<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q SB
(MARK ONE)
/S/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-29280
HAWAIIAN NATURAL WATER COMPANY, INC.
(Exact name of small business issuer as specified in its charter)
HAWAII 99-0314848
(State or jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
98-746 Kuahao Place
Pearl City, Hawaii 96782
(Address of principal executive offices)
(808) 483-0520
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
The issuer had issued and outstanding 6,878,685 shares of Common Stock on
August 11, 2000.
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
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<PAGE>
Hawaiian Natural Water Company, Inc.
Consolidated Balance Sheet
June 30, 2000
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 210,638
Inventories 338,915
Trade accounts receivable, net of allowance for doubtful
accounts of $70,879 515,206
Other current assets 252,053
-----------
Total Current Assets 1,316,812
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $1,210,733 2,744,307
CO-PACKING AGREEMENT, net of accumulated amortization
of $22,500 127,500
INTANGIBLE ASSET, net of accumulated amortization of $1,486 138,260
PURCHASE PRICE IN EXCESS OF BOOK VALUE, net of
accumulated amortization of $23,182 and 408,493
impairment allowance of $903,094 -----------
Total Assets $ 4,735,372
-----------
-----------
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 990,260
Customer deposit liability 380,719
Book overdraft 154,134
Accrued professional fees 78,824
Accrued vacation 39,279
Accrued payroll and related taxes 75,292
Accrued commissions and billbacks 173,882
Accrued other 231,910
Notes payable - Current portion 638,209
Capital lease obligation - Current portion 73,405
-----------
Total Current Liabilities 2,835,914
-----------
NON-CURRENT LIABILITIES:
Capital lease obligation - net of current portion 106,165
Notes payable - net of current portion 307,545
Other 51,885
-----------
Total Non-Current Liabilities 465,595
-----------
Total Liabilities 3,301,509
-----------
MANDATORILY-REDEEMABLE PREFERRED STOCK
Series B Convertible Preferred - 100 shares issued and
outstanding with conversion rights and aggregate
liquidation preference of $100,000 100,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value; 5,000,000 shares Authorized:
Series A Convertible Preferred -
140 shares issued and outstanding with conversion
rights and aggregate liquidation preference of
$140,000; 64,216
Common stock, no par value; 20,000,000 shares authorized;
6,852,685 shares issued and outstanding 9,378,157
Common stock warrants and options; 5,813,325 issued
and outstanding 3,809,688
Accumulated Deficit (11,918,198)
-----------
Total Stockholders' Equity 1,333,863
-----------
Total Liabilities, Mandatorily-Redeemable
Preferred Stock, and Stockholders' Equity $ 4,735,372
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
Hawaiian Natural Water Company, Inc.
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
1999 2000 1999 2000
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 742,739 $1,173,421 $ 1,228,544 $ 2,198,113
COST OF SALES 516,946 955,964 965,591 1,755,946
----------- ----------- ----------- ----------
Gross Margin 225,793 217,457 262,953 442,167
EXPENSES:
Selling and Marketing 175,311 316,452 324,366 542,199
General and Administrative 343,472 408,657 628,383 902,155
----------- ----------- ----------- ----------
518,783 725,109 952,749 1,444,354
OTHER INCOME (EXPENSE)
Interest and other income 1,166 - 4,557 -
Interest expense (16,967) (56,667) (40,100) (77,677)
Impairment charge - (903,094) - (903,094)
----------- ----------- ----------- ----------
(15,801) (959,761) (35,543) (980,771)
Net Loss $ (308,791) $(1,467,413) $ (725,339) $(1,982,958)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Basic and Diluted
Net Loss Per Share: $ (0.08) $ (0.22) $ (0.18) $ (0.31)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Weighted Average Common
Shares Outstanding 4,079,563 6,800,471 4,075,115 6,339,583
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
Hawaiian Natural Water Company, Inc.
Consolidated Statement of Manditorily-Redeemable
Preferred Stock and Stockholders' Equity For the
Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
COMMON STOCK AND OPTIONS PREFERRED STOCK
----------------------- ---------------------- ------------------ TOTAL
NUMBER OF NUMBER OF NUMBER OF ACCUMULATED STOCKHOLDERS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
------------ ---------- ---------- --------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1999 5,536,727 $8,076,886 5,709,458 $3,705,529 319 $205,755 $(9,894,059) $ 2,094,111
Issuance of common stock and
warrants to chief executive
officer
January 1, 2000 100,000 53,097 166,667 46,903 - - - 100,000
Issuance of common stock
and common stock warrants in
private offering
February 1, 2000 50,000 26,548 83,333 23,452 - - - 50,000
February 20, 2000 50,000 26,548 83,333 23,452 - - - 50,000
Issuance of common stock
and common stock warrants
to professional advisor
February 1, 2000 10,000 5,310 16,667 4,690 - - - 10,000
February 15, 2000 10,000 5,310 16,667 4,690 - - - 10,000
Issuance of common stock
and common stock warrants
to professional advisor
March 17, 2000 50,000 50,000 - - - - - 50,000
Issuance of common stock
in acquisition of Aloha
Water Company, Inc.
