<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 333-18289
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------
AMENDMENT NO. 5
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)
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<S> <C> <C>
Hawaii 5149 99-0314848
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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
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Form SB-2 Item Number and Caption Caption or Location in Prospectus
---------------------------------------------------- --------------------------------------------------------
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1. Front of Registration Statement 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
Plan of Operation ..................................... Use of Proceeds; Management's Discussion and Analysis of
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 APRIL 18, 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) ... $ $ $
================================================================================
1. Does not include additional compensation payable to the Underwriter in the
form of a 3% non-accountable expense allowance, warrants to purchase
200,000 shares (the "Underwriter's Warrants"). The Company has also agreed
to indemnify the Underwriter against certain liabilites, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
2. Before deducting expenses of the Offering payable by the Company,
estimated at $600,000, including the Underwriter's non-accountable expense
allowance.
<PAGE>
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>
[INSIDE FRONT COVER]
(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.)
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON STOCK
AND/OR REDEEMABLE WARRANTS, INCLUDING PURCHASES OF THE UNITS, COMMON STOCK
AND/OR REDEEMABLE WARRANTS TO STABILIZE THEIR RESPECTIVE MARKET PRICES,
PURCHASES OF THE UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS TO COVER SOME
OR ALL OF A SHORT POSITION MAINTAINED BY THE UNDERWRITER IN THE UNITS, COMMON
STOCK AND/OR REDEEMABLE WARRANTS, RESPECTIVELY, AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
(continued from cover page)
This Prospectus also relates to 643,500 Redeemable Warrants (the "Selling
Securityholders Warrants") and 643,500 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 12 months following the date of this Prospectus and
thereafter such securities may not be sold for an additional six months
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.
TO CALIFORNIA RESIDENTS ONLY
The Units may only be offered and sold to (i) persons with a net worth,
individually or jointly with his or her spouse, of at least $250,000
(exclusive of home, home furnishings and automobiles) and an annual income of
at least $65,000 or (ii) persons with a net worth, individually or jointly
with his or her spouse, of at least $500,000 (exclusive of home, home
furnishings and automobiles).
The Units offered hereby have been registered by a limited qualification
and cannot be offered for resale or resold in the State of California unless
registered for sale. Furthermore, the exemption afforded by Section 25104(h)
of the California Securities Law shall be withheld by the Commissioner of
Corporations and the Company is not permitted to apply for the exemption
afforded by 25101(b) until at least 90 days after the closing of the
Offering.
TO NEW JERSEY RESIDENTS ONLY
The Units may only be offered and sold to any person who comes within any
of the following categories, or who the Underwriter reasonably believes comes
within any of the following categories, at the time of the sales of the
securities to that person:
(1) Any bank as defined in section 3(a)(2) of the Securities Act of 1933
(the "Securities Act"), or any savings and loan association or other
institution as defined in section 5(a)(5)(A) of the Securities Act whether
acting in its individual or fiduciary capacity; any broker or dealer
registered pursuant to section 15 of the Securities Exchange Act of 1934; any
insurance company as defined in section 2(13) of the Securities Act; any
investment company registered under the Investment Company Act of 1940 or a
business development company as defined in section 2(a)(48) of that Act; any
Small Business Investment Company licensed by the U.S. Small Business
Administration under section 301(c) or (d) of the Small Business Investment
Act of 1958; any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions for the benefit of its employees, if such plan has total assets
in excess of $5,000,000; employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if the investment decision is
made by a plan fiduciary, as defined in section 3(21) of such Act, which is
either a bank, savings and loan association, insurance company, or registered
investment adviser, or if the employee benefit plan has total assets in
excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors:
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(C)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of
the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
<PAGE>
(6) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii) of the
Securities Act; and
(8) Any entity in which all of the equity owners are accredited investors.
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(TM)." The
Company draws its water from a well located at the base of the Mauna Loa
volcano in Kea'au on the Big Island of Hawaii. The water is "bottled at the
source" in polyethylene therephthalate ("PET") plastic bottles, which are
manufactured at the Company's bottling facility. This on-site bottle
manufacturing operation enables the Company to reduce its packaging costs
while at the same time improving its quality control, inventory management
and delivery scheduling. The Company markets its water on the basis of
superior quality and taste and on the worldwide reputation of Hawaii.
The Company has met all Food and Drug Administration ("FDA") requirements
for the labeling of its water as "bottled at the source" and "natural."
"Bottled at the source" signifies that the water is pumped directly from the
source to the bottling facility, thereby eliminating handling and
transportation procedures which might lead to contamination. "Natural"
signifies that the chemical composition and mineral content of the bottled
water are the same as those at the source. This contrasts with "purified"
water from which certain chemicals and minerals are removed by means of
filtration.
The Company began commercial operations in February 1995, selling
initially in the Hawaiian market exclusively. The Company has since expanded
its distribution on a limited basis into the West Coast and Southeastern
portion of the United States, Guam and the Middle East.
Approximately 2.88 billion gallons of bottled water were sold in the
United States in 1995, of which approximately 29.3% were sold in California.
Non-sparkling water accounted for approximately 2.43 billion gallons, or
approximately 84.4%, of total U.S. bottled water 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.............. 643,500 Redeemable Warrants, which will be
issued to the Selling Securityholders upon
the automatic conversion of the Bridge
Warrants, and 643,500 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 12 months
following the date hereof and thereafter for
an additional six months 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 .................... 2,643,500(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 $1,588,000, including accrued
interest, incurred in connection with the
Bridge Financing, (ii) to repay other
indebtedness of approximately $739,000,
including accrued interest, owed to
stockholders and other investors, (iii) to
repay indebtedness of approximately
$100,000, including accrued interest, owed
to the Underwriter, (iv) to pay deferred
compensation and consulting fees of
approximately $108,000, (v) for improvements
to plant and equipment of up to $1,500,000,
(vi) for sales and marketing programs of up
to $2,000,000, and (vii) the balance
($565,000) for working capital and general
corporate purposes.
Risk Factors................... Investment in the Units offered hereby is
highly speculative and involves significant
risks. These risks include (i) limited
history of operations; (ii) working capital
deficiencies, history of losses, accumulated
deficit, ability to continue as a going
concern; (iii) additional capital
requirements, uncertainty of additional
funding; (iv) lease of key operating assets;
(v) dependence on key personnel; (vi)
dependence on key customer; (vii)
governmental regulation, quality control;
(viii) competition; (ix) broad discretion of
management in use of proceeds; (x) repayment
of indebtedness, benefit to insiders,
potential conflicts of interest; (xi)
possible control by insiders; (xii)
securities eligible for future sale; (xiii)
absence of public market, arbitrary
determination of offering price, possible
volatility of stock price; (xiv) dilution;
(xv) Underwriter's lack of experience,
Underwriter's potential influence on the
market; (xvi) continued quotation on the
Nasdaq SmallCap Market; potential penny
stock classification; (xvii) current
prospectus and state Blue Sky registration
required to exercise Redeemable Warrants;
(xviii) redemption of Redeemable Warrants;
(xix) reduced probability of change of
control; and (xx) forward-looking
information and associated risk. See "Risk
Factors."
- ------
(1) Excludes (i) a warrant 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 643,500 Selling Securityholders Warrants.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial data of the Company as of
December 31, 1996 and for the two years then ended (collectively, the
"Year-End 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 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>
Years Ended December 31,
------------------------------
1995 1996
------------ --------------
<S> <C> <C>
Statement of Operations Data:
Net sales .................................. $ 588,920 $ 866,060
Cost of sales .............................. 620,593 754,159
Gross margin ............................... (31,673) 111,901
Selling and marketing ...................... 220,651 264,617
General and administrative ................. 437,289 787,592
------------ --------------
Total operating expenses ................. 657,940 1,052,209
Interest expense, net ...................... 51,261 247,443
------------ --------------
Net loss ................................... $ (740,874) $(1,187,751)
============ ==============
Net loss per share ......................... $ (0.62) $ (0.74)
============ ==============
Weighted average number of common and common
equivalent shares outstanding ............. 1,202,540 1,599,212
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------
Actual As Adjusted(1)
--------------- --------------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit) ..... $ (2,215,474) $ 3,981,629
Total assets .................. 1,192,393 4,970,196
Total liabilities ............. 2,610,315 478,212
Stockholders' equity (deficit) (1,417,922) 4,749,048
</TABLE>
- ------
(1) Adjusted to give effect to the Offering and the initial application of the
net proceeds therefrom. Also reflects the amortization of the remaining
original issue discount ($145,833) and loan costs ($287,197) relating to
the Bridge Financing. 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 $866,060 in net sales
in the fiscal year ended December 31, 1996. Approximately 75% of these
aggregate 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 $2,215,474 at December 31, 1995 and 1996,
respectively, and a net loss of $740,874 and $1,187,751 for the respective
fiscal years then ended. As of December 31, 1996, the Company had an
accumulated deficit of $2,047,715. The Company's results of operations for
the first quarter of fiscal 1997 will include aggregate interest expense of
approximately $471,000 relating to the Bridge Financing, including an
aggregate of approximately $433,000 in amortization of original issue
discount and offering expenses. See "The Company" and "Capitalization."
Subsequent to December 31, 1996 the Company has continued to generate losses.
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 each of the fiscal
years ended December 31, 1995 and 1996 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 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. In addition, the lease arrangement
results in the Company exercising less control over its operations
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than if the Company had ownership of these assets. The lessor is entitled to
make use of the premises (other than the existing structures) for the brewing
of beer or the manufacture of other beverages (other than natural water) and
is also entitled to draw up to 50% of the water flow from the leased well for
such purposes. The Company believes that if the lessor were to draw 50% of
the water flow from the well for other such purposes, the remaining 50% would
be adequate for the current and projected future needs of the Company's
business. The lessor currently conducts no other activity on the leased
premises, and the Company believes that the lessor has no current plans to
conduct any such activity in the foreseeable future. See
"Business--Facilities."
Dependence on Key Personnel. The Company has been substantially dependent
upon the services of Marcus Bender, its Chief Executive Officer, for the
development and management of its business to date. Loss of the services of
Mr. Bender would have a material adverse effect on the Company. The Company
has entered into an employment agreement with Mr. Bender pursuant to which he
will be employed as the Company's President for a five year term. Pursuant to
this employment agreement, Mr. Bender has agreed to devote his full working
time and best efforts to the performance of his duties on behalf of the
Company. Mr. Bender has also 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,
which is terminable at will by either party. 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. The Company's sales to Japan were halted in October 1995, after a
few months of operations, when the Japanese Ministry of Health and Welfare
ordered a total recall of all bottled water then stocked by certain
competitors. Although the Company's product was not specifically covered by
this order, due to ensuing adverse market conditions, the Company's then
Japanese distributor refused to accept additional shipments from the Company.
Although the Company retains its certification to sell bottled water in Japan
and has since entered into arrangements with a Japanese importer and broker
to represent the Company's product, shipments of the Company's product to
Japan have not yet recommenced and there can be no assurance that shipments
will recommence in the future. 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. subsid-
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iary, 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 38.9% of
the estimated net proceeds of the Offering (approximately 47.2% if the
Over-Allotment Option is exercised in full) is to be used for (i) selling 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 $1,800,000 or 27.3% of the estimated net proceeds of
the Offering, have been allocated for repayment of unaffiliated indebtedness,
including repayment of the Bridge Notes in the outstanding principal amount
of $1,500,000, plus accrued interest, and the repayment of indebtedness in
the amount of $100,000, plus accrued interest, owed to the Underwriter. In
addition, approximately $627,000 or 9.5% 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. The Company has also entered into other
arrangements with affiliated parties with respect to various significant
aspects of the Company's operations, such as the lease of its water source
and bottling facility, the purchase of its bottles pursuant to a Blow Molding
Agreement and the engagement of com.com. Inc. as its principal marketing
consultant. In addition, the Company has agreed in principle to purchase the
bottling equipment subject to the Blow Molding Agreement, for payments over
five years aggregating $1,200,000, and if such purchase is consummated, the
Company will use up to $375,000 of the net proceeds of this Offering as an
initial payment toward such purchase. The Company believes that all of these
arrangements are favorable to the Company and were entered into on terms
reflecting arms' length negotiation; however, since no independent appraisals
evaluating these affiliated business transactions were obtained, there can be
no assurance that such transactions were based on terms no less favorable
than could have been obtained from unaffiliated third parties. Potential
conflicts of interest could arise between the Company and the affiliated
parties in connection with the future enforcement, amendment or termination
of these arrangements. See "Use of Proceeds," "Business--Bottling
Operations," "--Marketing" and "--Facilities", "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 shares subject to such lock-up agreements.
