<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q SB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-29280
HAWAIIAN NATURAL WATER COMPANY, INC.
(Exact name of small business issuer as specified in its charter)
HAWAII 99-0314848
(State or jurisdiction of incorporation I.R.S. Employer
or organization) Identification Number)
248 Mokauea Street
Honolulu, Hawaii 96819
(Address of principal executive offices)
(808) 832-4550
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
The issuer had issued and outstanding 3,899,212 shares of Common Stock
on November 11, 1997.
Transitional Small Business Disclosure Format (check one):
YES NO X
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Hawaiian Natural Water Company, Inc.
Balance Sheet
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 89,335 $ 3,496,789
Inventories 156,570 234,582
Trade Accounts Receivable, net of Allowance For Doubtful Accounts of
$3,700 at September 30, 1997 53,515 163,880
Prepaid Expenses and Other 7,945 61,554
------------ ------------
Total Current Assets 307,365 3,956,805
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $112,110
and 163,312, respectively 441,352 1,541,537
ORGANIZATIONAL COSTS, net of accumulated amortization of $2,029 and $2,706, respectively 2,480 1,803
DEFERRED CHARGES AND OTHER, net of accumulated amortization of $82,056 at December 31, 1996 441,196 1,710
------------ ------------
Total Assets $ 1,192,393 $ 5,501,855
------------ ------------
------------ ------------
LIABILITIES
Current Liabilities:
Accounts Payable $ 331,370 $ 288,555
Notes Payable to Related Parties 496,393 90,335
Notes Payable 1,467,561 -
Accrued Expenses and Other Current Liabilities 189,251 102,339
Capital Lease Obligation - Current Portion 38,264 36,214
------------ ------------
Total Current Liabilities 2,522,839 517,443
Non-current Liabilities
Capital Lease Obligation - Net of Current Portion 87,476 81,503
Note Payable to Related Parties - Net of Current Portion - 511,680
------------ ------------
Total Long-Term Liabilities 87,476 593,183
------------ ------------
Total Liabilities 2,610,315 1,110,626
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' EQUITY (DEFICIT):
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 and 3,899,212
shares issued and outstanding, respectively 442,293 6,338,728
Common Stock Warrants and Options 924,351 and 3,442,429, respectively 187,500 2,024,617
Accumulated Deficit (2,047,715) (3,972,116)
------------ ------------
Total Stockholders Equity (Deficit) (1,417,922) 4,391,229
------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,192,393 $ 5,501,855
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statement of Operations
For the Three and Nine Months Ended September 30,1996 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1996 1997 1996 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 292,214 $ 339,456 $ 721,342 $ 839,449
COST OF SALES 330,996 387,329 804,221 930,045
---------- ---------- ---------- -----------
Gross Margin (Loss) (38,782) (47,873) (82,879) (90,596)
EXPENSES:
General and Administrative 49,991 282,516 432,356 652,689
Selling and Marketing 40,388 250,230 106,081 526,201
---------- ---------- ---------- -----------
90,379 532,746 538,437 1,178,890
OTHER INCOME ( EXPENSE)
Interest Income - 14,957 - 29,130
Interest Expense (37,762) (3,166) (65,497) (417,640)
Other Income - 300 - 2,405
---------- ---------- ---------- -----------
(37,762) 12,091 (65,497) (386,105)
Net Loss Before Extraordinary Item (166,923) (568,528) (686,813) (1,655,591)
Extraordinary Item -
Loss on Extinguishment of Debt - - - (268,810)
---------- ---------- ---------- -----------
Net Loss $ (166,923) $ (568,528) $ (686,813) $(1,924,401)
------------------------- -------------------------
------------------------- -------------------------
Net Loss Per Share:
Before Extraordinary Item $ (0.10) $ (0.15) $ (0.43) $ (0.60)
------------------------- -------------------------
------------------------- -------------------------
Extraordinary Item - - - (0.10)
------------------------- -------------------------
------------------------- -------------------------
Net Loss Per Share $ (0.10) $ (0.15) $ (0.43) $ (0.70)
------------------------- -------------------------
------------------------- -------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statement of Stockholders Equity (Deficit)
For the Period Ending September 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Common Stock Warrants Common Stock Options
--------------------- ----------------------- ---------------------- Total
Number of Number of Number of Accumulated Stockholders
Shares Amount Warrants Amount Options Amount Deficit Equity(Deficit)
--------- ---------- --------- ---------- --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,1996 1,599,212 $ 442,293 774,351 $ 187,500 150,000 - $(2,047,715) $(1,417,922)
Cancellation of Bridge
Warrants April 15, 1997 - 26,625 (106,500) (26,625) - - - -
Sale of shares
and common stock
warrants May 15, 1997 2,000,000 4,947,661 2,000,000 1,462,641 - - - 6,410,302
Issuance of Underwriter
common stock warrants
May 15, 1997 - - 200,000 146,264 - - - 146,264
Sale of shares
and common stock
warrants May 27, 1997 300,000 922,149 300,000 219,396 - - - 1,141,545
Issuance of Common Stock
Options to Consultants
and Employees - - - - 124,578 $ 35,441 35,441
Net Loss - - - - - - (1,924,401) (1,924,401)
--------- ---------- --------- ---------- --------- ---------- ----------- ------------
BALANCE AT
SEPTEMBER 30, 1997 3,899,212 $6,338,728 3,167,851 $1,989,176 274,578 $ 35,441 $(3,972,116) $ 4,391,229
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statement of Cash Flows
For the nine months ended September 30, 1996 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (686,813) $(1,924,401)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 3,388 51,879
Issuance of options to consultants - 35,441
Amortization of debt discount - 70,000
