UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
Date of Report (Date of earliest event reported) December 17, 2001
------------------------------------------------------------------
AMCON DISTRIBUTING COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-24708 47-0702918
------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
10228 "L" Street, Omaha, NE 68127
---------------------------------
(Address of principal executive offices) (Zip Code)
(402) 331-3727
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 17, 2001, Hawaiian Natural Water Company, Inc., a Hawaii
corporation ("HNWC" or "Hawaiian Natural"), was merged (the "Merger") with and
into AMCON Merger Sub, Inc. ("Merger Sub"), a wholly-owned subsidiary of AMCON
Distributing Company ("AMCON"). Merger Sub is a new corporation that was
formed under Delaware law solely for the purpose of effecting the merger and
changing the state of incorporation of HNWC from Hawaii to Delaware. The
companies were merged pursuant to the Fifth Amended and Restated Agreement and
Plan of Merger, dated September 27, 2001 (the "Merger Agreement"), by and
among HNWC, AMCON and Merger Sub. The shareholders of HNWC and Merger Sub
approved the Merger Agreement on December 17, 2001. As contemplated in the
Merger Agreement, AMCON Merger Sub, Inc. has changed its name to Hawaiian
Natural Water Company, Inc.
Under the Merger Agreement, HNWC and AMCON had established the total value of
HNWC common stock as $2,865,348. The exchange ratio, which specified the
fractional share of AMCON issued for each share of HNWC in the merger, was
determined by dividing this agreed upon value by the average AMCON stock price
described below and then dividing that resulting quotient by the number of
shares of HNWC common stock outstanding immediately prior to the time the
Merger was completed. For purposes of this calculation under the Merger
Agreement, the average closing price of AMCON common stock was measured during
a 20 trading day period ending three days prior to December 17, 2001, the date
of the HNWC shareholder vote on the merger. However, the common stock of
AMCON would be priced no lower than $6.00 and no greater than $8.00 per share
for this purpose. As a result of AMCON's stock price during this measurement
period, the exchange ratio was 0.052 of a share of AMCON common stock for each
share of HNWC common stock. A total of 477,558 shares of AMCON common stock
were therefore issued in the merger, of which AMCON received back 104,000
shares with respect to its ownership of 2,000,000 shares of common stock of
HNWC.
The merger is expected to qualify as a tax-free reorganization and has been
recorded on AMCON's books using the purchase method of accounting. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values. The purchase price valued the entire
common equity interest in Hawaiian Natural at approximately $2.9 million,
which was paid in cash of $0.8 million during fiscal 2001 and in common stock
of AMCON valued at approximately $2.1 million. AMCON funded the cash portion
of the purchase price through borrowings on its revolving line of credit. The
portion of the purchase price in excess of the fair value of the net assets
acquired to be allocated to other intangible assets is approximately $3.4
million. The identifiable intangible asset, the Hawaiian Natural trade name,
is being amortized over 20 years.
Although the amounts are subject to change based on evaluations performed
subsequently, the final purchase price allocation is not expected to
materially differ from those recorded in AMCON's Quarterly Report on Form 10-Q
for the first quarter ended December 2001, as filed with the Securities and
Exchange Commission on February 11, 2002 (File No. 0-24708).
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
Hawaiian Natural Water Company, Inc.
Balance Sheet
September 30, 2001
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,748
Inventories 423,873
Trade accounts receivable, net of allowance for doubtful
accounts of $67,408 256,613
Other current assets 109,479
-----------
Total Current Assets 822,713
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $1,275,078 2,049,722
-----------
Total Assets $ 2,872,435
===========
LIABILITIES AND STOCKHOLDERS'(DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 968,886
Accrued vacation, payroll and related taxes 77,201
Accrued commissions and billbacks 207,289
Accrued other 243,745
Notes payable - Current portion 1,938,410
Capital lease obligation - Current portion 11,593
-----------
Total Current Liabilities 3,447,124
-----------
NON-CURRENT LIABILITIES:
Capital lease obligation - net of current portion 8,127
Notes payable - net of current portion 9,552
Other 41,380
-----------
Total Non-Current Liabilities 59,059
-----------
Total Liabilities 3,506,183
-----------
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred Stock, $1 par value; 5,000,000 shares authorized;
no shares issued or outstanding -
Common stock, no par value; 20,000,000 shares authorized;
7,935,982 shares issued and outstanding 9,912,446
Common stock warrants and options; 5,624,358 issued
and outstanding 3,680,765
Accumulated Deficit (14,226,959)
-----------
Total Stockholders' Equity (Deficit) (633,748)
-----------
Total Liabilities and Stockholders' Equity $ 2,872,435
===========
The accompanying notes are an integral part of these financial statements.
Hawaiian Natural Water Company, Inc.
Statements of Operations
For the Three and Nine Months Ended September 30, 2000 and 2001
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
NET SALES $ 944,999 $ 765,629 $ 3,143,112 $ 2,365,029
COST OF SALES 661,677 849,325 2,417,623 2,215,235
----------- ----------- ----------- -----------
Gross Margin 283,322 (83,696) 725,489 149,794
EXPENSES:
Selling and Marketing 217,451 129,944 759,650 363,238
General and Administrative 281,420 178,165 1,124,195 744,804
----------- ----------- ----------- -----------
498,871 308,109 1,883,845 1,108,042
OTHER INCOME (EXPENSE)
Interest income (expense) 24,076 (46,231) (53,601) (111,951)
Impairment charge (122,841) (188,345) (1,025,935) (188,345)
----------- ----------- ----------- -----------
Net Loss $ (314,314) $ (626,381) $(2,237,892) $(1,258,544)
=========== =========== =========== ===========
Preferred stock dividend 49,700 - 113,245 -
Net Loss Applicable to
Common Shareholders $ (364,014) $ (626,381) $(2,351,137) $(1,258,544)
=========== =========== =========== ===========
Basic and Diluted
Net Loss Per Share: $ (0.05) $ (0.08) $ (0.36) $ (0.16)
=========== =========== =========== ===========
Weighted Average Common
Shares Outstanding 7,041,501 7,935,982 6,559,193 7,850,502
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Hawaiian Natural Water Company, Inc.
Statement of Stockholders' Equity(Deficit) For the
Nine Months Ended September 30, 2001
(Unaudited)
Common Stock Warrants
and
Common Stock Options
---------------------- ----------------------
Total
Number of Number of Accumulated Stockholders'
Shares Amount Shares Amount Deficit Equity (Deficit)
--------- ----------- --------- ----------- ------------ ----------------
BALANCE AT
DECEMBER 31, 2000 7,185,966 $ 9,612,446 5,595,558 $ 3,669,035 $(12,968,415) $ 313,066
Sale of common stock
to AMCON Distributing
Company
February 1, 2001 750,000 300,000 -- -- -- 300,000
Issuance of common
stock options to
non-employee
directors
January 1, 2001 -- -- 900 -- -- --
April 2, 2001 -- -- 900 -- -- --
Issuance of common
stock options to
marketing consultants -- -- 27,000 11,730 -- 11,730
Issuance of common
stock pursuant to
Co-Packing Agreement 16 -- -- -- -- --
Net Loss -- -- -- -- (1,258,544) (1,258,544)
--------- ----------- --------- ----------- ------------- -----------
BALANCE AT
SEPTEMBER 30, 2001 7,935,982 $ 9,912,446 5,624,358 $ 3,680,765 $ (14,226,959) $ (633,748)
========= =========== ========= =========== ============= ===========
The accompanying notes are an integral part of these financial statements.
Hawaiian Natural Water Company, Inc.
Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 2001
(Unaudited)
Nine Months Ended
September 30,
2000 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,237,892) $ (1,258,544)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 286,227 328,317
Amortization of debt discount 25,974 19,108
Impairment charge 1,025,935 188,345
Net income from subsidiary (Aloha Water Co) (18,435) -
Issuance of stock and options to consultants,
distributors, non-employee directors and
employees 70,024 11,730
Net decrease (increase) in current assets 62,125 115,289
Net increase (decrease) in current liabilities 415,599 (113,144)
------------ ------------
Net cash used in
operating activities (370,443) (708,899)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (78,293) (79,193)
------------- ------------
Net cash used in
investing activities (78,293) (79,193)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock and
common stock warrants 100,000 -
Net proceeds from private placement of common
stock and common stock warrants 300,000
Exercise of common stock options and warrants
by private investors 431,600 -
Proceeds from note payable 350,000 854,483
Redemption of preferred stock (179,000) (150,000)
Repayments of notes payable (7,060) (171,195)
Repayment of principal on capital leases (22,384) (27,078)
------------ ------------
Net cash provided by
financing activities 673,156 806,210
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 224,420 18,118
CASH AND CASH EQUIVALENTS, beginning of period 8,988 14,630
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 233,408 $ 32,748
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Addition of capital leases $ 17,243 -
============ ============
Preferred shareholder dividends paid in cash $ 37,461 -
============ ============
Preferred shareholder dividends accrued $ 6,366 -
============ ============
The accompanying notes are an integral part of these financial statements.
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2001
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements of Hawaiian Natural Water
Company, Inc.,(the Company) should be read in conjunction with the audited
financial statements for the year ended December 31, 2000 of Hawaiian Natural
Water Co., Inc. and notes thereto as filed with the Securities and Exchange
Commission in the Company's Annual Report on Form 10-KSB. The auditor's report
on those financial statements included an explanatory fourth paragraph
indicating that there is substantial doubt about the Company's ability to
continue as a going concern.
In the opinion of management, the accompanying financial statements reflect
all adjustments (which consist primarily of normal recurring adjustments)
considered necessary to fairly present the financial position of the Company
at September 30, 2001, the results of its operations for the three month and
nine month periods ended September 30, 2001 and 2000, and the cash flows for
the nine month periods ended September 30, 2001 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.
Organization and Going Concern
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 extended 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. This business is concentrated in the Kailua-Kona
area of the Big Island of Hawaii.
In January 2000, the Company introduced a line of herbal beverages under the
East Meets West XEN-TM-(XEN) name. The beverages were manufactured for the
Company pursuant to a co-packing agreement with a Los Angeles area bottler
(see Note 5). Due to its inability to successfully market this product line,
the Company has discontinued manufacturing and distributing XEN products.
In March 2000, the Company acquired Aloha Water Company Co. Inc., a
distributor of purified water in the home and office market in the Honolulu
area. This acquisition was subsequently rescinded in December 2000 (see Note
6).
In November 2000, the Company agreed to be acquired by Amcon Distributing
Company, an Omaha, Nebraska based distributor, by means of a merger of the
Company into a wholly owned subsidiary of Amcon (see Note 7).
Since the execution of the merger agreement, the Company has been
substantially dependent upon Amcon for its financing requirements. If the
merger agreement were terminated for any reason, the Company would likely not
be able to continue as a going concern.
As shown in the accompanying financial statements, the Company has incurred
significant losses and negative cash flows from operations 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. Additionally, the Company has past due accounts
payable of approximately $876,000 and notes payable amounts due in the near
term of approximately $1,938,000. 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.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
The Company recognizes revenue on the accrual method of accounting when title
transfers: upon shipment, for bottled water products and other beverages, and
upon delivery for home and office delivery products. The Company grants
customers the right to return goods that are defective or otherwise unsuitable
for sale. The Company issues refunds to customers or replaces goods that 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. The Company also estimates the amount of billbacks from certain
distributors which represents price adjustments for quantity or other
discounts to distributors' customers.
Gross Margin
The Company's plant currently has a normal production capacity of
approximately 200,000 cases per calendar quarter. The Company is currently
operating its plant at approximately 58 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
(adjusted for preferred dividends) by the Weighted Average Common Shares
Outstanding during the period.
The Company's Basic and Diluted Loss Per Share is the same for 2000 and 2001
in that any exercise of stock options or warrants would have been anti-
dilutive.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include savings accounts and investments in a money
market account with original maturities less than 90 days.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. As of September 30, 2001, inventories were comprised of the following:
Raw materials $337,663
Finished goods 86,210
--------
$423,873
========
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.
5. XEN LINE OF HERBAL BEVERAGES AND IMPAIRMENT CHARGE
In June 1999, the Company purchased for $150,000 the beverage products,
trademarks and all other rights related to its XEN line of herbal beverages.
