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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-29280
HAWAIIAN NATURAL WATER COMPANY, INC.
(Name of small business issuer in its charter)
HAWAII 99-0314848
(State or jurisdiction of incorporation I.R.S. Employer
or organization) Identification Number)
248 Mokauea Street
Honolulu, Hawaii 96819
(Address of principal executive offices)
(808) 832-4550
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
Redeemable Common Stock Purchase Warrants("Warrants")
Units, consisting of one share of Common Stock and one Warrant
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $1,048,806
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days:
$5,804,980 as of March 20, 1998.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,899,212 shares of Common
Stock as of March 20, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive proxy statement to be filed with the Commission
in connection with the 1998 Annual Meeting of Stockholders and Registrant's
Registration Statement on Form SB-2 (File No. 333-18289) are incorporated by
reference into Part III of this Report.
Transitional Small Business Disclosure Format (check one):
YES NO X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. Hawaiian Natural Water Company, Inc. (the "Company") bottles,
markets and distributes "natural water" under the name "Hawaiian
Springs-TM-." The term "natural water" signifies that the bottled water
retains the same chemical composition and mineral content as the water at the
source. Natural water is distinguished from "purified" water, from which
certain chemicals and minerals have been removed by means of reverse osmosis
filtration. There are several purified Hawaiian waters currently on the
market; however, the Company's product is the only bottled natural water
available from Hawaii.
The Company draws its water from a well located at the base of the Mauna
Loa mountain range in Kea'au on the Big Island of Hawaii. The water is
"bottled at the source" in polyethylene terephthalate ("PET") plastic
bottles, which are manufactured at the Company's bottling facility. The term
"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. The proprietary
source of the Company's water further distinguishes it from competing
purified waters, which are typically drawn from municipal water supplies.
The Company currently offers its product only in PET plastic bottles of
1.5 liters or less. The Pet "premium" category (bottles of two liters or
less are considered "premium") is currently the fastest growing segment of
the non-sparkling water market in the United States. The Company markets
its water on the basis of superior quality and taste and on the worldwide
reputation of Hawaii.
The Company was incorporated in Hawaii in September 1994, and began
commercial operations in February 1995, selling initially in the Hawaiian
market exclusively. The Company continues to market its product primarily in
Hawaii but has since developed a limited presence on the U.S. Mainland and in
certain international markets (currently Guam and the Middle East). The
Company's objective is to become a leading provider of premium quality
bottled water on a national and international basis. Accordingly, the
Company is seeking to expand its presence on the U.S. Mainland and in
developed Asian markets, such as Japan and Taiwan. The Company is attempting
to penetrate these markets by establishing distributor relationships as well
as strategic alliances with beverage and other marketing 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. The
following summary describes the demand for bottled water in those territories
which the Company considers its primary target markets.
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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 U.S.
Mainland is the West Coast, particularly California. California is by far
the largest single state market, accounting for approximately 28.4% of total
domestic bottled water consumption in 1997. The bottled water market in the
United States as a whole has grown from about 300 million gallons in 1976 to
approximately 3.425 billion gallons in 1997, with per capita consumption
increasing by 8.8% in 1997. The largest segment of the U.S. bottled water
market is the non-sparkling water segment, which accounted for approximately
2.949 billion gallons or approximately 86.1% of the total 3.425 billion
gallons sold in 1997. The total U.S. non-sparkling bottled water market is
projected to grow at an average annual growth rate of approximately 9.0%
through the year 2001 to a total of approximately 3.798 billion gallons. The
fastest growing segment of the non-sparkling bottled water market 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
grew from a total of approximately 230 million gallons in 1992 to
approximately 750 million gallons in 1997 (a 26.7% annual compound growth
rate). Industry sources project this segment to reach 1.4 billion gallons
($2.3 billion) by the year 2001.
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 most developed market for bottled water is
Japan, with total 1996 consumption of approximately 172 million gallons -
almost twice the 1992 level. Bottled water is now commonly stocked in
convenience stores, mass merchandisers, kiosks and vending machines in Japan,
and is used in cooking, in addition to being drunk out of the bottle.
Imported waters accounted for 23% of the Japanese bottled water market in
1996 - up from 13% in 1992. The Company believes that imported bottled waters
will continue to garner a substantial share of the Japanese market in the
long-term. Most natural source water in Japan is soft; i.e., with a
relatively low mineral content. The Company believes that the comparatively
low mineral content of its water will enhance its ability to penetrate the
Japanese market.
THE COMPANY'S WATER SOURCE. The Company draws its water from a well at
the base of Mauna Loa mountain range in Kea'au on the Big Island of Hawaii
("Source Kea'au"). 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
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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 major 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
thousands of feet of porous lava rock and then collects in underground pools
and aquifers that flow into the ocean. This constant movement maintains the
purity of the source.
BOTTLING OPERATIONS. The Company operates its own bottling and
packaging facility in an 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 "Item 2. Description
of Property." 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 herein.
Source water 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 rinsing and filling lines. Bottles are fed onto an automated
conveyor system, labeled and then passed into the first stage of a two-stage
"clean" room, which is separately enclosed and pressurized to minimize
contamination during the filling process. In the first stage, the bottles
are vacuumed with an ionized air system and then rinsed with ozonated water
before entering the filling stage. 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 machine into cardboard cases, which are then placed onto pallets
for shipment. One 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 on site.
Finished goods not destined for immediate shipment are transported by truck
to a leased warehouse facility in Hilo on the Big Island. The Company
currently maintains approximately one month's supply in inventory at this
warehouse and small amounts at its executive offices/warehouse in Honolulu.
The Company is contemplating construction of a new warehouse facility at
Kea'au should circumstances warrant, in light of then existing production
levels and available funding. See "Item 2. Description of Property."
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. Sports
caps are also available on 1.0 liter bottles. The Company may in the future
extend its product line to include other sizes, including 24 ounce and one
gallon bottles for retail distribution and/or five gallon bottles for the
home and office delivery market. Any such extension
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would require a significant investment in additional plant and equipment.
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 Bottles Packaging, Inc. ("BPI"), a
California bottle supplier, pursuant to which BPI agreed to manufacture
bottles for the Company on site, using equipment owned by BPI but installed
at the Company's bottling facility. This on-site bottle manufacturing
operation enabled the Company to reduce its packaging costs, while at the
same time improving its quality control, inventory management and delivery
scheduling. The equipment installed by BPI, which has a maximum capacity of
approximately 18 million bottles annually, became fully operational in July
1996. The Company agreed to purchase all of its bottle requirements from
this source, subject to a minimum purchase requirement of $750,000 per year
during the three year term of the agreement. The Company failed to meet this
minimum purchase requirement during the first year.
On September 30, 1997, the Company acquired the equipment subject to the
Blow Molding Agreement for an aggregate of $1.2 million, payable in
installments over five years as follows:
(i) $375,000 paid on or prior to September 30, 1997;
(ii) $330,000, payable in monthly installments of $13,750 during the
first two years thereafter; and
(iii) the balance of $495,000, payable in three annual installments of
$165,000 thereafter, plus interest on the outstanding
balance at the annual rate of 5%.
In connection with this purchase, the parties entered into a mutual
release with respect to all obligations under the Blow Molding Agreement,
other than payment obligations of the Company with respect to invoices
outstanding as of the purchase date. The Company was released from any
obligation arising out of its failure to meet the minimum purchase
requirement during the first year of the Blow Molding Agreement as described
above. The Company believes that the purchase of this equipment will
significantly reduce its cost of bottles below what it would otherwise have
been under the Blow Molding Agreement.
DISTRIBUTION. The Company distributes its product primarily in Hawaii
and to a limited extent on the U.S. Mainland and in certain international
markets (currently Guam and the Middle East). A majority 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 and country clubs. Food service
distribution was the fastest growing segment of the Company's business in
1997. 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 exchanges in Hawaii.
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In Hawaii, the Company has appointed Paradise Beverages ("Paradise"),
one of Hawaii's largest beer wholesalers, as its 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 has entered into exclusive broker
agreements in Hawaii to support the sales efforts of the Company's
distributors. Sales in Hawaii accounted for approximately 78% of the
Company's revenue during 1997.
Sales to the U.S. Mainland accounted for approximately 8% of the
Company's revenue during 1997. California, the largest U.S. market,
accounted for approximately 3% of sales. The Company shipped its first
product into California in July 1995, concentrating initially on the Los
Angeles area. The Company later expanded its West Coast presence to a
limited extent, relying primarily on direct sales to specialty supermarket
chains such as Bristol Farms in Southern California and Raley's in the Bay
Area. The Company currently has distribution arrangements in the Seattle and
Santa Barbara areas. The Company has also made limited sales in Las Vegas
through an exclusive distributorship arrangement with Nevada Beverage Co.,
the Anheuser-Busch distributor in Southern Nevada. The Company has not had
the financial resources to support distribution of its product through the
major supermarket chains in California because of "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 if
its product gains market recognition through specialty retail channels, it
may then be able to access these major supermarket chains. However, the
Company's current strategy for the U.S. Mainland is directed toward narrower,
niche markets rather than mass distribution channels, which tend to be highly
competitive and price sensitive. See "Marketing" below.
In an effort to expand its presence on the U.S. Mainland, in December
1997, the Company entered into a distributorship agreement with William F.
Wright, a significant shareholder and officer of several distribution
companies operating in the Western United States. Pursuant to this agreement,
the Company granted Mr. Wright, or a new entity to be formed by him,
exclusive distribution rights with respect to the Company's product in most
states west of the Mississippi, subject to certain minimum purchase
requirements, ranging from 200,000 cases in 1998 to over 2.6 million cases in
2008. Currently, Mr. Wright is utilizing the services of Food For Health
Company, Inc., a health food and natural products distributor serving 14
Western states, in order to distribute the Company's product through health
and natural food stores. The Company has also recently entered into a
distribution arrangement with a distributor specializing in fitness clubs, in
order to further position the Company's product in the health and fitness
market.
In May 1996, the Company entered into a distributorship agreement with
Aloha Products, Ltd. ("Aloha"), pursuant to which the Company granted Aloha
exclusive distribution rights within a ten state territory in the
Southeastern United States, subject to certain minimum purchase requirements
in 1998 and thereafter. In November 1997, the Company negotiated the
termination of this agreement. Based upon Aloha's performance as of that
date, the Company concluded that Aloha was unlikely to satisfy the minimum
purchase requirements under the agreement and therefore decided to release
the territory in anticipation of a more favorable agreement with a different
distributor. Thereafter, the Company entered into negotiations with another
party concerning a distribution agreement covering this territory but did not
conclude an arrangement. The Company continues to seek a new distributor for
this territory but currently has no distribution arrangements in place
covering the Eastern portion of the United States.
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Internationally, the Company has been shipping limited quantities of
product into Guam and the Middle East since 1996, but is still seeking to
establish significant distribution in its primary overseas target markets,
the developed countries of Asia, such as Japan and Taiwan. The Company had
early targeted Japan because of its 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 various 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 halted. Thereafter, the Company entered into
negotiations with other Japanese distributors and/or brokers concerning the
sale of its product but to date has resumed only limited sales to Japan. The
Company has also shipped limited quantities of product to Hong Kong.
Primarily as a result of recent economic weakness, the Company believes that
certain Asian markets, especially Korea, are currently resistant to the
import of premium foreign waters. However, the Company believes that the long
term outlook for its product in Asia is excellent and continues to seek
opportunities to re-enter these markets.
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 principal 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 overseas markets are
often not significantly higher than those incurred by competitors for
shipping their product within their regional markets.
MARKETING. The Company's marketing program originally concentrated
on selling efforts by its distributors and brokers as well as attendance at
trade shows and outdoor events. Trade shows in Asia and the U.S. Mainland
have been particularly successful in establishing contacts with distributors
interested in carrying the Company's product. In Hawaii, the Company has
promoted its product through sales to airlines, hotels, country clubs and
other such customers which enhances the visibility of the product. The
Company has also completed a product video, which is used primarily in
presentations to distributors, but which was shown on in-room video in
Sheraton Hotels in Hawaii. A 30 second commercial has also been produced,
which is airing on local television.
