<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, 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 4,079,563 shares of Common Stock on
May , 1999.
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
Hawaiian Natural Water Company, Inc.
Balance Sheet
March 31, 1999
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 437,203
Inventories 351,413
Trade accounts receivable, net of allowance for doubtful
accounts of $19,109 293,735
Other current assets 45,147
-----------
Total Current Assets 1,127,498
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $453,451 2,076,501
-----------
Total Assets $ 3,203,999
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 341,354
Accrued professional fees 34,538
Accrued vacation 41,243
Accrued payroll and related taxes 47,183
Accrued commissions and billbacks 90,560
Accrued other 92,850
Note payable - Current portion 25,322
Capital lease obligation - Current portion 43,783
-----------
Total Current Liabilities 716,833
-----------
NON-CURRENT LIABILITIES
Capital lease obligation - net of current portion 17,925
Note payable - net of current portion 469,257
-----------
Total Non-Current Liabilities 487,182
-----------
Total Liabilities 1,204,015
-----------
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;
4,079,563 shares issued and outstanding 6,836,812
Common stock warrants and options; 3,825,959 issued
and outstanding 2,987,060
Accumulated Deficit (8,312,285)
-----------
Total Stockholders' Equity 1,999,984
-----------
Total Liabilities and Stockholders' Equity $ 3,203,999
-----------
-----------
</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, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------------
1998 1999
---------- -----------
<S> <C> <C>
NET SALES $ 399,603 $ 485,805
COST OF SALES 393,049 448,645
---------- -----------
Gross Margin 6,554 37,160
EXPENSES:
Selling and Marketing 242,480 149,055
General and Administrative 310,759 284,911
---------- -----------
553,239 433,966
OPERATING LOSS (546,685) (396,806)
OTHER INCOME (EXPENSE)
Interest and other income 28,110 3,391
Interest expense (25,484) (23,133)
---------- -----------
2,626 (19,742)
Net Loss $ (544,059) $(416,548)
---------- -----------
---------- -----------
Basic and Diluted
Net Loss Per Share: $ (0.14) $ (0.10)
---------- -----------
---------- -----------
Weighted Average Common
Shares Outstanding 3,899,212 4,070,619
---------- -----------
</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, 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 - - 3,000 6,639 - - - 6,639
Exercise of common stock
options by financial public
relations advisor
January 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 warrants to financial
advisors
March 3, 1999 5,000 18,750 15,000 41,670 - - - 60,420
Net Loss - - - - - - (416,548) (416,548)
--------- ---------- --------- ---------- --------- --------- ------------ -----------
BALANCE AT
MARCH 31, 1999 4,079,563 $6,836,812 3,825,959 $2,987,060 750 $ 488,397 $(8,312,285) $1,999,984
--------- ---------- --------- ---------- --------- --------- ------------ -----------
--------- ---------- --------- ---------- --------- --------- ------------ -----------
</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, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (544,059) $ (416,548)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 44,182 55,527
Issuance of stock and options to consultants and distributors 53,370 -
Issuance of stock options to non-employee directors - 6,639
Amortization of debt discount 23,238 18,151
Net decrease(increase) in current assets (122,116) 18,477
Net increase(decrease) in current liabilities 27,347 (166,673)
------------ ------------
Net cash used in operating activities (518,038) (484,427)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (121,634) (115,534)
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 (42,408) (42,485)
Repayment of principal on capital leases (11,022) (11,879)
------------ ------------
Net cash provided by (used in) financing activities (53,430) 716,875
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (693,102) $ 116,914
CASH AND CASH EQUIVALENTS, beginning of period 2,471,363 320,289
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,778,261 $ 437,203
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31,1999
(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 March 31, 1999, the
results of its operations for the three month periods ended March 31, 1998 and
1999, and the cash flows for the three month periods ended March 31, 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 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 three months
ended March 31, 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
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 40 percent of this capacity. Since a
significant portion of the Company's cost of sales includes certain fixed
production costs, the Company anticipates low gross margins to continue until
such time, if any, as production and sales reach levels sufficient to absorb
these fixed costs. The increased utilization of production capacity in First
Quarter 1999 as compared to First Quarter 1998 (31 percent of capacity) 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 period ended March 31,
1999 were 4,070,619 compared to 3,899,212 during the three month period ended
March 31, 1998.
The Company's Basic and Diluted Loss Per Share is the same for the first
Quarters 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 March 31, 1999, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials $269,238
Finished goods 82,175
--------
$351,413
--------
--------
</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.
