<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q SB
(MARK ONE)
/S/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-29280
HAWAIIAN NATURAL WATER COMPANY, INC.
{Exact name of small business issuer as specified in its charter}
HAWAII 99-0314848
(State or jurisdiction of incorporation I.R.S. Employer
or organization) Identification Number)
248 Mokauea Street
Honolulu, Hawaii 96819
(Address of principal executive offices)
(808) 832-4550
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
The issuer had issued and outstanding 4,023,563 shares of Common Stock
on November 11, 1998.
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
Hawaiian Natural Water Company, Inc.
Balance Sheet
September 30, 1998
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 721,893
Inventories 329,686
Trade accounts receivable, net of allowance for doubtful
accounts of $5,076 382,555
Other current assets 117,329
-----------
Total Current Assets 1,551,463
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $356,318 1,950,923
-----------
Total Assets $ 3,502,386
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 309,522
Accrued professional fees 67,566
Accrued vacation 43,525
Accrued payroll and related taxes 52,308
Accrued commissions and billbacks 119,831
Accrued other 71,740
Note payable - Current portion 99,771
Capital lease obligation - Current portion 45,778
-----------
Total Current Liabilities 810,041
NON-CURRENT LIABILITIES
Capital lease obligation - net of current portion 13,798
Note payable - net of current portion 442,520
-----------
Total Non-Current Liabilities 456,318
Total Liabilities 1,266,359
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value; 5,000,000 shares
authorized; none issued and outstanding -
Common stock, no par value; 20,000,000 shares authorized;
4,023,563 shares issued and outstanding 6,688,750
Common stock warrants and options; 3,753,959 issued
and outstanding 2,826,829
Accumulated Deficit (7,279,552)
-----------
Total Stockholders' Equity 2,236,027
Total Liabilities and Stockholders' Equity $ 3,502,386
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Hawaiian Natural Water Company, Inc.
Statements of Operations
For the Three and Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------- ---------------------------------------
1997 1998 1997 1998
---------- ----------- ----------- -----------
<S> <C> <C>
NET SALES $ 339,456 $ 515,465 $ 839,449 $ 1,392,073
COST OF SALES 387,329 473,579 930,045 1,273,652
---------- ----------- ----------- -----------
Gross Margin (Loss) (47,873) 41,886 (90,596) 118,421
EXPENSES:
Selling and Marketing 250,230 234,948 526,201 746,914
General and Administrative 282,516 272,910 652,689 888,783
---------- ----------- ----------- -----------
532,746 507,858 1,178,890 1,635,697
OPERATING LOSS (580,619) (465,972) (1,269,486) (1,517,276)
OTHER INCOME (EXPENSE)
Investor Relations expense - (1,122,913) - (1,122,913)
Interest and other income 15,257 17,873 31,535 64,722
Interest expense (3,166) (24,788) (417,640) (74,800)
---------- ----------- ----------- -----------
12,091 (1,129,828) (386,105) (1,132,991)
Net loss before extraordinary item (568,528) (1,595,800) (1,655,591) (2,650,267)
Extraordinary item-
Loss on extinquishment of debt - - (268,810) -
---------- ----------- ----------- -----------
Net Loss $ (568,528) $(1,595,800) $(1,924,401) $(2,650,267)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Basic and Diluted
Net Loss Per Share:
Before Extraordinary Item (0.15) (0.40) (0.60) (0.68)
Extraordinary Item - - (0.10) -
Net Loss Per Share: $ (0.15) $ (0.40) $ (0.70) $ (0.68)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Weighted Average Common and
Common Equivalent Shares Outstanding 3,899,212 3,973,192 2,748,663 3,924,143
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Hawaiian Natural Water Company, Inc.
Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Warrants
and
Common Stock Options
-------------------------- -------------------------- Total
Number of Number of Accumulated Stockholders
Shares Amount Shares Amount Deficit Equity
--------- ---------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 3,899,212 $6,338,728 3,170,310 $2,000,546 $ (4,629,285) $ 3,709,989
Issuance of common stock
July 31, 1998 100,000 350,000 - - - 350,000
Exercise of warrants
September 2, 1998 24,351 22 (24,351) - - 22
Issuance of stock options
to consultants and distributors - - 608,000 826,283 - 826,283
Net Loss - - - - (2,650,267) (2,650,267)
--------- ---------- --------- ---------- ------------ -----------
BALANCE AT
SEPTEMBER 30, 1998 4,023,563 $6,688,750 3,753,959 $2,826,829 $ (7,279,552) $ 2,236,027
--------- ---------- --------- ---------- ------------ -----------
--------- ---------- --------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Hawaiian Natural Water Company, Inc.
Statements of Cash Flow
For the Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,924,401) $ (2,650,267)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 51,879 145,112
Issuance of stock and options to consultants and distributors 35,441 1,176,282
Amortization of loan discount and deferred costs 235,000 65,452
Extraordinary loss on extinquishment of debt 268,810 -
Net (decrease) in current assets (244,101) (259,689)
Net (decrease) increase in current liabilities (129,705) 244,031
------------ ------------
Net cash used in operating activities (1,707,077) (1,279,079)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (529,278) (308,607)
CASH FLOWS FROM FINANCING ACTIVITIES:
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 -
Repayments of notes payable (2,291,265) (126,994)
Repayment of principal on capital leases (28,116) (34,790)
------------ ------------
Net cash provided by (used in) financing activities 5,643,809 (161,784)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 3,407,454 $ (1,749,470)
CASH AND CASH EQUIVALENTS, beginning of period 89,335 2,471,363
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,496,789 $ 721,893
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30,1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements of Hawaiian Natural Water
Company, Inc. (the "Company") should be read in conjunction with the audited
financial statements for the year ended December 31, 1997 and notes thereto as
filed with the Securities and Exchange Commission in the Company's Annual Report
on Form 10-KSB. In the opinion of management, the accompanying financial
statements reflect all adjustments (which consist primarily of normal recurring
adjustments) considered necessary to fairly present the financial position of
the Company at September 30, 1998, the results of its operations for each of the
three and nine month periods ended September 30, 1997 and 1998, and the cash
flows for the nine month periods ended September 30, 1997 and 1998, in
accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission. The results of operations
for interim periods are not necessarily indicative of results to be achieved for
full fiscal years. Certain amounts from prior periods have been reclassified to
conform to current period presentation.
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 significantly
higher levels of sales. The Company is continuing to enhance and implement 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. In order to sustain operations,
the Company must obtain additional financing. The ability of the Company to
achieve profitability or obtain additional financing is uncertain. Although the
accompanying unaudited financial statements for the nine months ended September
30, 1998 have not been audited by Arthur Andersen LLP, they have informed the
Company that, if the uncertainty described above continues to exist at the time
of their audit of the financial statements for the year ended December 31, 1998,
their report on these statements will include an explanatory fourth paragraph
indicating that there is substantial doubt about the Company's ability to
continue as a going concern.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION. The Company recognizes revenue on the accrual method of
accounting when title to product transfers to the buyer (generally upon
shipment). The Company's policy is to provide a reserve for estimated
uncollectible accounts receivable, if any.
<PAGE>
RESERVE FOR RETURNS. The Company grants customers the right to return goods
which are defective or otherwise unsuitable for sale. The Company replaces
returned goods or issues a refund to the customer. The Company's policy is to
provide a reserve for estimated returns and related disposal costs.
GROSS MARGIN. The Company's plant currently has a normal maximum production
capacity of approximately 800,000 cases per year. The Company is currently
operating its plant at approximately 46 percent of this capacity.
2. LOSS PER SHARE
Basic and Diluted Loss Per Share is computed by dividing the Net Loss by the
Weighted Average Common and Common Equivalent Shares Outstanding during the
period. The Weighted Average Common and Common Equivalent Shares Outstanding
during the three and nine month periods ended September 30, 1998 were
3,973,192 and 3,924,143, respectively, compared to 3,899,212 and 2,748,663
during the three and nine month periods ended September 30, 1997,
respectively.