March 20, 2000 750,000 937,500 - - - - - 937,500
Issuance of preferred stock
to private investor
March 3, 2000 - - - - 100 100,000 - 100,000
Redemption of preferred stock
February 7, 2000 - - - - (50) (39,536) (10,464) (50,000)
March 6, 2000 - - - - (50) (39,536) (10,464) (50,000)
May 1, 2000 - - - - (35) (27,675) (7,325) (35,000)
May 26, 2000 - - - - (15) (11,861) (3,139) (15,000)
June 29, 2000 - - - - (29) (22,931) (6,039) (29,000)
Exercise of stock options by
institutional investor
March 3, 2000 100,000 1,000 (100,000) - - - - 1,000
Exercise of stock options by
Private investor
March 3, 2000 50,000 50,000 (50,000) - - - - 50,000
May 1, 2000 35,000 35,000 (35,000) - - - - 35,000
May 25, 2000 15,000 15,000 (15,600) - - - - 15,000
June 1, 2000 14,600 14,600 (14,600) - - - - 14,600
June 16, 2000 35,000 35,000 (35,000) - - - - 35,000
June 29, 2000 15,000 15,000 (15,000) - - - - 15,000
Issuance of common stock
options to non-employee
directors
February 16, 2000 - - 900 486 - - - 486
May 11, 2000 - - 900 486 - - - 486
Issuance of common stock
To marketing consultant
March 31, 2000 20,000 20,000 - - - - - 20,000
April 12, 2000 3,000 3,000 - - - - - 3,000
June 30, 2000 2,250 2,250 - - - - - 2,250
Issuance of common stock
Pursuant to Co-Packing
Agreement
May 5, 2000 3,490 3,490 - - - - - 3,490
June 30, 2000 2,618 2,618 2,618
Accrued dividends to
preferred shareholder - - - - - - (3,920) (3,720)
Net Loss - - - - - - (1,982,958) (1,982,958)
---------- ---------- --------- ---------- --- -------- ---------- -----------
BALANCE AT
June 30, 2000 6,852,685 $9,378,157 5,813,325 $3,809,688 240 $164,216 $ (11,918,198) $ 1,433,863
---------- ---------- --------- ---------- --- -------- ---------- -----------
---------- ---------- --------- ---------- --- -------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
Hawaiian Natural Water Company, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 2000
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (725,339) $(1,982,958)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 116,201 209,556
Impairment charge - 903,094
Issuance of stock and options to consultants
and distributors 29,336 25,250
Issuance of stock options to
non-employee directors 7,389 972
Amortization of debt discount 35,064 51,183
Net (increase) decrease in current assets (377,212) 225,281
Net increase in current liabilities 286,944 363,210
Net increase in other liabilities 41,380 10,505
------------ ------------
Net cash (used in) provided by
operating activities (586,237) (193,907)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (267,235) (43,506)
Cash acquired in merger with Aloha 183,111
Decrease in deposits on equipment (34,145)
------------ ------------
Net cash (used in) provided by
investing activities (301,380) 139,605
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock and
common stock warrants 646,239 100,000
Net proceeds from private placement of common stock
and common stock warrants - 200,000
Exercise of common stock options and warrants 125,000 165,600
Redemption of preferred stock - (179,000)
Repayments of notes payable (85,578) (6,454)
Repayment of principal on capital leases (25,290) (24,194)
------------ ------------
Net cash provided by
financing activities 660,371 255,952
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (227,246) $ 201,650
CASH AND CASH EQUIVALENTS, beginning of period 320,209 8,988
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 93,043 $ 210,638
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of certain assets of Ali'i Water
Bottling, Inc. for common stock $ 312,359 $ -
------------ ------------
------------ ------------
Merger with Aloha Water Company, Inc., in exchange
for common stock and promissory note $ - $ 1,334,769
------------ ------------
------------ ------------
Preferred shareholder dividends $ - $ 41,351
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements of Hawaiian Natural Water
Company, Inc., and its wholly-owned subsidiary, Aloha Water Co., Inc. (the
"Company") should be read in conjunction with the audited financial
statements for the year ended December 31, 1999 and notes thereto as filed
with the Securities and Exchange Commission in the Company's Annual Report on
Form 10-KSB. The auditor's report on those financial statements included an
explanatory fourth paragraph indicating that there is substantial doubt about
the Company's ability to continue as a going concern.
In the opinion of management, the accompanying financial statements reflect
all adjustments (which consist primarily of normal recurring adjustments)
considered necessary to fairly present the financial position of the Company
at June 30, 2000, the results of its operations for the three and six month
periods ended June 30, 1999 and 2000, and the cash flows for the six month
periods ended June 30, 1999 and 2000 in accordance with accounting principles
generally accepted in the United States and the rules and regulations of the
Securities and Exchange Commission. The results of operations for interim
periods are not necessarily indicative of results to be achieved for full
fiscal years. Certain amounts from prior periods have been reclassified to
conform to their current period presentation.
As shown in the accompanying financial statements, the Company has incurred
significant losses since inception. Management expects that the Company will
continue to incur additional losses until the Company achieves significantly
higher levels of sales. The Company does not anticipate sufficient sales
growth by the end of 2000 to achieve positive cash flow. Therefore, the
Company must obtain additional financing in order to sustain operations. The
accompanying financial statements do no include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.