In September 2001, due to unsatisfactory sales volume of this product line,
the Company discontinued ongoing marketing efforts. Current marketing
activities are limited to the liquidation of inventory on hand, a significant
portion of which has been reserved as of September 30, 2001 due to a potential
realization issue. The acquisition cost of the XEN product line and related
trademark registration expenses had been capitalized and were being amortized
over a five-year period. The unamortized balance of the cost of this
intangible asset of $98,345, was deemed to be impaired and was written off at
September 30, 2001 as an impairment charge.
In June 1999, the Company entered into a five-year agreement with an
independent bottler in Los Angeles, California for the production,
warehousing, and shipment of the XEN product line. On September 13, 1999, the
Company issued an aggregate of 850,000 shares of common stock to the
principals of the bottler in partial consideration for these services which
were recorded as an asset on the Company's accounting records in the amount of
$150,000, based on the fair value of the securities issued. The unamortized
balance of the cost of this intangible asset of $90,000 was deemed to be
impaired and was written off at September 30, 2001 as an impairment charge.
6. ACQUISITION OF ALOHA WATER COMPANY, INC. AND IMPAIRMENT CHARGE
On March 17, 2000, the Company acquired Aloha Water Company, Inc., (Aloha), a
distributor of purified water to the home and office delivery market in the
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 (the Aloha note) to the stockholders of Aloha. Interest on the
note was payable monthly at the annual rate of 10%. The entire principal
amount was due on April 1, 2000. The Aloha note was secured by a first
priority security interest on all of the capital stock of Aloha.
In August, 2000 the holders of the Aloha note declared a default for failure
to make certain interest payments, and foreclosed on their collateral, which
was all of the stock of Aloha. As a result, the Company wrote off its
investment in Aloha, the related goodwill and the Aloha note.
In December 2000, the parties agreed to rescind the acquisition, as a result
of which Aloha returned the Aloha note and the 750,000 shares of the Company's
common stock. The fair value of the Company's shares returned was not
material.
7. AMCON MERGER
In November 2000, the Company entered into a merger agreement with AMCON
Distributing Company (AMCON), pursuant to which the Company has agreed to
merge with and into, and thereby become, a wholly owned subsidiary of AMCON.
The merger consideration values the entire common equity interest in the
Company at $2,865,348, payable in common stock of AMCON, which will be priced
at not less than $6.00 or more than $8.00 per share, based on a 20 trading day
measuring period ending three trading days before the date of the Company's
stockholder vote on the merger. As a result, AMCON will issue an aggregate of
not less than 358,168 or more than 477,558 shares. Holders of outstanding
options and warrants of the Company would receive comparable options and
warrants of AMCON with the exercise price and number of shares covered
adjusted based upon the exchange ratio.
The merger is expected to qualify as a tax-free reorganization. It is subject
to various conditions, including the effectiveness of a registration statement
covering the shares to be issued in the merger, the listing of such shares on
the American Stock Exchange, and the approval of the Company's stockholders.
All of the Company's officers and directors and any of their affiliated
entities that own shares of the Company's common stock have agreed to vote
their shares in favor of the merger.
The Company has established December 17, 2001 as the date for a special
meeting of shareholders to vote on the Merger. If approved, as expected, the
Company expects the Merger to be completed on the same date. However, the
Merger Agreement is terminable under certain circumstances, and there can be
no assurance that the Merger will be completed. Pending completion of the
Merger, AMCON has made certain interim financing available to the Company. If
the Merger Agreement is terminated for any reason, it is likely that the
Company will not be able to continue as a going concern.
8. NOTES PAYABLE
In anticipation of acquiring the Company, AMCON has provided certain debt
financing to the Company for working capital and other general corporate
purposes. AMCON advanced $350,000 in September 2000, $400,000 in October 2000,
and an additional $500,000 in June 2001. These loans are evidenced by secured
promissory notes (the AMCON notes) bearing interest at a rate of 10% per
annum, payable quarterly. The AMCON notes are convertible at the election of
AMCON, under certain circumstances, into Series C convertible preferred stock
bearing dividends, payable quarterly, of 10% per annum and giving effective
control of the Board of Directors to AMCON. The first two AMCON notes are also
convertible into common stock of the Company at AMCON's election at a
conversion price equal to $2,865,348 divided by the number of shares of common
stock outstanding on the conversion date. The AMCON notes are secured by a
lien on all of the Company's assets. The third AMCON note is convertible into
common stock at a conversion price of $.40 per share. The due date of the
AMCON notes, originally February 28, 2001, has been extended to December 31,
2001.
In September 2001, an affiliate of AMCON, provided $354,483 of debt financing
to the Company for working capital and other general corporate purposes. This
loan is evidenced by a secured promissory note bearing interest at a rate of
8% per annum. The note, along with earned interest, is due and payable on or
before December 31, 2001.
In September 1997, the Company acquired certain bottle making equipment used
in its bottling operations. The consideration for the equipment was an
aggregate of $1.2 million, a portion of which was paid through the issuance of
a promissory note in the original principal amount of $825,000, payable in
installments, as defined. The Company discounted this equipment note payable
using an estimated weighted average cost of capital of 12%, and amortized the
resulting discount to interest expense using the effective interest method
over the term of the loan. In October 2000, the Company negotiated a
restructuring of the $189,000 installment due on September 30, 2000, so as to
extend the payment over six months. This installment was paid in full as of
May 11, 2001. The outstanding principal balance of this note is due in two
equal installments of $165,000 (plus interest) on September 30, 2001 and on
September 30, 2002. The Company failed to make the payment due on September
30, 2001 and is in default on the note.
In September 1999, the Company acquired a prefabricated warehouse, which it
assembled and installed on its property in Kea'au. The warehouse was purchased
for $24,995 with a down payment of $2,000 and a 5-year note, with monthly
payments aggregating $22,995, including interest.
The following summarizes the Company's notes payable as of September 30, 2001:
First AMCON note $ 350,000
Second AMCON note 400,000
Third AMCON note 500,000
AMCON affiliate note 354,483
Equipment note payable in default 330,000
---------
Net notes payable 1,934,483
Warehouse note payable 13,479
---------
Subtotal--notes payable 1,947,962
Less: Current portion (1,938,410)
---------
Non-current portion $ 9,552
=========
9. STOCK OPTIONS
The total number of Common Stock warrants and options shown on the balance
sheet at September 30, 2001 excludes an aggregate of 438,367 options
outstanding at such date held by officers and employees of the Company, of
which 150,000 (held by the Company's president) expired unexercised in October
2001. Stock options granted to employees are accounted for under APB Opinion
No. 25, under which compensation expense is recognized only if the exercise
price is less than the market price at the date of grant. All employee stock
options outstanding at September 30, 2001 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, which has not
resulted in any further compensation charges to income through September 30,
2001.
Stock options granted to non-employees are accounted for in accordance with
Statement of Financial Accounting Standards No. 123 (SFAS 123) Accounting for
Stock-Based Compensation, which requires that these transactions be accounted
for based upon the fair value of consideration received or the fair value of
the equity instruments issued, whichever is more reliably determinable.
10. SEGMENT INFORMATION
The Company has three segments: PET, home and office delivery, and XEN. The
Company reportable segments are business units defined by product line, the
results of which are reported directly to the Company's chief operating
decision maker. The accounting policies of the segments are the same as those
described in the "Summary of Significant Accounting Policies." The Company
manages cash flows and assets on a consolidated basis, and not by segment.
Information for the three-month period ended September 30, 2000, and for the
nine-month period ended September 30, 2000, has been recast, as required by
SFAS 131, "Disclosure About Segments of an Enterprise and Related
Information."
The following tables summarize the operating results by segment for the three-
month periods ended September 30, 2000 and 2001:
THREE MONTHS ENDED SEPTEMBER 30, 2000:
Home and Company
PET Office XEN Corporate Total
--------- --------- -------- --------- ---------
Revenue from external customers $ 807,891 $ 87,745 $ 49,363 $ - $ 944,999
Depreciation and
amortization expense 60,363 15,073 2,959 21,882 100,277
Total operating costs 603,580 82,520 114,187 360,261 1,160,548
Operating income (loss) 204,311 (5,225) (64,824) (360,261) (215,549)
Net interest income - - - 24,076 24,076
Impairment charge - (122,841) - - (122,841)
Net income (loss) 204,311 (45,546) (64,824) (408,255) (314,314)
THREE MONTHS ENDED SEPTEMBER 30, 2001:
Home and Company
PET Office XEN Corporate Total
--------- --------- -------- --------- ---------
Revenue from external customers $ 673,028 $ 84,518 $ 8,083 $ - $ 765,629
Depreciation and
amortization expense 62,928 15,425 459 50,047 128,859
Total operating costs 729,676 94,901 124,283 208,574 1,157,434)
Operating income (loss) (56,648) (10,383) (116,200) (208,574) (391,805)
Impairment charge - - 188,345 188,345
Net interest expense - - - 46,231 46,231
Net income (loss) (56,648) (10,383) (304,545) (254,804) (626,381)
The following tables summarize the operating results by segment for the nine-
month periods ended September 30, 2000 and 2001:
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Home and Company
PET Office XEN Corporate Total
--------- --------- -------- --------- ----------
Revenue from external customers $2,334,242 $ 531,958 $ 276,912 $ - $ 3,143,112
Depreciation and
amortization expense 219,323 42,318 3,571 21,066 287,886
Total operating costs 1,904,035 566,379 455,119 1,375,935 4,301,468
Operating income (loss) 430,207 (34,421) (178,207) (1,375,935) (1,158,356)
Net interest expense - 1,266 - 52,335 53,601
Impairment charge - 1,025,935 - - 1,025,935
Net income (loss) 430,207 (1,061,622) (178,207) (1,428,270) (2,237,892)
NINE MONTHS ENDED SEPTEMBER 30, 2001:
Home and Company
PET Office XEN Corporate Total
--------- --------- -------- --------- ---------
Revenue from external customers $2,056,821 $ 235,061 $ 73,147 $ - $ 2,365,029
Depreciation and
amortization expense 191,121 46,274 1,377 90,141 328,913
Total operating costs 2,018,695 306,649 239,624 758,309 3,323,277
Operating income (loss) 38,126 (71,588) (166,477) (758,309) (958,248)
Net interest expense - - - 111,951 111,951
Impairment charge - - 188,345 - 188,345
Net income (loss) 38,126 (71,588) (354,822) (870,260) (1,258,544)
11. 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 an institutional investor. The Company also issued to this investor
for no additional consideration warrants to purchase 100,000 shares of common
stock at an original exercise price of $3.625 per share.
Each share of Series A preferred stock had a liquidation preference of $1,000,
and was 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 was 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 as of each conversion date (the beneficial conversion feature).
In August 1999, the investor converted six shares of Series A preferred into
an aggregate of 11,429 shares of common stock. In September 1999, the Company
entered into a standstill agreement with the investor, pursuant to which the
investor agreed not to convert any additional shares of Series A preferred and
granted the Company an option to redeem the outstanding shares. This
standstill agreement was extended continuously until November 2, 2000.
Pursuant to this standstill arrangement, the Company redeemed an aggregate of
(i) 925 shares of Series A preferred stock for an aggregate of $808,750 in
1999, (ii) 100 shares for an aggregate of $100,000 during the first quarter of
2000, (iii) 79 shares for an aggregate of $79,000 during the second quarter of
2000, and (iv) the remaining 140 shares for an aggregate of $140,000 in
October 2000. There are currently no Series A preferred shares outstanding.
As partial consideration for the extension of the standstill agreement, the
Company reduced the exercise price of the warrants held by the investor in
several increments to $.01 per share. The investor exercised these warrants
in full in March 2000.
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 stock dividend of $416,379 during 1999. In 2000, the
Company redeemed the remaining Series A preferred shares and adjusted the
previously accrued preferred stock dividend to the holder, resulting in an
aggregate preferred stock dividend of $86,698 for the Series A preferred
shares.
b. Series B Convertible Mandatorily Redeemable 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 stock was mandatorily redeemable, at the
election of the holder, at any time within 90 days following the first
anniversary date of the date of issuance in the event that the market price
(as defined) of the common stock was less than $1.50 per share on the first
anniversary date. The redemption price in such event would have been $1,500
per share ($150,000 in the aggregate).