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On the U.S. Mainland, substantial marketing and promotional expenditures
are typically required in order to obtain widespread distribution through the
largest retail outlets, such as supermarkets. Supermarkets, especially in
markets such as California, typically charge entry or "slotting fees" in
exchange for introducing new and untested products. Even after a successful
introduction, continuing expenditures for in-store promotions and coupon
programs are generally required in order to maintain shelf space for these
products. Such promotional programs often need to be supported by widespread
marketing campaigns (e.g. television, radio or print advertising) which can
be very costly. The Company believes that it lacks the financial resources
required to maintain such a mass marketing campaign. Accordingly, the
Company's marketing strategy on the U.S. Mainland is directed toward
narrower, specialized channels of distribution, such as specialty food stores,
health food stores and health and fitness clubs, rather than mass
distribution channels, such as major supermarket chains.
In support of this strategy, the Company recently entered into a
distribution agreement with William F. Wright, which it expects to facilitate
its entrance into the health food market. See "Distribution" above. In
addition, in December 1997, the Company entered into a Sponsorship Agreement
with Mad Dogg Athletics, Inc., the organizer of the aerobic bicycling
movement known as Spinning-Registered Trademark-, pursuant to which the
Company's product has been recognized as the "official water" of
Spinning-Registered Trademark-. This arrangement will enable the Company to
advertise its product at Spinning events held throughout the U.S. Mainland.
The Company anticipates that it may also enable the Company to generate
distribution and sales at hundreds of exercise facilities at which
Spinning-Registered Trademark- is practiced, thereby supporting the Company's
entree into the health and fitness market. Similarly, in January 1998, the
Company entered into a sponsorship agreement with Tanning Research
Laboratories, Inc., organizer of the Hawaiian Tropic-Registered Trademark-
Pageant, pursuant to which the Company's product was recognized as the
official bottled water of the Pageant. The Hawaiian Tropic-Registered
Trademark- Pageant is the largest beauty pageant system in the world and can
give the Company advertising exposure at over 1,700 pageant events each year
as well as rights to promote its product in conjunction with Hawaiian
Tropic-Registered Trademark- suntan oil.
The Company's marketing strategy for the U.S. Mainland is still in the
development stage, and there can be no assurance that the programs currently
being implemented will be successful. The Company expects to evaluate the
results of its marketing strategy on an ongoing basis and to adjust or
reorient the strategy as perceived necessary in light of results achieved.
The bottled water market on the U.S. Mainland is highly competitive, and
there can be no assurance that the Company will achieve significant
penetration in this market, either through its current or any future
marketing strategy.
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.
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The Company's bottling facility has an on-site laboratory, where samples
of its finished product are visually and chemically tested daily. In
addition, the Company's production line is subject to constant visual
inspection. The Company believes that it meets or exceeds all applicable
regulatory standards concerning the quality of its water.
The Company is also subject to regulation by the Food and Drug
Administration (the "FDA"), which regulates the Company's packaging and
labeling practices. The Company has met all FDA requirements for the labeling
of its water as "natural" and "bottled at the source." "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 chemicals and minerals have been removed by means of reverse osmosis
filtration. "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. The
Company's product has also been certified as Kosher by the Union of Orthodox
Jewish Congregations of America.
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" above.
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.
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 Hawaii, the Company competes primarily with Evian, Crystal Geyser,
Arrowhead and certain local brands, such as Menehune. All local bottlers,
except the Company, sell "purified" municipal water, not "natural"
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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 11 full-time employees at its executive
offices in Honolulu and one full-time employee on the Mainland. The Company
also has 15 employees at its bottling facility in Kea'au. 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has a bottling facility in Kea'au on the Big Island of
Hawaii, executive offices in Honolulu and a warehouse facility in Hilo on the
Big Island. The Company also stores limited amounts of finished goods
inventory in temporary storage facilities located in Los Angeles and Seattle.
All of these premises are occupied pursuant to lease arrangements.
The Company's bottling facility is located on approximately 14.5 acres
of land owned by Hawaii Brewery Development Co., Inc. ("HBDC"), a principal
stockholder of the Company owned by two of the Company's founders, which was
originally formed for the purpose of developing a beer brewing operation on
the Big Island of Hawaii. The property is located within an agricultural
zone, but has been granted a Special Use Permit for water extraction and
bottling operations. The facility itself consists of an 8,000 square foot
concrete structure built in 1943. The building has been retrofitted by the
Company for its current use, which includes the water bottling and packaging
line, office and laboratory space and storage space for raw materials and
supplies, as well as a limited amount of storage space for finished goods
inventory. The facility also houses the Company's on-site bottle
manufacturing equipment, which the Company purchased in September 1997. See
"Item 1. Description of Business--Bottling Operations."
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 (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 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). 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.
11
<PAGE>
The Company's headquarters are currently located in approximately 5,500
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 $4,000 per month. Effective February 1, 1998, the Company
entered into a lease agreement with respect to approximately 5,300 feet of
warehouse space in Hilo. This lease is for 12 months at $3,000 per month.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock has been quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq")
SmallCap Market under the symbol HNWC since the Company's initial public
offering on May 12, 1997. The following table sets forth the high and low
sales prices for the periods indicated as furnished by Nasdaq. These prices
reflect prices between dealers, without retail markups, markdowns or
commissions:
1997: HIGH LOW
---- ---
Second Quarter 5-1/4 3-7/8
Third Quarter 4-1/2 3-1/8
Fourth Quarter 3-1/2 2
The last sales price for the Company's Common Stock, as reported by Nasdaq
on March 20, 1998, was $2.25.
The Company has approximately 19 stockholders of record as of March 20,
1998 (which number does not include the number of stockholders whose shares
are held of record by a brokerage house or clearing agency, but does include
such brokerage house or clearing agency as one record holder).
12
<PAGE>
The Company has never paid any dividends on its Common Stock and does
not anticipate paying any such dividends in the foreseeable future. The
Company intends to retain any earnings it may generate in the foreseeable
future to finance the development and expansion of its business.
During the year ended December 31, 1997, the Company granted to certain
consultants, sales agents and employees stock options to purchase an
aggregate of 224,272 shares of Common Stock at an exercise price of $4.00 per
share. Of these options, an aggregate of 99,738 were forfeited unexercised
as of year end. All of the foregoing transactions were exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof and the rules and regulations thereunder.
(b) The Company completed its initial public offering (the "IPO") in
May 1997, raising approximately $7,600,000, net of underwriting discounts and
expenses of the offering. Out of these net proceeds, as previously reported,
the Company repaid approximately $628,000 of indebtedness to affiliates and
an additional $1,804,000 to unaffiliated parties. An additional $115,000 was
used to pay deferred compensation and consulting fees.
Since the completion of the IPO, the Company purchased approximately
$560,000 in additional machinery and equipment for use at its bottling
facility, of which approximately $465,000 had been paid for in cash as of
December 31, 1997. All of these purchases were made from unaffiliated
parties. In addition, as previously reported, on September 30, 1997, the
Company purchased the bottle making equipment installed at its bottling
facility from Bottles Packaging, Inc. ("BPI") for an aggregate of $1,200,000,
of which $375,000 was paid in cash on or before the closing and the balance
($825,000) was paid through the issuance of a promissory note, payable over
five years. As of December 31, 1997, aggregate payments of $41,250 had been
made pursuant to this note. Nathan Keller, a director of the Company at the
time of this transaction, is the chief financial officer of BPI.
The Company sustained significant losses subsequent to the IPO, which
were funded by the proceeds of the IPO. As of December 31, 1997, the Company
had approximately $2,471,000 in cash proceeds remaining from the IPO. As of
such date, all of these proceeds were, and continue to be, invested in money
market instruments.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION MAY BE DEEMED TO CONTAIN CERTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, AS INDICATED BY THE USE OF TERMS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ESTIMATE," "ANTICIPATE," "INTEND" OR
OTHER SIMILAR TERMS OR THE NEGATIVE OF SUCH TERMS. FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN MAY INCLUDE, WITHOUT LIMITATION, STATEMENTS
CONCERNING: (i) ANTICIPATED CHANGES IN REVENUE, COST OF MATERIALS, EXPENSE
ITEMS, INCOME OR LOSS, EARNINGS OR LOSS PER SHARE, CAPITAL EXPENDITURES,
CAPITAL STRUCTURE AND OTHER FINANCIAL ITEMS; (ii) PLANS OR OBJECTIVES OF THE
COMPANY WITH RESPECT TO THE COMPANY'S GROWTH STRATEGY, INTRODUCTION OF NEW
PRODUCTS, AND PROPOSED ACQUISITIONS OF ASSETS OR BUSINESSES; (iii) POSSIBLE
ACTIONS BY CUSTOMERS, SUPPLIERS, COMPETITORS OR REGULATORY AUTHORITIES; AND
(iv) ASSUMPTIONS UNDERLYING THE FOREGOING. THESE FORWARD-LOOKING STATEMENTS
ARE BASED UPON THE COMPANY'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER
OF RISKS AND UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, RISKS AND
UNCERTAINTIES RELATING TO: (i) THE MARKET FOR THE COMPANY'S PRODUCTS; (ii)
THE MAINTENANCE AND DEVELOPMENT OF THE COMPANY'S DISTRIBUTOR NETWORK; (iii)
POSSIBLE CHANGES IN THE COMPANY'S BUSINESS STRATEGY OR THE EXECUTION OF ITS
EXISTING STRATEGY; (iv) THE COMPANY'S COST OF MATERIALS OR SOURCES OF SUPPLY;
(v) THE COMPANY'S NEED FOR ADDITIONAL CAPITAL OR, IF NEEDED, THE AVAILABILITY
OF ADDITIONAL CAPITAL ON ACCEPTABLE TERMS AND CONDITIONS; (vi) THE COMPANY'S
ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL; (vii) REGULATORY ISSUES IN THE
U.S. OR ABROAD; AND (viii) THE COMPETITIVE ENVIRONMENT IN THE COMPANY'S
INDUSTRY. MANY OF THESE RISKS AND UNCERTAINTIES ARE BEYOND THE ABILITY OF
THE COMPANY TO PREDICT OR CONTROL. SHOULD ANY UNANTICIPATED CHANGES OCCUR IN
THE COMPANY'S BUSINESS, OR SHOULD MANAGEMENT'S OPERATING ASSUMPTIONS PROVE
INCORRECT, THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Net Sales. Net Sales increased approximately 21% to approximately
$1,049,000 for the fiscal year ended December 31, 1997 ("1997") from
approximately $866,000 for the fiscal year ended December 31, 1996 ("1996").
The increase in net revenues in 1997 was due primarily to unit sales growth
to approximately 151,000 cases in 1997 from approximately 115,000 cases in
1996. The average sales price per case decreased approximately 8% in 1997
compared to 1996, due to discounting to promote sales. Sales in the Hawaiian
market accounted for approximately 78% of sales in 1997 compared to
approximately 81% in 1996. International sales accounted for approximately
14% of sales in 1997 compared to approximately 17% in 1996. Sales to the U.S.
Mainland accounted for approximately 8% of sales in 1997 compared to
approximately 2% in 1996. The Company's expansion strategy emphasizes growth
in international sales as well as growth on the U.S. Mainland. In December
1997, the Company entered into a distributorship agreement with William F.
Wright, a significant shareholder and officer of several distribution
companies operating in the Western United States. Pursuant to this agreement,
the Company granted Mr. Wright, or a new entity to be formed by him,
exclusive distribution rights with respect to the Company's product in most
states west of the Mississippi, subject to certain minimum purchase
requirements, ranging from 200,000 cases in 1998 to over 2.6 million cases in
2008. Currently, Mr. Wright is utilizing the services of Food For Health
Company, Inc., a health food and natural products distributor servicing 14
Western states, in order to distribute the Company's product through health
and natural food stores. The Company has also recently entered into a
distribution arrangement with a distributor specializing in fitness clubs, in
order to further position the Company's product in the health and fitness
market. In addition, the Company continues to pursue opportunities to expand
international sales, especially to developed Asian markets, such as Taiwan
and Japan. The Company currently has no significant sales to these markets.
However, the Company believes that the long term outlook for its product in
Asia is excellent and continues to seek opportunities in these markets.
