<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, 2000
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 99-031484
(State or jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
98-746 Kuahao Place
Pearl City, Hawaii 96782
(Address of principal executive offices)
(808) 483-0520
(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 6,783,217 shares of Common Stock on May
10, 2000.
Transitional Small Business Disclosure Format (check one):
YES NO X
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TABLE OF CONTENTS
- -------------------------------------------------------------------------------
10QSB
<TABLE>
<CAPTION>
<S> <C>
Part I..........................................................................1
Item 1..........................................................................1
Balance Sheet...................................................................2
Income Statement................................................................3
Table 3.........................................................................4
Cash Flow Statement.............................................................5
Table 5.........................................................................7
Table 6.........................................................................9
Table 7........................................................................10
Table 8........................................................................
Table 9........................................................................12
ITEM 2.........................................................................12
PART II........................................................................13
ITEM 3.........................................................................13
ITEM 4.........................................................................15
</TABLE>
i
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Hawaiian Natural Water Company, Inc.
Consolidated Balance Sheet
March 31, 2000
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $132,687
Inventories 590,618
Trade accounts receivable, net of allowance for doubtful
accounts of $84,952 717,707
Other current assets 96,953
-----------
Total Current Assets 1,537,965
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $1,119,953 2,810,911
CO-PACKING AGREEMENT, net of accumulated amortization
of $15,000 135,000
INTANGIBLE ASSET, net of accumulated amortization of $19,942 139,207
PURCHASE PRICE IN
EXCESS OF NET BOOK VALUE 1,334,769
-----------
Total Assets $ 5,957,852
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,170,805
Accrued professional fees 88,698
Accrued vacation, payroll and related taxes 85,377
Accrued promotional expenses 28,746
Accrued commissions and billbacks 112,223
Accrued other 108,140
Accrued dividends payable 29,234
Notes payable - Current portion 141,202
Capital lease obligation - Current portion 61,352
-----------
Total Current Liabilities 1,825,777
-----------
NON-CURRENT LIABILITIES:
Capital lease obligation - net of current portion 115,049
Notes payable - net of current portion 759,475
Customer deposit liability 361,308
Other 41,380
-----------
Total Non-Current Liabilities 1,277,212
-----------
Total Liabilities 3,102,989
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STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value; 5,000,000 shares
authorized; Series A Convertible Preferred - 219 shares
issued and outstanding with conversion rights and
aggregate liquidation preference of $219,000; Series B
Convertible Preferred - 100 shares issued and outstanding
With conversion rights and aggregate liquidation
preference of $100,000. 226,683
Common stock, no par value; 20,000,000 shares authorized;
6,606,727 shares issued and outstanding 9,252,199
Common stock warrants and options; 5,927,025 issued
and outstanding 3,809,202
Accumulated Deficit 10,433,221)
-----------
Total Stockholders' Equity 2,854,863
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Total Liabilities and Stockholders' Equity $ 5,957,852
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
1
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Hawaiian Natural Water Company, Inc.
Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------
1999 2000
----------- ----------
<S> <C> <C>
NET SALES $ 485,805 $1,024,692
COST OF SALES 448,645 799,982
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Gross Margin 37,160 224,710
EXPENSES:
Selling and Marketing 149,055 225,747
General and Administrative 284,913 493,498
---------- ----------
433,968 719,245
OPERATING LOSS (396,808) (494,535)
OTHER INCOME (EXPENSE)
Interest and Other Income 3,391 -
Interest Expense (23,131) (21,010)
---------- ----------
(19,740) (21,010)
NET LOSS $ (416,548) $ (515,545)
---------- ----------
---------- ----------
Basic and Diluted
Net Loss Per Share: $ (0.10) $ (0.09)
---------- ----------
---------- ----------
Weighted Average Common
Shares Outstanding 4,070,619 5,883,760
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
2
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Hawaiian Natural Water Company, Inc.