The Company's Basic and Diluted Loss Per Share is the same for each of the third
quarter and first nine months of both 1997 and 1998 in that any exercise of
stock options or warrants would have been anti-dilutive.
3. 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.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. As of September 30, 1998, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials $213,185
Finished goods 116,501
--------
$329,686
--------
</TABLE>
5. NOTES PAYABLE
As discussed in Note 3 to the audited financial statements contained in the
Company's Annual Report on Form 10-KSB, in September 1997, the Company acquired
certain bottle making equipment used in its bottling operations. The
consideration for the equipment was an aggregate of $1.2 million, a portion of
which was paid through the
<PAGE>
issuance of a promissory note in the original principal amount of $825,000,
payable in installments, as defined. The Company has discounted this
equipment note payable using an estimated weighted average cost of capital of
12%, and amortizes the resulting discount to interest expense using the
effective interest method over the term of the loan.
Additionally, the Company has a $15,897 installment note payable for the
purchase of a vehicle.
The following summarizes the Company's notes payable as of September 30, 1998:
<TABLE>
<S> <C>
Equipment note payable $ 660,000
Less: Unamortized discount (133,606)
---------
Net equipment note payable 526,394
Vehicle installment note payable 15,897
---------
Subtotal - notes payable 542,291
Less: Current portion (99,771)
---------
Non-current portion $ 442,520
---------
---------
</TABLE>
At December 31, 1997 the equipment note payable was reported as a note payable
to a related party, because at that time an executive officer of the equipment
note lender was a director of the Company. On March 31, 1998, this officer
resigned as a director of the Company.
6. STOCK OPTIONS
The total number of Common Stock warrants and options shown at September 30,
1998 excludes an aggregate of 422,975 options outstanding at such date held
by officers and employees of the Company. No options were issued to officers
or employees of the Company in the third quarter of 1998, but 3,600 of these
options were forfeited during the period upon resignation of an employee.
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.
The Company accounts for stock options granted to non-employees in accordance
with Statement of Financial Accounting Stardards No. 123 (SFAS 123) "Accounting
for Stock-Based Compensation," which requires that these transactions be
accounted for based upon the fair value of consideration received or the fair
value of the equity instruments issued, whichever is more reliably determinable.
In the first quarter of 1998, the Company recorded $53,370 for options granted
to certain consultants and distributors.
<PAGE>
In the third quarter of 1998, an additional 565,000 options were granted to
the Company's financial public relations advisor. The Company believes that
the fair value of such options was approximately $773,000 (see Note 9).
7. SETTLEMENT OF TERMINATED DISTRIBUTION AGREEMENT
In May 1998 the Company terminated its exclusive distribution agreement
with William Wright covering most of the Western U.S. due to his failure to
meet certain minimum purchase requirements. In connection with this
termination, Mr. Wright made a $100,000 lump-sum payment to the Company in
August 1998. That payment was recorded in the financial statements as a
reduction in certain selling, general and administrative expenses which
primarily had been incurred in connection with the agreement and its
termination.
