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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
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Form 10-SB/A
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GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(g) of
The Securities Exchange Act of 1934
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HAWAIIAN VINTAGE CHOCOLATE COMPANY, INC.
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(Name of Small Business Issuer in its charter)
Hawaiian Vintage Chocolate #99-0306492
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4614 Kilauea Ave., Ste.435
Honolulu, HI 96816
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(Address of principal executive offices) (zip code)
Issuer's telephone number: (808) 735-8494
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
$.001 Common Stock
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(Title of Class)
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Description of Business ............................................. 3
Item 2. Management's Discussion and Analysis on Plan of Operation ........... 8
Item 3. Description of Property ............................................. 14
Item 4. Security Ownership of Certain
Beneficial Owners and Management ................................. 14
Item 5. Directors and Executive Officers, Promoters
and Control Persons .............................................. 16
Item 6. Executive Compensation .............................................. 17
Item 7. Certain Relationships and
Related Transactions ............................................. 18
Item 8. Description of Securities ........................................... 18
PART II
Item 1. Market Price for Registrant's for Common Equity and
Related Shareholder Matters .............................. 19
Item 2. Legal Proceedings ................................................... 19
Item 3. Changes in and Disagreements with Accountants ....................... 19
Item 4. Recent Sales of Unregistered Securities ............................. 20
Item 5. Indemnification of Directors and Officers ........................... 23
PART F/S
Report of Independent Auditors ......................................... F-1
Balance sheets as of December 31, 1998 and September 30, 1999 (unaudited) F-2
Statements of Operations for the years ended December 31, 1997
and 1998 nine month period ending September 30, 1999 (unaudited) ... F-3
Statements of Shareholder's Equity for the years ended December
31, 1997 and 1998 and nine month period ended September 30, 1999
(unaudited) ........................................................ F-4
Statements of Cash Flow for the years ended December 31, 1997 and
1998 and nine month period ended September 30, 1999 (unaudited) .... F-5
Notes to Financial Statements .......................................... F-6
PART III
Item 1. Index to Exhibits ................................................... 26
Item 2. Description of Exhibits ............................................. 27
Signatures .......................................................... 28
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ITEM 1 - DESCRIPTION OF BUSINESS:
Business Development
Hawaiian Vintage Chocolate Company, Inc. (the "Company") was incorporated
in July 1993 under the laws of the State of Hawaii to engage in the development,
growing, manufacturing and marketing of cocoa and chocolate products. From its
inception the Company has been developing cocoa genetics and farming methods for
the growing of cocoa in Hawaii. The Company planted a selection of existing
cocoa varieties collected from around the world, field tested and selected
varieties for their adaptability to the Hawaiian micro environments and then
back bred these varieties with ancestor varieties of cacao to produce a distinct
variety. The selection and breeding process is a trade secret of the company
that is maintained strictly on a "confidential - need to know" basis. As trade
secret proprietary information, unauthorized use or disclosure is generally
protected under the state trade secret laws. The Company has tested its cocoa
genetics through the production, test marketing and sales of a resulting
chocolate product to chefs.
In September 1997, the Company entered into an Agreement of Merger with
American Graphics Industries, Inc. (AGI), a corporation, which had filed a
voluntary petition for Reorganization under Chapter 11 of the United States
Bankruptcy Code, pursuant to an Amended Plan of Reorganization filed with and
approved by the Bankruptcy Court (the Plan). The Plan provided for a merger of
the Company with AGI with the Company remaining as the surviving corporation.
The Company decided on this merger so that shares of common stock issued in the
merger approved by the Bankruptcy Court would be unrestricted under section 1145
of the Bankruptcy Code, and would thus facilitate qualifying the Company's
common stock for trading on the National Association of Securities Dealer's OTC
Bulletin Board (the OTC Bulletin Board). In December of 1997, public trading of
the Company's common stock began on the National Association of Securities
Dealers OTC Bulletin Board, under the stock symbol "HWVI".