Amortization of deferred charges/advances - 165,000
Extraordinary loss on extinguishment of debt - 268,810
Net decrease (increase) in current assets 137,721 (241,986)
Net increase (decrease) in current liabilities 251,159 (129,705)
Increase in deposits and other (5,744) (2,115)
---------- -----------
Net cash used in operating activities (300,289) (1,707,077)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net - (529,278)
Purchase of short-term investment - (3,000,000)
Sale of short-term investment - 3,000,000
---------- -----------
Net cash used in investing activities - (529,278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering of common stock - 8,280,000
Payments for services related to the initial public offering (167,202) (498,288)
Proceeds from underwriter note payable - 100,000
Proceeds from related party notes payable 487,987 75,000
Proceeds from note payable 100,000 -
Repayment of related party notes payable - (571,393)
Advances from affiliates 10,000 100,272
Repayment to affiliates (10,000) (100,272)
Repayment of bridge notes payable - (1,500,000)
Repayment of private investor borrowing - (100,000)
Repayment of bank note payable - (13,394)
Repayment of underwriter note payable - (100,000)
Repayment of principal on capital leases (19,607) (28,116)
---------- -----------
Net cash provided by financing activities 411,178 5,643,809
---------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS: 110,889 3,407,454
CASH AND CASH EQUIVALENTS, beginning of period - 89,335
---------- -----------
CASH AND CASH EQUIVALENTS, ending of period $ 110,889 $ 3,496,789
------------------------------
------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of bottlemaking equipment with seller note payable $ - $ 825,000
Discount on seller note payable - (222,984)
Acquisition of auto under capital lease - 20,093
------------------------------
------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements of Hawaiian Natural Water
Company, Inc. (the "Company") should be read in conjunction with the audited
financial statements for the year ended December 31, 1996 and notes thereto
filed with the Securities and Exchange Commission in the Company's
Registration Statement on Form SB-2. In the opinion of management, the
accompanying financial statements reflect all adjustments (consisting only of
normal recurring accruals) considered necessary to fairly present the
financial position of the Company at September 30, 1997 and December 31, 1996
and the results of its operations for the three and nine month periods ended
September 30, 1997 and 1996 in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission. The results of operations for interim periods are not
necessarily indicative of results to be achieved for full fiscal years.
Certain amounts from prior periods have been reclassified to conform to
current period presentation.
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 revenue and expenses during the reporting period. Actual results could
differ from those estimates.
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
customers in Hawaii 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.
RECLASSIFICATIONS. During the third quarter of 1997, the Company reviewed
its expenses and determined that certain costs previously reflected as
General and Administrative Expenses were in fact related to production
overhead. Accordingly, these costs, approximating $56,000 in the six months
ended June 30,1997, were reclassified to Cost of Sales.
GROSS MARGIN. The Company's plant currently has a maximum production
capacity of approximately 800,000 cases per year. The Company is currently
operating its plant at less than 20 percent of this capacity. Since a
significant portion of the Company's cost of sales includes certain fixed
production costs, the Company anticipates negative gross margins to continue
until production and sales reach levels sufficient to absorb these fixed
costs.
2. LOSS PER SHARE
Loss Per Share is computed by dividing the Net Loss by the weighted average
number of Common and Common Equivalent Shares issued and outstanding during
the period. The weighted average number of Common and Common Equivalent
Shares issued and outstanding during the period were as follows:
Common and Common Equivalent
shares issued and outstanding
September 30, 1996 September 30, 1997
------------------ ------------------
For the three months ended 1,599,212 3,899,212
For the nine months ended 1,599,212 2,748,663
Loss per Share and weighted average number of Common and Common Equivalent
Shares retroactively reflect the split of the Company's outstanding common
shares on a 1,111.428-for-one basis effected in August 1996 and the
conversion of all outstanding shares of Convertible Preferred Stock into
389,000 shares of Common Stock effected in October 1996. As of September 30,
1997, 274,578 options and 3,167,851 warrants to purchase the Company's Common
Stock (including 200,000 warrants issued to the Underwriter of the IPO (See
Note 11)) were
<PAGE>
outstanding. The effect on Loss per Share of all outstanding warrants and
options would be anti-dilutive.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of savings accounts and investments in a
money market account with original maturities less than 90 days.
4. INVENTORIES
Inventories were comprised of the following:
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
Raw Materials $ 95,088 $125,448
Finished Goods 61,482 109,134
-------- --------
Total $156,570 $234,582
-------- --------
-------- --------
5. NOTES PAYABLE
Notes Payable to Related Parties.
In February 1997, certain shareholders loaned the Company an aggregate of
$75,000, bearing interest at 12 percent per annum. This was in addition to
an aggregate of approximately $496,000 then owed to related parties. All of
these loans, bearing interest between 8% and 12% per annum, plus all accrued
interest, were repaid as shown in the table below.
