with respect to the public offering of the
Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriter expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriter for inclusion in the Prospectus.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date and each Option Closing
Date, if any, and during such longer period as the Prospectus may be required to
be delivered in connection with sales by the Underwriter or a dealer, the
Registration Statement and the Prospectus will contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the Rules and
Regulations; and, at and through such dates, neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriter and its proposed method
of distribution of the Units by or on behalf of the Underwriter expressly for
use in the Registration Statement or the Prospectus or any amendment thereof or
supplement thereto; provided that such written information or omissions only
pertain to disclosures in the Preliminary Prospectus, the Registration Statement
or Prospectus or any amendment thereof or supplement thereto directly relating
to the transactions effected by the Underwriter in connection with this
Offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriter expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriter for inclusion in the
Prospectus.
(d) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
3
<PAGE>
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which its operations
require such qualification or licensing. The Company does not own, directly or
indirectly, an interest in any other corporation, partnership, trust, joint
venture or other business entity. The Company has all requisite power and
authority (corporate and other), and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business as
conducted on the date hereof and as described in the Prospectus; the Company is
and has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and with all
federal, state, local and foreign laws, rules and regulations to which it is
subject; and the Company has not received any notice of proceedings relating to
the revocation or modification of any such authorization, approval, order,
license, certificate, franchise or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
prospects, stockholders' equity, value, operations, properties, business or
results of operations of the Company. The disclosure in the Registration
Statement concerning the effects of federal, state, local and foreign laws,
rules and regulations on the Company's business as currently conducted and as
contemplated are correct in all respects and do not omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Capital Stock" and will have the adjusted capitalization set
forth therein on the Closing Date and the Option Closing Date, if any, based
upon the assumptions set forth therein, and the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other securities, except
for this Agreement, the Underwriter's Warrant Agreement and the Warrant
Agreement (as defined in Section 1(ff) hereof of this Agreement) and as
described in the Prospectus. The Securities and all other securities issued or
issuable by the Company on or prior to the Closing Date and each Option Closing
Date, if any, conform or, when issued and paid for, will conform, in all
respects to the descriptions thereof contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holder of
any security of the Company or any similar contractual right granted by the
Company. The Securities to be issued and sold by the Company hereunder and
pursuant to the Underwriter's Warrant Agreement and the Warrant Agreement are
not and will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof and thereof, will be validly issued, fully
paid and non-assessable and conform to the descriptions thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the authorization,
issue and sale of the Securities has been duly and validly taken; and the
certificates representing the Securities, when delivered by the Company, will be
in due and proper form. Upon the issuance and delivery of the Securities,
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pursuant to the terms hereof, and pursuant to the Warrant Agreement and the
Underwriter's Warrant Agreement, to be sold by the Company hereunder and
thereunder to the Underwriter, the Underwriter will acquire good and marketable
title to such Securities, free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity of
any kind whatsoever asserted against the Company or any affiliate (within the
meaning of the Rules and Regulations) of the Company.
(f) The financial statements of the Company and the notes
thereto included in the Registration Statement, each Preliminary Prospectus and
the Prospectus fairly present the financial position, income, changes in
stockholders' equity and the results of operations of the Company at the
respective dates and for the respective periods to which they apply. Such
financial statements have been prepared in conformity with generally accepted
accounting principles and the Rules and Regulations, consistently applied
throughout the periods involved. There has been no adverse change or development
involving a material prospective change in the condition, financial or
otherwise, or in the earnings, prospects, stockholders' equity, value,
operations, properties, business or results of operations of the Company,
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus;
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company conform in all respects to the descriptions thereof
contained in the Registration Statement and the Prospectus. The financial
information set forth in the Prospectus under the headings "The Company,"
"Summary Financial Information," "Capitalization," "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" fairly presents, on the basis stated in the Prospectus, the
information set forth therein and such financial information has been derived
from or compiled on a basis consistent with that of the financial statements
included in the Prospectus.
(g) The Company (i) has paid all federal, state, local and
foreign taxes for which it is liable, including, but not limited to, withholding
taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue
Code of 1986, as amended (the "Code"), and has furnished all information returns
it is required to furnish pursuant to the Code, (ii) has established adequate
reserves for such taxes which are not due and payable, and (iii) does not have
any tax deficiency or claims outstanding, proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriter in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase by the Underwriter of any of
the Securities from the Company, (iii) the consummation by the Company of any of
its obligations under this Agreement, the Warrant Agreement, or the
Underwriter's Warrant Agreement, or (iv) resales of the Securities in connection
with the distribution contemplated hereby.
(i) The Company maintains insurance policies, including, but
not limited to, general liability, property, personal and product liability
insurance, and surety bonds which insure the Company and its employees against
such losses and risks generally insured against by comparable businesses. The
Company (i) has not failed to give notice or present any insurance claim with
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respect to any insurable matter under the appropriate insurance policy or surety
bond in a due and timely manner, (ii) has no disputes or claims against any
underwriter of such insurance policies or surety bonds, nor has the Company
failed to pay any premiums due and payable thereunder, or (iii) has not failed
to comply with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those pertaining to environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
which (i) questions the validity of the capital stock of the Company, this
Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement or the
Consulting Agreement (as defined in Section 1(gg) hereof) or of any action taken
or to be taken by the Company pursuant to or in connection with this Agreement,
the Underwriter's Warrant Agreement, the Warrant Agreement or the Consulting
Agreement, (ii) is required to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all respects), or (iii) might materially
and adversely affect the condition, financial or otherwise, or the earnings,
prospects, stockholders' equity, value, operations, properties, business or
results of operations of the Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, to enter into this Agreement,
the Underwriter's Warrant Agreement, the Warrant Agreement and the Consulting
Agreement and to consummate the transactions provided for in such agreements;
and each of this Agreement, the Underwriter's Warrant Agreement, the Warrant
Agreement and the Consulting Agreement have been duly and properly authorized,
executed and delivered by the Company. Each of this Agreement, the Underwriter's
Warrant Agreement, the Warrant Agreement and the Consulting Agreement
constitutes a legal, valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting the enforcement of
creditors' rights and the application of equitable principles in any motion,
legal or equitable, and except as obligations to indemnify or contribute to
losses may be limited by applicable law). None of the Company's issue and sale
of the Securities, execution or delivery of this Agreement, the Underwriter's
Warrant Agreement, the Warrant Agreement or the Consulting Agreement, its
performance hereunder or thereunder, its consummation of the transactions
contemplated herein or therein, or the conduct of its business as described in
the Registration Statement and the Prospectus and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (i) the
articles of incorporation or by-laws of the Company, (ii) any license, contract,
indenture, mortgage, lease, deed of trust, voting trust agreement, stockholders'
6
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agreement, note, loan or credit agreement or other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company is or may be
bound or to which its properties or assets (tangible or intangible) are or may
be subject, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties.
(l) No consent, approval, authorization or order of, and no
filing with, any arbitrator, court, regulatory body, administrative agency,
government agency or other body, domestic or foreign, is required for the
issuance of the Securities pursuant to the Prospectus and the Registration
Statement, this Agreement, the Underwriter's Warrant Agreement and the Warrant
Agreement, the performance of this Agreement, the Underwriter's Warrant
Agreement, the Warrant Agreement and the Consulting Agreement and the
transactions contemplated hereby and thereby, except such as have been obtained
under the Act, state securities or Blue Sky laws and the rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
issuance and sale of the Securities by the Company and the Underwriter's
purchase and distribution of the Firm Units and the Option Units.
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which the
Company may be bound or to which its assets, properties or business may be
subject have been duly and validly authorized, executed and delivered by the
Company, and constitute legal, valid and binding agreements of the Company,
enforceable against the Company, in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles in any motion, legal or equitable, and
except as obligations to indemnify or contribute to losses may be limited by
applicable law). The descriptions in the Registration Statement of agreements,
contracts and other documents are accurate and fairly present the information
required to be shown with respect thereto by Form SB-2; and there are no
agreements, contracts or other documents which are required by the Act to be
described in the Registration Statement or filed as exhibits to the Registration
Statement which are not described or filed as required; and the exhibits which
have been filed are complete and correct copies of the documents of which they
purport to be copies.
(n) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, (ii) entered into any transaction other than in
the ordinary course of business, or (iii) declared or paid any dividend or made
any other distribution on or in respect of any class of its capital stock; and,
subsequent to such dates, and except as may otherwise be disclosed in the
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Prospectus, there has not been any change in the capital stock, debt (long or
short term) or liabilities of the Company or any material change in the
condition, financial or otherwise, or the earnings, prospects, stockholders'
equity, value, operations, properties, business or results of operations of the
Company.
(o) No default exists in the due performance and observance of
any term, covenant or condition of any license, permit, contract, indenture,
mortgage, lease, deed of trust, voting trust agreement, stockholders' agreement,
note, loan or credit agreement or any other agreement or instrument evidencing
an obligation for borrowed money, or any other agreement or instrument to which
the Company is a party or by which the Company is or may be bound or to which
the property or assets (tangible or intangible) of the Company is or may be
subject.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and the Company is in
compliance with all federal, state, local and foreign laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations involving
the Company by the United States Department of Labor or any other governmental
agency responsible for the enforcement of any federal, state, local or foreign
laws, rules and regulations relating to employment. There is no unfair labor
practice charge or complaint against the Company pending before the National
Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or, to the knowledge of the Company, threatened against or
involving the Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists or, to the knowledge
of the Company, is imminent.
(q) The Company does not maintain, sponsor or contribute to
any program or arrangement that is an "employee pension benefit plan," an
"employee welfare benefit plan" or a "multiemployer plan," as such terms are
defined in Sections 3(2), 3(l) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans").
The Company does not maintain or contribute, now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code which could
subject the Company to any tax penalty on prohibited transactions and which has
not adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA as
they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. The Company has never completely
or partially withdrawn from a "multiemployer plan."
(r) Neither the Company, nor any of its respective employees,
directors, stockholders or affiliates (within the meaning of the Rules and
Regulations), has taken or will take, directly or indirectly, any action
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designed to or which has constituted or which might be expected to cause or
result in, under the Exchange Act or otherwise, the stabilization or
manipulation of the price of any security of the Company, whether to facilitate
the sale or resale of the Securities or otherwise.
(s) To the best of the Company's knowledge, none of the
trademarks, trade names, service marks, service names, copyrights, patents and
patent applications, and none of the licenses and rights to the foregoing,
presently owned or held by the Company are in dispute or are in conflict with
the right of any other person or entity. The Company (i) owns or has the right
to use, free and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any kind
whatsoever, all trademarks, trade names, service marks, service names,
copyrights, patents and patent applications, and licenses and rights with
respect to the foregoing, used in the conduct of its business as now conducted
or proposed to be conducted without infringing upon or otherwise acting
adversely to the right or claimed right of any person, corporation or other
entity under or with respect to any of the foregoing and (ii) is not obligated
or under any liability whatsoever to make any payments by way of royalties, fees
or otherwise to any owner or licensee of, or other claimant to, any trademark,
trade name, service mark, service name, copyright, patent or patent application
except as set forth in the Registration Statement or the Prospectus. There is no
action, suit, proceeding, inquiry, arbitration, investigation, litigation or
governmental or other proceeding, domestic or foreign, pending or to the
knowledge of the Company, threatened (or circumstances that may give rise to the
same) against the Company which challenges the exclusive rights of the Company
with respect to any trademarks, trade names, service marks, service names,
copyrights, patents, patent applications or licenses or rights to the foregoing
used in the conduct of its business.
(t) The Company owns and has the unrestricted right to use all
trade secrets, know-how (including all unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
technology, designs, processes, works of authorship, computer programs and
technical data and information that are material to the development,
manufacture, operation and sale of all products and services sold or proposed to
be sold by the Company, free and clear of and without violating any right, lien,
or claim of others, including, without limitation, former employers of its
employees.
(u) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
currently used in the conduct of business or stated in the Prospectus to be
owned or leased by it, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, other than liens for taxes not yet due and
payable.
(v) Arthur Andersen LLP whose reports are filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(w) The holders of all shares of Common Stock and securities
exchangeable for or convertible into shares of Common Stock of the Company,
including each director, officer and principal stockholder of the Company have
executed an agreement (collectively, the "Lock-Up Agreements") pursuant to which
he, she or it has agreed, (i) for a period extending eighteen (18) months
9
<PAGE>
following the effective date of the Registration Statement (the "Lock-Up
Period"), not to, directly or indirectly, offer, offer to sell, sell, grant an
option for the purchase or sale of, transfer, assign, pledge, hypothecate or
otherwise encumber (whether pursuant to Rule 144 of the Rules and Regulations or
otherwise) any securities issued or issuable by the Company, whether or not
owned by or registered in the name of such persons, or dispose of any interest
therein, without the prior written consent of the Underwriter and (ii) for a
period extending twenty-four (24) months following the effective date of the
Registration Statement, that all sales of such securities issued by the Company
shall be made through the Underwriter in accordance with its customary brokerage
policies. The Company will cause its transfer agent to mark an appropriate
legend on the face of stock certificates representing all of such securities and
to place "stop transfer" orders on the Company's stock ledgers.
(x) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuances
that may affect the Underwriter's compensation, as determined by the NASD.
(y) The Units, the Common Stock and the Redeemable Warrants
have been approved for quotation on the Nasdaq SmallCap Market ("Nasdaq").
(z) Neither the Company, nor any of its directors, officers,
stockholders, employees, agents or any other person acting on behalf of the
Company has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the ordinary
course of business) to any customer, supplier, employee or agent of a customer
or supplier, or any official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or any other person who was, is or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (i) might subject the
Company or any other such person to any damage or penalty in any civil, criminal
or governmental litigation or proceeding (domestic or foreign), (ii) if not
given in the past, might have had a material and adverse effect on the
condition, financial or otherwise, or the earnings, business affairs, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company, or (iii) if not continued in the future, might
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company. The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(aa) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of Doing Business with Cuba, and the Company
further agrees that if it or any affiliate commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
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"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.
(bb) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company and no affiliate or associate (as these
terms are defined in the Rules and Regulations) of any of the foregoing persons
or entities, has or has had, either directly or indirectly, (i) an interest in
any person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which the Company may be bound. Except as set forth in the
Prospectus under "Certain Transactions," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company and
any officer, director or any person listed in the "Principal Stockholders"
section of the Prospectus or any affiliate or associate of any of the foregoing
persons or entities.
(cc) The minute books of the Company have been made available
to the Underwriter, contain a complete summary of all meetings and actions of
the directors and stockholders of the Company since the time of incorporation,
and reflect all transactions referred to in such minutes accurately in all
respects.
(dd) Except and to the extent described in the Prospectus, no
holder of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company has the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement. Except as set forth in the Prospectus, no person
or entity holds any anti-dilution rights with respect to any securities of the
Company.
(ee) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to Underwriter's Counsel (as defined in Section
4(d) herein), shall be deemed a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
(ff) The Company has entered into a warrant agreement,
substantially in the form filed as Exhibit [__] to the Registration Statement
(the "Warrant Agreement"), with Continental Stock Transfer & Trust Company, in
form and substance satisfactory to the Underwriter, with respect to the
Redeemable Warrants and providing for the payment of warrant solicitation fees
contemplated by Section 4(x) hereof. The Warrant Agreement has been duly and
validly authorized by the Company and, assuming due execution by the parties
thereto other than the Company, constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
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application of equitable principles in any action, legal or equitable, and
except as obligations to indemnify or contribute to losses may be limited by
applicable law).
(gg) The Company has entered into a financial advisory and
consulting agreement substantially in the form filed as Exhibit [__] to the
Registration Statement (the "Consulting Agreement") with the Underwriter, with
respect to the rendering of consulting services by the Underwriter to the
Company. The Consulting Agreement provides that the Underwriter shall be
retained by the Company commencing on the consummation of the proposed public
offering and ending 24 months thereafter, at a monthly retainer of $2,000, all
of which is payable on consummation of the proposed public offering. The
Consulting Agreement has been duly and validly authorized by the Company and
assuming due execution by the parties thereto other than the Company,
constitutes a valid and legally binding agreement of the Company, enforceable
against the Company in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law).
(hh) The Company has filed a Form 8-A with the Commission
providing for the registration under the Exchange Act of the Securities and such
Form 8-A has been declared effective by the Commission.
(ii) Each warrant issued in connection with the Private
Placement financing completed in August 1996, (each a "Selling Securityholder
Warrant") has been automatically converted into a Redeemable Warrant without any
action by the holder thereof and all of such Redeemable Warrants, as converted
and the Selling Securityholder Shares, have been registered in the Registration
Statement.
(jj) The Company has as of the effective date of the
Registration Statement (i) entered into an employment agreement with Marcus
Bender, in the form filed as Exhibit ___ to the Registration Statement and (ii)
purchased term key man insurance on the life of Marcus Bender, in the amount of
$1,000,000, which policy names the Company as the sole beneficiary thereof.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriter, and the Underwriter
agrees to purchase from the Company, the Firm Units at a price equal to $[____]
per Unit [90% of the initial public offering price per Unit].