8. SALES BY GEOGRAPHIC REGION
The Company sells its product directly to certain foreign distributors. All
sales are made in U.S. dollars. For the three month periods ended September 30,
1997 and 1998, the Company had the following sales by geographic region:
<TABLE>
<CAPTION>
1997 % 1998 %
-------- --- -------- ---
<S> <C> <C> <C> <C>
Hawaii $266,161 78 $491,659 95
U. S. Mainland 29,116 9 (8,142) (1)
International 44,179 13 31,948 6
-------- --- -------- ---
$339,456 100 $515,465 100
-------- --- -------- ---
</TABLE>
For the nine month periods ended September 30, 1997 and 1998, the Company had
the following sales by geographic region:
<TABLE>
<CAPTION>
1997 % 1998 %
-------- --- ---------- ---
<S> <C> <C> <C> <C>
Hawaii $608,808 73 $1,072,847 77
U. S. Mainland 123,006 15 121,671 9
International 107,635 12 197,555 14
-------- --- ---------- ---
$839,449 100 $1,392,073 100
-------- --- ---------- ---
</TABLE>
<PAGE>
9. INVESTOR RELATIONS
On July 31, 1998, the Company engaged 8607 Colonial Group, Inc. ("Colonial")
as its financial public relations advisor for a two-year term. As
compensation for its services, the Company issued to Colonial 100,000 shares
of Common Stock (the "Initial Shares"), plus options (the "Options") to
purchase an aggregate of 565,000 additional shares (the "Option Shares") at
exercise prices ranging from $2.50 to $6.00 per share. The Options are
exercisable over staggered terms commencing September 1, 1998, and ending
July 15, 2000. If Colonial exercises all of the first 300,000 Options, the
Company will issue to Colonial an additional 50,000 shares of Common Stock
(the "Contingent Shares") for no additional consideration. The Options are
redeemable by the Company at $.05 per Option if the trading price (as
defined) of the Common Stock exceeds 150% of the exercise price of the
Options to be redeemed for a period of 10 consecutive trading days. The
Company believes that the fair value of the Initial Shares was approximately
$350,000 and the Options $772,913 based upon the Black-Scholes option pricing
model with the following weighted average assumptions: risk-free interest
rate of 5.42%; expected dividend yield of zero; expected life of nine months;
and expected volatility of 126%. This entire amount was recorded as a charge
to income in the third quarter of 1998. The Contingent Shares will be
recorded as a charge to income at their fair value upon issuance. The Company
has registered the Initial Shares, the Option Shares and the Contingent
Shares under the Securities Act of 1933, as amended.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
THE FOLLOWING DISCUSSION MAY BE DEEMED TO CONTAIN CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, AS INDICATED BY THE USE OF SUCH TERMS AS "MAY," "WILL," "EXPECT,"
"BELIEVE," "ESTIMATE," "ANTICIPATE," "INTEND" OR OTHER SIMILAR TERMS OR THE
NEGATIVE OF SUCH TERMS. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN MAY INCLUDE,
WITHOUT LIMITATION, STATEMENTS CONCERNING: (I) ANTICIPATED CHANGES IN REVENUE,
COST OF MATERIALS, EXPENSE ITEMS, INCOME OR LOSS, EARNINGS OR LOSS PER SHARE,
CAPITAL EXPENDITURES, CAPITAL STRUCTURE AND OTHER FINANCIAL ITEMS; (II) PLANS OR
PROPOSALS OF THE COMPANY OR ITS MANAGEMENT WITH RESPECT TO THE COMPANY'S GROWTH
STRATEGY, INTRODUCTION OF NEW PRODUCTS, AND POSSIBLE ACQUISITIONS OF ASSETS OR
BUSINESSES; (III) POSSIBLE ACTIONS BY CUSTOMERS, SUPPLIERS, COMPETITORS OR
REGULATORY AUTHORITIES; AND (IV) ASSUMPTIONS UNDERLYING THE FOREGOING. THESE
FORWARD-LOOKING STATEMENTS ARE BASED UPON THE COMPANY'S CURRENT EXPECTATIONS AND
ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING WITHOUT
LIMITATION, RISKS AND UNCERTAINTIES RELATING TO: (I) THE MARKET FOR THE
COMPANY'S PRODUCTS; (II) THE MAINTENANCE AND DEVELOPMENT OF THE COMPANY'S
DISTRIBUTOR NETWORK; (III) POSSIBLE CHANGES IN THE COMPANY'S BUSINESS STRATEGY
OR THE EXECUTION OF ITS EXISTING STRATEGY; (IV) THE COMPANY'S COST OF MATERIALS
OR SOURCES OF SUPPLY; (V) THE COMPANY'S NEED FOR ADDITIONAL CAPITAL OR, IF
NEEDED, THE AVAILABILITY OF ADDITIONAL CAPITAL ON ACCEPTABLE TERMS AND
CONDITIONS; (VI) THE COMPANY'S ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL;