The market price of the common stock was less than $1.50 on the first
anniversary date, and the investor delivered to the Company a notice of
redemption with respect to all of the outstanding Series B preferred stock.
The Company recorded the $50,000 redemption premium as a preferred stock
dividend. The Series B preferred stock was redeemed in full during the quarter
ended June 30, 2001.
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 unaffiliated investors exercised (i) 50,000 $1.00
warrants for an aggregate of $50,000 in the first quarter of 2000, (ii)
114,600 $1.00 warrants for an aggregate of $114,600 in the second quarter of
2000, and (iii) 66,000 $1.00 warrants for an aggregate of $66,000 in the third
quarter of 2000.
d. Issuance of Stock to AMCON
In February 2001, the Company issued 750,000 shares of common stock to AMCON
at a purchase price of $.40 per share for an aggregate purchase price of
$300,000. These shares will participate in the Merger consideration (see Note
8). In June 2001, the Company issued to AMCON a $500,000 convertible
promissory note, convertible at any time at AMCON's election, into an
aggregate of 1,250,000 shares of common stock at a conversion price of $.40
per share. This note is expected to be converted prior to the Merger,. The
shares issued upon conversion will participate in the Merger consideration.
12. SIGNIFICANT EVENTS
In July and August 2001, the Company took delivery of a new blow molding
machine and certain related equipment for installation at the Company's
bottling facility. The total value of this new equipment is estimated at
$2,000,000. The Company expects this new equipment to significantly enhance
the efficiency of its bottling operations. The equipment was acquired by AMCON
in its own name. Upon installation, the Company expects to lease this
equipment from AMCON, on terms to be agreed upon. This lease is expected to be
accounted for as an operating lease by the Company.
In August 2001, the Company commenced construction of an addition to its
existing bottling facility to house this new equipment. The Company
anticipates this addition to be completed in November 2001, at an estimated
cost of $190,000,and the equipment to be fully operational by December 2001.
REPORT OF INDEPENDENT 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, 2000 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, 2000 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 and
negative cash flows from operations. Additionally, the Company has past due
accounts payable of approximately $944,000 and mandatorily redeemable
preferred stock and notes payable amounts due in the near term of
approximately $1,211,000. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
respect 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
April 13, 2001
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Current Assets:
Cash and cash equivalents $ 14,630
Trade accounts receivable, net of allowance
for doubtful accounts of $39,062 275,428
Inventories 571,164
Due from officers 21,672
Other current assets 56,100
-------------
Total current assets 938,994
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $989,490 2,256,116
CO-PACKING AGREEMENT, net of accumulated amortization of $37,500 112,500
INTANGIBLE ASSET, net of accumulated amortization of $40,575 118,574
-------------
Total assets $ 3,426,184
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,062,487
Book overdraft 59,466
Accrued professional fees 99,001
Accrued vacation 21,363
Accrued commissions and billbacks 195,241
Accrued payroll and related taxes 42,957
Accrued other 155,273
Amount due for mandatorily-redeemable preferred stock 150,000
Notes payable 1,061,437
Capital lease obligation 30,375
-------------
Total current liabilities 2,877,600
Non-current Liabilities:
Notes payable--net of current portion 177,717
Capital lease obligation--net of current portion 16,421
Other 41,380
-------------
Total non-current liabilities 235,518
-------------
Total liabilities 3,113,118
-------------
Stockholders' Equity:
Preferred stock, $1 par value:
Authorized - 5,000,000 shares
No shares outstanding -
Common Stock, no par value:
Authorized - 20,000,000 shares
Issued and outstanding - 7,185,966 shares 9,612,446
Common stock warrants and options:
Issued and outstanding - 5,595,558 shares 3,669,035
Accumulated deficit (12,968,415)
-------------
Total stockholders' equity 313,066
-------------
Total liabilities and stockholders' equity $ 3,426,184
=============
The accompanying notes are an integral part of this financial statement.
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------- -------------
NET SALES $ 3,681,026 $ 3,050,383
COST OF SALES 2,983,160 2,464,403
------------- -------------
Gross margin 697,866 585,980
EXPENSES:
General and administrative 1,589,275 1,436,214
Selling and marketing 900,285 661,289
------------- -------------
2,489,560 2,097,503
------------- -------------
(1,791,694) (1,511,523)
------------- -------------
OTHER INCOME (EXPENSE):
Impairment charge (1,025,935) -
Interest income - 10,515
Interest expense (120,029) (80,935)
------------- -------------
NET LOSS (2,937,658) (1,581,943)
Preferred Stock Dividend (136,698) (416,379)
------------- -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (3,074,356) $ (1,998,322)
------------- -------------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.45) $ (0.45)
------------- -------------
The accompanying notes are an integral part of these financial statements.
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
COMMON STOCK
WARRANTS
COMMON STOCK AND OPTIONS
---------------------- --------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
BALANCE, January 1, 1999 4,024,563 $6,693,062 3,757,959 $ 2,841,329
Issuance of common stock and warrants in
private offering
September 28, 1999 850,000 440,646 1,416,666 389,354
December 6, 1999 100,000 53,097 166,667 46,903
December 10, 1999 100,000 53,098 166,666 46,902
Issuance of common stock for purchase of Net
Assets of Ali'i Water Bottling, Inc.
June 30, 1999 263,040 312,359 - -
Issuance of common stock for Co-Packing
Agreement
September 13, 1999 100,000 43,750 - 106,250
Issuance of common stock and common stock options
to professional advisor for services rendered
April 1, 1999 - - 12,500 16,226
July 1, 1999 - - 12,500 16,226
July 14, 1999 2,695 2,695 - -
September 28, 1999 30,000 15,929 50,000 14,071
October 1, 1999 - - 12,500 3,000
Issuance of common stock options to non-
employee directors - - 9,000 8,395
Issuance of common stock options to marketing
consultant
May 20, 1999 - - 10,000 4,370
May 24, 1999 - - 30,000 13,110
Exercise of common stock options by financial
public relations advisor
January 11, 1999 50,000 125,000 (50,000) -
Issuance of preferred stock and common stock
warrants to institutional investor,
net of offering costs
March 3, 1999 - - 100,000 97,422
Issuance of common stock and common stock warrants
to broker for services rendered
March 3, 1999 5,000 18,750 15,000 41,670
Issuance of preferred stock to institutional
investor
August 10, 1999 - 312,500 - -
Repricing of warrants associated with the
outstanding preferred stock
August 10, 1999 - - - 27,003
September 23, 1999 - - - 19,069
November 5, 1999 - - - 14,229
Conversion of preferred stock to common stock
August 24, 1999 11,429 6,000 - -
Redemption of preferred stock
September 23, 1999 - - - -
October 1, 1999 - - - -
October 8, 1999 - - - -
November 5, 1999 - - - -
Accrued dividends to preferred Shareholder - - - -
Net loss - - - -
---------- ----------- ---------- -----------
BALANCE at December 31, 1999 5,536,727 $8,076,886 5,709,458 $3,705,529
---------- ----------- ---------- -----------
Issuance of common stock bonus to executive
officer
December 15, 2000 350,000 84,370 - -
Issuance of common stock and common stock
warrants in private offering
February 1, 2000 50,000 26,548 83,333 23,452
February 20, 2000 50,000 26,548 83,333 23,452
Exercise of common stock warrants by private
investor
March 3, 2000 50,000 50,000 (50,000) -
May 25, 2000 35,000 35,000 (35,000) -
June 1, 2000 15,000 15,000 (15,000) -
June 16, 2000 14,600 14,600 (14,600) -
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
COMMON STOCK
WARRANTS
COMMON STOCK AND OPTIONS
---------------------- --------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
June 16, 2000 35,000 35,000 (35,000) -
June 29, 2000 15,000 15,000 (15,000) -
July 21, 2000 26,000 26,000 (26,000) -
August 25, 2000 40,000 40,000 (40,000) -
Issuance of common stock to non-employee directors
February 16, 2000 - - 900 486
May 11, 2000 - - 900 486
June 13, 2000 - - 600 -
August 8, 2000 - - 900 -
September 28, 2000 - - 900 -
Redemption of preferred stock
February 7, 2000 - - - -
March 6, 2000 - - - -
May 1, 2000 - - - -
May 26, 2000 - - - -
June 29, 2000 - - - -
October 2, 2000 - - - -
October 23, 2000 - - - -
Issuance of common stock and common stock warrants
to professional advisor
February 1, 2000 10,000 5,310 16,667 4,690
February 15, 2000 10,000 5,310 16,667 4,690
March 17, 2000 50,000 50,000 - -
Issuance of common stock to professional advisor
March 31, 2000 - - 12,500 12,500
Issuance of common stock in merger with Aloha
Water Co.
March 17, 2000 750,000 937,500 - -
Return of common stock in conjunction with
rescission of agreement to merge with Aloha
Water Co.
December 27, 2000 (750,000) - - -
Exercise of stock option by institutional
investor
March 3, 2000 100,000 1,000 (100,000) -
Issuance of common stock to marketing consultant
March 31, 2000 20,000 20,000 - -
April 12, 2000 3,000 3,000 - -
June 30, 2000 2,250 2,250 - -
September 30, 2000 10,000 10,000 - -
September 30, 2000 6,750 6,750 - -
December 31, 2000 4,500 4,500 - -
Issuance of common stock pursuant to
Co-Packing Agreement
May 5, 2000 3,490 3,490 - -
June 30, 2000 2,618 2,618 - -
July 31, 2000 2,643 512 - -
September 13, 2000 700,000 106,250 - (106,250)
September 30, 2000 4,483 869 - -
December 31, 2000 1,905 310 - -
Issuance of common stock for U.S. Mainland
office rental
June 5, 2000 1,000 406 - -
June 30, 2000 1,000 438 - -
July 3, 2000 1,000 406 - -
September 1, 2000 1,000 188 - -
October 31, 2000 1,000 200 - -
December 31, 2000 2,000 562 - -
Issuance of common stock to key management
executives as incentive compensation
August 31, 2000 30,000 5,625 - -
Accrued dividend to Series B preferred holder
December 31, 2000 - - - -
Adjustment of previously accrued dividend to
Series A preferred holder - - - -
Net loss - - - -
---------- ---------- ---------- -----------
BALANCE at December 31, 2000 7,185,966 $9,612,446 5,595,558 $3,669,035
---------- ---------- ---------- -----------
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
PREFERRED STOCK TOTAL
------------------------ STOCKHOLDERS'
NUMBER OF ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
----------- ----------- ------------- -------------
BALANCE, January 1, 1999 - $ - $ (7,895,737) $ 1,638,654
Issuance of common stock and warrants in
private offering
September 28, 1999 - - - 830,000
December 6, 1999 - - - 100,000
December 10, 1999 - - - 100,000
Issuance of common stock for purchase of Net
Assets of Ali'i Water Bottling, Inc.