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 2000
(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, 1999 5,536,727 8,076,886 5,709,458 $3,705,529 319 $205,755 $ (9,894,059) $2,094,111
Issuance of common stock and
warrants to chief executive
officer
January 1, 2000 100,000 53,097 166,667 46,903 - - - 100,000
Issuance of common stock
and common stock warrants in
private offering
February 1, 2000 50,000 26,548 83,333 23,452 - - - 50,000
February 20, 2000 50,000 26,548 83,333 23,452 - - - 50,000
Issuance of common stock
and warrants to
professional advisor
February 1, 2000 10,000 5,310 16,667 4,690 - - - 10,000
February 15, 2000 10,000 5,310 16,667 4,690 - - - 10,000
Issuance of common stock
and common stock warrants
to professional advisor
March 17, 2000 50,000 50,000 - - - - - 50,000
Issuance of common stock in
acquisition of Aloha
Water Company, Inc.
March 20, 2000 750,000 937,500 - - - - - 937,500
Issuance of preferred stock
to private investor
March 3, 2000 - - - - 100 100,000 - 100,000
Redemption of preferred stock
February 7, 2000 - - - - (50) (39,536) (10,464) (50,000)
March 6, 2000 - - - - (50) (39,536) (10,464) (50,000)
Exercise of stock options by
institutional investor
March 3, 2000 100,000 1,000 (100,000) - - - - 1,000
Exercise of stock options by
Private investor
March 3, 2000 50,000 50,000 (50,000) - - - - 50,000
Issuance of common stock
options to non-employee
directors
February 16, 2000 - - 900 486 - - - 486
Issuance of common stock
To marketing consultant
March 31, 2000 20,000 20,000 - - - - - 20,000
Accrued dividends to
preferred shareholder - - - - - - (2,689) (2,689)
Net Loss - - - - - - (515,545) (515,545)
------------ ----------- ------------ ----------- ------- -------- ------------- ----------
BALANCE AT
March 31, 2000 6,726,727 $9,252,199 5,927,025 $3,809,202 319 $226,683 $(10,433,221) $2,854,863
------------ ----------- ------------ ----------- ------- -------- ------------- ----------
------------ ----------- ------------ ----------- ------- -------- ------------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
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Hawaiian Natural Water Company, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(416,548) $(515,545)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 55,527 93,791
Issuance of stock and options to
consultants and distributors - 20,000
Issuance of stock options to
non-employee directors 6,639 486
Amortization of debt discount 18,151 8,658
Net decrease(increase) in current assets 18,477 (73,823)
Net (decrease)increase in current liabilities (166,673) 226,801
------------ ------------
Net cash used in operating
activities (484,427) (239,632)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (115,534) (55,038)
Cash added in merger with Aloha Water Company, Inc. - 183,111
Net cash provided by (used in) investing
activities (115,534) 128,073
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock
and common stock warrants 646,239 100,000
Exercise of common stock options by financial
public relations advisor 125,000 -
Net proceeds from private placement of common
stock and common stock warrants - 200,000
Net proceeds from exercise of common stock
Warrants - 51,000
Redemption of preferred stock - (100,000)
Repayments of notes payable (42,485) (7,411)
Repayment of principal on capital leases (8,879) (8,331)
------------ ------------
Net cash provided by
financing activities 419,875 235,258
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 363,621 $ 123,699
CASH AND CASH EQUIVALENTS, beginning of period 320,289 8,988
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 683,910 $ 132,687
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
MERGER WITH ALOHA WATER COMPANY, INC.
WITH COMMON STOCK AND NOTES - $1,314,769
------------ ------------
------------ ------------
PREFERRED SHAREHOLDER DIVIDENDS - $ 23,617
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements of Hawaiian Natural
Water Company, Inc., and its wholly-owned subsidiary, Aloha Water Co., Inc. (the
"Company") should be read in conjunction with the audited financial statements
for the year ended December 31, 1999 of Hawaiian Natural Water Co., Inc. 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,
2000, the results of its operations for the three month period ended March 31,
2000, and the cash flows for the three month periods ended March 31, 1999 and
2000, 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. To date, the Company has been unable to generate cash
flow sufficient to support its operations. The accompanying financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern
ORGANIZATION
Hawaiian Natural Water Company, Inc. was incorporated in the state of Hawaii on
September 13, 1994. The Company was formed for the purpose of bottling,
marketing and distributing Hawaiian natural water in Hawaii, the U.S. Mainland
and foreign markets. The Company's initial product introduction occurred in the
first quarter of 1995.
