<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 June 30, 1999
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 4,342,603 shares of Common Stock on
August 13, 1999.
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
Hawaiian Natural Water Company, Inc.
Balance Sheet
June 30, 1999
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 93,043
Inventories 425,173
Trade accounts receivable, net of allowance for doubtful
accounts of $24,841 517,673
Other current assets 111,698
-----------
Total Current Assets 1,147,587
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $513,825 2,388,386
INTANGIBLE ASSET, net of accumulated amortization of $1,486 157,663
-----------
Total Assets $ 3,693,636
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 709,740
Accrued professional fees 49,914
Accrued vacation 47,728
Accrued payroll and related taxes 43,974
Accrued commissions and billbacks 117,363
Accrued other 142,627
Notes payable - Current portion 30,943
Capital lease obligation - Current portion 32,099
-----------
Total Current Liabilities 1,174,388
-----------
NON-CURRENT LIABILITIES:
Capital lease obligation - net of current portion 16,200
Notes payable - net of current portion 438,030
Other 41,380
-----------
Total Non-Current Liabilities 495,610
-----------
Total Liabilities 1,669,998
-----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value; 5,000,000 shares
authorized; 750 shares issued and outstanding
with conversion rights and aggregate liquidation
preference of $750,000 488,397
Common stock, no par value; 20,000,000 shares authorized;
4,342,603 shares issued and outstanding 7,149,171
Common stock warrants and options; 3,870,259 issued
and outstanding 3,017,146
Accumulated Deficit (8,631,076)
-----------
Total Stockholders' Equity 2,023,638
-----------
Total Liabilities and Stockholders' Equity $ 3,693,636
-----------
-----------
</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 Six Months Ended June 30, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
1998 1999 1998 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 477,005 $ 742,739 $ 876,608 $ 1,228,544
COST OF SALES 407,024 516,946 800,073 965,591
----------- ----------- ----------- ----------
Gross Margin 69,981 225,793 76,535 262,953
EXPENSES:
Selling and Marketing 269,486 175,311 511,966 324,366
General and Administrative 305,114 343,472 615,873 628,383
----------- ----------- ----------- ----------
574,600 518,783 1,127,839 952,749
OTHER INCOME (EXPENSE)
Interest and other income 18,739 1,166 46,849 4,557
Interest expense (24,528) (16,967) (50,012) (40,100)
----------- ----------- ----------- ----------
(5,789) (15,801) (3,163) (35,543)
Net Loss $ (510,408) $ (308,791) $(1,054,467) $ (725,339)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Basic and Diluted
Net Loss Per Share: $ (0.13) $ (0.08) $ (0.27) $ (0.18)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Weighted Average Common
Shares Outstanding 3,899,212 4,079,563 3,899,212 4,075,115
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Hawaiian Natural Water Company, Inc.
Statement of Stockholders' Equity
For the Six Months Ended June 30, 1999
(Unaudited)
<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
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1998 4,024,563 $6,693,062 3,757,959 $2,841,329 -- $ -- $(7,895,737) $1,638,654
Issuance of common stock options
to non-employee directors -- -- 4,800 7,389 -- -- -- 7,389
Exercise of common stock options
by financial public relations
advisor
Jaunary 11, 1999 50,000 125,000 (50,000) -- -- -- -- 125,000
Issuance of preferred stock
and common stock warrants to
institutional investor, net of
offering costs
March 3, 1999 -- -- 100,000 97,422 750 488,397 -- 585,819
Issuance of common stock and
common stock warrants to
broker for services rendered
March 3, 1999 5,000 18,750 15,000 41,670 -- -- -- 60,420
Dividends payable to preferred
stock institutional investor
for period March thru June, 1999 -- -- -- -- -- -- (10,000) (10,000)
Issuance of common stock and
common stock warrants to
professional advisor for
services rendered
June 30, 1999 -- -- 12,500 16,226 -- -- -- 16,226
Issuance of common stock
options to marketing consultant
June 30, 1999 -- -- 30,000 13,110 -- -- -- 13,110
Issuance of common stock for
purchase of certain net assets
of Alii Water Bottling, Inc.