(b) In addition, on the basis of the representations,
warranties, covenants and agreement, herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of the Option Units at a price equal to
$[____] per Unit [90% of the initial public offering price per Unit]. The option
granted hereby will expire forty-five (45) days after (i) the date the
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Registration Statement becomes effective, if the Company has elected not to rely
on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement
if the Company has elected to rely upon Rule 430A under the Rules and
Regulations, and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Firm Units upon notice by the Underwriter to
the Company setting forth the number of Option Units as to which the Underwriter
is then exercising the option and the time and date of payment and delivery for
any such Option Units. Any such time and date of delivery (an "Option Closing
Date") shall be determined by the Underwriter, but shall not be later than seven
(7) full business days after the exercise of said option, nor in any event prior
to the Closing Date, unless otherwise agreed upon by the Underwriter and the
Company. Nothing herein contained shall obligate the Underwriter to exercise the
option granted hereby. No Option Units shall be delivered unless the Firm Units
shall be simultaneously delivered or shall theretofore have been delivered as
herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Units shall be made at the offices of the Underwriter
at 33 Maiden Lane, New York, New York 10038, or at such other place as shall be
agreed upon by the Underwriter and the Company. Such delivery and payment shall
be made at 10:00 a.m. (New York City time) on [_______], 1997 or at such other
time and date as shall be agreed upon by the Underwriter and the Company, but
not less than three (3) nor more than seven (7) full business days after the
effective date of the Registration Statement (such time and date of payment and
delivery being herein called the "Closing Date"). In addition, in the event that
any or all of the Option Units are purchased by the Underwriter, payment of the
purchase price for, and delivery of certificates for, such Option Units shall be
made at the above mentioned office of the Underwriter or at such other place as
shall be agreed upon by the Underwriter and the Company. Delivery of the
certificates for the Firm Units and the Option Units, if any, shall be made to
the Underwriter against payment by the Underwriter of the purchase price for the
Firm Units and the Option Units, if any, to the order of the Company by New York
Clearing House funds. Certificates for the Firm Units and the Option Units, if
any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such names as the
Underwriter may request in writing at least two (2) business days prior to the
Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Firm Units and the Option Units, if any, shall be made
available to the Underwriter at such offices or such other place as the
Underwriter may designate for inspection, checking and packaging no later than
9:30 a.m. on the last business day prior to the Closing Date or the relevant
Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to
the Underwriter or its designees the Underwriter's Warrants for an aggregate
purchase price of $.0001 per warrant, which warrants shall entitle the holders
thereof to purchase an aggregate of an additional 200,000 Units. The
Underwriter's Warrants shall be exercisable for a period of four (4) years
commencing one (1) year from the effective date of the Registration Statement at
a price equaling one hundred and twenty percent (120%) of the initial public
offering price of the Units. The Underwriter's Warrant Agreement and the form of
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the certificates for the Underwriter's Warrant shall be substantially in the
form filed as Exhibit [____] to the Registration Statement. Payment for the
Underwriter's Warrants shall be made on the Closing Date.
3. Public Offering of the Units. As soon after the
Registration Statement becomes effective as the Underwriter deems advisable, the
Underwriter shall make a public offering of the Firm Units and such of the
Option Units as the Underwriter may determine (other than to residents of or in
any jurisdiction in which qualification of the Units is required and has not
become effective) at the price and upon the other terms set forth in the
Prospectus. The Underwriter may from time to time increase or decrease the
public offering price after distribution of the Units has been completed to such
extent as the Underwriter, in its sole discretion, deems advisable. The
Underwriter may enter into one or more agreements as the Underwriter, in its
sole discretion, deems advisable with one or more broker-dealers who shall act
as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company
covenants and agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or the Exchange Act before termination of the offering of the Firm
Units and the Option Units to the public by the Underwriter, of which the
Underwriter shall not previously have been advised and furnished with a copy, or
to which the Underwriter shall have objected or which is not in compliance with
the Act, the Exchange Act and the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriter and confirm the same in
writing, (i) when the Registration Statement, as amended, becomes effective,
when any post-effective amendment to the Registration Statement becomes
effective and, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding the outcome of which may
result in the suspension of the effectiveness of the Registration Statement or
any order preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution of any
proceedings for that purpose, (iii) of the issuance by the Commission or by any
state securities commission of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the receipt of any comments from the Commission, and (v) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. If the
Commission or any state securities regulatory authority shall enter a stop order
or suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Underwriter) with the Commission, or transmit the
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Prospectus by a means reasonably calculated to result in filing the same with
the Commission, pursuant to Rule 424(b)(1) of the Rules and Regulations (or, if
applicable and if consented to by the Underwriter, pursuant to Rule 424(b)(4) of
the Rules and Regulations) within the time period specified in Rule 424(b)(1)
(or, if applicable and if consented to by the Underwriter, Rule 424(b)(4)).
(d) The Company will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
in connection with the offering of any of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will
furnish the Underwriter with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such amendment or supplement to which the Underwriter
or Orrick, Herrington & Sutcliffe LLP, its counsel ("Underwriter's Counsel"),
shall object.
(e) The Company shall endeavor in good faith, in cooperation
with the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Underwriter may reasonably designate to permit
the continuance of sales and dealings therein for as long as may be necessary to
complete the distribution contemplated hereby, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to qualify as a
foreign corporation or file a general or limited consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act, the Exchange Act and the Rules
and Regulations so far as necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and the
Prospectus, or any amendments or supplements thereto. If, at any time when a
prospectus relating to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which, in the opinion of counsel
for the Company or Underwriter's Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading, or if it is necessary at any time to amend or supplement the
prospectus to comply with the Act, the Company will notify the Underwriter
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be satisfactory to Underwriter's Counsel, and the Company will
furnish to the Underwriter copies of such amendment or supplement as soon as
available and in such quantities as the Underwriter may request.
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(g) As soon as practicable, but in any event not later than
forty five (45) days after the end of the 12-month period beginning on the day
after the end of the fiscal quarter of the Company during which the effective
date of the Registration Statement occurs (ninety (90) days in the event that
the end of such fiscal quarter is the end of the Company's fiscal year), the
Company shall make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the Underwriter,
an earnings statement which will be in the detail required by, and will
otherwise comply with, the provisions of Section 11(a) of the Act and Rule
158(a) of the Rules and Regulations, which statement need not be audited unless
required by the Act, covering a period of at least twelve (12) consecutive
months after the effective date of the Registration Statement.
(h) During a period of seven (7) years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings and will deliver to the
Underwriter:
i) concurrently with furnishing such quarterly reports
to its stockholders statements of income of the Company for
such quarter in the form furnished to the Company's
stockholders and certified by the Company's principal
financial and accounting officer;
ii) concurrently with furnishing such annual reports to
its stockholders, a balance sheet of the Company as at the end
of the preceding fiscal year, together with statements of
operations, stockholders' equity and cash flows of the Company
for such fiscal year, accompanied by a copy of the report
thereon of the Company's independent certified public
accountants;
iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with
the Commission, the NASD or any securities exchange;
v) every press release and every material news item or
article of interest to the financial community in respect of
the Company or its affairs which was released or prepared by
or on behalf of the Company; and
vi) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its
business which the Underwriter may request.
During such seven-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
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(i) The Company will maintain a transfer and warrant agent
and, if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for the Units,
the Common Stock and the Redeemable Warrants.
(j) The Company will furnish to the Underwriter, without
charge and at such place as the Underwriter may designate, copies of each
Preliminary Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (one of which will be signed and will include
all financial statements and exhibits), the Prospectus, and all amendments and
supplements thereto, including any prospectus prepared after the effective date
of the Registration Statement, in each case as soon as available and in such
quantities as the Underwriter may request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Underwriter with originally-executed
copies of duly executed, legally binding and enforceable Lock-Up Agreements
which are in form and substance satisfactory to the Underwriter. On or before
the Closing Date, the Company shall deliver instructions to its transfer agent
authorizing such transfer agent to place appropriate legends on the certificates
representing the securities of the Company subject to the Lock-Up Agreements and
to place appropriate stop transfer orders on the Company's ledgers.
(l) The Company agrees that, for a period of eighteen (18)
months commencing on the effective date of the Registration Statement, and
except as contemplated by this Agreement, it and its present and future
subsidiaries will not, without the prior written consent of the Underwriter (i)
issue, sell, contract or offer to sell, grant an option for the purchase or sale
of, assign, transfer, pledge, distribute or otherwise dispose of, directly or
indirectly, any shares of capital stock or any option, right or warrant with
respect to any shares of capital stock or any security convertible, exchangeable
or exercisable for capital stock, except pursuant to stock options or warrants
issued by the Company or any other person or entity on the date hereof or up to
[1,000,000] shares of Common Stock issuable pursuant to options which may be
granted after the date hereof, provided, however, that such options shall have
an exercise price which is at least equal to the greater of (a) the initial
public offering price per Unit and (ii) the fair market value of the Common
Stock on the date of grant or (iii) file any registration statement for the
offer or sale by the Company or any other person or entity securities issued or
to be issued by the Company or any present or future subsidiaries.
(m) Neither the Company nor any of its officers, directors,
stockholders or affiliates (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to stabilize or
manipulate the price of any securities of the Company, or which might in the
future reasonably be expected to cause or result in the stabilization or
manipulation of the price of any such securities.
(n) The Company shall apply the net proceeds from the sale of
the Securities offered to the public in the manner set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
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(o) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, any Form SR
required by Rule 463 under the Act) from time to time under the Act, the
Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents will comply as to form and substance with the applicable requirements
under the Act, the Exchange Act and the Rules and Regulations.
(p) The Company shall furnish to the Underwriter as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date hereof, the Closing Date or the relevant Option Closing
Date, as the case may be) which have been read by the Company's independent
public accountants, as stated in their letters to be furnished pursuant to
Section 6(j) hereof.
(q) The Company shall cause the Units, the Common Stock and
the Redeemable Warrants to be quoted on Nasdaq and, for a period of seven (7)
years from the date hereof, use its best efforts to maintain the Nasdaq
quotation listing of the Units, the Common Stock and the Redeemable Warrants to
the extent outstanding.
(r) For a period of five (5) years from the Closing Date, the
Company shall at the request of the Underwriter, furnish or cause to be
furnished to the Underwriter and at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Units, the Common Stock and the
Redeemable Warrants and (ii) a list of holders of all of the Company's
securities.
(s) For a period of five (5) years from the Closing Date, the
Company shall, at the Company's sole expense, (i) promptly provide the
Underwriter, upon any and all requests of the Underwriter, with a "blue sky
trading survey" for secondary sales of the Company's securities, prepared by
counsel to the Company, and (ii) take all necessary and appropriate actions to
further qualify the Company's securities in all jurisdictions of the United
States in order to permit secondary sales of such securities pursuant to the
"blue sky" laws of those jurisdictions, provided that such jurisdictions do not
require the Company to qualify as a foreign corporation.
(t) As soon as practicable, but in no event more than thirty
(30) days after the effective date of the Registration Statement, the Company
agrees to take all necessary and appropriate actions to be included in Standard
and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such
inclusion for a period of not less than seven (7) years.
(u) Without the prior written consent of the Underwriter, the
Company hereby agrees that it will not, for a period of eighteen (18) months
from the effective date of the Registration Statement, (i) adopt, propose to
adopt or otherwise permit to exist any employee, officer, director, consultant
or compensation plan or arrangement permitting the grant, issue, sale or entry
into any agreement to grant, issue or sell any option, warrant or other contract
right (x) at an exercise price per share of Common Stock that is less than the
greater of (a) the initial public offering price of the Units set forth herein
and (b) the fair market value per share of Common Stock on the date of grant or
sale or (y) to any holder of five percent (5%) or more of the Common Stock other
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<PAGE>
than an officer or director or any holder of five percent (5%) or more of the
Common Stock as the result of the exercise or conversion of equivalent
securities other than an officer or director, including, but not limited to
options, warrants or other contract rights and securities convertible, directly
or indirectly, into shares of Common Stock or any affiliate of the foregoing;
(ii) permit the maximum number of shares of Common Stock or other securities of
the Company purchasable at any time pursuant to options, warrants or other
contract rights to exceed 1,024,351 shares of Common Stock, excluding the
Underwriter's Warrants and the Redeemable Warrants; (iii) permit the existence
of stock appreciation rights, phantom options or similar arrangements; or (iv)
permit the payment for such securities with any form of consideration other than
cash.
(v) Until the completion of the distribution of the Units to
the public, and during any period during which a prospectus is required to be
delivered, the Company shall not, without the prior written consent of the
Underwriter, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(w) For a period of five (5) years after the effective date of
the Registration Statement, the Company shall use its best efforts to cause one
(1) individual selected by the Underwriter to be elected to the Board of
Directors of the Company (the "Board"), if requested by the Underwriter. In the
event the Underwriter shall not have designated such individual at the time of
any meeting of the Board or such person has not been elected or is unavailable
to serve, the Company shall notify the Underwriter of each meeting of the Board.
An individual selected by the Underwriter shall be permitted to attend all
meetings of the Board and to receive all notices and other correspondence and
communications sent by the Company to members of the Board. The Company shall
reimburse the Underwriter's designee for his or her out-of-pocket expenses
reasonably incurred in connection with his or her attendance of the Board
meetings.
(x) Commencing one year from the date hereof, to pay the
Underwriter a warrant solicitation fee equal to five percent (5%) of the
exercise price of the Redeemable Warrants, payable on the date of the exercise
thereof on terms provided in the Warrant Agreement. The Company will not solicit
the exercise of the Redeemable Warrants through any solicitation agent other
than the Underwriter. The Underwriter will not be entitled to any warrant
solicitation fee unless the Underwriter provides bona fide services in
connection with any warrant solicitation and the investor designates, in
writing, that the Underwriter is entitled to such fee.
(y) For a period equal to the lesser of (i) seven (7) years
from the date hereof, and (ii) the sale to the public of the Underwriter's
Securities, the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form SB-2 or S-1 (or other appropriate form) for
the registration under the Act of the Underwriter's Securities.
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<PAGE>
(z) For a period of twenty four (24) months after the
effective date of the Registration Statement, the Company shall not restate,
amend or alter any term of any written employment, consulting or similar
agreement entered into between the Company and any officer, director or key
employee as of the effective date of the Registration Statement in a manner
which is more favorable to such officer, director or key employee, without the
prior written consent of the Underwriter.
(aa) The Company will use its best efforts to maintain the
effectiveness of the Registration Statement for a period of five years after the
date hereof.
(bb) The Company agrees that, for a period of three (3) years
beginning with the effective date of the Registration Statement, the Underwriter
shall have a right of first refusal for all sales of any securities made by the
Company or any of its present or future affiliates or subsidiaries.
(cc) The Company agrees, that for a period of twenty-four (24)
months from the effective date of the Registration Statement, it will not
without the prior written consent of the Underwriter (i) declare or pay any
dividend or make any other distribution on any equity securities of the Company
except for the payment of an aggregate of [$40,000] in dividends on preferred
stock of the Company which was converted into Common Stock upon consummation of
the Company's bridge financing on October 10, 1996, or (ii) purchase, redeem or
otherwise acquire or retire for value any equity securities of the Company,
except for the Redeemable Warrants, or (iii) permit a subsidiary of the Company
to purchase, redeem or otherwise acquire or retire for value any equity
securities of the Company, except for the Redeemable Warrants.
5. Payment of Expenses.
(a) The Company hereby agrees to pay (such payment to be made,
at the discretion of the Underwriter, on the Closing Date and any Option Closing
Date (to the extent not paid on the Closing Date or a previous Option Closing
Date)) all expenses and fees (other than fees of Underwriter's Counsel except as
provided in (iv) below) incident to the performance of the obligations of the
Company under this Agreement, the Underwriter's Warrant Agreement and the
Warrant Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, (including mailing and
handling charges) filing, delivery and mailing (including the payment of
postage, overnight delivery or courier charges with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the printing, mailing (including the payment of postage, overnight
delivery or courier charges with respect thereto) and delivery of this
Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement, and
agreements with selected dealers, and related documents, including the cost of
all copies thereof and of each Preliminary Prospectus and of the Prospectus and
any amendments thereof or supplements thereto supplied to the Underwriter and
such dealers as the Underwriter may request, in such quantities as the
Underwriter may request, (iii) the printing, engraving, issuance and delivery of
the Securities, (iv) the qualification of the Securities under state or foreign
securities or "blue sky" laws and determination of the status of such securities
under legal investment laws, including the costs of printing and mailing the
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<PAGE>
"Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and
"Legal Investments Survey," if any, and disbursements and fees (such fees not to
exceed $45,000) of counsel in connection therewith, (v) advertising costs and
expenses, including, but not limited to costs and expenses in connection with
"road shows," information meetings and presentations (such costs and expenses
relating to "road shows", information meetings and presentations not to exceed
$25,000), bound volumes and prospectus memorabilia and "tombstone" advertisement
expenses, (vi) costs and expenses in connection with due diligence
investigations, including, but not limited to, the fees of any independent
counsel or consultants, (vii) fees and expenses of a transfer and warrant agent
and registrar for the Securities, (viii) applications for assignments of a
rating of the Securities by qualified rating agencies, (ix) the fees payable to
the Commission and the NASD, and (x) the fees and expenses incurred in
connection with the quotation of the Securities on Nasdaq and any other
exchange.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6, Section 10(a) or Section 11 hereof,
the Company shall reimburse and indemnify the Underwriter for all of its actual
out-of-pocket expenses, including the fees and disbursements of Underwriter's
Counsel, less any amounts already paid pursuant to Section 5(c) hereof. In
addition, the Company shall remain liable for all Blue Sky counsel fees (such
fees not to exceed $45,000) and expenses and Blue Sky filing fees.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to Section 5(a) hereof, it will pay to the Underwriter
on the Closing Date by certified or bank cashier's check, or, at the election of
the Underwriter, by deduction from the proceeds of the offering of the Firm
Units, a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Firm Units,
twenty-five thousand dollars ($25,000) of which has been paid to date by the
Company. In the event the Underwriter elects to exercise the overallotment
option described in Section 2(b) hereof, the Company further agrees to pay to
the Underwriter on each Option Closing Date, by certified or bank cashier's
check, or, at the Underwriter's election, by deduction from the proceeds of the
Option Units purchased on such Option Closing Date, a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of such Option Units.