(VII) REGULATORY ISSUES IN THE U.S. OR ABROAD; AND (VIII) THE COMPETITIVE
ENVIRONMENT IN THE COMPANY'S INDUSTRY. MANY OF THESE RISKS AND UNCERTAINTIES ARE
BEYOND THE COMPANY'S ABILITY TO PREDICT OR CONTROL. SHOULD MANAGEMENT'S
OPERATING ASSUMPTIONS PROVE INCORRECT, THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS INCLUDED HEREWITH AND THE NOTES THERETO.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net Sales. Net Sales increased 52% to approximately $515,000 for the three
months ended September 30, 1998 (the "1998 Quarter") from approximately $339,000
for the three months ended September 30, 1997 (the "1997 Quarter"). The increase
in net revenues in the 1998 Quarter was due primarily to unit sales growth from
approximately 51,000 cases in the 1997 Quarter to approximately 93,000 cases in
the 1998 Quarter. The average sales price per case decreased approximately 17%
in the 1998 Quarter compared to the 1997 Quarter due to discounts and
promotional allowances granted to promote sales. Sales in the Hawaiian market
accounted for approximately 95% of sales in the
<PAGE>
1998 Quarter compared to 78% in the 1997 Quarter. International sales
accounted for approximately 6% of sales in the 1998 Quarter compared to
approximately 13% in the 1997 Quarter. International sales for the 1998
Quarter were lower than in the preceding quarter due to advance sales
recorded in the second quarter. The Company expects growth in International
sales, especially in the Pacific Rim, through increased penetration of
existing markets and entrance into new markets. In September 1998, the
Company entered into a distributorship agreement with the largest beverage
distributor in Thailand. Shipments pursuant to this agreement are expected to
commence in the Fourth Quarter of 1998. Net sales to the U.S. Mainland were
negative $(8,000) in the 1998 Quarter compared to approximately $29,000 in
the 1997 Quarter. This negative sales amount in the 1998 Quarter reflects the
costs of shipping finished goods in connection with establishing warehouses
on the U.S. Mainland, in excess of sales.
Cost of Sales. The Company's cost of sales increased 22% to
approximately $474,000 in the 1998 Quarter from approximately $387,000 in the
1997 Quarter, primarily due to unit sales growth. However, the average cost
per case sold decreased approximately 32% in the 1998 Quarter. The primary
raw material cost component in Cost of Sales is the cost of the bottle. That
cost was substantially reduced in the 1998 Quarter compared to the 1997
Quarter as a result of the Company's purchase of the blow molding equipment
(see Note 5 to the Financial Statements). Bottling costs were also reduced
through the installation of new equipment used to further automate the
Company's bottling line. The Company continues to implement improvements to
its bottling line, which the Company believes will further reduce its
bottling costs in the Fourth Quarter of 1998.
Gross Margin. Gross margin increased to approximately $42,000 in the 1998
Quarter from approximately ($48,000) in the 1997 Quarter, primarily as a result
of the decrease in the Company's bottling costs, offset partially by decreases
in unit sales prices described above under "Net Sales."
Expenses. Selling and marketing expenses decreased 6% to approximately
$235,000 in the 1998 Quarter from approximately $250,000 in the 1997 Quarter.
General and administrative expenses decreased 3% to approximately $273,000 in
the 1998 Quarter from approximately $283,000 in the 1997 Quarter. These
expense decreases, are primarily attributable to the receipt of $100,000 from
William Wright (see Note 7 to the Financial Statements), of which
approximately $27,000 and $73,000 were applied to reduce selling and
marketing and general and administrative expenses, respectively, in the 1998
Quarter.
<PAGE>
Other Income (Expense). Other (Expense) increased to approximately $(7,000)
in the 1998 Quarter from approximately $12,000 of Other Income in the 1997
Quarter. This increase is primarily due to interest expense incurred in the 1998
Quarter associated with the equipment note payable issued to the vendor of the
Company's blow molding equipment (see Note 5 to the Financial Statements).