June 30, 1999 263,040 312,359 -- -- -- -- -- 312,359
Net Loss -- -- -- -- -- -- (725,339) (725,339)
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
BALANCE AT
JUNE 30, 1999 4,342,603 $7,149,171 3,870,259 $3,017,146 750 $488,397 $(8,631,076) $2,023,638
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Hawaiian Natural Water Company, Inc.
Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,054,467) $ (725,339)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 105,233 116,201
Issuance of stock and options to consultants
and distributors 53,370 29,336
Issuance of stock options to
non-employee directors - 7,389
Amortization of debt discount 44,825 35,064
Net (increase) in current assets (248,402) (377,212)
Net increase in current liabilities 28,895 286,944
Net increase in other liabilities - 41,380
------------ ------------
Net cash used in operating activities (1,069,546) (586,237)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (183,898) (267,235)
Decrease in deposits on equipment - (34,145)
------------ ------------
Net cash used in investing activities (183,898) (301,380)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock and common
stock warrants - 646,239
Exercise of common stock options by financial public
relations advisor - 125,000
Repayments of notes payable (84,818) (85,578)
Repayment of principal on capital leases (23,738) (25,290)
------------ ------------
Net cash provided by (used in)
financing activities (108,556) 660,371
NET (DECREASE) IN CASH AND CASH EQUIVALENTS $ (1,362,000) $ (227,246)
CASH AND CASH EQUIVALENTS, beginning of period 2,471,362 320,289
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,109,362 $ 93,043
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Aquisition of certain assets of Ali'i Water Bottling, Inc.
for common stock $ - $ 312,359
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
June 30,1999
(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, 1998 and notes thereto
as filed with the Securities and Exchange Commission in the Company's Annual
Report on Form 10-KSB. The auditor's report on those financial statements
included an explanatory fourth paragraph indicating that there is substantial
doubt about the Company's ability to continue as a going concern. 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 June 30, 1999, the results of its operations for the three and six month
periods ended June 30, 1998 and 1999, and the cash flows for the six month
periods ended June 30, 1998 and 1999, 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
their 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 sufficient additional financing is
uncertain. Although the accompanying unaudited financial statements for the
three and six months ended June 30, 1998 and 1999 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 ending December 31, 1999, their report on
these statements will include an
<PAGE>
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 upon shipment. 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. The Company also provides a reserve for estimated
sales returns and related disposal costs. Net sales revenue reflects
reductions for the reserve for sales returns, discounts and freight-out.
GROSS MARGIN. The Company's plant currently has a normal production capacity
of approximately 200,000 cases per calendar quarter. The Company is currently
operating its plant at approximately 61 percent of this capacity. Since a
significant portion of the Company's cost of sales includes fixed production
costs, the Company anticipates higher gross margins as production and sales
increase. The increased utilization of production capacity in the second
quarter of 1999 (61 percent) compared to the second quarter of 1998 (30
percent) enabled the Company to improve gross margin for the quarter.
2. LOSS PER SHARE
Basic and Diluted Loss Per Share is computed by dividing the Net Loss by the
Weighted Average Common Shares Outstanding during the period. The Weighted
Average Common Shares Outstanding during the three month periods ended June
30, 1998 and 1999, were 3,899,212 and 4,079,563, respectively, and for the six
month periods ended June 30, 1998 and 1999, were 3,899,212 and 4,075,115,
respectively.
The Company's Basic and Diluted Loss Per Share is the same for the second
quarter and first half of both 1998 and 1999 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 June 30, 1999, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials $285,204
Finished goods 139,969
--------
$425,173
--------
--------
</TABLE>
Raw materials inventory consists of PET "pre-forms", caps, labels and various
packaging and shipping materials. Finished goods inventory includes materials
and conversion costs.