Although the Underwriter does not currently intend to release all of such
shares from the lock-up agreements prior to their expiration, it may from
time to time release all or a portion thereof, 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
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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, all 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, 643,500 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 first 12 months of the Lock-up Period and thereafter
until the end of the Lock-up Period without the prior written consent of the
Underwriter.
Absence of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Stock Price. Prior to this Offering, there has been no
public market for the Units, the Common Stock or the Redeemable Warrants, and
there can be no assurance that any active public market for any such
securities will develop or be sustained after the Offering. The initial
public offering price of the Units has been determined by negotiations among
the Company and the Underwriter and may not necessarily bear any relationship
to the assets, book value, earnings or net worth of the Company or any other
recognized criteria and should not be considered to be an indication of the
actual value of the Company. Accordingly, the initial public offering price
may bear no relationship to the trading prices of the securities offered
hereby after the consummation of this Offering, and there can be no assurance
that these prices will not decline below the initial public offering price.
See "Underwriting." The trading prices of the Units, the Common Stock and the
Redeemable Warrants could be subject to wide fluctuations in response to
actual or anticipated quarterly operating results of the Company,
announcements of the Company or its competitors and general market
conditions, as well as other events or factors. In addition, the stock
markets have experienced extreme price and volume trading volatility in
recent years. This volatility has had a substantial effect on the market
price of many small capitalization companies, and has often been unrelated to
the operating performance of those companies. This volatility may adversely
affect the market price of the Units, Common Stock and Redeemable Warrants.
Dilution; Disproportionate Risk to Purchasers of Units. 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 $2.68 or 67% ($2.51 or 63%, if the Over-Allotment Option is exercised in
full). The existing stockholders of the Company have acquired their
respective equity interests at costs substantially below the offering price
in this Offering. Accordingly, to the extent that the Company incurs losses,
the purchasers of the Units will bear a disproportionate risk with respect to
such losses. 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
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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 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.
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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, Section 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.
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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 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 effective interest rate on the Bridge Notes, including coupon
interest at the rate of 10% per annum, $187,500 in aggregate original issue
discount and $369,253 in aggregate issuance costs, is 47.1% to maturity and
73.6% assuming the Bridge Notes are repaid in full on May 10, 1997. In April
1997, certain investors who participated in the Bridge Financing agreed to
cancel an aggregate of 106,500 Bridge Warrants.
The net proceeds of approximately $1,131,000 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 outstanding 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 $38,678, was paid in the form of a promissory
note, bearing interest at an annual rate of 8%, due and payable in full upon
the satisfaction of certain financial conditions by the Company. Such
conditions will be met upon consummation of this Offering, and accordingly
the Company will be obligated to pay such promissory notes in full out of the
proceeds of this Offering. See "Use of Proceeds."
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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 $6,600,000
($7,644,000 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
$1,588,000 to repay the Bridge Notes (plus all accrued interest) in full;
(ii) approximately $627,000 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 $112,000 to repay all of the Company's outstanding indebtedness
(plus accrued interest) to an unaffiliated investor; (iv) approximately
$100,000 to repay indebtedness owed to the Underwriter, plus accrued
interest, (v) approximately $108,000 to pay deferred compensation and
consulting fees; (vi) up to $1,500,000 for improvements to plant and
equipment; (vii) up to $2,000,000 to further develop and enhance the
Company's sales and marketing programs; and (viii) the balance ($565,000) for
working capital and general corporate purposes. Anticipated improvements to
the Company's plant and equipment involve primarily (i) the purchase of
bottle manufacturing equipment, including the expected purchase of the
equipment currently subject to the Blow Molding Agreement, so as to increase
the Company's supply of bottles and lower its cost of materials, (ii) the
purchase of automated packing and labelling equipment so as to improve the
efficiency of the Company bottling line, and (iii) the construction of new,
or reconfiguration of old, warehouse space so as to create on-site storage
for finished goods inventory. Anticipated sales and marketing expenditures
involve primarily (i) radio and television advertising, and (ii) event
marketing, in the Company's primary target markets. 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 ........................... $1,588,000 24.1%
Repayment of indebtedness to stockholders and their affiliates, plus
accrued interest ......................................................... 627,000 9.5
Repayment of unaffiliated investor loan, plus accrued interest ............ 112,000 1.7
Repayment of indebtedness to the Underwriter, plus accrued interest ....... 100,000 1.5
Payment of deferred compensation and consulting fees ...................... 108,000 1.6
Improvements to plant and equipment ....................................... 1,500,000 22.7
Selling and marketing ..................................................... 2,000,000 30.3
Working capital and general corporate purposes ............................ 565,000 8.6
------------- -------------
Total .................................................................... $6,600,000 100 %
============= =============
</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 underwriting discounts and the Underwriter's non-accountable
expense allowance, and will utilize such additional proceeds for additional
selling 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 $482,715, 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 $38,678, owing to holders of the Company's pre-
15
<PAGE>
viously 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 consummation of this Offering. The $100,000 loan from the Underwriter bears
interest at the rate of 10% per annum and is due and payable in full on July 15,
1997 or, if earlier, upon consummation of this Offering.
The Company anticipates that the proceeds from the Offering, together with
projected cash flow from operations, will be sufficient to fund its
operations for at least 12 months from the date of this Prospectus.
Thereafter, the Company may need to raise additional funds. There can be no
assurance that additional financing will be available or if available will be
on favorable terms. If the Company is unable to obtain such additional
financing, the Company's ability to maintain its current level of operations
will be materially and adversely affected. See "Risk Factors--Additional
Capital Requirements; Uncertainty of Additional Funding."
Pending application of the proceeds of the Offering, the Company intends
to invest the net proceeds in certificates of deposit, money market accounts,
United States government obligations or other short-term interest bearing
obligations of investment grade.
Proceeds of this Offering may also be used, if the Company so elects, to
acquire companies or products that complement its business or operations. In
the ordinary course of its business, the Company from time to time evaluates
companies for acquisition and products for acquisition or license. The
Company has no agreement or arrangement with respect to any such acquisition
or license.
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."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996, and 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 As Adjusted
-------------- --------------
<S> <C> <C>
Loans from related parties ..................................... $ 532,715(1) $ --
Capital lease obligations ...................................... 125,740 125,740
Private investor loan .......................................... 100,000 --
Loan from Underwriter(2) ....................................... 100,000
Bridge Notes ................................................... 1,354,167(3) --
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(4) ............................................ 629,793 7,229,793
Accumulated deficit .......................................... (2,047,715) (2,480,745)(5)
-------------- --------------
Total stockholders' equity (deficit) ...................... (1,417,922) 4,749,048
-------------- --------------
Total capitalization .................................... $ 794,700 $ 4,874,788
============== ==============
</TABLE>
- ------
(1) Includes a February 1997 shareholder loan of $75,000.
(2) Incurred in April 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(3) Includes $145,833 of unamortized original issue discount relating to the
value of the Bridge Warrants.
(4) Excludes (i) a 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.
(5) Includes non-recurring interest expense of $433,030 for the unamortized
portion of the original issue discount ($145,833) and loan costs
($287,197) relating to the Bridge Financing.
17
<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, and the pro forma net tangible book value per share as of December
31, 1996, after giving effect to the Offering. At December 31, 1996, the net
tangible book value of the Common Stock was $(1,861,598) in the aggregate, or
$(1.16) 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 $6,600,000, 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 December 31, 1996, would have been
$4,746,568 in the aggregate, or $1.32 per share. This represents an immediate
increase in net tangible book value of $2.48 per share of Common Stock to
existing stockholders and an immediate dilution per share of $2.68, or 67%,
to new investors in the Offering.
The following table illustrates the dilution per share as described above:
<TABLE>
<CAPTION>
Assumed initial public offering price per share of Common
Stock .................................................... $4.00
<S> <C>
Net tangible book value per share
before Offering ..................... $(1.16)
Increase attributable to new investors 2.48
--------
Pro forma net tangible book value per share after the
Offering ................................................ 1.32
---------
Dilution per share to new investors ....................... $2.68
=========
</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 December 31, 1996, after giving effect to the Offering (assuming no
value is attributed to the Redeemable Warrants included in the Units), would
be approximately $5,790,568 or $1.49 per share, and the dilution per share to
new investors would be approximately $2.51 or 63%.
The foregoing also assumes no exercise of any outstanding stock options or
warrants. As of December 31, 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 and options to purchase 150,000 shares of Common Stock
at $4.00 per share (subject to adjustment). None of these options are
currently exercisable. Subsequent to December 31, 1996, the Company granted
additional options to purchase an aggregate of 75,000 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.
18
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as
of December 31, 1995 and 1996 and for the years then ended (collectively, the
"Year-End 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 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>
Years Ended
December 31,
------------------------------
1995 1996
------------ --------------
<S> <C> <C>
Statement of Operations Data:
Net sales ............................................ $ 588,920 $ 866,060
Cost of sales ........................................ 620,593 754,159
Gross margin ......................................... (31,673) 111,901
Selling and marketing ................................ 220,651 264,617
General and administrative ........................... 437,289 787,592
------------ --------------
Total operating expenses ........................... 657,940 1,052,209
Interest expense, net ................................ 51,261 247,443
------------ --------------
Net loss ............................................. $ (740,874) $(1,187,751)
============ ==============
Net loss per share ................................... $ (0.62) $ (0.74)
============ ==============
Weighted average number of common and common
equivalent shares outstanding ....................... 1,202,540 1,599,212
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1995 1996
------------- ---------------
<S> <C> <C>
Balance Sheet Data:
Working capital deficit $ (721,336) $ (2,215,474)
Total assets ........... 703,272 1,192,393
Total liabilities ...... 1,104,836 2,610,315
Stockholders' deficit .. (401,564) (1,417,922)
</TABLE>
19
<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.
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 75% of the Company's net
sales through December 31, 1996. Accordingly, the Company's results of
operations through December 31, 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 December 31, 1996, the Company had an accumulated deficit of
$2,047,715, and a net loss of $1,187,751 and negative cash flow from
operations of $959,051 for the year then ended. Subsequent to December 31,
1996, the Company has continued to generate losses. 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. Additionally, the
Company's results of operations for the first quarter of fiscal 1997 will
include aggregate interest expense of approximately $471,000 relating to the
Bridge Financing, including an aggregate of approximately $433,000 in
amortization of original issue discount and offering expenses. See "The
Company" and "Capitalization."
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 reporting standards for stock-based compensation
plans, including all arrangements by which employees receive shares of stock
or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock. This statement also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. Those
transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably determinable. This statement is effective for
fiscal years beginning after December 15, 1995. The Company adopted the new
standard's disclosure requirements and accounting requirements for
transactions in which the Company issues its equity securities to acquire
goods and services from non-employees. The Company accounts for the issuance
of equity securities to employees under APB Opinion No. 25.
20
<PAGE>
RESULTS OF OPERATIONS
Net Sales. Net sales increased to approximately $866,000 for the year
ended December 31, 1996 (the "1996 Period") from approximately $589,000 for
the year ended December 31, 1995. Since the Company began commercial
operations in February 1995, the Company's results for 1995 are based upon
less than eleven full months of operations versus twelve months in 1996. The
increase in net revenues in 1996 was due primarily to unit sales growth from
approximately 77,500 cases in 1995 to approximately 114,800 cases in 1996.