Cost of Sales. The Company's cost of sales increased approximately
36% to approximately $1,233,000 in 1997 from approximately $908,000 in
1996 primarily due to unit sales growth. Increased manufacturing fixed
overhead expenses also added to the increase, primarily due to increased
payroll and depreciation expense arising out of the purchase of the bottling
equipment described below. The primary component in Cost of
Sales is the cost of finished bottles. In July 1996, the Company began
purchasing all of its bottle requirements pursuant to a Blow Molding
Agreement with Bottles Packaging, Inc. ("BPI"), a California bottle supplier.
Pursuant to this agreement, BPI agreed to manufacture bottles for the Company
on site, using equipment owned by BPI but installed at the Company's bottling
facility. In September 1997, the Company purchased this equipment and hired the
BPI employees who were operating it. The Company believes that the purchase
of this equipment will enable it to reduce the cost of its bottles once
production reaches levels sufficient to enable economies of scale to be
realized. Currently, however, the Company's bottling facility is operating at
only 20% of capacity. The Company anticipates continued excess capacity until
such time, if any, as sales increase significantly. See Note 3 to the
Financial Statements.
Expenses. Selling and marketing expenses increased approximately 202%
to approximately $801,000 in 1997 from approximately $265,000 in 1996,
primarily as a result of an increase in consulting fees, advertising expenses
and promotional events. The Company utilized significant consulting services
in 1997 in the development of its marketing and distribution strategy. The
Company has reduced or terminated most of these consulting arrangements,
eliminating certain services and converting some consultants to employees at
lower salaries. Accordingly, the Company anticipates reduced consulting
expenses in future periods. However, the Company expects advertising and
promotional expenses to increase in an effort to penetrate the U.S. Mainland
and overseas markets. General and administrative expenses increased
approximately 60% to approximately $1,013,000 in 1997 from approximately
$634,000 in 1996. The majority of this increase was due to the addition of
administrative personnel and salary increases at the Company's headquarters
and from increases in travel, legal and accounting expenses
resulting from the Company's transition to public company status in May 1997.
Other Income (Expense). Other Income (Expense) increased to
approximately $(315,000) in 1997 from approximately $(247,000) in 1996. This
increase is attributable to an increase in interest expense associated with
the Bridge Financing described below, including amortization of deferred loan
costs and original issue discount, offset by interest income earned on cash
equivalents invested subsequent to the Company's initial public offering (the
"IPO"). All of the indebtedness incurred in connection with the Bridge
Financing as well as all other indebtedness of the Company (other than trade
payables) was repaid out of the proceeds of the IPO. The Company currently
has no long-term indebtedness, other than the promissory note to BPI (see
"Liquidity and Capital Resources" below) and minor amounts due pursuant to
capital equipment leases.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $2,581,570, or $(.85) per share, in 1997 compared to a
net loss of $1,187,751, or $(.74) per share, in 1996. Average shares
outstanding increased to 3,038,664 in 1997 from 1,599,212 in 1996. The
Company expects to continue to generate losses until such time, if any, as it
achieves significantly higher sales levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company was initially dependent upon equity investments and loans as
well as personal guarantees from its affiliates in order to meet its capital
requirements. In March 1995, the Company also established a $300,000 credit
line with First Hawaiian Bank ("FHB"), Lihue Branch. This line of credit
expired on March 31,1996 and was not renewed. Outstanding borrowings remained
at the maximum level until the line was repaid in full in October 1996. In
addition, in May 1996, the Company obtained a $100,000 subordinated,
unsecured loan from an unrelated private investor. In connection with such
loan, the Company issued to the investor a warrant to purchase 24,351 shares
of Common Stock at an exercise price of $.00009 per share.
The Company consummated a Bridge Financing on October 10, 1996. See Note
4a to the Financial Statements. The Company used the net proceeds of
approximately $1,131,000: (i) to repay all borrowings from FHB in full
(approximately $300,000); (ii) to repay a portion of the indebtedness to an
affiliate in the amount of approximately $62,000; and (iii) to pay fees and
expenses in connection with the IPO (described below). The balance was used
for working capital and general corporate purposes. Due to continuing losses
from operations, these proceeds were exhausted during the first quarter of
1997. As a result, in February and March 1997, the Company borrowed an
aggregate of $75,000 from three stockholders, bearing interest at 12 percent
per annum. In addition, in April 1997, the Underwriter of the IPO loaned the
Company $100,000, bearing interest at 10% per annum, to enable the Company to
meet its working capital requirements pending the completion of the IPO.
In May 1997, the Company completed an IPO consisting of 2,300,000 Units
(including 300,000 Units subject to the Underwriter's over-allotment option)
at $4.00 per Unit, yielding aggregate net proceeds of approximately
$7,600,000, net of underwriting discounts and expenses of the offering. Each
Unit consisted of one share of Common Stock and one Redeemable Common Stock
Purchase Warrant. Of the net proceeds, the Company used (i) approximately
$1,591,000 to repay the Bridge Notes (including all accrued interest) in
full; (ii) approximately $628,000 to repay all of the Company's outstanding
indebtedness to stockholders or their affiliates (including accrued
interest), including an aggregate of approximately $40,000 of indebtedness
(including accrued interest) incurred in connection with the conversion of
the Company's previously outstanding Convertible Preferred Stock; (iii)
approximately $213,000 to repay all of the Company's outstanding indebtedness
(including accrued interest) to unaffiliated parties (including the
Underwriter); and (iv) approximately $115,000 to pay deferred compensation
and consulting fees. See Note 2 to the Financial Statements. As a result, all
outstanding borrowings of the Company (other than accounts payable and
capital lease obligations), were repaid in full, including all outstanding
borrowings from stockholders or their affiliates. It is not currently
anticipated that affiliates of the Company will lend or invest any additional
funds to or in the Company or guarantee any additional borrowings of the
Company in the future. The Company's cash position increased from
approximately nil immediately prior to the IPO to approximately $5.05 million
immediately thereafter. Due to continuing losses and capital expenditures,
this cash balance was reduced to approximately $2.47 million at December 31,
1997. The Company believes that it has adequate cash on hand to fund its
operations for at least the next 12 months. However, the Company does not
currently anticipate achieving profitability within this period. Therefore,
the Company will need to raise additional capital or improve its performance
more rapidly than expected in order to sustain its operations. The Company is
currently negotiating with certain sources concerning the investment of
additional capital. However, there can be no assurance that additional
capital will become available to the Company on acceptable terms. The
Company does not anticipate obtaining bank financing at this time.
The Company financed most of its original equipment purchases through a
capital lease agreement with First Hawaiian Leasing, Inc., Honolulu, Hawaii,
entered into in March 1995. This agreement has a term of five years and
provides for up to $200,000 in equipment purchases. The depreciated cost of
equipment purchased under this agreement was approximately $112,000 at
December 31, 1997. The current portion of the lease liability was
approximately $42,000 at that date. The Company's obligations under this lease
agreement are personally guaranteed by certain directors and an affiliate of
the Company.
The Company had cumulative capital expenditures of approximately $66,000
in 1996 and approximately $840,000 in 1997, including the initial cash
payment on the purchase of the bottling equipment described below. In
September, 1997, the Company purchased the bottling equipment subject to the
Blow Molding Agreement for $1.2 million, $375,000 of which was paid at or
prior to the closing and the balance of which ($825,000) was paid through the
issuance of a secured promissory note, payable over five years. Pursuant to
this note, during the first two years, the Company is required to make
monthly payments of $13,750 (including principal and interest). The remaining
$495,000 will be payable in annual principal installments payments of
$165,000, plus 5 percent per annum on the unpaid principal balance. This note
was originally recorded net of a discount of $222,985.
The Company's bottling facility is currently operating at only
approximately 20% capacity. Therefore, the Company can increase output
significantly without additional investment in new equipment. However, the
Company is currently contemplating capital expenditures of at least $200,000
in 1998 in order to enhance the quality and efficiency of its operations.
Additional improvements not considered essential to the Company's current
operations may be implemented if and when sufficient funds become available.
The Company is currently considering extending its product line by entering
the home/office market, either independently or through the acquisition of an
existing bottler. Any such extension would require substantial additional
capital investment.
Net operating loss carryforwards available to offset future taxable
income were approximately $4.5 million as of December 31, 1997. The Company
is subject to Internal Revenue Code Section 382, which limits the Company's
ability to utilize net operating losses generated prior to the close of the
IPO (approximately $2.9 million). The annual net operating loss limitation
under Section 382 is approximately $361,000.
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.
CURRENCY FLUCTUATIONS
The Company is not directly affected by currency fluctuations in overseas
markets, since all of the Company's sales are quoted in U.S. dollars.
However, currency fluctuations can adversely affect the demand for the
Company's product in foreign markets by increasing the price of the product
in local currency.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements required by this Item are attached hereto,
commencing on page F-2.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
13
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this Item is incorporated herein by reference
to the Company's Definitive Proxy Statement (the "Proxy Statement"), to be
filed with the Securities and Exchange Commission (the "Commission") pursuant
to Regulation 14A in connection with the Company's 1998 Annual Meeting of
Stockholders, under the headings "Election of Directors" and "Management."
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by
reference to the Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Proxy Statement under the heading "Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation, as amended, of the Registrant
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form SB-2 (File No. 333-18289))
(the "Form SB-2")
3.2 By-Laws, as amended, of the Registrant
4.1 Specimen Stock Certificate for the Registrant's Common Stock
(Incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10Q SB for the quarter ended
June 30, 1997 (the "June 10-Q"))
4.2 Warrant Agreement between the Registrant and Continental Stock
Transfer & Trust Company, as Warrant Agent (Incorporated by
reference to Exhibit 4.2 to the June 10-Q)
4.3 Specimen Public Warrant Certificate (Incorporated by reference
to Exhibit 4.3 to the June 10-Q)
4.4 Underwriter's Warrant Agreement between the Registrant and
Joseph Stevens & Company, Inc. (Incorporated by reference
to Exhibit 4.4 to the June 10-Q)
4.5 Underwriter's Warrant Certificate (Incorporated by reference to
Exhibit 4.5 to the June 10-Q)
4.6 Form of Bridge Warrant (Incorporated by reference to
Exhibit 4.5 to the Form SB-2)
4.7 Form of Lock-Up Agreement between Joseph Stevens & Company, Inc.
and each of the Selling Securityholders registering securities
pursuant to the Form SB-2 (Incorporated by reference to
Exhibit 4.6 to the Form SB-2)
4.8 Form of Lock-Up Agreement between Joseph Stevens & Company,
Inc., and certain officers, directors and stockholders of the
Registrant (Incorporated by reference to Exhibit 4.7 to the
June 10-Q)
10.1 Lease Agreement dated October 3, 1994, as amended, between the
Registrant as Lessee and Hawaii Brewery Development Co., Inc.