<PAGE>
5. ACQUISITION OF INTANGIBLE ASSETS
On June 1, 1999, the Company purchased for $150,000 the beverage products,
trademarks and all other rights related to a line of herbal beverages. The
acquisition cost and related legal expenses have been capitalized and will be
amortized over a 5 year period. The Company intends to introduce this product
line into selected markets over the next year.
6. 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 issuance of a promissory note in the original
principal amount of $825,000, payable in installments, as defined. The
Company 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 $11,739 installment note payable for the
purchase of a vehicle.
The following summarizes the Company's notes payable as of June 30, 1999:
<TABLE>
<S> <C>
Equipment note payable $ 536,250
Less: Unamortized discount (79,016)
---------
Net equipment note payable 457,234
Vehicle installment note payable 11,739
---------
Subtotal - notes payable 468,973
Less: Current portion (30,943)
---------
Non-current portion $ 438,030
---------
---------
</TABLE>
<PAGE>
7. STOCK OPTIONS
The total number of Common Stock warrants and options shown at June 30, 1999
excludes an aggregate of 482,000 options outstanding at such date held by
officers and employees of the Company. In the second quarter of 1999, 45,000
options were issued to officers or employees of the Company and 50,000
options were forfeited unexercised. 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. No such compensation expense was recognized during the second
quarter of 1999.
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 second quarter of 1999, the Company
recorded $13,110 for stock options granted to a marketing consultant and
$16,226 for stock options granted to a legal advisor.
<PAGE>
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 June 30,
1998 and 1999, the Company had the following sales by geographic region:
<TABLE>
<CAPTION>
1998 % 1999 %
-------- --- --------- ---
<S> <C> <C> <C> <C>
Hawaii $305,771 64 $537,833 73
U. S. Mainland 42,191 9 39,654 5
International 129,043 27 165,252 22
-------- --- -------- ---
$477,005 100 $742,739 100
-------- --- -------- ---
-------- --------
</TABLE>
For the six month periods ended June 30, 1998 and 1999, the Company had the
Following sales by geographic region:
<TABLE>
<CAPTION>
1998 % 1999 %
------- --- -------- ---
<S> <C> <C> <C> <C>
Hawaii $581,188 66 $ 959,317 78
U.S. Mainland 129,813 15 58,379 5
International 165,607 19 210,848 17
------- --- --------- ---
$876,608 100 $1,228,544 100
------- --- --------- ---
------- ---------
</TABLE>
<PAGE>
9. SERIES A CONVERTIBLE PREFERRED STOCK OFFERING
In March 1999, the Company completed the first $750,000 installment of an
aggregate $1.25 million private offering of Series A convertible preferred
stock and three year warrants to purchase an additional 100,000 shares of
common stock. The offering was placed with a single institutional investor
who committed to fund the second $500,000 installment subject to certain
closing conditions. The funding of this second installment occurred subsequent
to June 30, 1999 (See Note 12).
The preferred stock is entitled to cumulative dividends at an annual rate of
4%, payable Quarterly commencing May 31, 1999, in cash or common stock at the
election of the Company.
The preferred stock is convertible into common stock, in whole or in part at
the election of the holder, at a variable conversion price based upon the
market price (as defined) of the common stock during a measurement period
prior to each conversion date. The entirety of the shares of preferred stock
may be converted within 180 days of the initial closing. The preferred stock
is redeemable by the Company prior to conversion. Under certain
circumstances, the Company may also redeem the conversion shares in cash.
The Company has filed a registration statement with the Securities and
Exchange Commission (SEC) covering the shares of common stock underlying the
preferred stock and warrants. Offering costs, consisting primarily of
financial advisory and legal fees, amounted to approximately $164,000,
including the non-cash grant of common stock and warrants valued at
approximately $60,000 using the trading price of the Company's common stock
at the date of grant and the Black-Scholes Option pricing model.