Beginning in 1998, the Company started its transition from a cocoa genetics
and chocolate product development company to an operating company. The Company
operates as a grower, manufacturer, and marketer of gourmet cocoa and chocolate
products. In its operations, the Company grows cocoa trees using proprietary
genetics and produces and markets gourmet cocoa and chocolate products for both
wholesale and retail sale to the public.
Business of Issuer
The Company is the only producer of Vintage/varietal chocolate in the world
and the only grower of cacao in the United States. Vintage chocolate refers to
the chocolate made from a single harvest of a single year of cocoa beans and
varietal refers to chocolate made from selected varieties of cocoa.
The Company produces five types of basic chocolate that emphasize the
unique flavor of the beans used to make the chocolate. The Company developed and
popularized the gourmet varietial chocolate category in the United States as a
flavorful gourmet alternative to other chocolates. Currently the Company markets
five chocolate varieties under the Hawaiian Vintage brand. In 1999 the Company
started marketing four varieties of gourmet Hawaiian coffee that are
independently cultivated and marketed by the Company under the Hawaiian Vintage
brand for retail sale. The name Hawaiian Vintage Chocolate has a high level of
awareness among gourmet chefs and food service institutions. Hawaiian Vintage
Chocolate Vintage and non-vintage products are sold to celebrity chefs, cooking
schools, upscale restaurants, hotels, confectioners, cruise lines and bakeries.
It is also sold at specialty and health food stores in Hawaii, the West Coast
and the Northeast Coast of the United States, and directly "online" through the
Company's Internet website.
The Company develops vintage and non-vintage, high quality, gourmet,
natural and/or organically grown chocolate products as well as attractive,
stylish and high quality packaging for its products. The unique flavors of the
Company's chocolate are a direct result of the cocoa beans and the environment
in which they are grown and the Company's recipes for processing. The Company
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uses a variety of suppliers to roast, grind and finish its cocoa beans into
chocolate based on the Company's proprietary formulas. The Company's mission is
to educate the consumer that chocolate is a product of cocoa beans and the
flavor of the bean determines the flavor of the chocolate. The chocolate
produced by the Company is packaged to supply the food service industry in bulk
and the retail industry in quarter pound, half pound, and full pound gold
resealable packages. The Company's products include Vintage and non-vintage
Keaau, Kona, Royal Pahoa, Snows of Mauna Kea, and Hapa gourmet Chocolate, a line
of Estate grown Hawaiian coffees grown for and marketed by the Company under the
Hawaiian Vintage Coffee name, and a line of specialty ingredient chocolates. In
September of 1999 the Company opened its first retail store on the campus of the
University of Illinois in Champaign/Urbana, Illinois. This prototype store
serves products made with the coffees and chocolate of the Company as well as
other related products. For further details concerning the Company's plans for
opening additional retail stores, see the section below under the header
"Principal Products, Markets and Distribution - Retail".
Principal Products, Markets, and Distribution
The Company's chocolate products contain no artificial flavors or
preservatives, are made from high-quality, natural ingredients and are normally
offered in 48 LB, 1 LB, one-half and one-quarter pound packages. According to
the National Confectionery Association industry sales of gourmet chocolate has
grown by the rate of 12% per year for the last three calendar years. The
following table sets forth the percentages of the Company's sales for each major
market segment category during the last two years and for the first eleven
months of this calendar year, the timing of promotional activities, consumer
trends, and the development and introduction of new products will result in the
changes in percentage of the Company's products sold in each of these market
segments. Historical results may not be indicative of results in future years.
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1997 1998 November 1999
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Bulk (Food Service) 90% 70% 35%
Retail 10% 29% 34%
Ingredient 0% 0% 25%
Internet 0% 1% 6%
Bulk (Food Service)
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The Company's bulk chocolate is offered in five types of chocolates 64%
cocoa mass chocolates - Kona and Keaau, 56% cocoa mass chocolate - Royal Pahoa,
white chocolate, Snows of Mauna Kea, and milk chocolate - Hapa. The channels of
distribution for food services are specialty distributors who in turn sell the
product to restaurants, hotels, cruise lines, airlines, confectioners and
bakeries. The Company also sells directly to key consulting chefs who act as an
advisory council for the Company such as Emeril Lagasse, Charlie Trotter,
Charlie Palmer, Todd English, Stephan Pyles, Robert Del Grande, Roy Yamaguchi,
and Alan Wong. The Company also sells directly to cooking and culinary schools
as well as national upscale hotel and restaurant chains.