On September 30, 1997, the Company acquired the bottle making equipment used
in its bottling operations from Bottles Packaging, Inc. ("BPI"), a California
bottle supplier (See Note 13). The consideration for the equipment was an
aggregate of $1.2 million, a portion of which was paid through the issuance
of a promissory note (the "BPI Note") in the original principal amount of
$825,000, payable in installments as follows:
(i) $13,750 per month (an aggregate of $330,000) during the two years
following the closing of the acquisition; and
(ii) the balance of $495,000, payable in three annual installments of
$165,000 thereafter, plus interest on the outstanding
balance, at the annual rate of 5%.
BPI's Chief Financial Officer is also a Director of the Company. The Company
has discounted the BPI Note using the Company's estimated weighted average
cost of capital of 12 percent and will amortize the resulting discount of
$222,985 to interest expense using the effective interest method over the
term of this note. $90,335 of the discounted amount of the BPI Note is shown
on the Balance Sheet under Current Liabilities: Notes Payable to Related
Parties and the balance ($511,680) is shown under Non-Current Liabilities:
Note Payable to Related Parties.
Note Payable To Managing Underwriter
In April 1997, the managing underwriter (the "Underwriter") for the Company's
IPO (See Note 11) loaned the Company $100,000 on a short-term basis, bearing
interest at 10 percent per annum, in order to enable the Company to meet its
working capital requirements pending completion of the IPO. The Company
repaid this note and accrued interest as shown in the table below.
Bridge Notes Payable
On October 10, 1996, the Company completed a private bridge financing (the
"Bridge Financing"), consisting of (i) an aggregate of $1.5 million of
unsecured promissory notes ("Bridge Notes") of the Company bearing interest
at the rate of 10 percent per annum and (ii) an
<PAGE>
aggregate of 750,000 warrants ("Bridge Warrants") of the Company, each Bridge
Warrant entitling the holder to purchase one share of 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. In April 1997, certain investors who participated in the Bridge
Financing agreed to cancel an aggregate of 106,500 Bridge Warrants. Upon
completion of the IPO in May 1997, the remaining 643,500 Bridge Warrants were
converted into a like number of Public Warrants (See Note 12), and the Bridge
Notes and accrued interest were repaid in full. The Bridge Warrants were
valued by the Company at $187,500 in the aggregate, and this amount was
recorded as original issue discount ("OID") in October 1996. The Company
amortized the OID to interest expense and recorded approximately $112,000 of
amortization expense from inception through May 1997. In May 1997, upon the
early repayment of the Bridge Loan, the Company wrote off the remaining
$76,000 as an Extraordinary Item - Loss on Extinguishment of Debt.
Direct costs of the Bridge Financing totaled approximately $440,000 and were
reflected as Deferred Charges and Other, net of accumulated amortization as
of December 31, 1996. The Company amortized these direct costs to interest
expense and recorded approximately $247,000 from inception through May 1997.
In May 1997, upon the early repayment of the Bridge Loan, the Company wrote
off the remaining $193,000 as an Extraordinary Item - Loss on Extinguishment
of Debt.
In May 1997, the following notes payable and accrued interest were repaid out
of the proceeds of the IPO:
Principal Interest Total
---------- -------- ----------
Bridge Notes Payable....................... $1,500,000 $ 91,000 $1,591,000
Notes Payable to Related Parties........... 571,000 57,000 628,000
Note Payable to Unaffiliated Investor...... 100,000 12,000 112,000
Note Payable to Underwriter................ 100,000 1,000 101,000
---------- -------- ----------
Total...................................... $2,271,000 $160,000 $2,432,000
---------- -------- ----------
---------- -------- ----------
6. SIGNIFICANT CUSTOMERS AND SUPPLIERS
In 1995, approximately 81 percent of the Company's sales were made through a
Hawaiian distribution company. In 1996, this distribution company was sold
to Anheuser - Busch which terminated sales of all non Anheuser - Busch
products. In June 1996, the Company negotiated an oral agreement with another
distribution company in Hawaii. The following table summarizes the Company's
sales to its Hawaiian distributors during the applicable periods.
Percentage of Sales
September 30, 1996 September 30, 1997
------------------ ------------------
Three Months Ending 60% 80%
Nine Months Ending 70% 73%
<PAGE>
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 BPI (See Note 5), which operated a bottle-making
machine at the Company's bottling facility. Pursuant to a Blow Molding
Agreement with BPI, the Company committed to purchase a minimum of $750,000
of bottles per year, as defined, for three years. During the first year of
the agreement ended June 30, 1997, the Company purchased approximately
$347,000 of bottles from this source. On September 30, 1997, the Company
purchased the bottling equipment subject to the Blow Molding Agreement (See
Note 13). In connection with this purchase, the Company was released from
any obligation arising out of its failure to meet this minimum purchase
obligation.
7. 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. Approximately $28,100 of this amount is recorded in Trade Accounts
Payable at September 30, 1997. 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.
There were no significant sales returns during the nine months ended
September 30, 1997.
