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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 0-29280
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HAWAIIAN NATURAL WATER COMPANY, INC.
(Name of small business issuer in its charter)
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HAWAII 99-0314848
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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98-746 KUAHAO PLACE
PEARL CITY, HAWAII 96814
(Address of principal executive offices)
(808) 483-0520
Issuer's telephone number
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF EXCHANGE THE ACT:
COMMON STOCK, NO PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS ("WARRANTS")
(Title of Class)
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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 / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year: $3,050,383
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold or the average bid and asked price of such common equity, as of
a specified date within the past 60 days: $3,766,277 of March 27, 2000.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,606,727 shares of Common
Stock, 219 shares of Series A Convertible Preferred Stock, and 100 shares of
Series B Convertible Preferred Stock as of March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive proxy statement to be filed with the Commission in
connection with the 2000 Annual Meeting of Stockholders and Registrant's
Registration Statement on Form SB-2 (File No. 333-18289) are incorporated by
reference into Part III of this Report.
Transitional Small Business Disclosure Format (check
one): YES / / NO: /X/
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. Hawaiian Natural Water Company, Inc. (together with its
subsidiary, the "Company") produces and sells bottled water under the "Hawaiian
Springs,-TM-" "Ali'i" and "Aloha" names and a line of herbal beverages under the
"East Meets West XEN-TM-" name.
The Company's Hawaiian Springs-TM- brand is the only bottled "natural" water
available from Hawaii. All other bottled waters produced in Hawaii contain
"purified" water, from which chemicals and minerals have been removed by means
of reverse osmosis filtration. Purified waters are often drawn from municipal
water sources.
The Company draws its Hawaiian Springs-TM- water from a well located at the
base of the Mauna Loa mountain in Kea'au (near Hilo) on the Big Island of
Hawaii. The water is "bottled at the source" in polyethylene terepthalate
("PET") plastic bottles, which are manufactured at the Company's bottling
facility. PET products under the Ali'i name are bottled at the same facility,
using purified water.
The Company was incorporated in Hawaii in September 1994, and began
commercial operations in February 1995. From inception until mid-1999, the
Company was involved exclusively in the sale of PET products under the Hawaiian
Spings-TM- name. In June 1999, the Company entered the home and office delivery
market through the acquisition of Ali'i Water Bottling Co., Inc. ("Ali'i"), a
bottler of purified water under the Ali'i name. The operations of Ali'i
consisted of a home and office delivery business on the Big Island of Hawaii and
a line of PET products sold through retail channels in the Hawaiian islands.
Upon completion of the acquisition, the Company consolidated the PET bottling
operations of Ali'i into the Company's bottling facility in Kea'au. In March
2000, the Company expanded its home and office delivery business through the
acquisition of Aloha Water Company, Inc. ("Aloha"), a major distributor of
purified water under the Aloha name to the home and office market in the greater
Honolulu area. The acquisition was accomplished by means of a merger of Aloha
into a wholly owned subsidiary of the Company formed for the purpose. This
subsidiary (renamed "Aloha Water Company, Inc.") continues to operate the Aloha
business. As a result of these acquisitions, the Company believes that it is
currently the second largest participant in the home and office delivery market
in Hawaii, based upon total customer accounts.
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. This beverage line consists of six natural juice
flavors containing concentrated herbal extracts. The beverages are bottled in
20-ounce glass packaging, featuring unique oriental style graphics. The product
is manufactured for the Company pursuant to a co-packing agreement with a Los
Angeles area bottler. Initial sales efforts have concentrated on California and
Hawaii, but the Company anticipates distribution in other major West Coast
markets by the end of 2000.
All of the Company's revenues for 1999 were generated from the sale of water
products, since sales of East Meets West XEN-TM- products did not commence until
January 2000. Approximately 95% of the Company's revenues for 1999 were
attributable to the sale of PET products; the remaining 5% were derived from
home and office delivery. Approximately 88% of the Company's PET sales were
generated in Hawaii, approximately 3% on the U.S. Mainland, and approximately 9%
in international markets (principally Guam, Japan, Thailand and the Middle
East).
THE BOTTLED WATER MARKET. Since the mid-1970's the bottled water market has
experienced substantial growth in the United States and most of the
industrialized world. Concerns about municipal water quality combined with
increased health awareness and the availability of light weight convenient
packaging, such as plastic bottles, have fueled bottled water consumption in the
United States and other industrialized nations. The bottled water market in the
United States has grown from approximately 317 million gallons in 1976 to
approximately 4.25 billion gallons in 1999.
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From 1998 to 1999, per capita consumption increased by 11.5% to approximately
15.5 gallons. Currently, bottled water is one of the fastest growing segments of
the beverage industry worldwide.
The bottled water market is generally divided into two principal segments:
(i) retail and (ii) home and office delivery. In the retail segment, water is
bottled at the manufacturer's bottling plant, packed into cases and sold through
a distribution network to retail outlets for resale to consumers. Retail product
is often distinguished by type of water (e.g., sparkling versus non-sparkling)
and by type of bottle (e.g., PET versus glass). For several years, the fastest
growing market within the retail segment has been the non-sparkling premium PET
market (bottles of two liters or less are considered premium). This category has
grown from approximately 230 million gallons nationwide in 1992 to approximately
1.3 billion gallons in 1999, up 25% in 1996, 29% in 1997, 31% in 1998 and 35% in
1999. The Company estimates the total retail market in Hawaii at approximately
5.8 million gallons (1,600,000 cases) per year and believes that sales of PET
products continue to grow at a rapid pace. The cost of the bottle is typically
the largest cost component in the manufacture of retail product, since a new
bottle must be used for each unit of production. Empty bottles are not intended
to be refilled and are not returned to the manufacturer. Competition in the
retail market is regional, national and international in scope. Some of the best
known brands, such as "Evian" and "Crystal Geyser," are shipped from a local
bottling source for sale throughout the world.
In the home and office delivery segment, water is bottled at the
manufacturer's bottling plant in large (typically five gallon) bottles and
delivered to the customer. The manufacturer services the customer on a periodic
(typically weekly) basis by picking up empty bottles and replacing them with
full ones. The empty bottles are returned to the bottling facility for
refilling. The bottles are typically made of a hard, durable plastic designed
for reuse at least 20 times. As a result, the cost of the bottle is a relatively
small component in the cost of the finished product. Competition in the home and
office market is inherently local, since the size and weight of the product and
the need to service customers on a continuing basis require the manufacturer to
be located within reasonable proximity to customers. Office accounts often
service several or even large numbers of employees at a single location, and
therefore typically involve larger or more frequent deliveries than home
accounts.
THE NUTRACEUTICAL MARKET. Nutraceutical beverages are typically juices or
teas mixed with herbal extracts or other additives thought to have nutritional
benefit. The nutraceutical market has recently emerged as a significant beverage
category, anticipated by industry sources to grow at an annual rate of 25% and
to reach over $300 million (wholesale) by the year 2003. Expanding interest
among consumers in health and well-being is fueling growth in this market.
Nutraceutical beverages are currently experiencing growing consumer demand in
most large metropoplitan areas throughout the Mainland. The New York City and
Los Angeles areas are currently the two largest markets. Consumer interest in
these products has also emerged in Europe and the more developed countries in
Asia.
THE COMPANY'S NATURAL WATER SOURCE. The Company draws its natural water
from a well at the base of the Mauna Loa mountain range in Kea'au (near Hilo) on
the Big Island of Hawaii. The southeastern slopes of Mauna Loa, above Kea'au,
are among the wettest places on earth, experiencing up to 225 inches of rainfall
annually. Rainfall filters through the porous lava rock of the mountainside
forming large underground reservoirs and aquifers that flow back into the ocean.
This constant movement maintains the purity of the source and also accounts for
the low mineral content of the water, which gives it its distinctively light or
"young" taste.
The Company's well is drilled to a depth of approximately 250 feet. The
source is continuously recharged from rainwater at this level. Water is pumped
from the well at the rate of approximately 250 gallons per minute. This water
flow is more than adequate to satisfy the Company's maximum production capacity.
The flow rate could be expanded, if desired, through the use of stronger pumping
equipment. In 1998, the Company replaced its pumping equipment and refurbished
its well shaft through the installation of new stainless steel casing.
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BOTTLING OPERATIONS. The Company currently has bottling facilities at three
locations, one for retail PET production, located adjacent to the Company's well
at Kea'au, and two others for home and office delivery, one serving the Big
Island, and the other, Oahu. The Company's East Meets West XEN-TM- line is
manufactured by a Los Angeles area bottler pursuant to a co-packing agreement.
PET OPERATIONS. All of the Company's retail PET products are bottled at the
Company's facility in Kea'au. These products consist of the Hawaiian Springs-TM-
natural water line, the Ali'i purified water line and various limited production
co-labelled products.
The Company's PET bottling operations consist of three processes: bottle
manufacturing, filling and packing. The Company currently manufactures all of
its own PET bottles, utilizing blow molding equipment installed at the Company's
bottling facility in Kea'au. This equipment has a normal annual capacity of
approximately 18 million bottles. The Company purchased the equipment in
September 1997, for an aggregate of $1.2 million, payable in installments over
five years. See Note 4 to the Financial Statements. In March 1999, the Company
purchased additional blow molding and bottling equipment for the production of
its new 5 liter product (see below). This equipment is installed as a separate
bottling line at the Kea'au bottling facility.
Bottles manufactured by the Company can either be fed directly onto the
bottling line or stored for later use. The Company's bottling line is a fully
automated conveyor system which moves the bottles through continuous stages of
production: rinsing, filling, labelling and capping. Finished bottles are date
stamped and conveyed into the packing room, where they are packed by machine
into cardboard cases and placed onto pallets for immediate shipment or storage.
The Company stores finished goods inventory at its Kea'au facility and also
maintains approximately one month's supply of finished goods in inventory at its
headquarters facility in Pearl City. See "Item 2. Description of Property."
Most of the Company's PET product is sold in standard sizes of 0.33, 0.5,
1.0 and 1.5 liters. All sizes come with tamper-proof caps. Sports caps are also
available on 1.0 liter bottles. Since the fall of 1999, the Company has also
been offering its Hawaiian Springs-TM- brand in a 5 liter PET bottle. The
Company believes that it is the only bottler in the United States offering water
in this package. Sales of 5 liter product to date have been strong, and the
Company foresees growing demand for this product in the future.
HOME AND OFFICE DELIVERY. The Company has two home and office bottling
facilities, one in Kailua-Kona, serving customers on the Big island, and another
in Waipahu (near Pearl City) on Oahu, serving customers in the greater Honolulu
area. The Company expects to relocate the bottling operations from Waipahu to
the Company's headquarters facility in Pearl City as soon as practicable. The
Kailua-Kona facility produces water under the Ali'i name; the Waipahu facility
produces water under the Aloha name. Both are purified water products.
The Kailua-Kona facility was acquired in June 1999 in connection with the
acquisition of the business and operating assets of Ali'i Water Bottling
Co., Inc. ("Ali'i"), a company then owned by Dennis Harris, currently a director
of the Company. The Waipahu facility was acquired in March 2000 in connection
with the acquisition of Aloha Water Company, Inc. ("Aloha"). Daniel Gabriel, a
founder and principal shareholder of Aloha is also a director of the Company and
President of the Company's Aloha subsidiary. The Company believes that Aloha is
the second largest competitor in the home and office market on Oahu, and that
Ali'i is one of two principal competitors on the Big Island. Giving effect to
both acquisitions, the Company believes that it is currently the second largest
vendor in the home and office market in Hawaii, based upon total customer
accounts. See Notes 3 and 13 to the Financial Statements.
At both home and office facilities, the Company draws its water from
municipal water sources. The water is "purified" through reverse osmosis
filtration. The Company's automated bottling lines clean, fill and cap the
bottles. Most of daily production is placed onto delivery vehicles for immediate
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delivery. The Company usually keeps only a few days of finished goods in
inventory, which are stored at each bottling facility. Product is sold in
various sizes ranging from 2 1/2 to 6 gallons. The most common size in the
industry is 5 gallons. In addition to water, the Company also provides coolers
or other dispensing equipment to its customers. This equipment may either be
purchased or rented for a monthly fee. The Company owns substantially all of the
equipment and delivery vehicles used in its home and office operations. The
facilities are occupied pursuant to leases. See "Item 2. Description of
Property." All of the Company's deliverymen are Company employees.
EAST MEETS WEST XEN-TM-. The Company's East Meets West XEN-TM- beverage
line is currently offered in 20-ounce glass bottles. Product is manufactured for
the Company by a Los Angeles area bottler pursuant to a long-term co-packing
agreement. Pursuant to this agreement, the bottler manufactures product based
upon the Company's formulations and stores the product in its warehouse pending
shipment. In exchange, the bottler is entitled to receive cash compensation in
an amount equal to its actual production costs, plus a specified mark-up. The
bottler is also entitled to receive a specified premium per case, payable
quarterly in common stock of the Company, valued at its trading price (as
defined) at the time of issuance.
DISTRIBUTION. PET PRODUCTS. The Company distributes its PET products
primarily in Hawaii and to a limited extent on the U.S. Mainland and in certain
international markets (currently Guam, Japan, Thailand, and the Middle East). A
majority of the Company's product is sold through retail channels such as
convenience stores and supermarkets, although the Company also sells through
food service outlets such as restaurants, bars, airlines, hotels and country
clubs. Food service distribution was the fastest growing segment of the
Company's business in 1999. The Company's product is currently distributed on
Japan Airlines (flights departing Hawaii), Aloha Air (Continental flights and
flights to Micronesia) and Continental Airlines/Air Micronesia (flights
departing Hawaii and flights departing New York, Houston and Los Angeles for
Hawaii). The product is also sold at the Mauna Lani Golf Course and other
prestigious golf courses on the Big Island of Hawaii, as well as military
commissaries in Hawaii.
Paradise Beverages ("Paradise"), one of Hawaii's largest beverage
wholesalers, acts as the Company's retail distributor throughout Hawaii. The
Company has also appointed several other distributors to cover food service
markets in Hawaii not normally covered by Paradise. In addition, the Company has
entered into broker agreements in Hawaii to support the sales efforts of the
Company's distributors. Sales in Hawaii accounted for approximately 88% of the
Company's PET revenue during 1999.
Sales to the Mainland accounted for approximately 3% of the Company's PET
revenue during 1999. The Company's primary marketing efforts on the Mainland are
directed toward niche markets, with special emphasis on the specialty and
natural food markets. The Company believes that demand for its product is
enhanced in these markets due to consumer focus on quality and willingness to
pay a premium for products perceived as superior. An additional niche market
being cultivated by the Company is the health and fitness club market.
The Company's largest international markets are currently Guam, Thailand and
Japan. Distribution in Thailand is handled through an exclusive distribution
agreement with Sahapathanapibul Public Co., Ltd.--a major consumer products
distributor. In Japan the Company has established an importer relationship with
Brother International, a well-known company with wide-ranging business.