ORGANIZATION
Hawaiian Natural Water Company, Inc. was incorporated in the state of Hawaii
on September 13, 1994. The Company was formed for the purpose of bottling,
marketing and distributing Hawaiian natural water in Hawaii, the U.S.
Mainland and foreign markets. The Company's initial product introduction
occurred in the first quarter of 1995.
In June 1999, the Company acquired certain assets of Ali'i Water Bottling
Inc., which extended the Company's product line into the home and office
delivery market. The majority of this business is concentrated in the
Kailua-Kona area of the Big Island of Hawaii (see Note 7).
In March, 2000, the Company extended its home and office delivery business by
acquiring Aloha Water Company, Inc.,("Aloha") a major distributor of purified
water to the home and office delivery market in the greater Honolulu area
(see Note 8). The consideration for Aloha was stock of the Company and a
promissory note secured by all of the stock of Aloha. In August, 2000 the
prior owners of Aloha declared a default under this promissory note, and took
action to foreclose on the collateral (see Note 9).
In January 2000, the Company expanded its product line beyond the water
category through the introduction of a line of herbal beverages under the
"East Meets West XEN-TM-" name.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
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<PAGE>
differ from those estimates.
REVENUE RECOGNITION. The Company recognizes revenue on the accrual method of
accounting when title to product transfers to the buyer upon shipment. The
Company issues refunds to customers or replaces goods which are rejected.
The Company's policy is to provide a reserve for estimated uncollectible
trade accounts receivable. The Company also provides a reserve for estimated
sales returns and related disposal costs. Net sales revenue reflects
reductions for the reserve for sales returns, discounts and freight-out.
GROSS MARGIN. The Company's PET products bottling plant currently has a
normal production capacity of approximately 200,000 cases per calendar
quarter. The Company is currently operating its plant at approximately 63%
percent of this capacity. Since a significant portion of the Company's cost
of sales includes fixed production costs, the Company anticipates higher
gross margins as production and sales increase.
2. LOSS PER SHARE
Basic and Diluted Loss Per Share is computed by dividing the Net Loss by the
Weighted Average Common Shares Outstanding during the period. The Weighted
Average Common Shares Outstanding during the three month periods ended June
30, 1999 and 2000, were 4,079,563 and 6,800,471, respectively, and for the
six month periods ended June 30, 1999 and 2000, were 4,075,115 and 6,339,583,
respectively.
The Company's Basic and Diluted Loss Per Share is the same for the second
quarter and first half of both 1999 and 2000 in that any exercise of stock
options or warrants would have been anti-dilutive.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in a money market account with
original maturities less than 90 days.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. As of June 30, 2000, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials $252,389
Finished goods 86,526
--------
$338,915
--------
--------
</TABLE>
Raw materials inventory consists of PET "pre-forms", caps, labels and various
packaging and shipping materials. Finished goods inventory includes materials
and conversion costs.
5. ACQUISITION OF INTANGIBLE ASSET
In June 1999, the Company purchased for $150,000 the beverage products,
trademarks and all other rights related to a line of herbal beverages. The
acquisition cost and related trademark registration expenses have been
capitalized and are amortized over a 5 year period. The Company introduced
this product line into selected markets during the first quarter of 2000.
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<PAGE>
6. 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 5. On September 13, 1999, the Company issued 100,000 shares of common
stock to the principals of the Bottler in partial consideration for these
services. The agreement provides that in the event the market price (as
defined) of the Company's common stock on the first anniversary of the date
of issuance is less than $1.50 per share, the Company will issue, for no
additional consideration, sufficient additional shares of common stock to
bring the then market value of all such shares issued up to $150,000. The
agreement was recorded as an asset on the Company's accounting records in the
amount of $150,000. $43,750 was allocated to the common stock account (based
on the aggregate market value of 100,000 shares of the Company's common stock
on September 13, 1999) and the balance ($106,250) was allocated to common
stock options.
7. ACQUISITION OF ALI'I WATER BOTTLING, INC.
Effective June 30, 1999, the Company purchased all of the operating assets,
net of certain liabilities, of Ali'i Water Bottling, Inc.("Ali'i"). Ali'i
bottles and distributes purified water to the home and office market on the
Big Island of Hawaii and also sells purified water in PET plastic bottles
through retail channels throughout the Hawaiian Islands. The consideration
for the net assets purchased was 300,000 shares of common stock of the
Company, subject to adjustment based upon the Net Current Assets (as defined)
of Ali'i as of the closing. This post-closing adjustment resulted in the
cancellation of 36,960 shares. The Company assumed Ali'i's trade payables and
contractual obligations related to continuing operations but did not assume
any note(s) payable, line of credit or liabilities for federal, state,or
local taxes incurred by Ali'i. The net assets acquired were recorded in the
accounting records of the Company on June 30, 1999 in the amount of $312,359,
which was the fair value of the 263,040 issued shares (based upon the closing
sales price of the common stock on the closing date). No significant goodwill
resulted from this acquisition. Acquisition costs were not material. The
shares issued are "restricted securities" as defined in Rule 144 under the
Securities Act of 1933, and may not be sold except in compliance with such
Rule or other exemption from registration under the Securities Act.