In June 1999, the Company acquired certain assets of Ali'i Water Bottling
Inc., which extended the Company's product line into the home and office
delivery market. The majority of this business is concentrated in the
Kailua-Kona area of the Big Island of Hawaii (see Note 7).
In March, 2000, the Company extended its home and office delivery business by
acquiring Aloha Water Company, Inc., a major distributor of purified water to
the home and office delivery market in the greater Honolulu area (see Note 8).
In January 2000, the Company expanded its product line beyond the water
category through the introduction of a line of herbal beverages under the
"East Meets West XEN-TM-" name.
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
5
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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 65 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 first quarter
of 2000 (65 percent) compared to the first quarter of 1999 (40 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 period ended March 31,
2000 were 5,867,826 compared to 4,070,619 for the three month period ended March
31,2000.
The Company's Basic and Diluted Loss Per Share is the same for the first quarter
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, 2000, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials $298,674
Finished goods 291,944
--------
$590,618
--------
--------
</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. ACQUISITION OF INTANGIBLE ASSET
In June 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 trademark registration expenses have been
capitalized and are amortized over a 5 year period. The Company introduced this
product line into selected markets during the first quarter of 2000.
6. CO-PACKING AGREEMENT
6
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In June 1999, the Company entered into a five year agreement with an independent
bottler in Los Angeles, California (the "Bottler") for the production,
warehousing, and shipment of the herbal beverages referred to in Note 5. On
September 13, 1999, the Company issued 100,000 shares of common stock to the
principals of the Bottler in partial consideration for these services. The
agreement provides that in the event the market price (as defined) of the
Company's common stock on the first anniversary of the date of issuance is less
than $1.50 per share, the Company will issue, for no additional consideration,
sufficient additional shares of common stock to bring the then market value of
all such shares issued up to $150,000. The agreement was recorded as an asset on
the Company's accounting records in the amount of $150,000. $43,750 was
allocated to the common stock account (based on the aggregate market value of
100,000 shares of the Company's common stock on September 13, 1999) and the
balance ($106,250) was allocated to common stock options.
7. 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 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 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
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 (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.
8. ACQUISITION OF ALOHA WATER COMPANY, INC. AND RESULTING GOODWILL
On March 20, 2000 the Company completed the acquisition of Aloha Water
Company, Inc., ("Aloha") a major distributor of purified water to the home
and office delivery market in the greater Honolulu area. The acquisition was
accomplished through a merger of Aloha into a wholly owned subsidiary of the
Company formed for this purpose. The purchase price for Aloha consisted of an
aggregate of (1) 750,000 shares of Common Stock of the Company and (ii) a
promissory note of the Company in the amount of $500,000 (see Note 9). The
total consideration paid by the Company to the owners of Aloha, by way of
common stock and a promissory note, in excess of the net assets recorded by
Aloha on the date of acquisition amounted to $1,334,769 plus associated
professional fees incurred. The Company has not yet valued the net assets as
recorded by Aloha. This amount, upon determination, will be recorded as
goodwill to be amortized over a 15-year period.
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:
7
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<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------
1999 2000
--------- ------------
<S> <C> <C>
Net sales $745,153 $1,319,426
Net loss (423,482) (515,545)
Diluted net loss per share $(.09) $ (.08)
Diluted weighted average
common shares outstanding 4,820,007 6,510,134
</TABLE>
9. NOTES PAYABLE
As discussed in Note 4 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.
In September 1999, the Company acquired a prefabricated warehouse, which it
assembled and installed on its property in Keaau. The warehouse was purchased
for $24,995 with a down payment of $2,000 and a 5 year note, with monthly
payments, totaling $22,995.