as Lessor (Incorporated by reference to Exhibit 10.1 to the
Form SB-2)
10.2 Blow Molding Agreement dated December 1, 1995, between the
Registrant and Bottles Packaging, Inc. ("BPI") (Incorporated by
reference to Exhibit 10.2 to the Form SB-2)
10.3 Financing Agreement dated March 31, 1995, between the Registrant
and First Hawaiian Bank (Incorporated by reference to Exhibit
10.3 to the Form SB-2)
10.4 Master Lease Agreement No. A2500, dated December 8, 1994, between
the Registrant and First Hawaiian Leasing and related agreements
(Incorporated by reference to Exhibit 10.4 to the Form SB-2)
10.5 Employment Agreement, dated October 10, 1996, between the
Registrant and Marcus Bender (Incorporated by reference to
Exhibit 10.5 to the Form SB-2)
10.6 Stock Option Agreement, dated October 10, 1996, between the
Registrant and Marcus Bender (Incorporated by reference to
Exhibit 10.6 to the Form SB-2)
10.7 Stock Option Agreement, dated September 17, 1997, between the
Registrant and David K. Laeha
10.8 Form of Bridge Note (Incorporated by reference to Exhibit 10.8
to the Form SB-2)
10.9 Form of Promissory Note evidencing an aggregate of $407,715 in
principal amount of indebtedness of the Registrant to certain of
its affiliates (Incorporated by reference to Exhibit 10.9 to
the Form SB-2)
10.10 Promissory Note dated May 24, 1995, in the original principal
amount of $100,000 payable by the Registrant to Inter Island
Petroleum, Inc. (Incorporated by reference to Exhibit 10.10 to
Form SB-2)
10.11 Letter Agreement dated August 1, 1996, between the Registrant and
com.com Inc. (Incorporated by reference to Exhibit 10.11 to the
Form SB-2)
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 (Incorporated by reference to Exhibit 10.12 to
the Form SB-2)
10.13 Promissory Note dated April 15, 1997, in the original principal
amount of $100,000 payable by the Registrant to
Joseph Stevens & Company, Inc. (Incorporated by reference to
Exhibit 10.13 to the Form SB-2)
10.14 Form of Cancellation Agreement between the Registrant and certain
holders of an aggregate of 106,500 Bridge Warrants (Incorporated
by reference to Exhibit 10.14 to the Form SB-2)
10.15 Underwriting Agreement between the Registrant and Joseph
Stevens & Company, Inc. (Incorporated by reference to
Exhibit 10.1 to the June 10-Q)
10.16 Financial Advisory and Consulting Agreement between the
Registrant and Joseph Stevens & Company, Inc. (Incorporated by
reference to Exhibit 10.2 to the June 10-Q)
10.17 Asset Purchase Agreement between the Registrant and BPI
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K, dated October 7, 1997
(the "Form 8-K"))
10.18 Bill of Sale between the Registrant and BPI evidencing the
transfer of assets pursuant to the Asset Purchase Agreement
(Incorporated by reference to Exhibit 10.2 to the Form 8-K)
10.19 Promissory Note evidencing an aggregate of $825,000 in
indebtedness of the Registrant to BPI in connection with the
Asset Purchase Agreement (Incorporated by reference to Exhibit
10.3 to the Form 8-K)
10.20 Security Agreement between the registrant and BPI securing the
obligations of the Registrant to BPI under the Promissory Note
(Incorporated by reference to Exhibit 10.4 to the Form 8-K)
21 Subsidiaries -- None
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K with the Commission on October 7,
1997, reporting the purchase of certain bottling equipment in response to
Item 2 thereof.
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HAWAIIAN NATURAL WATER COMPANY, INC.
(Registrant)
March 26, 1998 By: /s/ MARCUS BENDER
-----------------------------------
Marcus Bender
President & Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ MARCUS BENDER March 26, 1998
------------------------
Marcus Bender
Chief Executive Officer
and Director
/s/ DAVID LAEHA March 26, 1998
------------------------
David Laeha
Chief Financial Officer
/s/ BRIAN BARBATA March 26, 1998
------------------------
Brian Barbata
Director
/s/ JOHN MAYO March 26, 1998
------------------------
John Mayo
Director
/s/ MICHAEL CHAGAMI March 26, 1998
------------------------
Michael Chagami
Director
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. F-2
Balance Sheet - December 31, 1997......................................... F-3
Statements of Operations For the Years Ended
December 31, 1996 and 1997.............................................. F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996 and 1997.............................................. F-6
Statements of Cash Flows for the Years Ended
December 31, 1996 and 1997.............................................. F-7
Notes to Financial Statements - December 31, 1997......................... F-9
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, 1997, and the
related statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The Company has incurred significant losses since inception. Management
expects that the Company will continue to incur losses until the Company
achieves significantly improved levels of sales. The Company is continuing to
develop its strategic plan and related marketing strategies which would allow
for the improvement of sales, profitability and cash flow. Additional
financing may be required. See Note 1 for management's plans to improve
sales and/or obtain additional financing.
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, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Honolulu, Hawaii
March 20, 1998
F-2
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
------------------------------------
BALANCE SHEET - DECEMBER 31, 1997
---------------------------------
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,471,362
Trade accounts receivable, net of allowance for
doubtful accounts of $7,225 135,846
Inventories 330,122
Other current assets 105,466
----------
Total current assets 3,042,796
----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $208,274 1,785,851
----------
Total assets $4,828,647
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
------------------------------------
BALANCE SHEET - DECEMBER 31, 1997
---------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 298,140
Accrued professional fees 75,000
Accrued vacation 37,211
Accrued other 18,555
Note payable to related party 80,022
Capital lease obligation--current portion 42,230
----------
Total current liabilities 551,158
----------
NON-CURRENT LIABILITIES:
Note payable to related party 504,670
Note payable 14,242
Capital lease obligation--net of current portion 48,588
----------
Total non-current liabilities 567,500
----------
Total liabilities 1,118,658
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value:
Authorized--5,000,000 shares
Issued or outstanding--no shares --
Common stock, no par value:
Authorized--20,000,000 shares
Issued and outstanding--3,899,212 shares 6,338,728
Common stock warrants and options:
Issued and outstanding--3,170,310 2,000,546
Accumulated deficit (4,629,285)
----------
Total stockholders' equity 3,709,989
----------
Total liabilities and stockholders' equity $4,828,647
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
------------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 1,048,806 $ 866,060
COST OF SALES 1,232,502 907,557
----------- -----------
Gross margin (183,696) (41,497)
EXPENSES:
General and administrative 1,013,264 634,194
Selling and marketing 801,035 264,617
----------- -----------
1,814,299 898,811
----------- -----------
OTHER INCOME (EXPENSE):
Interest Income 130,014 722
Interest expense (444,779) (248,165)
----------- -----------
(314,765) (247,443)
----------- -----------
Net loss before extraordinary item (2,312,760) (1,187,751)
EXTRAORDINARY ITEM--
Loss on extinguishment of debt (268,810) --
----------- -----------
NET LOSS $(2,581,570) $(1,187,751)
=========== ===========
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (0.76) $ (0.74)
EXTRAORDINARY ITEM (0.09) --
----------- -----------
BASIC AND DILUTED LOSS PER SHARE $ (0.85) $ (0.74)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
Common Stock Warrants
and
Common Stock Options Preferred Stock
--------------------- --------------------- -------------------- Total
Number of Number of Number of Accumulated Stockholders
Shares Amount Shares Amount Shares Amount Deficit Equity (Deficit)
--------- ------ --------- -------- --------- ------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1995 1,210,212 $ 208,959 - $ - 389,000 $ 233,334 $ (843,857) $ (401,564)
Issuance of Warrant -
May 1996 - - 24,351 - - - - -
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,
December 31, 1996 1,599,212 442,293 774,351 187,500 - - (2,047,715) (1,417,922)
Cancellation of bridge
warrants, April 15, 1997 - 26,625 (106,500) (26,625) - - - -
Sale of shares of stock
and stock warrants,
May 15, 1997 2,000,000 4,947,661 2,000,000 1,462,641 - - - 6,410,302
Issuance of underwriter
common stock warrants,
May 15, 1997 - - 200,000 146,264 - - - 146,264
Sale of stock and
stock warrants,
May 15, 1997 300,000 922,149 300,000 219,396 - - - 1,141,545
Issuance of stock options
to consultants - - 20,503 35,441 - 35,441
Forfeitures of stock
options - - (18,044) (24,071) - (24,071)
Net loss - - - - - - (2,581,570) (2,581,570)
--------- ---------- --------- ---------- ------- -------- ----------- -----------
BALANCE,
December 31, 1997 3,899,212 $6,338,728 3,170,310 $2,000,546 - - $(4,629,285) $ 3,709,989
========= ========== ========= ========== ======= ======== ============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,581,570) $(1,187,751)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 97,066 63,167
Issuance of options to consultants 11,370 --
Amortization of debt discount 94,259 41,667
Amortization of deferred charges 172,028 82,056
Extraordinary loss on extinguishment of debt 268,810 --
Net (increase) decrease in current assets (350,924) 43,370
Net decrease in current liabilities (91,694) (1,560)
----------- -----------
Net cash used in operating activities (2,380,655) (959,051)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of property and equipment, net (839,549) (65,814)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering of
common stock 7,942,312 --
Payments for services related to the initial
public offering (168,364) --
Proceeds from notes payable 189,242 1,837,294
Repayments of notes payable (2,326,037) (450,272)
Increase in deferred charges - (238,477)
Repayment of principal on capital leases (34,922) (34,345)
----------- -----------
Net cash provided by
financing activities 5,602,231 1,114,200
----------- -----------
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C>
NET INCREASE IN CASH AND
CASH EQUIVALENTS $ 2,382,027 $ 89,335
CASH AND CASH EQUIVALENTS, beginning of period 89,335 --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,471,362 $ 89,335
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of bottlemaking equipment with
seller note payable $ 825,000 $ --
=========== ===========
Discount on seller note payable $ (222,984) --
=========== ===========
INTEREST PAID $ 180,000 $ 125,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1997
-----------------
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 Hawaii, United States mainland and foreign markets. The Company's
initial product introduction occurred in the first quarter of 1995.
As of December 31, 1997, the Company was actively involved in its
operations.
As shown in the accompanying financial statements, the Company has incurred
significant losses since inception. Management expects that the Company
will continue to incur additional losses until the Company achieves
significant levels of sales. The Company is continuing to develop its
strategic plan and related marketing strategies, which would allow for the
improvement of sales and cash flow. However, in order for the Company to
achieve profitability, it will need to improve revenues and/or obtain
additional financing.
b. BASIS OF ACCOUNTING
The Company's accounting policies are in accordance with generally accepted
accounting principles in the United States.
c. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include savings accounts and investments in a
money market account with original maturities less than 90 days.
d. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
As of December 31, 1997, inventories were comprised of the following:
Raw materials $230,300
Finished goods 99,822
--------
$330,122
========
F-9
<PAGE>
Raw materials inventory consists of PET "pre-forms", caps, labels and various
packaging and shipping materials. Finished goods inventory includes
materials and conversion costs.
e. 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 and repairs are expensed as incurred. Depreciation and
amortization are provided by the straight-line method over the following
estimated useful lives:
Leasehold improvements The shorter of the useful
life or the lease term
Machinery and equipment and
assets under capital lease 7-15 years
Property and equipment is summarized as follows:
Machinery and equipment $1,471,430
Leasehold improvements 328,469
Assets under capital lease 194,226
----------
1,994,125
Less--Accumulated depreciation
and amortization (208,274)
----------
$1,785,851
==========
f. 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.
g. ADVERTISING
The Company charges the cost of advertising to expense as incurred. The
Company incurred approximately $123,000 and $34,000 of advertising expense
during the years ended December 31, 1997 and 1996, respectively.
F-10
<PAGE>
h. STOCK-BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based compensation
plans, including all arrangements by which employees receive shares of
stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock. This statement also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for based on the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably determinable. The Company
accounts for the issuance of equity instruments to employees under APB
Opinion No. 25. (See Note 6).
i. LOSS 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. Under the new standard, the
Company's basic and diluted loss per share are the same for both 1997 and
1996 in that any conversion of stock options and warrants would have been
anti-dilutive.
j. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of fair
value information for certain financial instruments. The carrying amounts
for trade receivables and payables are considered to be their fair values.
The differences between the carrying values and the estimated fair values
of the Company's other financial instruments at December 31, 1997 were
not material.
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 7).
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.
F-11
<PAGE>
m. BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share is based on the weighted average number
of common shares issued and outstanding during the period of 3,038,664 and
1,599,212 for 1997 and 1996, respectively. Basic and diluted loss per
share and the weighted average number of common 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 effected in October 1996.
n. RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform to their 1997
presentation.
o. GROSS MARGIN
The Company's plant currently has a maximum production capacity of
approximately 800,000 cases per year. The Company is currently operating its
plant at less than 20 percent of this capacity. Since a significant portion
of the Company's cost of sales includes certain fixed production costs, the
Company anticipates negative gross margins to continue until such time, if
any, as production and sales reach levels sufficient to absorb these
fixed costs. As more fully discussed in Note 3, on September 30, 1997,
the Company acquired certain bottlemaking equipment (and personnel) which
resulted in an increase in the Company's fixed production costs,
primarily consisting of payroll costs and depreciation expense.
2. INITIAL PUBLIC OFFERING AND USE OF PROCEEDS
In May 1997, the Company completed an initial public offering (IPO) of
2,300,000 Units (including 300,000 Units subject to the underwriter's
over-allotment option) at $4.00 per Unit. Each unit consisted of one share
of common stock and one common stock warrant ("Public Warrant"). Each Public
Warrant entitles the holder to purchase one share of the Company's common
stock at an exercise price of $6 per share (subject to adjustment) for a
period of five years.