Sales of approximately $83,000 in 1995 were reversed in the fourth quarter of
1995 due to product returns in Japan. Net revenues for 1996 include the
resale (at cost) of 6,900 cases of such returned product. See "Business--
Distribution." Sales in the Hawaiian market accounted for approximately 71%
of all sales in 1996 compared to approximately 82% in 1995. Beginning in the
second quarter of 1995, the Company began export sales to Asia and the
Pacific islands. Such sales accounted for approximately 16% of sales in 1996.
The average sales price per case decreased approximately 1% in 1996 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 $754,000
in 1996 from approximately $621,000 in 1995, primarily due to unit sales
growth. The Company reduced its unit cost in 1996 by switching from a
California bottle supplier to a lower cost Hawaii supplier. Due to higher
volume bottle purchases in 1996, the Company was able to receive certain
quantity discounts and thereby further reduce unit costs. 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. As a result of reductions in its cost of bottles
arising out of the foregoing, the Company's gross margin improved to
approximately 13% in 1996 from approximately (5)% in 1995. The Company has
recently agreed in principle 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 this purchase will be
consummated.
Selling and marketing expenses increased to approximately $265,000 in 1996
from approximately $221,000 in 1995 primarily as a result of an increase in
internal promotional activities, including product giveaways, and the hiring
of certain advertising consultants. General and administrative expenses
increased to approximately $788,000 in 1996 from approximately $437,000 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
$247,000 in 1996 from approximately $51,000 in 1995 due primarily to the
incurrence of approximately $408,000 in loans from related parties, a
$100,000 loan from a private investor in 1996 and the completion of a $1.5
million Bridge Financing in October 1996, resulting in the amortization of
approximately $124,000 of related original issue discount and offering
expenses and accrued interest of approximately $33,000 in 1996. See "The
Company--Recent Bridge Financing."
Net Loss. Due to the foregoing, the Company incurred a net loss of
$1,187,751 in 1996 compared to a net loss of $740,874 in 1995.
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 to be
granted from time to time to directors, officers, employees and consultants
of the Company. The Company accounts for options granted to employees under
APB Opinion No. 25, pursuant to which no compensation expense has been
recognized.
In October 1996 and January 1997, the Company granted to its President and
Chief Financial Officer, options (subject to vesting requirements) to
purchase 150,000 and 75,000 shares, respectively, of the Company's Common
Stock at an initial exercise price of $4.00 per share (subject to
adjustment). As of December 31, 1996, none of these options were exercised,
forfeited or expired. The Company has determined that the fair value of the
options granted is approximately $550,000 determined on the date of grant
using the Black-Scholes option
21
<PAGE>
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%. As of December 31, 1996,
approximately 11,200 of the 150,000 options originally granted had been
earned. If compensation expense had been recognized in connection with these
option grants in accordance with FASB Statement No. 123, the Company's net
loss and net loss per common and common equivalent share in 1996 would not
have been materially impacted.
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 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. In February 1997, the Company borrowed an
aggregate of $75,000 from three of its stockholders. 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." All of these
unsecured advances were repaid prior to December 31, 1996. 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. In April 1997, the Underwriter loaned the Company $100,000 on a
short-term basis in order to enable the Company to meet its working capital
requirements pending the closing of this Offering. This loan bears interest at
the rate of 10% per annum and is due and payable in full on July 15, 1997 or, if
earlier, upon the closing of any sale of securities or other financing
(including this Offering) from which the Company receives gross proceeds of at
least $100,000. Upon completion of this Offering, all outstanding borrowings of
the Company from its stockholders or their affiliates will be repaid in full.
There can be no assurance that the Company's stockholders or their affiliates
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 $162,000 in 1995
compared to approximately $66,000 in 1996. Capital expenditures in 1995
consisted primarily of leasehold improvements to the Company's production
facility to prepare the facility for use. Capital expenditures in 1996
involved primarily the purchase of production equipment to improve the
Company's bottling operations. 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
22
<PAGE>
in equipment purchases. The depreciated cost of equipment purchased under
this agreement was approximately $139,400 at December 31, 1996. The lease
liability was approximately $87,500, net of current portion, at December 31,
1996. The Company's obligations under this lease agreement are personally
guaranteed by certain directors and an affiliate of the Company.
Approximately $215,000 of the Company's accounts payable (representing
amounts greater than 30 days past the respective vendors' invoice date) and a
$50,000 note payable to an affiliated company were past due as of December
31, 1996.
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
(approximately 417,000 cases of 0.33 or 0.5 liter bottles or 833,000 cases of
1.0 or 1.5 liter bottles), calling for aggregate payments of $1,825,000
during the first year of the contract. The Company expects to fund these
bottle purchases out of revenue from operations, since bottles are only
ordered when needed. In the event that the Company fails to order the minimum
number of bottles called for by its initial purchase order, the Company will
lose the volume discount which would otherwise be applicable but will not be
subject to any other penalty. Effective October 1996, the Company's Facility
Lease requires the Company to pay rent 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 is $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). 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 will recognize an extraordinary loss of approximately $232,000
upon the repayment of the Bridge Notes, consisting of approximately $78,000
of unamortized original issue discount and approximately $154,000 of
unamortized issuance costs. The effective interest rate on the Bridge Notes,
including coupon interest at the rate of 10% per annum, $187,500 in aggregate
original issue discount and $369,253 in aggregate issuance costs, is 47.1% to
maturity and 73.6% assuming the Bridge Notes are repaid in full on May 10,
1997.
The Company intends to use the net proceeds as follows: (i) approximately
$1,588,000 to repay the Bridge Notes (plus all accrued interest) in full;
(ii) approximately $627,000 to repay all of the Company's outstanding
indebtedness to stockholders or their affiliates (plus accrued interest),
including an aggregate of approximately $40,000 of indebtedness (including
accrued interest) declared as a dividend in connection with the conversion of
the Company's previously outstanding Convertible Preferred Stock; (iii)
approximately $112,000 to repay all of the Company's outstanding indebtedness
(plus accrued interest) to an unaffiliated investor; (iv) approximately
$100,000 to repay indebtedness owed to the Underwriter, plus accrued
interest, (v) approximately $108,000 to pay deferred compensation and
consulting fees; (vi) up to $1,500,000 for improvements to plant and
equipment; (vii) up to $2,000,000 to further develop and enhance the
Company's sales and marketing programs and (viii) the balance ($565,000) for
working capital and general corporate purposes. Anticipated improvements to
the Company's plant and equipment involve primarily (i) the purchase of
bottle manufacturing equipment, including the expected purchase of the
equipment currently subject to the Blow Molding Agreement, so as to increase
the Company's supply of bottles and lower its cost of materials, (ii) the
purchase of automated packing and labelling equipment so as to improve the
efficiency of the Company bottling line, and (iii) the construction of new or
reconfiguration of old warehouse space so as to create on-site storage for
finished goods inventory. Anticipated sales and marketing expenditures
involve primarily (i) radio and television advertising, and (ii) event
marketing, in the Company's primary target markets.
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. There-
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after, 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 $1,960,000 as of December 31, 1996. Use of these net
operating losses in future years will be limited pursuant to Section 382 of
the Internal Revenue Code because of the ownership change (as defined)
resulting from this Offering.
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.
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BUSINESS
GENERAL
The Company bottles, markets and distributes "natural" water under the
name "Hawaiian Springs(TM)." The Company draws its water from a well located
at the base of the Mauna Loa volcano in Kea'au on the Big Island of Hawaii
("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
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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. The Special Use Permit is
of perpetual duration, so long as the conditions to its effectiveness have
been met. The Company is currently in compliance with all of the conditions
of the Special Use Permit and expects that it will remain in compliance in
the indefinite future as long as the Company conducts its operations in the
manner described in or contemplated by this Prospectus.
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
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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. The
Company expects to fund these bottle purchases out of revenue from
operations, since bottles are only ordered when needed. In the event that the
Company fails to order the minimum number of bottles called for by its
initial purchase order, the Company will lose the volume discount which would
otherwise be applicable but will not be subject to any other penalty.
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 agreed in principle 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
this purchase will be consummated.
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,
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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.
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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
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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.
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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. The Company believes that even if HBDC were to
draw 50% of the water flow for other such purposes, the remaining 50% would
be adequate for the current and projected future needs of the Company's
business. HBDC currently conducts no other activity on the leased premises,
and the Company believes that HBDC has no current plans to conduct any such
activity in the foreseeable future. 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's current directors and executive officers and their ages, as
of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
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 .. 49 Vice President, Administration
John Mayo ...... 46 Director
Michael Chagami . 44 Director
Nathan Keller .. 58 Director
Alexander Brody . 63 Director
</TABLE>
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"), an inactive brewery
company, 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.
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.
32
<PAGE>
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.
See "Certain Transactions." 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" and
"Certain Transactions." 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.
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 years ended December 31, 1996 and 1995, respectively. 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 Year Salary Bonus Options Compensation
------------------------------ ------ ------------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Marcus Bender ................ 1996 $126,250(1) (2) 150,000(3) --
President and Chief Executive
Officer 1995 85,000(4) -- -- --
</TABLE>
- ------
(1) As of October 10, 1996, Mr. Bender's salary was increased from the annual
rate of $120,000 to $150,000.
(2) Mr. Bender is entitled to an annual bonus of up to $100,000 in the event
that the Company meets certain performance goals to be established by the
Board. No portion of this bonus was paid or accrued in 1996.
(3) Subject to vesting. Fifty thousand options vest on each of the first,
second and third anniversaries of the effective date of the employment
agreement described below, provided that such employment agreement has
not then been terminated for any reason.
(4) As of August 1, 1995, Mr. Bender's salary was increased from the annual
rate of $60,000 to $120,000.
33
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of
Securities % of Total
Underlying Options/SARs
Options/ Granted to
SARs Employees in Exercise or Base Expiration
Name Granted Fiscal Year Price ($/Sh) Date
---------------------- ------------ -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Marcus Bender ........ 150,000 75%(1) $4.00(2) October 10, 2001
President and
Chief Executive
Officer..............
</TABLE>
- ------
(1) Options to purchase an additional 50,000 shares of Common Stock granted
to the Company's then Chief Financial Officer during fiscal 1996 expired
unvested upon such officer's resignation in December 1996.
(2) Subject to adjustment so as to equal the public offering price per Unit
in this Offering.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information with respect to unexercised
options to purchase Common Stock held by the Chief Executive Officer at
December 31, 1996. No executive officer exercised any stock options during
the fiscal year ended December 31, 1996. Except for the Chief Executive
Officer, no other executive officer held unexercised options at December 31,
1996.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held In-The-Money Options
-------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Marcus Bender ......... -- 150,000 -- (1)
President and
Chief Executive
Officer ..............
</TABLE>
(1) The stock options are exercisable at an exercise price equal to the
initial public offering price of the Units offered hereby. Such options
were not in-the-money at December 31, 1996.
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 to devote his full working time and best efforts to the
performance of his duties on behalf of the Company. 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.
34
<PAGE>
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.
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of May 1, 1997, 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.
(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.
36
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of 643,500 Selling Securityholders Warrants (identical to the
Redeemable Warrants) which will be issued to certain Selling Securityholders
in exchange for the Bridge Warrants, together with 643,500 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. 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 exercisable for four years commencing
October 10, 1997. The Placement Agent Warrants will be canceled prior to the
consummation of this Offering. 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.
<TABLE>
<CAPTION>
Redeemable Warrants(1) Common Stock(1)
------------------------------------- -------------------------------------
Number of
Redeemable Number of
Warrants Owned Common Stock
Prior to and Owned Prior to
Registered in the Percent of Class and Registered in Percent of Class
Concurrent after the the Concurrent after the
Selling Securityholder Offering Offerings(2) Offering Offerings(3)
- ---------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Stanley S. Arkin 28,700 1.08% 28,700 *
Louis A. and Madeline Best, JTWROS 50,000 1.89 50,000 *
Delaware Charter Guarantee & Trust Co.