8. ACQUISITION OF ALOHA WATER COMPANY, INC. AND RESULTING PURCHASE
PRICE IN EXCESS OF BOOK VALUE
On March 20, 2000 the Company completed the acquisition of Aloha Water
Company, Inc., ("Aloha") a major distributor of purified water to the home
and office delivery market in the greater Honolulu area. The acquisition was
accomplished through a merger of Aloha into a wholly owned subsidiary of the
Company formed for this purpose. The purchase price for Aloha consisted of an
aggregate of (1) 750,000 shares of Common Stock of the Company and (ii) a
promissory note of the Company in the amount of $500,000 (see Note 9). The
total consideration paid by the Company to the owners of Aloha, by way of
common stock and a promissory note, in excess of the net assets recorded by
Aloha on the date of acquisition amounted to $1,334,769 plus associated
professional fees incurred. The Company has not yet completed the purchase
price allocation. Pending the valuation of net assets, the Company is
amortizing the purchase price in excess of book value over a 15-year period.
In August, 2000 the holders of the promissory note issued in connection with
the acquisition of Aloha declared a default, and have taken action to
foreclose on the collateral, which is all of the stock of Aloha. The Company
has recorded at June 30, 2000 a provision for impairment of the purchase
price in excess of book value. The provision amount was determined as the
difference between the purchase price in excess of book value and the fair
value of the promissory note issued, or $903,904.
Had the acquisitions of Ali'i and Aloha 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:
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<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30
------------------------
1999 2000
---------- -----------
<S> <C> <C>
Net sales $ 2,306,661 $ 2,492,847
Net loss $(1,120,154) $(1,982,060)
Diluted net loss per share $ (.22) $ (.30)
Diluted weighted average
common shares outstanding 5,174,812 6,654,500
</TABLE>
9. NOTES PAYABLE
In connection with the acquisition of Aloha described in Note 8 above, the
Company issued a $500,000 promissory note (the "Aloha note") to the
Stockholders of Aloha. Interest on the Aloha note is payable monthly at the
annual rate of 10%. The entire principal amount is due on April 1, 2001. The
Aloha note is secured by a first priority security interest on all of the
capital stock of Aloha. The Company discounted this note using an estimated
weighted average cost of capital of 25%, and will amortize the resulting
discount to interest expense using the effective interest method over the
term of the loan.
The following summarizes the Company's notes payable as of June 30, 2000
<TABLE>
<S> <C>
Aloha note $ 500,000
Less: Unamortized discount (36,102)
Equipment note payable 495,000
Less: Unamortized discount (37,366)
---------
Net notes payable 921,532
Vehicle installment note payable 6,354
Warehouse note payable 17,868
---------
Subtotal - notes payable 945,754
Less: Current portion (638,209)
---------
Non-current portion $ 307,545
---------
---------
</TABLE>
In August, 2000 the prior owners of Aloha declared a default under the Aloha
note, and took action to foreclose on the collateral (see Note 8).
10. STOCK OPTIONS
In July 1998, the Company granted to its financial public relations advisor
options to purchase an aggregate of 565,000 shares of Common Stock. These
options were valued, in accordance with SFAS 123 (using the Black-Scholes
options pricing model), at $772,913. In January 1999 the holder exercised
50,000 of these options at an aggregate exercise price of $125,000. 250,000
options expired unexercised in August, 1999 and the remaining 265,000 options
expired unexercised in July, 2000.
The total number of Common Stock warrants and options shown at June 30, 2000
excludes an aggregate of 447,167 options outstanding at such date held by
officers and employees of the Company. Stock options granted to employees are
accounted for under APB Opinion No. 25, under which compensation expense is
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<PAGE>
recognized only if the exercise price is less than the market price at the
date of grant. All employee stock options outstanding at June 30, 2000 had an
original exercise price of $4.00 per share. In February 2000, the Company
reduced the exercise price of the options held by all active employees to
$2.00 per share.
The Company accounts for stock options granted to non-employees in accordance
with Statement of Financial Accounting Standards No. 123 (SFAS 123)
"Accounting for Stock-Based Compensation," which requires that these
transactions be accounted for based upon the fair value of consideration
received or the fair value of the equity instruments issued, whichever is
more reliably determinable. In the second quarter of 2000, the Company
recorded $5,250 for stock options granted to marketing consultants. In May
2000, the Company reduced the exercise price of the options held by all
active consultants to $2.00 per share. It was determined by the Company that
the revaluation of the consultant options would not have a material impact on
the amounts previously recorded in the accounting records.