International sales accounted for approximately 9% of the Company's PET revenue
in 1999.
EAST MEETS WEST XEN-TM-. Sales of the Company's East Meets West XEN-TM-
line commenced in January 2000. Sales efforts to date have concentrated on
California and Hawaii. Distribution of the Company's product is being handled by
a network of beverage distributors and to a lesser extent food service
distributors. Depending upon the initial success in these channels and available
financing, the
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Company may seek to introduce the product into supermarket chains. The Company
currently has distribution arrangements with six beverage distributors and two
major food service distributors in Southern California. An additional six
beverages distributors in Southern California and Nevada are expected to launch
the product within the next six weeks. Distribution in Hawaii is being handled
by Paradise and two food service distributors.
MARKETING. PET PRODUCTS. The Company's marketing program for its PET
products concentrates on selling efforts by its distributors and brokers as well
as attendance at trade shows and events. In Hawaii, the Company has promoted its
product through sales to airlines, hotels, country clubs and other such
customers which enhances the visibility of the Company's product.
On the Mainland, substantial marketing and promotional expenditures are
typically required in order to obtain widespread distribution through the
largest retail outlets, such as supermarkets. Supermarkets, especially in
California, typically charge entry or "slotting fees" in exchange for
introducing new and untested products. Even after a successful introduction,
continuing expenditures for in-store promotions and coupon programs are
generally required in order to maintain shelf space for these products. Such
promotional programs often need to be supported by widespread marketing
campaigns (e.g. television, radio or print advertising) which can be very
costly. The Company has lacked the financial resources required to maintain such
a mass marketing campaign. Accordingly, the Company's marketing strategy for the
Mainland has been directed toward niche markets, with special emphasis on the
specialty and natural food markets. The Company has appointed five distributors
specializing in these markets in California, Texas, New York and New Jersey. A
related niche market receiving attention is the health and fitness market. The
Company is the "official water" of SPINNING-TM-, an indoor cycling exercise
program featured in health clubs in 60 countries. The Company is also the
"official water" of the Hawaiian Tropic-TM- Pageant, the second largest beauty
pageant system in the world, which gives the Company advertising exposure at
over 1,700 pageant events each year.
Another component of the Company's marketing strategy has been the
development of custom labels bearing recognizable images or logos licensed from
third parties. This "co-branding" strategy enables the Company to benefit from
the market recognition established by the licensor. The Company's current
licenses include the right to use Sanrio's Hello Kitty-TM- character in selected
territories and the artwork of Christian Riese Lassen on a worldwide basis.
Hello Kitty-TM- merchandise is highly popular among young children and teenagers
in the United States and Asia. Mr. Lassen's artwork is widely known and sought
after, especially in Japan. The Company believes that these licensing
arrangements will enhance its ability to penetrate foreign markets, especially
in Asia. The Company is required to pay royalties based upon a specified
percentage of sales under both agreements.
The Company has also entered into marketing contracts with several
celebrities to represent the Company's products in television and radio
appearances.
EAST MEETS WEST XEN-TM-. Marketing for the Company's East Meets West
XEN-TM- line is primarily based upon sales efforts by distributors and by
Company sales representatives who may accompany distributors on sales calls. New
accounts are typically offered free merchandise or other allowances in
connection with their first order. The Company also provides point of sale
marketing materials, in-store sampling and displays to enhance consumer
interest. The Company utilizes a program of prizes, bonuses and awards to
incentivize distributors to open and grow new accounts.
HOME AND OFFICE DELIVERY. Marketing efforts in this segment rely primarily
upon customer referrals, display of Company logos on delivery vehicles and
bottles, advertising in certain mass print media, such as the Yellow Pages and
appearances at trade shows and events. The Company also
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expects to develop its office delivery business through the extension of
customer relationships in its PET product line.
GOVERNMENTAL REGULATION; QUALITY CONTROL. The bottled water industry is
highly regulated both in the United States and abroad. Various state and Federal
regulations, designed to ensure the quality of the product and the truthfulness
of its marketing claims, require the Company to monitor each aspect of its
production process, including its water source, bottling operations and
packaging and labeling practices. The Environmental Protection Agency requires a
yearly analysis of the Company's water source by a certified laboratory with
respect to a comprehensive list of contaminants (including herbicides,
pesticides, volatile chemicals and trace metals). In addition, the Hawaii
Department of Health requires weekly microbiological testing of the Company's
well water and finished product, as well as monthly inspection of its production
line.
The Company's PET bottling facility has an on-site laboratory, where samples
of its finished product are visually and chemically tested daily. The Company
also utilizes an outside state certified laboratory to test samples from each
production run. In addition, the Company's production line is subject to
constant visual inspection. The Company believes that it meets or exceeds all
applicable regulatory standards concerning the quality of its water.
The Company is also subject to regulation by the Food and Drug
Administration (the "FDA"), which regulates the Company's packaging and labeling
practices. Separate regulations apply to water and nutraceutical products. The
Company has met all FDA requirements for the labeling of its water as "natural"
and "bottled at the source." "Natural" signifies that the chemical composition
and mineral content of the bottled water are the same as those at the source.
This contrasts with "purified" water from which chemicals and minerals have been
removed by means of reverse osmosis filtration. "Bottled at the source"
signifies that the water is pumped directly from the source to the bottling
facility, thereby eliminating handling and transportation procedures which might
lead to contamination. The Company's Hawaiian Springs-TM- products have also
been certified as Kosher by the Union of Orthodox Jewish Congregations of
America.
In addition to U.S. regulations, the Company must meet the requirements of
foreign regulatory agencies in order to import and sell its product into other
countries. These requirements are generally similar to, and in certain respects
more stringent than, U.S. regulations. The Company believes that it is in
compliance with applicable regulations in all foreign territories where it
currently markets its product.
Failure to meet applicable regulations in U.S. or foreign markets could lead
to costly recalls, loss of certification to market product or, even in the
absence of governmental action, to loss of revenue as a result of adverse market
reaction to negative publicity.
COMPETITION. PET PRODUCTS. The retail PET water market is highly
competitive, with numerous participants selling products often perceived as
generic by consumers. The principal bases of competition in the industry are
price, brand recognition, water source and packaging. Price competition has
become more pronounced as the industry has matured. The Company seeks to develop
recognition for its Hawaiian Springs-TM- brand based upon its unique water
source. The Company generally prices this product at or slightly below the price
for other premium brands. Competition in the market for the Company's Ali'i
brand is largely based upon price.
The Company sells most of its product in Hawaii but also seeks to compete on
the Mainland and in foreign markets. See "Distribution." Competition is
international in scope, even in Hawaii, where the Company competes primarily
with large, established foreign and domestic companies, as well as local
competitors. The most popular brands of natural water sold in Hawaii include
"Crystal Geyser," "Arrowhead," and "Alhambra" (all bottled on the Mainland) and
"Evian" (bottled in France), as well as local brands, such as "Menehune,"
"Hawaiian Isles" and "Hawaii." All local bottlers, except the
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Company, sell "purified" municipal water, not "natural" or "spring" water. The
Company is the only producer of natural water from Hawaii. The Company believes
that it is likely to remain the only such producer, at least for some time,
because of zoning, water use and other restrictions currently in effect which
make development of a competing natural water source difficult.
HOME AND OFFICE DELIVERY. Competition in the home and office delivery
market is inherently local. None of the major national or international
competitors in the PET products market offer home and office delivery in Hawaii.
Competition in the market is generally limited by island. The largest market is
on Oahu, where the bulk of Hawaii's population resides. "Menehune" is currently
the largest competitor in this market. Significant markets also exist on the Big
Island, Maui and Kauai. The Company is currently the second largest competitor
on Oahu and one of two principal competitors on the Big Island.
EAST MEETS WEST XEN-TM-. The nutraceutical beverage market is still a young
and developing market with a limited number of national or international
competiitors. Competition is primarily based upon brand recognition, packaging,
taste and ingredients. The Company seeks to compete primarily on the basis of
taste and distinctive packaging. Currently, the best selling brand of herbal
juices is the "SOBE" brand, which competes directly with the Company's product.
"AriZona" is currently the best selling brand of herbal tea. "Snapple" and
"Hansen's Natural" have recently extended their product lines to include
nutraceutical beverages. "Red Bull," an energy drink originated in Asia, is
currently popular in Europe as well as the United States.
EMPLOYEES. The Company has 8 employees at its executive offices in
Honolulu, 27 employees at its PET bottling facility in Kea'au, 6 employees at
its home and office facility in Kailua-Kona and 18 employees at its home and
office facility in Waipahu. See "Item 2. Description of Property." The Company
also has two sales representatives dedicated to the East Meets West XEN-TM-
line. The Company's employees are not unionized, and the Company has not
experienced any work stoppages or strikes as a result of labor disputes. The
Company considers its relations with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently operates four leased facilities: (i) a PET bottling
facility in Kea'au on the Big Island of Hawaii, (ii) a headquarters facility in
Pearl City (outside Honolulu), and (iii) two home and office bottling
facilities, one in Kailua-Kona on the Big Island and the other in Waipahu (near
Pearl City) on Oahu. The Company also stores limited amounts of finished goods
inventory in temporary storage facilities located in Los Angeles, Houston and
New Jersey.
The Company's PET bottling facility is located on approximately 14.5 acres
in Kea'au (near Hilo) on the Big Island. The facility consists of an
approximately 8,000 square foot renovated concrete building which houses the
Company's bottle manufacturing, filling and packing operations, and several
adjacent warehouse structures. The property is located within an agricultural
zone, but has been granted a Special Use Permit by the County of Hawaii for
water extraction and bottling operations. The Special Use Permit is of perpetual
duration, so long as the conditions to its effectiveness have been met. The
Company is currently in compliance with all of these conditions and does not
anticipate any material difficulties in compliance in the indefinite future. See
"Item 1. Description of Business--Bottling Operations--PET Operations."
The bottling facility and surrounding property, including the water source
and pumping equipment, are owned by Hawaii Brewery Development Co., Inc.
("HBDC"), a principal stockholder of the Company owned by two of the Company's
officers and directors. The facility is leased from HBDC pursuant to a long-term
lease agreement (the "HBDC Lease"). The HBDC Lease provides for an initial term
of 50 years commencing on October 1, 1994, which may be extended at the option
of the
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Company for an additional 50 years. The HBDC Lease requires the Company to pay
rent to HBDC on a monthly basis at a rate equal to the greater of (i) a certain
base rent (the "Base Rent"), or (ii) 2% of the Company's net revenues (as
defined). The Base Rent is currently $5,355 per month. The HBDC Lease entitles
the Company to exclusive use of the water source; provided, however, that HBDC
may draw up to 50% of the water flow for use in beer brewing or other beverage
production, but may not draw water for the sale of natural water. The Company
believes that 50% of the water flow is adequate for the current and projected
future needs of the Company's business. HBDC currently conducts no other
activity on the leased premises, and the Company is not aware of any current
plans by HBDC to conduct any other activities in the foreseeable future.
In November 1999, the Company relocated its headquarter facility from
Honolulu to a much larger facility in Pearl City. The facility consists of
approximately 15,000 square feet of office and warehouse space. The Company
incurred approximately $37,000 in leasehold improvement costs in 1999 to build
out the office space at this facility. The warehouse space is used to store
finished goods inventory of PET products as well as shipments of East Meets West
XEN-TM-. The Company also anticipates relocating the Aloha bottling operations
to this facility as soon as practicable. The Company leases this facility
pursuant to a lease agreement (the "Headquarters Lease") with an initial term of
45 months (commencing November 1999). Rent under the Headquarters Lease is
payable monthly at the rate of $6,800 per month through May 2001, $7,800 per
month thereafter through May 2002 and $8,800 thereafter through May 2003.
The Company's Ali'i home and office bottling operations are conducted in
approximately 5,043 square feet of office and warehouse space in Kailua-Kona on
the Big Island of Hawaii. This facility is leased on a month-to-month basis at a
current rental rate of $1,866 per month. The Company's Aloha home and office
bottling operations are conducted in approximately 7,500 square feet of office
and warehouse space in Waipahu (near Pearl City) on Oahu. This facility is
occupied pursuant to a lease (the "Aloha Lease") for a six year term, ending
July 2003. The current rental rate is $6,075 per month, subject to annual
adjustments on August 1 of each year. This facility was acquired by the Company
in connection with the acquisition of Aloha Water Company, Inc. in March 2000.
The Company anticipates terminating the Aloha Lease as soon as practicable and
relocating the Aloha bottling line to the Company's headquarters facility. The
payment of a termination fee (of which the Company has agreed to pay up to
$30,000) may be required upon early termination of the Aloha Lease.
The Company's temporary storage facilities in Los Angeles, Houston and New
Jersey are leased on a month-to-month basis.
In the opinion of management, all of the Company's facilities are adequately
covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock was quoted on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") SmallCap Market under
the symbol HNWC from May 1997, until October 5, 1999. The Company's Common Stock
was delisted from the Nasdaq SmallCap Market, effective as of the close of
business on October 5,1999, pursuant to the decision of a Nasdaq panel that the
Company had failed to meet certain continued listing requirements. The Company
has appealed this decision, which is set for review by the Nasdaq Listing and
Hearing Review Council. The Company made a written submission in support of its
appeal on March 20, 2000. Since October 6, 1999, the Company's Common Stock has
been quoted on the OTC Bulletin Board. The following table sets forth the high
and low closing bid prices for the Company's Common Stock during the periods
indicated as reported by Nasdaq, and the OTC Bulletin Board. These prices
reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions,
and may not represent actual transactions:
<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
1999:
First Quarter............................................... 4 1/8 2 1/2
Second Quarter.............................................. 2 11/16 9/16
Third Quarter............................................... 1 5/16 1/2
Fourth Quarter.............................................. 1 9/32
1998
First Quarter............................................... 2 15/16 1 15/16
Second Quarter.............................................. 2 1/16 1 1/4
Third Quarter............................................... 4 3/4 1 7/16
Fourth Quarter.............................................. 4 3/8 3
</TABLE>
The last sales price for the Company's Common Stock, on the OTC Bulletin
Board on March 27, 2000, was $1.00.
The Company had approximately 32 stockholders of record as of March 22, 2000
(which number does not include the number of stockholders whose shares are held
of record by a brokerage house or clearing agency, but does include such
brokerage house or clearing agency as one record holder).
The Company has never paid any dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future. The Company
intends to retain any earnings it may generate in the foreseeable future to
finance the development and expansion of its business.