In connection with the acquisition of Aloha described in Note 8 above, the
Company issued a $500,000 promissory note (the "Aloha note") to the
Stockholders of Aloha. Interest on the Aloha note is payable monthly at the
annual rate of 10%. The entire principal amount is due on April 1, 2001. The
Aloha note is secured by a first priority security interest on all of the
capital stock of Aloha. The Company discounted this note using an estimated
weighted average cost of capital of 25%, and will amortize 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, 2000
<TABLE>
<S> <C>
Aloha note $ 500,000
Less: Unamortized discount (68,325)
Equipment note payable 495,000
Less: Unamortized discount (47,668)
---------
Net notes payable 879,007
Vehicle installment note payable 2,726
Warehouse note payable 18,944
---------
Subtotal - notes payable 900,677
Less: Current portion (141,202)
---------
Non-current portion $ 759,475
---------
---------
</TABLE>
10. STOCK OPTIONS
The total number of Common Stock warrants and options shown at March 31, 2000
excludes an aggregate of 447,167 options outstanding at such date held by
officers and employees of the Company. Stock options granted to employees are
accounted for under APB Opinion No. 25, under which compensation expense is
recognized only if the exercise price is less than the market price at the
date of grant. All employee stock options outstanding at March 31, 2000 had
an original exercise price of $4.00 per share. In February 2000, the Company
reduced the exercise price of the options held by all active employees to
$2.00 per share.
8
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Stock options granted to non-employees are accounted for 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.
11. SALES BY GEOGRAPHIC REGION
The Company sells its products directly to certain foreign distributors. All
sales are made in U.S. dollars. For the three month periods ended September 30,
1998 and 1999, the Company had the following sales by geographic region:
<TABLE>
<CAPTION>
1999 % 2000 %
-------- --- ---------- ---
<S> <C> <C> <C> <C>
Hawaii $421,484 87 $ 964,991 94
U. S. Mainland 18,725 4 59,701 6
International 45,596 13 - -
-------- --- ---------- ---
$485,805 100 $1,024,692 100
-------- --- ---------- ---
-------- --- ---------- ---
</TABLE>
12. EQUITY TRANSACTIONS
a. SERIES A CONVERTIBLE PREFERRED STOCK
In 1999, the Company issued an aggregate of 1,250 shares ($1.25 million in
aggregate liquidation preference amount) of Series A convertible preferred
stock to a single investor. The Company also issued to this investor warrants
to purchase an additional 100,000 shares of common stock at $3.625 per share.
The exercise price of these warrants was reduced to $1.25 per share in
August 1999.
Each share of Series A preferred stock has a liquidation preference of $1,000,
and 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 Series A 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.
In September 1999, the Company entered into a standstill agreement with the
holder of the Series A preferred stock pursuant to which the Company redeemed
250 shares for an aggregate of $250,000 and was granted a 30-day option to
redeem the balance of the outstanding shares at a discount to their
liquidation preference amount. The investor agreed not to convert any shares
during this option period. In October 1999, the Company exercised this option
with respect to an aggregate of 625 shares for an aggregate redemption price
of $508,750. In connection with the grant of this option, the Company further
reduced the exercise price of the 100,000 warrants held by the investor to
$.25 per share. In November 1999, the Company entered into a second
standstill agreement with the investor, pursuant to which the Company
redeemed 50 shares for an aggregate of $50,000 and was granted a second
option to redeem the balance of the outstanding shares (then 319 shares after
giving effect to such redemption) at their liquidation preference amount at
any time through January 31, 2000. The investor agreed not to convert any
shares during such option period. In connection with the grant of this second
option, the Company further reduced the exercise price of the 100,000
warrants held by the investor to $.01 per share. The investor exercised these
warrants in full in March, 2000. During the first quarter of 2000, the
Company redeemed an additional 100 shares of Series A preferred stock for an
aggregate of $100,000. After the end of the first quarter, the Company
redeemed 50 more shares for an aggregate of $50,000. There are currently 169
shares of Series A preferred stock outstanding. The investor has agreed not
to convert any of such shares until July 1, 2000.