June 30, 1999 - - - 312,359
Issuance of common stock for Co-Packing
Agreement
September 13, 1999 - - - 150,000
Issuance of common stock and common stock options
to professional advisor for services rendered
April 1, 1999 - - - 16,226
July 1, 1999 - - - 16,226
July 14, 1999 - - - 2,695
September 28, 1999 - - - 30,000
October 1, 1999 - - - 3,000
Issuance of common stock options to non-
employee directors - - - 8,395
Issuance of common stock options to marketing
consultant
May 20, 1999 - - - 4,370
May 24, 1999 - - - 13,110
Exercise of common stock options by financial
public relations advisor
January 11, 1999 - - - 125,000
Issuance of preferred stock and common stock
warrants to institutional investor,
net of offering costs
March 3, 1999 750 488,397 - 585,819
Issuance of common stock and common stock warrants
to broker for services rendered
March 3, 1999 - - - 60,420
Issuance of preferred stock to institutional
investor
August 10, 1999 500 500,000 (312,500) 500,000
Repricing of warrants associated with the
outstanding preferred stock
August 10, 1999 - (20,252) - 6,751
September 23, 1999 - (14,302) - 4,767
November 5, 1999 - (10,672) - 3,557
Conversion of preferred stock to common stock
August 24, 1999 (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 319 $ 205,755 $(9,894,059) $ 2,094,111
------ ----------- ------------ ------------
Issuance of common stock bonus to executive
officer
December 15, 2000 - - - 84,370
Issuance of common stock and common stock
warrants in private offering
February 1, 2000 - - - 50,000
February 20, 2000 - - 50,000
Exercise of common stock warrants by private
investor
March 3, 2000 - - - 50,000
May 25, 2000 - - - 35,000
June 1, 2000 - - - 15,000
June 16, 2000 - - - 14,600
June 16, 2000 - - - 35,000
June 29, 2000 - - - 15,000
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
PREFERRED STOCK TOTAL
------------------------ STOCKHOLDERS'
NUMBER OF ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
----------- ----------- ------------- -------------
July 21, 2000 - - - 26,000
August 25, 2000 - - - 40,000
Issuance of common stock to non-employee directors
February 16, 2000 - - - 486
May 11, 2000 - - - 486
June 13, 2000 - - - -
August 8, 2000 - - - -
September 28, 2000 - - - -
Redemption of preferred stock
February 7, 2000 (50) (32,250) (17,750) (50,000)
March 6, 2000 (50) (32,250) (17,750) (50,000)
May 1, 2000 (35) (22,575) (12,425) (35,000)
May 26, 2000 (15) (9,675) (5,325) (15,000)
June 29, 2000 (29) (18,705) (10,295) (29,000)
October 2, 2000 (40) (25,800) (14,200) (40,000)
October 23, 2000 (100) (64,500) (35,500) (100,000)
Issuance of common stock and common stock warrants
to professional advisor
February 1, 2000 - - - 10,000
February 15, 2000 - - - 10,000
March 17, 2000 - - - 50,000
Issuance of common stock to professional advisor
March 31, 2000 - - - 12,500
Issuance of common stock in merger with Aloha
Water Co.
March 17, 2000 - - - 937,500
Return of common stock in conjunction with
rescission of agreement to merge with Aloha
Water Co.
December 27, 2000 - - - -
Exercise of stock option by institutional
investor
March 3, 2000 - - - 1,000
Issuance of common stock to marketing consultant
March 31, 2000 - - - 20,000
April 12, 2000 - - - 3,000
June 30, 2000 - - - 2,250
September 30, 2000 - - - 10,000
September 30, 2000 - - - 6,750
December 31, 2000 - - - 4,500
Issuance of common stock pursuant to
Co-Packing Agreement
May 5, 2000 - - - 3,490
June 30, 2000 - - - 2,618
July 31, 2000 - - - 512
September 13, 2000 - - - -
September 30, 2000 - - - 869
December 31, 2000 - - - 310
Issuance of common stock for U.S. Mainland
office rental
June 5, 2000 - - - 406
June 30, 2000 - - - 438
July 3, 2000 - - - 406
September 1, 2000 - - - 188
October 31, 2000 - - - 200
December 31, 2000 - - - 562
Issuance of common stock to key management
executives as incentive compensation
August 31, 2000 - - - 5,625
Accrued dividend to Series B preferred holder
December 31, 2000 - - (50,000) (50,000)
Adjustment of previously accrued dividend to
Series A preferred holder - - 26,547 26,547
Net loss - - (2,937,658) (2,937,658)
------ ----------- ------------- ------------
BALANCE at December 31, 2000 - - $(12,968,415) $ 313,066
------ ----------- ------------- ------------
The accompanying notes are an integral part of these financial statements.
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,937,658) $(1,581,943)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 384,880 288,759
Amortization of debt discount 35,574 59,398
Impairment charge 1,025,935 -
Net income from subsidiary (18,435) -
Issuance of common stock to Co-Packer,
landlord and consultants 56,499 -
Issuance of common stock bonuses
to executive officer 84,370 -
Issuance of common stock compensation
to executives 5,625 -
Issuance of common stock options to
consultants and distributors 12,500 85,627
Issuance of common stock options to
non-employee directors 972 8,395
Warrants granted for preferred
standstill agreement - 15,075
Loss on sale of equipment - 3,282
Net decrease (increase) in current assets 304,751 (520,343)
Increase in other noncurrent liabilities - 41,380
Net increase in current liabilities 436,474 484,915
----------- -----------
Net cash used in operating activities (608,513) (1,115,455)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (100,877) (328,902)
Acquisition of intangible asset - (159,149)
Proceeds from sale of equipment - 1,080
----------- -----------
Net cash used in investing activities (100,877) (486,971)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 796,903 -
Repayments of principal on notes payable (62,669) (131,956)
Repayment of principal on capital leases (31,802) (69,408)
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 100,000 1,030,000
Redemption of preferred stock (319,000) (808,750)
Proceeds from exercise of common stock
warrants and options 231,600 125,000
----------- -----------
Net cash provided by financing activities 715,032 1,291,125
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 5,642 $ (311,301)
CASH AND CASH EQUIVALENTS, beginning of period 8,988 320,289
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 14,630 $ 8,988
----------- -----------
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(CONTINUED)
2000 1999
----------- -----------
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 $ 17,243 $ 82,176
----------- -----------
CAPITAL ADDITION - ACQUIRED WITH NOTE PAYABLE $ - $ 22,195
----------- -----------
ACQUISITION AND RESCISSION OF NET OPERATING ASSETS
OF ALOHA WATER CO.:
Issuance of common stock and common stock warrants
to professional advisor $ 70,000 $ -
Issuance of common stock in merger 937,500 -
Issuance of note payable 500,000 -
Cancellation of note payable (500,000) -
----------- -----------
$ 1,007,500 $ -
----------- -----------
The accompanying notes are an integral part of these financial statements.
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
(a) Organization and Going Concern
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. (see Note 3), which extended 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. This business is concentrated in the
Kailua-Kona area of the Big Island of Hawaii.
In January 2000, the Company introduced a line of herbal beverages under the
"East Meets West XEN(TM)" name. The beverages are manufactured for the
Company pursuant to a co-packing agreement with a Los Angeles area bottler
(see Note 10d to the financial statements). Sales efforts in 2000 were
concentrated in Southern California, Hawaii and the Vancouver, Canada area.
In March 2000, the Company acquired Aloha Water Company Inc., a distributor of
purified water in the home and office market in the Honolulu area. This
acquisition was subsequently rescinded in December, 2000 (see Note 4).
In November 2000, the Company agreed to be acquired by AMCON Distributing
Company, an Omaha, Nebraska based distributor, by means of a merger of the
Company into a wholly owned subsidiary of AMCON (see Note 5).
Since the execution of the merger agreement, the Company has been
substantially dependent upon AMCON for its financing requirements. If the
merger agreement were terminated for any reason, the Company would likely not
be able to continue as a going concern.
As shown in the accompanying financial statements, the Company has incurred
significant losses and negative cash flows from operations 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. Additionally, the Company has past due accounts
payable of approximately $944,000 and mandatorily redeemable preferred stock
and notes payable amounts due in near term of approximately $1,211,000. 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.
(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, 2000, inventories were comprised of the following:
Raw materials $315,873
Finished goods 255,291
--------
$571,164
========
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 construct major leasehold improvements.
Maintenance and repairs are expensed as incurred. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives:
Leasehold improvements The shorter of the
useful life or the
lease term
Machinery, equipment and assets under
capital lease 7-15 years
Property and equipment is summarized as follows:
Machinery and equipment $2,610,658
Leasehold improvements 529,960
Assets under capital lease 104,988
----------
3,245,606
Less--Accumulated depreciation and amortization (989,490)
----------
$2,256,116
==========
(f) Revenue Recognition
The Company recognizes revenue on the accrual method of accounting when title
transfers: upon shipment, for bottled water products and other beverages, and
upon delivery for home and office delivery products. The Company 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. The Company also estimates the amount of billbacks from certain
distributors which represents price adjustments for quantity or other
discounts to distributors' customers.
(g) Advertising
The Company charges the cost of advertising to expense as incurred. The
Company incurred approximately $85,000 and $113,000 of advertising expense
during the years ended December 31, 2000 and 1999, respectively.
(h) Stock-Based Compensation
The Company accounts for transactions in which its equity instruments are
issued 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 has elected to account for the issuance of equity
instruments to employees, using this intrinsic value method under APB Opinion
No. 25. (See Note 8).
(i) Basic and Diluted Loss Per Share
Basic and diluted loss per share is calculated using net loss adjusted for
dividends to preferred shareholders. The Company's basic and diluted loss per
share are the same for both 2000 and 1999 in that any conversion of stock
options and warrants would have been anti-dilutive. Basic and diluted loss
per share is based on the weighted average number of common shares issued and
outstanding during the period of 6,844,744 and 4,476,554 for 2000 and 1999,
respectively.
(j) Fair Value of Financial Instruments
The carrying amounts for trade receivables and payables are considered to be
their fair values. The fair value of the Company's notes payable at December
31, 2000 may be significantly different from their carrying value as a result
of the matters discussed in Note 1a. above and as a result of fluctuations in
market interest rates.
(k) Income Taxes
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 bases of assets and liabilities. A reserve is provided to
reduce deferred tax assets to estimated realizable value (See Note 9).
(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.
(m) New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 2000 as amended by SFAS No. 137 and SFAS No. 138.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments. The statement requires that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value, and that changes in the derivative's fair value be recognized
currently in the earnings unless specific hedge accounting criteria are met.
The Company did not have any derivative instruments as of December 31, 2000
and believes that the adoption of SFAS No. 133 will not have a material impact
on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, disclosure and
presentation of revenue in financial statements. SAB 101, as amended by SAB
101A and SAB 101B, is required to be implemented no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The
adoption of SAB 101 did not have a material impact on the Company's financial
position or the results of operations.
In March 2000, the FASB issued interpretation No. 44, "Accounting For Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion
No. 25." The Interpretation clarifies the application of APB Opinion No. 25
in certain situations, as defined. The Interpretation is effective July 1,
2000, but covers certain events occurring during the period after December 15,
1998, but before the effective date. To the extent that events covered by the
effective date, the effects of applying this Interpretation would be
recognized on a prospective basis from the effective date. Accordingly, upon
initial application of the final Interpretation, (a) no adjustments would be
made to the financial statements for periods before the effective date and (b)
no expense would be recognized for any additional compensation cost measured
that is attributable to periods before the effective date. The adoption of
this new Interpretation had no impact on the Company's financial statements,
based on its current structure and operations.
(n) 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. 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 on 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.
(o) Reclassifications
Certain 1999 amounts have been reclassified to conform to their 2000
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, 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. All of the remaining options have expired
unexercised.
(b) 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 an institutional investor. The Company also issued to this investor
for no additional consideration warrants to purchase 100,000 shares of common
stock at an original exercise price of $3.625 per share.
Each share of Series A preferred stock had a liquidation preference of $1,000,
and was 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 was 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 as of each conversion date (the "beneficial conversion feature").
In August 1999, the investor converted six shares of Series A preferred into
an aggregate of 11,429 shares of common stock. In September 1999, the Company
entered into a standstill agreement with the investor, pursuant to which the
investor agreed not to convert any additional shares of Series A preferred and
granted the Company an option to redeem the outstanding shares. This
standstill agreement was extended continuously until November 2, 2000.
Pursuant to this standstill arrangement, the Company redeemed an aggregate of
(i) 925 shares of Series A preferred stock for an aggregate of $808,750 in
1999, (ii) 100 shares for an aggregate of $100,000 during the first quarter of
2000, (iii) 79 shares for an aggregate of $79,000 during the second quarter of
2000, and (iv) the remaining 140 shares for an aggregate of $140,000 in
October 2000. As a result of these redemptions, there were no shares of
Series A preferred outstanding at December 31, 2000.
As partial consideration for the extension of the standstill agreement, the
Company reduced the exercise price of the warrants held by the investor in
several increments to $.01 per share. The investor exercised these warrants
in full in March 2000.
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 stock dividend of $416,379 during 1999. In 2000, the
Company redeemed the remaining Series A preferred shares and adjusted the
previously accrued preferred stock dividend to the holder, resulting in an
aggregate preferred stock dividend of $86,698 for the Series A preferred
shares.
(c) Series B Convertible Mandatorily Redeemable 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 stock is mandatorily redeemable, at the
election of the holder, at any time within 90 days following the first
anniversary date of the date of issuance in the event that the market price
(as defined) of the 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
($150,000 in the aggregate).
The market price of the common stock was less than $1.50 on the first
anniversary date, and the investor has delivered to the Company a notice of
redemption with respect to all of the outstanding Series B preferred stock.