During the year ended December 31, 1999, the Company granted to certain
employees and consultants stock options to purchase an aggregate of 306,500
shares of Common Stock at an exercise price of $4.00 per share. An optionholder
exercised options to purchase an aggregate of 50,000 shares of Common Stock at
an exercise price of $2.50 per share. The Company has also affected an offering
of Series A Convertible Preferred Stock and of Units, consisting of Common Stock
and Warrants during the year. See Note 2 to the Financial Statements. All of the
foregoing transactions were exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof and the rules and regulations
thereunder.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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"
10
<PAGE>
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, 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 PRODUCTS.
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased 69% to approximately $3,050,000 for the
fiscal year ended December 31, 1999 ("1999") from approximately $1,810,000 for
the fiscal year ended December 31, 1998 ("1998"). $2,903,000 (95%) of net sales
in 1999 were derived from sales of PET products. The remaining $147,000 (5%) in
net sales were derived from home and office delivery operations, which commenced
in July 1999 following the acquisition of Ali'i. Sales of the Company's East
Meets West XEN-TM- herbal beverage line did not commence until January 2000. The
increase in net sales in 1999 was due primarily to a 56% increase in unit sales
of PET products to approximately 481,000 cases in 1999 from approximately
309,000 cases in 1998. The average net sales price per case increased
approximately 3% in 1999 compared to 1998, due to a reduction in sales returns
and a decrease in the average sales discounts and freight out per case,
partially offset by an increase in promotional allowances per case. Sales in the
Hawaiian market accounted for approximately 88% of PET sales in 1999, compared
to approximately 76% in 1998. Sales to the Mainland accounted for approximately
3% of PET sales in 1999, compared to approximately 7% in 1998. International
sales accounted for approximately 9% of PET sales in 1999, compared to
approximately 17% in 1998. The Company
11
<PAGE>
believes that the outlook for its PET products in Asia is still promising but
that the development of these markets may take longer than originally
anticipated, given the Company's limited financial resources and economic
conditions in Asia which are somewhat resistive to the sale of an imported
premium priced product. The Company anticipates introducing its East Meets West
XEN-TM- line into Japan in 2000 and believes that the market there will be
receptive to this product. Initially, the Company's primary target markets for
this product line will be the West Coast and Hawaii. The Company anticipates
growth in its home and office delivery business within the next several years.
The Company has recently developed a significant presence in this business in
the Honolulu area as a result of the acquisition of Aloha in March 2000. The
Company will consider other acquisition in the home and office segment in the
future, based upon the availability of attractive opportunities and adequate
financing.
COST OF SALES. The Company's aggregate cost of sales increased 47% in 1999
compared to 1998, while aggregate net sales increased 69%. The primary component
in PET cost of sales is the production cost of finished bottles. The average
cost per bottle declined approximately 14% in 1999 compared to 1998 due to lower
unit costs of bottle pre-forms, labels, packaging costs and labor. These direct
cost reductions were partially offset by increased depreciation, warehouse rent
and utilities. For 1999, the Company's bottling facility operated at 60% of
normal capacity compared to 39% in 1998.
EXPENSES. Selling and marketing expenses decreased 33% to approximately
$661,000 in 1999 from approximately $982,000 in 1998, primarily as a result of a
decrease in advertising and promotional expenses, event activities, travel and
consulting expenses. The Company utilized significant consulting services in
1998 in the development of its marketing and distribution strategy. The Company
has reduced or terminated most of these consulting arrangements.
General and administrative expenses increased 13% to approximately
$1,436,000 in 1999 from approximately $1,266,000 in 1998. The majority of this
increase was due to increased legal and accounting fees resulting from the
unusually large volume of financing and acquisition transactions during the
year. Additionally, in 1998, the Company received a $73,450 payment in
settlement of the termination of a distribution agreement. That payment was
recorded in 1998 as a reduction of general and administrative expenses incurred
in 1997 in support of that agreement. See Note 7 to the Financial Statements.
OTHER INCOME (EXPENSE). Investor relations expense in 1998 was due to the
engagement of the Company's financial public relations advisor in July 1998. The
Company issued to this advisor, as its sole compensation, 100,000 shares of
Common Stock and options to purchase an aggregate of 565,000 additional shares
of Common Stock. The Company recorded the fair market value of these securities
as a charge to income in the third quarter of 1998. See Note 2a to the Financial
Statements. Interest (expense) decreased to approximately $(81,000) in 1999 from
approximately $(96,000) in 1998. Interest expense in 1999 was due primarily to
interest on capitalized leases and the note due on the Company's blow molding
equipment. See Note 4a to the Financial Statements.
PREFERRED STOCK DIVIDEND. Primarily as a result of the amortization of the
beneficial conversion feature and redemption of the Series A Preferred shares,
the Company recorded an aggregate preferred dividend of $416,379 during 1999.
There was no Preferred Stock outstanding in 1998. See Note 2b to the Financial
Statements.
NET LOSS AND NET LOSS PER SHARE. Due to the foregoing, the Company incurred
a net loss of $(1,581,943), and net loss available to common shareholders of
$(1,998,322) or $(.45) per share, in 1999 compared to a net loss of
$(3,266,452), or $(.83) per share, in 1998. Weighted average shares outstanding
increased to 4,476,554 in 1999 from 3,949,454 in 1998. The Company expects to
continue to generate losses until such time, if any, as it achieves
significantly higher sales levels.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $9,000 at December 31, 1999,
compared to approximately $320,000 at December 31, 1998. During 1999, the
Company raised an aggregate of approximately $2,305,000 in equity financing (net
of offering costs). As of December 31, 1999 these proceeds had been
substantially consumed as a result of (i) redemptions of outstanding securities,
(ii) capital expenditures and (iii) losses from operations.
In 1999, the Company obtained equity financing from three transactions or
related series of transactions: (i) In January 1999, the Company received
$125,000 from the exercise of certain options previously granted to its
financial public relations advisor. See Note 2a to the Financial Statements;
(ii) In March and August 1999, the Company received an aggregate of
approximately $1,150,000 in net proceeds from the sale of 1,250 shares ($1,000
liquidation preference per share) of Series A Convertible Preferred Stock (the
"Series A Preferred") (and a warrant to purchase 100,000 shares of Common Stock)
to an institutional investor (the "Series A Investor"). See Note 2b to the
Financial Statements; and (iii) in September and December, the Company received
an aggregate of $1,030,000 (net of expenses) from a private offering of an
aggregate of 1,050,000 units (each, a "Unit") to a group of investors (including
the Company's President (collectively, the "Units Investors")). The Units
consisted of an aggregate of 1,050,000 shares of Common Stock and five year
warrants to purchase an aggregate of 1,750,000 shares of Common Stock. See
Note 2c to the financial Statements. During the first quarter of 2000, the
Company obtained equity financing from two additional transactions: (i) the
Units Investors purchased an additional 200,000 Units and exercised an aggregate
of 50,000 warrants, yielding an additional $250,000 in net proceeds to the
Company; and (ii) in March 2000, the Company received $100,000 from the issuance
of 100 shares of Series B Convertible Preferred Stock. Approximately $908,750 of
these proceeds has been used to redeem an aggregate of 1,025 shares of Series A
Preferred pursuant to redemption agreements with the Series A Investor. Giving
effect to the conversion of six shares of Series A Preferred in August 1999,
there are currently 219 shares of Series A Preferred outstanding. The Company
has an option, exercisable through April 2000, to repurchase these shares at
100% of their liquidation preference amount.
The Company had capital expenditures of approximately $451,000 in 1999, and
approximately $840,000 in 1998. As of December 31, 199, the Company owed an
aggregate of $495,000 on its bottling equipment, payable in three annual
installments of $165,000 (plus accrued interest) commencing October 1, 2000. As
of December 31, 1998 the Company owed approximately an additional $29,000 on
other equipment. In June 1999, the Company acquired the operating assets and
business of Ali'i for an aggregate of approximately $312,000. The consideration
for these assets was paid entirely through the issuance of an aggregate of
263,040 shares of Common Stock. See Note 3 to the Financial Statements. In March
2000, the Company acquired Aloha in a merger transaction in consideration for
the issuance of an aggregate of 750,000 shares of Common Stock and a promissory
note in the original principal amount of $500,000 (the "Aloha Note"). The Aloha
Note bears interest at the annual rate of 10% payable monthly and is due in full
on April 1, 2001. The Aloha Note is secured by a first priority security
interest in all of the outstanding stock of Aloha.
During the next year the Company will need to raise additional capital at a
minimum to repay outstanding indebtedness on its equipment and the Aloha Note
due and to cover continuing losses from operations. In addition, the Company is
seeking capital to fund the development of its East Meets West XEN-TM- line and
the growth of its home and office delivery business. The Company is also
committed to repurchasing the balance of the outstanding Series A Preferred
($219,000), subject to available financing. The Company does not currently
anticipate obtaining bank financing or other debt financing to meet these
requirements. The Company is currently negotiating with equity investors and
believes that additional funding could become available from existing
stockholders or from new sources. The Units Investors have informed the Company
that they intend to exercise at least a portion of their outstanding warrants
during the next several months. The Company has received expressions of interest
13
<PAGE>
from other investors as well. However, there can be no assurance that sufficient
funds will become available to the Company on acceptable terms. If additional
capital does not become available, the Company will have to rely upon cash
generated from operations to meet its obligations. The Company believes that due
to projected revenue growth from the sale of East Meets West XEN-TM- products,
expansion into the home and office delivery business and continued growth in PET
retail sales, its operating losses will narrow substantially and could be
eliminated by the end of the year. However, if operating results do not improve
as anticipated and if the Company is unsuccessful in raising additional capital
as planned, the Company may not be able to continue as a going concern.
Loss carryforwards available to offset future taxable income were
approximately $6 million as of December 31, 1999. The Company is subject to
Internal Revenue Code Section 382, which limits the Company's ability to utilize
net operating losses generated prior to the close of the IPO (approximately
$2.9 million). The annual net operating loss limitation under Section 382 is
approximately $361,000.
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.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements required by this Item are attached hereto,
commencing on page F-2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES. The Company is exposed to certain market risks
associated with interest rate fluctuations on its borrowing arrangements. All
borrowing arrangements are entered into for purposes other than trading. The
Company is not subject to risks from currency rate fluctuations, except as
described above. See "Item 6. Management's Discussion and Analysis or Plan of
Operation--Currency Fluctuations". The Company does not utilize hedging
contracts or similar instruments.
The Company's exposure to interest rate risk arises from financial
instruments entered into in the normal course of business. The Company's
borrowings bear interest at fixed annual rates. Changes in interest rates
generally affect the fair value of such borrowings, but do not have an impact on
earnings or cash flows. Because of the uncertainty with respect to the Company's
ability to continue as a going concern, the fair value of the Company's
financial instruments may be significantly different than their respective
carrying values as of December 31, 1999.
QUALITATIVE DISCLOSURES. The Company's primary exposures relate to (1)
interest rate risk on its borrowings, (2) the Company's ability to pay or
refinance its borrowings at maturity at market rates, and (3) the impact of
interest rate movements on the Company's ability to obtain adequate financing to
fund future cash requirements. The Company manages interest rate risk on its
outstanding
14
<PAGE>
borrowings by using fixed rate debt. While the Company can not predict or manage
its ability to refinance existing borrowings or the impact of interest rate
movements will have on its existing borrowings, management evaluates the
Company's financial position on an ongoing basis.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this Item is incorporated herein by reference to
the Company's Definitive Proxy Statement (the "Proxy Statement"), to be filed
with the Securities and Exchange Commission (the "Commission") pursuant to
Regulation 14A in connection with the Company's 2000 Annual Meeting of
Stockholders, under the headings "Election of Directors" and "Management."
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to
the Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to
the Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to
the Proxy Statement under the heading "Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- ------------------------------------------------------------
<C> <S>
2.1 Merger Agreement and Plan of Reorganization (relating to the
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"))
3.1 Articles of Incorporation, as amended, of the Registrant
(Incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1998 (the 1998 "10-K"))
3.2 By-Laws, as amended, of the Registrant (Incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1997 (the
"1997 10-K"))
4.1 Specimen Stock Certificate for the Registrant's Common Stock
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997 (the "June 1997 10-Q"))
4.2 Specimen Stock Certificate for the Registrant's Series A
Convertible Preferred Stock (the ("Series A
Preferred")(Incorporated by reference to Exhibit 4.2 to the
Registrant's Current Report on Form 8-K dated March 12, 1999
(the "March 1999 8-K"))
4.3 Resolutions setting forth the relative rights and
preferences of the Series A Preferred (Incorporated by
reference to Exhibit 4.1 to the March 1999 8-K)
4.4 Specimen Stock Certificate for the Registrant's Series B
Convertible Preferred Stock (the "Series B Preferred")
4.5 Resolutions setting forth the relative rights and
preferences of the Series B Preferred
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- ------------------------------------------------------------
<C> <S>
4.6 Warrant Agreement between the Registrant and Continental
Stock Transfer & Trust Company, as Warrant Agent
(Incorporated by reference to Exhibit 4.2 to the June
1997 10-Q)
4.7 Specimen Warrant Certificate (Incorporated by reference to
Exhibit 4.3 to the June 1997 10-Q)
4.8 Underwriter's Warrant Agreement between the Registrant and
Joseph Stevens & Company, Inc. (Incorporated by reference to
Exhibit 4.4 to the June 1997 10-Q)
4.9 Underwriter's Warrant Certificate (Incorporated by reference
to Exhibit 4.5 to the June 1997 10-Q)
4.10 Warrant Agreement between the Registrant and Amro
International, S.A. (Incorporated by reference to
Exhibit 4.3 to the March 1999 8-K)
4.11 Form of Common Stock Purchase Warrant ($1.00 exercise price)
issued to investors in September 1999 private offering
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999 (the "September 1999 10-Q"))
4.12 Form of Common Stock Purchase Warrant ($1.50 exercise price)
issued to investors in September 1999 private offering
(Incorporated by reference to Exhibit 4.2 to the September
1999 10-Q)
10.1 Lease Agreement dated October 3, 1994, as amended, between
the Registrant as Lessee and Hawaii Brewery Development Co.,
Inc. as Lessor (Incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement on Form SB-2
(File No. 333-18289)(the "Form SB-2")
10.2 Master Lease Agreement No. A2500, dated December 8, 1994,
between the Registrant and First Hawaiian Leasing and
related agreements (Incorporated by reference to
Exhibit 10.4 to the Form SB-2)
10.3 Employment Agreement, dated October 10, 1996, between the
Registrant and Marcus Bender (Incorporated by reference to
Exhibit 10.5 to the Form SB-2)
10.4 Stock Option Agreement, dated October 10, 1996, between the
Registrant and Marcus Bender (Incorporated by reference to
Exhibit 10.6 to the Form SB-2)
10.5 Employment Agreement between Aloha Water Company, Inc. and
Daniel Gabriel (Incorporated by reference to Exhibit 10.1 to
the March 2000 8-K)
10.6 1998 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1998 (the "June
1998 10-Q"))
10.7 Underwriting Agreement between the Registrant and Joseph
Stevens & Company, Inc. (Incorporated by reference to
Exhibit 10.1 to the June 1997 10-Q)
10.8 Financial Advisory and Consulting Agreement between the
Registrant and Joseph Stevens & Company, Inc. (Incorporated
by reference to Exhibit 10.2 to the June 1997 10-Q)
10.9 Asset Purchase Agreement between the Registrant and Bottles
Packaging, Inc. ("BPI") (Incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated October 7, 1997 (the "October 1997 8-K"))
10.10 Bill of Sale between the Registrant and BPI (Incorporated by
reference to Exhibit 10.2 to the October 1997 8-K)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- ------------------------------------------------------------
<C> <S>
10.11 Promissory Note evidencing an aggregate of $825,000 in
indebtedness of the Registrant to BPI (Incorporated by
reference to Exhibit 10.3 to the October 1997 8-K)
10.12 Security Agreement between the registrant and BPI securing
the obligations of the Registrant to BPI under the
Promissory Note (Incorporated by reference to Exhibit 10.4
to the October 1997 8-K)
10.13 Letter Agreement between the Registrant and 8607 Colonial
Group, Inc. ("Colonial") (Incorporated by reference to
Exhibit 99.1 to the June 1998 10-Q)
10.14 Option Agreement between the Registrant and Colonial
(Incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-3 (File
No. 333-63827))
10.15 Asset Purchase Agreement by and among the Registrant, Ali'i
Water Bottling, Inc. ("Ali'i") 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"))
10.16 Bill of Sale between the Registrant and Ali'i (Incorporated
by reference to Exhibit 10.2 to the June 1999 8-K)
10.17 Co-Packing Agreement between the Registrant and Langer Juice
Company, Inc.*
10.18 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)
10.19 Pledge and Security Agreement securing the Aloha Note
(Incorporated by reference to Exhibit 4.2 to the March 2000
8-K)
21 Subsidiaries--Aloha Water Company, Inc., a Hawaii
corporation, is a wholly-owned subsidiary.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
- - ------------------------
* Certain information in this Exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
HAWAIIAN NATURAL WATER COMPANY, INC.