8. INTERNATIONAL SALES
The Company sells its product directly to foreign distributors. All sales are
made in U.S. dollars. Export sales were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
------- ------- ------- --------
Total $43,329 $47,227 $78,329 $116,227
------- ------- ------- --------
------- ------- ------- --------
9. CONSULTING AGREEMENTS
a. Financial Advisor
<PAGE>
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 was
$120,000 for the term of the agreement, accrued at the rate of $10,000 per
month. These fees are reflected in General and Administrative Expenses.
b. Sales Representatives
In 1995, the company entered into an agreement with an individual to be the
Company's sales agent for the Western Region of the United States. The
Company paid this agent a fee of $2,000 per month commencing June 1995. In
June 1996, the fee was increased to $4,000 per month, which is reflected in
Sales and Marketing Expense.
In 1996, the Company entered into certain other sales agent agreements with
individuals, covering periods of up to one year. Certain of these agreements
provide for reimbursement to the agents for travel, lodging and communication
expenses and also provide for additional compensation in the form of sales
commissions ranging from 2.5 to 5 percent of sales (as defined) and bonus
payments ranging from $500 to $1,000 for each new distribution agreement
entered into (as defined). These expenses are reflected in Selling and
Marketing Expense.
Effective November 1, 1996, the Company engaged the landlord of the Company's
Honolulu warehouse and office space as a sales representative for a one-year
term. The Company has agreed to pay the landlord $2,000 per month for the
first five months and $1,000 per month for the remainder of the term.
In March 1997, the Company entered into a six month sales agent agreement
with an individual which provided a monthly fee of $500, plus 6 percent
commission on sales (as defined). This expense is reflected in Sales and
Marketing Expense. In April 1997, the Company also granted this agent 2,500
options to purchase the Company's Common Stock (See Note 12).
c. Marketing Consultants
In July 1996, the Company engaged an outside marketing consultant to develop
a marketing plan for the Company. The Company accrued approximately $25,000
in expenses in 1996 pursuant to this agreement. In March 1997, the Company
retained the services of this consultant on a month to month basis.
<PAGE>
In March 1997, the Company entered into a month to month agreement with an
outside marketing consultant specializing in event and sponsorship marketing
and public relations. The consultant's fee is $4,500 per month plus
reasonable travel expenses (as defined). This expense are reflected in Selling
and Marketing Expenses.
In June 1997, the Company entered into a two-month agreement with an outside
marketing consultant to revise the Company's marketing plan and to enhance
the graphic design of the Company's label. The consultant's fee for these
services was $30,000, plus travel expenses, payable $24,000 in cash, plus
$6,000 in equivalent stock options. In September 1997, the Company entered
into an additional three-month agreement with this same consultant to provide
further assistance in connection with the Company's marketing and
distribution. The consultant's fee for these services is $24,000 in cash,
plus options to purchase 3,000 shares of the Company's Common Stock. None of
these latter options were earned as of September 30, 1997.
d. Advertising Consultant
On July 31, 1996, the Company entered into a one year agreement with an
advertising consultant (who was appointed a Director of the Company in August
1996). The consultant's fee was $5,000 per month. The agreement also
provided that the Company, at its discretion, may grant the consultant stock
options. The agreement was terminated at the end of May 1997, and no stock
options were granted.
e. Summary
The total consulting expenses (excluding the value of stock options earned)
pertaining to the aforementioned sales representatives, marketing consultants
and advertising consultants for the comparative periods were as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1997 1996 1997
-------- -------- -------- --------
General and
Administrative $20,000 $ 30,975 $116,001 $ 50,071
Selling and Marketing 14,635 111,788 20,117 212,657
-------- -------- -------- --------
$34,635 $142,763 $136,118 $262,728
-------- -------- -------- --------
-------- -------- -------- --------
10. OFFICE LEASE COMMITMENT
In October 1996, the Company entered into a three year lease for new office
and warehouse space in Honolulu. Monthly minimum rental payments are $3,000
for the term of the lease. In exchange for the favorable monthly rent, the
Company granted the landlord 10,000 stock options in April 1997. The value
of these options (approximately $24,000 in the aggregate) will be amortized
ratably over the remaining lease term (See Note 12).
11. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
In July 1996, the Company increased the number of authorized shares of Common
Stock to 20,000,000. In August 1996, the Company effected a 1,111.428 for 1
Common Stock split. In October 1996, the Company increased the number of
authorized shares of Preferred Stock to 5,000,000 and changed the par value
to $1. In October 1996, all outstanding shares of the Company's Convertible
Preferred Stock were converted into an aggregate of 389,000 shares of Common
Stock.
In May 1997, the Company completed an initial public offering ("IPO") of
2,300,000 Units (including 300,000 Units subject to the Underwriter's
over-allotment option) at $4.00 per Unit, each Unit consisting of one share
of Common Stock and one Common Stock purchase warrant
<PAGE>
(each, a "Public Warrant"). Each Public Warrant entitles the holder to
purchase one share of the Company's Common Stock at an exercise price of $6
per share (subject to adjustment) for a period of five years. The IPO
resulted in aggregate net proceeds of approximately $8,280,000, net of
underwriting discounts. Of these proceeds, the Company used approximately
(i) $2,432,000 to repay Notes Payable plus all accrued interest (see Note 5),
(ii) approximately $109,000 to pay deferred compensation and consulting fees,
(iii) approximately $665,000 to pay other related expenses of the IPO and
(iv) $375,000 as an initial payment on the purchase of a bottle making
machine (See Note 5). Of the remaining $5 million, approximately $3.4 million
was held in the form of cash equivalents at September 30, 1997 (See Note 3),
and the balance has been used for capital improvements and general corporate
and working capital purposes.