Retail
In 1998, the Company introduced its new stylish, high quality packaging for
it products in one, one-half, and quarter pound stand up pouches for sale at
retail. All the Company's chocolate, Kona, Keaau, Royal Pahoa, Snows of Mauna
Kea (white chocolate) and Hapa (milk chocolate) are available in these retail
sizes. The retail packaging was only available in Hawaii at specialty food and
gift shops until the fall of 1998 when the Company launched a test market on the
West Coast selling directly to natural food and specialty food stores. In 1999
the Company's retail products were also sold by the Company's
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sales staff and 7 brokers in the Northeast who represent the Company in
connection with sales to the supermarket and grocery trade, natural food stores,
and to distributors who service this market. The seven brokers represent the
Company in presenting marketing and sales programs, supporting retail stores,
selling new items, and establishing sale promotions with the Company's retail
clients. The Company's policy is to grant its brokers the rights to sell the
Company's products within a defined territory.
In September of 1999 the Company opened its first Company owned retail
store on the campus of the University of Illinois in Champaign/Urbana, Illinois.
The Company chose this site due to its location in the heartland of America, the
abundance of young people that fit the demographics of the intended market for
the Company's products and, if successful, to facilitate the opening of
additional stores within a 200-mile radius that includes Chicago. This store is
designed to serve as a prototype for further expansion. The store features the
Company's coffees, chocolates as truffles, bars, other finished chocolates,
baked goods, ice cream, coffee/chocolate smoothies, and other related products
in a Hawaiian setting. The store serves as an educational center for the story
of the Company. The store also provides a training ground for new store
personnel and managers and is a testing ground for new Company products such as
the sale of its Estate coffees which are available only through the store and
the Company's Internet site. It also serves as a test center for promotions,
operating and training methods and merchandising techniques planned by the
company. The Company's plans for additional retail stores project five new
corporate stores to be opened in 2000. Based on the results of these retail
stores further expansion plans will be considered in 2001. The Company presently
has no plans for the franchising of retail stores in 2000.
Ingredient Chocolate
In 1999, the Company decided to develop its co-branded business where the
Company's would formulate unique non-vintage chocolate products to be used as a
branded ingredient by other manufacturers. These products will carry the name of
the Company as well as the name of the primary manufacturer. The Company
believes that this will provide the Company with additional exposure to the
public and will inform them that the chocolate used in health bars, ice creams,
and baked goods is a natural gourmet alternative to existing products. The
Company's sales staff services this market directly.
Internet
The Company opened its Internet website in December of 1998 as an
informational site and as an Internet store where all the Company's retail
chocolate and coffee products could be offered for sale to the online retail
customer. Sales for that month contributed 1% of the Company's sales revenues
for the calendar year 1998. For the first eleven months of calendar 1999
Internet sales have accounted for 6% of the Company's sales revenues. The site
offers information on how the chocolate is used, grown, and is cross-linked to
over 200 other chefs and chocolate related sites on the Internet so the consumer
finds it easy to access the Company's information even while visiting other web
destinations. The website also features the current news on the Company, its
celebrity chefs, and serves as a direct communication link to the Company.
Marketing
The Company's marketing strategy is based upon emphasizing the consistently
superior quality of its products. It sponsors a number of events where
excellence in the food industry is recognized such as sponsoring the James Beard
Foundation's Pastry Chef of the Year Award which has been renamed
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the "Hawaiian Vintage Chocolate Pastry Chef of the Year". It also sponsors a
variety of food events throughout the year designed to educate the consumer to
the qualities of the Company's unique products and to raise the level of
understanding of chocolate in general. The Company employs chef support programs
at various times during the year to highlight the efforts of key chefs and
institutions in promoting the Company products. In 1999 the Company developed
and employed a variety of advertising and promotional programs designed to
support the sell-through of its retail products at the consumer level. These
include, but are not limited to, store personnel training, co-promotions with
local restaurants, radio campaign and contests.