(REGISTRANT)
By: /s/ MARCUS BENDER
--------------------------------------------
Marcus Bender
PRESIDENT & CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MARCUS BENDER
------------------------------------------- Chief Executive Officer and March 29, 2000
Marcus Bender Director
/s/ WILLARD IRWIN
------------------------------------------- Chief Financial Officer March 29, 2000
David Laeha
/s/ BRIAN BARBATA
------------------------------------------- Director March 29, 2000
Brian Barbata
/s/ KEIJIRO SORIMACHI
------------------------------------------- Director March 29, 2000
Keijiro Sorimachi
/s/ MICHAEL CHAGAMI
------------------------------------------- Director March 29, 2000
Michael Chagami
/s/ MICHAEL ISCOVE
------------------------------------------- Director March 29, 2000
Michael Iscove
/s/ DENNIS HARRIS
------------------------------------------- Director March 29, 2000
Dennis Harris
</TABLE>
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-1
Balance Sheet--December 31, 1999............................ F-2
Statements of Operations For the Years Ended December 31,
1999 and 1998............................................. F-3
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1999 and 1998.......................... F-4
Statements of Cash Flows for the Years Ended December 31,
1999 and 1998............................................. F-5
Notes to Financial Statements--December 31, 1999............ F-6
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Hawaiian Natural Water Company, Inc.:
We have audited the accompanying balance sheet of HAWAIIAN NATURAL WATER
COMPANY, INC., (a Hawaii corporation) as of December 31, 1999 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
two years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hawaiian Natural Water
Company, Inc. as of December 31, 1999 and the results of its operations and its
cash flows for the two years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and negative cash flows that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Honolulu, Hawaii
March 21, 2000
F-1
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,988
Trade accounts receivable, net of allowance for doubtful
accounts of $24,068..................................... 542,317
Inventories............................................... 583,391
Other current assets...................................... 103,407
----------
Total current assets.................................. 1,238,103
----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $661,402.................................. 2,465,504
CO-PACKING AGREEMENT, net of accumulated amortization
of $7,500................................................. 142,500
INTANGIBLE ASSET, net of accumulated amortization
of $17,708................................................ 145,900
----------
Total assets.......................................... $3,992,057
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 984,236
Book overdraft............................................ 28,001
Accrued professional fees................................. 84,193
Accrued vacation.......................................... 32,489
Accrued commissions and billbacks......................... 97,358
Accrued promotional expenses.............................. 28,746
Accrued other............................................. 70,838
Notes payable............................................. 141,153
Capital lease obligation.................................. 31,100
----------
Total current liabilities............................. 1,498,114
----------
NON-CURRENT LIABILITIES:
Notes payable--net of current portion..................... 328,197
Capital lease obligation--net of current portion.......... 30,255
Other..................................................... 41,380
----------
Total non-current liabilities......................... 399,832
----------
Total liabilities..................................... 1,897,946
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value:
Authorized--5,000,000 shares
Issued and outstanding--319 shares
Liquidation preference of $319,000...................... 205,755
Common stock, no par value:
Authorized--20,000,000 shares
Issued and outstanding--5,536,727 shares................ 8,076,886
Common stock warrants and options:
Issued and outstanding--5,709,458 shares................ 3,705,529
Accumulated deficit (9,894,059)
----------
Total stockholders' equity............................ 2,094,111
----------
Total liabilities and stockholders' equity............ $3,992,057
==========
</TABLE>
The accompanying notes are an integral part of this financial statement
F-2
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET SALES................................................... $ 3,050,383 $ 1,809,730
COST OF SALES............................................... 2,464,403 1,680,381
----------- -----------
Gross margin............................................ 585,980 129,349
EXPENSES:
General and administrative................................ 1,436,214 1,266,158
Selling and marketing..................................... 661,289 982,118
----------- -----------
2,097,503 2,248,276
----------- -----------
OPERATING LOSS.............................................. (1,511,523) (2,118,927)
OTHER INCOME (EXPENSE):
Investor relations expense................................ -- (1,122,913)
Interest income........................................... 10,515 71,829
Interest expense.......................................... (80,935) (96,441)
----------- -----------
(70,420) (1,147,525)
NET LOSS.................................................... (1,581,943) (3,266,452)
----------- -----------
Preferred Stock Dividend.................................. (416,379) --
----------- -----------
NET LOSS Available to Common Shareholders................... $(1,998,322) $(3,266,452)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE........................ $ (0.45) $ (0.83)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
WARRANTS
COMMON STOCK AND OPTIONS PREFERRED STOCK TOTAL
---------------------- ---------------------- --------------------- STOCKHOLDERS'
NUMBER OF NUMBER OF NUMBER OF ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT (DEFICIT)
--------- ---------- --------- ---------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1997.................... 3,899,212 $6,338,728 3,170,310 $2,000,546 -- $ -- $(4,629,285) $ 3,709,989
Issuance of common stock
July 31, 1998........... 100,000 350,000 -- -- -- -- -- 350,000
October 1, 1998......... 1,000 4,312 -- -- -- -- -- 4,312
Exercise of warrants
September 2, 1998....... 24,351 22 (24,351) -- -- -- -- 22
Issuance of stock options
to consultants and
distributors
January 2, 1998......... -- -- 43,000 53,370 -- -- -- 53,370
July 31, 1998........... -- -- 565,000 772,913 -- -- -- 772,913
October 7, 1998......... -- -- 4,000 14,500 -- -- -- 14,500
Net Loss.................. -- -- -- -- (3,266,452) (3,266,452)
--------- ---------- --------- ---------- -------- --------- ----------- -----------
BALANCE, 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
and warrants in private
offering
September 28, 1999...... 850,000 440,646 1,416,666 389,354 -- -- -- 830,000
December 6, 1999........ 100,000 53,097 166,667 46,903 -- -- -- 100,000
December 10, 1999....... 100,000 53,098 166,666 46,902 -- -- -- 100,000
Issuance of common stock
for purchase of Net
Assets of Alii Water
Bottling, Inc.
June 30, 1999........... 263,040 312,359 -- -- -- -- -- 312,359
Issuance of common stock
for Co-Packing agreement
September 13, 1999...... 100,000 43,750 -- 106,250 -- -- -- 150,000
Issuance of common stock
and common stock options
to professional advisor
for services rendered
April 1, 1999........... -- -- 12,500 16,226 -- -- -- 16,266
July 1, 1999............ -- -- 12,500 16,226 -- -- -- 16,266
July 14, 1999........... 2,695 2,695 -- -- -- -- -- 2,695
September 28, 1999...... 30,000 15,929 50,000 14,071 -- -- -- 30,000
October 1, 1999......... -- -- 12,500 3,000 -- -- -- 3,000
Issuance of common stock
options to non-employee
directors............... -- -- 9,000 8,395 -- -- -- 8,395
Issuance of common stock
options to marketing
consultant
May 20, 1999............ -- -- 10,000 4,370 -- -- -- 4,370
May 24, 1999............ -- -- 30,000 13,110 -- -- -- 13,110
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 Common stock
warrants to Broker for
services rendered
March 3, 1999........... 5,000 18,750 15,000 41,670 -- -- -- 60,420
Issuance of preferred
stock to institutional
investor
August 10, 1999......... -- 312,500 -- -- 500 500,000 (312,500) 500,000
Repricing of warrants
associated with the
outstanding preferred
stock
August 10, 1999......... -- -- -- 27,003 -- (20,252) -- 6,751
September 23, 1999...... -- -- -- 19,069 -- (14,302) -- 4,767
November 5, 1999........ -- -- -- 14,229 -- (10,672) -- 3,557
Conversion of preferred
stock to common stock
August 24, 1999......... 11,429 6,000 -- -- (6) (6,000) -- --
Redemption of preferred
stock
September 23, 1999...... -- -- -- -- (250) (197,680) (52,320) (250,000)
October 1, 1999......... -- -- -- -- (375) (296,520) (3,480) (300,000)
October 8, 1999......... -- -- -- -- (250) (197,680) (11,070) (208,750)
November 5, 1999........ -- -- -- -- (50) (39,536) (10,464) (50,000)
Accrued dividends to
preferred Shareholder... -- -- -- -- -- -- (26,545) (26,545)
Net loss.................. -- -- -- -- -- -- (1,581,943) (1,581,943)
--------- ---------- --------- ---------- -------- --------- ----------- -----------
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
========= ========== ========= ========== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,581,943) $(3,266,452)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 288,759 198,315
Issuance of common stock options to consultants and
distributors.......................................... 85,627 1,195,117
Issuance of common stock options to non-employee
directors............................................. 8,395 --
Amortization of debt discount........................... 59,398 84,840
Warrants granted for preferred standstill agreement..... 15,075 --
Loss on sale of equipment............................... 3,282 --
Net (increase) in current assets........................ (520,343) (137,338)
Increase in other noncurrent liabilities................ 41,380 --
Net increase in current liabilities..................... 484,915 279,812
----------- -----------
Net cash used in operating activities................. (1,115,455) (1,645,706)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (328,902) (351,854)
Acquisition of intangible asset........................... (159,149) --
Proceeds from sale of equipment........................... 1,080 --
Deposit on equipment...................................... -- (47,238)
----------- -----------
Net cash used in investing activities................. (486,971) (399,092)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable............................... (131,956) (169,728)
Repayment of principal on capital leases.................. (69,408) (42,230)
Net proceeds from sale of preferred stock and common stock
warrants................................................ 1,146,239 --
Net proceeds from sale of common stock and common stock
warrants................................................ 1,030,000 --
Redemption of preferred stock............................. (808,750) --
Proceeds from exercise of common stock options............ 125,000 --
----------- -----------
Net cash provided by (used in) financing activities... 1,291,125 (211,958)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS................. $ (311,301) $(2,256,756)
CASH AND CASH EQUIVALENTS, beginning of period.............. 320,289 2,577,045
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 8,988 $ 320,289
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
ACQUISITION OF NET OPERATING ASSETS OF ALII WATER BOTTLING,
INC. WITH COMMON STOCK.................................... $ 312,359 $ --
=========== ===========
CO-PACKING AGREEMENT--PAID WITH COMMON STOCK................ $ 150,000 $ --
=========== ===========
ADDITION OF CAPITALIZED EQUIPMENT LEASES.................... $ 82,176 $ --
=========== ===========
CAPITAL ADDITION--ACQUIRED WITH NOTE PAYABLE................ $ 22,195 $ --
=========== ===========
PREFERRED SHAREHOLDER DIVIDENDS............................. $ 416,379 $ --
=========== ===========
INTEREST PAID............................................... $ 21,537 $ 11,463
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
a. ORGANIZATION
Hawaiian Natural Water Company, Inc. (the "Company") 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
United States 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
Co., Inc., which served to extend the Company's product line to include
(1) premium purified bottled water, and (2) the Home and Office large bottle
(3 gallon and 5 gallon) delivery market. The majority of the business is
concentrated in the Kailua-Kona area of the Big Island of Hawaii (See Note 3).
See also Note 13 for acquisition subsequent to year end.
As shown in the accompanying financial statements, the Company has incurred
significant losses and negative cash flows since inception. Management expects
that the Company will continue to incur additional losses and negative cash
flows until the Company achieves significant 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.
The Company is continuing to evaluate various alternatives, including
obtaining additional financing from strategic and financial investors, the
launch of new products, revisions to the Company's marketing plan, acquisitions
and other strategies. However, there can be no assurance that management will
successfully improve profitability and cash flow, or be able to obtain
additional financing on terms acceptable to the Company.
The Company had $493,707 of past due accounts payable at December 31, 1999.
b. BASIS OF ACCOUNTING
The Company's accounting policies are in accordance with generally accepted
accounting principles in the United States.
c. 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.
d. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
As of December 31, 1999, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials............................................... $385,822
Finished goods.............................................. 197,569
--------
$583,391
========
</TABLE>
F-6
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
Raw materials inventory consists of PET "pre-forms", caps, labels and
various packaging and shipping materials. Finished goods inventory includes
materials, labor and manufacturing overhead costs.
e. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, which includes the cost of labor
used to install equipment and perform major leasehold improvements. Maintenance
and repairs are expensed as incurred. Depreciation and amortization are provided
by the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Leasehold improvements............................. The shorter of the useful
life or the lease term
Machinery, equipment and assets under capital
lease............................................ 7-15 years
</TABLE>
Property and equipment is summarized as follows:
<TABLE>
<S> <C>
Machinery and equipment..................................... $2,513,332
Leasehold improvements...................................... 525,829
Assets under capital lease.................................. 87,745
----------
3,126,906
Less--Accumulated depreciation and amortization............. (661,402)
----------
$2,465,504
==========
</TABLE>
f. REVENUE RECOGNITION
The Company recognizes revenue on the accrual method of accounting when
title transfers upon shipment, for PET bottled water products. For home and
office delivery products, revenue is recognized when the products are delivered.