Investor Relations. In the 1998 Quarter, the Company engaged the
services of 8607 Colonial Group, Inc. ("Colonial") as its financial public
relations advisor for a two-year term. As compensation for such services, the
Company issued to Colonial 100,000 shares of Common Stock, plus options to
purchase an aggregate of 565,000 additional shares, exercisable over
staggered terms commencing September 1, 1998 and ending July 15, 2000. The
Company believes that the fair market value of these securities is $1,122,913,
all of which was charged as an expense in the 1998 Quarter. (see Note 9 to the
Financial Statements)
Extraordinary Item - Loss on Extinquishment of Debt. This loss was realized
in the 1997 Quarter as a result of the repayment of the Bridge Financing from
proceeds of the Company's initial public offering ("IPO").
Net Loss and Net Loss Per Share. Due to the foregoing, the Company incurred
a net loss of $(1,595,800), or $(.40) per share, in the 1998 Quarter compared to
a net loss of $(568,528) or $(.15) per share, in the 1997 Quarter. Weighted
Average Shares Outstanding were 3,973,192 in the 1998 Quarter compared to
3,899,212 in the 1997 Quarter. The Company expects to continue to generate
losses until such time, if any, as it achieves significantly higher sales
levels.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net Sales. Net Sales increased 66% to approximately $1,392,000 for the nine
months ended September 30, 1998 ("1998 YTD") from approximately $839,000 for the
nine months ended September 30, 1997 ("1997 YTD"). The increase in net revenues
in the 1998 YTD was due primarily to unit sales growth from approximately
119,000 cases in 1997 YTD to approximately 225,000 cases in 1998 YTD. Sales in
the Hawaiian market accounted for approximately 77% of sales in 1998 YTD
compared to 73% in 1997 YTD. Sales in the USA Mainland and International markets
accounted for approximately 9% and 14% of sales, respectively, in 1998 YTD
compared to 15% and 12% of sales, respectively, in 1997 YTD.
Cost of Sales. The Company's cost of sales increased 37% to approximately
$1,274,000 in 1998 YTD from approximately $930,000 in 1997 YTD, primarily due to
unit sales growth. However, the average cost per case sold decreased
approximately 28% in 1998 YTD.
Gross Margin. Gross margin increased to approximately $118,000 in the 1998
YTD from approximately ($91,000) in the 1997 YTD, primarily as a result of
reductions in the Company's cost of bottles and improvements to its bottling
line, offset partially by unit sales price decreases.
<PAGE>
Expenses. Selling and marketing expenses increased 42% to approximately
$747,000 in 1998 YTD from approximately $526,000 in 1997 YTD. The majority of
this increase is attributable to an expanded sales staff, and promotional
events. General and administrative expenses increased 36% to approximately
$889,000 in 1998 YTD from approximately $653,000 in 1997 YTD. The majority of
this increase resulted from increased outside legal and accounting expenses,
investor relation expenses, and other expenses related to being a public
company, most of which were not applicable until May 1997.
Other Income (Expense). Other (Expense) decreased to approximately $(10,000) in
1998 YTD from approximately $(386,000) in 1997 YTD. This decrease is primarily
due to the reduction in interest expense, resulting from the repayment of the
Bridge Financing in May 1997.
Extraordinary Item - Loss on Extinquishment of Debt. This loss was realized
in 1997 YTD as a result of the repayment of the Bridge Financing from proceeds
of the Company's IPO.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company incurred
a net loss of $(2,650,267), or $(.68) per share in 1998 YTD compared to a net
loss of $(1,924,401) or $(.70)) per share, in 1997 YTD. Weighted average shares
outstanding were 3,924,143 in the 1998 YTD compared to 2,748,663 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined from approximately $2,471,000 at
December 31, 1997 to approximately $722,000 at September 30, 1998, primarily due
to continuing losses from operations, capital expenditures and debt repayment.
In connection with the purchase of its bottling equipment in September
1997, the Company issued to the seller a promissory note in the original
principal amount of $825,000. This note is payable in monthly principal
installments of $13,750 during the first two years following the issuance
thereof, and thereafter in three annual installments of $165,000, plus interest
at the annual rate of 5% on the unpaid principal and balance.