Upon closing of the IPO, the Company issued to the Underwriter (for aggregate
consideration of $20) five year warrants to purchase 200,000 shares of
Common Stock. Each warrant may be exercised at any time during a period of
four years commencing on the first anniversary of the date of issuance, to
purchase one share of Common Stock at an exercise price of $6.60 (165 percent
of the IPO price per Unit), subject to adjustment in certain circumstances.
At June 30, 1997, the fair market value of the Public Warrant and Unit
were $1.38 and $5.81, respectively. On that basis, the Company has allocated
approximately 24 percent of the net proceeds of the IPO to the Public
Warrants and the Underwriter's warrants.
12. STOCK OPTIONS
In 1996, the Company reserved an aggregate of 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. Options granted to employees are accounted for under APB Opinion No.
25, under which no compensation expense is recognized in connection with the
grant of options. Options granted to non - employees (e.g., consultants and
outside directors) are accounted for under FASB 123, pursuant to which the
fair market value of the options granted is amortized over the related
service period.
In October 1996, the Company granted to its President options (subject to
vesting requirements) to purchase 150,000 shares of the Company's Common
Stock at an initial exercise price of $4.00 per share (subject to
adjustment). In January 1997, the Company granted to its Chief Financial
Officer options (subject to vesting requirements) to purchase 75,000 shares
of the Company's Common Stock at an initial exercise price of $4.00 per share
(subject to adjustment). On September 19, 1997, this Chief Financial Officer
resigned prior to the vesting of any of these options. On September 22, 1997,
the Company engaged a new Chief Financial Officer and granted to him options
to purchase 75,000 shares (subject to vesting requirements) on substantially
the same terms as those forfeited. As of September 30, 1997, none of these
options were exercised, or expired.
As of September 30, 1997, approximately 52,000 options granted to officers
and other employees of the company had been earned. The Company has
determined that the aggregate fair market value of these options is
approximately $2.44 per option determined on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions; risk-free interest rate of 6.37%; expected dividend yield of
zero; expected life of five years; and expected volatility of 66%. Management
believes that the fair value results from using the Black-Scholes calculation
may not be indicative of the Company's economic cost of issuing stock options
to its employees. If compensation expense had been recognized in connection
with these
<PAGE>
option grants in accordance with FASB Statement No. 123, the Company's Net
Loss and Net Loss per Share for the period ending September 30, 1997 would
have been $2,051,281 and $.75, respectively.
In 1997, the Company granted outside consultants and its landlord an
aggregate of 20,503 stock options valued at approximately $35,441. In
accordance with FASB No. 123 , the cost of options granted to these
individuals will be recognized over the related service period.
13. PURCHASE OF BOTTLING EQUIPMENT
On September 30, 1997 the Company purchased the bottling equipment subject to
the Blow Molding Agreement for $1.2 million, of which an aggregate of
$375,000 was paid at or prior to the closing, and the remaining $825,000 was
paid through the issuance of the BPI Note. (See Note 5). In addition, the
parties entered into a mutual release with respect to all obligations under
the Blow Molding Agreement, other than payment obligations of the Company
with respect to invoices outstanding as of the closing. The Company was
released from any obligation arising out of its failure to meet the minimum
purchase requirement during the first year of the Blow Molding Agreement.
The bottling equipment was recorded at its discounted present value of
$977,015 at September 30, 1997. (See Note 5) The Company will depreciate the
equipment over the manufacturer's estimated remaining useful life of 15 years.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
THE FOLLOWING DISCUSSION MAY BE DEEMED TO CONTAIN CERTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, AS INDICATED BY THE USE OF SUCH TERMS AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ESTIMATE," "ANTICIPATE," "INTEND" OR
OTHER SIMILAR TERMS OR THE NEGATIVE OF SUCH TERMS. FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN MAY INCLUDE, WITHOUT LIMITATION, STATEMENTS
CONCERNING: (I) ANTICIPATED CHANGES IN REVENUE, COST OF MATERIALS, EXPENSE
ITEMS, INCOME OR LOSS, EARNINGS OR LOSS PER SHARE, CAPITAL EXPENDITURES,
CAPITAL STRUCTURE AND OTHER FINANCIAL ITEMS; (II) PLANS OR PROPOSALS OF THE
COMPANY OR ITS MANAGEMENT WITH RESPECT TO THE COMPANY'S GROWTH STRATEGY,
INTRODUCTION OF NEW PRODUCTS, AND POSSIBLE ACQUISITIONS OF ASSETS OR
BUSINESSES; (III) POSSIBLE ACTIONS BY CUSTOMERS, SUPPLIERS, COMPETITORS OR
REGULATORY AUTHORITIES; AND (IV) ASSUMPTIONS UNDERLYING THE FOREGOING. THESE
FORWARD-LOOKING STATEMENTS ARE BASED UPON THE COMPANY'S CURRENT EXPECTATIONS
AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING WITHOUT
LIMITATION, RISKS AND UNCERTAINTIES RELATING TO: (I) THE MARKET FOR THE
COMPANY'S PRODUCTS; (II) THE MAINTENANCE AND DEVELOPMENT OF THE COMPANY'S
DISTRIBUTOR NETWORK; (III) POSSIBLE CHANGES IN THE COMPANY'S BUSINESS
STRATEGY OR THE EXECUTION OF ITS EXISTING STRATEGY; (IV) THE COMPANY'S COST
OF MATERIALS OR SOURCES OF SUPPLY; (V) THE COMPANY'S NEED FOR ADDITIONAL
CAPITAL OR, IF NEEDED, THE AVAILABILITY OF ADDITIONAL CAPITAL ON ACCEPTABLE
TERMS AND CONDITIONS; (VI) THE COMPANY'S ABILITY TO ATTRACT AND RETAIN KEY
PERSONNEL; (VII) REGULATORY ISSUES IN THE U.S. OR ABROAD; AND (VIII) THE
COMPETITIVE ENVIRONMENT IN THE COMPANY'S INDUSTRY. MANY OF THESE RISKS AND
UNCERTAINTIES ARE BEYOND THE COMPANY'S ABILITY TO PREDICT OR CONTROL. SHOULD
ANY UNANTICIPATED CHANGES OCCUR IN THE COMPANY'S BUSINESS, OR SHOULD
MANAGEMENT'S OPERATING ASSUMPTIONS PROVE INCORRECT, THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THESE
FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS INCLUDED HEREWITH AND THE NOTES THERETO.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net Sales. Net Sales increased to approximately $339,000 for the three
months ended September 30, 1997 (the "1997 Quarter") from approximately
$292,000 for the three months ended September 30, 1996 (the "1996 Quarter").