9
<PAGE>
b. Series B Convertible Preferred Stock
In March 2000, the Company issued 100 shares ($100,000 aggregate
liquidation preference amount) of Series B convertible preferred stock to a
private investor. Each share of Series B preferred stock has a liquidation
preference of $1,000. The Series B preferred is mandatorily redeemable, at the
election of the holder, at any time within 90 days following the first
anniversary of the date of issuance in the event that the market price (as
defined) of the Company's common stock is less than $1.50 per share on the first
anniversary date. The redemption price in such event is $1,500 per share.
c. Private Offering of Common Stock and Warrants
In September 1999, the Company raised $850,000 ($830,000 net of
offering expenses) through a private offering of 850,000 Units at a purchase
price of $1.00 per Unit. Each Unit consisted of (i) one share of common stock,
(ii) one five year warrant to purchase one share of common stock at an exercise
price of $1.00 per share (a $1.00 warrant), and (iii) one five year warrant to
purchase 2/3 of one share of common stock at an exercise price of $1.50 per
share. An investment of $750,000 was received from two unaffiliated private
investors (and certain of their affiliated entities), and an additional
investment of $100,000 was received from the Company's Chief Executive Officer.
The unaffiliated investors purchased an additional 200,000 Units in December
1999 and 100,000 Units in February 2000 for an aggregate additional investment
of $300,000. The Company's Chief Executive Officer purchased an additional
100,000 Units in January 2000 for $100,000. One of the affiliated investors
exercised 50,000 $1.00 warrants for an aggregate of $50,000 in March 2000 and an
additional 50,000 $1.00 warrants for an aggregate of $50,000 after the end of
the first quarter of 2000.
10
<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; THE COMPANY'S
NEED FOR ADDITIONAL CAPITAL AND THE POSSIBLE UNAVAILABILITY OF SUCH CAPITAL
ON ACCEPTABLE TERMS AND CONDITIONS; POSSIBLE ADVERSE CONDITIONS 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; 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, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
Net Sales. Net Sales increased 111% to approximately $1,025,000 for the
three months ended March 31, 2000 (the "2000 Quarter") from approximately
$486,000 for the three months ended March 31, 1999 (the "1999 Quarter").
$792,000 (77%) of net sales for the 2000 Quarter were derived from sales of
PET products. The remaining $233,000 in net sales were comprised of $83,000
(8%) in home and office delivery sales and $150,000 (15%) in East Meets West
XEN-TM- ("XEN") herbal beverage sales. The increase in net sales of PET
products in the 2000 Quarter was due primarily to a 63% increase in unit
sales to approximately 130,000 cases in 2000 from approximately 80,000 cases
in 1999. The average net sales price per case remained unchanged in the 2000
Quarter compared to the 1999 Quarter. Sales in the Hawaiian market accounted
for 94% of PET sales in 2000 Quarter as compared to 87% in the 1999 Quarter.
U.S. Mainland sales accounted for 6% of PET sales in the 2000 Quarter
compared to 4% in the 1999 Quarter. The Company had no International sales of
PET products in the 2000 Quarter, compared to approximately 13% of in the
1999 Quarter. 50% of XEN sales were made in the Hawaiian market and the
remaining 50% were made in California. The Company anticipates increasing
sales of XEN products to other U.S. Mainland markets by the end of the year.
All home and office delivery sales were made in Hawaii.
11
<PAGE>
Cost of Sales. The Company's aggregate cost of sales increased 78% to
approximately $800,000 in the 2000 Quarter from approximately $449,000 in the
1999 Quarter, primarily due to unit sales growth of PET products. The average
cost per case of PET products increased 3% in the 2000 Quarter compared to
the 1999 Quarter. Contributing to this increase was an approximate 13%
increase in the cost of raw materials for PET products, partially offset by
an approximate 10% reduction in labor and plant overhead expenses.