The IPO resulted in aggregate net proceeds to the Company of approximately
$7,600,000, net of underwriting discounts and expenses of the offering. The
Company used the IPO proceeds as follows: (I) repaid $1,591,000 of principal
and accrued interest on a 10% Bridge Loan (see Note 4), (II) repaid $628,000
of principal and accrued interest on 8% to 12% notes payable to related
parties, (III) repaid $101,000 of principal and accrued interest on a 10%
note payable to the underwriter of the IPO, (IV) repaid $112,000 of principal
and accrued interest on a 12% note payable to an unaffiliated investor, (V)
paid approximately $115,000 of deferred compensation and consulting fees, and
(VI) used $375,000 as an initial payment on the purchase of a bottle making
machine (see Note 3). Of the remaining IPO proceeds, approximately $2.47
million was held as cash and cash equivalents at December 31,1997.
Approximately $2.2 million has been used for capital improvements and general
corporate and working capital purposes through December 31, 1997.
Upon the closing of the IPO, the Company issued to the Underwriter (for
aggregate consideration of $20), five year warrants to purchase 200,000
shares of the Company's common stock. Each warrant may be exercised at any
time during a period of four years commencing on the first anniversary of the
date of issuance, to purchase one share of common stock at an exercise price
of $6.60 (165% of the IPO price per unit), subject to adjustment in certain
circumstances.
F-12
<PAGE>
3. BLOW MOLDING AGREEMENT AND PURCHASE OF BOTTLING EQUIPMENT
Prior to July 1996, the Company imported all of its bottles from a
single-source supplier. Subsequent to July 1996, the Company began to
purchase bottles from Bottles Packaging, Inc. ("BPI") which operated a
bottle-making machine at the Company's bottling facility. An officer of BPI
is a director of the Company. Pursuant to a Blow Molding Agreement with BPI,
the Company committed to purchase a minimum of $750,000 of bottles per year,
as defined, for three years. During the first year of the agreement ended
June 30, 1997, the Company did not meet the minimum purchase commitment. The
Company purchased approximately $400,000 and $200,000 of bottles from BPI in
the years ended December 31, 1997 and 1996, respectively.
On September 30, 1997, the Company purchased the bottling equipment subject
to the Blow Molding Agreement for $1.2 million, of which $375,000 was paid at
the closing, and the remaining $825,000 was paid through the issuance of a
note payable to BPI (see Note 4). The bottling equipment was recorded at the
discounted present value of the payments provided for in the purchase
agreement (approximately $977,000) and is being depreciated over the estimated
remaining useful life of 15 years.
In addition, the parties entered into a mutual release with respect to all
obligations under the Blow Molding Agreement, other than payment obligations
of the Company with respect to invoices outstanding at the date of the
closing. The Company was released from any obligation arising out of its
failure to meet the minimum purchase requirement during the first year of the
Blow Molding Agreement.
4. NOTES PAYABLE
a. BRIDGE NOTES PAYABLE
On October 10, 1996, the Company completed a private bridge financing (the
"Bridge Financing"), consisting of (1) an aggregate of $1.5 million of
unsecured promissory notes ("Bridge Notes") of the Company bearing interest
at the rate of 10 percent per annum and (2) an aggregate of 750,000
warrants ("Bridge Warrants") of the Company, each Bridge Warrant entitling
the holder to purchase one share of common stock, at an exercise price of
$1.50 per share, subject to adjustment under certain circumstances, during
the thirty-six month period commencing October 10, 1997. In April 1997,
certain investors who participated in the Bridge Financing agreed to cancel
an aggregate of 106,500 Bridge Warrants. Upon completion of the IPO in May
1997, the remaining 643,500 Bridge Warrants were converted into a like
number of Public Warrants, and the Bridge Notes and accrued interest were
repaid in full. The Bridge Warrants were valued by the Company at
approximately $188,000 in the aggregate, and this amount was recorded as
original issue discount ("OID") in October 1996. The Company amortized the
OID to interest expense and recorded approximately $112,000 of amortization
expense from inception through May 1997. In May 1997, upon the early
repayment of the Bridge Loan, the Company wrote off the remaining $76,000
as an Extraordinary Item - Loss on Extinquishment of Debt.
Direct costs of the Bridge Financing totaled approximately $440,000 and
were reflected as Deferred Charges and Other, net of accumulated
amortization as of December 31, 1996. The Company amortized these direct
costs to interest expense and recorded approximately $247,000 from
inception through May 1997. In May 1997, upon the early repayment of the
Bridge Loan, the Company wrote off the remaining $193,000 as an
Extraordinary Item - Loss on Extinquishment of Debt.
F-13
<PAGE>
b. NOTE PAYABLE TO RELATED PARTY
As discussed in Note 3, the Company acquired the bottle making equipment
used in its bottling operations from BPI. The consideration for the
equipment was an aggregate of $1.2 million, a portion of which was paid
through the issuance of a promissory note in the original principal amount
of $825,000, payable in installments as follows:
(i) $13,750 per month (an aggregate of $330,000) during the two years
following the close of the acquisition with no interest; and
(ii) the balance of $495,000, payable in three annual installments of
$165,000 plus interest on the outstanding balance at an annual
rate of 5%.
The Company has discounted this note payable using the Company's
estimated weighted average cost of capital of 12% and will amortize the
resulting discount to interest expense using the effective interest method
over the term of the loan.
The following summarizes the note payable to related party as of December 31,
1997:
Note payable to related party $ 783,750
Less: unamortized discount (199,058)
--------
Note payable to related party, net 584,692
Less--Current portion (80,022)
--------
Non-current portion $504,670
========
Maturities of note payable to related party, net of discount at December 31,
1997 are as follows:
1998 $ 80,022
1999 64,352
2000 132,292
2001 143,836
2002 164,190
--------
$584,692
========
5. CONSULTING ARRANGEMENTS
During 1997 and 1996, the Company hired various consultants to perform sales,
marketing and other functions. The Company recognized consulting expenses of
approximately $331,000 and $222,000 for 1997 and 1996, respectively.
Approximately $36,000 and $25,000, respectively, of these consulting expenses
was incurred with related parties.
F-14
<PAGE>
6. STOCK OPTIONS
During 1996, the Board of Directors authorized 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. Stock options granted to employees are accounted
for under APB Opinion No. 25, under which compensation expense is recognized
only if the exercise price is less than the market price at the date of
grant. Stock options granted to consultants are accounted for under SFAS
123, pursuant to which the fair market value of the stock options granted is
amortized over the related service period.
If compensation cost for stock options granted to employees had been accounted
for under SFAS. 123, the Company's net loss per share for 1997 and 1996 would
have been $(0.90) and $(0.76), respectively.
The following summarizes information about stock options outstanding at December
31,1997:
Weighted-Average
Shares Exercise Price
--------- ----------------
Balance at December 31, 1995 - -
Granted 150,000 $4.00
Exercised - -
Forfeited - -
------- -----
Balance at December 31,1996 150,000 $4.00
Granted 224,272 $4.00
Exercised -
Forfeited (99,738) $4.00
------- -----
Balance at December 31,1997 274,534 $4.00
======= =====
At December 31, 1997, the Company had 60,492 vested options exercisable at a
weighted-average exercise price of $4.00.
Using the Black-Scholes option valuation model, the estimated fair values of
options granted during 1997 ranged from $1.79 to $2.51. The estimated fair
value of options granted in 1996 was $2.45 per share. 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. Principal weighted-average assumptions used in applying the
Black-Scholes model were as follows:
Black-Scholes Model Assumptions 1997 1996
-----------------------------------------------------------
Risk-free interest rate 6.06% 6.37%
Expected volatility 64.51% 66.15%
Expected dividend yield 0.00% 0.00%
Expected term 5 yrs 5 yrs
7. INCOME TAXES
Certain items of expense are recognized in different periods for income tax
purposes than for financial reporting purposes.
F-15
<PAGE>
As of December 31, 1997, the Company had approximately $4.5 million of net
operating loss (NOL) carryforwards available to reduce future taxable income.
These NOL carryforwards expire on various dates through 2012.
The deferred tax asset as of December 31, 1997 consisted of the following:
Net operating loss carryforward $1,804,700
Depreciation and amortization (33,500)
Inventory costs 28,700
Accrued liabilities 16,500
Other 4,100
----------
1,820,500
Valuation allowance (1,820,500)
----------
Net deferred tax asset $ --
==========
Due to the uncertainty of its future realization, the net deferred tax asset
has been fully reserved. Since the close of the IPO, the Company is subject
to Internal Revenue Code Section 382 which limits the Company's ability to
utilize net operating losses generated prior to the closing of the IPO (of
approximately $2.9 million). The annual net operating loss limitation under
Section 382 is approximately $361,000.
The Company paid no taxes and had no net deferred or current tax
provision/benefit for the years ended December 31, 1997 and 1996.
8. COMMITMENTS AND CONTINGENCIES
a. CAPITAL LEASE OBLIGATIONS
The Company leases machinery and equipment under capital leases which expire
on various dates through April 2000.
As of December 31, 1997, future minimum payments were as follows:
1998 $ 49,998
1999 49,998
2000 1,597
--------
Total future minimum payments 101,593
Less--Amount representing interest (10,775)
--------
Total capital lease obligations 90,818
Less--Current portion (42,230)
--------
Noncurrent portion $ 48,588
========
These capital leases are guaranteed by certain of the Company's directors
and an affiliate and bear interest at 11%.
F-16
<PAGE>
b. OPERATING LEASE OBLIGATIONS
PLANT LEASE
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. The lease includes the following provisions:
- 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, provided that net sales are
at least $1,700,000.
- 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. The Company believes
that even if the lessor were to draw 50%
of the water flow for such other purposes,
the remaining 50% would be adequate for
the current and projected future needs of
the Company's business.
During 1997, the Company incurred approximately $173,000 for leasehold
improvements to this leased property.
OFFICE LEASE
In October 1996, the Company vacated its former office space and entered
into a three-year office and warehouse lease in Honolulu, with a renewal
option. Monthly rental payments were $3,000 through November 1997.
Thereafter, monthly rental payments are $4,000.
The Company recognized approximately $98,000 and $66,000 in lease expense
in 1997 and 1996, respectively.
The future minimum lease payments as of December 31, 1997 were as follows:
1998 $ 108,000
1999 96,000
2000 60,000
2001 60,000
2002 60,000
Thereafter 2,505,000
----------
$2,889,000
==========
F-17
<PAGE>
8. SIGNIFICANT CUSTOMERS AND SUPPLIERS
For the years ended December 31, 1997 and 1996 approximately 64% and 66%,
respectively, of the Company's sales were made through one Hawaii distributor.
No other single customer accounted for greater than 10% of sales.