FBO Laurence Heller IRA Rollover 25,000 * 25,000 *
Isaack R. Dweck 25,000 * 25,000 *
Jerry Finkelstein 50,000 1.89 50,000 *
Charles Johnston 12,500 * 12,500 *
Jack A. Kaster 25,000 * 25,000 *
Ralph K. Kato 50,000 1.89 50,000 *
J. D. Kosmo 12,500 * 12,500 *
Daniel R. Lee 57,400 2.17 57,400 *
Barry J. Lind Revocable Trust 28,700 1.08 28,700 *
Barry J. Lind/Neil G. Bluhm,
tenants in common 28,700 1.08 28,700 *
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 4.72 125,000 2.0
Gail Reich 12,500 * 12,500 *
Richard S. Simms II, Keogh 12,500 * 12,500 *
Richard B. Schechter 12,500 * 12,500 *
TOTAL 643,500 24.34% 643,500 10.30%
</TABLE>
- ------
* Less than one percent (1%)
(1) Assumes no purchase by any Selling Securityholder of Common Stock or
Redeemable Warrants offered in the Offering. The Offering and the
Concurrent Offering are referred to as the "Offerings."
(2) Assumes none of the Selling Securityholders Warrants have been exercised
and is therefore based upon 2,643,500 Redeemable Warrants outstanding
after the Offerings. Assumes no Selling Securityholders Warrants have
been sold by any Selling Securityholder.
(3) Assumes the exercise of all Redeemable Warrants, including the 643,500
Selling Securityholders Warrants, and is therefore based upon 6,242,712
shares of Common Stock outstanding after the Offerings and such exercise.
Assumes no shares of Common Stock have been sold by any Selling
Securityholder.
37
<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. Each Selling
Securityholder currently maintains a brokerage account with the Underwriter
subject to the terms and conditions of the Underwriter's standard brokerage
account agreement pursuant to which the Underwriter provides brokerage
services to such individuals/entities. None of these accounts is
discretionary. Other than as described herein, there are no other current or
future plans, proposals, agreements, arrangements or understandings of the
Underwriter or known to the Underwriter with respect to engaging in
transactions with or by the Selling Securityholders in connection with the
sale of their securities. The Selling Securityholders have agreed not to sell
or otherwise dispose of any of the Selling Securityholders Warrants or
Selling Securityholders Shares for a period of 12 months from the date hereof
and thereafter for an additional six months without the prior consent of the
Underwriter. 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 Shares 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.
38
<PAGE>
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 proceeds of this
Offering. See "Use of Proceeds." Certain directors and an affiliate of the
Company are personal guarantors of this indebtedness and the Company's
$200,000 equipment lease agreement with First Hawaiian Leasing, Inc. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In July 1995, certain stockholders of the Company made an equity
contribution to the Company in the aggregate amount of $65,800, in exchange
for an aggregate of 237,912 shares of Common Stock. In September 1995, all of
the stockholders of the Company made an additional equity contribution, on a
pro rata basis, in the aggregate amount of $92,159, in exchange for an
aggregate of 333,229 shares of Common Stock. In February 1996, Marcus Bender,
the Company's President, loaned the Company $10,000 on an interest free basis
in order to meet certain then current obligations. The Company repaid $4,500
of this loan in March 1996, and repaid the balance in April 1996. In March
1996, HSC advanced the Company $40,000 on an interest free basis. In April
1996, HSC loaned the Company an additional $67,320, and the earlier $40,000
advance was converted into an interest bearing loan on the same terms. HBDC
also loaned the Company $182,400 in April 1996. These loans bear interest at
an annual rate of 12% and are due in April 1997 or, if earlier, upon
consummation of this Offering. In July and August 1996, HBDC and HSC loaned
the Company an additional $42,985 and $25,284, respectively, and Mayo Water
Co., Inc. ("MWC"), a corporation wholly owned by John Mayo, a director of the
Company, loaned the Company $49,726. In February 1997, HSC, MWC and HBDC made
further loans to the Company in the amount of $24,500, $11,922 and $38,578,
respectively. 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. 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. The Company has agreed in principle to purchase the bottling
equipment subject to the Blow Molding Agreement from BPI for aggregate
payments over five years of $1,200,000, and, if such purchase is consummated,
the Company will use up to $375,000 of the net proceeds of this Offering as
an initial payment toward such purchase. The price and other terms of such
possible purchase are being determined by negotiation between the Company and
BPI. The final terms of this arrangement will be approved by a majority of
the Company's directors, excluding Mr. Keller. There can be no assurance that
this purchase will be consummated on terms no less favorable then could have
been obtained from an unaffiliated third party, if at all. 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
39
<PAGE>
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. Pursuant to
applicable provisions of Hawaii law, stockholders of the Company are entitled
to cumulate their votes in the election of directors upon delivery of a
written request thereof to any officer of the Company at least 48 hours prior
to the date of any annual or special meeting at which directors are to be
elected; provided, however, that this right may be restricted, qualified or
eliminated by a provision of the Company's Articles of Incorporation or
By-Laws, if the Company has a class of equity securities registered pursuant
to the Exchange Act which are either listed on a national securities exchange
or traded on the National Market System of Nasdaq (the "NMS"). The Company
has adopted a provision in its By-Laws eliminating this right, which
provision will take effect at such time as the Company has a class of equity
securities listed on a national securities exchange or traded on the NMS. The
Company will not have a class of equity securities listed on a national
securities exchange or traded on the NMS upon completion of this Offering,
and there can be no assurance that any class of the Company's equity
securities will ever be so listed or traded. Therefore, stockholders of the
Company may be entitled to cumulate their votes in the election of directors
indefinitely.
Subject to preferences that may be applicable to any then outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of 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.
40
<PAGE>
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.
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.
41
<PAGE>
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. All of these shares will become eligible for sale in the public market
under Rule 144 90 days after the date hereof; 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.
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, 643,500 Selling Securityholders Warrants and
643,500 Selling Securityholders Shares are being registered in the Concurrent
Offering. The Selling Securityholders have agreed not to transfer such
securities for a period of 12 months from the date hereof, and thereafter
such securities may not be sold for an additional six months without the
prior written consent of the Underwriter. An appropriate legend shall be
marked on the face of the certificates representing such securities.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities during the Lock-up
Period, except pursuant to outstanding options and warrants and pursuant to
the Company's existing option plans and no option shall have an exercise
price that is less than the fair market value per share of Common Stock on
the date of grant. An appropriate legend shall be marked on the face of
certificates representing all such securities.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned shares for at least one year 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 two 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.
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.
42
<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 firm 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. If the individual fails to designate the firm
entitled to such warrant solicitation fee, it shall be presumed that such
exercise was unsolicited. Additionally, 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 101
under Regulation M promulgated under the Securities Act, the Underwriter will
be prohibited from engaging in any market making activities with regard to
the Company's securities for the period from five business days (or such
applicable periods as Rule 101 under Regulation M 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 101 under Regulation M during the
period described above, the Underwriter undertakes to waive unconditionally
its rights to receive a commission on the exercise of such Redeemable
Warrants.
43
<PAGE>
All of the holders of the issued and outstanding shares of Common Stock
prior to the Offering have agreed (i) not to transfer any securities issued
by the Company, including shares of Common Stock or securities convertible
into or exchangeable or exercisable for or evidencing any right to purchase
of subscribe for any shares of Common Stock during the Lock-up Period,
without the prior written consent of the Underwriter and (ii) that, for 24
months following the effective date of the Registration Statement, any sales
of the Company's securities shall be made through the Underwriter in
accordance with its customary brokerage practices either on a principal of
agency basis. An appropriate legend shall be marked on the face of
certificates representing all such securities.
In connection with the Offering, the Company has agreed to issue and sell
to the Underwriter and/or its designees, at the closing of this Offering, for
nominal consideration, the Underwriter's Warrants to purchase 200,000 shares
of Common Stock. The Underwriter's Warrants are exercisable at a price of
$______ [165% of the public offering price of the Units] per share at any
time during a period of four years commencing twelve months after the date of
this Prospectus and are restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the date hereof, except to
officers of the Underwriter. The shares of Common Stock issuable upon the
exercise of the Underwriter's Warrants are identical to those offered to the
public. The Underwriter's Warrants contain anti-dilution provisions providing
for adjustment of the number of shares of Common Stock 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 exercisable
for four years 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.
Pursuant to the Financial Advisory and Consulting Agreement, 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. The Company has agreed to
compensate Joseph Stevens & Company, Inc. during the 60 month period from the
date hereof for any advice furnished in connection with acquisitions or
mergers, joint ventures, license and royalty agreements and other financings,
other than the private or public sale of the Company's securities for cash.
The amount of compensation Joseph Stevens & Company, Inc. shall receive shall
be dependent upon the value of consideration involved in the business
transaction for which advice is rendered. The Company has further agreed to
indemnify and hold harmless Joseph Stevens & Company, Inc. from all
liabilities which are related to or arise from any actions taken or omitted
to be taken in connection with Joseph Stevens & Company, Inc.'s engagement as
a consultant pursuant to the Financial Advisory and Consulting Agreement.
In April 1997, the Underwriter loaned the Company $100,000 on a short-term
basis in order to enable the Company to meet its working capital requirements
pending the closing of this Offering. This loan bears interest at the rate of
10% per annum and is due and payable in full on July 15, 1997 or, if earlier,
upon the closing of any sale of securities or other financing (including this
Offering) from which the Company receives gross proceeds of at least
$100,000.
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
44
<PAGE>
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. The Underwriter has acted
as managing underwriter of nine public offerings. See "Risk Factors --
Underwriter's Lack of Experience; Underwriter's Potential Influence on the
Market."
In connection with this Offering, the Underwriter and certain selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market prices of the Units, the
Common Stock and/or the Redeemable Warrants (the "Securities"). Such
transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase the Securities for the purpose of stabilizing their respective
market prices. The Underwriter also may create a short position for the
account of the Underwriter by selling more Securities in connection with the
Offering than it is committed to purchase from the Company, and in such case
may purchase Securities in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriter
may also cover all or a portion of such short position, up to 300,000 Units,
by exercising the Over- Allotment Option referred to above. In addition, the
Underwriter may impose "penalty bids" under contractual arrangements with
dealers whereby it may reclaim from a dealer participating in the Offering
for the account of the Underwriter, the selling concession with respect to
the Securities that are distributed in the Offering but subsequently
purchased for the account of the Underwriter in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
prices of the Securities at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
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 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
45
<PAGE>
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.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants .............................................. F-2
Balance Sheet -- December 31, 1996 ................................................... F-3
Statements of Operations For the Years Ended December 31, 1995 and 1996 .............. F-4
Statements of Stockholders' Deficit for the Years Ended December 31, 1995 and 1996 ... F-5
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 .............. F-6
Notes to Financial Statements -- December 31, 1996 ................................... F-7
</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, 1996, and the
related statements of operations, stockholders' deficit and cash flows for
each of the two years in the period ended December 31, 1996. 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, 1996, and the results of its operations and
its cash flows for each of the two years in the period ended December 31,
1996, 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.