Competitive Business Conditions
The retailing of confectionery products is highly competitive. The Company
competes with numerous businesses that offer confectionery products. Many of
these competitors have greater name recognition and financial, marketing and
other resources than the Company. Hershey and Mars have dominated the 12
billion-dollar per year domestic chocolate industry. Utilizing branding
strategies, these producers have emphasized their name and advertised
extensively to compliment their retail sales activities targeted at the
mass-market consumer. In the gourmet chocolate segment Godiva is the industry
leader having evolved from an upscale gift chocolate into a branded product,
sold through its own stores or department stores as primarily a gift item. The
National Confectionery Association predicts that sales of gourmet chocolate is
presently at $1 billion dollars in the United States and predicts these sales
will rise 12% per annum while total chocolate sales are expected to rise by 2-3%
per annum.
The Company believes that its principal competitive strengths lie in its
name recognition and its reputation as the leader in varietal chocolates and in
the quality of its products. With its emphasis on the quality of its chocolate,
the Company has demonstrated in its food service markets and lately at retail
that there is a niche for its gourmet varietal chocolate. Nevertheless, past
successes are no guarantee that the Company will be able to compete on a
national scale successfully. The Company believes that the overall market for
its chocolate products is significant in size. An additional advantage for the
Company's chocolate products is that they are grown naturally and/or
organically. The organic candy market is increasing by a rate of 300% per year
according to ResearchFocus, a health and nutrition industry trade journal. As
the only chocolate producer who grows their beans organically, the Company
believes it is well positioned to take advantage of this dynamic market segment.
Sources and availability of raw materials
The principal ingredients used by the Company are cocoa beans and sugar.
Cocoa beans are produced around the world with West Africa accounting for
approximately 65% of the world's crop. Cocoa beans are not uniform, and the
various grades and varieties reflect the diverse agricultural practices and
natural conditions found in the many growing areas. The Company grows its own
beans in the State of Hawaii which, under certain circumstances, could become
scarce or unavailable and purchases beans from independent growers whose
products can reflect the lack of uniformity in the world's crop. No single
source represents more than 10% of the Company's raw material purchases. The
purchases of organic and/or naturally grown varietal cocoa beans from a numerous
source of independent growers of other origins are available and are used in the
Company's non-vintage products. The availability of these beans is not a
limiting factor on Company sales. For its organically grown products the Company
follows the standards of the State of California. The Company continues to
endeavor to expand its cocoa growing activities to increase its capacity to
develop new varieties, new products and to develop a more efficient and cost
effective basis for sale of its products. This activity is subject to factors
which could cause results to be adversely effected including, but not limited
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to: changes in the chocolate, confectionery and grocery business environment,
including actions of competitors and changes in consumer preferences; changes in
governmental laws and regulations; market demand for new and existing products;
the availability and pricing of raw materials and weather or other environmental
problems, including diseases that could adversely effect the cultivation and
availability of cocoa or coffee beans used in the Company's organically grown
products. Such factors could cause a drain on the capital of the Company and
could adversely effect its future expansion and/or business operations.
The table below sets forth the average annual cocoa prices as well as the
highest and lowest monthly averages for the calendar years indicated. The prices
are the monthly average of the quotations at noon of the three active futures
trading contracts closest to maturity on the New York Coffee, Sugar and Cocoa
Exchange. Because of the premiums paid for its flavor beans these average
futures contract prices are not necessarily indicative of the Company's cost of
cocoa beans or cocoa products.
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Cocoa Futures Contract Prices*
(Cents per Pound)
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1996 1997 1998
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Annual Average 62.1 62.1 70.0 72.7
High 64.4 77.2 78.3
Low 57.4 59.1 65.5
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*Source: International Cocoa Organization Quarterly Bulletin of Cocoa
Statistics.