9. SALES BY GEOGRAPHIC REGION
The Company sells its product directly to certain foreign distributors. All
sales are made in U.S. dollars. For the years ended December 31, 1997 and
1996, the Company had the following sales by geographic region:
<TABLE>
<CAPTION>
1997 % 1996 %
---------- ----- --------- -----
<S> <C> <C> <C> <C>
Hawaii $ 815,000 78 $ 702,000 81
International 143,000 14 146,000 17
United States Mainland 91,000 8 18,000 2
---------- ----- --------- -----
$1,049,000 100 $ 866,000 100
---------- ----- --------- -----
---------- ----- --------- -----
</TABLE>
10. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
QUARTER ENDED
(unaudited)
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 216,683 $ 283,310 $ 339,456 $ 209,357
Cost of Sales 241,475 301,241 387,329 302,457
---------- ---------- ---------- ----------
Gross Margin (24,792) (17,931) (47,873) (93,100)
Expenses
General and Administrative 125,206 244,967 282,516 360,575
Selling and Marketing 86,784 189,187 250,230 274,834
---------- ---------- ---------- ----------
211,990 434,154 532,746 635,409
Other Income (Expenses)
Interest Income 1,029 15,249 15,257 98,479
Interest Expense (236,195) (178,279) (3,166) (27,139)
---------- ---------- ---------- ----------
(235,166) (163,030) 12,091 71,340
Net Loss Before Extraordinary
Item (471,948) (615,115) (568,528) (657,169)
Extraordinary Item -
Loss on Extinguishment of Debt - (268,810) - -
---------- ---------- ---------- ----------
Net Loss $ (471,948) (883,925) (568,528) (657,169)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and Diluted Net Loss
Per Share Before
Extraordinary item $ (0.30) (0.23) (0.15) (0.17)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Extraordinary item $ - (0.10) - -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and Diluted Loss
Per Share $ (0.30) (0.33) (0.15) (0.17)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted Average Shares
Outstanding 1,599,212 2,709,212 3,899,212 3,899,212
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1996
QUARTER ENDED
(unaudited)
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 202,375 $ 226,753 $ 292,214 $ 144,718
Cost of Sales 197,323 275,902 330,996 103,336
---------- ---------- -------------- ----------
Gross Margin 5,052 (49,149) (38,782) 41,382
Expenses
General and Administrative 194,761 187,604 49,991 201,838
Selling and Marketing 24,184 41,509 40,388 158,536
---------- ---------- -------------- ----------
218,945 229,113 90,379 360,374
Other Income (Expense)
Interest Income - - - 722
Interest Expense (15,404) (12,331) (37,762) (182,668)
---------- ---------- -------------- ----------
(15,404) (12,331) (37,762) (181,946)
Net Loss $ (229,297) $ (290,593) $ (166,923) $ (500,938)
---------- ---------- -------------- ----------
---------- ---------- -------------- ----------
Basic and Diluted Net
Loss Per Share $ (0.14) $ (0.18) $ (0.10) $ (0.32)
---------- ---------- -------------- ----------
---------- ---------- -------------- ----------
Weighted Average Shares
Outstanding 1,599,212 1,599,212 1,599,212 1,599,212
---------- ---------- -------------- ----------
---------- ---------- -------------- ----------
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Articles of Incorporation, as amended, of the Registrant
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form SB-2 (File No. 333-18289))
(the "Form SB-2")
3.2 By-Laws, as amended, of the Registrant
4.1 Specimen Stock Certificate for the Registrant's Common Stock
(Incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10Q SB for the quarter ended
June 30, 1997 (the "June 10-Q"))
4.2 Warrant Agreement between the Registrant and Continental Stock
Transfer & Trust Company, as Warrant Agent (Incorporated by
reference to Exhibit 4.2 to the June 10-Q)
4.3 Specimen Public Warrant Certificate (Incorporated by reference
to Exhibit 4.3 to the June 10-Q)
4.4 Underwriter's Warrant Agreement between the Registrant and
Joseph Stevens & Company, Inc. (Incorporated by reference
to Exhibit 4.4 to the June 10-Q)
4.5 Underwriter's Warrant Certificate (Incorporated by reference to
Exhibit 4.5 to the June 10-Q)
4.6 Form of Bridge Warrant (Incorporated by reference to
Exhibit 4.5 to the Form SB-2)
4.7 Form of Lock-Up Agreement between Joseph Stevens & Company, Inc.
and each of the Selling Securityholders registering securities
pursuant to the Form SB-2 (Incorporated by reference to
Exhibit 4.6 to the Form SB-2)
4.8 Form of Lock-Up Agreement between Joseph Stevens & Company,
Inc., and certain officers, directors and stockholders of the
Registrant (Incorporated by reference to Exhibit 4.7 to the
June 10-Q)
10.1 Lease Agreement dated October 3, 1994, as amended, between the
Registrant as Lessee and Hawaii Brewery Development Co., Inc.
as Lessor (Incorporated by reference to Exhibit 10.1 to the
Form SB-2)
10.2 Blow Molding Agreement dated December 1, 1995, between the
Registrant and Bottles Packaging, Inc. ("BPI") (Incorporated by
reference to Exhibit 10.2 to the Form SB-2)
10.3 Financing Agreement dated March 31, 1995, between the Registrant
and First Hawaiian Bank (Incorporated by reference to Exhibit
10.3 to the Form SB-2)
10.4 Master Lease Agreement No. A2500, dated December 8, 1994, between
the Registrant and First Hawaiian Leasing and related agreements
(Incorporated by reference to Exhibit 10.4 to the Form SB-2)
10.5 Employment Agreement, dated October 10, 1996, between the
Registrant and Marcus Bender (Incorporated by reference to
Exhibit 10.5 to the Form SB-2)
10.6 Stock Option Agreement, dated October 10, 1996, between the
Registrant and Marcus Bender (Incorporated by reference to
Exhibit 10.6 to the Form SB-2)
10.7 Stock Option Agreement, dated September 17, 1997, between the
Registrant and David K. Laeha
10.8 Form of Bridge Note (Incorporated by reference to Exhibit 10.8
to the Form SB-2)
10.9 Form of Promissory Note evidencing an aggregate of $407,715 in
principal amount of indebtedness of the Registrant to certain of
its affiliates (Incorporated by reference to Exhibit 10.9 to
the Form SB-2)
10.10 Promissory Note dated May 24, 1995, in the original principal
amount of $100,000 payable by the Registrant to Inter Island
Petroleum, Inc. (Incorporated by reference to Exhibit 10.10 to
Form SB-2)
10.11 Letter Agreement dated August 1, 1996, between the Registrant and
com.com Inc. (Incorporated by reference to Exhibit 10.11 to the
Form SB-2)
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 (Incorporated by reference to Exhibit 10.12 to
the Form SB-2)
10.13 Promissory Note dated April 15, 1997, in the original principal
amount of $100,000 payable by the Registrant to
Joseph Stevens & Company, Inc. (Incorporated by reference to
Exhibit 10.13 to the Form SB-2)
10.14 Form of Cancellation Agreement between the Registrant and certain
holders of an aggregate of 106,500 Bridge Warrants (Incorporated
by reference to Exhibit 10.14 to the Form SB-2)
10.15 Underwriting Agreement between the Registrant and Joseph
Stevens & Company, Inc. (Incorporated by reference to
Exhibit 10.1 to the June 10-Q)
10.16 Financial Advisory and Consulting Agreement between the
Registrant and Joseph Stevens & Company, Inc. (Incorporated by
reference to Exhibit 10.2 to the June 10-Q)
10.17 Asset Purchase Agreement between the Registrant and BPI
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated October 7, 1997
(the "Form 8-K"))
10.18 Bill of Sale between the Registrant and BPI evidencing the
transfer of assets pursuant to the Asset Purchase Agreement
(Incorporated by reference to Exhibit 10.2 to the Form 8-K)
10.19 Promissory Note evidencing an aggregate of $825,000 in
indebtedness of the Registrant to BPI in connection with the
Asset Purchase Agreement (Incorporated by reference to Exhibit
10.3 to the Form 8-K)
10.20 Security Agreement between the registrant and BPI securing the
obligations of the Registrant to BPI under the Promissory Note
(Incorporated by reference to Exhibit 10.4 to the Form 8-K)
21 Subsidiaries -- None
27.1 Financial Data Schedule
</TABLE>
<PAGE>
BY-LAWS
OF
HAWAIIAN NATURAL WATER COMPANY, INC.
ARTICLE I - OFFICES
The principal office of the corporation in the State of Hawaii shall be
located in Kailua-Kona, County of Hawaii. The corporation may have such other
offices, either within or without the State of incorporation as the board of
directors may designate or as the business of the corporation may from time
to time require.
ARTICLE 11 - STOCKHOLDERS
1. ANNUAL MEETING
The annual meeting of the stockholders shall be held on such day within
ninety (90) days following the close of each fiscal as the Board of Directors
shall designate or, if the Board of Directors shall not have designated such day
by the end of the second month following the close of the fiscal year, and
unless the President designates some other date the annual meeting for that year
shall be held on the fourth Thursday in the third month following the close of
the fiscal year.
2. SPECIAL MEETINGS
Special meetings of the stockholders for any purpose or purposes, unless
otherwise prescribed by statute, may be called by the president or by the
directors, and shall be called by the president at the request of the holders of
not less than Fifty-One Percent (51%) of all the outstanding shares of the
corporation entitled to vote at the meeting.
3. PLACE OF MEETING
The directors may designate any place, either within or without the State
unless otherwise prescribed by statute, as the place of meeting for any annual
meeting or for any special meeting called by the directors. A waiver of notice
signed by all stockholders entitled to vote at a meeting may designate any
place, either within or without the state unless otherwise prescribed by
statute, as the place for holding such meeting.
If no designation is made, or if a special meeting be otherwise called, the
place of meeting shall be the principal office of the corporation.
<PAGE>
4. NOTICE OF MEETING
Written or printed notice stating the place, day and hour of the meeting
and, in case of a special meeting, the purpose or purposes for which the meeting
is called, shall be delivered not less than ten (10) nor more than twenty (20)
days before the date of the meeting, either personally or by mail, by or at the
direction of the president, or the secretary, or the officer or person calling
the meeting, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, addressed to the stockholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon prepaid.
5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE
For the purpose of determining stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or stockholders
entitled to receive payment of any dividend, or in order to make a determination
of stockholders for any other proper purpose, the directors of the corporation
may provide that the stock transfer books shall be closed for a stated period
but not to exceed, in any case, thirty (30) days. If the stock transfer books
shall be closed for the purpose of determining stockholders entitled to notice
of or to vote at a meeting of stockholders, such books shall be closed for at
least ten (10) days immediately preceding such meeting. In lieu of closing the
stock transfer books, the directors may fix in advance a date as the record date
for any such determination of stockholders, such date in any case to be not more
than twenty (20) days prior to the date on which the particular action requiring
such determination of stockholders is to be taken. If the stock transfer books
are not closed and no record date in fixed for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders, or stockholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the directors declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders entitled to
vote at any meeting of stockholders has been made as provided in this section,
such determination shall apply to any adjournment thereof.
6. VOTING LISTS
The officer or agent having charge of the stock transfer books for shares
of the corporation shall, at least ten (10) days before each meeting of
stockholders, make a complete list of the stockholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten (10) days prior to such meeting, shall be kept on
-2-
<PAGE>
file at the principal office of the corporation and shall be subject to
inspection by any stockholder at any time during usual business hours. Such list
shall also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any stockholder during the whole time of
the meeting. The original stock transfer book shall be prima facie evidence as
to who are the stockholders entitled to examine such list or transfer books or
to vote at the meeting of stockholders.
7. QUORUM
At any meeting of stockholders, sixty-eight percent (68%) of the
outstanding shares of the corporation entitled to vote, represented in person or
by proxy, shall constitute a quorum. If less than said number of the outstanding
shares are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The stockholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
8. PROXIES
At all meetings of stockholders, a stockholder may vote by proxy executed
in writing by the stockholder or by his duly authorized attorney-in-fact. Such
proxy shall be filed with the secretary of the corporation before or at the time
of the meeting.
9. VOTING
Each stockholder entitled to vote in accordance with the terms and
provisions of the Certificate of Incorporation and these By-Laws shall be
entitled to one vote, in person or by proxy, for each share of stock entitled to
vote held by such stockholder. Upon the demand of any stockholder, the vote for
directors and upon any question before the meeting shall be by ballot. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of this State.
10. ORDER OF BUSINESS
The order of business at all meetings of the stockholders shall be as
follows:
1. Roll call.
2. Proof of notice of meeting or waiver of notice.
-3-
<PAGE>
3. Reading of minutes of preceding meeting.
4. Reports of Officers.
5. Reports of Committees.
6. Election of Directors.
7. Unfinished business.
8. New business.
11. INFORMAL ACTION BY STOCKHOLDERS
Unless otherwise provided by law, any action required to be taken at a
meeting of the shareholders, or any other action which may be taken at a meeting
of the shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the shareholders
entitled to vote with respect to the subject matter thereof.
ARTICLE III - BOARD OF DIRECTORS
1. GENERAL POWERS
The business and affairs of the corporation shall be managed by its board
of directors. The directors shall in all cases act as a board, and they may
adopt such rules and regulations for the conduct of their meetings and the
management of the corporation as they may deem proper, not inconsistent with
these By-Laws and the laws of this State.
2. NUMBER, TENURE AND QUALIFICATIONS
The number of directors of the corporation shall be four (4). Each director
shall hold office until the next annual meeting of stockholders and until his
successor shall have been elected and qualified.