/s/ ARTHUR ANDERSEN LLP
Honolulu, Hawaii
March 5, 1997
F-2
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET -- DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash ..................................................................... $ 89,335
Inventories .............................................................. 156,570
Trade Accounts Receivable ................................................ 53,515
Prepaid Expenses ......................................................... 7,945
-----------
Total Current Assets ................................................ 307,365
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
of $112,110 ................................................................ 441,352
ORGANIZATIONAL COSTS, net of accumulated amortization of $2,029 .............. 2,480
DEFERRED CHARGES AND OTHER, net of accumulated amortization of $82,056 ....... 441,196
-----------
Total Assets ....................................................... $1,192,393
===========
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable ........................................................ $ 331,370
Notes Payable to Related Parties ........................................ 496,393
Notes Payable ........................................................... 1,467,561
Accrued Expenses and Other Current Liabilities .......................... 156,751
Deferred Compensation ................................................... 32,500
Capital Lease Obligation -- Current Portion ............................. 38,264
-------------
Total Current Liabilities .......................................... 2,522,839
CAPITAL LEASE OBLIGATION -- Net of Current Portion ........................... 87,476
-------------
Total Liabilities .................................................. 2,610,315
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT:
Preferred Stock, $1 par value, 5,000,000 shares authorized, no shares
issued or outstanding ................................................. --
Common Stock, no par; 20,000,000 shares authorized; 1,599,212 shares
issued and outstanding, including warrants ............................ 629,793
Accumulated Deficit ..................................................... (2,047,715)
-------------
Total Stockholders' Deficit ........................................ (1,417,922)
-------------
Total Liabilities and Stockholders' Deficit ........................ $ 1,192,393
=============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ --------------
<S> <C> <C>
NET SALES ..................................... $ 588,920 $ 866,060
COST OF SALES ................................. 620,593 754,159
------------ ------------
Gross Margin ........................ (31,673) 111,901
------------ ------------
EXPENSES:
General and Administrative ............... 437,289 787,592
Selling and Marketing .................... 220,651 264,617
------------ ------------
657,940 1,052,209
------------ ------------
OTHER INCOME (EXPENSE):
Interest and Rental Income ............... 2,179 722
Interest Expense ......................... (53,440) (248,165)
------------ ------------
(51,261) (247,443)
------------ ------------
Net Loss ............................ $(740,874) $(1,187,751)
========= ===========
Net Loss per common and common
equivalent share .................. $ (0.62) $ (0.74)
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stock Common Stock Warrants
--------------------- --------------------- ----------------------
Stock Total
Number of Number of Subscriptions Number of Accumulated Stockholders'
Shares Amount Shares Amount Receivable Warrants Amount Deficit Deficit
----------- ---------- ---------- ---------- -------------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 . 639,071 $ 51,000 222,286 $ 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 . -- -- 166,714 -- 100,000 -- -- -- 100,000
Preferred
dividends .... -- -- -- -- -- -- -- (18,667) (18,667)
Net loss ........ -- -- -- -- -- -- -- (740,874) (740,874)
----------- ---------- ---------- ---------- -------------- ----------- ---------- ------------- ------------
BALANCE AT
DECEMBER 31, 1995 . 1,210,212 208,959 389,000 233,334 -- -- -- (843,857) (401,564)
Conversion of
preferred stock
to common stock
-- October 10, 1996 389,000 233,334 (389,000) (233,334 -- -- -- -- --
Issuance of common
stock warrants --
October 10, 1996 -- -- -- -- -- 750,000 187,500 -- 187,500
Preferred
dividends .... -- -- -- -- -- -- -- (16,107) (16,107)
Net loss ........ -- -- -- -- -- -- -- (1,187,751) (1,187,751)
----------- ---------- ---------- ---------- ------------ --------- --------- ------------- ------------
BALANCE AT
DECEMBER 31, 1996 1,599,212 $442,293 -- $ -- $ -- 750,000 $187,500 $ (2,047,715) $ (1,417,922)
=========== ========== ========== ========== ============= ======== ========= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (740,874) $ (1,187,751)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 50,682 63,167
Amortization of debt discount ........................... -- 41,667
Amortization of deferred charges ........................ -- 82,056
Net decrease (increase) in current assets ............... (255,124) 38,697
Net increase (decrease) in current liabilities .......... 489,195 (1,560)
Net (increase) decrease in deferred charges and other ... (4,504) 4,673
------------- ---------------
Net cash used in operating activities .............. (460,625) (959,051)
------------- ---------------
CASH USED IN INVESTING ACTIVITIES --
Purchases of property and equipment ........................ (162,002) (65,814)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ......................... 157,959 --
Proceeds from sale of preferred stock ...................... 100,000 --
Proceeds from bank loan .................................... 280,000 --
Repayment of bank loan ..................................... -- (300,000)
Proceeds from notes payable ................................ -- 1,329,307
Proceeds from loans payable to related parties ............. 100,000 407,715
Repayment of loan from affiliate ........................... -- (50,000)
Proceeds from advances from affiliates ..................... -- 100,272
Repayment of advances from affiliates ...................... -- (100,272)
Increase in deferred charges ............................... -- (238,477)
Repayment of principal on capital leases ................... (34,126) (34,345)
------------- ---------------
Net cash provided by financing activities .......... 603,833 1,114,200
------------- ---------------
NET (DECREASE) INCREASE IN CASH .............................. (18,794) 89,335
CASH, beginning of period .................................... 18,794 --
------------- ---------------
CASH, end of period .......................................... $ -- $ 89,335
============= ===============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Acquisition of equipment under capital leases ................ $ 18,430 $ --
============= ===============
Conversion of preferred stock to common stock ................ $ -- $ 233,334
============= ===============
Preferred dividends .......................................... $ 18,667 $ 16,107
============= ===============
Issuance of common stock warrants ............................ $ -- $ 187,500
============= ===============
Conversion of preferred dividends payable to note payable .... $ -- $ 38,678
============= ===============
Costs related to borrowings included in deferred charges ..... $ -- $ 284,087
============= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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, 1996, 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, 1996, the Company had an accumulated deficit, negative
cash flows from operations and significant liabilities, some of which were
past due. The Company 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 4, in October 1996 the Company sucessfully
completed a bridge financing that raised proceeds, net of expenses, of
approximately $1.13 million from Accredited Investors, as defined. In
addition, as more fully discussed in Note 17, the Company also plans an
initial public offering ("IPO") for the purpose of raising gross proceeds of
approximately $8 million of capital in order to implement its planned
expansion.
There can be no assurances that the IPO will be consummated. Additionally,
should the Company require additional financing subsequent to the IPO, 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 net sales of $866,060 and $588,920 for the years
ended December 31, 1996 and 1995, respectively. Approximately 71 percent
and 82 percent, respectively, of each year's 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.
F-7
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
1. Summary of Significant Accounting Policies and Risk Factors - (Continued)
o The Company depends upon the services of its President for development and
management of the business to date. Loss of the services of this
individual could have an adverse effect on the Company.
o The Company currently depends upon a Hawaii distributor for the majority
of the Company's sales. Termination of this oral distribution agreement
could have a material adverse impact on the Company.
o The Company's operations are subject to regulation by various governmental
agencies. Failure of the Company to meet applicable regulations both in
the United States and in foreign markets could lead to costly recalls,
loss of certification to market the product or loss of revenue resulting
from negative publicity.
d. 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
e. 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.
f. Advertising
The Company charges the cost of advertising to expense as incurred. The
Company incurred approximately $34,000 and $48,000 of advertising expense
during the years ended December 31, 1996 and 1995, respectively, which are
reflected in Selling and Marketing Expenses in the accompanying financial
statements.
g. 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 adoption of the new standard in 1996 did not
materially impact the Company.
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
F-8
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
1. Summary of Significant Accounting Policies and Risk Factors - (Continued)
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's disclosure requirements in 1996. The Company accounts for the
issuance of equity instruments to employees under APB Opinion No. 25 (See
related discussion at Note 16).
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." This statement establishes standards for computing and
presenting earnings per share ("EPS") previously found in APB Opinion No. 15,
"Earnings Per Share," and makes them comparable to international EPS
standards. The statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. This statement requires restatement of all
prior-period EPS data presented. Management does not believe that the
adoption of the new standard will have a material impact on Net Loss Per
Common and Common Equivalent Share.
h. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
i. Organizational Costs
Costs incurred in organizing the Company are being amortized over a five
year period.
j. Fair Value of Financial Instruments
Management believes that it is not practicable to estimate the fair value
of the Company's notes payable as of December 31, 1996. Because of the
Company's deteriorating financial condition, the fair value as of such date
may be significantly less than the amounts at which the notes payable are
carried.
k. 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 (See Note 9).
l. 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.
m. Net Loss Per Common and Common Equivalent Share
Net Loss per Common and Common Equivalent Share is based on the weighted
average number of Common and Common Equivalent Shares issued and outstanding
during the period of 1,599,212 and 1,202,540 for 1996 and 1995, respectively.
Net Loss per Common and Common Equivalent Share and weighted average number
of Common and Common Equivalent Shares retroactively reflect the
recapitalization 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 an aggregate of
389,000 shares of the Company's common stock ("Common Stock") effected in
October 1996.
F-9
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
2. INVENTORIES
As of December 31, 1996, inventories were comprised of the following:
Finished goods ................................... $ 95,088
Raw materials .................................... 61,482
----------
$156,570
==========
Raw materials inventory consists of empty bottles, caps, labels and various
packaging and shipping materials. Finished goods inventory includes materials
and conversion costs.
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Leasehold improvements ......................... $ 156,004
Assets under capital lease ...................... 194,226
Machinery and equipment ......................... 203,232
-----------
553,462
Less: Accumulated depreciation and amortization (112,110)
-----------
$ 441,352
===========
Depreciation and amortization expense for the years ended December 31, 1996
and 1995 was $62,265 and $49,780, respectively, and is reflected in General
and Administrative Expenses in the accompanying financial statements.
Accumulated amortization of assets under capital lease was approximately
$55,000 at December 31, 1996.
4. NOTES PAYABLE
Notes Payable are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Bridge financing notes payable ................. $1,500,000
Less: Unamortized original issue discount ....... (145,833)
------------
Bridge financing notes payable, net ........... 1,354,167
Private investor borrowing .................... 100,000
Bank note payable ............................. 13,394
------------
$1,467,561
============
</TABLE>
BRIDGE FINANCING NOTES PAYABLE
On October 10, 1996, the Company successfully 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 (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
("Bridge Warrants") of the Company, each warrant entitling the holder
F-10
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
4. Notes Payable - (Continued)
thereof 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. The Bridge Warrants do
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 (See Note 17) prior to the last day
on which the Bridge Warrants may be exercised and such IPO includes warrants
("Public Warrants") to purchase shares of Common Stock, each Bridge Warrant
which is then unexercised will automatically, without any action by the
holder thereof be converted into a new Public Warrant exercisable to purchase
the same number of shares of Common Stock as are then purchasable pursuant to
the Bridge 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 Bridge Warrants. 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 OID is being amortized
to interest expense over the one-year term of the Bridge Notes. In 1996, the
Company recorded approximately $42,000 of amortization expense related to
this OID.
The Company also issued 150,000 warrants (the "Placement Agent Warrants") to
Joseph Stevens & Company, Inc., the placement agent for the Bridge Financing
("Placement Agent"). Each Placement Agent Warrant is exercisable to purchase
one share of Common Stock at an exercise price of $1.50 per share, subject to
adjustment under certain circumstances, and expiring on October 10, 2001. In
the event that the Company successfully completes an IPO within one year of
the date of the Bridge Financing and the Placement Agent is the managing
underwriter of such IPO, the Placement Agent Warrants will be canceled. Since
the Company anticipates completing an IPO in March 1997, no value has been
assigned to the Placement Agent Warrants.
Direct costs of completing the Bridge Financing totaled approximately
$369,000 and are reflected as Deferred Charges and Other, net of accumulated
amortization. Included in these costs are Placement Agent commissions and
expense reimbursements of approximately $202,000. These direct costs are
being amortized to interest expense over the one-year term of the Bridge
Notes. In 1996, the Company recorded approximately $82,000 of amortization
expense related to these costs.
The effective interest rate (to maturity) on the Bridge Notes, including
amortization of OID and direct costs is approximately 47 percent. The Company
expensed approximately $33,000 of interest on the Bridge Notes in 1996 and
has paid no interest to date. The Company anticipates completing an IPO in
March 1997 and expects to use a portion of the IPO proceeds to repay the
principal and accrued interest on the Bridge Notes.
PRIVATE INVESTOR BORROWING
In May 1996, the Company entered into a $100,000 subordinated, unsecured note
agreement with a private investor (the "Investor"). Such note bears interest
at 12 percent per annum and is due in one year. The Company expensed
approximately $7,400 of interest in 1996 and has paid no interest to date on
such note. The Company plans to repay the principal and accrued interest on
such note with a portion of the IPO proceeds.
The Investor also received a common stock purchase warrant ("Investor
Warrant") to purchase 24,351 shares of Common Stock 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. The Company has determined that
the value of the Investor Warrant is not material to the Company's financial
statements. As such, no amounts have been recorded related to the Investor
Warrant.
