<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1997
REGISTRATION NO. 333-18289
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------
AMENDMENT NO. 1
TO
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)
Hawaii 5149 99-0314848
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification
organization) Number)
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)
------
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. / /
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>
HAWAIIAN NATURAL WATER COMPANY, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Caption or Location in Prospectus
--------------------------------- ---------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus............................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................. Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges ............................. Prospectus Summary; The Company; 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, Proprietors and
Control Persons........................................ Management
11. Security Ownership of Certain Beneficial Owners
and Management......................................... Principal Stockholders
12. Description of Securities.............................. Risk Factors; Dividend Policy; Description of
Capital Stock
13. Interests of Named Experts and Counsel................. Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities......... Inapplicable
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 or................ Use of Proceeds; Management's Discussion and Analysis of
Plan of Operation Financial Condition and Results of Operations
18. Description of Property................................ Business
19. Certain Relationships and Related Transactions......... Certain Transactions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Caption or Location in Prospectus
--------------------------------- ---------------------------------
<S> <C> <C>
20. Market for Common Equity and Related
Stockholder Matters.................................... Outside Front Cover Page of 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 Accountants on
Accounting and Financial Disclosure.................... Inapplicable
</TABLE>
<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 JANUARY 17, 1997
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, Inc. (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."
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 8, 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.
===============================================================================
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
- -------------------------------------------------------------------------------
Per Unit ............. $ $ $
- -------------------------------------------------------------------------------
Total(3) ............. $ $ $
===============================================================================
<PAGE>
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 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, Inc., New York,
New York, on or about , 1997.
------
JOSEPH STEVENS & COMPANY, INC.
The date of this Prospectus is , 1997.
<PAGE>
[Artwork consisting of three different size bottles of the Company's natural
water and a pink orchid superimposed upon a background consisting of water in
motion and three white orchids. Each bottle of water bears the label that
appears on the Company's bottled water which is sold to consumers. Each label
consists of a pink orchid superimposed on a blue, green and white rectangular
background with the following text "BOTTLED AT THE SOURCE" appearing above the
rectangle and "MAUNA LOA VOLCANO HAWAIIAN SPRINGS(TM) NATURAL ARTESIAN WATER
sodium-free-noncarbonated" appearing below the rectangle.]
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.
<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.
3
<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(TR)." 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 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.
4
<PAGE>
THE OFFERING
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 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."
5
<PAGE>
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.
Risk Factors................... Investment in the Units offered hereby is
highly speculative. See "Risk Factors."
- ------
(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 225,000 shares of Common Stock at an exercise price
of $4.00 per share and (iii) 775,000 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.
6
<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.
<TABLE>
<CAPTION>
Period From
Inception to Year Ended Nine Months Ended
December 31, December 31, September 30,
-------------- -------------- ----------------------------
1994 1995 1995 1996
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
----------------- ------------------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(2)
-------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
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>
- ------
(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."
7
<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 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
8
<PAGE>
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. The Company has obtained $1.0 million in key man life
insurance on the life of Mr. Bender. Nevertheless, the loss of Mr. Bender
would have a material adverse effect on the Company. 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
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 inter-
9
<PAGE>
est. 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 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 225,000 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, 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 "Under-
10
<PAGE>
writing." 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, 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
11
<PAGE>
distributed a current prospectus covering the shares of Common Stock issuable
upon exercise of such Redeemable Warrants and such shares have been
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 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.
12
<PAGE>
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 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."
13
<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:
<TABLE>
<CAPTION>
Approximate Approximate
Application of Proceeds Amount Percentage
---------------------- ------------- -------------
<S> <C> <C>
Repayment of Bridge Note, plus accrued interest ........................... $1,550,000 23.3%
Repayment of indebtedness to stockholders and their affiliates, plus
accrued interest ......................................................... 532,000 8.0
Repayment of unaffiliated investor loan, plus accrued interest ............ 110,000 1.7
Payment of deferred compensation and consulting fees ...................... 115,000 1.7
Improvements to plant and equipment ....................................... 1,500,000 22.6
Sales and marketing ....................................................... 2,000,000 30.0
Working capital and general corporate purposes ............................ 843,000 12.7
------------- -------------
Total ................................................................... $6,650,000 100%
</TABLE>
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."
