<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 MARCH 31, 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 has issued and outstanding 3,899,212 shares of Common Stock
on May 15, 1998
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
Hawaiian Natural Water Company, Inc.
Balance Sheet
March 31, 1998
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31,
1998
------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,778,261
Inventories 316,508
Trade accounts receivable, net of allowance for doubtful
accounts of $7,224 257,281
Other current assets 119,534
------------
Total Current Assets 2,471,584
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $252,231 1,863,528
------------
Total Assets $ 4,335,112
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 272,282
Accrued professional fees 27,667
Accrued vacation 46,000
Accrued payroll and related taxes 44,447
Accrued commissions and billbacks 35,349
Accrued other 25,776
Notes payable - Current portion 84,753
Capital lease obligation - Current portion 42,230
------------
Total Current Liabilities 578,504
NON-CURRENT LIABILITIES
Capital lease obligations - net of current portion 37,566
Notes payable - net of current portion 499,742
------------
Total Non-Current Liabilities 537,308
------------
Total Liabilities 1,115,812
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;
3,899,212 shares issued and oustanding 6,338,728
Common stock warrants and options; 3,213,310
issued and outstanding 2,053,916
Accumulated Deficit (5,173,344)
------------
Total Stockholders' Equity 3,219,300
Total Liabilities and Stockholders' Equity $ 4,335,112
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statements of Operations
For The Three Months Ended March 31, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
1997 1998
---------- ----------
<S> <C> <C>
NET SALES $ 216,683 $ 399,603
COST OF SALES 208,360 393,049
---------- ----------
Gross Margin 8,323 6,554
EXPENSES:
Selling and Marketing 86,784 242,480
General and Administrative 158,321 310,759
---------- ----------
245,105 553,239
OTHER INCOME (EXPENSE)
Interest income 1,029 28,110
Interest expense (236,195) (25,484)
---------- ----------
(235,166) 2,626
Net Loss $ (471,948) $ (544,059)
---------- ----------
---------- ----------
Basic and Diluted
Net Loss Per Share $ (0.30) $ (.14)
---------- ----------
---------- ----------
Weighted Average Common and
Common Equivalent Shares Outstanding 1,599,212 3,899,212
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statement of Stockholders' Equity
For The Three Months Ended March 31, 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 stock options
to consultants and distributors -- -- 43,000 53,370 -- 53,370
Net Loss -- -- -- -- (544,059) (544,059)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
MARCH 31, 1998 3,899,212 $6,338,728 3,213,310 $2,053,916 $ (5,173,344) $ 3,219,300
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statements of Cash Flows
For The Three Months Ended March 31, 1977 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (471,948) $ (544,059)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 17,378 44,182
Issuance of stock options to consultants and distributors -- 53,370
Amortization of loan discount and deferred costs 46,875 23,238
Net decrease (increase) in current assets 154,401 (122,116)
Net increase in current liabilities 201,371 27,347
----------- -----------
Net cash used in operating activities (51,923) (518,038)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,549) (121,634)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of principal on capital leases (3,013) (11,022)
Repayment of notes payable (13,394) (42,408)
----------- -----------
Net cash used in financing activities (16,407) (53,430)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (72,879) (693,102)
CASH AND CASH EQUIVALENTS, beginning of period 89,335 2,471,363
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 16,456 $1,778,261
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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
filed with the Securities and Exchange Commission in the the Company's Annual
Report on Form 10-KSB. In the opinion of management, the accompanying
financial statements reflect all adjustments considered necessary to fairly
present the financial position of the Company at March 31, 1998, and the
results of its operations and cash flows for the three month periods ended
March 31, 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.
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 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.
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.
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.
<PAGE>
2. LOSS PER SHARE
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 month period ended March 31, 1998 was 3,899,212 compared to 1,599,212
during the three month period ended March 31, 1997.
The Company's basic and diluted loss per share are the same for the first
quarter 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 March 31, 1998, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials $223,779
Finished goods 92,729
--------
$316,508
--------
</TABLE>
5. NOTES PAYABLE
As discussed in Note 3 to the audited financial statements for the year ended
December 31, 1997, 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 from Bottles Packaging, Inc. ("BPI"). The
consideration for the equipment was an aggregate of $1.2 million, a portion
of which was
<PAGE>
paid through the issuance of a promissory note in the original principal
amount of $825,000, payable in installments, as defined. The Company has
discounted this 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.
The following summarizes the Company's notes payable as of March 31, 1998:
<TABLE>
<S> <C>
Notes payable $760,315
Less: Unamortized discount (175,820)
-----------
Notes payable 584,495
Less: Current portion (84,753)
-----------
Non-current portion $499,742
-----------
</TABLE>
On March 11, 1998, an officer of BPI resigned as a director of the Company.
6. STOCK OPTIONS
The total number of Common Stock warrants and options shown at March 31, 1998
excludes an aggregate of 502,034 options outstanding at such date held by
officers and employees of the Company.
The Company accounts for stock options granted to non-employees in accordance
with Statement of Financial Accounting Standards 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 approximately $53,000 for options granted to certain consultants and
distributors.
In February 1998, the Company granted an aggregate of 202,500 5-year options
to certain officers and employees at an exercise price of $4 per share,
(subject to adjustment under certain circumstances). These options vest over
a three-year period. 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. If
compensation cost for stock options granted to employees had been accounted
for under SFAS 123, the Company's basic and diluted net loss per share for
the first quarter of 1998 and 1997 would have been (0.16) and (0.31),
respectively.