The Company had capital expenditures of approximately $309,000 in the
1998 YTD period, compared to approximately $529,000 in the 1997 YTD period.
Most of these capital expenditures involved improvement to the Company's
bottling facility and bottling line. The Company anticipates additional
improvements to its bottling line in the Fourth Quarter of 1998. The Company
is also 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.
The Company does not believe that cash on hand will be adequate to fund
its operations until such time as the Company is able to generate positive
cash flow from operations. Therefore, the Company will need to raise
additional capital in order to sustain its
<PAGE>
operations and to meet continued listing standards on NASDAQ. Additional
capital would also be required in connection with the possible acquisition of
other businesses or assets. The Company is currently negotiating with certain
sources concerning the investment of additional capital. Additional capital
may also become available through the exercise of options by the Company's
financial public relations advisor. (See Note 9 to Financial Statements).
However, there can be no assurance that such capital will become available on
acceptable terms or that any of such options will be exercised. The Company
does not anticipate obtaining bank financing at this time.
YEAR 2000 ISSUE
Management has assessed the consequences, if any, of Year 2000 issues and
has determined that there would be no material effect on the Company's business,
results of operations, or financial condition. The Company expects to upgrade
its accounting software, at a cost which is not deemed material.
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. To
date, the Company has not been prevented from expanding distribution into Asian
markets as a result of the strength of the U.S. dollar relative to local
currencies. However, further strengthening of the U.S. dollar could negatively
impact developments in these markets.
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
<PAGE>
(c) During the three months ended September 30, 1998, the Company issued
to its financial public relations advisor 100,000 shares of Common Stock (the
"Initial Shares") and options (the "Options") to purchase an additional
565,000 shares of Common Stock (the "Option Shares") in consideration for
financial public relations advisory services. The Company will also be
obligated to issue to the advisor an additional 50,000 shares of Common Stock
(the "Contingent Shares") for no additional consideration, if the first
300,000 Options are exercised. (See Note 9 to the Financial Statements) This
issuance was exempt from registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereunder. The Company has registered the
Initial Shares, the Option Shares and the Contingent Shares (upon issuance)
for resale under the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.1 Option Agreement between the Registrant and 8607
Colonial Group, Inc. (Incorporated by reference to
Exhibit 4.2 to the Registrant's registration statement
on Form S-3 (File No. 333-63827))
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HAWAIIAN NATURAL WATER COMPANY, INC.
(Registrant)
November 12, 1998 By: /s/ MARCUS BENDER
----------------------
Marcus Bender
President & Chief Executive Officer
November 12, 1998 By: /s/ DAVID K. LAEHA
-----------------------
David K. Laeha
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.1 Option Agreement between the Registrant and 8607
Colonial Group, Inc. (Incorporated by reference to
Exhibit 4.2 to the Registrant's registration statement
on Form S-3 (File No. 333-63827))
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JUL-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 721,893 0
<SECURITIES> 0 0
<RECEIVABLES> 387,631 0
<ALLOWANCES> 5,076 0
<INVENTORY> 329,686 0
<CURRENT-ASSETS> 1,551,463 0
<PP&E> 2,307,241 0
<DEPRECIATION> 356,318 0
<TOTAL-ASSETS> 3,502,386 0
<CURRENT-LIABILITIES> 810,041 0
<BONDS> 442,520 0
0 0
0 0
<COMMON> 9,515,579 0
<OTHER-SE> (7,279,552) 0
<TOTAL-LIABILITY-AND-EQUITY> 3,502,386 0
<SALES> 1,392,073 515,465
<TOTAL-REVENUES> 1,456,795 533,338
<CGS> 1,273,652 413,579
<TOTAL-COSTS> 1,273,652 413,579
<OTHER-EXPENSES> 2,758,610 1,630,771
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 74,800 24,788
<INCOME-PRETAX> (2,650,267) (1,595,800)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,650,267) (1,595,800)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,650,267) (1,595,800)
<EPS-PRIMARY> (.68) (.40)
<EPS-DILUTED> (.68) (.40)
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