The price of sugar, the Company's second most important commodity for its
chocolate production is subject to price supports under the Federal Agricultural
and Improvement Reform Act of 1996. Due to import quotas and duties imposed to
support the price of sugar established by that legislation, sugar prices paid by
United States users are currently substantially higher than prices on the world
sugar market. The average wholesale list price of refined sugar has remained
relatively stable in the range of $.28 to $.35 per pound for the past ten years.
The Company uses a variety of suppliers to roast, grind and finish its
cocoa beans into chocolate based on the Company's proprietary formulas. If, any
of these suppliers should become unavailable, the Company believes there are
numerous companies that could provide these services without any adverse
business impact on the Company's operations.
Dependence upon a single customer; or a few customers
As of November 30, 1999, 39% of the Company's net sales were derived from
food service sales to three customers (17%, 12%, and 10%).
Patents, trademarks, licenses, franchises, concessions, royalty agreements or
labor contracts.
The Company has a license agreement for the sale of its products through
kiosks in the Midwest states of Missouri, Illinois, Wisconsin, and Michigan with
Hobson Global Marketing. The Company's rights under this agreement are
extendible on a long-term basis at the Company's option, which obligates the
licensee to maintain a minimum inventory level. The license is subject to a
minimum sales requirement for 1999. The Corporation owns various unregistered
trademarks and service marks, which are of material importance to the Company's
business and which are in the process of being registered Federally and at the
state level where it is appropriate.
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The following trademarks are registered with the State of Hawaii: Hawaiian
Vintage Chocolate, Hot Lava Chocolate, Kona Chocolate, Lava Chocolate, White
Lava Chocolate, Golden Hawaiian Chocolate, Golden Hawaiian Cocoa, Hawaii Cocoa
Estates, Hawaii Estate Grown, Hawaiian Vintage Estates, Island Cocoa, Little
bits of Aloha, Tropical cocoa, Unforgettable Hawaiian Chocolate, Snows of Mauna
Kea, Hodge's Estate, Keaau, Estate, Keaau Cocoa Plantation, Keaau chocolate,
Kona Estate.
The costs associated with the development of these trademarks and names
such as registration fees and legal fees are expensed as incurred.
Regulation
The Company's and its suppliers' production facilities are subject to
inspection by the Foods and Drug Administration and various other governmental
agencies, and its products must comply with regulations under the Federal Food,
Drug and Cosmetic Act and various comparable state statues regulating the
manufacturing and marketing of food products. A finding of a failure to comply
with one or more regulations could result in the imposition of sanctions. The
Company's product labeling is subject to and complies with the Nutrition
Labeling and Education Act of 1990. The Company believes it is operating in
compliance with all applicable laws and regulations.
Environmental Considerations
The Company grows its product organically and is in compliance with
environmental laws and regulations. Accordingly, the costs and effects of
compliance with environmental laws (federal, state and local) has not been
material to the Company's operations.
Research and Development
Despite the fact that there can be no assurance that the Company can
successfully produce new products, nor that such products will be profitable,
the Company will be required to continue to spend substantial sums on research
and development in the foreseeable future in order to enhance its existing
genetics, products, and to develop new products. New technology developed, or
products introduced by other entities could adversely affect the marketability
of the Company's products. Consequently, the Company is compelled to continue
development of new technologies and the implementation of new technologies in
order to remain competitive. In Fiscal 1998 the Company spent $21,000 in product
development and in 1999 the Company has spent $125,000 on Company-related
research and development.
Employees
As of November 30, 1999, the Company employed 17 full time workers of whom
5 were in corporate administration, 2 in sales and marketing, 3 in fieldwork and
7 in its retail location. The Company also hires a varying number of part-time
seasonal workers for work in its fields.