6. Conditions of the Underwriter's Obligations. The
obligations of the Underwriter hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company herein as of the
date hereof and as of the Closing Date and each Option Closing Date, if any, as
if they had been made on and as of the Closing Date and each Option Closing
Date, as the case may be; the accuracy on and as of the Closing Date and each
Option Closing Date, if any, of the statements of officers of the Company made
pursuant to the provisions hereof; the performance by the Company on and as of
the Closing Date and each Option Closing Date, if any, of its covenants and
obligations hereunder; and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 12:00 p.m., New York time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Underwriter, and,
at the Closing Date and each Option Closing Date, if any, no stop order
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suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriter's Counsel. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, the price of the Units and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Underwriter of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Underwriter's opinion, is material, or omits to
state a fact which, in the Underwriter's opinion, is material and is required to
be stated therein or is necessary to make the statements therein, in light of
the circumstances in which they were made not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Underwriter's opinion, is material, or omits to state a fact
which, in the Underwriter's opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall
have received from Underwriter's Counsel such opinion or opinions with respect
to the organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and such other related matters as the
Underwriter may request and Underwriter's Counsel shall have received such
papers and information as they may request in order to enable them to pass upon
such matters.
(d) On the Closing Date, the Underwriter shall have received
the favorable opinion of Graham & James LLP, counsel to the Company, dated the
Closing Date, addressed to the Underwriter, in form and substance satisfactory
to Underwriter's Counsel, to the effect that:
i) The Company (A) is duly qualified and licensed and
in good standing as a foreign corporation in each jurisdiction
in which its ownership or leasing of any properties or the
character of its operations requires such qualification or
licensing, except where the failure to be so qualified or
licensed would not materially adversely affect the Company and
(B) has all requisite power and authority (corporate and
other) and has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials
and bodies (including, without limitation, those having
jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in
the Prospectus; the Company is and has been doing business in
compliance with all such authorizations, approvals, orders,
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licenses, certificates, franchises and permits obtained by it
from governmental or regulatory officials and agencies and all
federal, state, local and foreign laws, rules and regulations
to which it is subject; and, the Company has not received any
notice of proceedings relating to the revocation or
modification of any such authorization, approval, order,
license, certificate, franchise or permit which, singly or in
the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, prospects,
stockholders' equity, value, operations, properties, business
or results of operations of the Company. The disclosure in the
Registration Statement concerning the effects of federal,
state, local and foreign laws, rules and regulations on the
Company's business as currently conducted and as contemplated
are correct in all respects and do not omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in
which they were made, not misleading;
ii) except as set forth in the Prospectus, the Company
is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock,
rights, warrants, options or other securities, except for this
Agreement, the Underwriter's Warrant Agreement and the Warrant
Agreement and as described in the Prospectus. The
Underwriter's Warrants and the Redeemable Warrants (including
the Selling Securityholder Warrants) constitute valid and
binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby. Upon the
issuance and delivery pursuant to this Agreement, the
Underwriter's Warrant Agreement and the Warrant Agreement of
the Firm Units, the Option Units and the Underwriter's
Warrants to be issued and sold by the Company hereunder and
thereunder, the Underwriter will acquire good and marketable
title to such Firm Units, Option Units and Underwriter's
Warrants, free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever asserted against
the Company or any affiliate (within the meaning of the Rules
and Regulations) of the Company. No transfer tax is payable by
or on behalf of the Underwriter in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by
the Underwriter of the Firm Units, the Option Units and the
Underwriter's Warrants from the Company, (C) the consummation
by the Company of any of its obligations under this Agreement,
the Underwriter's Warrant Agreement or the Warrant Agreement,
or (D) resales of the Securities in connection with the
distribution contemplated hereby;
iii) the Registration Statement is effective under the
Act, and, if applicable, filing of all pricing information has
been timely made in the appropriate form under Rule 430A, and
no stop order suspending the use of the Preliminary
Prospectus, the Registration Statement or the Prospectus or
any part of any thereof or suspending the effectiveness of the
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Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending, threatened
or contemplated under the Act;
iv) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments
or supplements thereto (other than the financial statements
and schedules and other financial and statistical data
included therein, as to which no opinion need be rendered)
comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations;
v) to such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act
to be described in the Registration Statement and the
Prospectus or required to be filed as exhibits to the
Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated,
in whole or in part, by reference therein) other than those
described in the Registration Statement and the Prospectus and
filed as exhibits thereto, and the exhibits which have been
filed are correct copies of the documents of which they
purport to be copies; (B) the descriptions in the Registration
Statement and the Prospectus and any supplement or amendment
thereto of agreements, contracts and other documents to which
the Company is a party or by which the Company is bound are
accurate and fairly represent the information required to be
shown by Form SB-2; (C) there is no action, suit, proceeding,
inquiry, arbitration, investigation, litigation or
governmental proceeding (including, without limitation, those
pertaining to environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that
may give rise to the same), or involving the properties or
business of, the Company which (I) is required to be disclosed
in the Registration Statement which is not so disclosed (and
such proceedings as are summarized in the Registration
Statement are accurately summarized in all respects), or (II)
questions the validity of the capital stock of the Company or
of this Agreement, the Underwriter's Warrant Agreement, the
Warrant Agreement or the Consulting Agreement or of any action
taken or to be taken by the Company pursuant to or in
connection with any of the foregoing; (D) no statute or
regulation or legal or governmental proceeding required to be
described in the Prospectus is not described as required; and
(E) there is no action, suit or proceeding pending or
threatened against or affecting the Company before any court,
arbitrator or governmental body, agency or official (or any
basis thereof known to such counsel) in which there is a
reasonable possibility of an adverse decision which may result
in a material adverse change in the condition, financial or
otherwise, or the earnings, prospects, stockholders' equity,
value, operation, properties, business or results of
operations of the Company taken as a whole, which could
adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement, the
Underwriter's Warrant Agreement, the Warrant Agreement or the
Consulting Agreement or which in any manner draws into
question the validity or enforceability of this Agreement, the
Underwriter's Warrant Agreement, the Warrant Agreement or the
Consulting Agreement;
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<PAGE>
vi) the Company has full legal right, power and
authority to enter into each of this Agreement, the
Underwriter's Warrant Agreement, the Warrant Agreement and the
Consulting Agreement and to consummate the transactions
provided for herein and therein; and each of this Agreement,
the Underwriter's Warrant Agreement, the Warrant Agreement and
the Consulting Agreement has been duly authorized, executed
and delivered by the Company. Each of this Agreement, the
Underwriter's Warrant Agreement, the Warrant Agreement and the
Consulting Agreement, assuming due authorization, execution
and delivery by each other party thereto, constitutes a legal,
valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of
general application relating to or affecting the enforcement
of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as
obligations to indemnify or contribute to losses may be
limited by applicable law). None of the Company's execution or
delivery of this Agreement, the Underwriter's Warrant
Agreement, the Warrant Agreement or the Consulting Agreement,
its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the
conduct of the Company's business as described in the
Registration Statement and the Prospectus and any amendments
or supplements thereto, conflicts with or will conflict with
or results or will result in any breach or violation of any of
the terms or provisions of, or constitutes or will constitute
a default under, or result in the creation or imposition of
any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind
whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (A) the
articles of incorporation or bylaws of the Company, (B) any
license, contract, indenture, mortgage, lease, deed of trust,
voting trust agreement, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company is a party or by
which the Company is or may be bound or to which its
properties or assets (tangible or intangible) are or may be
subject, (C) any statute applicable to the Company or (D) any
judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or
properties;
vii) no consent, approval, authorization or order of,
and no filing with, any arbitrator, court, regulatory body,
administrative agency, government agency or other body,
domestic or foreign (other than such as may be required under
"blue sky" laws, as to which no opinion need be rendered), is
required in connection with the issuance or sale of the
Securities pursuant to the Prospectus, the Registration
Statement, this Agreement, the Underwriter's Warrant Agreement
25
<PAGE>
and the Warrant Agreement, or the performance of this
Agreement, the Underwriter's Warrant Agreement, the Warrant
Agreement and the Consulting Agreement and the transactions
contemplated hereby and thereby;
viii) the properties and business of the Company conform
to the description thereof contained in the Registration
Statement and the Prospectus; and the Company has good and
marketable title to, or valid and enforceable leasehold
estates in, all items of real and personal property stated in
the Prospectus to be owned or leased by it, in each case free
and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, other than those referred to
in the Prospectus and liens for taxes not yet due and payable;
ix) to such counsel's knowledge, the Company is not in
breach of, or in default under, any term or provision of any
contract, indenture, mortgage, lease, deed of trust, voting
trust agreement, stockholders' agreement, note, loan or credit
agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the
Company is or may be bound or to which its property or assets
(tangible or intangible) are or may be subject; and the
Company is not in violation of any term or provision of (A)
its articles of incorporation or by-laws, (B) any
authorization, approval, order, license, certificate,
franchise or permit (it being understood that such counsel
need not express an opinion as to the Special Use Permit) of
any governmental or regulatory official or body, or (C) any
judgement, decree, order, statute, rule or regulation to which
it is subject;
x) the statements in the Prospectus under "Prospectus
Summary," "Risk Factors," "The Company," "Business,"
"Management," "Principal Stockholders," "Selling
Securityholders," "Certain Transactions," "Securities Eligible
For Future Sale," and "Description of Capital Stock" have been
reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules
or regulations or legal conclusions, are correct in all
material respects;
xi) the Units, the Common Stock and the Redeemable
Warrants have been accepted for quotation on Nasdaq;
xii) the Company owns or possesses, free and clear of
all liens or encumbrances and right thereto or therein by
third parties, the requisite licenses or other rights to use
all trademarks, service marks, copyrights, service names,
tradenames, patents, patent applications and licenses
necessary to conduct its business (including without
limitation any such licenses or rights described in the
Prospectus as being owned or possessed by the Company) and
there is no claim or action by any person pertaining to, or
proceeding, pending or threatened, which challenges the
exclusive rights of the Company with respect to any
trademarks, service marks, copyrights, service names, trade
26
<PAGE>
names, patents, patent applications and licenses used in the
conduct of the Company's business (including, without
limitation, any such licenses or rights described in the
Prospectus as being owned or possessed by the Company);
xiii) to such counsel's knowledge, the persons listed
under the captions "Principal Stockholders" and "Selling
Securityholders" in the Prospectus are the respective
"beneficial owners" (as such phrase is defined in Rule 13d-3
under the Exchange Act) of the securities set forth opposite
their respective names thereunder as and to the extent set
forth therein;
xiv) except as disclosed in the Prospectus, no person,
corporation, trust, partnership, association or other entity
has the right to include and/or register any securities of the
Company in the Registration Statement, require the Company to
file any registration statement or, if filed, to include any
security in such registration statement;
xv) to such counsel's knowledge, there are no claims,
payments, issuances, arrangements or understandings, whether
oral or written, for services in the nature of a finder's or
origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangement or any other
arrangements, agreements, understandings, payments or
issuances that may affect the Underwriter's compensation, as
determined by the NASD; and
xvi) assuming due execution by the parties thereto, the
Lock-Up Agreements are legal, valid and binding obligations of
the parties thereto, enforceable against such parties and any
subsequent holder of the securities subject thereto in
accordance with their terms.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus and related matters and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement or the Prospectus, on the
basis of the foregoing, no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or any
amendment thereto, at the time such Registration Statement or amendment became
effective, or the Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, as of the date of the Preliminary Prospectus and the
Prospectus, and as of the date of such opinion, contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading (it being understood that
such counsel need express no opinion with respect to the financial statements
and schedules and other financial and statistical data included in the
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
supplements or amendments thereto).
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<PAGE>
In rendering such opinion, such counsel may rely (a) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance satisfactory to Underwriter's
Counsel) of other counsel acceptable to Underwriter's Counsel, familiar with the
applicable laws; and (b) as to matters of fact, to the extent they deem proper,
on certificates and written statements of responsible officers of the Company
and certificates or other written statements of officers of departments of
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriter's Counsel, if requested. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and that the Underwriter
and they are justified in relying thereon. Such opinion shall also state that
Underwriter's Counsel is entitled to rely thereon. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other document relating to legal opinions,
including without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991) or any comparable state accord.
At each Option Closing Date, if any, the Underwriter shall
have received the favorable opinion of Graham & James LLP counsel to the
Company, dated the relevant Option Closing Date, addressed to the Underwriter,
and in form and substance satisfactory to Underwriter's Counsel confirming as of
the Option Closing Date, the statements made by Graham & James LLP in its
opinion delivered on the Closing Date.
(e) On the Closing Date, the Underwriter shall have received
the favorable opinion of Tam, O'Connor & Henderson, counsel to the Company,
dated the Closing Date, addressed to the Underwriter, in form and substance
satisfactory to Underwriter's Counsel, to the effect that:
i) The Company (A) has been duly organized and is
validly existing as a corporation in good outstanding under
the laws of its jurisdiction of incorporation and (B) is not
currently in violation of any term of its articles of
incorporation or by-laws;
ii) the Company has duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and
any amendment or supplement thereto, under "Capitalization"
and "Description of Capital Stock." The Securities, and all
other equity securities issued or issuable by the Company
conform, or when issued and paid for, will conform, in all
respects to all statements with respect thereto contained in
the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of
rescission with respect thereto and are not subject to
personal liability solely by reason of being such holders; and
none of such securities were issued in violation of the
preemptive rights of any holders of any security of the
Company or any similar contractual right granted by the
28
<PAGE>
Company. The Securities to be issued and sold by the Company
hereunder and under the Underwriter's Warrant Agreement and
the Warrant Agreement are not and will not be subject to any
preemptive rights or other similar rights of any stockholder,
have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable and conform to the
descriptions thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such
holders; all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been
duly and validly taken; and the certificates representing the
Securities are in due and proper form;
iii) the Company has full legal right, power and
authority to enter into each of this Agreement, the
Underwriter's Warrant Agreement, the Warrant Agreement and the
Consulting Agreement and to consummate the transactions
provided for herein and therein; and each of this Agreement,
the Underwriter's Warrant Agreement, the Warrant Agreement and
the Consulting Agreement has been duly authorized, executed
and delivered by the Company; and
iv) the disclosure in the Registration Statement
concerning the effects of state and local laws and rules and
regulations on the Company's business as currently conducted
and as contemplated are correct in all respects and do not
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. The
Special Use Permit utilized by the Company is in full force
and effect and has not been modified or withdrawn. The Special
Use Permit permits the Company to lease its facilities in
Kea'au on the Big Island of Hawaii and to conduct its business
operations as described in the Registration Statement and the
Prospectus and assuming that the Company is conducting its
operations as described in the Registration Statement and the
Prospectus the Company is in compliance with the Special Use
Permit.
In rendering such opinion, such counsel may rely (a) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance satisfactory to Underwriter's
Counsel) of other counsel acceptable to Underwriter's Counsel, familiar with the
applicable laws; and (b) as to matters of fact, to the extent they deem proper,
on certificates and written statements of responsible officers of the Company
and certificates or other written statements of officers of departments of
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriter's Counsel, if requested. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and that the Underwriter
and they are justified in relying thereon. Such opinion shall also state that
Underwriter's Counsel is entitled to rely thereon. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other document relating to legal opinions,
including without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991) or any comparable state accord.
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<PAGE>
At each Option Closing Date, if any, the Underwriter shall
have received the favorable opinion of Tam, O'Connor & Henderson counsel to the
Company, dated the relevant Option Closing Date, addressed to the Underwriter,
and in form and substance satisfactory to Underwriter's Counsel confirming as of
the Option Closing Date, the statements made by Tam, O'Connor & Henderson in its
opinion delivered on the Closing Date.
(f) On or prior to each of the Closing Date and each Option
Closing Date, if any, Underwriter's Counsel shall have been furnished with such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
Section 6(c) hereof, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company herein contained.