Approximately $97,000 of the net proceeds was allocated to the warrants
granted to the preferred stock investor, based upon the relative fair value
of the preferred stock and the warrants. In connection with the funding of
the second installment, the original exercise price of the warrants issued to
the preferred stock investor was reduced. (See Note 12).
<PAGE>
10. INVESTOR RELATIONS
On July 31, 1998, the Company engaged a financial public relations advisor
for a two-year term. As compensation for its services, the Company issued to
this advisor 100,000 shares of Common Stock, plus options to purchase an
aggregate of 565,000 additional shares at exercise prices ranging from $2.50
to $6.00 per share. On January 11, 1999, the advisor exercised 50,000 of
these options, at an exercise price of $2.50 per share, which resulted in
cash proceeds to the Company of $125,000.
11. ACQUISITION OF ALI'I WATER BOTTLING, INC.
Effective June 30, 1999, the Company purchased all of the operating assets,
net of certain liabilities, of Ali'i Water Bottling, Inc.("Ali'i"). Ali'i
bottles and distributes purified water to the home and office market on the
Big Island of Hawaii and also sells purified water in PET plastic bottles
through retail channels throughout the Hawaiian Islands. The Company assumed
Ali'i's trade payables and contractual obligations related to continuing
operations but did not assume any note(s) payable, line of credit or
liabilities for federal, state,or local taxes incurred by Ali'i. The
consideration for the net assets purchased was 300,000 shares of common stock
of the Company, subject to adjustment based upon the Net Current Assets (as
defined) of Ali'i as of the closing. This post-closing adjustment resulted
in the cancellation of 36,960 shares. The net assets acquired were recorded
in the accounting records of the Company on June 30, 1999 in the amount of
$312,359, which was the fair value of the 263,040 issued shares (after
adjustment), based upon the closing sales price of the common stock on the
closing date. No significant goodwill resulted from this acquisition.
Acquisition costs were not material. The shares issued are "restricted
securities" as defined in Rule 144 under the Securities Act of 1933, and may
not be sold except in compliance with such Rule or other exemption from
registration under the Securities Act.
Had the acquisition occurred at the beginning of the current and prior fiscal
years, the unaudited and pro forma net sales, net loss, diluted net loss per
share and diluted weighted average common shares outstanding would be as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
-------------------- --------------------
1998 1999 1998 1999
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 634,206 $ 965,939 $ 1,178,227 $ 1,705,345
Net loss $(608,920) $(392,055) (1,191,268 $(1,140,048)
Diluted net loss per share $(0.15) $(0.09) $(0.29) $(0.26)
Diluted weighted average
common shares outstanding 4,162,252 4,342,603 4,162,252 4,338,155
</TABLE>
12. SUBSEQUENT EVENT
On August 10, 1999, the Company received the second investment of $500,000 in
Series A convertible preferred stock from an institutional investor (See Note
9). In connection with this investment, the Company agreed to reduce the
exercise price of the 100,000 warrants held by the investor to $1.25 per
share.