11. SALES BY BUSINESS SEGMENT
For the three month periods ended June 30, 1999 and 2000, the Company had the
following sales by business segment:
<TABLE>
<CAPTION>
1999 % 2000 %
-------- --- ---------- ---
<S> <C> <C> <C> <C>
PET products 742,739 100 734,235 63
Home & office delivery -- -- 362,563 31
XEN products -- -- 76,623 6
-------- --- ---------- ---
742,739 100 1,173,421 100
-------- --- ---------- ---
-------- --- ---------- ---
</TABLE>
For the six month periods ended June 30, 1999 and 2000, the Company had the
following sales by business segment:
<TABLE>
<CAPTION>
1999 % 2000 %
--------- --- ---------- ---
<S> <C> <C> <C> <C>
PET products 1,228,544 100 1,525,927 70
Home & office delivery -- -- 445,563 20
XEN products -- -- 226,623 10
--------- --- ---------- ---
1,228,544 100 2,198,113 100
--------- --- ---------- ---
--------- --- ---------- ---
</TABLE>
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PAGE 10
<PAGE>
12. EQUITY TRANSACTIONS
a. Series A Convertible Preferred Stock
In 1999, the Company issued an aggregate of 1,250 shares ($1.25 million in
aggregate liquidation preference amount) of Series A convertible preferred
stock to a single investor. The Company also issued to this investor warrants
to purchase an additional 100,000 shares of common stock at $3.625 per share.
The exercise price of these warrants was reduced to $1.25 per share in August
1999.
Each share of Series A preferred stock has a liquidation preference of
$1,000, and is entitled to cumulative dividends at an annual rate of 4%,
payable quarterly commencing May 31, 1999, in cash or common stock at the
election of the Company. The Series A preferred stock is convertible into
common stock, in whole or in part at the election of the holder, at a
variable conversion price based upon the market price (as defined) of the
common stock during a measurement period prior to each conversion date.
In September 1999, the Company entered into a standstill agreement with the
holder of the Series A preferred stock pursuant to which the Company redeemed
250 shares for an aggregate of $250,000 and was granted a 30-day option to
redeem the balance of the outstanding shares at a discount to their
liquidation preference amount. The investor agreed not to convert any shares
during this option period. In October 1999, the Company exercised this option
with respect to an aggregate of 625 shares for an aggregate redemption price
of $508,750. In connection with the grant of this option, the Company further
reduced the exercise price of the 100,000 warrants held by the investor to
$.25 per share. In November 1999, the Company entered into a second
standstill agreement with the investor, pursuant to which the Company
redeemed 50 shares for an aggregate of $50,000 and was granted a second
option to redeem the balance of the outstanding shares (then 319 shares after
giving effect to such redemption) at their liquidation preference amount at
any time through January 31, 2000. The investor agreed not to convert any
shares during such option period. In connection with the grant of this second
option, the Company further reduced the exercise price of the 100,000
warrants held by the investor to $.01 per share. The investor exercised these
warrants in full in March, 2000. During the first quarter of 2000, the
Company redeemed an additional 100 shares of Series A preferred stock for an
aggregate of $100,000. During the second quarter, the Company redeemed 79
more shares for an aggregate of $79,000. There are currently 140 shares of
Series A preferred stock outstanding. The investor has agreed not to convert
any of such shares until September 1, 2000.
b. Series B Convertible Preferred Stock
In March 2000, the Company issued 100 shares ($100,000 aggregate
liquidation preference amount) of Series B convertible preferred stock to a
private investor. Each share of Series B preferred stock has a liquidation
preference of $1,000. The Series B preferred is mandatorily redeemable, at
the election of the holder, at any time within 90 days following the first
anniversary of the date of issuance in the event that the market price (as
defined) of the Company's common stock is less than $1.50 per share on the
first anniversary date. The redemption price in such event is $1,500 per
share.
c. Private Offering of Common Stock and Warrants
In September 1999, the Company raised $850,000 ($830,000 net of
offering expenses) through a private offering of 850,000 Units at a purchase
price of $1.00 per Unit. Each Unit consisted of (i) one share of common
stock, (ii) one five year warrant to purchase one share of common stock at an
exercise price of $1.00 per share (a $1.00 warrant), and (iii) one five year
warrant to purchase 2/3 of one share of common stock at an exercise price of
$1.50 per share. An investment of $750,000 was received from two
unaffiliated private investors (and certain of their affiliated entities),
and an additional investment of $100,000 was received from the Company's
Chief Executive Officer. The unaffiliated investors purchased an additional
200,000 Units in December 1999 and 100,000 Units in February 2000 for an
aggregate additional investment of $300,000. The Company's Chief Executive
Officer purchased an additional 100,000 Units in January 2000 for $100,000.