(g) Prior to the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change or development
involving a prospective adverse change in the condition, financial or otherwise,
or the earnings, stockholders' equity, value, operations, properties, business
or results of operations of the Company, whether or not in the ordinary course
of business, from the latest dates as of which such matters are set forth in the
Registration Statement and the Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and the Prospectus; (iii) the Company shall
not be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) the Company shall not have issued any securities
(other than the Securities) or declared or paid any dividend or made any
distribution in respect of its capital stock of any class except as set forth in
the Prospectus and there shall not have been any change in the capital stock,
debt (long or short term) or liabilities or obligations of the Company
(contingent or otherwise) from the latest dates as of which such matters are set
forth in the Registration Statement and the Prospectus; (v) no material amount
of the assets of the Company shall have been pledged or mortgaged, except as set
forth in the Registration Statement and the Prospectus; (vi) no action, suit,
proceeding, inquiry, arbitration, investigation, litigation or governmental or
other proceeding, domestic or foreign, shall be pending or threatened (or
circumstances giving rise to same) against the Company or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially and adversely affect the condition,
financial or otherwise, or the earnings, stockholders' equity, value,
operations, properties, business or results of operations of the Company taken
as a whole, except as set forth in the Registration Statement and Prospectus;
and (vii) no stop order shall have been issued under the Act with respect to the
Registration Statement and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any,
the Underwriter shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or the relevant Option Closing
Date, as the case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
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<PAGE>
i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as
of the Closing Date or the Option Closing Date, as the case
may be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior
to such Closing Date or Option Closing Date, as the case may
be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued,
and no proceedings for that purpose have been instituted or
are pending or, to the best of each of such person's
knowledge, are contemplated or threatened under the Act;
iii) The Registration Statement and the Prospectus and,
if any, each amendment and each supplement thereto contain all
statements and information required to be included therein,
and none of the Registration Statement, the Prospectus or any
amendment or supplement thereto includes any untrue statement
of a material fact or omits to state any material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which
they were made, not misleading and neither the Preliminary
Prospectus nor any supplement thereto included any untrue
statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which
they were made, not misleading; and
iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (A) the Company has not incurred any material
liabilities or obligations, direct or contingent; (B) the
Company has not paid or declared any dividends or other
distributions on its capital stock; (C) the Company has not
entered into any transactions not in the ordinary course of
business; (D) there has not been any change in the capital
stock or long-term debt or any increase in the short-term
borrowings (other than any increase in short-term borrowings
in the ordinary course of business) of the Company; (E) the
Company has not sustained any material loss or damage to its
property or assets, whether or not insured; (F) there is no
litigation which is pending or threatened (or circumstances
giving rise to same) against the Company or any affiliate
(within the meaning of the Rules and Regulations) of the
foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (G)
there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this Section 6(h)
are to such documents as amended and supplemented at the date of such
certificate.
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(i) By the Closing Date, the Underwriter will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriter, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriter
shall have received a letter, dated such date, addressed to the Underwriter and
in form and substance satisfactory in all respects (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
to the Underwriter and Underwriter's Counsel, from Arthur Andersen LLP.
i) confirming that they are independent certified
public accountants with respect to the Company within the
meaning of the Act and the Rules and Regulations;
ii) stating that it is their opinion that the
consolidated financial statements of the Company included in
the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the
Act and the Rules and Regulations and that the Underwriter may
rely upon the opinion of Arthur Andersen LLP with respect to
such financial statements and supporting schedules included in
the Registration Statement;
iii) stating that, on the basis of a limited review
which included a reading of the latest unaudited interim
financial statements of the Company, a reading of the latest
available minutes of the stockholders and board of directors
and the various committees of the board of directors of the
Company, consultations with officers and other employees of
the Company responsible for financial and accounting matters
and other specified procedures and inquiries, nothing has come
to their attention which would lead them to believe that (A)
the unaudited financial statements and supporting schedules of
the Company included in the Registration Statement do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements of the Company included in the Registration
Statement, or (B) at a specified date nor more than five (5)
days prior to the effective date of the Registration
Statement, there has been any change in the capital stock or
long-term debt of the Company, or any decrease in the
stockholders' equity or net current assets or net assets of
the Company as compared with amounts shown in the September
30, 1996 balance sheet included in the Registration Statement,
other than as set forth in or contemplated by the Registration
Statement, or, if there was any change or decrease, setting
forth the amount of such change or decrease, and (C) during
the period from September 30, 1996 to a specified date not
more than five (5) days prior to the effective date of the
Registration Statement, there was any decrease in net
revenues, net earnings or net earnings per share of Common
Stock, in each case as compared with the corresponding period
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<PAGE>
beginning September 30, 1995, other than as set forth in or
contemplated by the Registration Statement, or, if there was
any such decrease, setting forth the amount of such decrease;
iv) setting forth, at a date not later than five (5)
days prior to the effective date of the Registration
Statement, the amount of liabilities of the Company (including
a break-down of commercial paper and notes payable to banks);
v) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and
earnings, statements and other financial information
pertaining to the Company set forth in the Prospectus, in each
case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general
accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an audit in accordance
with generally accepted auditing standards) set forth in the
letter and found them to be in agreement; and
vi) statements as to such other matters incident to
the transaction contemplated hereby as the Underwriter may
request.
(k) At the Closing Date and each Option Closing Date, if any,
the Underwriter shall have received from Arthur Andersen LLP a letter, dated as
of the Closing Date or the relevant Option Closing Date, as the case may be, to
the effect that (i) it reaffirms the statements made in the letter furnished
pursuant to Section 6(j), (ii) if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that Arthur Andersen LLP has
carried out procedures as specified in clause (v) of Section 6(j) hereof with
respect to certain amounts, percentages and financial information as specified
by the Underwriter and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
(l) The Company shall have received a letter, dated such date,
addressed to the Company, in form and substance satisfactory in all respects to
the Underwriter, from Arthur Andersen LLP stating that they have not during the
immediately preceding five (5) year period brought to the attention of the
Company's management any "weakness," as defined in Statement of Auditing
Standard No. 60 "Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's internal controls.
(m) On each of the Closing Date and Option Closing Date, if
any, there shall have been duly tendered to the Underwriter the appropriate
number of Securities.
(n) No order suspending the sale of the Securities in any
jurisdiction designated by the Underwriter pursuant to Section 4(e) hereof shall
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<PAGE>
have been issued on either the Closing Date or the Option Closing Date, if any,
and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(o) On or before the effective date of the Registration
Statement, the Company shall have executed and delivered to the Underwriter, the
Underwriter's Warrant Agreement, substantially in the form filed as Exhibit [__]
to the Registration Statement. On or before the Closing Date, the Company shall
have executed and delivered to the Underwriter the Underwriter's Warrants in
such denominations and to such designees as shall have been provided to the
Company.
(p) On or before Closing Date, the Units, the Common Stock and
the Redeemable Warrants shall have been duly approved for quotation on Nasdaq,
subject to official notice of issuance.
(q) On or before Closing Date, there shall have been delivered
to the Underwriter all of the Lock-Up Agreements, in form and substance
satisfactory to Underwriter's Counsel.
(r) On or before the Closing Date, the Company shall have (i)
executed and delivered to the Underwriter the Consulting Agreement,
substantially in the form filed as Exhibit [__] to the Registration Statement
and (ii) paid the Underwriter $48,000 representing the retainer fee pursuant to
the Consulting Agreement.
(s) On or before the effective date of the Registration
Statement, the Company and Continental Stock Transfer & Trust Company shall have
executed and delivered to the Underwriter the Warrant Agreement, substantially
in the form filed as Exhibit [__] to the Registration Statement.
(t) At least two (2) full business days prior to the date
hereof, the Closing Date and each Option Closing Date, if any, the Company shall
have delivered to the Underwriter the unaudited interim consolidated financial
statements required to be so delivered pursuant to Section 4(p) of this
Agreement.
If any condition to the Underwriter's obligations hereunder to
be fulfilled prior to or at the Closing Date or at any Option Closing Date, as
the case may be, is not so fulfilled, the Underwriter may terminate this
Agreement or, if the Underwriter so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification
(a) The Company agrees to indemnify and hold harmless the
Underwriter (for purposes of this Section 7, "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriter), and each person, if any, who controls the Underwriter
("controlling person") within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several (and actions, proceedings,
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<PAGE>
investigations, inquiries and suits in respect thereof), whatsoever (including
but not limited to any and all costs and expenses whatsoever reasonably incurred
in investigating, preparing or defending against such action, proceeding,
investigation, inquiry or suit commenced or threatened, or any claim
whatsoever), as such are incurred, to which the Underwriter or such controlling
person may become subject under the Act, the Exchange Act or any other statute
or at common law or otherwise or under the laws of foreign countries, arising
out of or based upon (A) any untrue statement or alleged untrue statement of a
material fact contained (i) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Securities; or (iii) in any application or
other document or written communication (in this Section 7, collectively
referred to as "applications") executed by the Company or based upon written
information furnished by the Company filed, delivered or used in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
the NASD, Nasdaq or any securities exchange; (B) the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading (in the case of the Prospectus, in
light of the circumstances in which they were made); or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this Section 7(a) shall be in addition to any liability which the Company may
have at common law or otherwise.
(b) The Underwriter agrees, to indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, to the same extent as the foregoing indemnity from the Company to
the Underwriter but only with respect to statements or omissions, if any, made
in any Preliminary Prospectus, the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto or in any application made in
reliance upon, and in strict conformity with, written information furnished to
the Company with respect to the Underwriter by the Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or the Prospectus directly
relating to the transactions effected by the Underwriter in connection with the
offering contemplated hereby. The Company acknowledges that the statements with
respect to the public offering of the Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriter expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus. The indemnity agreement in this Section 7(b) shall be in addition to
any liability which the Underwriter may have at common law or otherwise.
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<PAGE>
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 7, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 (except to the extent that it
has been prejudiced in any material respect by such failure) or from any
liability which it may have otherwise). In case any such action, investigation,
inquiry, suit or proceeding is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it or they may elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, an indemnified party shall
have the right to employ its own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of such counsel shall have been authorized in writing
by the indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party shall have
reasonably concluded that there may be defenses available to it which are
different from or additional to those available to one or all of the
indemnifying parties (in which event the indemnifying parties shall not have the
right to direct the defense of such action, investigation, inquiry, suit or
proceeding on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action, investigation, inquiry, suit or proceeding or separate but
similar or related actions, investigations, inquiries, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances. An indemnifying party will not, without the prior written consent
of the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party. Anything in this Section 7 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent may not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
36
<PAGE>
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand, from the offering of the Securities or (B) if
the allocation provided by clause (A) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (A) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is a contributing party
and the Underwriter is the indemnified party, the relative benefits received by
the Company, on the one hand, and the Underwriter, on the other, shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Securities (before deducting expenses) bear to the total underwriting discounts
received by the Underwriter hereunder, in each case as set forth in the table on
the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Underwriter, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions, investigations, inquiries, suits or proceedings in
respect thereof) referred to in the first (1st) sentence of this Section 7(d)
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action, claim, investigation, inquiry suit or proceeding. Notwithstanding the
provisions of this Section 7(d), the Underwriter shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriter hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 12(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7(d), each person, if
any, who controls the Company or the Underwriter within the meaning of the Act,
each officer of the Company who has signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company or the Underwriter, as the case may be, subject in each case to this
Section 7(d). Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit, inquiry, investigation or
proceeding, against such party in respect to which a claim for contribution may
be made against another party or parties under this Section 7(d), notify such
party or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this Section 7(d), or to the extent that such party or
parties were not adversely affected by such omission. Notwithstanding anything
in this Section 7 to the contrary, no party will be liable for contribution with
respect to the settlement of any action or claim effected without its written
consent. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
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<PAGE>
8. Representations, Warranties, Covenants and Agreements to
Survive Delivery. All representations, warranties, covenants and agreements of
the Company contained in this Agreement, or contained in certificates of
officers of the Company submitted pursuant hereto, shall be deemed to be
representations, warranties, covenants and agreements at the Closing Date and
each Option Closing Date, if any, and such representations, warranties,
covenants and agreements of the Company, and the respective indemnity and
contribution agreements contained in Section 7 hereof, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of the Underwriter, the Company, any controlling person of the
Underwriter or the Company, and shall survive the termination of this Agreement
or the issuance and delivery of the Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at
10:00 a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Underwriter, in its discretion, shall release the Firm Units
for sale to the public; provided, however, that the provisions of Sections 5, 7
and 10 of this Agreement shall at all times be effective. For purposes of this
Section 9, the Securities to be purchased hereunder shall be deemed to have been
so released upon the earlier of dispatch by the Underwriter of telegrams to
securities dealers releasing such Firm Units for offering or the release by the
Underwriter for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
(a) Subject to Section 10(b) hereof, the Underwriter shall
have the right to terminate this Agreement: (i) if any domestic or international
event or act or occurrence has materially adversely disrupted, or in the
Underwriter's opinion will in the immediate future materially adversely disrupt,
the financial markets; or (ii) if any material adverse change in the financial
markets shall have occurred; or (iii) if trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the NASD, the Boston Stock
Exchange, the Commission or any governmental authority having jurisdiction over
such matters; or (iv) if trading of any of the securities of the Company shall
have been suspended, or if any of the securities of the Company shall have been
delisted, on any exchange or in any over-the-counter market; or (v) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities, or
a national emergency shall have been declared in the United States; or (vi) if a
banking moratorium shall have been declared by any state or federal authority;
or (vii) if a moratorium in foreign exchange trading shall have been declared;
or (viii) if the Company shall have sustained a material or substantial loss by
fire, flood, accident, hurricane, earthquake, theft, sabotage, volcanic eruption
or other calamity or malicious act which, whether or not such loss shall have
been insured, will, in the Underwriter's opinion, make it inadvisable to proceed
with the delivery of the Securities; or (ix) if there shall have occurred any
outbreak or escalation of hostilities or any calamity or crisis or there shall
have been such a material adverse change in the conditions or prospects of the
Company, or if there shall have been such a material adverse change in the
38
<PAGE>
general market, political or economic conditions, in the United States or
elsewhere, as in the Underwriter's judgment would make it inadvisable to proceed
with the offering, sale and/or delivery of the Securities; or (x) Mr. Marcus
Bender shall no longer serve the Company in his present capacities.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6, Section 10(a) or Section 11 hereof
the Company shall promptly reimburse and indemnify the Underwriter for all its
actual out-of-pocket expenses, including the fees and disbursements of
Underwriter's Counsel, less amounts previously paid pursuant to Section 5(c)
hereof. In addition, the Company shall remain liable for all "blue sky" counsel
fees and expenses and "blue sky" filing fees. Notwithstanding any contrary
provision contained in this Agreement, any election hereunder or any termination
of this Agreement (including, without limitation, pursuant to Sections 6, 10(a)
and 11 hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way be affected by
such election or termination or failure to carry out the terms of this Agreement
or any part hereof.
11. Default by the Company. If the Company shall fail at the
Closing Date or any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Units to be purchased on an Option Closing Date, the Underwriter may,
at its option, by notice from the Underwriter to the Company, terminate the
Underwriter's obligation to purchase Option Units from the Company on such date)
without any liability on the part of any non-defaulting party other than
pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant
to this Section 11 shall relieve the Company from liability, if any, in respect
of such default.
12. Notices. All notices and communications hereunder, except
as herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to the
Underwriter at Joseph Stevens & Company, L.P., 33 Maiden Lane, 8th Floor, New
York, New York 10038, Attention: Mr. Joseph Sorbara, with a copy to Orrick,
Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103,
Attention: Rubi Finkelstein, Esq. Notices to the Company shall be directed to
the Company at Hawaiian Natural Water Company, Inc., 4747 Kilauea Avenue, Suite
201, Honolulu, Hawaii 96816, Attention: Marcus Bender, Chief Executive Officer,
with a copy to Graham & James LLP, 801 South Figueroa Street, 15th Floor, Los
Angeles, California 90017, Attention: Richard Manson, Esq.
13. Parties. This Agreement shall inure solely to the benefit
of, and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Units from the Underwriter shall be deemed to be a
successor by reason merely of such purchase.
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<PAGE>
14. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York,
without giving effect to choice of law or conflict of laws principles.
15. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement, the
Underwriter's Warrant Agreement and the Consulting Agreement constitute the
entire agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof and thereof. This Agreement may not be amended except in a writing signed
by the Underwriter and the Company.
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<PAGE>
If the foregoing correctly sets forth the understanding
between the Underwriter and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
HAWAIIAN NATURAL WATER COMPANY, INC.
By:
--------------------------------------------
Name: Marcus Bender
Title: Chief Executive Officer
Confirmed and accepted as of the date first above written.
JOSEPH STEVENS & COMPANY, L.P.
By:
------------------------------------
Name:
Title:
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<PAGE>
================================================================================
HAWAIIAN NATURAL WATER COMPANY, INC.
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
----------------
WARRANT AGREEMENT
Dated as of [__________], 1997
================================================================================
<PAGE>
WARRANT AGREEMENT, dated this [__] day of [________], 1997 by and
between HAWAIIAN NATURAL WATER COMPANY, INC., a Hawaiian corporation (the
"Company"), and CONTINENTAL STOCK TRANSFER & TRUST COMPANY.
WITNESSETH:
WHEREAS, in connection with (i) the offering (the "Offering") to the
public of 2,000,000 units (the "Units"), each Unit consisting of one share of
the Company's common stock, no par value per share (the "Common Stock"), and one
redeemable warrant (the "Warrants"), each Warrant entitling the holder thereof
to purchase one share of Common Stock, (ii) the over-allotment option granted to
Joseph Stevens & Company, L.P., (the "Underwriter") in the public offering
referred to above, to purchase up to an additional 300,000 Units (the
"Over-Allotment Option"), (iii) the sale to the Underwriter of warrants (the
"Underwriter's Warrants") to purchase up to 200,000 Units and (iv) 750,000
Warrants to be issued upon consummation of the Offering and registered for the
account of certain securityholders of the Company in exchange for certain
Warrants issued in connection with the Company's bridge financing consummated in
October 1996 (the "Bridge Financing"), the Company will issue up to 3,250,000
Warrants (subject to increase as provided herein);
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent (as defined in Section
1(r) hereof) to act on behalf of the Company, and the Warrant Agent is willing
to so act, in connection with the issuance, registration, transfer and exchange
of certificates representing the Warrants and the exercise of the Warrants.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the
Underwriter, the holders of certificates representing the Warrants and the
Warrant Agent, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have
the following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Commission" shall mean the Securities and Exchange
Commission.