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 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 $13,008 installment note payable for the
purchase of a vehicle.
The following summarizes the Company's notes payable as of March 31, 1999:
<TABLE>
<S> <C>
Equipment note payable $ 577,500
Less: Unamortized discount (95,929)
---------
Net equipment note payable 481,571
Vehicle installment note payable 13,008
---------
Subtotal - notes payable 494,579
Less: Current portion (25,322)
---------
Non-current portion $ 469,257
---------
---------
</TABLE>
6. STOCK OPTIONS
The total number of Common Stock warrants and options shown at March 31, 1999
excludes an aggregate of 487,000 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 first quarter of 1999. 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 1999, the Company recorded $6,639 for common stock
options granted to non-employee directors and $139,092 for common stock warrants
granted to an institutional investor and a financial advisor related to an
offering of preferred stock (see Note 8).
<PAGE>
7. 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 March 31, 1998
and 1999, the Company had the following sales by geographic region:
<TABLE>
<CAPTION>
1998 % 1999 %
-------- --- -------- ---
<S> <C> <C> <C> <C>
Hawaii $275,417 69 $421,484 87
U. S. Mainland 87,622 22 18,725 4
International 36,564 9 45,596 9
-------- --- -------- ---
$399,603 100 $485,805 100
-------- --- -------- ---
</TABLE>
<PAGE>
8. $1.25 MILLION OFFERING WITH AN INSTITUTIONAL INVESTOR
On March 3, 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 has
committed to fund the second $500,000 installment subject to certain closing
conditions. The funding of this second installment has not yet occurred.
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 conversion price of $3.00 per share until the
closing of the second installment. Thereafter, the conversion price will be a
variable 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.
Since the preferred stock will be convertible into common stock at a price
determined by future market conditions, the precise number of common stock
shares into which the Preferred stock will be converted is currently
indeterminable and could be in excess of 20% of the total common shares
currently outstanding. Under applicable provisions of the Nasdaq Stock Market's
Corporate Governance Rules, any such issuance in excess of 20% would require the
approval of the Company's stockholders. The Company has agreed to submit the
matter to a vote at the 1999 annual shareholders' meeting.
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 stock warrants.
9. 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.
<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 CONITIONS, 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
Net Sales. Net Sales increased 22% to approximately $486,000 for the three
months ended March 31, 1999 (the "1999 Quarter") from approximately $400,000
for the three months ended March 31, 1998 (the "1998 Quarter"). The increase
in net revenues in the 1999 Quarter was due primarily to unit sales growth
from approximately 61,000 cases in the 1998 Quarter to approximately 79,000
cases in the 1999 Quarter. The average sales price per case decreased 6% 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 87% of sales in the 1999 Quarter compared to 69% in the 1998
Quarter. U.S. Mainland sales accounted for 4% in the 1999 Quarter compared to
22% in the 1998 Quarter. International sales accounted for 9% of sales in
both the 1999 Quarter and 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 14% to
approximately $449,000 in the 1999 Quarter from approximately $393,000 in the
1998 Quarter, primarily due to unit sales growth. However, the average cost
per case sold decreased 12% in the 1999 Quarter. 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 $37,000 in the 1999
Quarter from approximately $7,000 in the 1998 Quarter, primarily as a result Of
higher volume sales 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 40% of capacity in the 1999 Quarter, compared to
31% in the 1998 Quarter.
Expenses. Selling and marketing expenses decreased 39% to approximately
$149,000 in the 1999 Quarter from approximately $242,000 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 decreased 8% to approximately $285,000 in
the 1999 Quarter from approximately $311,000 in the 1998 Quarter. This
decrease resulted primarily from reduced consulting fees and investor
relations expenses.
Other Income (Expense). Net Other Income (Expense) was approximately
$(20,000) in the 1999 Quarter compared to approximately $3,000 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 $(416,548), or $(.10) per share, in the 1999 Quarter compared to a
net loss of $(544,059) or $(.14) per share, in the 1998 Quarter. Weighted
Average Shares Outstanding were 4,070,619 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased from approximately $320,000 at
December 31, 1998 to approximately $437,000 at March 31, 1999, primarily due
to the net cash proceeds from an offering of convertible preferred stock and
the exercise of common stock options (see Note 8 to Financial Statements),
offset in part by continuing losses from operations, capital expenditures and
debt repayment. The preferred stock investor has committed to purchase an
additional $500,000 (approximately $450,000, net of fees and expenses) in
convertible preferred stock, subject to certain conditions.