The Company also grants customers the right to return goods which are defective
or otherwise unsuitable for sale. 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, promotional allowances and
freight-out.
g. ADVERTISING
The Company charges the cost of advertising to expense as incurred. The
Company incurred approximately $111,000 and $203,000 of advertising expense
during the years ended December 31, 1999 and 1998, respectively.
F-7
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
h. STOCK-BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement establishes financial
accounting and reporting standards for stock-based compensation plans, including
all arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. This statement also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably determinable. The Company
accounts for the issuance of equity instruments to employees under APB Opinion
No. 25. (See Note 6).
i. LOSS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS") previously found in APB
Opinion No. 15, "Earnings Per Share," and makes them comparable to international
EPS standards. Under the new standard, the Company's basic and diluted loss per
share are the same for both 1999 and 1998 in that any conversion of stock
options and warrants would have been anti-dilutive.
j. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of fair value
information for certain financial instruments. The carrying amounts for trade
receivables and payables are considered to be their fair values. The fair value
of the Company's note payable at December 31, 1999 may be significantly
different than its carrying value as a result of the matter discussed in
Note 1a. above and as a result of fluctuations in market interest rates.
k. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this statement, income tax liabilities and
assets are recognized at enacted tax rates for the expected future tax
consequences of temporary differences between carrying amounts and the tax basis
of assets and liabilities. A reserve is provided to reduce deferred tax assets
to estimated realizable value (See Note 8).
l. 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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-8
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
m. BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share is based on the weighted average number of
common shares issued and outstanding during the period of 4,476,554 and
3,949,454 for 1999 and 1998, respectively. Common stock options and warrants are
excluded from the computation, as their effect would be anti-dilutive.
n. NEW ACCOUNTING PRONOUNCEMENT
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 133, "ACCOUNTING FOR
DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES"
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2001, and is not applied retroactively to financial
statements of prior periods. The Company was not involved in the current or
prior periods in the use of derivative instruments or hedging activities.
o. LONG-LIVED ASSETS
Whenever there are recognized events or changes in circumstances that could
affect the carrying amount of long-lived assets, management reviews these assets
for possible impairment. In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
management uses estimated expected future net cash flows (undiscounted and
excluding interest costs) to measure the recoverability of these assets. The
estimation of expected future net cash flows is inherently uncertain and, relies
to a considerable extent, the availability of capital. If in future periods,
there are changes in the estimates or assumptions incorporated into the
impairment review analysis, the changes could impact the carrying amount of
these assets.
p. RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to their 1999
presentation.
2. EQUITY TRANSACTIONS
a. 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,
F-9
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. EQUITY TRANSACTIONS (CONTINUED)
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. Options with respect
to 250,000 shares expired in August, 1999.
b. 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 1,250 shares of Series A convertible
preferred stock (the "Series A Preferred") and warrants (the "Warrants") to
purchase an additional 100,000 shares of common stock at an exercise price of
$3.625 per share . 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 in August 1999. In
connection with this second installment, the Company agreed to reduce the
exercise price of the Warrants held by the investor to $1.25 per share. 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 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. The
Company has filed a registration statement with the Securities and Exchange
Commission (SEC) covering the shares of common stock underlying the Series A
Preferred and Warrants.
The Series A Preferred has a liquidation preference of $1,000. Each share 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.
It is convertible into common stock, in whole or in part at the election of the
holder, at a variable conversion price based upon a discount to the market price
(as defined) of the common stock during a measurement period prior to each
conversion date (the "beneficial conversion feature"). The Series A preferred is
redeemable by the Company prior to conversion. Under certain circumstances, the
Company may also redeem the conversion shares in cash.
In August 1999, the holder of the Series A Preferred converted 6 shares into
an aggregate of 11,429 shares of common stock based upon the conversion price of
$.52 per share. On September 20, 1999 the Company entered into an agreement with
the holder of the Series A Preferred, 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 prices increasing ratably from 75% of
the liquidation preference amount on the first day to 90% on the 30(th) day. The
investor agreed not to convert any shares of the Series A Preferred during the
option period (standstill). 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 Warrants to $.25 per share. In November 1999,
the Company entered into a second standstill agreement with the holder of the
Series A Preferred, 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. In
connection with the grant of this second option, the Company further reduced the
exercise price of the Warrants to $.01 per share.
F-10
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. EQUITY TRANSACTIONS (CONTINUED)
Primarily as a result of the amortization of the beneficial conversion feature
and the redemptions of the Series A Preferred shares described above, the
Company recorded an aggregate preferred dividend of $416,379 during 1999.
In the first quarter of 2000, the Company entered into additional agreements
with the holder of the Series A Preferred, pursuant to which the company
redeemed an additional 100 shares for an aggregate of $100,000. In connection
therewith, the investor exercised the Warrant receiving 100,000 shares of common
stock at $.01 per share for a total consideration of $1,000. As a result of the
foregoing transactions, there are currently 219 shares ($219,000 liquidation
preference amount) of Series A preferred outstanding (see Note 13.)
c. PRIVATE OFFERING OF COMMON STOCK AND WARRANTS
In September 1999, the Company completed a private offering of common stock
and warrants, resulting in aggregate proceeds to the Company of $850,000
($830,000 net of offering expenses). An investment of $750,000 was received from
two unaffiliated private investors and certain affiliated entities; and an
additional $100,000 was received from the Company's Chief Executive Officer. In
December 1999, the Company received an additional $200,000 investment on the
same terms from the unaffiliated investor.
The Offering involved the issuance of an aggregate of 1,050,000 shares of
common stock at a purchase price of $1.00 per share. The investors were also
granted, for no additional consideration, five year warrants to purchase an
aggregate of (i) 1,050,000 shares of common stock at $1.00 per share, and
(ii) 699,999 shares of common stock at $1.50 per share. Further, the Company's
legal counsel was issued 30,000 shares of common and 50,000 warrants in lieu of
the fees due him. The warrants are subject to standard anti-dilution protection,
and are redeemable under certain circumstances.
Approximately $483,000 of the net proceeds of the offering was allocated to
the warrants granted to the investors, based upon the trading price of the
common stock on the date of grant and the Black-Scholes option pricing model.
3. ACQUISITION
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. These post-closing adjustments 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 (after giving effect to the post-closing adjustments). 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
F-11
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. ACQUISITION (CONTINUED)
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>
TWELVE MONTHS ENDED
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net sales.......................................... $ 2,692,869 $ 3,557,585
Net loss........................................... $(3,940,169) $(2,244,833)
Diluted net loss per share......................... $ (1.00) $ (0.50)
Diluted weighted average common shares
outstanding...................................... 3,949,454 4,476,554
</TABLE>
4. NOTES PAYABLE
EQUIPMENT NOTE PAYABLE
On September 30, 1997, the Company purchased certain bottle making equipment
for $1.2 million, of which $375,000 was paid at the closing, and the remaining
$825,000 was paid through the issuance of a note payable to the seller. The
bottling equipment was recorded at the discounted present value of the payments
provided for in the purchase agreement (approximately $977,000) and is being
depreciated over the estimated remaining useful life of 15 years. The note is
payable in installments as follow:
(i) $13,750 per month (an aggregate of $330,000) during the two years
following the close of the acquisition with no interest; and
(ii) the balance of $495,000, payable in three annual installments of
$165,000 plus interest on the outstanding balance at an annual rate of
5%, commencing September 30, 2000.
The Company has discounted this note payable using the Company's estimated
weighted average cost of capital of 12% and amortizes the resulting discount to
interest expense using the effective interest method over the term of the loan.
The following summarizes the notes payable as of December 31, 1999:
<TABLE>
<S> <C>
Equipment note payable...................................... $ 495,000
Less: unamortized discount................................ (54,682)
---------
Equipment note payable, net................................. 440,318
Warehouse building note payable............................. 19,477
Vehicle installment note payable............................ 9,555
---------
Notes payable at December 31, 1999.......................... 469,350
Less: current portion..................................... (141,153)
---------
Non-current portion....................................... $ 328,197
=========
</TABLE>
F-12
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. NOTES PAYABLE (CONTINUED)
Maturities of notes payable, net of discount at December 31, 1999 are as
follow:
<TABLE>
<S> <C>
2000........................................................ $141,153
2001........................................................ 151,460
2002........................................................ 176,737
--------
$469,350
========
</TABLE>
5. CONSULTING ARRANGEMENTS
During 1999 and 1998, the Company hired various consultants to perform
sales, marketing and other functions. The Company recognized consulting expenses
of approximately $88,000 and $147,000 for 1999 and 1998, respectively.
6. STOCK OPTIONS
During 1996, the Board of Directors authorized an aggregate of 1,000,000
shares of common stock for issuance upon the exercise of stock options which may
be granted from time to time to directors, officers, employees and consultants
of the Company under the Company's stock option plan. Under this plan, the
Company granted to certain consultants and distributors options to purchase an
aggregate of 136,500 shares of common stock in 1999, and 47,000 shares of common
stock in 1998. These options are exercisable for five years at exercise prices
ranging from $1.00 to $4.00 per share. These options were valued, in accordance
with SFAS 123 (using the Black-Scholes option pricing model), at $75,398 in
1999, and $67,870 in 1998, which amounts were charged to expense as incurred.
These options vested upon grant. Under a separate authorization, in July 1998,
the Company granted to its financial public relations advisor vested options to
purchase an aggregate of 565,000 shares of Common Stock, all of which were
outstanding at December 31, 1998. These options were valued, in accordance with
SFAS 123 (using the Black-Scholes option pricing model), at $772,913, which was
charged to income in the third quarter of 1998. See Note 2. All of the foregoing
options are reflected on the balance sheet as "Common Stock warrants and
options, issued and outstanding."
Using the Black-Scholes option valuation model (and the following
assumptions), the estimated fair values of options granted during 1999 ranged
from $.13 to $2.21. The estimated fair value of options granted in 1998 ranged
from $1.76 to $3.51 per share. Management believes that the fair value results
from using the Black-Scholes calculation may not be indicative of the Company's
economic cost of issuing stock options. Principle weighted-average assumptions
used in applying the Black-Scholes model were as follow:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
<S> <C> <C>
Expected volatility........................ 60.00% 109.95%
Expected dividend yield.................... 0.00% 0.00%
Expected term.............................. 5 yrs 5 yrs
Risk-free interest rate.................... 5.63% to 5.78% 4.74% to 5.57%
</TABLE>
In addition, as further described below, at December 31, 1999, outstanding
options to purchase an aggregate of 447,167 shares of common stock were held by
employees of the Company. These options
F-13
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCK OPTIONS (CONTINUED)
are not reflected on the balance sheet as "Common Stock warrants and options,
issued and outstanding."
The following summarizes information about stock options granted to
employees during the years ended December 31,1999 and 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Balance at December 31, 1997....................... 254,075 $4.00
Granted.......................................... 266,525 $4.00
Forfeited........................................ (33,600) $4.00
--------
Balance at December 31, 1998....................... 487,000 $4.00
Granted.......................................... 70,000 $4.00
Forfeited........................................ (109,833) $4.00
--------
Balance at December 31, 1999....................... 447,167 $4.00
========
</TABLE>
At December 31, 1999 and 1998, respectively, the Company had 265,925 and
132,891 vested employee options outstanding, exercisable at a weighted-average
exercise price of $4.00
If compensation cost for stock options granted to employees had been
accounted for under SFAS. 123, the Company's net loss per share for 1999 and
1998 would have been $(.51) and $(0.88), respectively.
7. SETTLEMENT OF TERMINATED DISTRIBUTION AGREEMENT
In May 1998, the Company terminated its exclusive distribution agreement
with a distributor covering most of the Western U.S. due to his failure to meet
a certain minimum purchase requirement. In connection with this termination, the
distributor made a $100,000 lump-sum payment to the Company in August 1998. That
payment was recorded in the accompanying financial statements as a reduction in
certain selling, and general and administrative expenses which primarily had
been incurred in order to reach the settlement.
8. INCOME TAXES
Certain items of expense are recognized in different periods for income tax
purposes than for financial reporting purposes. As of December 31, 1999, the
Company had approximately $6 million of net operating loss (NOL) carryforwards
available to reduce future taxable income. These NOL carryforwards expire on
various dates beginning in 2009 through 2019. The deferred tax asset as of
December 31, 1999 consisted primarily of net operating loss carryforwards. A
valuation allowance has been provided for the entire deferred tax asset due to
the uncertainty of its realization.
The Company is subject to Internal Revenue Code Section 382 which limits the
Company's ability to utilize net operating losses generated prior to the closing
of its initial public offering (of approximately $2.8 million). The annual net
operating loss limitation under Section 382 is approximately $361,000. The
current limitation is subject to change as a result of recent equity
transactions.
F-14
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. INCOME TAXES (CONTINUED)
The Company paid no income taxes and had no net deferred or current tax
provision/benefit for the years ended December 31, 1999 and 1998.
9. COMMITMENTS AND CONTINGENCIES
a. CAPITAL LEASE OBLIGATIONS
The Company leases machinery and equipment under capital leases which expire
on various dates through June 2002.
As of December 31, 1999, future minimum lease payments were as follows:
<TABLE>
<S> <C>
2000........................................................ $ 40,456
2001........................................................ 30,578
2002........................................................ 3,205
--------
Total future minimum payments............................. 74,239
Less--Amount representing interest.......................... (12,884)
--------
Total capital lease obligations........................... 61,355
Less--Current portion....................................... (31,100)
--------
Noncurrent portion.......................................... $ 30,255
========
</TABLE>
Certain of the Company's directors guarantee these capital leases which,
bear interest ranging from 11% to 27%.
b. OPERATING LEASE OBLIGATIONS
PLANT LEASE
The Company leases its bottling facility and surrounding property, including
the water source and pumping equipment from a principal stockholder, under a 50
year lease. The lease can be renewed at the Company's option for an additional
50 years. The lease includes the following provisions:
Rent is the greater of $5,335 per month (Base Rent), adjusted every five
years based upon changes in the consumer price index in Hawaii, as defined, or
two percent of the Company's net revenue, as defined.
The lease entitles the Company to exclusive use of the water source, except
that the lessor may draw up to 50 percent of the water flow for use in beverage
production other than the sale of natural water. The Company believes the
remaining 50% is adequate for the current and projected future needs of the
Company's business.
During 1999, the Company incurred approximately $134,000 for leasehold
improvements to this property.
F-15
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
WAREHOUSE LEASE
On February 1, 1998 the Company entered into a one-year lease for warehouse
space comprised of approximately 5,300 square feet, with lease payments of
$3,000 per month. This space was replaced on February 1, 1999 when the Company
entered into a lease for warehouse space in a location of closer proximity to
the plant, comprised of approximately 4,000 square feet of warehouse space. The
lease payments pursuant to the new lease were $2,560 per month. In January 2000,
this new lease was terminated and the warehouse space was replaced with the new
prefabricated warehouse erected on the Company's leased bottling facility
property.