The increase in net revenues in the 1997 Quarter was due primarily to unit
sales growth from approximately 41,000 cases in the 1996 Quarter to
approximately 51,000 cases in the 1997 Quarter. The average sales price per
case decreased approximately 7% in the 1997 Quarter compared to the 1996
Quarter due to general price reductions to promote sales. Sales in the
Hawaiian market accounted for approximately 80% of sales in the 1997
Quarter compared to 60% in the 1996 Quarter. Beginning in the second quarter
of 1995, the Company began export sales to Asia and the Pacific Islands. Such
sales accounted for approximately 11% of sales in the 1997 Quarter compared
to 14% in the 1996 Quarter. The Company's expansion strategy emphasizes
growth in this export market as well as growth in domestic markets outside of
Hawaii. In October 1997, the Company terminated its distribution agreement
with a distributor in Alabama covering a ten state territory in the
Southeastern United States. The Company is currently negotiating a new
arrangement with a national distributor covering this and other territories
within the Continental United States which, if consummated, would
substantially enlarge the Company's distribution network on the Mainland. In
addition, the Company continues to pursue opportunities to expand sales to
Asia. The Company is currently negotiating a major distribution agreement in
Japan and has also recently entered into a Purchase Agreement for the sale of
significant quantities of product to be shipped to Japan and possibly Korea.
Sales pursuant to this agreement are expected to commence in December 1997.
Cost of Sales. The Company's cost of sales increased to approximately
$387,000 in the 1997 Quarter from approximately $331,000 in the 1996 Quarter,
primarily due to unit sales growth. However, the average cost per case
decreased approximately 6% in the 1997 Quarter. The primary component in
Cost of Sales is the cost of finished bottles. In July 1996, the Company
stopped importing bottles from Honolulu and began purchasing all of its
requirements pursuant to a Blow Molding Agreement with a California bottle
supplier. Pursuant to this agreement, such supplier agreed to manufacture
bottles for the Company on site, using equipment owned by the supplier but
installed at the Company's bottling facility. This arrangement substantially
reduced the Company's cost of bottles. In September 1997, the Company
purchased the equipment subject to the Blow Molding Agreement, which the
Company believes will enable it to further reduce the cost of its bottles.
(See Note 13 to the Financial Statements)
Expenses. Selling and marketing expenses increased to approximately
$250,000 in the 1997 Quarter from approximately $40,000 in the 1996 Quarter,
primarily as a result of an increase in consulting fees, advertising expenses
and promotional events. The Company terminated its relationship with its
advertising consultant in May 1997 and will continue to evaluate the merits
of retaining the services of present and future outside consultants. (See
Note 10 to the Financial Statements) General and administrative expenses
increased to approximately $283,000 in the 1997 Quarter from approximately
$50,000 in the 1996 Quarter. The majority of this increase resulted from the
accrual of stock options for consultants, increased administrative personnel
costs and travel.
Other Income (Expense). Other Income (Expense) increased to
approximately $12,100 in the 1997 Quarter from approximately $(38,000) in the
1996 Quarter. Decrease is primarily due to the reduction in interest expense
resulting from the repayment of obligations existing at September 30, 1996
with proceeds from the Bridge Financing in October 1996 and the Company's
initial public offering (the "IPO") in May 1997.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $568,528, or $(.15) per share, in the 1997 Quarter
compared to a net loss of $166,923, or $(.10) per share, in the 1996 Quarter.