(c) "Common Stock" shall have the meaning set forth in Section
8(d) hereof.
(d) "Company" shall have the meaning assigned to such term in
the first (1st) paragraph of this Agreement.
(e) "Corporate Office" shall mean the office of the Warrant
Agent at which at any particular time its principal business in New York, New
York shall be administered, which office is located on the date hereof at 2
Broadway, New York, New York 10004.
(f) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(g) "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder (as
defined in Section 1(m) hereof) thereof or his attorney duly authorized in
writing, and (ii) payment in cash or by check made payable to the Warrant Agent
for the
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<PAGE>
account of the Company of an amount in lawful money of the United States of
America equal to the applicable Purchase Price (as defined in Section 1(k)
hereof).
(h) "Initial Warrant Exercise Date" shall mean [________],
1997 [the date of the Prospectus].
(i) "Initial Warrant Redemption Date" shall mean [________],
1998 [the date twelve (12) months after the date of the Prospectus].
(j) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(k) "Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 8 hereof, $[___] [150% of the initial public
offering price per Unit] per Share.
(l) "Redemption Date" shall mean the date (which may not occur
before the Initial Warrant Redemption Date) fixed for the redemption of the
Warrants in accordance with the terms hereof.
(m) "Registered Holder" shall mean the person in whose name
any certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6(b) hereof.
(n) "Underwriter's Warrant Agreement" shall mean the agreement
dated as of [________], 1997 between the Company and the Underwriter relating to
and governing the terms and provisions of the Underwriter's Warrants.
(o) "Subsidiary" or "Subsidiaries" shall mean any corporation
or corporations, as the case may be, of which stock having ordinary power to
elect a majority of the board of directors of such corporation or corporations
(regardless of whether or not at the time the stock of any other class or
classes of such corporation shall have or may have voting
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<PAGE>
power by reason of the happening of any contingency) is at the time directly or
indirectly owned by the Company or by one or more Subsidiaries, or by the
Company and one or more Subsidiaries.
(p) "Transfer Agent" shall mean Continental Stock Transfer &
Trust Company of New York, New York or its authorized successor.
(q) "Underwriting Agreement" shall mean the underwriting
agreement dated [___________], 1997 between the Company and the Underwriter
relating to the purchase for resale to the public of 2,000,000 Units (without
giving effect to the Over-Allotment Option).
(r) "Warrant Agent" shall mean Continental Stock Transfer &
Trust Company of New York, New York or its authorized successor.
(s) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the Warrants
are redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New
York time) on [________], 2002 [the 60 month anniversary of the effective date
of the Registration Statement] or, if such date shall in the State of New York
be a holiday or a day on which banks are authorized to close, then 5:00 p.m.
(New York time) on the next following day which in the State of New York is not
a holiday or a day on which banks are authorized to close, subject to the
Company's right, prior to the Warrant Expiration Date, with the consent of the
Underwriter, to extend such Warrant Expiration Date on five (5) business days
prior written notice to the Registered Holders.
4
<PAGE>
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) One Warrant shall initially entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase at the Purchase
Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one (1) share of Common Stock upon the exercise thereof, subject
to modification and adjustment as provided in Section 8 hereof.
(b) Upon execution of this Agreement, Warrant Certificates
representing 2,000,000 Warrants to purchase up to an aggregate of 2,000,000
shares of Common Stock (subject to modification and adjustment as provided in
Section 8 hereof), shall be executed by the Company and delivered to the Warrant
Agent.
(c) Upon exercise of the Over-Allotment Option, in whole or in
part, Warrant Certificates representing up to 300,000 Warrants to purchase up to
an aggregate of 300,000 shares of Common Stock (subject to modification and
adjustment as provided in Section 8 hereof) shall be executed by the Company and
delivered to the Warrant Agent.
(d) Upon exercise of the Underwriter's Warrants as provided
therein, Warrant Certificates representing 200,000 Warrants to purchase up to an
aggregate of 200,000 shares of Common Stock (subject to modification and
adjustment as provided in Section 8 hereof and in the Underwriter's Warrant
Agreement), shall be countersigned, issued and delivered by the Warrant Agent
upon written order of the Company signed by its Chief Executive Officer,
President or a Vice President and by its Treasurer or an Assistant Treasurer or
its Secretary or an Assistant Secretary.
(e) Upon consummation of the Offering, Warrant Certificates
representing 750,000 Warrants, issued to certain security holders of the Company
in exchange for certain warrants issued in connection with the Bridge Financing,
entitling the holders thereof to purchase
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<PAGE>
up to an aggregate of 750,000 shares of Common Stock (subject to modification
and adjustment as provided in Section 8) shall be executed by the Company and
delivered to the Warrant Agent.
(f) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. No Warrant Certificates shall be issued except (i) Warrant
Certificates initially issued hereunder, (ii) Warrant Certificates issued upon
any transfer or exchange of Warrants, (iii) Warrant Certificates issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Section 7 hereof, and (iv) Warrant Certificates issued pursuant to
the Underwriter's Warrant Agreement (including Warrants in excess of the 200,000
Underwriter's Warrants issued as a result of the antidilution provisions
contained in the Underwriter's Warrant Agreement) and (v) at the option of the
Company, Warrant Certificates in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Purchase Price, the number
of shares of Common Stock purchasable upon the exercise of a Warrant or the
redemption price therefor.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage.
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<PAGE>
The Warrant Certificates shall be dated the date of issuance thereof (whether
upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen
or destroyed Warrant Certificates).
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chief Executive Officer, President or any Vice President and by
its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon, and
shall have imprinted thereon a facsimile of the Company's seal. Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Warrant Certificates shall cease to be
such officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant Agent and issued and delivered with the same force and effect as
though the officer of the Company who signed such Warrant Certificates had not
ceased to hold such office.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised commencing at any time on or after the Initial Warrant
Exercise Date, but not after the Warrant Expiration Date, upon the terms and
subject to the conditions set forth herein (including the provisions set forth
in Sections 5 and 9 hereof) and in the applicable Warrant Certificate. A Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the Exercise Date, provided that the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, together
with payment in cash or by check made payable
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to the Warrant Agent for the account of the Company of an amount in lawful money
of the United States of America equal to the applicable Purchase Price, have
been received by the Warrant Agent. The person entitled to receive the
securities deliverable upon such exercise shall be treated for all purposes as
the holder of such securities as of the close of business on the Exercise Date.
As soon as practicable on or after the Exercise Date and in any event within
three (3) business days after such date, the Warrant Agent, on behalf of the
Company, shall cause to be issued to the person or persons entitled to receive
the same a Common Stock certificate or certificates for the shares of Common
Stock deliverable upon such exercise, and the Warrant Agent shall deliver the
same to the person or persons entitled thereto. Upon the exercise of any
Warrants, the Warrant Agent shall promptly notify the Company in writing of such
fact and of the number of securities delivered upon such exercise and, subject
to Section 4(b) hereof, shall cause all payments in cash or by check made
payable to the order of the Company in respect of the Purchase Price to be
deposited promptly in the Company's bank account or delivered to the Company.
(b) At any time upon the exercise of any Warrants after one
year and one day from the date hereof, the Warrant Agent shall, on a daily
basis, within two business days after such exercise, notify the Underwriter, its
successors or assigns of the exercise of any such Warrants and shall, on a
weekly basis (subject to collection of funds constituting the tendered Purchase
Price, but in no event later than five business days after the last day of the
calendar week in which such funds were tendered), for services rendered by the
Underwriter to the Registered Holders of the Warrants then being exercised,
remit to the Underwriter an amount equal to five percent (5%) of the Purchase
Price of such Warrants then being exercised unless the Underwriter shall have
notified the Warrant Agent that the payment of such amount with
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respect to such Warrant is violative of the General Rules and Regulations
promulgated under the Exchange Act, or the rules and regulations of the NASD or
applicable state securities or "blue sky" laws, or the Warrants are those
underlying the Underwriter's Warrants in which event, the Warrant Agent shall
have to pay such amount to the Company; provided, that, the Warrant Agent shall
not be obligated to pay any amounts pursuant to this Section 4(b) during any
week that such amounts payable are less than $1,000 and the Warrant Agent's
obligation to make such payments shall be suspended until the amount payable
aggregates $1,000, and provided further, that, in any event, any such payment
(regardless of amount) shall be made not less frequently than monthly.
(c) The Company shall not be obligated to issue any fractional
share interests or fractional warrant interests upon the exercise of any Warrant
or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of
fractional interests. Any fractional interest shall be eliminated by rounding
any fraction up to the next full share or Warrant, as the case may be, or other
securities, properties or rights.
SECTION 5. Reservation of Shares, Listing, Payment of Taxes, etc.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that, upon exercise of the Warrants and payment of the
Purchase Price for the shares of Common Stock underlying the Warrants, all
shares of Common Stock which shall be issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable, free from all preemptive or
similar rights, and free from all taxes, liens and charges with respect to the
issuance thereof, and that upon issuance
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such shares shall be listed or quoted on each securities exchange, if any, on
which the other shares of outstanding Common Stock are then listed or quoted, or
if not then so listed or quoted on each place (whether the Nasdaq Stock Market,
Inc., the NASD OTC Electronic Bulletin Board, the National Quotation Bureau
"pink sheets" or otherwise) on which the other shares of outstanding Common
Stock are listed or quoted.
(b) The Company covenants that if any securities reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment to a registration statement, use its best efforts to
cause the same to become effective, keep such registration statement current
while any of the Warrants are outstanding and deliver a prospectus which
complies with Section 10(a)(3) of the Act, to the Registered Holder exercising
the Warrant (except, if in the opinion of counsel to the Company, such
registration is not required under the federal securities law or if the Company
receives a letter from the staff of the Commission stating that it would not
take any enforcement action if such registration is not effected). The Company
will use its best efforts to obtain appropriate approvals or registrations under
the state "blue sky" securities laws of all states in which Registered Holders
reside. Warrants may not be exercised by, nor may shares of Common Stock be
issued to, any Registered Holder in any state in which such exercise would be
unlawful.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares of Common Stock
upon exercise of the Warrants; provided,
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however, that if shares of Common Stock are to be delivered in a name other than
the name of the Registered Holder of the Warrant Certificate representing any
Warrant being exercised, then no such delivery shall be made unless the person
requesting the same has paid to the Warrant Agent the amount of transfer taxes
or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office, books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
assignment form, as the case may be,
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on the reverse thereof shall be duly endorsed or be accompanied by a written
instrument or instruments of subscription or assignment, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder
thereof or his attorney duly authorized in writing.
(d) No service charge shall be made for any exchange or
registration of transfer of Warrant Certificates. However, the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange shall be promptly cancelled by the Warrant Agent.
(f) Prior to due presentment for registration or transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall countersign and deliver in lieu thereof a new
Warrant Certificate representing an equal number of Warrants. Applicants for a
substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Warrant Agent may
prescribe.
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SECTION 8. Adjustments to Purchase Price and Number of Securities.
(a) Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Purchase Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
(b) Stock Dividends and Distributions. In case the Company
shall pay dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Purchase Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this Section 8(b) shall be made as of the record date for the subject stock
dividend or distribution.
(c) Adjustment in Number of Securities. Upon each adjustment
of the Purchase Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon the exercise at the adjusted Purchase Price
of each Warrant shall be adjusted to the nearest whole number by multiplying a
number equal to the Purchase Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Purchase Price.
(d) Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Articles of Incorporation of the Company as may be
amended or restated as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event the Company shall after the date
hereof issue
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Common Stock with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, each Holder, at its option, may receive
upon exercise of any Warrant either shares of Common Stock or a like number of
such securities with greater or superior voting rights.
(e) Merger or Consolidation or Sale.
(i) In case of any consolidation of the Company with, or
merger of the Company with, or merger of the Company into, another corporation
(other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or surviving such merger shall execute and deliver
to the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation, merger, sale or transfer by a
Holder of the number of shares of Common Stock of the Company for which such
Warrant might have been exercised immediately prior to such consolidation,
merger, sale or transfer. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in this Section
8. The above provision of this subsection shall similarly apply to successive
consolidations or mergers.
(ii) In the event of (A) the sale by the Company of all or
substantially all of its assets, or (B) the engagement by the Company or any of
its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of
Rule 13e-3 of the General Rules and Regulations under the Exchange Act or (C) a
distribution to the Company's stockholders of any cash, assets, property,
rights, evidences of indebtedness, securities or any other thing of value, or
any
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combination thereof, the Holders of the unexercised Warrants shall receive
notice of such sale, transaction or distribution twenty (20) days prior to the
date of such sale or the record date for such transaction or distribution, as
applicable, and, if they exercise such Warrants prior to the date of such
transaction or distribution, they shall be treated as holders of Common Stock of
the Company upon the consummation of such transaction or distribution.
(f) No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made if the amount of said adjustment
shall be less than ten cents (10(cent)) per share of Common Stock, provided,
however, that in such case any adjustment that would otherwise be required then
to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to at least ten cents (10(cent)) per share of
Common Stock.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the
Company may (but only with the prior written consent of the Underwriter), on
thirty (30) days' prior written notice, redeem all of the Warrants, in whole and
not in part, at a redemption price of five cents ($.05) per Warrant; provided,
however, that before any such call for redemption of Warrants can take place,
the (i) average closing bid price for the Common Stock, as reported by the
National Association of Securities Dealers Automated Quotation System, or (ii)
if not so quoted, as reported by any other recognized quotation system on which
the Common Stock is quoted, shall have for any twenty (20) trading days within a
period of thirty (30) consecutive trading days ending on the fifth (5th) trading
day prior to the date on which the notice contemplated by Sections 9(b) and 9(c)
hereof is given, equalled or exceeded 150% of the then exercise price per
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share of Common Stock (subject to adjustment in the event of any stock splits or
other similar events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all
of the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner provided
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five (5) business days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to the
Underwriter or its successors or assigns a similar notice telephonically and
confirmed in writing, together with a list of the Registered Holders (including
their respective addresses and number of Warrants beneficially owned by them) to
whom such notice of redemption has been or will be given.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, which shall in no event be less than
thirty (30) days after the date of mailing of such notice, (iii) the place where
the Warrant Certificates shall be delivered and the redemption price shall be
paid, and (iv) that the Underwriter is the Company's exclusive warrant
solicitation agent and shall receive the commission contemplated by Section 4(b)
hereof and (v) that the right to exercise the Warrant shall terminate at 5:00
p.m. (New York time) on the business day immediately preceding the date fixed
for redemption. The date fixed for the redemption of the Warrants shall be the
"Redemption Date" for purposes of this Agreement. No failure to mail such notice
nor any defect therein or in the mailing thereof shall affect the validity of
the proceedings for such redemption except as to a holder (A) to whom notice was
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not mailed or (B) whose notice was defective. An affidavit of the Warrant Agent
or the Secretary or Assistant Secretary of the Company that notice of redemption
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00
p.m. (New York time) on the business day immediately preceding the Redemption
Date. The redemption price payable to the Registered Holders shall be mailed to
such persons at their addresses of record.
(e) The Company shall indemnify the Underwriter and each
person, if any, who controls the Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from the registration statement or prospectus referred to in Section 5(b) hereof
to the same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant to which the company has agreed to
indemnify the Underwriter contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the
Company shall furnish to the Underwriter (i) opinions of counsel to the Company,
dated such date and addressed to the Underwriter, and (ii) a "cold comfort"
letter dated such date addressed to the Underwriter, signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's
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counsel and in accountants' letters delivered to underwriters in underwritten
public offerings of securities, including, without limitation, those matters
covered in Sections 6(d), 6(e) and 6(j) of the Underwriting Agreement.
(g) The Company shall as soon as practicable after the
Redemption Date, and in any event within 15 months thereafter, make "generally
available to its security holders" (within the meaning of Rule 158 under the
Act) an earnings statement (which need not be audited) complying with Section
11(a) of the Act and covering a period of at least 12 consecutive months
beginning after the Redemption Date.
(h) The Company shall deliver within five business days prior
to the Redemption Date copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to such registration statement and
permit the Underwriter to do such investigation, upon reasonable advance notice,
with respect to information contained in or omitted from the registration
statement as it deems reasonably necessary to comply with applicable securities
laws or rules of the NASD. Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as the Underwriter shall reasonably request.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and the Underwriter, and its duties shall
be determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or
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authorization of the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
non-assessable.