14
<PAGE>
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.
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 Forma(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:
<TABLE>
<CAPTION>
Bank loan .............................. $300,000
<S> <C>
Related party loan ..................... 50,000
Unsecured advances from related parties 90,272
----------
Total ................................ $440,272
==========
</TABLE>
(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 225,000 shares of Common Stock at an exercise price
of $4.00 per share and (iii) 775,000 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.
15
<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>
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>
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%.
16
<PAGE>
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 225,000 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.
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."
17
<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
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
----------------- ------------------
<S> <C> <C>
Balance Sheet Data:
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>
18
<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 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.
19
<PAGE>
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 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. The Company has recently
entered into negotiations with its bottle supplier to purchase the equipment
subject to the Blow Molding Agreement on terms which would further reduce the
Company's bottling cost. There can be no assurance however, that these
negotiations will be successfully concluded.
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 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
20
<PAGE>
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.
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
21
<PAGE>
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.
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.
22
<PAGE>
BUSINESS
GENERAL
The Company bottles, markets and distributes "natural" water under the
name "Hawaiian Springs(TR)." 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 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
23
<PAGE>
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.
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
24
<PAGE>
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 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. The Company has recently entered into negotiations with its
bottle supplier to purchase the equipment subject to the Blow Molding
Agreement on terms which would further reduce the Company's bottling cost.
There can be no assurance however, that these negotiations will be
successfully concluded.
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 flights 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 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,
25
<PAGE>
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, 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.
26
<PAGE>
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 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 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
27
<PAGE>
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 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's employees are not unionized, and the
Company has not experienced any work stoppages or strikes as a result of
labor disputes. 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.
28
<PAGE>
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 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.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
29
<PAGE>
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
Marc Miyahira .. 37 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
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. Miyahira has been Chief Financial Officer of the Company since January
1997. From June 1994 until joining the Company, he was Controller of City
Mill Company, a retail home improvement chain in Honolulu, Hawaii. From July
1993 through May 1994, he was Vice President-Finance of Island Beverage
Company, a beverage distribution company based in Honolulu, Hawaii. Prior
thereto, he was Controller/West Coast Manager of Unicold Corporation, an
operator of cold storage facilities based in Honolulu, Hawaii for more than
seven years.
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.
30
<PAGE>
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 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.
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<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
Underlying All other
Name and Principal Position Salary Bonus Options Compensation
------------------------------ ------------- ------- -------------- --------------
<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.
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 75,000 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
Company'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.
33
<PAGE>
(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.
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)
<TABLE>
<CAPTION>
Redeemable Warrants Common Stock
---------------------- ----------------------
Selling Securityholders Number Percent Number Percent
---------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Stanley S. Arkin 50,000 1.82% 50,000 1.37%
Louis A. and Madeline Best, JTWROS 50,000 1.82 50,000 1.37
Delaware Charter Guarantee & Trust Co.
FBO Laurence Heller IRA Rollover 25,000 * 25,000 *
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 Revocable Trust 50,000 1.82 50,000 1.37
Barry J. Lind/Neil G. Bluhm,
tenants in common 50,000 1.82 50,000 1.37
Christian Ludwigsen 12,500 * 12,500 *
Peter Maher and Patricia Maher, JTWROS 25,000 * 25,000 *
Daniel and Dianne Mine, JTWROS 12,500 * 12,500 *
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, Keogh 12,500 * 12,500 *
Richard B. Schecter 12,500 * 12,500 *
TOTAL 750,000 27.27% 750,000 17.24%
</TABLE>
- ------
* Less than one percent (1%)
(1) Assuming no purchase by any Selling Securityholder of Common Stock or
Redeemable Warrants offered in the Offering.