One of the affiliated investors exercised 50,000 $1.00 warrants for an
aggregate of $50,000 in the first quarter of 2000, and an additional $114,600
in the second quarter of 2000. Subsequent to the end of the quarter, in July
2000 the investor exercised an additional 26,000 warrants.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
THE FOLLOWING DISCUSSION MAY BE DEEMED TO CONTAIN CERTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, AS INDICATED BY THE USE OF TERMS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ESTIMATE," "ANTICIPATE," "INTEND" OR
OTHER SIMILAR TERMS OR THE NEGATIVE OF SUCH TERMS. FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN MAY INCLUDE, WITHOUT LIMITATION, STATEMENTS CONCERNING:
ANTICIPATED CHANGES IN REVENUE, COST OF MATERIALS, EXPENSE ITEMS, INCOME OR
LOSS, EARNINGS OR LOSS PER SHARE, CAPITAL EXPENDITURES, CAPITAL STRUCTURE AND
OTHER FINANCIAL ITEMS; PLANS OR OBJECTIVES OF THE COMPANY WITH RESPECT TO THE
COMPANY'S GROWTH STRATEGY, INTRODUCTION OF NEW PRODUCTS, AND PROPOSED
ACQUISITIONS OF ASSETS OR BUSINESSES; POSSIBLE ACTIONS BY CUSTOMERS,
SUPPLIERS, COMPETITORS OR REGULATORY AUTHORITIES; AND ASSUMPTIONS UNDERLYING
THE FOREGOING. THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON THE COMPANY'S
CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING WITHOUT LIMITATION: THE PROSPECT FOR CONTINUING LOSSES AND THE
COMPANY'S POSSIBLE INABILITY TO CONTINUE AS A GOING CONCERN BASED UPON ITS
EXISTING CAPITAL RESOURCES; THE COMPANY'S NEED FOR ADDITIONAL CAPITAL AND THE
POSSIBLE UNAVAILABILITY OF SUCH CAPITAL ON ACCEPTABLE TERMS AND CONDITIONS;
POSSIBLE ADVERSE CONDITIONS, INCLUDING VOLATILITY, IN THE MARKET FOR THE
COMPANY'S SECURITIES AND THE POSSIBLE ADVERSE IMPACT OF SUCH CONDITIONS ON
THE COMPANY'S ABILITY TO RAISE ADDITIONAL CAPITAL AS NEEDED; POSSIBLE ADVERSE
CHANGES IN THE MARKET FOR THE COMPANY'S PRODUCTS, INCLUDING AS A RESULT OF
ADVERSE ECONOMIC CONDITIONS, SUCH AS THOSE CURRENTLY AFFECTING CERTAIN
FOREIGN TARGET MARKETS; POSSIBLE ADVERSE EFFECTS OF CHANGES IN CURRENCY
EXCHANGE RATES; POSSIBLE ADVERSE CHANGES IN THE COMPANY'S DISTRIBUTOR
NETWORK; POSSIBLE ADVERSE DEVELOPMENTS IN THE EXECUTION OF THE COMPANY'S
EXISTING BUSINESS STRATEGY OR IN THE IMPLEMENTATION OF CHANGES THERETO;
POSSIBLE ADVERSE CHANGES IN THE COMPANY'S COST OF MATERIALS OR SOURCES OF
SUPPLY; POSSIBLE ADVERSE DEVELOPMENTS IN THE COMPANY'S ABILITY TO ATTRACT AND
RETAIN KEY PERSONNEL; POSSIBLE ADVERSE DEVELOPMENTS IN GOVERNMENTAL
REGULATION IN THE U.S. OR ABROAD; AND POSSIBLE ADVERSE DEVELOPMENTS IN THE
COMPETITIVE ENVIRONMENT FOR THE COMPANY'S PRODUCT. MANY OF THESE RISKS AND
UNCERTAINTIES ARE BEYOND THE ABILITY OF THE COMPANY TO PREDICT OR CONTROL.
SHOULD ANY UNANTICIPATED CHANGES OCCUR IN THE COMPANY'S BUSINESS, OR SHOULD
MANAGEMENT'S OPERATING ASSUMPTIONS PROVE INCORRECT, THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THESE
FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS INCLUDED HEREWITH AND THE NOTES THERETO.
RESULTS OF OPERATIONS
RECENT DEVELOPMENT. In August 2000, the holders of the promissory note
(the "Aloha Note") issued in connection with the acquisition of Aloha Water
Company ("Aloha") declared a default for failure by the Company to make
current interest payments. The Aloha Note is secured by all of the stock of
Aloha; and the holders have taken action to foreclosure on the collateral.
Such foreclosure would effectively constitute a divestiture of Aloha. Since
its acquisition in March 2000, Aloha accounted for a majority of the
Company's home and office delivery sales. Therefore, future sales and gross
margin in this category are expected to be lower than in the most recently
completed quarter; and costs associated with the Aloha operations will be
eliminated. Since Aloha had made a positive contribution to earnings and cash
flow, the Company's future overall results of operations will be adversely
affected by this development.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1999
Net Sales. Net Sales increased 58% to approximately $1,173,000 for the
three months ended June 30, 2000 (the "2000 Quarter") from approximately
$743,000 for the three months ended June 30, 1999 (the "1999 Quarter").
$734,000 (63%)of net sales for the 2000 Quarter were derived from sales of
PET products. The remaining $439,000 in net sales were comprised of $363,000
(31%) in home and office delivery sales (of which $280,000 related to Aloha)
and $77,000 (6%) in East Meets West XEN-TM- ("XEN") herbal beverage sales.
Case sales of PET products in the 2000 Quarter were approximately 126,000 as
compared to approximately 130,000 cases in the 1999 Quarter. The decline in
case sales in the 2000 Quarter resulted from a manufacturing equipment
breakdown of approximately one week, which resulted in a shutdown of
production. This breakdown created a backlog of sales orders which The
Company expects to fill in the third quarter of 2000. Sales in Hawaii
accounted for 99% of PET sales in the 2000 Quarter compared to 63% in the
1999 Quarter. International sales accounted
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<PAGE>
for the remaining 1% of PET sales in the 2000 Quarter, as compared to 22% in
the 1999 Quarter. PET sales to the U.S. Mainland in the 2000 Quarter were
offset by discounts and related shipping costs, which resulted in no net
sales volume during the period, whereas in the 1999 Quarter net sales to the
U.S. Mainland were 5% of total PET sales. 69% of XEN sales were made in the
U.S. Mainland, 19% were made in Hawaii, and 2% were made in Guam.