(b) The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustment, or with
respect to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. It shall not (i) be liable
for any recital or statement of fact contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible for
any failure on the part of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant Certificate, or (iii)
be liable for any act or omission in connection with this Agreement except for
its own gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or the Underwriter) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, President or any Vice
President (unless other evidence in respect thereof is herein specifically
prescribed). The Warrant Agent shall not be liable for any action taken,
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suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and hold it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own gross negligence or willful misconduct),
after giving thirty (30) days' prior written notice to the Company. At least
fifteen (15) days prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to be mailed to
the Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation the Company shall appoint in writing a new warrant agent. If
the Company shall fail to make such appointment within a period of thirty (30)
days after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may apply
to any court of competent jurisdiction for the appointment of a new warrant
agent. Any new warrant agent, whether appointed by the Company or by such a
court, shall be a bank or trust company having a capital and surplus, as shown
by its last published report to its stockholders, of not less than ten million
dollars ($10,000,000) or a stock transfer company doing business in New York,
New York. After acceptance in writing of such
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appointment by the new warrant agent is received by the Company, such new
warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the warrant agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment, the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effect as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
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(i) The Warrant Agent shall retain for a period of two (2)
years from the date of exercise any Warrant Certificate received by it upon such
exercise.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement (a) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained, or (b) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates; provided, however, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect except
with the consent in writing of the Registered Holders holding not less than
sixty-six and two-thirds percent (66-2/3%) of the Warrants then outstanding;
provided, further, that no change in the number or nature of the securities
purchasable upon the exercise of any Warrant, and no change that increases the
Purchase Price of any Warrant, other than such changes as are specifically set
forth in this Agreement as originally executed, shall be made without the
consent in writing of each Registered Holders affected by such change. In
addition, this Agreement may not be modified, amended or supplemented without
the prior written consent of the Underwriter or its successors or assigns, other
than to cure any ambiguity or to correct any defective or inconsistent provision
or manifest mistake or error herein contained or to make any such change that
the Warrant Agent and the Company deem necessary or desirable and which shall
not adversely affect the interests of the Underwriter or its successors or
assigns.
SECTION 12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid or
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delivered to a telegraph office for transmission, if to the Registered Holder of
a Warrant Certificate, at the address of such holder as shown on the registry
books maintained by the Warrant Agent; if to the Company at Hawaiian Natural
Water Company, Inc., [4747 Kilauea Avenue, Suite 201, Honolulu, Hawaii 96816],
Attention: Marcus Bender, Chief Executive Officer, or at such other address as
may have been furnished to the Warrant Agent in writing by the Company; and if
to the Warrant Agent, at its Corporate Office. Copies of any notice delivered
pursuant to this Agreement shall be delivered to Joseph Stevens & Company, L.P.,
33 Maiden Lane, 8th Floor, New York, NY 10038, Attention: Joseph Sorbara, Chief
Executive Officer or at such other address as may have been furnished to the
Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws
rules or principals.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Except as
hereinafter stated, nothing in this Agreement is intended or shall be construed
to confer upon any other person any right, remedy or claim or to impose upon any
other person any duty, liability or obligation. The Underwriter is, and shall at
all times irrevocably be deemed to be, a third-party beneficiary of this
Agreement, with full power, authority and standing to enforce the rights granted
to it hereunder.
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SECTION 15. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
24
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
HAWAIIAN NATURAL WATER CONTINENTAL STOCK TRANSFER
COMPANY, INC. & TRUST COMPANY
As Warrant Agent
By:________________________________ By:______________________________
Name: Marcus Bender Name:
Title: Chief Executive Officer Title:
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EXHIBIT A
No. W ___________ VOID AFTER ____________________, 2002
_________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE SHARES OF COMMON STOCK
HAWAIIAN NATURAL WATER COMPANY, INC.
CUSIP _____
THIS CERTIFIES THAT, FOR VALUE RECEIVED __________________________________
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. One Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and non-assessable share of Common Stock, no par value
per share, of Hawaiian Natural Water Company, Inc., a Hawaii corporation (the
"Company"), at any time from _____________, 1997 [the date of the Prospectus]
and prior to 5:00 p.m. on the Expiration Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of Continental
Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004 as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $_____
[150% of the initial public offering price per Unit] per share, subject to
adjustment (the "Purchase Price"), in lawful money of the United States of
America in cash or by check made payable to the Warrant Agent for the account of
the Company.
This Warrant Certificate is, and each Warrant represented hereby are,
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated __________,
1997 by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all of the Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
A-1
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
__________, 2002 [the 60 month anniversary of the effective date of the
registration statement]. If such date shall in the State of New York be a
holiday or a day on which banks are authorized to close, then the Expiration
Date shall mean 5:00 p.m. (New York time) on the next day which in the State of
New York is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, to
keep such registration statement current, if required under the Act, while any
of the Warrants are outstanding, and deliver a prospectus which complies with
Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant.
This Warrant shall not be exercisable by a Registered Holder in any state where
such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, in whole and not in part, at a redemption
price of $.05 per Warrant, at any time commencing __________, 1998 [twelve (12)
months from the date of the Prospectus] provided that (i) the average closing
bid price for the Company's Common Stock, as reported by the National
Association of Securities Dealers Automated Quotation System (or, if not so
quoted, as reported by any other recognized quotation system on which the price
of the Common Stock is quoted), shall have, for any twenty (20) trading days
within a period of thirty (30) consecutive trading days ending on the fifth
(5th) trading day prior to the date on which the Notice of Redemption (as
defined below) is given, equalled or exceeded 150% of the then exercise price
per share (subject to adjustment in the event of any stock splits or other
similar events) and (ii) the Company has obtained the prior written consent of
Joseph Stevens & Company, L.P. Notice of redemption (the "Notice of Redemption")
shall be given not later than the thirtieth (30th) day before the date fixed for
redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no
A-2
<PAGE>
rights with respect to this Warrant except to receive the $.05 per Warrant upon
surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ___________, 1996
HAWAIIAN NATURAL WATER COMPANY, INC.
[SEAL]
By: ________________________________
Name: Marcus Bender
Title: Chief Executive Officer
ATTEST:
By: ________________________________
Name:
Title:
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By: _________________________
Authorized Officer
A-3
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
________________________________
________________________________
________________________________
________________________________
(please print or type name and address)
and be delivered to
________________________________
________________________________
________________________________
________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-4
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. If the exercise of this Warrant was
solicited by Joseph Stevens & Company,
L.P. please check the
following box [ ]
2. The exercise of this Warrant was
solicited by [ ]
________________________
3. If the exercise of this Warrant was
not solicited, please check the
following box [ ]
Dated: ______________________ X_________________________________
_________________________________
Address
__________________________________
Social Security or Taxpayer
Identification Number
__________________________________
Signature Guaranteed
__________________________________
A-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________________, hereby sells, assigns
and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
________________________________
________________________________
________________________________
(please print or type name and address)
________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________ Attorney to transfer this Warrant Certificate on the books
of the Company, with full power of substitution in the premises.
Dated: _______________________ X__________________________
___________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME(S) AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST
BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE.
A-6
<PAGE>
================================================================================
HAWAIIAN NATURAL WATER COMPANY, INC.
AND
JOSEPH STEVENS & COMPANY L.P.
-----------------
UNDERWRITER'S
WARRANT AGREEMENT
[_________], 1997
================================================================================
<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of [___________],
1997 by and between HAWAIIAN NATURAL WATER COMPANY, INC., a Delaware corporation
(the "Company"), and JOSEPH STEVENS & COMPANY, L.P. ("Joseph Stevens") (Joseph
Stevens is hereinafter referred to variously as the "Holder" or the
"Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter or
its designee(s) warrants ("Warrants") to purchase up to 200,000 Units (as
defined in Section 1 hereof, each Unit consisting of one (1) share of common
stock, no par value per share, of the Company's ("Common Stock") and one (1)
redeemable Common Stock purchase warrant, each to purchase one additional share
of Common Stock ("Redeemable Warrants")); and
WHEREAS, the Underwriter has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
between the Underwriter and the Company in connection with the proposed public
offering of 2,000,000 Units at a public offering price of $[ ] per Unit; and
WHEREAS, the Warrants to be issued pursuant to this Agreement
will be issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriter in consideration for, and as part
of the Underwriter's compensation in connection with, Joseph Stevens acting as
the Underwriter pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriter to the Company of twenty dollars and no cents ($20.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
1. Grant. The Underwriter (or its designee(s)) is hereby
granted the right to purchase, at any time from [__________], 1998 [one year
from the effective date] until 5:00 p.m., New York time, on [__________], 2002,
[5 years from the effective date] up to 200,000 Units at an initial exercise
price (subject to adjustment as provided in Section 8 hereof) of $[________]
[120% of the initial public offering price per Unit] per Unit subject to the
terms and conditions of this Agreement. A "Unit" consists of one (1) share of
Common Stock and one (1) Redeemable Warrant. Each Redeemable Warrant is
exercisable to purchase one additional share of Common Stock at an initial
exercise price of $[____] [150% of the initial public offering price per Unit]
per share, commencing on the date of issuance (the "Initial Exercise Date") and
ending, at 5:00 p.m. New York time on [__________], 2002 [5 years from the
effective date] (the "Redeemable Warrant Expiration Date") at which time the
Redeemable Warrants shall expire. Except as set forth herein, the Units issuable
upon exercise of the Warrants are in all respects identical to the Units being
purchased by the Underwriter for resale to the public pursuant to the terms and
provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions and other
variations as required or permitted by this Agreement.
3. Exercise of Warrant.
3.1 Method of Exercise. The Warrants are initially exercisable
at an initial exercise price per Unit set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate, together with the annexed Form of Election to
2
<PAGE>
Purchase duly executed and payment of the Exercise Price (as hereinafter
defined) for the Units purchased at the Company's principal offices in Honolulu,
Hawaii (presently located at 4747 Kilauea Avenue, Suite 201, Honolulu, Hawaii
96816) the registered holder of a Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the shares of
Common Stock so purchased and a certificate or certificates for the Redeemable
Warrants so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional shares of the Common Stock and Redeemable
Warrants underlying the Warrants). In the event the Company redeems all of the
outstanding Redeemable Warrants, the Redeemable Warrants underlying the Warrants
may only be exercised if such exercise is simultaneous with the exercise of the
Warrants. Warrants may be exercised to purchase all or part of the Units
represented thereby. In the case of the purchase of less than all the Units
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Units purchasable
thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1 in
exchange for the number of Units equal to the product of (x) the number of Units
as to which the Warrants are being exercised, multiplied by (y) a fraction, the
numerator of which is the Market Price (as defined in Section 3.3 hereof) of the
Units minus the Exercise Price of the Units and the denominator of which is the
Market Price per Unit. Solely for the purposes of
3
<PAGE>
this Section 3.2, Market Price shall be calculated either (i) on the date on
which the form of election attached hereto is deemed to have been sent to the
Company pursuant to Section 14 hereof ("Notice Date") or (ii) as the average of
the Market Price for each of the five trading days immediately preceding the
Notice Date, whichever of (i) or (ii) results in a greater Market Price.
3.3 Definition of Market Price.
(a) As used herein, the phrase "Market Price" of the Units,
the Common Stock or the Redeemable Warrants, respectively, at any date shall be
deemed to be the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Units, the Common Stock or the
Redeemable Warrants, as the case may be, are listed or admitted to trading or by
the Nasdaq National Market ("Nasdaq National Market") or the Nasdaq Small Cap
Market ("Nasdaq Small Cap"), or, if the Units, the Common Stock or the
Redeemable Warrants, as the case may be, are not listed or admitted to trading
on any national securities exchange or quoted by the National Association of
Securities Dealers Automated Quotation System ("Nasdaq"), the average closing
bid price as furnished by the National Association of Securities Dealers, Inc.
("NASD") through Nasdaq or similar organization if Nasdaq is no longer reporting
such information (collectively, the "Appropriate Market Price").
(b) If the Market Price of the Units cannot be determined
pursuant to Section 3.3(a), the Market Price of the Units at any date shall be
deemed to be the sum of the Market Price of the Common Stock and the Market
Price of the Redeemable Warrants.
4
<PAGE>
(c) If the Market Price of the Common Stock cannot be
determined pursuant to Section 3.3(a) above, the Market Price of the Common
Stock shall be determined in good faith (using customary valuation methods) by
resolution of the members of the Board of Directors of the Company, based on the
best information available to it.
(d) If the Market Price of the Redeemable Warrants cannot be
determined pursuant to Section 3.3(a) above, the Market Price of a Redeemable
Warrant shall equal the difference between the Market Price of the Common Stock
and the Exercise Price of the Redeemable Warrant.
4. Issuance of Certificates. Upon the exercise of the
Warrants, the issuance of certificates for shares of Common Stock and Redeemable
Warrants or other securities, properties or rights underlying such Warrants, and
upon the exercise of the Redeemable Warrants, the issuance of certificates for
shares of Common Stock or other securities, properties or rights underlying such
Redeemable Warrants shall be made forthwith (and in any event such issuance
shall be made within three (3) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof.
The Warrant Certificates and the certificates representing the
shares of Common Stock and the Redeemable Warrants underlying the Warrants and
the shares of Common Stock underlying each Redeemable Warrant or other
securities, property or rights shall be executed on behalf of the Company by the
manual or facsimile signature of the then present Chairman or Vice Chairman of
the Board of Directors or President or Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then
5
<PAGE>
present Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of
the Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof; that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of one
(1) year from the effective date of the Company's Registration Statement on form
SB-2 (Registration No. 333-____________) (the "Registration Statement"), except
to officers [or partners] of the Underwriter.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $[____] per Unit [120% of the initial public offering price per Unit]. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933. The
Warrants, the shares of Common Stock and the Redeemable Warrants underlying the
Warrants and the shares of Common Stock issuable upon exercise of the Redeemable
Warrants underlying the Warrants and the other securities issuable upon exercise
of the Warrants and the Redeemable Warrants
6
<PAGE>
(collectively, the "Warrant Securities") have been registered under the
Securities Act of 1933, as amended (the "Act") pursuant to the Company's
Registration Statement. All the representations and warranties of the Company
contained in the Underwriting Agreement relating to the Registration Statement,
the Preliminary Prospectus and Prospectus (as such terms are defined in the
Underwriting Agreement) and made as of the dates provided therein, are hereby
incorporated by reference. The Company agrees and covenants promptly to file
post effective amendments to such Registration Statement as may be necessary to
maintain the effectiveness of the Registration Statement as long as any Warrants
are outstanding. In the event that, for any reason, whatsoever, the Company
shall fail to maintain the effectiveness of the Registration Statement, upon
exercise, in part or in whole, of the Warrants, certificates representing the
shares of Common Stock and the Redeemable Warrants underlying the Warrants, and
upon exercise, in whole or in part of the Redeemable Warrants, certificates
representing the shares of Common Stock underlying the Redeemable Warrants and
the other securities issuable upon exercise of the Warrants and the Redeemable
Warrants shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), and may not be offered, sold, pledged, hypothecated,
assigned or transferred except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent
applicable, Rule 144 under the Act (or any similar rule under
such Act relating to the disposition of securities), or (iii)
an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
7.2 Piggyback Registration. If, at any time commencing after
the date hereof and expiring seven (7) years after the effective date of the
Registration Statement, the Company proposes to register any of its securities
under the Act (other than pursuant to Form S-8, S-4 or a comparable registration
statement) the Company will give written notice by registered mail,
7
<PAGE>
at least thirty (30) days prior to the filing of each such registration
statement, to the Underwriter and to all other Holders of the Warrants and/or
the Warrant Securities of its intention to do so. If the Underwriter or other
Holders of the Warrants and/or Warrant Securities notifies the Company within
twenty (20) days after receipt of any such notice of its or their desire to
include any such securities in such proposed registration statement, the Company
shall afford the Underwriter and such Holders of the Warrants and/or Warrant
Securities the opportunity to have any such Warrant Securities registered under
such registration statement.
Notwithstanding the provisions of this Section 7.2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.2 (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring
five (5) years after the effective date of the Registration Statement, the
Holders of the Warrants and/or Warrant Securities representing a "Majority" (as
hereinafter defined) of such securities (assuming the exercise of all of the
Warrants and the Redeemable Warrants underlying the Warrants) shall have the
right (which right is in addition to the registration rights under Section 7.2
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Securities and Exchange Commission (the "Commission"),
on one occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Underwriter and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
8
<PAGE>
respective Warrant Securities for nine (9) consecutive months by such Holders
and any other Holders of the Warrants and/or Warrant Securities who notify the
Company within ten (10) days after receiving notice from the Company of such
request; provided, however, upon receipt of a request for a registration
pursuant to this Section 7.3, the Company may, one time, in any 12 month period
(i) postpone the filing of a registration statement for a period not to exceed
ninety (90) days from the date of receipt of such request, if the President of
the Company furnishes to the Holders requesting registration a certificate
signed by the Company's President stating that in the good faith judgment of the
Board of Directors of the Company it would be seriously detrimental to the
Company for a public offering of the Company's securities to be commenced in the
near future or (ii) postpone the filing of a registration statement for a period
not to exceed ninety (90) days from the effective date of any registration
statement relating to a primary underwritten offering of securities of the
Company which has been declared effective prior to the date of receipt of a
request for registration. If the Company so determines to postpone a
registration requested by the Holders pursuant to this Section 7.3, it shall
promptly notify the requesting Holders of such determination including the
reason therefor, whereupon the requesting Holders shall be entitled to withdraw
such request and such registration shall not count as a registration under this
Section 7.3. In addition, the Company may, one time, in any 12 month period,
suspend the effectiveness of any registration statement filed pursuant to this
Section 7.3 for a period of forty-five (45) days, if the President of the
Company furnishes to the Holders of securities registered pursuant to this
Section 7.3 a certificate signed by the Company's President stating that the
Board of Directors of the Company has determined, upon advice of counsel, that
it would be required to disclose any significant corporate development which
disclosure would have a material effect on the Company; provided, however, that
the
9
<PAGE>
period of time which such registration statement is required to be effective
shall be increased by the number of days that the registration statement was
suspended (the "Suspension Period"); and provided, further, that the Company
shall furnish to each Holder of securities registered pursuant to Section 7.3 a
notice stating that the Suspension Period has been terminated within three (3)
business days following the date of such termination..