The Company recorded the $50,000 redemption premium as a preferred stock
dividend and classified the original $100,000 of mandatorily redeemable
preferred stock as currently payable as of December 31, 2000 in the
accompanying Financial Statements.
(d) 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 unaffiliated investors exercised (i) 50,000 $1.00
warrants for an aggregate of $50,000 in the first quarter of 2000, (ii)
114,600 $1.00 warrants for an aggregate of $114,600 in the second quarter of
2000, and (iii) 66,000 $1.00 warrants for an aggregate of $66,000 in the third
quarter of 2000.
Approximately $530,000 of the net proceeds of the initial 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.
(e) Stock Bonus
In December 2000, the Company awarded its Chief Executive Officer bonus
compensation for 2000, payable in 350,000 shares of common stock. In
connection with this award, the $100,000 bonus awarded the Company's Chief
Executive Officer for 1999 (issued in January 2000) was rescinded. This
earlier award had been granted subject to a commitment by the Chief Executive
Officer to purchase an additional 100,000 Units at $1.00 per Unit. See Note
2b. The purchase of these Units was also rescinded in December 2000. The
effect of these transactions was in substance a repricing of the January 2000
stock award in December 2000. The compensation expense related to these
transactions was $84,370 in accordance with FIN 44. The withholding tax
related to the December 2000 award was advanced to the Chief Executive Officer
and included in the amount due from officers.
3. 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 263,040 shares of common stock of the
Company. 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. No significant goodwill resulted
from this acquisition. Acquisition costs were not material. The shares issued
are "restricted securities" as defined in Rule 144 under the Securities Act of
1933, and may not be sold except in compliance with such Rule or other
exemption from registration under the Securities Act. Had the acquisition
occurred at January 1, 1999, the unaudited and pro forma net sales, net loss,
diluted net loss per share and diluted weighted average common shares
outstanding for 1999 would be as follows:
Twelve Months
Ended Dec 31,
---------------
1999
-------------------
Net sales $ 3,303,984
Net loss $(1,913,388)
Diluted net loss per share $ (0.43)
Diluted weighted average common
shares outstanding 4,476,554
4. ACQUISITION OF ALOHA WATER COMPANY, INC. AND IMPAIRMENT CHARGE
On March 17, 2000, the Company acquired Aloha Water Company, Inc., ("Aloha"),
a distributor of purified water to the home and office delivery market in the
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 (the "Aloha note") to the shareholders of Aloha. Interest
on the note was payable monthly at the annual rate of 10%. The entire
principal amount was due on April 1, 2000. The Aloha note was secured by a
first priority security interest on all of the capital stock of Aloha.
In August, 2000 the holders of the Aloha note declared a default for failure
to make certain interest payments, and foreclosed on their collateral, which
was all of the stock of Aloha. As a result, the Company has written off its
investment in Aloha, the related goodwill and the Aloha note. This write-off
is reflected as a total impairment charge in 2000 of $1,025,935, which
represented the Company's entire investment in Aloha.
In December 2000, the parties agreed to rescind the acquisition, as a result
of which Aloha returned the Aloha note and the 750,000 shares of the Company's
common stock. The fair value of the Company's shares returned was not
material.
5. AMCON MERGER
In November 2000, the Company entered into a merger agreement with AMCON
Distributing Company ("AMCON"), pursuant to which the Company has agreed to
merge with and into, and thereby become, a wholly-owned subsidiary of AMCON.
The merger consideration values the entire common equity interest in the
Company at $2,865,348, payable in common stock of AMCON, which will be priced
at not less than $6.00 or more than $8.00 per share, based on a 20 trading day
measuring period ending three trading days before the date of the Company's
shareholder vote on the merger. As a result, AMCON will issue an aggregate of
not less than 358,168 or more than 477,558 shares. Holders of outstanding
options and warrants of the Company would receive comparable options and
warrants of AMCON with the exercise price and number of shares covered
adjusted based upon the exchange ratio.
The merger is expected to qualify as a tax-free reorganization. It is subject
to various conditions, including the effectiveness of a registration statement
covering the shares to be issued in the merger, the listing of such shares on
the American Stock Exchange, and the approval of the Company's shareholders.
All of the Company's officers and directors and any of their affiliated
entities that own shares of the Company's common stock have agreed to vote
their shares in favor of the merger.
If the Merger Agreement is terminated for any reason, it is likely that the
Company will not be able to continue as a going concern.
6. NOTES PAYABLE
In anticipation of acquiring the Company, AMCON has provided certain debt
financing to the Company for working capital and other general corporate
purposes. AMCON advanced $350,000 in September 2000, and an additional
$400,000 in October 2000. These loans are evidenced by secured promissory
notes (the "AMCON notes") bearing interest at a rate of 10% per annum, payable
quarterly. The AMCON notes are convertible at the election of AMCON, under
certain circumstances, into Series C convertible preferred stock bearing
dividends, payable quarterly, of 10% per annum and giving effective control of
the Board of Directors to AMCON. The AMCON notes are secured by a lien on all
of the Company's assets. The due date of the AMCON notes, originally February
28, 2001, has been extended to May 31, 2001.
In September 1997, the Company acquired certain bottle making equipment used
in its bottling operations. The consideration for the equipment was an
aggregate of $1.2 million, a portion of which was paid through the issuance of
a promissory note in the original principal amount of $825,000, payable in
installments, as defined. The Company discounted this
equipment note payable using an estimated weighted average cost of capital of
12%, and amortized the resulting discount to interest expense using the
effective interest method over the term of the loan. In October 2000, the
Company renegotiated the payment terms for this promissory note.
In September 1999, the Company acquired a prefabricated warehouse, which it
assembled and installed on its property in Kea'au. The warehouse was
purchased for $24,995 with a down payment of $2,000 and a 5 year note, with
monthly payments aggregating $22,995, including interest.
The following summarizes the Company's notes payable as of December 31, 2000:
Equipment note payable $ 466,457
Less: Unamortized discount (19,108)
-----------
Net equipment note payable 447,349
First AMCON note 350,000
Second AMCON note 400,000
Note payable to service provider 22,135
Vehicle installment note payable 3,490
Warehouse note payable 16,180
-----------
Subtotal - notes payable 1,239,154
Less: Current portion (1,061,437)
-----------
Non-current portion $ 177,717
===========
Maturities of notes payable, net of discount at December 31, 2000 are as
follows:
2001 $1,061,437
2002 169,025
2003, and thereafter 8,692
----------
$1,239,154
==========
7. CONSULTING ARRANGEMENTS
During 2000 and 1999, the Company hired various consultants to perform sales,
marketing and other functions. The Company recognized consulting expenses of
approximately $111,000 and $88,000 for 2000 and 1999, respectively.
8. STOCK OPTIONS
The Board of Directors has 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 12,500 shares of common stock options in 2000, and
136,500 shares of common stock options in 1999. These options are exercisable
for five years at exercise prices ranging from $1.00 to $4.00 per share.
Certain of these options were valued based upon the value of services provided
and others were valued using the Black-Scholes option pricing model, at
$12,500 in 2000, and $75,398 in 1999, which amounts were charged to expense as
incurred. These options vested upon grant.
Using the Black-Scholes option valuation model (and the following
assumptions), the estimated fair values of options granted ranged from $.13 to
$2.21 in 1999. 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:
1999
--------------
Expected volatility 60.00%
Expected dividend yield 0.00%
Expected term 5 years
Risk-free interest rate 5.63% to 5.78%
In addition, as further described below, at December 31, 2000, outstanding
options to purchase an aggregate of 438,367 shares of common stock were held
by employees and former employees of the Company. These options 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
and former employees during the years ended December 31, 2000 and 1999:
Weighted-Average
Shares Exercise Price
--------- ----------------
Balance at January 1, 1999 487,000 $ 4.00
Granted 70,000 $ 4.00
Forfeited (109,833) $ 4.00
--------- --------
Balance at December 31, 1999 447,167 $ 4.00
Granted -
Forfeited (8,800) $ 4.00
---------
Balance at December 31, 2000 438,367 $ 2.25
---------
In February 2000, the Company reduced the exercise price of all stock options
held by the current employees from $4.00 to $2.00 per share. This had no
impact on compensation expense during 2000.
At December 31, 2000 and 1999, respectively, the Company had 337,825 and
265,925 vested employee options outstanding, exercisable at a weighted-average
exercise price of $2.25 and $4.00, respectively.
The Company accounts for stock options granted to employees under APB No. 25,
under which expense is recognized if the exercise price of options granted is
less than the market price on the date of grant. If compensation expense for
stock options granted to employees had been accounted for under SFAS. 123, the
Company's net loss per share for 2000 and 1999 would have been $(.47) and
$(.51), respectively.
9. INCOME TAXES
Certain items of expense are recognized in different periods for income tax
purposes than for financial reporting purposes. As of December 31, 2000, the
Company had approximately $7.5 million of net operating loss (NOL)
carryforwards available to reduce future taxable income. These NOL
carryforwards expire on various dates beginning in 2012 through 2021. The
deferred tax asset as of December 31, 2000 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 $2.3 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.
The Company paid no income taxes and had no net deferred or current tax
provision/benefit for the years ended December 31, 2000 and 1999.
10. COMMITMENTS AND CONTINGENCIES
(a) Capital Lease Obligations
The Company leases machinery and equipment under capital leases which expire
on various dates through August 2005.
As of December 31, 2000, future minimum lease payments were as follows:
2001 36,174
2002 8,801
2003 5,596
2004 5,596
2005 2,798
---------
Total future minimum payments 58,965
Less - Amount representing interest (12,169)
---------
Total Capital lease obligations 46,796
Less - Current portion (30,375)
---------
Noncurrent portion $ 16,421
=========
The capital leases bear interest ranging from 12.5% to 27%, per year.
(b) Operating Lease Obligations
(i) Plant Lease
The Company leases its bottling facility and surrounding property, including
the water source and pumping equipment from an affiliate, 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 2% 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% 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 2000, the Company incurred approximately $4,000 for leasehold
improvements to this property.
(ii) Warehouse Lease
On February 1999, the Company entered into a one-year lease for warehouse
space located near its bottling plant with lease payments of $2,560 per month.
In January 2000, this lease was terminated and the warehouse space was
replaced with a prefabricated warehouse erected on the Company's leased
bottling facility property.
(iii) 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 45 month lease of office
and warehouse space in Pearl City, containing approximately 13,500 square feet
of warehouse and 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 December 2000, the Company relocated its accounting and administrative
operations to its bottling plant in Keaau on the Big Island. In January 2001,
the Company entered into an agreement to sublease 11,770 square feet of its
Pearl City office space. The sublease is for a 29 month period, ending on May
31, 2003, and the monthly sublease income is $7,062.
On July 1, 1999 the Company entered in to a month-to-month rental agreement
for 5,043 square feet of manufacturing and office space for its Ali'i home and
office delivery business in Kailua-Kona, Hawaii. The lease is terminable on a
14 day advance notice. Monthly payments are $2,747.
The Company incurred approximately $203,000 and $184,000 in lease expense
under all existing facility lease agreements in 2000 and 1999, respectively.
The future minimum lease payments for the plant, warehouse and office leases
as of December 31, 2000 were as follow:
2001 $ 167,428
2002 172,428
2003 110,828
2004 66,828
2005 66,828
Thereafter 2,522,757
----------
$3,107,097
==========
The future sublease income for the Pearl City office and warehouse space are
as follow:
2001 $ 84,744
2002 84,744
2003 35,310
-----------
$ 204,798
===========
(c) Sponsorship and Sales Agreement
In June 1999, the Company entered into a five year sponsorship and beverage
sales agreement with the USS Missouri Memorial Association, Inc., a nonprofit
corporation which operates the Battleship Missouri Memorial (the "Missouri")
as a visitor attraction at Pearl Harbor, Hawaii. Under the terms of this
agreement, the Company became an official sponsor of the Missouri, and agreed
to supply bottled water and vending machines to the Missouri, in exchange for
a license to certain of Missouri's trademarks for use in various marketing and
promotional activities, and a lease of space for the operation of vending
machines at the Missouri. The aggregate sponsorship fee is $100,000, payable
$20,000 annually in monthly installments of $1,667. Additionally, the Company
is obligated to provide cash and in-kind support for events promoting the
Missouri in an aggregate amount of $432,500 (none of which had been provided
as of December 31, 2000). In July 2001, the Company has the option to re-
negotiate or terminate the agreement if the prior 12 month sales of the
Company's bottled water to the Missouri are less than $144,000. In February
2001, based on sales to date, the Company advised the Missouri that it intends
to exercise its right to re-negotiate or terminate this agreement. As of
December 31, 2000, the Company has accrued approximately $12,000 for unpaid
sponsorship fees. In the opinion of management, the outcome of the re-
negotiation or termination will not have a material adverse effect on the
financial statements.