OFFICE LEASE
In October 1996, the Company entered into a three-year office and warehouse
lease in Honolulu, with a renewal option. Monthly rental payments were $3,000
through November 1997. Thereafter, monthly rental payments were $4,000.
Commencing October 1, 1999 the Company entered into a forty-five (45) month
office and warehouse lease for a space containing approximately thirteen
thousand five hundred (13,500) square feet of warehouse and one thousand five
hundred (1,500) square feet of office space. Terms of the lease provided for no
rental fee for the first month. Thereafter, monthly payments are $6,800 through
May 2001, $7,800 through May 2002, and $8,800 through May 2003.
On July 1, 1999 the Company entered in to a month-to-month rental agreement
for five thousand forty-three (5,043) square feet of manufacturing and office
space for its home and office bulk water operation in Kailua-Kona, Hawaii. The
Company with a minimum 14 day advance notice may terminate this lease. Monthly
payments are $2,747.
The Company recognized approximately $184,000 and $152,000 in lease expense
under all existing facility lease agreements in 1999 and 1998, respectively.
The future minimum lease payments for the plant, warehouse and office leases
as of December 31, 1999 were as follow:
<TABLE>
<S> <C>
2000........................................................ 157,028
2001........................................................ 167,428
2002........................................................ 172,428
2003........................................................ 110,828
2004........................................................ 66,828
Thereafter.................................................. 2,589,585
----------
$3,264,125
==========
</TABLE>
c. ARTWORK LICENSING AGREEMENTS
In December 1998, the Company entered into a license agreement with a
company to use certain "Hello Kitty" images and artwork on the Company's bottle
labels. The agreement expires December 31, 2000, with an option to renew for an
additional one year period. The agreement provides for royalty payments based
upon certain percentages of the net sales of the Company's
F-16
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
product using such images and artwork (as defined). These images have been
licensed for use in specified geographic territories. Royalty expense was not
material in 1998 or 1999.
In April 1998, the Company entered into a license agreement with an artist
to use certain images and other artwork on the Company's bottle labels. The
agreement expires in April 2000, and provides for royalty payments based upon
certain percentages of actual invoiced wholesale price of the Company's products
sold using such images and artwork (as defined). Royalty expense was not
material in 1999 or 1998.
d. CO-PACKING AGREEMENT
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 10. 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 stock on September 13, 1999), and the balance
($106,250) was allocated to common stock options.
10. 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 being amortized over a 5 year period.
11. SIGNIFICANT CUSTOMER
For the years ended December 31, 1999 and 1998 approximately 47% and 52%,
respectively, of the Company's sales were made through one Hawaii distributor.
No other single customer accounted for greater than 10% of sales.
12. SEGMENT INFORMATION
Management believes the Company operates presently in one segment (sale of
bottled water) in three major geographic regions: Hawaii, the Mainland and
International. Although the home and office delivery business and the herbal
beverage business represent new segments, the results of these operations were
not material in 1999.
F-17
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. SEGMENT INFORMATION (CONTINUED)
The Company sells its product directly to certain foreign distributors. All
sales are made in U.S. dollars. For the years ended December 31, 1999 and 1998,
the Company had the following sales by geographic region:
<TABLE>
<CAPTION>
1999 % 1998 %
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Hawaii.................................. $2,690,000 88 $1,372,000 76
International........................... 273,000 9 305,000 17
United States Mainland.................. 87,000 3 133,000 7
---------- --- ---------- ---
$3,050,000 100 $1,810,000 100
========== === ========== ===
</TABLE>
Substantially all long-lived assets of the Company are attributable to its
Hawaii operations.
13. SUBSEQUENT EVENTS
NEW PRODUCT LAUNCH
The Company launched its new herbal beverage line, East Meets West XEN, in
January 2000. The Company has entered into distribution arrangements with six
beverage distributors and two major food service distributors in Central and
Southern California, and an additional six beverage distributors in Southern
California and Nevada are scheduled to launch the product within the next six
weeks. East Meets West XEN has been selling in Hawaii since the middle of
January 2000.
ACQUISITION
On March 20, 2000 the Company completed the acquisition of Aloha Water
Company, Inc. 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
(i) 750,000 shares of Common Stock of the Company and (ii) a promissory note of
the Company in the amount of $500,000. Interest on the note is payable monthly
at the annual rate of 10%. The entire principal amount is due on April 1, 2001.
The note is secured by a first priority secured interest on all of the capital
stock of the subsidiary.
EQUITY TRANSACTIONS
Subsequent to year end, the Company received an aggregate of $200,000 in
private equity funding from two investors.
401K PLAN
The Company has established a defined contribution retirement plan (the
Plan) governed under Section 401(k) of the Internal Revenue Code. Employees must
meet certain requirements, as defined in the Plan, to be eligible for
participation. The Company may, at its discretion, make matching contributions
to the Plan. The Company shall also make an annual profit-sharing contribution
in an amount determined each year between a minimum of 3% and a maximum of 15%
of the compensation of all eligible participants for that Plan year.
F-18
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
14. QUARTERLY DATA (UNAUDITED)
In the opinion of management, the following unaudited, quarterly data
reflects all adjustments (consisting primarily of normal recurring adjustments)
considered necessary to fairly present the Company's results of operations in
accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission.
<TABLE>
<CAPTION>
1998 QUARTER ENDED*
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales...................................... $ 399,603 $ 477,005 $ 515,465 $ 417,657
Cost of Sales.................................. 393,049 407,024 473,579 406,729
--------- --------- ----------- ---------
Gross Margin................................... 6,554 69,981 41,886 10,928
Expenses
General and Administrative................... 310,759 305,114 272,910 377,375
Selling and Marketing........................ 242,480 269,486 234,948 235,204
--------- --------- ----------- ---------
553,239 574,600 507,858 612,579
Other Income (Expense)
Investor relations expense................... -- -- (1,122,913) --
Interest Income.............................. 28,110 18,739 17,873 7,107
Interest Expense............................. (25,484) (24,528) (24,788) (21,641)
--------- --------- ----------- ---------
Net Loss....................................... $(544,059) $(510,408) $(1,595,800) $(616,185)
========= ========= =========== =========
Basic and Diluted Net Loss Per Share........... $ (0.14) $ (0.13) $ (0.40) $ (0.15)
========= ========= =========== =========
Weighted Average Shares Outstanding............ 3,899,212 3,899,212 3,973,192 4,024,563
========= ========= =========== =========
</TABLE>
F-19
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
14. QUARTERLY DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1999 QUARTER ENDED*
---------------------------------------------------
SEPTEMBER 30
MARCH 31 JUNE 30 (AS RESTATED) DECEMBER 31
--------- --------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales...................................... $ 485,805 $ 742,739 $ 929,880 $ 891,959
Cost of Sales.................................. 448,645 516,946 709,988 788,824
--------- --------- ----------- ---------
Gross Margin................................... 37,160 225,793 219,892 103,135
Expenses
General and Administrative................... 284,911 343,472 423,584 384,247
Selling and Marketing........................ 149,055 175,311 169,342 167,581
--------- --------- ----------- ---------
433,966 518,783 592,926 551,828
Other Income (Expenses)
Interest Income.............................. 3,391 1,166 3,933 2,025
Interest Expense............................. (23,133) (16,967) (18,223) (22,612)
--------- --------- ----------- ---------
(19,742) (15,801) (14,290) (20,587)
--------- --------- ----------- ---------
Net Loss....................................... $(416,548) $(308,791) $ (387,324) $(469,280)
========= ========= =========== =========
Preferred stock dividend (**)................ -- -- (312,500) (103,879)
Net Loss Available to Common Shareholders...... $(416,548) $(308,791) $ (699,824) $(573,159)
========= ========= =========== =========
Basic and Diluted Net Loss Per Share......... $ (0.10) $ (0.08) $ (0.16) $ (0.11)
========= ========= =========== =========
Weighted Average Shares Outstanding............ 4,070,619 4,079,563 4,395,155 5,357,053
========= ========= =========== =========
</TABLE>
- - ------------------------
* Results of operations for interim periods are not necessarily indicative of
results to be achieved for full fiscal years.
** The preferred stock dividend of $312,500 results primarily from the
amortization of the preferred stock beneficial conversion feature and the
redemption of Preferred shares that should have been recorded in the
September 30 quarter.
F-20
<PAGE>
EXHIBIT 4.4
INCORPORATED UNDER THE LAWS OF
Hawaii
No. __ Series B Convertible SHARES ___
Preferred Stock
HAWAIIAN NATURAL WATER COMPANY, INC.
Series B Convertible Preferred Stock.
This Certifies that _________________ is the owner of _______________
_________ Series B Convertible Preferred Shares of the Capital Stock of
HAWAIIAN NATURAL WATER COMPANY, INC. transferable only on the Books of the
Corporation by the holder hereof in person or by duly authorized Attorney on
surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF the duly authorized officers of this Corporation have
hereunto subscribed their names and caused the Corporate Seal to be hereto
affixed at_____________________________ this___________day of ____________A.D.
_____________________________________ _____________________________________
BRIAN BARBATA, Secretary MARCUS BENDER, President
SHARES EACH.
<PAGE>
For Value Received _______ hereby sell, assign and transfer unto
____________________________________________________________________________
____________________________________________________________________ Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint __________________________________________
_____________________________________________________________________________
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________________
In presence of _____________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 4.5
UNANIMOUS WRITTEN CONSENT
OF THE
BOARD OF DIRECTORS
OF
HAWAIIAN NATURAL WATER COMPANY, INC.
MARCH 3, 2000
The undersigned, being all of the directors of Hawaiian Natural Water
Company, Inc., a Hawaii corporation (the "Corporation"), do hereby consent to
and adopt the following resolutions by unanimous written consent, without a
meeting, pursuant to Section 415-44 of the Hawaii Business Corporation Act.
RESOLVED: That pursuant to the authority vested in the Board of
Directors of the Corporation by Article IV, Section 1 of the
Corporation's Articles of Incorporation, as amended (the "Articles of
Incorporation"), a series of Preferred Stock of the Corporation be, and
it hereby is, created out of the authorized but unissued shares of the
capital stock of the Corporation, such series to be designated Series B
Convertible Preferred Stock (the "Series B Preferred"), to consist of
250 shares, par value $1.00 per share, of which the preferences and
relative and other rights, and the qualifications, limitations or
restrictions thereof, shall be as set forth below:
1. NUMBER OF SHARES; RANKING. The number of shares constituting the Series B
Preferred shall be 250. Such number of shares may be increased or decreased, at
any time and from time to time, by resolution of the Board of Directors;
provided that no decrease shall reduce the number of shares of Series B
Preferred to a number less than that of the shares then outstanding. The Series
B Preferred Stock shall rank on a parity with the Common Stock and junior to the
Series A Convertible Preferred Stock of the Corporation (the "Series A
Preferred"), with respect to the payment of dividends and shall rank senior to
the Common Stock and junior to the Series A Preferred with respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (each, a "Liquidation").
2. DIVIDENDS.
(a) The holders of the then outstanding Series B Preferred shall be entitled to
receive, when, as and if declared by the Board of Directors, out of any funds
legally available therefor, dividends at a rate per share equal to the
Conversion Ratio (as defined in Section 4(a) below) multiplied by the aggregate
per share amount of all cash dividends, and the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions, other than a
dividend payable in shares of
1
<PAGE>
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock. Except as provided
above in this Section 2(a), the holders of the Series B Preferred shall not be
entitled to receive any dividends thereon.
(b) The Corporation shall declare a dividend or distribution on the
Series B Preferred as provided in Section 2(a) above at the same time as it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock), if any, and such dividend shall be paid
concurrently with the payment of the corresponding dividend on the Common Stock.
Dividends shall be paid to the holders of record of the shares of Series B
Preferred as they appear on the stock register of the Corporation on such record
date as shall be fixed by the Board of Directors, which record date shall not be
more than sixty (60) days nor less than ten (10) days prior to the date fixed
for the payment thereof.
(c) Unless all dividends previously declared but unpaid on the Series
B Preferred shall have been paid in full or a sum sufficient for the payment
thereof set apart, no shares of Common Stock, or any other class or series of
stock ranking junior to the Series B Preferred upon Liquidation, shall be
purchased, redeemed or acquired by the Corporation, and no funds shall be paid
into or set aside or made available for a sinking fund for the purchase,
redemption, or acquisition thereof.
3. LIQUIDATION RIGHTS.
(a) In the event of any Liquidation, whether voluntary or
involuntary, the holders of the Series B Preferred then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, after payment or declaration and setting apart
for payment of all amounts to which the holders of any class or series of
Preferred Stock of the Corporation ranking senior to the Series B Preferred upon
Liquidation may be entitled, but before any payment or declaration and setting
apart for payment of any amount shall be made in respect of the Common Stock or
any class or series of Preferred Stock of the Corporation ranking junior to the
Series B Preferred upon Liquidation, an amount equal to $1000.00 per share, plus
all previously declared and unpaid dividends thereon, and no more. If upon any
Liquidation, whether voluntary or involuntary, the assets to be distributed to
the holders of the Series B Preferred and any other class or series of Preferred
Stock ranking on a parity with the Series B Preferred upon Liquidation shall be
insufficient to permit the payment to such shareholders of the full preferential
amounts to which they are entitled, then the holders of the Series B Preferred
shall be entitled to receive that portion of the total assets of the Corporation
available for distribution to the holders of the Series B Preferred and such
other class or series of Preferred Stock (the "Available Amount") equal to the
Available Amount multiplied by a fraction, the numerator of which shall be the
aggregate preferential payment to which the holders of the Series B Preferred
are entitled upon Liquidation and the denominator of which shall be the
aggregate preferential payment to which the holders of the Series B Preferred
and all such other classes or series of Preferred Stock are entitled upon
Liquidation.
(b) The holders of the Series B Preferred shall not be entitled to
share in any assets of the Corporation remaining after payment to the holders of
the Series B Preferred of the full preferential amounts to which they are
entitled as provided in Section 3(a) above.
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(c) The voluntary sale, conveyance, lease, exchange or transfer of
all or substantially all of the property or assets of the Corporation, or the
merger or consolidation of the Corporation into or with any other corporation,
or the merger of any other corporation into the Corporation, or any purchase or
redemption of some or all of the shares of any class or series of stock of the
Corporation, shall not be deemed to be a Liquidation of the Corporation for the
purpose of this Section 3 (unless in connection therewith the Liquidation of the
Corporation is specifically approved).