3. REGULAR MEETING
A regular meeting of the directors shall be held without any notice other
than this By-Law immediately after, and at the same place as, the annual meeting
of stockholders. The directors may provide, by resolution, the time and place
for the holding of additional regular meetings without any notice other than
such resolution.
-4-
<PAGE>
4. SPECIAL MEETINGS
Special meetings of the directors may be called by or at the request of the
president or any two directors. The person or persons authorized to call special
meetings of the directors may fix the place for holding any special meeting of
the directors called by them.
5. NOTICE
Notice of any special meeting shall be given at least three (3) days
previously thereto by written notice delivered personally or by telegram or
mailed to each director at his business address. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
6. QUORUM
At any meeting of the directors, fifty-one percent (51%) shall constitute a
quorum for the transaction of business, but if less than said number is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice.
7. MANNER OF ACTING
The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the directors.
8. NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the board for any reason except the removal
of directors without cause may be filled by a vote of a majority of the
directors then in office, although less than a quorum exists. Vacancies shall be
filled by vote of the stockholders. A director elected to fill a vacancy caused
by resignation, death or removal shall be elected to hold office for the
unexpired term of his predecessor.
9. RESIGNATION
A director may resign at any time by giving written notice to the board,
the president or the secretary of the
-5-
<PAGE>
corporation. Unless otherwise specified in the notice, the resignation shall
take effect upon receipt thereof by the board or such officer, and the
acceptance of the resignation shall not be necessary to make it effective.
10. COMPENSATION
No compensation shall be paid to directors, as such, for their services,
but by resolution of the board a fixed sum and expenses for actual attendance at
each regular or special meeting of the board may be authorized. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
11. PRESUMPTION OF ASSENT
A director of the corporation who is present at a meeting of the directors
at which action on any corporate matter is taken shall be presumed to have
assented to the action taken unless his dissent shall be entered in the minutes
of the meeting or unless he shall file his written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
12. EXECUTIVE AND OTHER COMMITTEES
The board, by resolution, may designate from among its members an executive
committee and other committees, each consisting of three or more directors. Each
such committee shall serve at the pleasure of the board.
ARTICLE IV - OFFICERS
1. NUMBER
The officers of the corporation shall be a president, a vice-president, a
secretary and a treasurer, each of whom shall be elected by the directors. Such
other officers and assistant officers as may be deemed necessary may be elected
or appointed by the directors.
2. ELECTION AND TERM OF OFFICE
The officers of the corporation to be elected by the directors shall be
elected annually at the first meeting of the directors held after each annual
meeting of the directors held
-6-
<PAGE>
after each annual meeting of the stockholders. Each officer shall hold office
until his successor shall have been duly elected and shall have qualified or
until his death or until he shall resign or shall have been removed in the
manner hereinafter provided.
3. VACANCIES
A vacancy in any office because of death, resignation, removal,
disqualification or otherwise, may be filled by the directors for the unexpired
portion of the term.
4. PRESIDENT
The president shall be the principal executive officer of the corporation
and, subject to the control of the directors, shall in general supervise and
control all of the business and affairs of the corporation. He shall, when
present, preside at all meetings of the stockholders and of the directors. He
may sign, with the secretary or any other proper officer of the corporation
thereunto authorized by the directors, certificates for shares of the
corporation, any deeds, mortgages, bonds, contracts, or other instruments which
the directors have authorized to be executed, except in cases where the signing
and execution thereof shall be expressly delegated by the directors or by these
By-Laws to some other officer or agent of the corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of president and such other duties as may be
prescribed by the directors from time to time.
5. VICE-PRESIDENT
In the absence of the president or in event of his death, inability or
refusal to act, the vice-president shall perform the duties of the president
and when so acting shall have all the powers of and be subject to all the
restrictions upon the president. The vice-president shall perform such other
duties as from time to time may be assigned to him by the president or by the
directors.
6. SECRETARY
The secretary shall keep the minutes of the stockholders' and of the
directors' meetings in one or more books provided for that purpose, see that all
notices are duly given in accordance with the provisions of these By-Laws or as
required, be custodian of the corporate records and of the seal of the
corporation and keep a register of the post office address of each stockholder
which shall be furnished to the secretary by such stockholder, have general
charge of the stock transfer books of the corporation and in general perform all
duties incident to the office of secretary and such other duties as from time to
time may
-7-
<PAGE>
be assigned to him by the president or by the directors.
7. TREASURER
If required by the directors, the treasurer shall give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the directors shall determine. He shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these By-Laws, and in general perform all of the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him by the president or by the directors.
8. SALARIES
The salaries of the officers shall be fixed from time to time by the
directors and no officer shall be prevented from receiving such salary by reason
of the fact that he is also a director of the corporation.
9. FINANCIAL RESPONSIBILITY
No shareholder shall be liable for the debts of the corporation beyond the
amount which may be due or unpaid upon any share or shares of stock of the
corporation owned by him, unless such shareholder personally guarantees payment
of such debt.
ARTICLE V - CONTRACTS, LOANS, CHECKS AND DEPOSITS
1. CONTRACTS
The directors may authorize any officer or officers, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation, and such authority may be general or confined to
specific instances.
2. LOANS
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the directors. Such authority may be general or confined to specific instances.
3. CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation, shall be signed
by such officer or officers,
-8-
<PAGE>
agent or agents of the corporation and in such manner as shall from time to time
be determined by resolution of the directors.
4. DEPOSITS
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies or
other depositories as the directors may select.
ARTICLE VI - CERTIFICATES FOR SHARES AND THEIR TRANSFER
1. CERTIFICATES FOR SHARES
(a) Certificates representing shares of the corporation shall be in such
form as shall be determined by the directors. Such certificates shall be signed
by the president and by the secretary or by such other officers authorized by
law and by the directors. All certificates for shares shall be consecutively
numbered or otherwise identified. All certificates shall express on its face the
name of the corporation, the name of the record holder to whom issued, the
number of shares and class or series represented thereby, the par value or a
statement that the shares are without par value, and the date of issue. The name
and address of the stockholder, the number of shares and date of issue, shall be
entered on the stock transfer books of the corporation.
(b) Each share certificate shall clearly specify the professional financial
responsibility as stated in Article X of the Articles of Incorporation and
Article IV of these By-Laws.
(c) All certificates surrendered to the corporation for transfer shall be
canceled and no new certificate shall be issued until the former certificate for
a like number of shares shall have been surrendered and cancelled, except that
in case of a lost, destroyed or mutilated certificate, a new one may be issued
therefor upon such terms and indemnity to the corporation as the directors may
prescribe.
2. TRANSFER OF SHARES
(a) Shares of stock of the corporation may be transferred only pursuant to
the restrictions and requirements as set forth in the Articles of Incorporation
and Stock Redemption Agreement, if any.
(b) Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or
-9-
<PAGE>
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, and cancel the old certificate;
every such transfer shall be entered on the transfer book of the corporation
which shall be kept at its principal office.
(c) The corporation shall be entitled to treat the holder of record of any
share as the holder in fact thereof, and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by the laws of this state.
(d) Each stock certificate shall contain an appropriate legend setting
forth the transfer restrictions set forth in this Section.
ARTICLE VII - FISCAL YEAR
The fiscal year of the corporation shall be such as may from time to time
be established by the Board of Directors.
ARTICLE VIII - DIVIDENDS
The directors may from time to time declare, and the corporation may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law.
ARTICLE IX - SEAL
The directors shall provide a corporate seal which shall be circular in
form and shall have inscribed thereon the name of the corporation, the state of
incorporation, year of incorporation and the words "Corporate Seal."
ARTICLE X - WAIVER OF NOTICE
Unless otherwise provided by law, whenever any notice is required to be
given to any stockholder or director of the corporation under the provisions of
these By-Laws or under the provisions of the Articles of Incorporation, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.
ARTICLE XI - AMENDMENTS
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<PAGE>
These By-Laws may be altered, amended or repealed and new By-Laws may be
adopted by a vote of the stockholder representing a majority of all the shares
issued and outstanding, at any annual stockholders' meeting or at any special
stockholders' meeting when the proposed amendment has been set out in the notice
of such meeting.
I HEREBY CERTIFY the foregoing to be a true and exact copy of the By-Laws
of HAWAIIAN NATURAL WATER COMPANY, INC.
/S/ Marcus Bender
-----------------------------
Assistant Secretary
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<PAGE>
AMENDMENT NUMBER 1 TO BY-LAWS
OF
HAWAIIAN NATURAL WATER COMPANY, INC.
(Effective as of August 29, 1996)
1. Article III, Section 2 of the By-Laws is hereby amended and restated to read
in full as follows:
"2. NUMBER, TENURE AND QUALIFICATIONS
The authorized number of directors which shall constitute the whole
board shall be at least four, the exact number of directors to be fixed
from time to time by resolution of the board or the stockholders. The exact
number of directors shall be six (6) until changed as provided in this
Section 2. The directors shall be elected at the annual meeting of the
stockholders, except as provided in Section 8 of this Article III, and each
director elected shall hold office until his successor is elected and
qualified. Directors need not be stockholders."
2. Article III, Section 8 of the By-Laws is hereby amended and restated to read
in full as follows:
"8. NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Newly created directorships resulting from an increase in the number
of directors and vacancies occurring in the board for any reason, except
the removal of directors without cause, may be filled by a vote of a
majority of the directors then in office, although less than a quorum.
Vacancies occurring in the board by reason of a removal of directors
without cause shall be filled by vote of the stockholders. A director
elected to fill a vacancy caused by resignation, death or removal shall be
elected to hold office for the unexpired term of his predecessor."
<PAGE>
AMENDMENT NUMBER 2 TO BY-LAWS
OF
HAWAIIAN NATURAL WATER COMPANY, INC.
(Effective as of February 4, 1997)
Article II, Section 2. of the By-Laws is hereby amended and restated to read
in full as follows:
"2. SPECIAL MEETINGS
Special meetings of the stockholders for any purpose or purposes,
unless otherwise prescribed by statute, may be called by the board of
directors, the holders of not less than one-tenth (1/10) of all shares
entitled to vote at the meeting, the Chairman of the Board, or such other
persons as may be authorized in the corporations Articles of
Incorporation or these by-laws."
Article II, Section 5. of the By-Laws is hereby amended and restated to read
in full as follows:
"5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE
For the purposes of determining stockholders entitled to notice of or
to vote at any meeting of stockholders or any adjournment thereof, or
stockholders entitled to receive payment of any dividend, or in order to
make a determination of stockholders for any other proper purpose, the
directors of the corporation may provide that the stock transfer books
shall be closed for a stated period but not to exceed, in any case sixty
(60) days. If the stock transfer books shall be closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten (10) days
immediately preceding such meeting. In lieu of closing the stock transfer
books, the directors may fix in advance a date as the record date for any
such determination of stockholders, such date in any case to be not more
than sixty (60) days and, in case of a meeting of stockholders, not less
than ten (10) days prior to the date on which the particular action,
requiring the determination of stockholders, is to be taken. If the stock
transfer books are not closed and no record date is fixed for the
determination of stockholders entitled to notice of or to vote at a meeting
of stockholders, or stockholders entitled to receive payment of a dividend,
the date on which notice of the meeting is
<PAGE>
mailed or the date on which the resolution of the directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders
entitled to vote at any meeting of stockholders has been made as provided
herein, such determination shall apply to any adjournment thereof."
3. The following sentence shall be added to the and of Article II, Section 9. of
the By-Laws:
"Unless otherwise required by law, no stockholder or stockholders
shall have any right to have directors of the corporation elected by
cumulative voting."
4. Article III, Section 7. of the By-Laws is hereby amended and restated to read
in full as follows:
"7. QUORUM
At any meeting of stockholders, a majority of shares of the
outstanding shares entitled to vote, represented in person or by proxy,
shall constitute a quorum. If a quorum is present, the affirmative vote of
the majority of the shares represented at the meeting and entitled to vote
on the subject matter shall be the act of the stockholders, unless the vote
of a greater number or voting by classes is required under Hawaii law, the
articles of incorporation, or these by-laws."