<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 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:
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; 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; POSSIBLE ACTIONS BY CUSTOMERS,
SUPPLIERS, COMPETITORS OR REGULATORY AUTHORITIES; AND 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: THE PROSPECT FOR CONTINUING LOSSES AND THE
COMPANY'S POSSIBLE INABILITY TO CONTINUE AS A GOING CONCERN BASED UPON ITS
EXISTING CAPITAL RESOURCES; THE COMPANY'S NEED FOR ADDITIONAL CAPITAL AND THE
POSSIBLE UNAVAILABILITY OF SUCH CAPITAL ON ACCEPTABLE TERMS AND CONDITIONS;
POSSIBLE ADVERSE CONDITIONS, INCLUDING VOLATILITY, IN THE MARKET FOR THE
COMPANY'S SECURITIES AND THE POSSIBLE ADVERSE IMPACT OF SUCH CONDITIONS ON
THE COMPANY'S ABILITY TO RAISE ADDITIONAL CAPITAL AS NEEDED; POSSIBLE ADVERSE
CHANGES IN THE MARKET FOR THE COMPANY'S PRODUCTS, INCLUDING AS A RESULT OF
ADVERSE ECONOMIC CONDITIONS, SUCH AS THOSE CURRENTLY AFFECTING CERTAIN FOREIGN
TARGET MARKETS; POSSIBLE ADVERSE EFFECTS OF CHANGES IN CURRENCY EXCHANGE
RATES; POSSIBLE ADVERSE CHANGES IN THE COMPANY'S DISTRIBUTOR NETWORK;
POSSIBLE ADVERSE DEVELOPMENTS IN THE EXECUTION OF THE COMPANY'S EXISTING
BUSINESS STRATEGY OR IN THE IMPLEMENTATION OF CHANGES THERETO; POSSIBLE
ADVERSE CHANGES IN THE COMPANY'S COST OF MATERIALS OR SOURCES OF SUPPLY;
POSSIBLE ADVERSE DEVELOPMENTS IN THE COMPANY'S ABILITY TO ATTRACT AND RETAIN
KEY PERSONNEL; POSSIBLE ADVERSE DEVELOPMENTS IN GOVERNMENTAL REGULATION IN
THE U.S. OR ABROAD; AND POSSIBLE ADVERSE DEVELOPMENTS IN THE COMPETITIVE
ENVIRONMENT FOR THE COMPANY'S PRODUCT. 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.
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 JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998
Net Sales. Net Sales increased 56% to approximately $743,000 for the
three months ended June 30, 1999 (the "1999 Quarter") from approximately
$477,000 for the three months ended June 30, 1998 (the "1998 Quarter"). The
increase in net sales in the 1999 Quarter was due primarily to unit sales
growth from approximately 71,000 cases in the 1998 Quarter to approximately
122,000 cases in the 1999 Quarter. The average sales price per case decreased
9% in the 1999 Quarter compared to the 1998 Quarter due to discounts and
promotional allowances granted to promote sales. Sales in the Hawaiian market
accounted for 73% of sales in the 1999 Quarter compared to 64% in the 1998
Quarter. U.S. Mainland sales accounted for 5% in the 1999 Quarter compared to
9% in the 1998 Quarter. International sales accounted for 22% of sales in the
1999 Quarter compared to 27% in the 1998 Quarter. The Company expects growth
in International sales, especially in the Pacific Rim, through increased
penetration of existing markets and entrance into new markets. As previously
reported, the Company has recently entered into distributorship agreements
with major distribution companies in Thailand and Japan. Shipments pursuant
to these agreements commenced in the fourth quarter of 1998.
Cost of Sales. The Company's aggregate cost of sales increased 27% to
approximately $517,000 in the 1999 Quarter from approximately $407,000 in the
1998 Quarter, primarily due to unit sales growth. However, the average cost
per case sold decreased 26% in the 1999 Quarter. Contributing to the decrease
in the average cost per case were a reduction in (1) the amount of production
fixed costs per case as a result of the increase in unit sales, and (2) raw
material cost. A primary raw material cost component in Cost of Sales is the
cost of the finished bottle, which was substantially reduced in the 1999
Quarter compared to the 1998 Quarter as a result of a reduction in labeling
costs. 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 it believes
will further reduce its direct costs in the remainder of 1999.
Gross Margin. Gross margin increased to approximately $226,000 in the
1999 Quarter from approximately $70,000 in the 1998 Quarter, primarily as a
result of higher sales volume and the decrease in the Company's bottling
costs, offset partially by decreases in unit sales prices described above
under "Net Sales." Plant utilization improved to 61% of capacity in the 1999
Quarter, compared to 30% in the 1998 Quarter.