(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 herbal beverages. 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 was
recorded as an asset on the Company's accounting records in the amount of
$150,000. Initially, $43,750 was allocated to the common stock account (based
on the aggregate market value of the 100,000 common shares issued) and the
balance ($106,250) was allocated to common stock options. The agreement
provided that in the event the market price (as defined) of the Company's
common stock on the first anniversary of the date of issuance was less than
$1.50 per share, the Company would issue, for no additional consideration,
sufficient additional shares of common stock to bring the then market value of
all shares issued (including the initial 100,000 shares) up to $150,000.
Pursuant to this provision, on September 13, 2000, the Company issued an
additional 700,000 shares of common stock to the principals of the Bottler.
Upon issuance of these additional 700,000 shares, the $106,250 initially
allocated to common stock options was reclassified to the common stock
account.
11. 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 five year period.
12. SIGNIFICANT CUSTOMER
For the years ended December 31, 2000 and 1999 approximately 49% and 47%,
respectively, of the Company's sales were made through one Hawaii distributor.
No other single customer accounted for greater than 10% of sales.
13. SEGMENT INFORMATION
The Company has three segments: PET, home and office delivery, and XEN. The
Company's reportable segments are business units defined by product line, the
results of which are reported directly to the Company's chief operating
decision maker. The accounting policies of the segments are the same as those
described in the "Summary of Significant Accounting Policies". The Company
manages cash flows and assets on a consolidated basis, and not by segment, and
does not allocate or report assets and capital expenditures by segment.
Information for the year ended December 31, 1999 has been recast, as required
by SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information."
The following tables summarize the operating results by segment for the years
ended December 31, 1999 and 2000:
YEAR ENDED DECEMBER 31, 1999:
Home and Company
PET Office XEN Corporate Total
---------- --------- --------- ----------- -----------
Revenue from
external customers $2,902,949 $ 147,434 $ - $ - $ 3,050,383
Depreciation and
amortization expense 167,413 26,025 20,698 74,623 288,759
Total operating costs 2,899,211 236,724 20,698 1,405,273 4,561,906
Operating income (loss) 3,738 (89,290) (20,698) (1,405,273) (1,511,523)
Net interest expense - 10,630 - 59,790 70,420
Net income (loss) $ 3,738 $ (99,920) $ (20,698) $(1,465,063) $(1,581,943)
YEAR ENDED DECEMBER 31, 2000:
Home and Company
PET Office XEN Corporate Total
---------- --------- --------- ----------- -----------
Revenue from
external customers $2,794,919 $ 598,001 $ 288,106 $ - $ 3,681,026
Depreciation and
amortization expense 167,288 82,062 60,907 74,623 384,880
Total operating costs 2,729,618 777,166 572,828 1,393,108 5,472,720
Operating income (loss) 65,301 (179,165) (284,722) (1,393,108) (1,791,694)
Net interest expense - 8,411 - 111,618 120,029
Impairment charge - 1,025,935 - - 1,025,935
Net income (loss) $ 65,301 $(1,213,511) $(284,722) $(1,504,726) $(2,937,658)
14. 401(k) PLAN
In 1999, the Company established a defined contribution retirement plan
(the Plan) governed under Section 401(k) of the Internal Revenue Code.
In 2000, prior to implementation of the Plan, the Company determined
that based on the Company's current financial condition, it would not
be prudent to proceed with the Plan. In December 2000 the Plan was
terminated.
15. SUBSEQUENT EVENTS
(a) Issuance of Stock to AMCON
In February 2001, the Company issued 750,000 shares of common stock to
AMCON at $.40 per share for an aggregate equity investment of $300,000.
These shares will participate in the Merger consideration (see Note 5).
AMCON now owns approximately 9.5% of the Company's common stock.
(b) Equipment Lease
The Company has ordered new blow molding and related equipment for
installation at the Company's bottling facility. The Company expects
this equipment, which will be fully operational by August 2001, to
significantly enhance the efficiency of its bottling operations. The
equipment was acquired by AMCON in its own name. Upon installation,
the Company expects to lease this equipment from AMCON, on terms to be
agreed upon. This lease is expected to be accounted for as an
operating lease.
16. 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.
1999 Quarter Ended*
-----------------------------------------------------------------
September 30
March 31 June 30 (As Restated) December 31
-------- ------- ------------- -----------
(Unaudited)
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 Applicable
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
----------- ----------- ----------- -----------
2000 Quarter Ended*
-----------------------------------------------------------------
March 31
(As Restated) June 30 September 30 December 31
------------ ----------- ------------- -----------
(Unaudited)
Net Sales $ 1,024,692 $ 1,173,421 $ 944,999 $ 537,914
Cost of Sales 799,982 955,964 661,677 565,537
----------- ----------- ----------- -----------
Gross Margin 224,710 217,457 283,322 (27,623)
Expenses
General and
Administrative (***) 434,118 408,657 281,420 465,080
Selling and Marketing 225,747 316,452 217,451 140,635
----------- ----------- ----------- -----------
659,865 725,109 498,871 605,715
Other Income (Expenses)
Impairment Charge - (903,094) (122,841) -
Interest Expense (21,010) (56,667) 24,076 (66,428)
----------- ----------- ----------- -----------
Net Loss $ (456,165) $(1,467,413) $ (314,314) (699,766)
----------- ----------- ----------- -----------
Preferred Stock Dividend (35,500) (28,045) (49,700) (23,453)
Net Loss Applicable
to Common Shareholders $ (491,665) $(1,495,458) $ (364,014) $ (723,219)
----------- ----------- ----------- -----------
Basic and Diluted
Net Loss Per Share $ (0.08) $ (0.22) $ (0.05) $ (0.09)
----------- ----------- ----------- -----------
Weighted Average
Shares Outstanding 5,883,760 6,759,582 7,041,501 7,682,761
----------- ----------- ----------- -----------
* Results of operations for interim periods are not necessarily indicative of
results to be achieved for full fiscal years.
** Restatement of Quarter Ended September 30, 1999: The preferred stock dividend
of
$312,500 represents the amortization of preferred stock discount resulting from
a beneficial conversion feature related to the Company's Series A convertible
preferred stock. The beneficial conversion feature should have been recognized
when the preferred shares were issued and the resulting discount to preferred
stock should have been amortized to the date the securities first became
convertible. The beneficial conversion feature issue was identified during the
third quarter but was not resolved until the fourth quarter. All of the shares
became convertible on September 3, 1999. As such, the results for the third
quarter were restated to give effect to the amortization of the beneficial
conversion feature discount.
*** Restatement of Quarter Ended March 31, 2000: In January 2000, the Company
granted its Chief Executive Officer a cash bonus of $100,000, subject to a
commitment by the Chief Executive Officer to purchase an additional 100,000
Units at $1 per Unit (each Unit consisting of one share of common stock of the
company and one warrant to purchase one share of the Company at a strike price
of $1). This bonus arrangement was incorrectly treated like a cash bonus and
the amount charged to expense was $100,000. During the fourth quarter of 2000,
the Company concluded that this was in substance an equity compensation
arrangement. As such, the intrinsic value of the equity compensation at the
date of grant was $40,620, thereby resulting in a restatement of general and
administrative expense of $59,380 in the quarter ended March 31, 2000.
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
HAWAIIAN NATURAL WATER COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
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
==========
The accompanying notes are an integral part of this financial statement.
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
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)
=========== ===========
The accompanying notes are an integral part of these financial statements.
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
COMMON STOCK
WARRANTS
COMMON STOCK AND OPTIONS
---------------------- --------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
BALANCE,
January 1, 1998 3,899,212 $ 6,338,728 3,170,310 $ 2,000,546
Issuance of common stock
July 31, 1998 100,000 350,000 - -
October 1, 1998 1,000 4,312 - -
Exercise of warrants
September 2, 1998 24,351 22 (24,351) -
Issuance of stock options to
consultants and distributors
January 2, 1998 - - 43,000 53,370
July 31, 1998 - - 565,000 772,913
October 7, 1998 - 4,000 14,500
Net Loss - - - -
---------- ----------- ---------- -----------
BALANCE, December 31, 1998 4,024,563 6,693,062 3,757,959 2,841,329
Issuance of common stock and warrants in
private offering
September 28, 1999 850,000 440,646 1,416,666 389,354
December 6, 1999 100,000 53,097 166,667 46,903
December 10, 1999 100,000 53,098 166,666 46,902
Issuance of common stock for purchase of Net
Assets of Alii Water Bottling, Inc.
June 30, 1999 263,040 312,359 - -
Issuance of common stock for Co-Packing
agreement
September 13, 1999 100,000 43,750 - 106,250
Issuance of common stock and common stock options
to professional advisor for services rendered
April 1, 1999 - - 12,500 16,226
July 1, 1999 - - 12,500 16,226
July 14, 1999 2,695 2,695 - -
September 28, 1999 30,000 15,929 50,000 14,071
October 1, 1999 - - 12,500 3,000
Issuance of common stock options to non-
employee directors - - 9,000 8,395
Issuance of common stock options to marketing
consultant
May 20, 1999 - - 10,000 4,370
May 24, 1999 - - 30,000 13,110
Exercise of common stock options by financial
public relations advisor
January 11, 1999 50,000 125,000 (50,000) -
Issuance of preferred stock and common stock
warrants to institutional investor,
net of offering costs
March 3, 1999 - - 100,000 97,422
Issuance of common stock and Common stock
warrants to Broker for services rendered
March 3, 1999 5,000 18,750 15,000 41,670
Issuance of preferred stock to institutional
investor
August 10, 1999 - 312,500 - -
Repricing of warrants associated with the
outstanding preferred stock
August 10, 1999 - - - 27,003
September 23, 1999 - - - 19,069
November 5, 1999 - - - 14,229
Conversion of preferred stock to common stock
August 24, 1999 11,429 6,000 - -
Redemption of preferred stock
September 23, 1999 - - - -
October 1, 1999 - - - -
October 8, 1999 - - - -
November 5, 1999 - - - -
Accrued dividends to preferred Shareholder - - - -
Net loss - - - -
---------- ----------- ---------- -----------
BALANCE at December 31, 1999 5,536,727 $8,076,886 5,709,458 $3,705,529
========== =========== ========== ===========
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(CONTINUED)
PREFERRED STOCK TOTAL
------------------------ STOCKHOLDERS'
NUMBER OF ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
----------- ----------- ----------- -------------
BALANCE, December 31, 1997 - $ - $(4,629,285) $ 3,709,989
Issuance of common stock
July 31, 1998 - - - 350,000
October 1, 1998 - - - 4,312
Exercise of warrants
September 2, 1998 - - - 22
Issuance of stock options to
consultants and distributors
January 2, 1998 - - - 53,370
July 31, 1998 - - - 772,913
October 7, 1998 - - - 14,500
Net Loss - - (3,266,452) (3,266,452)
---------- ------------ ----------- -----------
BALANCE, December 31, 1998 - - (7,895,737) 1,638,654
Issuance of common stock and warrants in
private offering
September 28, 1999 - - - 830,000
December 6, 1999 - - - 100,000
December 10, 1999 - - - 100,000
Issuance of common stock for purchase of Net
Assets of Alii Water Bottling, Inc.