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the Warrant
Securities within the time period specified in Section 7.4(a) hereof pursuant to
the written notice specified in Section 7.3(a) of a Majority of the Holders of
the Warrants and/or Warrant Securities, the Company shall have the option, upon
the written notice of election of a Majority of the Holders of the Warrants
and/or Warrant Securities to repurchase (i) any and all Warrant Securities at
the higher of the Market Price per share of Common Stock on (x) the date of the
notice sent pursuant to Section 7.3(a) or (y) the expiration of the period
specified in Section 7.4(a) and (ii) any and all Warrants at such Market Price
less the Exercise Price of such Warrant. Such repurchase shall be in immediately
available funds and shall close within two (2) days after the later of (i) the
expiration of the period specified in Section 7.4(a) or (ii) the delivery of the
written notice of election specified in this Section 7.3(c).
(d) In addition to the registration rights under Section 7.2
and subsection (a) of this Section 7.3, at any time commencing after the date
hereof and expiring five (5) years
10
<PAGE>
thereafter, any Holder of Warrants and/or Warrant Securities shall have the
right, exercisable by written request to the Company, to have the Company
prepare and file, on one occasion, with the Commission a registration statement
so as to permit a public offering and sale for nine (9) consecutive months by
any such Holder of its Warrant Securities provided, however, that the provisions
of Section 7.4(b) hereof shall not apply to any such registration request and
registration and all costs incident thereto shall be at the expense of the
Holder or Holders making such request.
7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within forty-five (45) days of receipt of any
demand therefor, shall use its best efforts to have any registration
statement declared effective at the earliest possible time, and shall
furnish each Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.2 and 7.3(a) hereof including,
without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs,
fees and expenses in connection with any registration statement filed
pursuant to Section 7.3(d). If the Company shall fail to comply with
the provisions of Section 7.4(a), the Company
11
<PAGE>
shall be liable for any equitable or other relief available at law to
the Holder(s) requesting registration of their Warrant Securities,
excluding consequential damages.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included
in a registration statement for offering and sale under the securities
or blue sky laws of such states as reasonably are requested by the
Holder(s), provided that the Company shall not be obligated to execute
or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such
jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934,
as amended ("Exchange Act"), against all loss, claim, damage, expense
or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to
which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement but only to the
same extent and with the same effect as the provisions pursuant to
which the Company has agreed to indemnify the Underwriter contained in
Section 7 of the Underwriting Agreement. The Company further agree(s)
that upon demand by an indemnified person, at any time or from time to
time, it will promptly reimburse such indemnified person for any loss,
claim, damage, liability, cost or expense actually and reasonably paid
by the indemnified person as to which the Company has indemnified such
person pursuant hereto. Notwithstanding the foregoing provisions of
this Section 7.4(d) any such payment or reimbursement by the Company of
fees, expenses
12
<PAGE>
or disbursements incurred by an indemnified person in any proceeding in
which a final judgment by a court of competent jurisdiction (after all
appeals or the expiration of time to appeal) is entered against the
Company or such indemnified person as a direct result of the Holder(s)
or such person's gross negligence or willful misfeasance will be
promptly repaid to the Company.
(e) The Holder(s) of the Warrant Securities to be sold
pursuant to a registration statement, and their successors and assigns,
shall severally, and not jointly, indemnify the Company, its officers
and directors and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from
information furnished by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 7 of the Underwriting Agreement pursuant to which
the Underwriter have agreed to indemnify the Company. The Holder(s)
further agree(s) that upon demand by an indemnified person, at any time
or from time to time, they will promptly reimburse such indemnified
person for any loss, claim, damage, liability, cost or expense actually
and reasonably paid by the indemnified person as to which the Holder(s)
have indemnified such person pursuant hereto. Notwithstanding the
foregoing provisions of this Section 7.4(e) any such payment or
reimbursement by the Holder(s) of fees, expenses or disbursements
incurred by an indemnified person in any proceeding in which a final
judgment by a
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court of competent jurisdiction (after all appeals or the expiration of
time to appeal) is entered against the Company or such indemnified
person as a direct result of the Company or such person's gross
negligence or willful misfeasance will be promptly repaid to the
Holder(s).
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Securities to be included in any
registration statement filed pursuant to Section 7.3 hereof, or permit
any registration statement to be or remain effective during the
effectiveness of a registration statement filed pursuant to Section 7.3
hereof, without the prior written consent of the Holders of the
Warrants and Warrant Securities representing a Majority of such
securities (assuming the exercise of all of the Warrants and the
Redeemable Warrants underlying the Warrants) other than (i) the Warrant
Securities or (ii) any securities issuable upon the exercise of that
certain common stock purchase warrant dated May 24, 1996 issued to
Leisure Fund Ltd. in accordance with the registration rights of such
warrant, as in effect on the date hereof, unless such party shall have
waived such registration rights.
(h) The Company shall furnish to each Holder participating in
the offering and to each underwriter, if any, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel
to the Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, an
opinion dated the date of the closing under the underwriting
agreement), and (ii) a
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<PAGE>
"cold comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, a letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who have issued
a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same
matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with
respect to events subsequent to the date of such financial statements,
as are customarily covered in opinions of issuer's counsel and in
accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within
15 months thereafter, make "generally available to its security
holders" (within the meaning of Rule 158 under the Act) an earnings
statement (which need not be audited) complying with Section 11(a) of
the Act and covering a period of at least 12 consecutive months
beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriter, if any,
copies of all correspondence between the Commission and the Company,
its counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration statement
and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the
NASD.
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<PAGE>
Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder or
underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement
with the managing underwriter selected for such underwriting by Holders
holding a Majority of the Warrant Securities requested to be included
in such underwriting, which may be the Underwriter. Such agreement
shall be satisfactory in form and substance to the Company, each Holder
and such managing underwriter, and shall contain such representations,
warranties and covenants by the Company and such other terms as are
customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Warrant Securities and may,
at their option, require that any or all of the representations,
warranties and covenants of the Company to or for the benefit of such
underwriters shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters except
as they may relate to such Holders and their intended methods of
distribution.
(l) In addition to the Warrant Securities, upon the written
request therefor by any Holder(s), the Company shall include in the
registration statement any other securities of the Company held by such
Holder(s) as of the date of filing of such registration statement,
including without limitation, restricted shares of Common Stock,
options, warrants or any other securities convertible into shares of
Common Stock.
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(m) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrants or Warrant Securities shall mean
in excess of fifty percent (50%) of the then outstanding Warrants or
Warrant Securities that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public
pursuant to a registration statement filed with the Commission under
the Act.
8. Adjustments to Exercise Price and Number of Securities.
8.1 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.2 Stock Dividends and Distributions. In case the Company
shall pay dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Exercise Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this Section 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
8.3 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon the exercise at the adjusted Exercise Price
of each Warrant shall be adjusted to the nearest whole number by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise
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of the Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
8.4 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Articles of Incorporation of the Company as may be
amended or restated as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value.
8.5 Merger or Consolidation or Sale.
(a) In case of any consolidation of the Company with, or
merger of the Company with, or merger of the Company into, another corporation
(other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or merger shall execute and deliver to the Holder a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation, merger, sale or transfer by a holder of the number of shares
of Common Stock of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in this Section 8. The above provision of
this subsection shall similarly apply to successive consolidations or mergers.
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(b) In the event of (i) the sale by the Company of all or
substantially all of its assets, or (ii) the engagement by the Company or any of
its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of
Rule 13e-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended, or (iii) a distribution to the Company's stockholders
of any cash, assets, property, rights, evidences of indebtedness, securities or
any other thing of value, or any combination thereof, the Holders of the
unexercised Warrants shall receive notice of such sale, transaction or
distribution twenty (20) days prior to the date of such sale or the record date
for such transaction or distribution, as applicable, and, if they exercise such
Warrants prior to such date, they shall be treated as holders of Common Stock of
the Company upon the consummation of such transaction or distribution.
8.6 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made if the amount of said adjustment
shall be less than ten cents (10(cent)) per Warrant Security, provided, however,
that in such case any adjustment that would otherwise be required then to be
made shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least ten cents (10(cent)) per Warrant Security.
8.7 Adjustment of Redeemable Warrants' Exercise Price. With
respect to any of the Redeemable Warrants whether or not the Redeemable Warrants
have been exercised (or are exercisable) and whether or not the Redeemable
Warrants are issued and outstanding, the Redeemable Warrant exercise price and
the number of shares of Common Stock underlying such Redeemable Warrants shall
be automatically adjusted in accordance with Section 8 of the Warrant Agreement
between the Company and Continental Stock Transfer & Trust Company dated
[__________], 1997 (the "Redeemable Warrant Agreement"), upon the occurrence of
any
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<PAGE>
of the events described therein. Thereafter, the underlying Redeemable Warrants
shall be exercisable at such adjusted Redeemable Warrant exercise price for such
adjusted number of underlying shares of Common Stock or other securities,
properties or rights.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holder at the principal executive office of the Company, for a
new Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Units in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock or Redeemable Warrants upon the exercise of the Warrants, or fractions of
shares of Common Stock upon the exercise of the Redeemable Warrants underlying
the Warrants, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
shares of Common Stock or Redeemable Warrants, as the case may be, or other
securities, properties or rights.
11. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose
20
<PAGE>
of issuance upon the exercise of the Warrants and the Redeemable Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder. The Company further covenants and
agrees that upon exercise of the Redeemable Warrants underlying the Warrants and
payment of the respective Redeemable Warrant exercise price therefor, all shares
of Common Stock and other securities issuable upon such exercises shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants and the Redeemable Warrants and all Redeemable
Warrants underlying the Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock or the
Redeemable Warrants issued to the public in connection herewith may then be
listed and/or quoted on Nasdaq National Market or Nasdaq Small Cap Market.
12. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
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(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe therefor;
or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least twenty (20) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
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<PAGE>
13. Redeemable Warrants. The form of the certificate
representing Redeemable Warrants (and the form of election to purchase shares of
Common Stock upon the exercise of Redeemable Warrants and the form of assignment
printed on the reverse thereof) shall be substantially as set forth in Exhibit
"A" to the Redeemable Warrant Agreement. Each Redeemable Warrant issuable upon
exercise of the Warrants shall evidence the right to initially purchase one
fully paid and non-assessable share of Common Stock at an initial purchase price
of $[____] [150% of the initial public offering price per Unit] per share
commencing on the Initial Exercise Date and ending at 5:00 p.m. New York time on
the Redeemable Warrant Expiration Date at which time the Redeemable Warrants
shall expire. The exercise price of the Redeemable Warrants and the number of
shares of Common Stock issuable upon the exercise of the Redeemable Warrants are
subject to adjustment, whether or not the Warrants have been exercised and the
Redeemable Warrants have been issued, in the manner and upon the occurrence of
the events set forth in Section 8 of the Redeemable Warrant Agreement, which is
hereby incorporated herein by reference and made a part hereof as if set forth
in its entirety herein. Subject to the provisions of this Agreement and upon
issuance of the Redeemable Warrants underlying the Warrants, each registered
holder of such Redeemable Warrants shall have the right to purchase from the
Company (and the Company shall issue to such registered holders) up to the
number of fully paid and non-assessable shares of Common Stock (subject to
adjustment as provided herein and in the Redeemable Warrant Agreement), free and
clear of all preemptive rights of stockholders, provided that such registered
holder complies with the terms governing exercise of the Redeemable Warrants set
forth in the Redeemable Warrant Agreement, and pays the applicable exercise
price, determined in accordance with the terms of the Redeemable Warrant
Agreement. Upon exercise of the Redeemable Warrants, the Company
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<PAGE>
shall forthwith issue to the registered holder of any such Redeemable Warrant in
his name or in such name as may be directed by him, certificates for the number
of shares of Common Stock so purchased. Except as otherwise provided herein, the
Redeemable Warrants underlying the Warrants shall be governed in all respects by
the terms of the Redeemable Warrant Agreement. The Redeemable Warrants shall be
transferable in the manner provided in the Redeemable Warrant Agreement, and
upon any such transfer, a new Redeemable Warrant Certificate shall be issued
promptly to the transferee. The Company covenants to, and agrees with, the
Holder(s) that without the prior written consent of the Holder(s), the
Redeemable Warrant Agreement will not be modified, amended, cancelled, altered
or superseded, and that the Company will send to each Holder, irrespective of
whether or not the Warrants have been exercised, any and all notices required by
the Redeemable Warrant Agreement to be sent to holders of Redeemable Warrants.
14. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by notice
to the Holders.
15. Supplements and Amendments. The Company and the
Underwriter may from time to time supplement or amend this Agreement without the
approval of any Holders of Warrant Certificates (other than the Underwriter) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any
24
<PAGE>
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall not
adversely affect the interests of the Holders of Warrant Certificates.
16. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close
of business on [__________], 2004 [7 years from the date hereof].
Notwithstanding the foregoing, the indemnification provisions of Section 7 shall
survive such termination until the close of business on [__________], 2009 [12
years from the date hereof.]
18. Governing Law, Submission to Jurisdiction. This Agreement
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect to the
rules of said State governing the conflicts of laws.
The Company, the Underwriter and the Holders hereby agree that
any action, proceeding or claim against it arising out of, or relating in any
way to, this Agreement shall be brought and enforced in the courts of the State
of New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Underwriter and the Holders hereby irrevocably waive
any objection to such exclusive jurisdiction or inconvenient forum. Any such
process or summons to be served upon any of the Company, the Underwriter and the
Holders (at the option of the party bringing such action, proceeding or claim)
may be served by
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transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address as set forth in
Section 14 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or claim.
The Company, the Underwriter and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
19. Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) and the Redeemable Warrant Agreement contain the entire understanding
between the parties hereto with respect to the subject matter hereof and may not
be modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Underwriter and any other registered Holder(s) of the Warrant
Certificates or Warrant Securities any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole and
26
<PAGE>
exclusive benefit of the Company and the Underwriter and any other Holder(s) of
the Warrant Certificates or Warrant Securities.
23. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall to either constitute but one and
the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
HAWAIIAN NATURAL WATER COMPANY, INC.
By: ________________________________
Name: Marcus Bender
Title: Chief Executive Officer
Attest:
__________________________
Secretary
JOSEPH STEVENS & COMPANY, L.P.
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION
OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, ________, 2002
No. W- ____ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Joseph Stevens &
Company, L.P., or registered assigns, is the registered holder of __________
Warrants to purchase initially, at any time from ____________, 1998 [one year
from the effective date of the Registration Statement] until 5:00 p.m. New York
time on ____________, 2002 [five years from the effective date of the
Registration Statement] ("Expiration Date"), up to ______________ Units, each
Unit consisting of one (1) fully-paid and non-assessable share of common stock,
no par value ("Common Stock") of HAWAIIAN NATURAL WATER COMPANY, INC., a Hawaii
corporation (the "Company"), and one (1) redeemable common stock purchase
warrant ("Redeemable Warrants") (each Redeemable Warrant entitling the holder to
purchase one fully-paid and non-assessable share of Common Stock), at the
initial exercise price, subject to adjustment in certain events (the "Exercise
Price"), of $_____________ [120% of the public offering price per Unit] per Unit
upon surrender of this Warrant Certificate and payment of the Exercise Price at
an office or agency of the Company, or by surrender of this Warrant Certificate
in lieu of cash payment, but subject to the conditions set forth herein and in
the warrant agreement dated as of _________________, 1997 between the Company
and Joseph Stevens & Company, L.P. (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company or by surrender of this
Warrant Certificate.
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No Warrant may be exercised after 5:00 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such Warrant.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of , 1997
HAWAIIAN NATURAL WATER COMPANY, INC.
[SEAL] By:_________________________________
Marcus Bender
Chief Executive Officer
Attest:
_____________________________
Secretary
3
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[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _____________ Units
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of HAWAIIAN NATURAL
WATER COMPANY, INC. in the amount of $__________, all in accordance with the
terms of Section 3.1 of the Underwriter's Warrant Agreement dated as of
___________, 1997 between HAWAIIAN NATURAL WATER COMPANY, INC. and Joseph
Stevens & Company, L.P. The undersigned requests that certificates for such
securities be registered in the name of _______________ whose address is
____________________________ and that such certificates be delivered to
______________________________ whose address is ____________________________.
Dated:
Signature ______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
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<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ____________ Units
all in accordance with the terms of Section 3.2 of the Underwriter's Warrant
Agreement dated as of ______________, 1997 between HAWAIIAN NATURAL WATER
COMPANY, INC. and Joseph Stevens & Company, L.P. The undersigned requests that
certificates for such securities be registered in the name of __________________
whose address is ___________________________________________ and that such
certificates be delivered to __________________________ whose address is
________________________________.
Dated:
Signature ______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
5
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificate.)
FOR VALUE RECEIVED _____________ hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _______________________________
Signature ______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
6
<PAGE>
FINANCIAL ADVISORY AND CONSULTING AGREEMENT
This Agreement is made and entered into as of this [__] day of
[________], 1997, by and between HAWAIIAN NATURAL WATER COMPANY, INC., a Hawaii
corporation (the "Company"), and JOSEPH STEVENS & COMPANY, L.P. (the
"Consultant").