4. CONVERSION.
(a) The holder of any share of Series B Preferred shall have the
right, at such holder's option at any time to convert such share into 1000 fully
paid and non-assessable shares of Common Stock, subject to adjustment as set
forth below (as so adjusted, the "Conversion Ratio").
(i) In case the Corporation shall hereafter (A) pay a dividend
or make a distribution on its Common Stock in shares of Common Stock, (B)
subdivide its outstanding shares of Common Stock into a greater number of
shares, or (C) combine its outstanding shares of Common Stock into a smaller
number of shares, the Conversion Ratio in effect immediately after such action
shall be equal to the Conversion Ratio in effect immediately prior to such
action multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action and the
denominator of which shall be the number of shares of Common Stock outstanding
prior to giving effect to such action.
(ii) In case the Corporation shall hereafter issue by
reclassification of its Common Stock any shares of capital stock of the
Corporation, the holder of any share of Series B Preferred shall thereafter be
entitled to convert such share of Series B Preferred into the same kind and
number of shares of capital stock of the Corporation as such holder would have
owned immediately following such action had he converted such share of Series B
Preferred immediately prior thereto. In case, as a result of an adjustment made
pursuant to this Section 4(a)(ii), the holder of any shares of Series B
Preferred shall become entitled to receive upon conversion of the Series B
Preferred any shares of the Corporation other than shares of Common Stock,
thereafter the Conversion Ratio with respect to such other shares so receivable
upon the conversion of Series B Preferred shall be subject to readjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained herein.
(iii) An adjustment made pursuant to this Section 4(a) above
shall become effective as of the record date in the case of a dividend or
distribution and shall become effective as of the effective date in the case of
a subdivision, combination or reclassification.
(iv) Whenever the Conversion Ratio is adjusted as herein
provided, the Corporation shall promptly mail to each holder of shares of Series
B Preferred, at his last address as the same appears on the books of the
Corporation, a notice setting forth the Conversion Ratio after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the manner of computing the same.
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(b) In order to convert any shares of Series B Preferred, the
holder thereof shall surrender such shares, accompanied by instruments of
transfer satisfactory to the Corporation and sufficient to transfer such shares
to the Corporation, and shall give written notice to the Corporation that such
holder elects to convert such shares. Such notice shall also state the name or
names, together with address or addresses, in which the certificate or
certificates for shares of Common Stock (or other capital stock) which shall be
issuable upon such conversion shall be issued. As promptly as practicable after
the surrender of such shares of Series B Preferred as aforesaid, the Corporation
shall issue and deliver to such holder, or on his written order, a certificate
or certificates for the number of full shares of Common Stock (or other capital
stock) issuable upon the conversion of such shares in accordance with the
provisions hereof; and any fractional interest in respect of a share of Common
Stock (or other capital stock) arising upon such conversion shall be settled as
provided in Section 7 below. Balance certificates will be issued for the
remaining shares of Series B Preferred in any case in which fewer than all of
the shares of Series B Preferred represented by a certificate are converted.
Each conversion shall be deemed to have been effected immediately prior to the
close of business on the date on which shares of Series B Preferred shall have
been so surrendered and such notice received by the Corporation as aforesaid,
and the person or persons in whose name or names any certificate or certificates
for shares of Common Stock (or other capital stock) shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of the
Common Stock (or other capital stock) represented thereby at such time, unless
the stock transfer books of the Corporation shall be closed on the date on which
shares of Series B Preferred are so surrendered for conversion, in which event
such conversion shall be deemed to have been effected immediately prior to the
close of business on the next succeeding day on which such stock transfer books
are open, and such person or persons shall be deemed to have become such holder
or holders of record of the Common Stock (or other capital stock) at the close
of business on such later day. In either case, such conversion shall be based
upon the Conversion Ratio in effect on the date on which such shares shall have
been surrendered and such notice received by the Corporation.
(c) The Corporation shall pay any and all documentary stamp or
similar issue or transfer taxes payable in respect of the issue or delivery of
shares of Common Stock (or other capital stock) upon conversion of shares of
Series B Preferred pursuant hereto; provided, however, that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of shares of Common Stock (or other
such capital stock) in a name other than that of the holder of the shares of
Series B Preferred to be converted, and no such issue or delivery shall be made
unless and until the person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(d) Notwithstanding any other provision in this Section 4 to the
contrary, in case of any consolidation or merger to which the Corporation is a
party other than a merger or consolidation in which the Corporation is the
surviving corporation, or in case of any sale or conveyance to another
corporation of all or substantially all of the assets of the Corporation, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Corporation) , there shall be no adjustments of the
Conversion Ratio, but each holder of a share of Series B Preferred
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then outstanding shall have the right thereafter to convert such share into the
kind and amount of securities, cash or other property which such holder would
have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale or conveyance had such share of
Series B Preferred been converted immediately prior to the effective date of
such consolidation, merger, statutory exchange, sale or conveyance and, in any
case, if necessary, appropriate adjustment shall be made in the application of
the provisions set forth herein with respect to the rights and interests
thereafter of the holders of the Series B Preferred so that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
practicable, in relation to any shares of stock or other securities or property
thereafter deliverable upon conversion of such shares. The Corporation shall
notify each holder of Series B Preferred of any such adjustment in the manner
set forth in Section 4(a)(iv) above. The above provisions shall similarly apply
to successive consolidations, mergers statutory exchanges, sales or conveyances.
5. VOTING RIGHTS.
(a) Unless required by law, no holder of Series B Preferred shall be
entitled to vote at any meeting of stockholders of the Corporation (or any
written consents of the stockholders in lieu of meetings) with respect to any
matters presented the stockholders of the Corporation for their action or
consideration. Notwithstanding the foregoing, the Corporation shall provide each
holder of Series B Preferred with timely notice of each meeting of stockholders
(or written consent in lieu thereof) and shall provide each holder with copies
of all proxy materials distributed in connection therewith.
(b) So long as any shares of Series B Preferred are outstanding, the
Corporation shall not, without first obtaining the approval of the holders of at
least a majority of the then outstanding shares of Series B Preferred, voting
separately as a series, (i) amend, alter or repeal any of the rights,
preferences or privileges of the Series B Preferred so as to adversely affect
the Series B Preferred, or (ii) create any new class or series of capital stock
ranking on a parity with or senior to the Series B Preferred upon Liquidation.
(c) In addition to the foregoing, the holders of the Series B
Preferred shall also be entitled to vote as a separate series on any matter with
respect to which they are entitled to vote as provided by law or by resolution
of the Board of Directors. Any such matter shall require the approval of the
holders of at least a majority of the then outstanding shares of Series B
Preferred, or such greater percentage as may be required by law or by resolution
of the Board of Directors.
6. REDEMPTION.
(a) The Series B Preferred shall be mandatorily redeemable, solely
at the election of the holder, in the event that the Market Price (as
hereinafter defined) of the Corporation's Common Stock on the first anniversary
of the date of issuance of the shares to be redeemed (the "Anniversary Date") is
less than $1.50 per share (appropriately adjusted for any stock dividends, stock
splits, recapitalizations and the like occurring after the date hereof). The
redemption price for the shares of Series B Preferred to be redeemed shall be
$1,500 per share,
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payable, at the option of the holder, either in cash or in Common Stock of the
Corporation, valued at the Market Price thereof on the Anniversary Date.
(b) In order to exercise redemption rights hereunder, the holder shall
deliver to the Corporation, within 90 days following the Anniversary Date, a
written notice of redemption (the "Redemption Notice") specifying: (i) the
number of shares of Series B Preferred to be redeemed, and (ii) whether the
redemption price is to be paid in cash or shares of Common Stock. Within 30 days
following receipt of the Redemption Notice, the Corporation shall pay the holder
the redemption price for the shares of Series B Preferred covered by the
Redemption Notice, upon surrender to the Corporation of the stock certificate(s)
representing such shares.
(c) For purposes hereof, the term "Market Price" of the
Corporation's Common Stock on any given determination date means the average
closing sales price (or the average of the closing bid and asked price, in the
event that no closing sales price is quoted) for the Common Stock during a
period of ten consecutive trading days ending immediately prior to the
applicable date of determination on the then principal trading market in the
United States on which the Common Stock is quoted (currently the OTC Bulletin
Board).
7. FRACTIONAL SHARES. In the event the holder of Series B Preferred shall
be entitled to receive a fractional interest in a share of Series B Preferred or
a fractional interest in a share of Common Stock (or other capital stock),
except as otherwise provided herein, the Corporation shall either, in the sole
discretion of the Board of Directors, (i) round such fractional interest up to
the next whole share of Series B Preferred or Common Stock (or other capital
stock), as the case may be, (ii) issue a fractional share of such stock, (iii)
deliver cash in the amount of the fair market value of such fractional interest,
or (iv) issue scrip representing a fractional share of such stock entitling the
holder to receive a full share of such stock upon the surrender of such scrip
aggregating a full share of such stock.
8. NO REISSUANCE OF SERIES B PREFERRED. No share or shares of Series B
Preferred acquired by the Corporation by reason of purchase, conversion or
otherwise shall be reissued, and all such shares shall be cancelled, retired,
and eliminated from the shares which the Corporation shall be authorized to
issue.
9. NO PREEMPTIVE RIGHTS. The Series B Preferred is not entitled to any
preemptive or subscription rights in respect of any securities of the
Corporation.
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IN WITNESS WHEREOF, the undersigned have executed this Unanimous
Written Consent as of the date first above written.
-------------------------------
Marcus Bender
-------------------------------
Brian Barbata
-------------------------------
Michael Chagami
-------------------------------
Keijiro Sorimachi
-------------------------------
Michael Iscove
-------------------------------
Dennis Harris
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EXHIBIT 10.17
CO-PACKING AGREEMENT
THIS CO-PACKING AGREEMENT (this "Agreement") is made and entered into as of
June 3, 1999, by and between Hawaiian Natural Water Company, Inc., a Hawaii
corporation (the "Company"), located at 248 Mokauea Street, Honolulu, Hawaii
96819, and LANGER JUICE COMPANY, INC. , a California corporation (the
"Bottler"), located at 16195 Stephens Street, Industry, CA 91745, with respect
to the following:
WHEREAS, the Company has certain rights and trademarks regarding various
nutriceutical beverages to be marketed under the "East Meets West XEN" label, as
set forth on Exhibit A hereto, as revised from time to time by the Company in
writing, (collectively, the "Products"); and
WHEREAS, the Company wishes to arrange for the production, warehousing and
shipment of the Products; and
WHEREAS, Bottler has the ability and capacity to produce, warehouse and
make the Products available for shipment;
NOW THEREFORE, in consideration of the terms, conditions and mutual
promises contained herein, the parties agree as follows:
1. RAW MATERIALS.
(a) An initial list of packaging materials and ingredients (collectively,
"Materials") required for the processing and packaging of the Products is set
forth on Exhibit B hereto. Such list may be revised from time to time by the
Company in writing at least thirty (30) days prior to any requested change in
production; provided, however, that the Company shall be obligated to reimburse
Bottler, within five business days following receipt of a request therefor, for
the cost of any Materials previously purchased by Bottler which remain unused
for ninety (90) days as a result of any such requested change in production.
(b) A current price list for the Materials is set forth on Exhibit B
hereto. Such prices shall be changed from time to time to reflect any changes
(upwards or downwards) in Bottler's cost of such Materials. Bottler shall
transmit to the Company a copy of any supplier's notice of price change within
seven (7) business days following receipt thereof by Bottler.
<PAGE>
(c) Bottler agrees to purchase and have on hand a sufficient quantity of
Materials to meet the Company's anticipated Product demand, as set forth on the
Company's forecast for such period delivered in accordance with Section 2(c)
hereof. Bottler shall be responsible for ordering all Materials from the
applicable supplier in order to ensure delivery before scheduled production
dates. Bottler shall maintain a written inventory of Materials purchased.
2. PRODUCTION.
(a) Bottler shall produce the Products using all specified Materials.
Bottler agrees to process and bottle the Products at its bottling facility in
accordance with the Company's written formulations and specifications. An
initial list of formulations, specifications and process instructions applicable
to the Products is set forth on Exhibit C hereto. Such list may be revised from
time to time by the Company in writing. Following production, Bottler shall
warehouse the Products and shall arrange for shipment of the Products in
accordance with instructions set forth on written purchase orders received from
the Company. The foregoing notwithstanding, Bottler may contract with other
producers (each, a "Contract Packer") to process and bottle the Products;
provided, however, that Bottler shall continue to order and arrange delivery of
all Materials and assure production in accordance with the Company's
formulations and specifications; and, provided further, that Bottler shall be
responsible for all payments to any Contract Packer which, unless the Company
otherwise agrees in writing, shall in no event affect the Company's payment
obligations to Bottler hereunder. The Company shall reimburse Bottler for its
actual out-of-pocket expenses in providing technical support and supervision to
any such Contract Packer.
(b) Bottler agrees to maintain written records of Materials utilized and
Products produced and shipped. A copy of such records shall be delivered to the
Company on a monthly basis.
(c) At the beginning of each month, the Company shall provide Bottler with
a three month rolling forecast of its requirements, which shall provide detailed
estimates of the monthly quantities of Product by type, package size and flavor
to be produced by Bottler. Bottler agrees to produce the Products and to keep
them on hand in sufficient quantities to meet the Company's estimated
requirements, as set forth on such forecasts.
(d) In addition to purchasing all Materials as specified in Section 1
hereof, Bottler shall supply all labor, overhead expenses and equipment required
for the production of the Products. All costs of production shall be funded by
Bottler. Bottler shall be reimbursed for such costs through receipt of the fees
described in Section 3 hereof.