June 30, 1999 - - - 312,359
Issuance of common stock for Co-Packing
agreement
September 13, 1999 - - - 150,000
Issuance of common stock and common stock options
to professional advisor for services rendered
April 1, 1999 - - - 16,226
July 1, 1999 - - - 16,226
July 14, 1999 - - - 2,695
September 28, 1999 - - - 30,000
October 1, 1999 - - - 3,000
Issuance of common stock options to non-
employee directors - - - 8,395
Issuance of common stock options to marketing
consultant
May 20, 1999 - - - 4,370
May 24, 1999 - - - 13,110
Exercise of common stock options by financial
public relations advisor
January 11, 1999 - - - 125,000
Issuance of preferred stock and common stock
warrants to institutional investor,
net of offering costs
March 3, 1999 750 488,397 - 585,819
Issuance of common stock and Common stock
warrants to Broker for services rendered
March 3, 1999 - - - 60,420
Issuance of preferred stock to institutional
investor
August 10, 1999 500 500,000 (312,500) 500,000
Repricing of warrants associated with the
outstanding preferred stock
August 10, 1999 - (20,252) - 6,751
September 23, 1999 - (14,302) - 4,767
November 5, 1999 - (10,672) - 3,557
Conversion of preferred stock to common stock
August 24, 1999 (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 319 $ 205,755 $(9,894,059) $ 2,094,111
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
HAWAIIAN NATURAL WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
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
=========== ===========
The accompanying notes are an integral part of these financial statements.
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:
Raw materials $385,822
Finished goods 197,569
--------
$583,391
========
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:
Leasehold improvements The shorter of the
useful life or the
lease term
Machinery, equipment and assets under
capital lease 7-15 years
Property and equipment is summarized as follows:
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
==========
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.
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
bases 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.
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, 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. 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 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:
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
Net sales $ 3,557,585 $ 2,692,869
Net loss $(2,244,833) $(3,940,169)
Diluted net loss per share $ (0.50) $ (1.00)
Diluted weighted average common shares
outstanding 4,476,554 3,949,454
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:
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
=========
Maturities of notes payable, net of discount at December 31, 1999 are as
follow:
2000 $141,153
2001 151,460
2002 176,737
--------
$469,350
========
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:
1999 1998
------------------- ------------------
Expected volatility 60.00% 109.95%
Expected dividend yield 0.00% 0.00%
Expected term 5 yrs 5 yrs
Risk-free interest rate 63% to 5.78% 4.74% to 5.57%
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 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:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Balance at January 1, 1998 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
========
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.
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:
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
=========
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.
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:
2000 157,028
2001 167,428
2002 172,428
2003 110,828
2004 66,828
Thereafter 2,589,585
----------
$3,264,125
==========
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 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.
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 approximate sales by geographic region:
1999 % 1998 %
---------- ----- ---------- -----
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
========== === ========== ===
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.
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.
1998 QUARTER ENDED*
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
(UNAUDITED)
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
========= ========= =========== =========
1999 QUARTER ENDED*
---------------------------------------------------
SEPTEMBER 30
MARCH 31 JUNE 30 (AS RESTATED) DECEMBER 31
--------- --------- ------------- -----------
(UNAUDITED)
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
========= ========= =========== =========
------------------------
* 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.
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following information has been provided to aid you in your analysis of the
financial aspects of the merger of Hawaiian Natural Water Company. The
financial information of AMCON was derived from its audited consolidated
financial statements for the fiscal year ended September 28, 2001 and its
unaudited condensed consolidated financial statements for the quarter ended
December 28, 2001. The financial information of HNWC was derived from its
audited financial statements for the fiscal year ended December 31, 2000 and
its unaudited financial statements for the period January 1, 2001 through
December 16, 2001. The information is only a summary and should be read
together with the historical financial statements and related notes contained
in the annual reports and quarterly reports and other information that AMCON
and HNWC have filed with the Securities and Exchange Commission and
incorporated by reference and included elsewhere herein.
The unaudited pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the financial position or
results of operations of AMCON that would have occurred if the merger had been
completed on the dates indicated, nor does it purport to be indicative of
future financial positions or results of operations. In the opinion of
AMCON's management, all material adjustments necessary to reflect the effects
of these transactions have been made.
PURCHASE METHOD OF ACCOUNTING
The merger is to be accounted for using the purchase method of accounting.
This means that, for accounting and financial reporting purposes, HNWC's
assets and liabilities will be recorded at their respective fair values at the
time of completion of the merger. Any excess of the purchase price over the
net fair value of the assets acquired and liabilities assumed, including
identifiable intangible assets, will be recorded as goodwill and assessed
annually to determine if any impairment of this goodwill has occurred. The
allocation of purchase price is subject to final determination based upon
estimates and other evaluations of fair value. Therefore, the allocations in
the following unaudited pro forma financial information may differ from the
amounts ultimately determined.
PERIODS COVERED
The following unaudited pro forma consolidated statements of operations for
the quarter ended December 28, 2001 and fiscal year ended September 30, 2001
is presented as if the merger had occurred on October 1, 2001 and October 1,
2000, respectively.
AMCON Distributing Company's historical results include the financial
operations of the Merchants Wholesale Inc.(Merchants)business, which was
acquired on June 1, 2001 in a business combination accounted for as a
purchase. Due to the timing of the acquisition of Merchants relative to
AMCON's year ended September 30, 2001, Merchants' historical results for the
period from June 1, 2001 through September 30, 2001 are included in AMCON's
historical results for the twelve month period ended September 30, 2001.
Accordingly, in addition to giving effect to the merger of Hawaiian Natural
Water Company, the accompanying unaudited pro forma combined statements of
operations for the year ended September 30, 2001 is presented as if the
acquisition of the net assets of Merchants occurred on October 1, 2000. The
unaudited pro forma statements of operations of AMCON and Merchants combined,
prior to the inclusion of the results of Hawaiian Natural Water Company and
the pro forma effects of the merger, are presented for informational purposes
only and are not necessarily indicative of the results of operations of AMCON
and Merchants combined that would have occurred if the acquisition of the net
assets of Merchants had occurred on the dates indicated, nor does it purport
to be indicative of future results of operations. In the opinion of AMCON's
management, all material adjustments necessary to reflect the effects of the
acquisition of the net assets of Merchants have been made.
AMCON's pro forma balance sheet as of December 28, 2001 is not included in
this report. The fair value of Hawaiian Natural's assets and liabilities are
reported on AMCON's Quarterly Report on Form 10-Q for the first quarter ended
December 2001, as filed with the Securities and Exchange Commission on
February 11, 2002 (File No. 0-24708).
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 28, 2001
AMCON
DISTRIBUTING
COMPANY HISTORICAL
3 MONTHS HAWAIIAN
ENDED NATURAL PRO COMBINED
DECEMBER 28, WATER FORMA PRO
2001 COMPANY /A/ ADJUSTMENTS /B/ FORMA
------------- ------------ --------------- -------------
Sales ............................ $210,153,847 $ 486,335 $ - $210,640,182
Cost of sales .................... 195,043,632 763,584 - 195,807,216
------------ ------------ ------------ ------------
Gross Profit.................. 15,110,215 (277,249) - 14,832,966
Selling, general and
administrative expenses ......... 12,557,354 272,283 - 12,829,637
Depreciation and amortization .... 719,284 - 36,994 756,278
------------ ------------ ------------ ------------
13,276,638 272,283 36,994 13,585,915
------------ ------------ ------------ ------------
Income (loss) from
operations .................. 1,833,577 (549,532) (36,994) 1,247,051
------------ ------------ ------------ ------------
Other expense (income):
Interest expense ............... 1,084,098 40,934 (32,352) 1,092,680
Other income, net .............. (46,797) - - (46,797)
Equity in loss of
unconsolidated affiliate ...... 95,007 - (95,007) -
------------ ------------ ------------ ------------
1,132,308 40,934 (127,359) 1,045,883
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before taxes ......... 701,269 (590,466) 90,365 201,168
Income tax expense (benefit) ..... 310,627 - (234,183) 76,444
------------ ------------ ------------ ------------
Income (loss) from
continuing operations ........... $ 390,642 $ (590,466) $ 324,548 $ 124,724
============ ============ ============ ============
Earnings per share from
continuing operations:
Basic ........................ $0.14 $0.04
Diluted ...................... 0.14 0.04
Weighted average shares:
Basic ........................ 2,788,633 2,788,633
Diluted ...................... 2,859,271 2,859,271
----------------------------------
/A/ Hawaiian Natural Water Company's historical results for the three months ended
December 28, 2001 include the operating results for the period October 1, 2001 through
December 16, 2001.
/B/ See components of the pro forma adjustments in the "Summary of Pro Forma Adjustments-
Hawaiian Natural Company Statements of Operations."
See notes to unaudited pro forma combined financial information.
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2001
AMCON MERCHANTS
DISTRIBUTING WHOLESALE
COMPANY INC.
12 MONTHS 8 MONTHS
ENDED ENDED PRO AMCON AND
SEPTEMBER 30, MAY 31, FORMA MERCHANTS
2001 2001 /A/ ADJUSTMENTS /C/ COMBINED
------------- ------------ --------------- -------------
Sales ............................ $582,035,314 $308,343,996 $ - $890,379,310
Cost of sales .................... 536,348,915 294,418,985 - 830,767,900
------------ ------------ ------------ ------------
Gross profit ................. 45,686,399 13,925,011 - 59,611,410
Selling, general and
administrative expenses ......... 42,186,916 12,945,487 (360,640) 54,771,763
Depreciation and amortization .... 2,519,377 416,838 296,578 3,232,793
Asset impairment.................. - - - -
------------ ------------ ------------ ------------
44,706,293 13,362,325 (64,062) 58,004,556
------------ ------------ ------------ ------------
Income (loss) from
operations .................. 980,106 562,686 64,062 1,606,854
------------ ------------ ------------ ------------
Other expense (income):
Interest expense ............... 3,876,606 2,224,378 (353,874) 5,747,110
Other income, net .............. (200,504) - - (200,504)
Equity in loss of
unconsolidated affiliate ...... 94,445 - - 94,445
Asset impairment................ - - - -
------------ ------------ ------------ ------------
3,770,547 2,224,378 (353,874) 5,641,051
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before taxes ......... (2,790,441) (1,661,692) 417,936 (4,034,197)
Income tax expense (benefit) ..... (1,018,411) - (486,781) (1,505,192)
------------ ------------ ------------ ------------
Income (loss) from
continuing operations ........... (1,772,030) (1,661,692) 904,717 (2,529,005)
Preferred stock dividends ........ - - - -
------------ ------------ ------------ ------------
Income (loss) from continuing
operations available to common
shareholders .................... $ (1,772,030) $ (1,661,692) $ 904,717 $ (2,529,005)
============ ============ ============ ============
Earnings (loss) per share from
continuing operations:
Basic ........................ $(0.65) $(0.92)
Diluted ...................... (0.65) (0.92)
Weighted average shares:
Basic ........................ 2,738,170 2,738,170
Diluted ...................... 2,738,170 2,738,170
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2001
(CONTINUED)
HAWAIIAN
NATURAL
WATER
COMPANY
12 MONTHS
ENDED PRO COMBINED
SEPTEMBER FORMA PRO
30, 2001 /B/ ADJUSTMENTS /D/ FORMA
------------- -------------- -------------
Sales ........................... $ 2,902,943 $ - $ 893,282,253
Cost of sales.................... 2,780,772 - 833,548,672
------------ ------------- -------------
Gross profit ................ 122,171 - 59,733,581
Selling, general and
administrative expenses ........ 1,713,757 - 56,485,520
Depreciation and amortization ... - 151,251 3,384,044
Asset impairment................. - 188,345 188,345
------------ ------------- -------------
1,713,757 339,596 60,057,909
------------ ------------- -------------
Income (loss) from
operations ................. (1,591,586) (339,596) (324,328)
------------ ------------- -------------
Other expense (income):
Interest expense .............. 178,379 (84,167) 5,841,322
Other income, net ............. - - (200,504)
Equity in loss of
unconsolidated affiliate ..... (94,445) -
Asset impairment............... 188,345 (188,345) -
------------ ------------- -------------
366,724 (366,957) 5,640,818
------------ ------------- -------------
Income (loss) from continuing
operations before taxes ........ (1,958,310) 27,361 (5,965,146)
Income tax expense (benefit) .... - (761,564) (2,266,756)
------------ ------------- -------------
Income (loss) from
continuing operations .......... (1,958,310) 788,925 (3,698,390)
Preferred stock dividends ....... (23,453) 23,453 -
------------ ------------- -------------
Income (loss) from continuing
operations available to common
shareholders ................... $(1,981,763) $ 812,378 $ (3,698,390)
============ ============= =============
Earnings (loss) per share from
continuing operations:
Basic ........................ $(1.19)
Diluted ...................... (1.19)
Weighted average shares:
Basic ........................ 373,558 3,111,728
Diluted ...................... 373,558 3,111,728
-------------------------------
/A/ MWI's historical results for the eight months ended May 31, 2001 include
the operating results for the 12 week period from October 6, 2000 through
December 29, 2000, representing sales and pre-tax loss of $116,565,044
and $626,923, respectively. The activity for this 12-week period is also
included in MWI's historical results for the year ended December 29, 2000.