5. Article VI, Section 1.(b) of the By-Laws is hereby deleted in its entirety.
6. Article VI, Section 2.(a) of the By-Laws is hereby deleted in its entirety.
7. Article VI, Section 2.(d) of the By-Laws is hereby deleted in its entirety.
8. Article XI of the By-Laws in hereby amended and restated to read as follows:
"ARTICLE XI - AMENDMENTS
-------------------------
The power to alter, amend, or repeal these By-Laws, subject to repeal
or change by action of the stockholders, shall be vested in the Board of
Directors, unless reserved to the stockholders by the Articles of
Incorporation."
-12-
<PAGE>
AMENDMENT NUMBER 3 TO BY-LAWS
OF
HAWAIIAN NATURAL WATER COMPANY, INC.
(effective as or February 25, 1998)
1. Article I of the By-Laws is hereby amended and restated to read in full as
follows:
"ARTICLE I - OFFICES
"The principal office of the corporation in the State of Hawaii shall be
located in Honolulu or such other place as the board of directors may
designate. The corporation may have such other offices within or without the
State as the board of directors may designate or as the business of the
corporation may from time to time require."
2. Article II, Section 1 of the By-Laws is hereby amended and restated to
read in full as follows:
"1. ANNUAL MEETING
Annual meetings of stockholders shall be held at such date and time as
shall be designated from time to time by the board of directors and stated in
the notice of such meetings."
3. Article III, Section 12 of the By-Laws is hereby amended and restated to
read in full as follows:
"12. EXECUTIVE AND OTHER COMMITTEES
The board, by resolution, may designate from among its members an
executive committee and other committees, each consisting of two or more
directors. Each such committee shall serve at the pleasure of the board."
-1-
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement") is made and entered into as
of September 17, 1997 by and between Hawaiian Natural Water Company, Inc., a
Hawaii corporation (the "Company"), and David K. Laeha, an individual resident
of the State of Hawaii ("Optionee"), with respect to the following:
WHEREAS, Optionee is concurrently employed as the Chief Financial Officer
of the Company; and
WHEREAS, in connection with such employment, the Company has agreed to
grant to Optionee the option provided for herein, and the Company and Optionee
have agreed to enter into this Agreement with respect thereto;
NOW, THEREFORE, in consideration of the premises and the covenants and
conditions contained herein, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee the right
and option (the "Option"), but not the obligation, to purchase a total of
Seventy-Five Thousand (75,000) shares of Common Stock, no par value, of the
Company, subject to adjustment as provided herein (the "Shares"), on the terms
and conditions set forth herein. The Option is intended to be a nonstatutory
option and not an incentive stock option within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended.
2. VESTING. The Option shall vest over a three year period as
follows: the Option shall vest as to Twenty-Five Thousand (25,000) Shares on the
first anniversary of the date hereof and as to an additional Twenty-Five
Thousand (25,000) Shares on each of the second and third anniversaries of the
date hereof, provided in each case that Optionee's employment with the Company
has not been terminated for any reason prior to such anniversary date; provided,
however, that the Option shall vest as to all then unvested Shares immediately
upon any Termination (as hereinafter defined) by the Company or any successor of
Optionee's employment, other than "For Cause" (as hereinafter defined),
following a Change in Control of the Company (as hereinafter defined). Subject
to the foregoing, any portion of the Option which is then unvested as of the
date of any termination of Optionee's employment shall thereupon become null and
void and of no further force or effect.
<PAGE>
As used herein:
(i) "Termination" means (A) any termination of Optionee's employment with
the Company or any successor, or (B) any substantial diminution in Optionee's
duties and responsibilities or compensation, unless such diminution is consented
to in writing by Optionee;
(ii) "For Cause" means (A) the conviction of Optionee of (or plea of nolo
contendere to) a felony or any crime involving moral turpitude, (B) any
embezzlement or intentional misappropriation by Optionee of any assets of the
Company (which for this purpose shall not include the incurrence of any business
expense by Optionee in good faith in the performance of his duties hereunder),
or (C) gross negligence by Optionee in the performance of his duties hereunder,
but does not mean the Company's disagreement with any lawful action undertaken
by Optionee in the good faith exercise of his business judgment, subject to the
reasonable directives of the Board of Directors (the "Board"); and
(iii) "Change in Control" means (A) any merger or consolidation of the
Company with or into, or the sale, lease or exchange of all or substantially all
of the assets of the Company to, any other person if, (x) as a result of any
such merger or consolidation, the holders of the outstanding stock of the
Company generally entitled to vote in the election of directors ("Voting Power)
immediately prior thereto own less than a majority of the Voting Power of the
survivor thereof or its parent, or (y) as a result of any such sale, lease or
exchange of assets, the Company owns less than a majority of the Voting Power of
such other person; OR (B) any election of new directors as a result of which a
majority of the Board consists of members who were not nominated as candidates
by a majority of the directors in office immediately prior to such election.
3. EXERCISE PRICE. The exercise price of the Option (the "Exercise
Price") shall be $4.00 per Share, subject to adjustment as provided herein.
4. EXERCISE PERIOD. The Option granted hereby shall be exercisable
to the extent vested for a period of five years, commencing on the date hereof
and continuing until the fifth anniversary of the date hereof (the "Exercise
Period").
5. MANNER OF EXERCISE. The option granted hereby may be exercised in
lots of 100 Shares or multiples thereof during the Exercise Period as provided
above, by written notice delivered to the board. Such notice shall state the
number of Shares with respect to which the Option is being exercised and shall
be accompanied by payment of the purchase price in full (i) in cash, (ii) by the
surrender of other shares of Common Stock
2.
<PAGE>
held by Optionee, which shall be valued at the fair market value thereof as
determined by the Board, or (iii) in the discretion of the Board, with full
recourse notes payable to the Company. As soon as practicable after any such
exercise of the Option, the Company shall issue and register in the name of and
deliver to Optionee a certificate or certificates for the Shares issuable upon
such exercise.
6. ADJUSTMENT PROVISIONS. If, at any time or from time to time
during the Exercise Period, any of the following events shall occur, the
Exercise Price and the number of and kind of Shares then subject to the Option
shall in each instance be adjusted as follows:
a. STOCK DIVIDENDS, SPLIT-UPS
AND COMBINATIONS
If a change is effected in the number of outstanding shares of Common
Stock by a stock dividend in Common Stock or by a subdivision or combination of
such shares, the Exercise Price shall be proportionately reduced or increased,
as the case may be, so that it will bear the same ratio to the Exercise Price in
effect immediately before such change as the number of shares outstanding
immediately before such change bears to the number outstanding immediately
thereafter.
Upon any adjustment of the Exercise Price as provided above, the
number of Shares subject to the Option shall be increased or decreased, as
appropriate, so that it will bear the same ratio to the number of shares subject
to the Option immediately before such change as the number of shares outstanding
immediately after such change bears to the number of outstanding immediately
prior thereto.
b. OTHER CHANGES IN CAPITAL STRUCTURE
In the case of any reclassification or other change in the outstanding
Common Stock not covered by the foregoing provisions, other than a change in par
value, or from par value to no par value, or from no par value to par value, or
in the case of any consolidation or merger of the Company with or into another
corporation (other than a merger in which the Company is the continuing
corporation and which does not result in any reclassification or change of
outstanding shares of the Company), or in the case of any sale or conveyance to
another corporation of the property of the Company as an entirety, or
substantially as an entirety, the Optionee shall have the right, upon exercise
of Option, to receive solely a like amount and kind of shares of stock and other
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as Optionee would have been entitled
to receive if the option, to the extent not previously exercised, had been
3.
<PAGE>
exercised in full (without regard to the vesting provisions set forth in Section
2 hereof) immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance.
c. NOTICE OF ADJUSTMENT
Upon any adjustment of the Exercise Price and change in the number of
Shares or other securities purchasable hereunder, the Company shall give written
notice thereof to Optionee, stating the new price and the increased or decreased
number of Shares or other securities purchasable upon exercise of the Option and
setting forth in reasonable detail the method of calculation and the pertinent
facts upon which such calculation is based.
7. NON-TRANSFERABILITY OF OPTION. The Option may be exercised during
the lifetime of Optionee only by Optionee and may not be transferred in any
manner other than by will or by the laws of descent and distribution. In the
event of death of Optionee, the person or persons entitled to exercise the
Option under Optionee's will or under the laws of descent and distribution shall
have the same right that Optionee would have had to exercise any previously
unexercised vested portion of the Option as of the date of Optionee's death,
provided that the Company has been supplied with documentation satisfactory to
it with respect to the appointment of such person or persons as such. The terms
of this Option shall be binding upon the executors, administrators, heirs and
successors of Optionee.
8. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that he has
been informed that the shares subject to the Option, if and when issued, will
not be registered under the Securities Act of 1933, as amended (the "Securities
Act"). Optionee acknowledges that he has been informed that the Company is
granting the Option in reliance upon exemptions contained in the Securities Act
and the General Rules and Regulations under the Securities Act as promulgated
and from time to time amended by the Securities and Exchange Commission on the
grounds that, subject to Section 10 hereof, the grant of the Option and the
issuance and sale of the Shares subject to the Option when exercised are
transactions not involving any public offering and that, consequently, such
transactions are exempt from registration under the Securities Act by virtue of
the provisions of section 4(2) thereof. Optionee acknowledges that reliance upon
this exemption is predicated in part upon his representation that he has no
intention of dividing his participation for any interest in the Option and the
Shares subject to the Option with others or otherwise distributing all or any
part thereof but that any Shares acquired by him upon exercise of the option
will be acquired for investment only. In addition, Employee specifically
4.
<PAGE>
authorizes the Company to place an appropriate legend an the Shares in the form
set forth in Section 10 hereof.
9. REPRESENTATION OF THE COMPANY. The Company represents and
warrants that the Shares issuable upon any exercise of the Option, when
purchased and paid for as herein provided, will be validly issued, fully paid
and non-assessable.
10. LEGEND. The certificates representing the Shares issued upon any
exercise of the Option granted hereby shall bear the following legend:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR UNLESS, IN THE
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, TRANSFER, PLEDGE OR
HYPOTHECATION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN COMPLIANCE
WITH THE SECURITIES ACT AND SUCH LAWS.
11. NO EMPLOYMENT CONTRACT. Nothing in this Agreement shall confer
upon the Optionee any right to continue to be an employee of the Company or
shall interfere with or restrict in any way the rights of the Company, which are
hereby expressly reserved, to discharge the Optionee, at any time, subject to
the provisions of applicable law. This Agreement is not an employment contract.
12. INCOME TAX WITHHOLDING. Optionee authorizes the Company to
withhold in accordance with applicable law from any compensation payable to him
or her any taxes required to be withheld by Federal, state or local laws as a
result of the exercise of the Option. Furthermore, in the event of any
determination that the Company has failed to withhold a sum sufficient to pay
all withholding taxes due in connection with the exercise of the Option,
Optionee agrees to pay the Company the amount of any such deficiency in cash
within five (5) days after receiving a written demand from the Company to do so,
whether or not Optionee is an employee of the Company at that time.
13. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Hawaii.
5.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stock Option Agreement
as OF THE DATE FIRST above written.
HAWAIIAN NATURAL WATER COMPANY, INC.
(the "Company")
By:
-------------------------------------
Marcus Bender, President
-------------------------------------
David K. Laeha ("Optionee")
6.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,471,362
<SECURITIES> 0
<RECEIVABLES> 143,071
<ALLOWANCES> 7,225
<INVENTORY> 330,122
<CURRENT-ASSETS> 3,042,796
<PP&E> 1,994,125
<DEPRECIATION> 208,274
<TOTAL-ASSETS> 4,828,647
<CURRENT-LIABILITIES> 551,158
<BONDS> 504,670
0
0
<COMMON> 8,339,274
<OTHER-SE> (4,629,285)
<TOTAL-LIABILITY-AND-EQUITY> 4,828,647
<SALES> 1,048,806
<TOTAL-REVENUES> 1,048,806
<CGS> 1,232,502
<TOTAL-COSTS> 1,232,502
<OTHER-EXPENSES> 1,758,234
<LOSS-PROVISION> 56,065
<INTEREST-EXPENSE> 444,779
<INCOME-PRETAX> (2,312,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,312,760)
<DISCONTINUED> 0
<EXTRAORDINARY> (268,810)
<CHANGES> 0
<NET-INCOME> (2,581,570)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