Cost of Sales. The Company's aggregate cost of sales increased 85% to
approximately $956,000 in the 2000 Quarter from approximately $517,000 in the
1999 Quarter. Included in the 2000 Quarter increase are $128,000 of costs
related to home and office delivery sales (of which $83,000 related to Aloha
sales), and $150,000 of costs associated with XEN sales. There were no XEN or
home and office delivery sales in the 1999 Quarter. Cost of sales relating to
the home and office business will be reduced in future quarters due to the
foreclosure on the Aloha note (see Note 8 to the Financial Statements). PET
average case costs increased approximately 17% in the 2000 Quarter compared
to the 1999 Quarter, primarily attributable to increased raw material cost.
Gross Margin. Gross margin decreased to approximately $217,000 in the
2000 Quarter from approximately $226,000 in the 1999 Quarter, primarily as a
result of increased utilization of the bottling plant and increased
average net case sales price, offset by increased raw material
costs. Plant utilization was to 63% of capacity in the 2000 Quarter,
compared to 61% in the 1999 Quarter.
Selling and Marketing. Selling and marketing expenses increased 80% to
$316,000 in the 2000 Quarter from approximately $175,000 in the 1999 Quarter.
The majority of this increase is attributable to $74,000 of expenses
associated with the 2000 launch of the XEN product line and $108,000 of
expenses related to the Company's home and office delivery business (of which
$84,000 related to Aloha), partially offset by a reduction in PET selling and
marketing expenses of $41,000 in the 2000 Quarter compared to the 1999
Quarter. The Company did not have any sales of XEN or home and office
delivery products in the 1999 Quarter.
General and Administrative. General and administrative expenses
increased 19% to approximately $409,000 in the 2000 Quarter from
approximately $343,000 in the 1999 Quarter. This increase resulted primarily
from $118,000 of expenses in the 2000 Quarter related to the XEN and home and
office delivery products (of which $94,000 related to Aloha), which product
lines were not introduced by the Company until 2000, partially offset by a
$52,000 reduction in general overhead expenses in the 2000 Quarter compared
to the 1999 Quarter.
Other (Expense). Net Other (Expense) was approximately $(960,000) in the
2000 Quarter compared to approximately $(16,000) in the 1999 Quarter. This
increase is primarily due to a provision for impairment of purchase price in
excess of book value due to the foreclosure on the Aloha note (see Note 8 to
the Financial Statements), increased interest expense associated with the
Aloha note, and capitalized leases of equipment related to the home and
office delivery business, plus a reduction in interest income earned on cash
equivalents.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $(1,467,413), or $(0.22) per share, in the 2000 Quarter
compared to a net loss of $(308,791), or $(0.08) per share, in the 1999
Quarter. Weighted Average Shares Outstanding were 6,800,471 in the 2000
Quarter compared to 4,079,563 in the 1999 Quarter.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30,
1999
Net Sales. Net sales increased 79% to approximately $2,198,000 for the
six months ended June 30, 2000 (the "2000 First Half") from approximately
$1,229,000 for the six months ended June 30, 1999 (the "1999 First Half").
$1,526,000 (70%) of net sales for the 2000 First Half were derived from sales
of PET products. The remaining $672,000 in net sales were comprised of
$446,000 (20%) in home and office delivery sales and $226,000 (10%) in XEN
sales. PET product sales in the 2000
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<PAGE>
Second Half represented a 24% increase over PET product sales of $1,229,000
in the 1999 Second Half. Case sales increased 22% to 256,000 cases in the
2000 First Half compared to 209,000 cases in the 1999 First Half. Sales in
the Hawaii accounted for 99% of PET sales in the 2000 First Half compared to
78% in the 1999 First Half. International sales accounted for the balance of
PET sales (1%) in the 2000 First Half, compared to 17% in the 1999 First
Half. PET sales to the U.S. Mainland in the 2000 First Half were partially
offset by discounts and related shipping costs, which resulted in no net
sales volume during the period, whereas in the 1999 First Half net sales to
the U.S. Mainland were 5% of total PET sales. 56% of XEN sales were made in
the U.S. Mainland, 40% were made in Hawaii and the balance of 4% were made in
Guam.
Cost of Sales. The Company's aggregate cost of sales increased 82% to
approximately $1,756,000 in the 2000 First Half from approximately $966,000
in the 1999 First Half. Included in 2000 First Half costs are $179,000
related to XEN product sales, and $168,000 associated with home and office
delivery product sales. There were no XEN or home and office sales in the
1999 First Half. PET product cost of sales increased $443,000, and is
attributable to the 22% increase in case sales in 2000 First Half as compared
to 1999 First Half. Additionally, PET average case costs increased
approximately 29% due to increased costs of raw materials in 2000 First Half
as compared to 1999 First Half.