BANK NOTE PAYABLE
In November 1996, the Company borrowed $13,750 from a bank, bearing interest
at the bank's prime rate (as defined) plus 2.5 percent (10.75 percent at
December 31, 1996) and due in monthly installments of principal and
F-11
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
4. Notes Payable - (Continued)
interest through October 6, 1999. The proceeds of the note were used to
purchase certain equipment. The loan is collateralized by a passbook savings
account with a balance of approximately $14,500 at December 31, 1996.
Interest accrued and paid during 1996 was not significant.
5. RELATED PARTY TRANSACTIONS
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 are owners of a principal stockholder
of the Company. In addition to the amounts accrued, the Company paid total
salaries to these individuals of approximately $126,000 in 1996 and $102,000
in 1995. These expenses are reflected in General and Administrative Expenses
in the accompanying financial statements. In August 1995, the Company's
Secretary orally agreed to defer payment of his salary, until the Company
achieves break-even, as defined. The Company continued to accrue and defer
payment of the Secretary's salary until his resignation as an executive
officer in September 1996. This amount is reflected as Deferred Compensation
in the accompanying balance sheet.
The Company leases its bottling facility and surrounding property, including
the water source and pumping equipment from a principal stockholder, under a
long-term lease (see Note 10.b.).
6. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are as follows:
Notes payable to shareholders ................................ $407,715
Note payable to affiliate ................................... 50,000
Preferred dividend notes .................................... 38,678
--------
$496,393
========
NOTES PAYABLE TO SHAREHOLDERS
In April through August 1996, three stockholders collectively loaned the
Company $407,715 on an unsecured basis, bearing interest at 12 percent and
due on April 12, 1997. The Company plans to repay the principal and accrued
interest with the proceeds from the planned IPO. The Company expensed
approximately $31,000 of interest in 1996 and has made no payments to date.
NOTE PAYABLE TO AFFILIATE
In May 1995, the Company borrowed $100,000 on an unsecured basis from a
business in which the Company's Secretary is the president and a stockholder.
The interest rate on this note is 12 percent, interest is due monthly and
principal was originally due on June 24, 1995. The note is currently past due
and a demand for payment has been made. The note is guaranteed by certain of
the Company's directors and an affiliate. In October 1996, the Company paid
$50,000 of the principal and approximately $12,000 of accrued interest to
date on the note with the proceeds from the Bridge Financing. The Company
plans to repay the balance of the note with the proceeds from the planned
IPO. Total interest expense on this note was $11,000 in 1996.
PREFERRED DIVIDEND NOTES
Concurrent with the closing of the Bridge Financing, the holders of the then
outstanding Convertible Preferred Stock converted all such shares to Common
Stock. Each share of Convertible Preferred Stock was converted into one share
of Common Stock on a pre-split basis (or 1,111.428 shares post-split). The
cumulative dividends payable to preferred stockholders (approximately $39,000
at the date of conversion, or approximately $0.10 per
F-12
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
6. Notes Payable to Related Parties - (Continued)
share) were declared and paid in the form of promissory notes bearing
interest at 8 percent. The principal and accrued interest on these notes are
due at such time as (i) the Board of Directors of the Company determines that
the Company is able to pay its debts as they become due in the usual course
of business and (ii) the Company's total assets are at least equal to the sum
of its total liabilities and the maximum amount that would then be payable,
in any liquidation, in respect of any outstanding shares having preferential
rights in liquidation. The Company plans to repay the principal of these
notes and accrued interest thereon with proceeds from the planned IPO.
Interest expense on these notes was not significant in 1996.
7. BANK LOAN
In October 1996, the Company repaid a $300,000 bank loan and accrued interest
with the proceeds of the Bridge Financing. The loan had an interest rate of
prime plus 2 percent and was originally due in March 1996.
The Company expensed approximately $24,000 of interest in 1996 and $53,000 in
1995 related to this loan. Interest payments on the bank loan for the years
ended December 31, 1996 and 1995 were approximately $30,000 and $46,000,
respectively.
8. PAST DUE LIABILITIES
Approximately $215,000 of the Company's accounts payable (representing
amounts greater than 30 days past the respective vendors' invoice date) and a
$50,000 Note Payable to Affiliate were past due as of December 31, 1996.
9. INCOME TAXES
Certain items of expense are recognized in different periods for income tax
purposes than for financial reporting purposes.
As of December 31, 1996, the Company had approximately $1,960,000 of net
operating loss (NOL) carryforwards available to reduce future taxable income.
These NOL carryforwards expire on various dates through 2011. The major
temporary differences as of December 31, 1996, primarily relate to inventory
costs capitalized for tax purposes and certain accrued liabilities not
currently deductible for tax purposes.
The deferred tax asset as of December 31, 1996 consisted of the following:
Net operating loss carryforward ................................ $ 784,000
Inventory costs capitalized for tax purposes ................... 29,000
Accrued liabilities not deductible for tax purposes ............. 13,000
Other .......................................................... 2,000
----------
828,000
Valuation allowance ............................................ (828,000)
----------
$
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
$499,000 and $297,000 for the years ended December 31, 1996 and 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 years ended December 31, 1996 and 1995.
F-13
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
10. 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, 1996, future minimum payments were as follows:
1997 ............................................................ $ 49,998
1998 ............................................................ 49,998
1999 ............................................................ 46,231
2000 ............................................................ 1,198
---------
Total Future Minimum Payments ................................... 147,425
Less -- Amount Representing Interest ............................ 21,685
---------
Total Capital Lease Obligations ................................. 125,740
Less -- Current Portion ........................................ 38,264
---------
Noncurrent Portion .............................................. $ 87,476
=========
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.
In July 1996, the lease was further amended to include the following
provisions, effective concurrent with the closing of the Bridge Financing
(see Note 4):
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.
Based on the terms of the amended lease, the future minimum lease payments as
of December 31, 1996 were as follows:
1997 ....................................................... $ 60,000
1998 ....................................................... 60,000
1999 ....................................................... 60,000
2000 ....................................................... 60,000
2001 ....................................................... 60,000
Thereafter ................................................. 2,622,000
------------
$2,922,000
============
The Company paid approximately $34,000 and $23,000 in lease payments in 1996
and 1995, respectively, which is reflected in General and Administrative
Expenses in the accompanying financial statements.
F-14
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
10. Commitments and Contingencies - (Continued)
In October 1996, the Company vacated its former office space and entered into
a three-year office and warehouse lease in Honolulu. Monthly rental payments
are $3,000 for the initial term with a renewal option. The Company subleases
a portion of the leased premises to an unrelated beverage company for $250
per month, on a month-to-month basis.
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).
o Executive Life Insurance -- $1,000,000 whole life policy for the President
of the Company, purchased in December 1996.
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. The Company plans to obtain errors and omissions insurance
coverage for its directors and officers.
11. SIGNIFICANT CUSTOMERS AND SUPPLIERS
In 1995, approximately 81 percent of the Company's sales were made through a
Hawaii distribution company. In 1996, this distributor was acquired by a
major beer manufacturer which terminated distribution of all non- beer
products. In June 1996, the Company negotiated an oral agreement with a new
distribution company in Hawaii. For the year ended December 31, 1996,
approximately 64 percent of the Company's sales were made through these two
Hawaii distributors.
Prior to July 1996, the Company imported all of its bottles from a
single-source supplier. In July 1996, the Company began to purchase bottles
from a vendor which installed bottle-making equipment at the Company's
production facility. Pursuant to a Blow Molding Agreement with this vendor,
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, 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 expects to fund these bottle purchases out of revenue
from operations, since bottles are only ordered when needed. In the event
that the Company fails to order the minimum number of bottles called for by
its initial purchase order, the Company will lose the volume discount which
would otherwise be applicable, but will not be subject to any other penalty.
The Company has agreed in principle to purchase the bottling equipment
subject to the Blow Molding Agreement for $1.2 million, with payment over 5
years. If such purchase is consummated, the Company will use up to $375,000
of the net proceeds of the planned IPO as an initial payment toward such
purchase. However, there can be no assurance that this purchase will be
completed.
In July 1996, an officer of this vendor was appointed a director of the
Company.
12. 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
F-15
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
12. Sales Returns - (Continued)
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 $33,000 of this amount is
received in Trade Accounts Payable at December 31, 1996. 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 in 1996.
13. 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
years ended December 31, 1996 and 1995 were approximately $146,000 and
$80,000, respectively (net of Japan sales returns of approximately $83,000 in
1995 as discussed in Note 12 above).
14. 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 was
$120,000 for the term of the agreement, payable in installments, as defined,
through January 1997. The Company recorded $100,000 and $20,000 of consulting
expense during 1996 and 1995, respectively, which is reflected in General and
Administrative Expenses in the accompanying financial statements. The Company
paid $45,000 to the Advisor in 1996. The Company plans to repay the remaining
amounts owed to the Advisor with a portion of the proceeds of the planned
IPO.
b. Sales Representatives
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
commencing June 1995. In June 1996, the fee was increased to $4,000 per month
and the Agent became a Vice President of the Company.
In 1996 the Company entered into certain other sales agent agreements with
individuals, covering periods of up to one year. At December 31, 1996, the
Company was committed to pay an aggregate of approximately $30,000 to these
agents over the remaining initial term of their agreements. 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 3 percent of sales (as defined)
and bonus payments ranging from $500 to $1,000 for each new distribution
agreement entered-into (as defined). The Company paid approximately $13,000
in 1996 to these agents, which is 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 5 months and $1,000 per month for the remainder of the term of the
agreement. The landlord is also entitled to a 5 percent commission on sales
(as defined). The Company paid approximately $4,000 in 1996 to the landlord
pursuant to this agreement.
F-16
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
14. Consulting Agreements - (Continued)
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 was
approximately $25,000 with payment terms of 75 percent payable in cash and 25
percent payable in stock options if the planned initial public offering is
successful, otherwise the total fee is payable in cash. In 1996, the Company
recognized $25,000 of Sales and Marketing Expense and paid the consultant
$11,250.
d. 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.
15. EMPLOYMENT AGREEMENT
In August 1996, the Company entered into a 5-year employment agreement (the
"Employment Agreement") with its President. The Employment Agreement was
effective concurrent with the closing of the Bridge Financing and 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 Bridge Financing 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 two years following termination of the Employment Agreement.
16. 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. The Company accounts for such options issued to employees under APB
Opinion No. 25, under which no compnsation cost has been recognized.
In October 1996 and January 1997, the Company granted to its President and
Chief Financial Officer, options (subject to vesting requirements) to
purchase 150,000 and 75,000 shares, respectively, of the Company's Common
Stock at an initial exercise price of $4.00 per share (subject to
adjustment). As of December 31, 1996, none of these options were exercised,
forfeited or expired. The Company has determined that the fair value of the
options granted is approximately $550,000 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%.
As of December 31, 1996, approximately 11,200 of the 150,000 options
originally granted had been earned. If compensation expense had been
recognized in connection with these option grants in accordance with FASB
F-17
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
16. Stock Options - (Continued)
Statement No. 123, the Company's Net Loss and Net Loss per Common and Common
Equivalent Share in 1996 would not have been materially impacted. 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 executives.
17. 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 will underwrite, on a firm commitment basis, 2,000,000 IPO
Units expected to result in aggregate gross proceeds of $8 million. The
Underwriter also has the option to purchase up to an additional 300,000 IPO
Units 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.
Upon the closing of the IPO, the Company has agreed to issue and sell to the
Underwriter 5-year warrants to purchase such number of shares of Common Stock
equal to 10 percent of the IPO Units 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 share of Common Stock at an exercise price equal to 165 percent
of the IPO price per Unit.
In 1996, the Company incurred approximately $153,000 of professional fees and
other costs related to the IPO which have been recorded as Deferred Charges
and Other in the accompanying financial statements. Upon the closing of the
IPO, these costs will be recorded in Common Stock, net of the proceeds of the
IPO.
18. RECAPITALIZATION
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. As discussed in Notes 1 and 6, in October 1996 all then outstanding
shares of the Company's Convertible Preferred Stock were converted to an
aggregate of 389,000 shares of Common Stock. The accompanying statements of
stockholders' deficit give retroactive effect to this recapitalization.