34
<PAGE>
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 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 this loan, plus all accrued interest, out of the pro-
35
<PAGE>
ceeds 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.
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
36
<PAGE>
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 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 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, Inc. (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.
37
<PAGE>
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.
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 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.
38
<PAGE>
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 35,992 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.
39
<PAGE>
UNDERWRITING
Joseph Stevens & Company, Inc. (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 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 secur- ities.
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
40
<PAGE>
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.
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 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
41
<PAGE>
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, 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.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants ....................................................... F-2
Balance Sheet -- December 31, 1995 ............................................................. F-3
Statement of Operations For the Period From Inception (September 13, 1994) to December 31, 1994
and the Year Ended December 31, 1994 .......................................................... F-5
Statement of Stockholders' Deficit for the Period From Inception (September 13, 1994) to
December 31, 1994 and the Year Ended December 31, 1995 ........................................ F-6
Statements of Cash Flows for the Period From Inception (September 13, 1994 to December 31, 1994)
and the Year Ended December 31, 1995 .......................................................... F-7
Notes to Financial Statements .................................................................. F-8
Supplemental Schedules I and II: Balance Sheet -- March 31, 1996 (Unaudited) ................... F-17, F-18
Supplemental Schedule III: Statement of Operations for the Three Months Ended March 31, 1995 and
1996 (Unaudited) .............................................................................. F-19
Supplemental Schedule IV: Statement of Stockholders' Deficit for the Three-Month Period Ended
March 31, 1996 (Unaudited) .................................................................... F-20
Supplemental Scheduel V: Statement of Cash Flows for the Three Months Ended March 31, 1995 and
1996 (Unaudited) .............................................................................. F-21
Supplemental Schedule VI: Notes to Financial Statements For the Three Months Ended March 31,
1995 and 1996 (Unaudited) ..................................................................... F-22
Balance Sheet -- September 30, 1996 (Unaudited) ................................................ F-23
Statement of Operations for the Nine Months Ended September 30, 1995 and 1996 (Unaudited) ...... F-25
Statement of Changes in Stockholders' Deficit for the Nine-Month Period Ended September 30, 1996
(Unaudited) ................................................................................... F-26
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1996 (Unaudited) ..... F-27
Notes to Financial Statements For the Nine Months Ended September 30, 1995 and 1996
(Unaudited) ................................................................................... F-28
</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.
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-2
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET -- DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET -- DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-4
<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
<TABLE>
<CAPTION>
Period From
Inception to Year Ended
December 31, December 31,
1994 1995
-------------- --------------
<S> <C> <C>
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)
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<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-6
<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
<TABLE>
<CAPTION>
Period From
Inception to Year Ended
December 31, December 31,
1994 1995
-------------- --------------
<S> <C> <C>
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 $ --
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
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
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<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.
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.
F-8
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
1. Summary of Significant Accounting Policies and Risk Factors - (Continued)
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.
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:
The shorter of the useful
Leasehold improvements 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.
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 con-
F-9
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
1. Summary of Significant Accounting Policies and Risk Factors - (Continued)
sideration 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.
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
==========
F-10
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
3. Property and Equipment - (Continued)
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.
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.
F-11
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
7. Income Taxes - (Continued)
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.
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.
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:
F-12
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
8. Commitments and Contingencies - (Continued)
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).
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 "Ven-
F-13
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
9. Significant Customers and Suppliers - (Continued)
dor") 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.
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.
F-14
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
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 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.
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
F-15
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
FROM INCEPTION (SEPTEMBER 13, 1994) TO DECEMBER 31, 1995
13. Subsequent Events - (Continued)
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.
<TABLE>
<CAPTION>
Pro forma
As of March 31,
1996
---------------
<S> <C>
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)
===============
</TABLE>
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.