Expenses. Selling and marketing expenses decreased 35% to approximately
$175,000 in the 1999 Quarter from approximately $269,000 in the 1998 Quarter.
The majority of this decrease is attributable to reduced consulting fees and
expenses due to the termination of certain Mainland sales representatives.
General and administrative expenses increased 12% to approximately $343,000
in
<PAGE>
the 1999 Quarter from approximately $305,000 in the 1998 Quarter. This
increase resulted primarily from increased professional advisory fees,
relating primarily to the acquisitions completed during the quarter.
Other (Expense). Net Other (Expense) was approximately $(16,000) in the
1999 Quarter compared to approximately $(6,000) in the 1998 Quarter. This
increased expense is primarily due to a reduction in interest income earned
on cash equivalents, as a result of a reduction in the amount invested.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $(308,791), or $(.08) per share, in the 1999 Quarter
compared to a net loss of $(510,408) or $(.13) per share, in the 1998
Quarter. Weighted Average Shares Outstanding were 4,079,563 in the 1999
Quarter compared to 3,899,212 in the 1998 Quarter. The Company expects to
continue to generate losses until such time, if any, as it achieves
significantly higher sales levels.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales increased 40% to approximately $1,229,000 for the
six months ended June 30, 1999 (the "1999 First Half") from approximately
$877,000 for the six months ended June 30, 1998 (the "1998 First Half"). This
increase in net sales was due primarily to unit sales growth from
approximately 133,000 cases in the 1998 First Half to approximately 203,000
cases in the 1999 First Half. The average sales price per case decreased
approximately 8% in the 1999 First Half compared to the 1998 First Half due
to discounts and promotional allowances granted to promote sales. Sales in
the Hawaiian market accounted for approximately 78% of sales in the 1999
First Half compared to 66% in the 1998 First Half. Sales to the U.S. Mainland
and International markets accounted for approximately 5% and 17% of sales,
respectively, in the 1999 First Half, compared to 15% and 19% of sales,
respectively, in the 1998 First Half.
Cost of Sales. The Company's aggregate cost of sales increased 21% to
approximately $965,000 in the 1999 First Half from approximately $800,000 in
the 1998 First Half, primarily due to unit sales growth. However, the average
cost per case sold decreased approximately 21% in the 1999 First Half.
Expenses. Selling and marketing expenses decreased 37% to approximately
$324,000 in the 1999 First Half from approximately $512,000 in the 1998 First
Half. The majority of this decrease is attributable to an overall reduction
in expenditures for advertising and promotion. General and administrative
expenses increased slightly during 1999 First Half as compared to the 1998
First Half.
Other (Expense). Other (Expense) increased to approximately ($36,000) in
the 1999 First Half from approximately ($3,000) in the 1998 First Half. This
decrease is primarily due to the reduction in interest income, resulting from
a reduction in interest income earned on cash equivalents as a result of a
reduction in the amount invested.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from approximately $320,000 at
December 31, 1998 to approximately $93,000 at June 30, 1999, primarily due to
continuing losses from operations, capital expenditures and debt repayment,
partially offset by the net cash proceeds of an offering of convertible
preferred stock (see Note 9 to the Financial Statements) and the exercise of
certain stock options (see Note 10 to the Financial Statements). Subsequent
to the end of the 1999 Quarter, the preferred stock investor completed the
second installment ($500,000) of its convertible preferred stock investment.
(See Note 12 to the Financial Statements.)
The Company's principal borrowings currently consist of a promissory
note issued in connection with the purchase of certain bottle making
equipment in September 1997. The Company issued to the seller of the
equipment a promissory note in the original principal amount of $825,000.
This note is payable in monthly installments of $13,750 through September
1999, and thereafter in three annual installments of $165,000, plus interest
at the annual rate of 5% on the unpaid principal balance.