7. SALES BY GEOGRAPHIC REGION
For the three month periods ended March 31, 1997 and 1998, the Company had
the following sales by geographic region. All sales are made in U.S. dollars:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 % 1998 %
-------- --- -------- ---
Hawaii $159,252 73 $275,417 69
United States Mainland 41,804 19 87,622 22
International 15,627 8 36,564 9
-------- --- -------- ---
$216,683 100 $399,603 100
-------- --- -------- ---
</TABLE>
<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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH
31, 1997
Net Sales. Net Sales increased 84% to approximately $400,000 for the
three months ended March 31, 1998 (the "1998 Quarter") from approximately
$217,000 for the three months ended March 31, 1997 (the "1997 Quarter"). The
increase in net revenues in the 1998 Quarter was due primarily to unit sales
growth from approximately 28,000
<PAGE>
cases in the 1997 Quarter to approximately 61,000 cases in the 1998 Quarter,
a 118% increase. The average sales price per case decreased approximately 15%
in the 1998 Quarter compared to the 1997 Quarter due to discounts and
promotional allowances granted to promote sales. Sales in Hawaii accounted
for approximately 69% of sales in the 1998 Quarter compared to 73% in the
1997 Quarter. Sales in the US Mainland and International markets accounted
for approximately 22% and 9% of sales, respectively, in the 1998 Quarter
compared to 19% and 8% of sales, respectively, in the 1997 Quarter.
Cost of Sales. Cost of Sales increased 89% to approximately $393,000 in
the 1998 Quarter from approximately $208,000 in the 1997 Quarter, primarily
due to unit sales growth. However, the average cost per case sold decreased
approximately 13% in the 1998 Quarter compared to the 1997 Quarter. The
primary cost component in Cost of Sales is the cost of finished bottles. This
cost was substantially reduced in the 1998 Quarter as a result of the
Company's September 1997 purchase of the bottle making equipment installed at
its bottling facility (see Note 5 to the Financial Statements).
Expenses. Selling and marketing expenses increased to approximately
$242,000 in the 1998 Quarter from approximately $87,000 in the 1997 Quarter.
The majority of this increase is attributable to an expanded sales staff,
increased advertising and promotional events, and distributor incentives.
General and administrative expenses increased to approximately $311,000 in
the 1998 Quarter from approximately $158,000 in the 1997 Quarter. The
majority of this change resulted from increased administrative personnel,
increased legal and accounting services, D&O insurance, investor relations
expenses, and other expenses related to being a public company, which were
not incurred in the 1997 Quarter since the Company did not complete its
initial public offering (the "IPO") until May 1997.
Other Income (Expense). Other Income increased to approximately $3,000
in the 1998 Quarter from approximately $(235,000) in the 1997 Quarter. This
increase is primarily due to the reduction in interest expense, resulting
from the repayment of indebtedness outstanding at March 31, 1997 and interest
income from the proceeds of the IPO.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $544,059, or $(.14) per share, in the 1998 Quarter
compared to a net loss of $471,948, or $(.30) per share, in the 1997 Quarter.
Weighted average shares outstanding were 3,899,212 in the 1998 Quarter
compared to 1,599,212 in the 1997 Quarter. The Company expects to continue
to generate losses until such time, if any, as it achieves significantly
higher sales levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined from approximately $2,471,000 at
December 31, 1997 to approximately $1,778,000 at March 31, 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 installments of
$13,750 (including principal and interest) 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
balance.
The Company had capital expenditures of approximately $122,000 in the
1998 Quarter, compared to approximately $5,000 in the 1997 Quarter, primarily
related to improvements to its bottling facility. The Company anticipates
additional capital expenditures of up to $170,000 during the second quarter
of 1998, to complete the automation of its bottling line, refurbish the
pumping equipment at its water source and for other possible improvements to
its facilities. Other improvements or additions 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.
Based upon current expectations, 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 or improve its performance
more rapidly than expected in order to sustain its operations. 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. However, there can
be no assurance that such capital will become available on acceptable terms.
The Company does not anticipate obtaining bank financing at this time.
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
<PAGE>
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 FLUCTUATION
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.
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) During the three months ended March 31, 1998, the Company granted
to certain employees, consultants and distributors stock options to purchase
an aggregate of 245,500 shares of Common Stock at an exercise price of $4.00
per share.
All of the foregoing transactions were exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and the
rules and regulations thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HAWAIIAN NATURAL WATER COMPANY, INC.
(Registrant)
May 15, 1998 By: /S/ MARCUS BENDER
----------------------
Marcus Bender
President & Chief Executive Officer
May 15, 1998 By: /S/ DAVID K. LAEHA
-----------------------
David K. Laeha
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,778,261
<SECURITIES> 0
<RECEIVABLES> 264,505
<ALLOWANCES> 7,224
<INVENTORY> 316,508
<CURRENT-ASSETS> 2,471,584
<PP&E> 2,115,759
<DEPRECIATION> 252,231
<TOTAL-ASSETS> 4,335,112
<CURRENT-LIABILITIES> 578,504
<BONDS> 499,742
0
0
<COMMON> 8,392,644
<OTHER-SE> (5,173,344)
<TOTAL-LIABILITY-AND-EQUITY> 4,335,112
<SALES> 399,603
<TOTAL-REVENUES> 427,713
<CGS> 393,049
<TOTAL-COSTS> 393,049
<OTHER-EXPENSES> 553,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,484
<INCOME-PRETAX> (544,059)
<INCOME-TAX> 0
<INCOME-CONTINUING> (544,059)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (544,059)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