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-16
<PAGE>
SUPPLEMENTAL SCHEDULE I
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET -- MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE>
SUPPLEMENTAL SCHEDULE II
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET -- MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
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
=============
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE>
SUPPLEMENTAL SCHEDULE III
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1996
-------------- --------------
<S> <C> <C>
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)
============== ==============
</TABLE>
See Notes to Financial Statements.
F-19
<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-20
<PAGE>
SUPPLEMENTAL SCHEDULE V
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1996
-------------- --------------
<S> <C> <C>
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
============== ==============
</TABLE>
See Notes to Financial Statements.
F-21
<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-22
<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.
<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET -- SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
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
=============
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996
--------------- ---------------
<S> <C> <C>
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)
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-25
<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-26
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996
--------------- ---------------
<S> <C> <C>
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
--------------- ---------------
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:
Preferred dividends .................................................... $ 14,000 $ 14,000
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-27
<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-8 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 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
F-28
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
5. Sales Returns -- (Continued)
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 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.
F-29
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS - (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
9. Subsequent Event -- $1.5 Million Bridge Loan - (Continued)
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
===========
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.
Pro forma 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 Warrants at a price equal to
five cents per Public Warrant, subject to certain conditions.
F-30
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS - (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
11. Initial Public Offering - (Continued)
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-31
<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
Page
----
Prospectus Summary ........................ 4
Risk Factors .............................. 8
The Company ............................... 13
Use of Proceeds ........................... 14
Capitalization ............................ 15
Dilution .................................. 16
Dividend Policy ........................... 17
Selected Financial Data ................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 19
Business .................................. 23
Management ................................ 30
Principal Stockholders .................... 33
Selling Securityholders ................... 34
Certain Transactions ...................... 35
Description of Capital Stock .............. 36
Securities Eligible for Future Sale ....... 38
Underwriting .............................. 40
Legal Matters ............................. 41
Experts ................................... 41
Available Information ..................... 42
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>
===============================================================================
[LOGO consisting of a pink orchid superimposed on a blue, green and white
rectangular background with the following text "BOTTLED AT THE SOURCE" appearing
above the rectangle and "MAUNA LOA VOLCANO HAWAIIAN SPRINGS(TM) NATURAL
ARTESIAN WATER" appearing below the rectangle.]
HAWAIIAN NATURAL
WATER COMPANY, INC.
2,000,000 UNITS
----------
PROSPECTUS
----------
JOSEPH STEVENS & COMPANY, INC.
, 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.
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
II-1
<PAGE>
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)").
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**
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 indebtedness 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.**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
23.1 Consent of Arthur Andersen LLP*
23.2 Consent of Graham & James (Included in Exhibit 5.1 hereto)**
24.1 Power of Attorney*
</TABLE>
- ------
* Filed previously.
** 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;
(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-3
<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 amendment
to registration statement to be signed on its behalf by the undersigned in
the City of Honolulu, State of Hawaii on January 15, 1997.
HAWAIIAN NATURAL WATER COMPANY,
INC.
By: /s/ MARCUS BENDER
---------------------------------
Marcus Bender
President & Chief Executive
Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MARCUS BENDER
------------------------- President and Chief Executive Officer and Director
Marcus Bender (Principal Executive Officer) January 15, 1997
/s/ MARC MIYAHIRA
------------------------- Chief Financial Officer (Principal Financial and
Marc Miyahira Accounting Officer) January 15, 1997
*
-------------------------
Brian Barbata Director January 15, 1997
*
-------------------------
John Mayo Director January 15, 1997
*
-------------------------
Michael Chagami Director January 15, 1997
*
-------------------------
Nathan Keller Director January 15, 1997
*
-------------------------
Alexander Brody Director January 15, 1997
*By: /s/ MARCUS BENDER
-------------------------
Marcus Bender
Attorney-in-fact
</TABLE>
II-4