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 had net capital expenditures of approximately $116,000 in
the 1999 Quarter, compared to approximately $121,000 in the 1998 Quarter.
Most of these capital expenditures involved the purchase and installation of
a five liter bottling line. The Company is also considering extending its
product line by entering the home/office delivery market, either
independently or through the acquisition of an existing bottler. Any such
extension would require additional capital expenditures.
The Company does not believe that cash on hand or currently committed
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, except for the convertible
preferred stock described above, 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.
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 four principal areas: (2) 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 second 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.
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>
(a) On March 3, 1999, the Company completed the first $750,000 installment of
an aggregate $1.25 million private offering of Series A Convertible Preferred
Stock (the "Preferred Stock") and warrant (the "Warrant") to purchase an
additional 100,000 shares of Common Stock of the Company. The Warrant is
exercisable for three years at an exercise price of $3.625 per share. The
offering was placed with a single institutional investor. The investor has
committed to purchase an additional $500,000 in Preferred Stock, subject to
certain conditions, including the effectiveness of a registration statement
covering the shares of Common Stock underlying the Preferred Stock and the
Warrant. In connection with the offering, the Company issued to certain
financial advisors as compensation an aggregate of 5,000 shares of Common
Stock and warrants to purchase an additional 15,000 shares of Common Stock.
The Company also granted to its non-employee directors non-qualified stock
options to purchase an aggregate of 3,000 shares of Common Stock. All of the
foregoing transactions were exempt from registration under the Securities Act
of 1933 as amended, by virtue of Section 4(2) hereunder.
(b) As of March 31, 1999, the Company had no proceeds remaining from its
May 1997 initial public offering. These proceeds were used primarily to fund
capital expenditures and ongoing losses from operations, as previously
reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.1 Certificate of Amendment re Series A Convertible
Preferred Stock (Incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on
Form 8-K dated March 3, 1999 (the "March 1999 8-K"))
4.2 Certificate representing Series A Convertible
Preferred Stock (Incorporated by reference to
Exhibit 4.2 to the March 1999 8-K)
4.3 Warrant issued to Amro International, S.A.
(the "Investor") (Incorporated by reference to
Exhibit 4.3 to the March 1999 8-K)
10.1 Convertible Preferred Shares and Warrant Purchase
Agreement between the Registrant and the Investor
(Incorporated by reference to Exhibit 10.1 to the
March 1999 8-K)
10.2 Registration Rights Agreement between the Registrant
and the Investor (Incorporated by reference to
Exhibit 10.2 to the March 1999 8-K)
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Current Report on Form 8-K, dated March 3, 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)
May 14, 1999 By: /s/ MARCUS BENDER
----------------------
Marcus Bender
President & Chief Executive Officer
May 14, 1999 By: /s/ DAVID K. LAEHA
-----------------------
David K. Laeha
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.1 Certificate of Amendment re Series A Convertible
Preferred Stock (Incorporated by reference to
Exhibit 4.1 to the Registrant's Current Report on
Form 8-K dated March 3, 1999 (the "March 1999 8-K"))
4.2 Certificate representing Series A Convertible
Preferred Stock (Incorporated by reference to
Exhibit 4.2 to the March 1999 8-K)
4.3 Warrant issued to Amro International, S.A.
(the "Investor") (Incorporated by reference to
Exhibit 4.3 to the March 1999 8-K)
10.1 Convertible Preferred Shares and Warrant Purchase
Agreement between the Registrant and the Investor
(Incorporated by reference to Exhibit 10.1 to the
March 1999 8-K)
10.2 Registration Rights Agreement between the Registrant
and the Investor (Incorporated by reference to
Exhibit 10.2 to the March 1999 8-K)
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 437,203
<SECURITIES> 0
<RECEIVABLES> 312,844
<ALLOWANCES> 19,109
<INVENTORY> 351,413
<CURRENT-ASSETS> 1,127,498
<PP&E> 2,529,952
<DEPRECIATION> 453,451
<TOTAL-ASSETS> 3,203,999
<CURRENT-LIABILITIES> 716,833
<BONDS> 469,257
0
488,397
<COMMON> 9,823,872
<OTHER-SE> (8,312,285)
<TOTAL-LIABILITY-AND-EQUITY> 3,203,999
<SALES> 485,805
<TOTAL-REVENUES> 489,196
<CGS> 448,645
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<INCOME-PRETAX> (416,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> (416,548)
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