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3. PAYMENTS. In consideration for the services to be provided by Bottler
hereunder, Bottler shall be entitled to receive from the Company the following
payments, in cash or shares of common stock of the Company ("Common Stock"), as
provided below:
(a) 100,000 shares of Common Stock, issuable upon placement by Bottler of
purchase orders for Materials, as provided in Section 1 hereof (the "Placement
Date"), subject to adjustment as provided in Section 3(d) hereof; plus
(b) An amount per case of Products sold (the "Case Fee") equal to the sum
of (i) $[Confidential treatment requested*], plus (ii) Bottler's actual cost of
Materials for such Products, adjusted as provided in Section 1(c) hereof, plus
(iii) Bottler's actual shipping cost for such Products, if any. For purposes,
hereof, a case shall be defined as twelve (12) twenty (20) ounce bottles or such
other containers per case as the parties may agree upon. The Case Fee shall be
payable (on an invoice by invoice basis) upon the earliest of (i) five (5)
business days following the Company's receipt of payment of each invoice for
Products shipped, (ii) 90 days following the shipment date of the invoiced
Products, or (iii) one hundred twenty (120) days following the production date
of such Products; plus
(c) $[Confidential treatment requested] per case of Products sold (the
"Incentive Fee"), payable quarterly in shares of Common Stock in an amount equal
to (i) the aggregate number of cases sold during each such quarter, multiplied
by $[Confidential treatment requested*] per case, (ii) divided by the lesser of
(A) the Market Price (as hereinafter defined) of the Common Stock, or (B) $4.00
(subject to appropriate adjustment in the event of stock dividends, stock splits
and the like). The shares issuable as an Incentive Fee for any given quarter
shall be issued to Bottler within 30 days following the end of the quarter for
which earned; the end of the first quarter hereunder shall be deemed to be
August 31, 1999. For purposes hereof, the term "Market Price" means (i) if the
Common Stock is then traded on Nasdaq or any national or regional stock exchange
("Exchange Traded"), the average of the closing sales prices of the Common Stock
during the period (the "Trading Period") consisting of five consecutive trading
days ending on the last trading day of the applicable quarter, as reported by
the principal market on which the Common Stock is then traded; (ii) if the
Common Stock is not then Exchange Traded but is quoted on the OTC Bulletin Board
or other similar market or is reported in the "pink sheets," the average of the
closing bid and asked prices for the Common Stock during the Trading Period; and
(iii) otherwise, as determined by the Board of Directors in the good faith
exercise of its discretion, which shall, if Bottler so requests, be based upon
an opinion of a recognized, independent business valuation or appraisal firm (an
"Appraiser"). Bottler shall be entitled to the Incentive Fee with respect to any
and all Products produced by Contract Packers, provided that, unless the Company
otherwise agrees in writing, the overall cost of such Products to the Company
shall be no greater than if such Products had been produced by Bottler
hereunder.
* Confidential treatment has been requested with respect to certain portions
of this exhibit. Confidential portions have been omitted from the public
filing and have been separately filed with the Securites and Exchange
Commission.
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(d) In the event that the Market Price of the Common Stock on the first
anniversary of the Placement Date is less than $1.50 per share, the Company
shall issue to Bottler, within thirty (30) days thereafter, for no additional
consideration, additional shares of Common Stock (X), calculated as follows:
X = ($150,000 / M) - 100,000, where M equals the Market Price
of the Common Stock on the first anniversary of the Placement Date.
4. SHIPMENT. Bottler shall load the Products from its plant only as
instructed by the Company. Bottler shall ship Product directly to the Company or
its designee, F.O.B. the Bottler's plant, using the shipment method and carrier
selected by the Company. Bottler may, in its discretion, extend credit for
freight charges billed C. (I.) F., subject to reimbursement as provided in
Section 3(b) hereof. Shipments shall be made on the Company's bills-of-lading
or, if such bills-of-lading have not been supplied to Bottler at the time of
such shipment, on blank bills-of-lading forms. Bottler agrees to give the
Company prompt notice of shipment by faxing to the Company a copy of the
bill-of-lading with respect to each shipment, and to comply with all other
reasonable written shipping instructions from the Company. In the event of a
damage claim, Bottler agrees to reasonably cooperate with the Company to handle
such claim. Responsibility for any such claim shall pass from Bottler to the
Company once the Products are loaded for shipment at Bottler's plant.
5. CREDIT AND TERM APPROVAL; SECURITY INTEREST IN RECEIVABLES.
(a) The Company agrees not to sell Products to any customers on credit
without the prior consent of Bottler. The Company shall obtain a signed credit
application from each customer to whom it proposes to extend credit, and shall
transmit a copy of such application to Bottler. Bottler shall be deemed to have
consented to the proposed credit extension and payment terms, unless it shall
have objected thereto (or imposed a limit thereon) in writing within ten (10)
business days following receipt of the application from the Company. Unless
Bottler shall have otherwise notified the Company in writing, customers approved
for credit on one sale shall be deemed to be approved for all subsequent credit
sales within the credit limits and payment terms imposed by Bottler, or if no
credit limit is imposed, up to $100,000 in aggregate sales to any one customer.
For purposes hereof, the term credit shall mean any arrangement involving
deferred payment following the customer's receipt of Products, unless such
payment is backed by a bank letter of credit or guaranteed by a third party
previously approved as a guarantor by Bottler.
(b) Concurrently herewith, the Company is executing a security agreement
and a UCC-1 Financing Statement in the form attached hereto, pursuant to which
the Company is granting to Bottler a first priority security interest in any and
all of the Company's receivables relating to sales of Products on credit.
Bottler agrees to subordinate such security interest, if requested, to the prior
interest of a bona fide third party lender to the Company.
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6. CONFIDENTIAL INFORMATION. It is understood and agreed that all
formulations, process descriptions, packaging specifications and related
technical information necessary for the fulfillment of this Agreement
(collectively, "Data") are considered to be trade secrets of the Company and
shall remain the exclusive property of the Company. Bottler agrees to keep the
Data confidential, and to restrict the disclosure thereof to those of its
employees directly and necessarily concerned with the production of the
Products. Bottler also agrees that it will not disclose such information to any
third parties without the written authorization of the Company. Confidential
Data shall not include any information which is known in the industry generally,
or which Bottler has or acquires knowledge of through sources other than the
Company or its agents. Bottler's obligation to maintain the confidentiality of
all Data shall survive the term of this Agreement for a period of two years;
provided, however, that the confidentiality of the Company's process
formulations and specifications shall survive the term of this Agreement
indefinitely. Bottler agrees not to discuss any aspect of the Company's
production with other companies the Bottler is servicing. Notwithstanding the
foregoing, Bottler may disclose Confidential Data pursuant to a judicial decree
or governmental order, provided that Bottler shall give the Company reasonable
advance notice of such judicial decree or governmental order and shall cooperate
with the Company in opposing same, if so requested by the Company.
7. QUALITY CONTROL. Bottler agrees to comply with all reasonable
standards of quality for the production of Products, as set forth in writing by
the Company. Bottler agrees to manufacture the Products in compliance with all
applicable state and federal laws, rules and regulations with respect to food
products and food plant sanitation. All Materials shall be stored and processed
in compliance with industry standards.
8. RIGHT OF INSPECTION. Bottler agrees, upon prior notice from the
Company received within a reasonable time, to permit technical employees or
representatives of the Company to enter the processing plant at all reasonable
times during normal business hours for the purpose of inspecting facilities,
equipment and supplies used in the manufacturing of the Products, to take with
them samples of Products and related materials and to conduct physical
inventories of raw materials and finished goods. Bottler's production records
with respect to the Products, including daily batch and production records,
shall be open to examination and inspection by Company or its designated agent
at any time during reasonable business hours upon prior notice received within a
reasonable time.
9. REPRESENTATIONS AND WARRANTIES OF BOTTLER.
(a) Bottler warrants that the Products shall be fit for human consumption
and shall not be adulterated within the meaning of the Federal Food, Drug and
Cosmetic Act or any similar state statute.
(b) Bottler warrants that production of the Products shall be in
accordance with the Company's specifications as set forth on Exhibits C hereto,
as revised from time to time by the Company in writing.
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(c) Bottler is a corporation validly existing and in good standing under
the laws of the State of California, with all requisite power and authority to
enter into this Agreement. The provisions of this Agreement, and the
consummation by Bottler of its obligations hereunder do not, and will not,
violate any provision of Bottler's Articles of Incorporation or Bylaws, any
material agreement, note, indenture or other obligation to which Bottler is a
party or any statute, rule or regulation by which Bottler or its assets may be
bound.
10. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company owns, or has full rights to use, all formulations and Data
provided to Bottler hereunder, and the use thereof in accordance with this
Agreement will not violate the Federal Food Drug and Cosmetic Act or any similar
state statute.
(b) The Company is a corporation validly existing and in good standing
under the laws of the State of Hawaii, with all requisite power and authority to
enter into this Agreement. The provisions of this Agreement, and the
consummation by the Company of its obligations hereunder do not, and will not,
violate any provision of the Company's Articles of Incorporation or Bylaws, any
material agreement, note, indenture or other obligation to which Company is a
party or any statute, rule or regulation by which the Company or its assets may
be bound.
11. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold Bottler harmless from and
against any loss, liabilities, damages, costs or expenses (including interest,
penalties and reasonable attorneys' fees), actually paid or incurred by Bottler,
resulting from breach of Company's representations, warranties, covenants or
other obligations set forth in this Agreement. Upon becoming aware, Bottler
agrees to promptly notify Company of any problem in the quality or supply of any
ingredient purchased by Bottler on behalf of Company or furnished by Company to
Bottler.
(b) Bottler agrees to indemnify and hold harmless the Company from and
against any loss, liability, damages, costs or expenses (including interest,
penalties and reasonable attorney's fees), actually paid by the Company
resulting from and directly and proximately caused by: (i) a breach of Bottler's
representations, warranties, covenants or other obligations set forth in this
Agreement; and (ii) defects in workmanship furnished by or on behalf of Bottler
hereunder.
(c) Promptly after receipt by Bottler or the Company of notice of any
action, proceeding, claim or potential claim (any of which is hereinafter
individually referred to as a "Circumstance") which could give rise to a right
of indemnification hereunder, such party shall give the party or parties who may
become obligated to provide indemnification hereunder (the "Indemnifying Party")
written notice describing the Circumstance in reasonable detail. Such
Indemnifying Party shall have the right, at its option, to compromise or defend,
at its own expense and by its own counsel, any such matter involving the
Circumstance. If any Indemnifying Party shall undertake to compromise or defend
any such Circumstance, it shall promptly notify the party seeking
6
<PAGE>
indemnification, which party seeking indemnification agrees to cooperate fully
with the Indemnifying Party and its counsel in the compromise of, or defense
against, any such circumstance. All costs and expenses incurred in connection
with such cooperation (other than the cost of internal personnel of the party
seeking indemnification) shall be borne by the Indemnifying Party. In any event,
the party seeking indemnification shall have the right at its own expense to
participate in the defense of such Circumstance. In no event shall the party
seeking indemnification compromise any such Circumstance without the written
consent of the Indemnifying Party unless the Indemnifying Party fails or refuses
to indemnify or to take reasonable action in defense of such Circumstance.
(d) Bottler and the Company shall each procure and maintain in force at
all times, with companies acceptable to each other, a comprehensive product
liability insurance policy in an amount not less than two million ($2,000,000)
Dollars. Each party shall name the other as an additional insured on its
respective policy and shall deliver a certificate or binder to such effect to
such other party.
12. TERM. The term of this Agreement shall be for the period commencing on
the date hereof and terminating on May , 2004, unless earlier terminated as
provided below. Notwithstanding the foregoing, in the event of a default by
either party in the performance of any of it is material obligations under this
Agreement (in each such case, a "Default"), the non-defaulting party may
terminate this Agreement upon written notice to the defaulting party at any time
within thirty (30) days following the end of a fifteen (15) day cure period,
commencing upon receipt by the defaulting party of a notice of Default. In
addition, either party may terminate this Agreement, upon thirty (30) days
written notice, if a petition in Bankruptcy shall be filed by or against the
other party or in the event that such other party's business or assets shall be
placed in the hands of a receiver, liquidator or trustee.
13. NO AGENCY. Nothing contained in this Agreement shall be construed as
constituting the Bottler as an agent of the Company or the Company as an agent
of Bottler. Each party acknowledges and agrees that it has no right regarding
the other to:
Bind the other or contact on the other's behalf.;
Pledge the credit of the other party;
Grant to a customer any warranty;
Make a representation in the name of or on behalf of the other; or
Undertake any liability of any kind whatsoever on behalf of the other,
except as otherwise specifically descibed herein.
7
<PAGE>
14. NOTICES. Any notice or other communication required or permitted
hereunder shall be deemed validly given or made if in writing and sent by fax,
registered mail prepaid or overnight delivery service such as Federal Express or
if hand delivered by either party to the other at their respective fax numbers
or addresses set forth below or such other fax number or address as either party
may hereafter designated in accordance with the provisions of this section:
If to Bottler, to:
Langer Juice Company, Inc.
16195 Stephens Street
Industry, CA 91745
Fax: (626) 961-2021
Attention: Bruce Langer
David Langer
If to the Company, to:
Hawaiian Natural Water Company, inc.
248 Mokauea Street
Honolulu, Hawaii 96819
Fax: (808) 832-4559
Attention: Marcus Bender
15. MISCELLANEOUS.
(a) The failure of either party to enforce at any time for any period of
time anyone of the terms hereof shall not constitute a waiver of such terms.
(b) Neither party shall be held liable for its failure to comply with any
of the terms hereof, provided such failure is caused solely by fire, strike,
war, insurrection, government restrictions, floods, crop failure, force majeure,
or other such causes beyond the control and without fault on the part of the
party in default.
(c) Bottler shall not assign this Agreement to any other person without
the prior written consent of the Company; provided, however, that Bottler may
assign this Agreement to an affiliate or to any purchaser of all or
substantially all of its manufacturing operation, provided that Bottler shall
continue to be responsible for the purchase of Materials and for the overall
supervision of production hereunder. Subject to the foregoing, this Agreement
shall inure to the benefit of and be binding upon the Company, its successors
and assigns.
(d) This Agreement may not be amended except by an instrument in writing
signed by both parties.
(e) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.
8
<PAGE>
(f) In case any one or more of the provisions (or parts of provisions)
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceablity shall not affect any other provisions (or parts of provisions)
of this Agreement; and this Agreement shall, to the fullest extent lawful, be
reformed and construed as if such invalid, illegal or unenforceable provisions
(or parts of provisions) had never been contained herein, and such provisions
(or parts) reformed so that they are valid, legal and enforceable to the maximum
extent possible.
(g) This Agreement shall be governed by and construed in accordance with
substantive laws of the State of California, without giving effect to the
conflict of laws provisions thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
LANGER JUICE COMPANY, INC.
By:
----------------------------------
Bruce Langer, Vice President
HAWAIIAN NATURAL WATER COMPANY, INC.
By:
----------------------------------
Marcus Bender, President
9
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (File No. 333-65253), Form S-3 (File No.
333-63827) and Form S-3 (File No. 333-76513).
/s/ ARTHUR ANDERSEN LLP
Honolulu, Hawaii
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,988
<SECURITIES> 0
<RECEIVABLES> 566,385
<ALLOWANCES> 24,068
<INVENTORY> 583,391
<CURRENT-ASSETS> 1,238,103
<PP&E> 3,126,906
<DEPRECIATION> 661,402
<TOTAL-ASSETS> 3,992,057
<CURRENT-LIABILITIES> 1,498,114
<BONDS> 328,197
0
205,755
<COMMON> 11,782,415
<OTHER-SE> (9,894,059)
<TOTAL-LIABILITY-AND-EQUITY> 3,992,057
<SALES> 3,050,383
<TOTAL-REVENUES> 3,050,383
<CGS> 2,464,403
<TOTAL-COSTS> 2,464,403
<OTHER-EXPENSES> 2,097,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,935
<INCOME-PRETAX> (1,998,322)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,998,322)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,971,327)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
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