19. SUBSEQUENT EVENT -- ADDITIONAL SHAREHOLDER LOANS
In February 1997, certain shareholders loaned the Company an aggregate of
$75,000, bearing interest at 12 percent and due on the earlier of April 12,
1997 or upon the successful closing of any public offering of equity
securities of the Company occurring prior to the maturity date with an
aggregate price to investors in such offering in excess of $2,000,000.
20. SUBSEQUENT EVENTS (UNAUDITED) -- UNDERWRITER LOAN AND CANCELLATION OF
CERTAIN BRIDGE WARRANTS
In April 1997, the Underwriter loaned the Company $100,000 on a short-term
basis in order to enable the Company to meet its working capital requirements
pending the closing of the IPO. This loan bears interest at the rate of
10% per annum and is due and payable in full on July 15, 1997 or, if earlier,
upon the closing of any sale of securities or other financing (including the
IPO) from which the Company receives gross proceeds of at least
$100,000.
F-18
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1996
20. Subsequent Events (Unaudited) -- Underwriter Loan and Cancellation of
Certain Bridge Warrants - (Continued)
In April 1997, certain investors who participated in the Bridge Financing
have agreed to cancel an aggregate of 106,500 Bridge Warrants.
F-19
<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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ........................ 4
Risk Factors .............................. 8
The Company ............................... 14
Use of Proceeds ........................... 15
Dividend Policy ........................... 16
Capitalization ............................ 17
Dilution .................................. 18
Selected Financial Data ................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 20
Business .................................. 25
Management ................................ 32
Principal Stockholders .................... 36
Selling Securityholders ................... 37
Certain Transactions ...................... 39
Description of Capital Stock .............. 40
Securities Eligible for Future Sale ....... 42
Underwriting .............................. 43
Legal Matters ............................. 45
Experts ................................... 45
Available Information ..................... 45
Index to Financial Statements ............. F-1
</TABLE>
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]
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:
(a) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by or
in the right of the corporation) if that person is or was a director,
officer, employee or other agent of the corporation (individually and/or
collectively referred to as "agent"), against expenses, judgments, fines,
settlement, and other amounts actually and reasonably incurred in connection
with the proceeding if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal proceeding, and no
reasonable cause to believe the conduct of the person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contenders or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in or not opposed to the
best interests of the corporation, or that the person had reasonable cause to
believe that the person's conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action
by or in the right of the corporation to procure a judgment in its favor
because that person is or was an agent of the corporation, against expenses
actually and reasonably incurred by the person in connection with the defense
or settlement of the action if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best interests
of the corporation; except that no indemnification shall be made in respect
of any claim, issue, or matter as to which the person shall have been
adjudged to be liable for negligence or misconduct in the performance of the
person's duty to the corporation unless and only to the extent the court in
which the action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
(c) To the extent that an agent has been successful on the merits or
otherwise in defense of any proceeding referred to in subsection (a) or (b),
or in defending any claim, issue, or matter therein, the agent shall be
indemnified by the corporation against expenses actually and reasonably
incurred by the agent in connection therewith.
(d) Any indemnification under subsection (a) or (b) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in subsection (a) or
(b). The determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to the
proceeding, or (2) if a quorum is not obtainable, by independent legal
counsel in a written opinion, or (3) by the stockholders, or (4) by the court
in which the proceeding is or was pending upon application made by the
corporation or the agent or the attorney or other person rendering services
in connection with the defense, whether or not the application by the agent,
attorney, or other person is opposed by the corporation.
(e) Expenses incurred in defending any proceeding may be paid by the
corporation in advance of the final disposition of the proceeding upon
receipt of an undertaking by or on behalf of an agent of the corporation to
repay such amount unless it shall ultimately be determined that the agent is
entitled to be indemnified by the corporation as authorized in this Article.
(f) The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under the By-Laws, or any agreement, vote of stockholders, or disinterested
directors or otherwise, both as to action in a person's official capacity and
as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be an agent and shall inure to the
benefit of the heirs and personal representatives of such a person.
(g) The corporation shall have the power to purchase and maintain
insurance on behalf of any agent of the corporation, against any liability
asserted against or incurred by the agent of the corporation in any such
capac-
II-1
<PAGE>
ity or arising out of the agent's status as such, whether or not the
corporation would have the power to indemnify the agent against such
liability under this Article. Any such insurance may be procured from any
insurance company designated by the Board of Directors, including any
insurance company in which the corporation shall have an equity or other
interest, through stock ownership or otherwise.
Article XI of the Registrant's Articles of Incorporation provides as
follows:
(a) No director of the corporation shall bear personal liability in any
action brought by the stockholders or the corporation for monetary damages
for a breach of fiduciary duty as a director, provided, however, that the
corporation shall not have the power to eliminate or limit the personal
liability of a director:
(1) For any breach of the director's duty of loyalty to the corporation or
its stockholders;
(2) For any act or omission of the director not performed in good faith,
or which involves intentional misconduct or knowing violation of law,
or which constitutes a wilful or reckless disregard of the director's
fiduciary duty:
(3) For the director's wilful or negligent violation of any provision of
the Hawaii Business Corporation Act regarding payment of dividends or
stock purchase or redemption; or
(4) For any transaction from which the director received an improper
benefit.
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 ............................... $ 8,334.00
NASD Fee ....................................... 3,250.00
NASDAQ Listing Fee ............................. 10,000.00
Legal Fees and Expenses ........................ 100,000.00
Blue Sky Fees and Expenses ..................... 45,000.00
Accounting Fees and Expenses ................... 60,000.00
Printing and Engraving Expenses ................ 80,000.00
Insurance Premium re Securities Act Liabilities . 40,000.00(1)
Transfer Agent's Fees and Expenses ............. 2,500.00
Miscellaneous Expenses ......................... 10,916.00
--------------
TOTAL ........................................ $360,000.00
==============
All of the foregoing expenses will be borne by the Registrant. The Selling
Securityholders will not bear any of such expenses.
- ------
(1) Such insurance premium will be expensed over the period covered by the
policy. No such expense has been incurred to date.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant was initially capitalized in September 1994 through the
issuance of an aggregate of (i) 639,071 shares of Common Stock, no par value
("Common Stock"), to two investors in exchange for an aggregate of $51,000 in
cash and certain leasehold rights to the Registrant's bottling facility as
described in the Prospectus constituting Part I of this Registration
Statement (the "Prospectus") under the heading "Business--Facilities," and
(ii) 350 shares of Convertible Preferred Stock, par value $666.67 per share
("Convertible Preferred Stock"), of which 200 shares were purchased by one
investor in exchange for $133,334 in cash and the remaining 150 shares were
purchased by another investor in exchange for a promissory note in the amount
of $100,000, which was paid in full in March 1995. In October 1995, all 350
shares of Convertible Preferred Stock then outstanding were converted into an
aggregate of 389,000 shares of Common Stock. The foregoing transactions were
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof and the rules and
regulations thereunder ("Section 4(2)").
II-2
<PAGE>
Reference is made to the information contained in the Prospectus under the
heading "Certain Transactions," with respect to subsequent issuances of
additional debt and equity securities by the Registrant to its stockholders,
which information is incorporated herein by reference. All of such issuances
were exempt from registration under the Securities Act pursuant to Section
4(2).
In May 1996, the Registrant issued a promissory note for $100,000,
together with a warrant to purchase an aggregate of 24,351 shares of Common
Stock at an exercise price of $.000009 per share, to Leisure Fund Associates,
L.P. 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), including pursuant to Regulation D promulgated
thereunder, because the securities offered in the Bridge Financing (the
"Bridge Securities") were offered only to a limited number of qualified
investors; were sold only to "accredited investors" as defined in Regulation
D; were not offered or sold by means of any public solicitation or
advertising; and all purchasers to whom the Bridge Securities were sold
represented in writing to the Company that they were purchasing same for
their own account, for investment and not with a view to any resale or
distribution thereof.
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*
4.6 Form of Lock-Up Agreement between the Underwriter and each of the Selling Securityholders*
5.1 Opinion of Graham & James LLP*
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.*
10.11 Letter Agreement dated August 1, 1996 between the Registrant and com.com Inc.*
10.12 Form of Promissory Note evidencing an aggregate of $75,000 in principal amount of indebtedness of the
Registrant to certain of its affiliates*
10.13 Promissory Note dated as of April 15, 1997 in the original principal amount of $100,000 payable by the
Registrant to Joseph Stevens & Company, Inc.
10.14 Form of Cancellation Agreement between the Registrant and certain holders of Bridge Warrants.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Graham & James LLP (Included in Exhibit 5.1 hereto)*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
24.1 Power of Attorney*
27.1 Financial Data Schedule as of September 30, 1996*
27.2 Financial Data Schedules as of December 31, 1995 and December 31, 1996*
</TABLE>
- ------
* Filed previously.
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-4
<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 April 17, 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 April 17, 1997
------------------------ (Principal Executive Officer)
Marcus Bender
/s/ MARC MIYAHIRA Chief Financial Officer (Principal Financial and April 17, 1997
------------------------ Accounting Officer)
Marc Miyahira
* Director April 17, 1997
------------------------
Brian Barbata
* Director April 17, 1997
------------------------
John Mayo
* Director April 17, 1997
------------------------
Michael Chagami
* Director April 17, 1997
------------------------
Nathan Keller
* Director April 17, 1997
------------------------
Alexander Brody
*By: /s/ MARCUS BENDER
---------------------
Marcus Bender
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<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*
4.6 Form of Lock-Up Agreement between the Underwriter and each of the Selling Securityholders*
5.1 Opinion of Graham & James LLP*
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.*
10.11 Letter Agreement dated August 1, 1996 between the Registrant and com.com Inc.*
10.12 Form of Promissory Note evidencing an aggregate of $75,000 in principal amount of indebtedness of the
Registrant to certain of its affiliates*
10.13 Promissory Note dated as of April 15, 1997 in the original principal amount of $100,000 payable by the
Registrant to Joseph Stevens & Company, Inc.
10.14 Form of Cancellation Agreement between the Registrant and certain holders of Bridge Warrants.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Graham & James LLP (Included in Exhibit 5.1 hereto)*
24.1 Power of Attorney*
27.1 Financial Data Schedule as of September 30, 1996*
27.2 Financial Data Schedules as of December 31, 1995 and December 31, 1996*
</TABLE>
- ------
* Filed previously.
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION
STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT
TO THESE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION
UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN
OPINION OF COUNSEL TO THE CORPORATION, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO
THE CORPORATION, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE
PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE
SECURITIES LAW.
HAWAIIAN NATURAL WATER COMPANY, INC.
PROMISSORY NOTE
The Transferability of this Note
is Restricted as Provided in Section 2
Dated: April 15, 1997
$100,000 New York, New York
FOR VALUE RECEIVED, Hawaiian Natural Water Company, Inc. , a Hawaii corporation
(the "Company"), promises to pay to Joseph Stevens & Company, Inc. or assigns
(the "Holder") the principal amount of One Hundred Thousand DOLLARS ($100,000)
(the "Principal Amount"), in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, together with simple interest thereon at the rate of
ten percent (10%) per annum (calculated on the basis of a 360-day year of 30-day
months), at the principal office of the Company, upon the earlier of (a) the
closing of the sale of securities or other financing of the Company from which
the Company or any of its subsidiaries receives gross proceeds of at least one
hundred thousand dollars ($100,000) or (b) July 15, 1997. No payments of
principal and/or interest shall be due until maturity.
Notwithstanding anything to the contrary herein contained, the
Principal Amount of this Note or any interest hereon may be prepaid at any time
or from time to time, prior to the maturity of this Note, in whole or in part,
without prior notice and without penalty or premium. Prepayments shall be
applied first to interest due and then to principal.