The Company acquired approximately $312,000 of capital assets for
non-cash consideration in the 1999 Quarter in connection with the purchase of
the operating assets of Ali'i Water Bottling, Inc. (See Note 11 to the
Financial Statements). The Company acquired approximately $267,000 of
additional capital assets for cash during the 1999 First Half compared to
approximately $184,000 of net capital expenditures in the 1998 First Half.
During the 1999 Quarter, the Company purchased for $150,000 the product
formulations, label designs, trademarks and all other rights related to a
line of herbal beverages. Additionally, approximately $9,000 of related legal
fees were incurred. These expenditures have been recorded as an intangible
asset. Of the total purchase price, $25,000 remained unpaid at June 30, 1999
and is recorded in the balance sheet at such date as a liability under
Accrued Other. The Company intends to introduce this product line into
selected markets over the next year.
The Company does not believe that cash on hand will be sufficient to
fund 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 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. However, the Company has no commitments for
any additional financing as of this date, and 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.
YEAR 2000 ISSUE
All statements contained in the following section are "Year 2000 Readiness
Disclosures" within the meaning of the Year 2000 Information and Disclosure Act.
<PAGE>
The Year 2000 issue (the "Year 2000 Issue") in computers arises from the
common industry practice of using two digits to represent a date in computer
software code and databases to enhance both processing time and save storage
space. Therefore, when dates in the Year 2000 and beyond are indicated and
computer programs read the date "00", the computer may default to the year
"1900" rather than the correct "2000." This could result in incorrect
calculations, faulty data and computer shutdowns, which would cause
disruptions of operations. In addition, the year 2000 is a leap year and
systems need to recognize it as such.
The Company has developed a multi-phase program for Year 2000 Issues
that consists of the following: (1) assessment of the corporate systems and
operations of the Company that could be affected by the Year 2000 Issue, (2)
remediation of non-compliant systems and components, if any, and (3) testing
of systems and components following remediation. The Company has focused its
Year 2000 compliance assessment program on three principal areas: (a) the
Company's internal information technology system applications, including
voice and data systems ("IT Systems"), (b) the Company's internal non-IT
facilities systems, including embedded software in environmental controls,
security systems, fire protection systems, and public utility connections for
gas, electric and telephone systems ("Facilities Systems"), (c) Year 2000
compliance by third parties with which the Company has a material
relationship, such as significant customers, vendors, financial institutions
and insurers.
The Company has completed an inventory and risk assessment of its own
internal IT Systems, Facilities Systems, and equipment that it believes could
be adversely affected by the Year 2000 Issue, and believes (except for
certain computer accounting software upgrades to be purchased in 1999) that
its own internal systems are, at present, substantially compliant based upon
internal system tests, currently available information and reasonable
assurance by its equipment and software vendors. The cost to remediate any
Year 2000 Issues with regard to the Company's IT, Facilities Systems and
equipment is not material.
In the third quarter of 1999, the Company plans to begin sending
questionnaires to and/or contacting its outside vendors and customers
regarding their state of readiness with respect to identifying and
remediating their Year 2000 Issues. It is not possible for the Company to
determine or be assured that adequate remediation of the Year 2000 Issue will
be accomplished by such vendors and customers. Furthermore, it is not
possible for the Company to determine or be assured that third parties upon
which the Company's vendors are dependent, will accomplish adequate
remediation of the their Year 2000 Issue. Except for the Company's public
utility service vendors, who have indicated that they expect to be in
compliance by mid-1999, the Company believes that, should a Year 2000 Issue
exist with respect to any of the Company's major outside vendors, alternative
vendors are readily available that could furnish the Company with similar
supplies or services without undue cost or expense. However, with respect to
customers, there can be no assurance that a major Year 2000 Issue would not
materially impact the Company's operations.