The Company expects to continue to generate losses until such time, if any,
as it achieves significantly higher sales levels.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net Sales. Net sales increased to approximately $839,000 for the nine
months ended September 30, 1997 ("1997 YTD") from approximately $721,000 for
the nine months ended September 30, 1996 (the "1996 YTD"). This increase was
due primarily to unit sales growth from approximately 99,000 cases in the
1996 YTD to approximately 119,000 cases in the 1997 YTD. Sales in the 1996
YTD included 8,000 cases which were returned in 1995 and resold in 1996 at
the Company's approximate cost of $43,000. The average sales price per case
decreased approximately 4% in the 1997 YTD due to a general price reduction
to promote sales and significant cash discounts to generate cash prior to the
closing of the IPO. Sales in the Hawaiian market accounted for approximately
70% in the 1997 YTD compared to approximately 73% in the 1996 YTD. Sales to
Asia and the Pacific Islands accounted for approximately 13% of sales in the
1997 YTD compared to 16% in the 1996 YTD.
Cost of Sales. The Company's cost of sales increased to approximately
$930,000 in the 1997 YTD from approximately $804,000 in the 1996 YTD,
primarily due to unit sales growth. However, the average cost per case
decreased approximately 4% in the 1997 YTD primarily due to the purchase of
bottles pursuant to the Blow Molding Agreement described above commencing in
July 1996.
Expenses. Selling and marketing expenses increased to approximately
$526,000 in the 1997 YTD from approximately $106,000 in the 1996 YTD,
primarily as a result of an increase in the use of consultants, advertising
and promotional events. General and administrative expenses increased to
approximately $653,000 in the 1997 YTD from approximately $432,000 in the
1996 YTD. The majority of this increase resulted from increased
administrative personnel costs, the accrual of stock options for consultants
and travel.
Other Income (Expense). Other Income (Expense) increased to ($386,000) in
the 1997 YTD from ($65,000) in the 1996 YTD. The increase is primarily due to
increased borrowings relating to the Bridge Financing in October 1996 as well
as certain additional borrowings from related parties and others prior to the
closing of the IPO. The Company also amortized approximately $314,000 of
original issue discount and offering expenses on the Bridge Financing to
interest expense in the 1997 YTD. All of these borrowings and accrued
interest were repaid out of the proceeds of the IPO.
Extraordinary Loss. In May 1997, upon the early retirement of the
Bridge Notes, the Company wrote off the remaining unamortized balance of
original issue discount and offering expenses of the Bridge Financing of
$76,000 and $193,000, respectively.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $1,924,401, or $(.70) per share, in the 1997 YTD
compared to a net loss of $686,813, or $(.43) per share, in the 1996 YTD.
Weighted average shares outstanding increased to 2,748,663 in the 1997 YTD
from 1,599,212 in the 1996 YTD due to the completion of the Company's IPO in
May 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Until the completion of the Bridge Financing in October 1996, 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. In 1996, the Company borrowed an aggregate
of $417,715 from three of its stockholders in the form of unsecured loans,
bearing interest at 12 percent per annum, and received additional unsecured,
non-interest bearing advances from these stockholders in the aggregate amount
of $100,272.
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 percent. This line of credit was
secured by a security interest in all of the Company's equipment, accounts
receivable, inventory and general intangibles and was also personally
guaranteed by certain directors and an affiliate of the Company. This line
of credit expired on March 31,1996 and was not renewed. Outstanding
borrowings remained at the maximum level until the line was repaid in full in
October 1996. In addition, in May 1996, the Company obtained a $100,000
subordinated, unsecured loan from an unrelated private investor. In
connection with such loan, the Company issued to the lender a warrant to
purchase 24,351 shares of Common Stock at an exercise price of $.00009 per
share.
The Company consummated the Bridge Financing on October 10, 1996 (See
Note 5 to the Financial Statements). The Company used the net proceeds of
approximately $1,131,000: (i) to repay all borrowings from FHB in full
(approximately $300,000); (ii) to repay a portion of the indebtedness to an
affiliate in the amount of approximately $62,000 and; (iii) to pay fees and
expenses in connection with the IPO. The balance was used for working
capital and general corporate purposes. Due to continuing losses from
operations, these proceeds were exhausted during the first quarter of 1997.
As a result, the Company needed to solicit additional loans from stockholders
in order to sustain its operations.
In February and March 1997, the Company borrowed an aggregate of $75,000
from three stockholders, bearing interest at 12 percent per annum. In April
1997, the Underwriter of the IPO loaned the Company $100,000, bearing
interest at 10% per annum, to enable the Company to meet its working capital
requirements pending the completion of the IPO. All outstanding borrowings of
the Company from its stockholders or their affiliates and other private
investors were repaid in full out of the proceeds from the IPO. There can be
no assurance that affiliates of the Company will lend or invest any
additional funds to or in the Company or guarantee any additional borrowings
of the Company in the future.
In May 1997, the Company completed an IPO consisting of 2,300,000 Units
(including 300,000 Units subject to the Underwriter's over-allotment option)
at $4.00 per Unit, yielding aggregate net proceeds of approximately
$8,280,000, net of underwriting discounts. Of these proceeds, the Company
used (i) approximately $1,591,000 to repay the Bridge Notes (including all
accrued interest) in full; (ii) approximately $628,000 to repay all of the
Company's outstanding indebtedness to stockholders or their affiliates
(including accrued interest), including an aggregate of approximately $40,000
of indebtedness (including accrued interest) incurred in connection with the
conversion of the Company's previously outstanding Convertible Preferred
Stock; (iii) approximately $213,000 to repay all of the Company's outstanding
indebtedness (including accrued interest) to unaffiliated parties (including
the Underwriter); and (iv) approximately $115,000 to pay deferred
compensation and consulting fees. As a result, all outstanding borrowings of
the Company (other than accounts payable and capital lease obligations),
including all indebtedness to related parties, were repaid in full. (See
Note 6 to the Financial Statements) The Company's cash position increased
from approximately nil immediately prior to the IPO to approximately $3.5
million at September 30,1997.