1. Covenants: The Company covenants and agrees that, so long as the
Note shall be outstanding and unpaid:
<PAGE>
1.1 Payment of Note. The Company will punctually pay or cause
to be paid the Principal Amount and interest on this Note. Any sums required to
be withheld from any payment of Principal Amount or interest on this Note by
operation of law or pursuant to any order, judgment, execution, treaty, rule or
regulation may be withheld by the Company and paid over in accordance therewith.
Nothing in this Note or in any other agreement between the Holder and
the Company shall require the Company to pay, or the Holder to accept, interest
in an amount which would subject the Holder to any penalty or forfeiture under
applicable law. In the event that the payment of any charges, fees or other sums
due under this Note or provided for in any other agreement between the Company
and the Holder are or could be held to be in the nature of interest and would
subject the Holder to any penalty or forfeiture under applicable law, then ipso
facto the obligations of the Company to make such payment to the Holder shall be
reduced to the highest rate authorized under applicable law and, in the event
that the Holder shall have ever received, collected, accepted or applied as
interest any amount in excess of the maximum rate of interest permitted to be
charged by applicable law, such amount which would be excess interest under
applicable law shall be applied first to the reduction of principal then
outstanding, and, second, if such principal amount is paid in full, any
remaining excess shall forthwith be returned to the Company.
1.2 Maintenance of Corporate Existence; Merger and Consolidation. The
Company will at all times cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence and all of its rights and
franchises and shall not be consolidated with or merge into any other
corporation or transfer all or substantially all of its assets to any person
unless (A)(i) the survivor of such consolidation or merger is the Company, or
(ii) the corporation formed by such consolidation or into which the Company is
merged or to which the assets of the Company are transferred is a corporation
which expressly assumes all of the obligations of the Company under the Note,
and (B) after giving effect to such transaction, no Event of Default (as
hereinafter defined), and no event which, after notice or lapse of time, or
both, would become an Event of Default, shall have occurred and be continuing.
1.3 Maintenance of Properties. The Company will reasonably maintain in
good repair, working order and condition its properties and other assets, and
from time to time make all reasonably necessary or desirable repairs, renewals
and replacements thereto.
1.4 Payment of Taxes. The Company will cause to be paid, set aside for
payment, or cause to be discharged, before the same shall become delinquent, all
taxes, assessments and governmental charges levied or imposed upon the Company
or upon its income, profits or property; provided, however, that the Company
shall not be required to cause to be paid or discharged any such tax, assessment
or charge whose amount, applicability or validity is being contested in good
faith by appropriate proceedings.
-2-
<PAGE>
1.5 Compliance with Statutes. The Company will comply in all material
respects with all applicable statutes and regulations of the United States of
America and of any state or municipality, and of any agency of any thereof, in
respect of the conduct of business, and the ownership of property by the
Company; provided, however, that nothing contained in this Section 1.5 shall
require the Company to comply with any such statute or regulation so long as its
legality or applicability shall be contested in good faith; and provided further
that an unintentional violation of this covenant done in good faith or
inadvertently shall not be deemed an Event of Default under Section 3 hereof.
1.6 Liens. The Company will not create, incur or suffer to exist any
liens, claims or encumbrances upon any of its assets or properties, except for
those in existence as of the date hereof, those incurred in connection with
indebtedness permitted pursuant to Section 1.9 or those incurred in the ordinary
course of business.
1.7 Restrictions on Dividends, Redemptions, etc. The Company will not
(i) declare or pay any dividend or make any other distribution on any equity
securities of the Company, except dividends or distributions payable in equity
securities of the Company, (ii) purchase, redeem or otherwise acquire or retire
for value any equity securities of the Company, except equity securities
acquired upon conversion thereof into other equity securities of the Company, or
(iii) permit a subsidiary of the Company to purchase, redeem or otherwise
acquire or retire for value any equity securities of the Company, if, upon
giving effect to such dividend, distribution, purchase, redemption, or other
acquisition or retirement, the net worth of the Company would be reduced to less
than an amount equal to the remaining indebtedness outstanding under the Note.
1.8 Transactions with Affiliates. Except as described in the Amendment
No. 4 to the registration statement (Registration No. 333-18289) the Company
will not itself, and will not permit any subsidiary to, engage in any
transaction of any kind or nature with any affiliate (as such term is used in
Rule 405 under the Act) of the Company, other than a wholly-owned subsidiary,
unless such transaction is upon terms which are fair to the Company or such
subsidiary, as the case may be, and which are reasonably similar to, or more
beneficial to the Company or such subsidiary than the terms deemed likely to
occur in similar transactions with unrelated persons under the same
circumstances.
1.9 Indebtedness. The Company shall not incur any liability or
obligation, direct or contingent, for borrowed money, except for those incurred
in the ordinary course of business; without the prior written consent of the
Holder.
2. Restrictions Upon Transferability. This Note has not been registered
under the Act, and may not be offered, sold, pledged, hypothecated, assigned or
transferred except (i) pursuant to a registration statement under the Act which
has become effective and is current with respect to this Note, or (ii) pursuant
to a specific exemption from registration under the Act but only upon a Holder
hereof first having obtained the written opinion of counsel to the
-3-
<PAGE>
Company, or other counsel reasonably acceptable to the Company, that the
proposed disposition is consistent with all applicable provisions of the Act as
well as any applicable "blue sky" or other state securities law.
3. Events of Default and Remedies. An "Event of Default" shall occur
if:
3.1 Payment of Notes. The Company defaults in the payment of Principal
Amount or interest of this Note, when and as the same shall become due and
payable whether at maturity thereof, or by acceleration or otherwise, which
default shall continue uncured for a period of thirty (30) days from the date
thereof; or
3.2 Performance of Covenants, Conditions or Agreements. The Company
fails to comply with any of the covenants, conditions or agreements set forth in
this Note and such default shall continue uncured for a period of thirty (30)
days after receipt of written notice to the Company from the Holder stating the
specific default or defaults; or
3.3 Bankruptcy, Insolvency, etc. The Company shall file or consent by
answer or otherwise to the entry of an order for relief or approving a petition
for relief, reorganization or arrangement or any other petition in bankruptcy
for liquidation or to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or shall make an assignment for the benefit of its creditors, or
shall consent to the appointment of a custodian, receiver, trustee or other
officer with similar powers of itself or of any substantial part of its
property, or shall be adjudicated a bankrupt or insolvent, or shall take
corporate action for the purpose of any of the foregoing, or if a court or
governmental authority of competent jurisdiction shall enter an order appointing
a custodian, receiver, trustee or other officer with similar powers with respect
to the Company or any substantial part of its property or an order for relief or
approving a petition for relief or reorganization or any other petition in
bankruptcy or for liquidation or to take advantage of any bankruptcy or
insolvency law, or an order for the dissolution, winding up or liquidation of
the Company, or if any such petition shall be filed against the Company and such
petition shall not be dismissed within sixty (60) days.
3.4. Remedies. In case an Event of Default (other than an Event of
Default resulting from the Company's failure to pay the Principal Amount of, or
any interest upon, this Note, when the same shall be due and payable in
accordance with the terms hereof (after giving affect to applicable "cure"
provisions herein) and an Event of Default resulting from bankruptcy, insolvency
or reorganization) shall occur and be continuing, the Holder of the Note may
declare by notice in writing to the Company all unpaid Principal Amount and
accrued interest on the Note then outstanding to be due and payable immediately.
Any such acceleration may be annulled and past defaults (except, unless
theretofore cured, a default in payment of Principal Amount or interest on the
Note) may be waived by the Holder. In case an Event of Default resulting from
the Company's nonpayment of Principal Amount of, or interest upon, this Note
shall occur, the Holder may declare all unpaid Principal Amount and
-4-
<PAGE>
accrued interest on this Note held by such Holder to be due and payable
immediately. In case an Event of Default resulting from bankruptcy, insolvency
or reorganization shall occur, all unpaid principal and accrued interest on the
Note held by the Holder shall be due and payable immediately without any
declaration or other act on the part of the Holder.
4. Costs of Collection. Should the indebtedness represented by this
Note or any part thereof be collected in any proceeding, or this Note be placed
in the hands of attorneys for collection after default, the Company agrees to
pay as an additional obligation under this Note, in addition to the Principal
Amount and interest due and payable hereon, all costs of collecting this Note,
including reasonable attorneys' fees.
5. Waiver and Amendments. This Note may be amended, modified,
superseded, canceled, renewed or extended, and the terms hereof may be waived
only by a written instrument signed by the Company and the Holder. No delay on
the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver hereof, nor shall any waiver on the part of any party
of any right, power or privilege or privilege hereunder preclude any other or
further exercise hereof or the exercise of any other right, power or privilege
hereunder. The rights and remedies provided herein are cumulative and are not
exclusive of any rights or remedies which any party may otherwise have at law or
in equity.
6. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Company, and upon reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
this Note, if mutilated, the Company will make and deliver a new Note of like
tenor, in lieu of this Note. Any Note made and delivered in accordance with the
provisions of this Section 6 shall be dated as of the date to which interest has
been paid on this Note, or if no interest has theretofore been paid on this
Note, then dated the date hereof.
7. Notice. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed or
sent by certified, registered, or express mail, postage prepaid, and shall be
deemed given when so delivered personally, telegraphed or, if mailed, five (5)
days after the date of deposit in the United States mails, as follows:
(i) if to the Company, to:
Hawaiian Natural Water Company, Inc.
248 Mokauea Street
Suite 201
Honolulu, Hawaii 96816
Attn: Marcus Bender, Chief Executive Officer
-5-
<PAGE>
(ii) if to the Holder, to the address of such Holder as shown on the
books of the Company.
8. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to its
conflicts of law principles. The Company agrees that any dispute or controversy
arising out of this Note shall be adjudicated in a court located in New York
City, and hereby submits to the exclusive jurisdiction of the courts of the
State of New York located in New York, New York and of the federal courts in the
Southern District of New York, and irrevocably waives any objection it now or
hereafter may have respecting the venue of such action or proceeding brought in
such a court or respecting the fact that such court is an inconvenient forum,
and consents to the service of process in any such action or proceeding by means
of registered or certified mail, return receipt requested.
9. Successors and Assigns. All the covenants, stipulations, promises
and agreements in this Note contained by or on behalf of the Company shall bind
its successors and assigns, whether or not so expressed.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its corporate name by a duly authorized officer and to be dated as of the date
first above written.
HAWAIIAN NATURAL WATER COMPANY, INC.
By: /s/ Marcus Bender
-------------------------------------
Name: Marcus Bender
Title: Chief Executive Officer
-7-
<PAGE>
EXHIBIT 10.14
CANCELLATION AGREEMENT
This Agreement is made and entered into as of April 15, 1997, by and
between Hawaiian Natural Water Company, Inc., a Hawaii corporation (the
"Company") and .
RECITALS
The Company consummated a $1,500,000 bridge financing (the "Bridge
Financing") on October 10, 1996, pursuant to which the Company issued and sold
30 Units (the "Units"), at a purchase price of $50,000 per Unit, each Unit
consisting of (i) a promissory note in the principal amount of $50,000, bearing
interest at the rate of 10% per annum, which is due and payable upon the earlier
of (a) the consummation of a public financing of the Company through the sale of
equity securities from which the Company receives gross proceeds of at least
$2,000,000 or (i) October 10, 1997 and (ii) 25,000 warrants (the "Bridge
Warrants"), each warrant to purchase one share of the Company's common stock;
purchased Units in the Bridge Financing
for $ .
NOW, THEREFORE, in consideration of the premises and the agreements set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each of the undersigned agrees as
follows:
1. has cancelled, without recourse, and
returned to the Company the Bridge Warrants issued to
him in connection with the Bridge Financing and
acknowledges that the Company has no further obligations to
in connection with the Bridge
Warrants.
Governing Law. This Agreement shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of such state without giving effect to the rules of
such state governing the conflict of laws.
Counterparts. This Agreement may be executed in any number of
counterparts, and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first written above.
HAWAIIAN NATURAL WATER COMPANY, INC.
a Hawaii corporation
By: /s/ Marcus Bender
--------------------------------------
Marcus Bender
President and Chief Executive Officer
- ----------------------------
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
------
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Honolulu, Hawaii
April 16, 1997