Selling and Marketing. Selling and marketing expenses increased 51% to
approximately $225,000 in the 2000 Quarter from approximately $149,000 in the
1999 Quarter. Substantially all of this increase was due to sales and
marketing expenses related to the sale of home and office and XEN products in
the 2000 Quarter. The Company did not have any sales of these products in the
1999 Quarter. Sales and Marketing expenses incurred in the 2000 Quarter
related to the home and office and XEN products approximated $70,000.
General and Administrative. General and administrative expenses
increased 73% to approximately $494,000 in the 2000 Quarter from
approximately $285,000 in the 1999 Quarter. This increase resulted primarily
from a $100,000 bonus paid to the Company's Chief Executive Officer,
approximately $70,000 in expenses associated with the sales of XEN and home
and office delivery products, and increased professional fees (partially
related to the acquisition of Aloha in the 2000 Quarter).
Other (Expense). Net Other (Expense) was approximately $(21,000) in the
2000 Quarter compared to approximately $(20,000) in the 1999 Quarter. Other
expense relates primarily to interest on indebtedness and capital leases.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company incurred
a net loss of $(515,545), or $(.09) per share, in the 2000 Quarter compared to a
net loss of $(416,548), or $(.10) per share, in the 1999 Quarter. Weighted
Average Shares Outstanding were 5,883,760 in the 2000 Quarter compared to
4,070,619 in the 1999 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $133,000 at March 31, 2000,
compared to approximately $9,000 at December 31, 1999. During the first
quarter of 2000, the Company received investment proceeds aggregating
approximately 351,000 offset by redemptions of outstanding securities
($100,000), losses from operating activities ($240,000), purchase of property
and equipment ($55,000) and repayment of notes and capital leases ($15,000).
This deficit was offset by the $183,000 of cash added in the merger with
Aloha. See Notes 8 and 12 to the Financial Statements.
The Company continues to reduce its operating losses and believes that
these losses will decline throughout the year based upon anticipated
increases in revenues from its home and office and East Meets West Xen-TM-
product lines as well as growth in sales of its retail PET products. The
Company also anticipates significant cost savings from the consolidation of
the Aloha operations, which were acquired in March 2000. See Note 8 to the
Financial Statements.
The Company will need to raise additional capital in order to fund its
operating deficits as well as to repay outstanding indebtedness on its
equipment and to repay the $500,000 promissory note incurred in connection
with the acquisition of Aloha. This note is secured by the stock of Aloha.
See Notes 8 and 9 to the Financial Statements. In addition, the Company is
seeking capital to support the sales and marketing of its East Meets West
Xen-TM- product line. The Company is also committed to repurchasing the
balance of its outstanding Series A Convertible Preferred Stock (currently
$169,000). The Company believes that any additional financing will likely be
in the form of equity capital. The Company is currently negotiating with
several investors and anticipates that additional financing could become
available from existing stockholders or from new sources. Based upon recent
contacts, the Company is optimistic that it will be able to obtain sufficient
funds to sustain its business. However, the Company has no firm commitments
from financing sources, and there can be assurance that adequate financing
will become available to the Company on acceptable terms. If no additional
financing becomes available, the Company may not be able to continue as a
going concern.