Selling and Marketing. Selling and marketing expenses increased 67% to
approximately $542,000 in the 2000 First Half from approximately $324,000 in
the 1999 First Half. The majority of this increase is attributable to
expenses associated with the XEN ($130,000) and the home and office delivery
business ($108,000) product lines, partially offset by a $20,000 reduction in
PET selling and marketing expenses. The Company did not have any sales of XEN
and home and office delivery products in the 1999 First Half.
General and Administrative. General and administrative expenses
increased 44% to approximately $902,000 in the 2000 First Half from
approximately $628,000 in the 1999 First Half. The majority of this increase
was related to expenses associated with the XEN($35,000) and the home and
office delivery ($124,000) product lines, a $100,000 bonus paid to the
Company's Chief Executive Officer, and increased professional fees,
approximately $33,000 in amortization expenses associated with the Co-Packing
Agreement and the purchase price of Aloha in excess of book value, partially
offset by an overall $18,000 reduction in corporate general and
administrative expenses.
Other (Expense). Other (Expense) increased to approximately ($981,000)
in the 2000 First Half from approximately ($36,000) in the 1999 First Half.
This increase is primarily due to a provision for impairment of purchase
price in excess of book value due to the foreclosure on the Aloha Stock (see
Note 8), increased interest expense associated with the Aloha note, and
capitalized leases of equipment related to the home and office delivery
business, plus a reduction in interest income, resulting from a reduction in
interest income earned on cash equivalents.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $(1,982,958), or $(0.31) per share, in the 2000 First
Half compared to a net loss of $(725,339), or $(0.18) per share, in the 1999
First Half. Weighted Average Shares Outstanding were 6,339,583 in the 2000
First Half compared to 4,075,115 in the 1999 First Half.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $211,000 at June 30, 2000,
compared to approximately $9,000 at December 31, 1999. During the first half
of 2000, the Company received investment proceeds aggregating approximately
$465,000 offset by redemptions of outstanding securities ($179,000), losses
from operating activities ($194,000), purchase of property
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<PAGE>
and equipment ($44,000) and repayment of notes and capital leases ($31,000).
This deficit was offset by the $183,000 of cash added in the merger with
Aloha. This cash will no longer be included in the Company's future quarters
due to the foreclosure on the Aloha note. See Notes 8 and 12 to the Financial
Statements.
The Company will need to raise additional capital in order to fund its
operating deficits as well as to repay outstanding indebtedness on its
equipment and to repay its outstanding promissory notes, which are secured by
significant assets of the Company.
The Company does not currently have adequate capital to operate in
accordance with its business plan. If the Company is not able to raise
additional capital by the end of 2000, the Company will likely not be able to
continue as a going concern. The Company is seeking funding from various
sources, but currently has no commitments for additional financing, and there
can be no assurance that such funding will become available to the Company.
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.
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c)
In the second quarter of 2000, the Company raised an aggregate of
approximately $432,000 in equity financing from private investors, including
$114,600 through the exercise of outstanding warrants. The Company also
granted to its non-employee directors as directors fees non-qualified stock
options to purchase an aggregate of 900 shares of common stock. All of the
foregoing transactions were exempt from registration under the Securities Act
of 1933, as amended, pursuant to section 4(2) thereof.
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<PAGE>
(c) Effective June 30, 1999, the Company issued an aggregate of 263,040
shares of Common Stock to Ali'i Water Bottling, Inc. ("Ali'i"), after
cancellation of 36,960 shares as a result of a post-closing adjustment. These
shares were issued in exchange for substantially all of the operating assets,
net of certain liabilities, of Ali'i. During the second quarter of 1999, the
Company also granted non-qualified stock options to purchase an aggregate of
1,800 shares of Common Stock to its non-employee directors and an aggregate
of 42,500 shares to certain professional advisors. All of the foregoing
transactions were exempt from registration under the Securities Act of 1933
as amended, by virtue of Section 4(2) hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2000 Annual Meeting of Stockholders (the "Annual
Meeting") on June 13, 2000.
(b) The following five persons were elected as directors of the Company:
Marcus Bender
Brian Barbata
Michael Chagami
Daniel Gabriel
Wilhelm Kuhlmann
(c) The following matters were voted upon at the Annual Meeting:
(1) Election of Directors:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Marcus Bender 4,023,691 21,900 --
Brian Barbata 4,023,691 21,900 --
Michael Chagami 4,023,691 21,900 --
Daniel Gabriel 4,023,691 21,900 --
Wilhelm Kuhlmann 4,023,691 21,900 --
</TABLE>
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<PAGE>
(2) Ratification of Arthur Andersen LLP as the Company's independent
accountants for the fiscal year ending December 31, 2000:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
4,021,991 23,600 --
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Current Report on Form 8-K/A dated May 26, 2000 amending
the Current Report on Form 8-K dated March 20, 2000
relating to the acquisition of Aloha Water Co., Inc.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HAWAIIAN NATURAL WATER COMPANY, INC.
(Registrant)
August 11, 2000 By: /s/ MARCUS BENDER
----------------------
Marcus Bender
President & Chief Executive Officer
August 11,2000 By: /s/ WILLARD D. IRWIN
-----------------------
Willard D. Irwin
Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
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