In consideration of and for the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Purpose. The Company hereby retains the Consultant during
the term specified in Section 2 hereof to render consulting advice to the
Company as an investment banker relating to financial and similar matters, upon
the terms and conditions as set forth herein.
2. Term. Subject to the provisions of Sections 8, 9 and 10
hereof, this Agreement shall be effective for a period of twenty-four (24)
months commencing [_______] [__], 1997.
3. Duties of Consultant. During the term of this Agreement,
the Consultant will provide the Company with such regular and customary
consulting advice as is reasonably requested by the Company, provided that the
Consultant shall not be required to undertake duties not reasonably within the
scope of the consulting advisory service contemplated by this Agreement. In
performance of these duties, the Consultant shall provide the Company with the
benefits of its best judgment and efforts. It is understood and acknowledged by
the parties that the value of the Consultant's advice is not measurable in any
quantitative manner, and that the Consultant shall be obligated to render
advice, upon the request of the Company, in good faith, but shall not be
obligated to spend any specific amount of time in doing so. The Consultant's
duties may include, but will not necessarily be limited to:
A. Providing sponsorship and exposure in connection with the
dissemination of corporate information regarding the Company to the investment
community at large under a systematic planned approach.
B. Rendering advice and assistance in connection with the
preparation of annual and interim reports and press releases.
C. Arranging, on behalf of the Company and its
representatives, at appropriate times, meetings with securities analysts of
major regional investment banking firms.
D. Assisting in the Company's financial public relations,
including discussions between the Company and the financial community.
<PAGE>
E. Rendering advice with regard to internal operations,
including:
(1) advice regarding formation of corporate goals and their
implementation;
(2) advice regarding the financial structure of the Company
and its divisions or subsidiaries or any programs and
projects of such entities;
(3) advice concerning the securing, when necessary and if
possible, of additional financing through banks, insurance
companies and/or other institutions; and
(4) advice regarding corporate organization and personnel.
F. Rendering advice with respect to any acquisition program of
the Company.
G. Rendering advice regarding a future public or private
offering of securities of the Company or of any subsidiary.
4. Relationships with Others. The Company acknowledges that
the Consultant and its affiliates are in the business of providing financial
services and consulting advice (of all types contemplated by this Agreement) to
others. Nothing herein contained shall be construed to limit or restrict the
Consultant or its affiliates from rendering such services or advice to others.
5. Consultant's Liability. In the absence of gross negligence
or willful misconduct on the part of the Consultant, or the Consultant's breach
of this Agreement, the Consultant shall not be liable to the Company, or to any
officer, director, employee, shareholder or creditor of the Company, for any act
or omission in the course of or in connection with the rendering or providing of
advice hereunder. Except in those cases where the gross negligence or willful
misconduct of the Consultant or the breach by the Consultant of this Agreement
is alleged and proven, the Company agrees to defend, indemnify and hold the
Consultant harmless from and against any and all reasonable costs, expenses and
liability (including, but not limited to, attorneys' fees paid in the defense of
the Consultant) which may in any way result from services rendered by the
Consultant pursuant to or in any connection with this Agreement.
6. Expenses. The Company, upon receipt of appropriate
supporting documentation, shall reimburse the Consultant for any and all
reasonable out-of-pocket expenses incurred by the Consultant in connection with
services rendered by the Consultant to the Company pursuant to this Agreement,
including, but not limited to, hotel, food and associated expenses, all charges
for travel and long-distance telephone calls and all other expenses incurred by
the Consultant in connection with services rendered by the Consultant to the
Company pursuant to this Agreement. Expenses payable under this Section 6 shall
not include allocable overhead expenses of the Consultant, including, but not
limited to, attorneys' fees, secretarial charges and rent.
2
<PAGE>
7. Compensation. As compensation for the services to be
rendered by the Consultant to the Company pursuant to Section 3 hereof, the
Company shall pay the Consultant a financial consulting fee of two thousand
dollars ($2,000) per month for twenty-four (24) months commencing on [______]
[__] 1997. Forty-Eight Thousand Dollars ($48,000), representing payment in full
of all amounts due the Consultant pursuant to this Section 7, shall be paid by
the Company on [_______] [__], 1997 [the closing of the initial public
offering].
8. Other Advice. In addition to the duties set out in Section
3 hereof, the Consultant agrees to furnish advice to the Company in connection
with the acquisition of and/or merger with other companies, joint ventures with
any third parties, license and royalty agreements and any other financing (other
than the private or public sale of the Company's securities for cash),
including, but not limited to, the sale of the Company itself (or any
significant percentage, subsidiaries or affiliates thereof).
In the event that any such transactions are directly or
indirectly originated by the Consultant for a period of five (5) years from the
date hereof, the Company shall pay fees to the Consultant as follows:
Legal Consideration Fee
------------------- ---
1. $ -0- - $3,000,000 5% of legal consideration
2. $ 3,000,001 - $4,000,000 Amount calculated pursuant to line 1
of this computation, plus 4% of
excess over $3,000,000
3. $ 4,000,001 - 5,000,000 Amount calculated pursuant to lines
1 and 2 of this computation, plus 3%
of excess over $4,000,000
4. above $ 5,000,000 Amount calculated pursuant to lines
1, 2 and 3 of this computation, plus
2% of excess over $5,000,000.
Legal consideration is defined, for purposes of this
Agreement, as the total of stock (valued at market on the day of closing, or if
there is no public market, valued as set forth herein for other property), cash
and assets and property or other benefits exchanged by the Company or received
by the Company or its shareholders (all valued at fair market value as agreed
or, if not, by any independent appraiser), irrespective of period of payment or
terms.
9. Sales or Distributions of Securities. If the Consultant
assists the Company in the sale or distribution of securities to the public or
in a private transaction, the Consultant shall receive fees in the amount and
form to be arranged separately at the time of such transaction.
3
<PAGE>
10. Form of Payment. All fees due to the Consultant pursuant
to Section 8 hereof are due and payable to the Consultant, in cash or by
certified check, at the closing or closings of a transaction specified in such
Section 8 or as otherwise agreed between the parties hereto; provided, however,
that in the case of license and royalty agreements specified in Section 8
hereof, the fees due the Consultant in receipt of such license and royalty
agreements shall be paid as and when license and/or royalty payments are
received by the Company. In the event that this Agreement shall not be renewed
for a period of at least twelve (12) months at the end of the five (5) year
period referred to in Section 8 hereof or if terminated for any reason prior to
the end of such five (5) year period then, notwithstanding any such non-renewal
or termination, the Consultant shall be entitled to the full fee for any
transaction contemplated under Section 8 hereof which closes within twelve (12)
months after such non-renewal or termination.
11. Limitation Upon the Use of Advice and Services.
(a) No person or entity, other than the Company or any of its
subsidiaries, shall be entitled to make use of or rely upon the advice of the
Consultant to be given hereunder, and the Company shall not transmit such advice
to others, or encourage or facilitate the use of or reliance upon such advice by
others, without the prior written consent of the Consultant.
(b) It is clearly understood that the Consultant, for services
rendered under this Agreement, makes no commitment whatsoever as to making a
market in the securities of the Company or to recommend or advise its clients to
purchase the securities of the Company. Research reports or corporate finance
reports that may be prepared by the Consultant will, when and if prepared, be
done solely on the merits or judgment of analysts of the Consultant or senior
corporate finance personnel of the Consultant.
(c) The use of the Consultant's name in any annual report or
other report of the Company, or any release or similar document prepared by or
on behalf of the Company, must have the prior written approval of the Consultant
unless the Company is required by law to include the Consultant's name in such
annual report, other report or release, in which event the Consultant will be
furnished with a copy of such annual report, other report or release using
Consultant's name in advance of publication by or on behalf of the Company.
(d) Should any purchases of securities be requested to be
effected through the Consultant by the Company, its officers, directors,
employees or other affiliates, or by any person on behalf of any profit sharing,
pension or similar plan of the Company, for the account of the Company or the
individuals or entities involved, such orders shall be taken by a registered
account executive of the Consultant, shall not be subject to the terms of this
Agreement, and the normal brokerage commission as charged by the Consultant will
apply in conformity with all rules and regulations of the New York Stock
Exchange, the National Association of Securities Dealers, Inc. or other
regulatory bodies. Where no regulatory body sets the fee, the normal established
fee as used by the Consultant shall apply.
4
<PAGE>
(e) The Consultant shall not disclose confidential information
which it learns about the Company as a result of its engagement hereunder,
except as such disclosure as may be required for Consultant to perform its
duties hereunder.
12. Indemnification. Since the Consultant will be acting on
behalf of the Company in connection with its engagement hereunder, the Company
and Consultant have entered into a separate indemnification agreement
substantially in the form attached hereto as Exhibit A and dated the date
hereof, providing for the indemnification of Consultant by the Company. The
Consultant has entered into this Agreement in reliance on the indemnities set
forth in such indemnification agreement.
13. Severability. Every provision of this Agreement is
intended to be severable. If any term or provision hereof is deemed unlawful or
invalid for any reason whatsoever, such unlawfulness or invalidity shall not
affect the validity of the remainder of this Agreement.
14. Miscellaneous.
(a) Any notice or other communication between the parties
hereto shall be sent by certified or registered mail, postage prepaid, if to the
Company, addressed to it at 4747 Kilauea Avenue, Suite 201, Honolulu, Hawaii
96816, Attention: Marcus Bender, Chief Executive Officer, with a copy to Graham
& James LLP, 801 South Figueroa Street, 15th Floor, Los Angeles, California
90017, Attention: Richard Manson, Esq., or, if to the Consultant, addressed to
it at 33 Maiden Lane, 8th Floor, New York, New York 10038, Attention: Joseph
Sorbara, Chief Executive Officer, with a copy to Orrick, Herrington & Sutcliffe
LLP, 666 Fifth Avenue, New York, New York 10103, Attention: Rubi Finkelstein,
Esq., or to such address as may hereafter be designated in writing by one party
to the other. Such notice or other communication shall be deemed to be given on
the date of receipt.
(b) If, during the term hereof, the Consultant shall cease to
do business, the provisions hereof relating to the duties of the Consultant and
compensation by the Company as it applies to the Consultant shall thereupon
cease to be in effect, except for the Company's obligation of payment for
services rendered prior thereto. This Agreement shall survive any merger of,
acquisition of, or acquisition by the Consultant and, after any such merger or
acquisition, shall be binding upon the Company and the corporation surviving
such merger or acquisition.
(c) This Agreement embodies the entire agreement and
understanding between the Company and the Consultant and supersedes any and all
negotiations, prior discussions and preliminary and prior agreements and
understandings related to the central subject matter hereof.
(d) This Agreement has been duly authorized, executed and
delivered by and on behalf of the Company and the Consultant.
(e) This Agreement shall be construed and interpreted in
accordance with laws of the State of New York, without giving effect to
conflicts of laws.
5
<PAGE>
(f) This Agreement and the rights hereunder may not be
assigned by either party (except by operation of law) and shall be binding upon
and inure to the benefit of the parties and their respective successors, assigns
and legal representatives.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date hereof.
HAWAIIAN NATURAL WATER
COMPANY, INC.
By:____________________________
Marcus Bender
Chief Executive Officer
JOSEPH STEVENS & COMPANY, L.P.
By:____________________________
6
<PAGE>
EXHIBIT A
_________________, 1997
JOSEPH STEVENS & COMPANY, L.P
33 Maiden Lane
8th Floor
New York, New York 10038
Ladies and Gentlemen:
In connection with our engagement of JOSEPH STEVENS & COMPANY,
L.P. (the "Consultant") as our financial advisor and investment banker, we
hereby agree to indemni y and hold the Consultant and its affiliates, and the
directors, officers, partners, shareholders, agents and employees of the
Consultant (collectively the "Indemnified Persons"), harmless from and against
any and all claims, actions, suits, proceedings (including those of
shareholders), damages, liabilities and expenses incurred by any of them
(including, but not limited to, fees and expenses of counsel) which are (A)
related to or arise out of (i) any actions taken or omitted to be taken
(including any untrue statements made or any statements omitted to be made) by
us, or (ii) any actions taken or omitted to be taken by any Indemnified Person
in connection with our engagement of the Consultant pursuant to the Financial
Advisory and Consulting Agreement, of even date herewith, between the Consultant
and us (the "Consulting Agreement"), or (B) otherwise related to or arising out
of the Consultant's activities on our behalf pursuant to the Consultant's
engagement under the Consulting Agreement, and we shall reimburse any
Indemnified Person for all expenses (including, but not limited to, fees and
expenses of counsel) incurred by such Indemnified Person in connection with
investigating, preparing or defending any such claim, action, suit or proceeding
(collectively a "Claim"), whether or not in connection with pending or
threatened litigation in which any Indemnified Person is a party. We will not,
however, be responsible for any Claim which is finally judicially determined to
have resulted exclusively from the gross negligence or willful misconduct of any
person seeking indemnification hereunder. We further agree that no Indemnified
Person shall have any liability to us for or in connection with the Consultant's
engagement under the Consulting Agreement except for any Claim incurred by us
solely as a direct result of any Indemnified Person's gross negligence or
willful misconduct.
We further agree that we will not, without the prior written
consent of the Consultant settle, compromise or consent to the entry of any
judgment in any pending or threatened Claim in respect of which indemnification
may be sought hereunder (whether or not
<PAGE>
any Indemnified Person is an actual or potential party to such Claim), unless
such settlement, compromise or consent includes a legally binding,
unconditional, and irrevocable release of each Indemnified Person hereunder from
any and all liability arising out of such Claim.
Promptly upon receipt by an Indemnified Person of notice of
any complaint or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution, but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless, and only to the extent that, such failure results in the forfeiture by
us of substantial rights and defenses, and such failure to so notify us will not
in any event relieve us from any other obligation or liability we may have to
any Indemnified Person otherwise than under this Agreement. If we so elect or
are requested by such Indemnified Person, we will assume the defense of such
Claim, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of the fees and expenses of such counsel. In
the event, however, that such Indemnified Person reasonably determines in its
sole judgment that having common counsel would present such counsel with a
conflict of interest or such Indemnified Person concludes that there may be
legal defenses available to it or other Indemnified Persons different from or in
addition to those available to us, then such Indemnified Person may employ its
own separate counsel to represent or defend it in any such Claim and we shall
pay the reasonable fees and expenses of such counsel. Notwithstanding anything
herein to the contrary, if we fail timely or diligently to defend, contest, or
otherwise protect against any Claim, the relevant Indemnified Party shall have
the right, but not the obligation, to defend, contest, compromise, settle,
assert crossclaims or counterclaims, or otherwise protect against the same, and
shall be fully indemnified by us therefor, including, but not limited to, for
the fees and expenses of its counsel and all amounts paid as a result of such
Claim or the compromise or settlement thereof. In any Claim in which we assume
the defense, the Indemnified Person shall have the right to participate in such
defense and to retain its own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person
hereunder is held by a court to be unavailable for any reason, then (whether or
not the Consultant is the Indemnified Person) we and the Consultant shall
contribute to the Claim for which such indemnity is held unavailable in such
proportion as is appropriate to reflect the relative benefits to us, on the one
hand, and the Consultant, on the other, in connection with the Consultant's
engagement by us under the Consulting Agreement, subject to the limitation that
in no event shall the amount of the Consultant's contribution to such Claim
exceed the amount of fees actually received by the Consultant from us pursuant
to the Consultant's engagement under the Consulting Agreement. We hereby agree
that the relative benefits to us, on the one hand, and the Consultant, on the
other hand, with respect to the Consultant's engagement under the Consulting
Agreement shall be deemed to be in the same proportion as (a) the total value
paid or proposed to be paid or received by us or our stockholders as the case
may be, pursuant to the transaction (whether or not consummated) for which the
Consultant is engaged to render services bears to (b) the fee paid or proposed
to be paid to the Consultant in connection with such engagement.
2
<PAGE>
Our indemnity, reimbursement and contribution obligations
under this Agreement shall be in addition to, and shall in no way limit or
otherwise adversely affect any rights that an Indemnified Part may have at law
or at equity.
Should the Consultant, or any of its directors, officers,
partners, shareholders, agents or employees, be required or be requested by us
to provide documentary evidence or testimony in connection with any proceeding
arising from or relating to the Consultant's engagement under the Consulting
Agreement, we agree to pay all reasonable expenses (including but not limited to
fees and expenses of counsel) in complying therewith and one thousand dollars
($1,000) per day for any sworn testimony or preparation therefor, payable in
advance.
We hereby consent to personal jurisdiction and service of
process and venue in any court in which any claim for indemnity is brought by
any Indemnified Person.
It is understood that, in connection with the Consultant's
engagement under the Consulting Agreement, the Consultant may be engaged to act
in one or more additional capacities and that the terms of the original
engagement or any such additional engagement may be embodied in one or more
separate written agreements. The provisions of this Agreement shall apply to the
original engagement and any such additional engagement and shall remain in full
force and effect following the completion or termination of the Consultant's
engagement(s).
Very truly yours,
HAWAIIAN NATURAL WATER
COMPANY, INC.
By:______________________________
Marcus Bender
Chief Executive Officer
CONFIRMED AND AGREED TO:
JOSEPH STEVENS & COMPANY, L.P.
By:________________________________
3
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
----------------------------
Arthur Andersen LLP
Honolulu, Hawaii
December 18, 1996