<PAGE>
(See Notes 3 and 4 to the Financial Statements). The Company intends to use
these funds primarily for improvements to plant and equipment and to further
develop and enhance its sales and marketing programs as well as to fund
current operations. The Company believes that the proceeds of the IPO will be
sufficient to fund its operations for at least 12 months following the
completion of the IPO.
The Company had cumulative capital expenditures of approximately $0 and
$529,278 for the nine months ended September 30, 1996 and 1997, respectively.
In March 1995, the Company financed certain equipment purchases through a
capital lease agreement 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 $126,000 at September 30, 1997. The current portion
of the lease liability was approximately $36,214, at September 30, 1997. The
Company's obligation under this lease agreement are personally guaranteed by
certain directors and an affiliate of the Company.
In September, 1997 the Company purchased the bottling equipment subject
to the Blow Molding Agreement for $1.2 million, $375,000 of which was paid at
or prior to the closing and the balance of which ($825,000) was paid through
the issuance of a secured promissory note payable over five years. The first
two years require a monthly payment of $13,750. The remaining $495,000 will
be payable in annual principal payments of $165,000 plus 5 percent per annum
on the unpaid principal balance. This note is recorded on the Balance Sheet
at a discount of $222,985. The Company expects to invest additional capital
in the near term in order to enhance the quality and efficiency of its
bottling operations. In the event that the Company is successful in
generating high volume demand for its product, the Company anticipates that
substantial additional investments in new plant and equipment will be
required.
Net operating loss carryforwards available to offset future taxable
income were approximately $4.0 million as of September 30, 1997. Use of
these net operating losses in future years will likely be limited pursuant to
Section 382 of the Internal Revenue Code due to the ownership change (as
defined) resulting from the 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.
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) During the three months ended September 30 1997, the Company
granted to certain employees, consultants and sales agents stock options to
purchase an aggregate of 108,115 shares of Common Stock at an exercise price
of $4.00 per share (subject to adjustment).
<PAGE>
All of the foregoing transactions were exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and the
rules and regulations thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10.1 Asset Purchase Agreement between the Registrant and Bottles
Packaging, Inc. ("BPI") (Incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K dated
October 7, 1997 (the "Form 8-K"))
10.2 Bill of Sale between the Registrant and BPI evidencing the
transfer of assets pursuant to the Asset Purchase Agreement
(Incorporated by reference to Exhibit 10.2 to the Form 8-K)
10.3 Promissory Note evidencing an aggregate of $825,000 in
indebtedness of the registrant to BPI in connection with the
Asset Purchase Agreement (Incorporated by reference to Exhibit
10.3 to the Form 8-K)
10.4 Security Agreement between the registrant and BPI securing the
obligations of the registrant to BPI under the Promissory Note
(Incorporated by reference to Exhibit 10.4 to the Form 8-K)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HAWAIIAN NATURAL WATER COMPANY, INC.
(Registrant)
November 14, 1997 By: /s/ MARCUS BENDER
-----------------------------------
Marcus Bender
President & Chief Executive Officer
November 14, 1997 By: /s/ DAVID K. LAEHA
-----------------------------------
David K. Laeha
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,496,789
<SECURITIES> 0
<RECEIVABLES> 167,580
<ALLOWANCES> 3,700
<INVENTORY> 234,582
<CURRENT-ASSETS> 3,956,805
<PP&E> 1,710,150<F1>
<DEPRECIATION> 165,100<F2>
<TOTAL-ASSETS> 5,501,855
<CURRENT-LIABILITIES> 517,443
<BONDS> 593,183<F3>
0
0
<COMMON> 8,363,345
<OTHER-SE> (3,972,116)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 5,501,855
<SALES> 839,449<F5>
<TOTAL-REVENUES> 870,984<F5>
<CGS> 930,045
<TOTAL-COSTS> 1,178,890
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 417,840
<INCOME-PRETAX> (1,655,591)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 268,810
<CHANGES> 0
<NET-INCOME> (1,924,401)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> (.64)<F9>
<FN>
<F1>INCLUDES CAPITALIZED ORGANIZATIONAL COSTS IN DEFERRED CHARGES
<F2>ACCUMULATED DEPRECIATION OF $162,394 & ACCUMULATED AMORTIZATION OF $2706
<F3>NON-CURRENT LIABILITIES OF CAPITAL LEASE, $61,410, AND NOTES PAYABLE TO
RELATED PARTIES OF $531,773
<F4>ACCUMULATED DEFICIT
<F5>PLUS OTHER INCOME & INTEREST INCOME
<F6>SELLING & MARKETING EXPENSES AND G&A
<F9>BASED ON WEIGHTED COMMON SHARES OUTSTANDING OF 2,748,663 & OUTSTANDING
COMMON WARRANTS & OPTIONS OF 274,578.
</FN>
</TABLE>