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.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 3. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c)
In the first quarter of 2000, the Company raised an aggregate of
approximately $350,000 in equity financing from private investors, including
through the exercise of outstanding warrants, and also issued 750,000 shares of
common stock as partial consideration in connection with the acquisition of
Aloha Water Company, Inc. See Notes 12 and 8 to the Financial Statements. In
addition, during the quarter, the Company issued 70,000 shares of common stock
to legal counsel in payment of certain legal fees. The Company also granted to
its non-employee directors as directors fees non-qualified stock options to
purchase an aggregate of 900 shares of common stock. All of the foregoing
transactions were exempt from registration under the Securities Act of 1933, as
amended, pursuant to section 4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Exhibit Number Description
- -------------- -----------
- --------------------------- ---------------------------------------------------
<S> <C>
2.1 Merger Agreement and Plan of Reorganization
(relating to Acquisition of Aloha Water Company,
Inc. ("Aloha")) (Incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on
Form 8-K, dated March 20, 2000 (the "March 2000
8-K"))
- --------------------------- ---------------------------------------------------
4.1 Specimen Stock Certificate for the Registrant's
Series B Convertible Preferred Stock (Incorporated
by reference to Exhibit 4.4 to the Registrant's
Annual Report on Form 10-KSB for the year ended
December 31, 1999 (the "1999 10-K"))
- --------------------------- ---------------------------------------------------
4.2 Resolutions setting forth the relative rights and
preferences of the Series B Convertible Preferred
Stock (Incorporated by reference to Exhibit 4.5 to
the 1999 10-K)
- --------------------------- ---------------------------------------------------
10.1 Employment Agreement between Aloha and Daniel
Gabriel (Incorporated by reference to Exhibit 10.1
to the March 2000 8-K)
- --------------------------- ---------------------------------------------------
10.2 Secured Exchangeable Promissory Note (the "Aloha
Note") issued to the stockholders of Aloha
(Incorporated by reference to Exhibit 4.1 to the
March 2000 8-K)
- --------------------------- ---------------------------------------------------
10.3 Pledge and Security Agreement securing the Aloha
Note (Incorporated by reference to Exhibit 4.2 to
the March 2000 8-K)
- --------------------------- ---------------------------------------------------
27.1 Financial Data Schedule
- --------------------------- ---------------------------------------------------
</TABLE>
(b) Reports on Form 8-K
Current Report on form 8-K, dated March 20, 2000.
13
<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 12, 2000 By: /s/ MARCUS BENDER
----------------------
Marcus Bender
President & Chief Executive Officer
May 12,2000 By: /s/ WILLARD D. IRWIN
-----------------------
Willard D. Irwin
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Exhibit
Number Description
------- -----------
- ------------------- ---------------------------------------------------
<S> <C>
2.1 Merger Agreement and Plan of Reorganization
(relating to Acquisition of Aloha Water Company,
Inc. ("Aloha")) (Incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on
Form 8-K, dated March 20, 2000 (the "March 2000
8-K"))
- -------------------- ---------------------------------------------------
4.1 Specimen Stock Certificate for the Registrant's
Series B Convertible Preferred Stock (Incorporated
by reference to Exhibit 4.4 to the Registrant's
Annual Report on Form 10-KSB for the year ended
December 31, 1999 (the "1999 10-K"))
- -------------------- ---------------------------------------------------
4.2 Resolutions setting forth the relative rights and
preferences of the Series B Convertible Preferred
Stock (Incorporated by reference to Exhibit 4.5 to
the 1999 10-K)
- -------------------- ---------------------------------------------------
10.1 Employment Agreement between Aloha and Daniel
Gabriel (Incorporated by reference to Exhibit 10.1
to the March 2000 8-K)
- -------------------- ---------------------------------------------------
10.2 Secured Exchangeable Promissory Note (the "Aloha
Note") issued to the stockholders of Aloha
(Incorporated by reference to Exhibit 4.1 to the
March 2000 8-K)
- -------------------- ---------------------------------------------------
10.3 Pledge and Security Agreement securing the Aloha
Note (Incorporated by reference to Exhibit 4.2 to
the March 2000 8-K)
- -------------------- ---------------------------------------------------
27.1 Financial Data Schedule
- --------------------------------------------------------------------------
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 132,687
<SECURITIES> 0
<RECEIVABLES> 802,659
<ALLOWANCES> 84,952
<INVENTORY> 590,618
<CURRENT-ASSETS> 1,537,965
<PP&E> 3,930,864
<DEPRECIATION> 1,119,953
<TOTAL-ASSETS> 5,957,852
<CURRENT-LIABILITIES> 1,825,777
<BONDS> 759,475
0
226,683
<COMMON> 13,011,401
<OTHER-SE> 10,433,221
<TOTAL-LIABILITY-AND-EQUITY> 5,957,852
<SALES> 1,024,692
<TOTAL-REVENUES> 1,024,692
<CGS> 799,982
<TOTAL-COSTS> 799,982
<OTHER-EXPENSES> 719,245
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> (21,010)
<INCOME-PRETAX> (515,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (515,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (515,545)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