/B/ Hawaiian Natural Water Company's historical results for the twelve months
ended September 30, 2001 include the operating results for three months
ended December 31, 2000, representing sales and pre-tax loss of $537,914 and
$699,766, respectively. The activity for this three-month period is also
included in Hawaiian Natural Water Company's historical results for the year
ended December 31, 2000.
/C/ See components of the pro forma adjustments in the "Summary of Pro Forma
Adjustments - Merchants Wholesale Statements of Operations."
/D/ See components of the pro forma adjustments in the "Summary of Pro Forma
Adjustments - Hawaiian Natural Water Company Statements of Operations."
See notes to unaudited pro forma combined financial information.
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
SUMMARY OF PRO FORMA ADJUSTMENTS -
HAWAIIAN NATURAL WATER COMPANY STATEMENTS OF OPERATIONS
FOR THE FOR THE
THREE TWELVE
MONTHS MONTHS
ENDED ENDED
STATEMENT OF OPERATIONS DECEMBER 28, SEPTEMBER 30,
COMPONENT NOTE ADJUSTMENT 2001 2001
----------------------- -------- ------------------------------------ ------------- --------------
Depreciation and
amortization (1) To record amortization expense for
the trade name intangible asset. $ 35,980 $ 134,425
(2) To record amortization expense for the
customer list intangible asset. 1,014 16,826
------------ ------------
36,994 151,251
------------ ------------
Asset impairment (3) To reclassify asset impairment charge
from other expense (income) to
operating expenses. - 188,345
------------ ------------
- 188,345
------------ ------------
Interest expense (4) To eliminate historical interest
expense recorded by Hawaiian Natural
Water Company with respect to the
notes payable to AMCON Distributing
Company. (32,352) (84,167)
------------ ------------
(32,352) (84,167)
------------ ------------
Equity in loss of
unconsolidated affiliates (5) To eliminate historical equity in
losses of Hawaiian Natural Water
Company. (95,007) (94,445)
------------ ------------
(95,007) (94,445)
------------ ------------
Asset impairment (3) To reclassify asset impairment charge
to operating expenses. - (188,345)
------------ ------------
- (188,345)
------------ ------------
Income tax expense
(benefit) (6) To record the tax effect of the pro
forma adjustments. (234,183) (761,564)
------------ ------------
(234,183) (761,564)
------------ ------------
Preferred stock dividends (7) To eliminate preferred stock
dividends recorded by Hawaiian
Natural Water Company. - 23,453
------------ ------------
- 23,453
------------ ------------
Net income (loss) available
to common shareholders
impact from pro forma
adjustments $ 324,548 $ 812,378
============ ============
See notes to unaudited pro forma combined financial information.
AMCON DISTRIBUTING COMPANY
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
SUMMARY OF PRO FORMA ADJUSTMENTS -
MERCHANTS WHOLESALE STATEMENT OF OPERATIONS
FOR THE
TWELVE
MONTHS
ENDED
STATEMENT OF OPERATIONS SEPTEMBER 30,
COMPONENT NOTE ADJUSTMENT 2001
----------------------- -------- ------------------------------------ --------------
Selling, general and
administrative expenses (8) To eliminate operating lease expense
on distribution facility. $ (360,640)
------------
(360,640)
------------
Depreciation and
amortization (9) Depreciation expense on purchased
distribution facility. 130,000
(10) Amortization of non-compete asset. 57,752
(11) Amortization of goodwill. 108,826
------------
296,578
------------
Interest expense (12) To eliminate MWI historical
interest expense. (2,162,111)
(13) To record interest expense on the
LaSalle Bank debt incurred to
purchase MWI assets. 1,601,829
(14) Amortization of LaSalle Bank debt
issuance costs. 66,667
(15) Interest expense on the Gold Bank debt
incurred to purchase distribution
facility. 345,376
(16) Interest on debt paid off with portion
of Gold Bank proceeds. (36,000)
(17) Amortization of Gold Bank debt issuance
costs. 4,933
(18) Interest expense on amounts due to MWI
sole stockholder. 137,020
(19) Impact of interest rate swap financial
instrument. (292,921)
(20) Amortization relating to MWI historical
debt issuance costs. (18,667)
------------
(353,874)
------------
Income tax expense
(benefit) (21) To adjust income taxes for the net
pro forma adjustments and the combined
pro forma results. (486,781)
------------
(486,781)
------------
Net income (loss) impact
of pro forma adjustments $ 904,717
============
See notes to unaudited pro forma combined financial information.
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - HAWAIIAN NATURAL WATER
COMPANY
(1) To record the pro forma amortization on the trade name intangible
asset of $3,411,138 and $2,688,504 over 20 years for the three months
ended December 28, 2001 and the twelve months ended September 30, 2001
of $35,980 and $134,425, respectively.
(2) To record the pro forma amortization on the customer list intangible
asset of $24,024 and $84,132 over 5 years for the three months ended
December 28, 2001 and twelve months ended September 30, 2001 of $1,014
and $16,826, respectively.
(3) To reclassify the asset impairment charge associated with the write-off
of XEN and Aloha Water Company, Inc. intangible assets and goodwill
from other expense (income) to operating expenses to conform to
AMCON's presentation.
(4) To eliminate the historical interest expense recorded by Hawaiian
Natural Water Company in connection with the notes payable to AMCON
Distributing Company of $350,000, $400,000, and $500,000 bearing
interest at 10% per annum and $354,483 bearing interest at 8% per
annum.
(5) Prior to the consummation of the acquisition, AMCON Distributing
Company accounted for its investment in Hawaiian Natural Water Company
under the equity method. Subsequent to the acquisition, AMCON will
consolidate Hawaiian Natural Water Company and, therefore, this pro
forma adjustment is to eliminate the historical AMCON Distributing
Company equity in losses of Hawaiian Natural Water Company.
(6) The net impact of the pro forma adjustments have been tax-effected at
AMCON's historical effective tax rate of approximately 38%.
Additionally, due to the fact that Hawaiian Natural Water Company was
providing a full reserve against the tax net operating loss
carryforward assets it was generating, no income tax benefit was
recorded in its historical results for the twelve months ended
September 30, 2001 or for its year ended December 31, 2000.
Accordingly, the pro forma tax adjustments include amounts to tax-
effect the combined pro forma results for the three months ended
December 28, 2001 and twelve months ended September 30, 2001 at AMCON's
historical effective tax rate of approximately 38%.
(7) To eliminate the preferred stock dividends recorded by Hawaiian
Natural Water Company relating to its preferred stock which has since
been fully redeemed.
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - MERCHANTS WHOLESALE
INC.
(8) To eliminate the operating lease expense on the Quincy, Illinois
distribution facility of $360,640 for the eight months ended
May 31, 2001 that was leased from the MWI sole stockholder under a
noncancellable operating lease through June 1, 2001. AMCON purchased
the building on June 1, 2001 for $6,500,000 and recorded it in the
preliminary purchase price allocation at its appraised fair value of
$7,800,000.
(9) To record depreciation expense on the $7,800,000 Quincy, Illinois
distribution facility of $130,000 for the eight months ended May 31,
2001. The facility is being depreciated over its estimated useful life
of 40 years.
(10) To record the pro forma amortization on the noncompete intangible
asset of $346,510 for the eight months ended May 31, 2001 of $57,752.
(11) To record the pro forma amortization on the goodwill of $4,080,980
for the eight months ended May 31, 2001 of $108,826. Upon the adoption
of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," the recording of goodwill amortization
relating to the acquisition of MWI and other pre-June 30, 2001
acquisitions will cease. Under this nonamortization approach, the
carrying value of the goodwill will be reviewed for impairment and
written down and charged to results of operations only in the periods
in which the impairment recognition criteria has been met and the
recorded value of goodwill is more than its measured fair value.
(12) To eliminate 100% of MWI's historical interest expense with the
exception of interest incurred on the capital lease obligations, as
the only debt that was assumed in the purchase of MWI's net assets
were certain obligations under capital lease.
(13) To record the incremental debt incurred under the LaSalle Bank
line of credit arrangement to purchase the net assets of MWI, to
finance a portion of the Quincy, IL distribution facility and to pay
the $337,000 in debt issuance costs was $28,844,459. Therefore, the
pro forma interest expense on the incremental debt at 8.33% for the
eight months ended May 31, 2001 is $1,601,829. The impact on pre-tax
income of a 1/8% variance in the interest rate would be $24,037
for the eight months ended May 31, 2001.
(14) To record the pro forma amortization of the LaSalle Bank debt
issuance costs of $300,000 for the eight months ended May 31, 2001
of $66,667.
AMCON DISTRIBUTING COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED)
(15) To record the pro forma interest expense on the Gold Bank 7.5%
(fixed rate) term debt of $6,960,000 for the eight months ended
May 31, 2001 of $345,376.
(16) To eliminate the historical interest expense for the eight months
ended May 31, 2001 of $36,000 relating to the $720,000 of existing
AMCON debt that was paid off with a portion of the Gold Bank term loan
proceeds.
(17) To record the pro forma amortization on the Gold Bank debt
issuance costs of $37,000 for the eight months ended May 31, 2001
of $4,933.
(18) To record the pro forma interest expense at a fixed rate of 6% on
the amounts due to the MWI sole stockholder relating to the noncompete
and goodwill arrangements for the eight months ended May 31, 2001
of $137,020.
(19) To record the estimated pro forma interest expense reduction
impact of marking to market the interest rate swap financial
instrument from a negative fair value (liability) of $951,995 as of
the date of the acquisition to zero as of the contract's maturity
date for the eight months ended May 31, 2001 of $292,921.
(20) To eliminate the historical MWI debt issuance cost amortization
for the eight months ended May 31, 2001 of approximately $18,667.
(21) The net impact of the pro forma adjustments have been tax-effected
at AMCON's historical effective tax rate of approximately 38%.
Additionally, due to the fact that MWI was an S-Corporation for tax
purposes, no income tax expense (benefit) was recorded in its
historical results for the eight months ended May 31, 2001 or for its
year ended December 29, 2000. Accordingly, the pro forma tax
adjustments include amounts to tax-effect the combined pro forma
results for the twelve months ended September 30, 2001 at AMCON's
historical effective tax rate of approximately 38%.
(c) Exhibits
The following items are filed as exhibits to this report:
EXHIBIT NO. DESCRIPTION
2.1 Fifth Amended and Restated Agreement and Plan of Merger dated
September 27, 2001 by and between AMCON Distributing Company,
AMCON Merger Sub, Inc. and Hawaiian Natural Water Company Inc.
(incorporated by reference to Exhibit 2.1 of AMCON's
Registration Statement on Form S-4 (Registration No. 333-
71300)filed on November 13, 2001)
23.1 Consent of Arthur Andersen LLP
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(Registrant)
Date: February 28, 2002 By : /s/Michael D. James
-------------------------
Name: Michael D. James
Title: Secretary, Treasurer & Chief
Financial Officer
EXHIBIT INDEX
-------------
Exhibit Description
2.1 Fifth Amended and Restated Agreement and Plan of Merger dated
September 27, 2001 by and between AMCON Distributing Company,
AMCON Merger Sub, Inc. and Hawaiian Natural Water Company Inc.
(incorporated by reference to Exhibit 2.1 of AMCON's
Registration Statement on Form S-4 (Registration No. 333-
71300)filed on November 13, 2001)
23.1 Consent of Arthur Andersen LLP
EXHIBIT 23.1
--------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the inclusion in this
Form 8-K (File No. 0-24708) of our reports dated April 13, 2001 and March 21,
2000. It should be noted that we have not audited any financial statements of
Hawaiian Natural Water Company, Inc. subsequent to December 31, 2000 or
performed any audit procedures subsequent to April 13, 2001.
/s/ARTHUR ANDERSEN LLP
Honolulu, Hawaii
February 12, 2002