<PAGE>
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
(c) Effective June 30, 1999, the Company issued an aggregate of 263,040
shares of Common Stock to Ali'i Water Bottling, Inc. ("Ali'i"), after
cancellation of 36,960 shares as a result of a post-closing adjustment. These
shares were issued in exchange for substantially all of the operating assets,
net of certain liabilities, of Ali'i. During the second quarter of 1999, the
Company also granted non-qualified stock options to purchase an aggregate of
1,800 shares of Common Stock to its non-employee directors and an aggregate
of 42,500 shares to certain professional advisors. All of the foregoing
transactions were exempt from registration under the Securities Act of 1933
as amended, by virtue of Section 4(2) hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1999 Annual Meeting of Stockholders (the "Annual
Meeting") on June 17, 1999.
(b) The following five persons were elected as directors of the Company:
Marcus Bender
Brian Barbata
Michael Chagami
Keijiro Sorimachi
Michael Iscove
(c) The following matters were voted upon at the Annual Meeting:
(1) Election of Directors:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Marcus Bender 3,978,907 57,071 --
Brian Barbata 3,979,007 56,971 --
Michael Chagami 3,979,007 56,971 --
Keijiro Sorimachi 3,979,007 56,971 --
Michael Iscove 3,979,007 56,971 --
</TABLE>
(2) Approval of the issuance of an indefinite number of shares of
Common Stock upon conversion of the Series A Convertible Preferred Stock:
<TABLE>
<CAPTION>
BROKER*
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C>
1,629,274 62,370 20,600 2,323,734
</TABLE>
* Brokers non-votes do not count for the purpose of
determining whether this matter has been approved.
(3) Ratification of Arthur Andersen LLP as the Company's
independent accountants for the fiscal year ending December 31, 1999:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
4,011,558 24,320 100
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Asset Purchase Agreement by and among the Registrant, Ali'i
Water Bottling, Inc. and Dennis Harris (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K dated June 30, 1999 (the "June 1999 8-K"))
10.2 Bill of Sale (incorporated by reference to Exhibit 10.2
to the June 1999 8-K)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Current Report dated June 30, 1999, relating to the acquisition of
Ali'i. The report includes audited financial statements of Ali'i as of and
for the year ended March 31, 1999, and pro forma financial statements giving
effect to the acquisition as of March 31, 1999 and for the year ended
December 31, 1998 and the three months ended March 31, 1999.
<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)
August 13, 1999 By: /s/ MARCUS BENDER
----------------------
Marcus Bender
President & Chief Executive Officer
August 13, 1999 By: /s/ WILLARD D. IRWIN
-----------------------
Willard D. Irwin
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.1 Asset Purchase Agreement by and among the Registrant, Ali'i
Water Bottling, Inc. and Dennis Harris (incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K dated June 30, 1999 (the "June 1999 8-K"))
10.2 Bill of Sale (incorporated by reference to Exhibit 10.2
to the June 1999 8-K)
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 APR-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 93,043 0
<SECURITIES> 0 0
<RECEIVABLES> 542,514 0
<ALLOWANCES> 24,841 0
<INVENTORY> 425,173 0
<CURRENT-ASSETS> 1,147,587 0
<PP&E> 2,902,211 0
<DEPRECIATION> 513,825 0
<TOTAL-ASSETS> 3,693,636 0
<CURRENT-LIABILITIES> 1,174,388 0
<BONDS> 438,030 0
0 0
488,397 0
<COMMON> 10,166,317 0
<OTHER-SE> (8,631,076) 0
<TOTAL-LIABILITY-AND-EQUITY> 3,693,636 0
<SALES> 742,739 1,228,544
<TOTAL-REVENUES> 743,905 1,233,101
<CGS> 516,946 965,591
<TOTAL-COSTS> 516,946 965,591
<OTHER-EXPENSES> 518,783 952,749
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (16,967) (40,100)
<INCOME-PRETAX> (308,791) (725,339)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (308,791) (725,339)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (308,791) (725,339)
<EPS-BASIC> (0.08) (0.18)
<EPS-DILUTED> (0.08) (0.18)
</TABLE>