ITEM II. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion should be read in conjunction with the audited and
unaudited financial statements and the related Notes to the Company's Financial
Statements included elsewhere in this registration statement. The Management's
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements that involve risks and uncertainties. Readers are
cautioned not to place undue reliance on the forward-looking statements in this
registration statement.
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Results of Operations --- 1997
Fiscal 1997 compared to Fiscal 1996
"Net Sales." Net sales increased 12% to $136,000 in 1997 from $122,000 in 1996.
The increase was the result of additional test marketing efforts.
"Other Income." During 1996 and 1997, the Company received grant income from the
Federal Government through its Rural Economic Development Assistance program.
This income increased to $69,000 from $52,000 in 1996. This program was designed
to attract agricultural companies to find alternative uses for demised Hawaiian
sugar cane land. The company used this money to offset expenses incurred in the
development of its plantings in Hawaii.
"Cost of sales" Cost of sales in 1997 decreased to $45,000 from $51,000 in 1996
because of a decrease in packaging costs. These costs include raw materials,
processing and packaging costs.
"Gross Profit." As a result of the increase in net sales, the gross profit for
1997 increased to $90,000 from $70,000 in 1996. The Company's gross profit
margin increased by 16% from 1996 primarily due to test market sales increase
and cost reduction.
"Selling and Marketing Expenses." Selling and marketing expenses for 1997
increased 38% to $ 122,000 from $88,000 in 1996 and as a percentage of net sales
it increased to 89% from 72%. The increase in selling and marketing expenses
primarily was due to an increase in sales payroll and brochure cost.
"General and Administrative expenses." General and administrative expenses for
1997 increased by 25% to $217,000 from $174,000 in 1996 and increased as a
percentage of sales to 159% from 142%. The primary reason for the increase of
the general and administrative expenses was the increase in professional fees as
part of the Company's merger with AGI and subsequent public listing on the OTC
Bulletin Board.
"Operating Income." Operating loss for 1997 increased to $264,000 from $196,000
in 1996 and the loss increased as a percentage of sales to 193% from 160% in
1996. The increase in the operating loss was due to the Company's increase in
marketing and sales expenses and the increase in accounting/audit and
professional fees as a result of the Company's preparation for its public
listing on the OTC Bulletin Board and its merger with AGI.
"Income Taxes." The Company has a net loss for the year therefore incurring no
income tax liability.
"Interest Expense." Interest expense for 1997 decreased to $88,000 from $108,000
in 1996 primarily due to the Company's redemption of two of its convertible
debentures.
"Net Income (loss)." Net loss for 1997 increased to $271,000 from $244,000 in
1996 however the loss decreased as percentage of sales remained unchanged at
199%. This increase of the net loss by the Company was due primarily to
increased expenditures in marketing and sales and the increase in
accounting/audit and professional fees paid as a result of the Company's
preparation for its public listing on the OTC Bulletin Board and its merger with
AGI.
Results of Operations --- 1998
Fiscal 1998 compared to Fiscal 1997
"Net Sales." Net sales increased 45% to $197,000 from $136,000 in 1997. The
increase was primarily attributable to the increase in the Company's retail
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test marketing sales including Internet sales. This increase in sales volume
reflects the Company's 1998 opening of its Internet site and a test market for
its chocolate products at retail in Hawaii and on the West Coast.
"Other Income." During 1997 and 1998, the Company received grant income from the
Federal Government through its Rural Economic Development Assistance program.
This income decreased to $6,000 from $69,000 in 1997. This program was designed
to attract agricultural companies to find alternative uses for demised Hawaiian
sugar cane land. The Company used this money to offset expenses incurred in the
development of its cocoa tree plantings in Hawaii. The Company believes this
grant income to be a one-time occurrence.
"Cost of sales" Cost of sales in 1998 increased to $47,429 from $45,986 in 1997
because an increase in net sales. These costs include raw materials, processing
and packaging costs.
"Gross Profit." As a result of the Company's increase in net sales, gross profit
for 1998 increased 65% to $149,000 from $90,000 in 1997. The Company's gross
profit margin was up 10% from 1997 primarily due to the higher per unit price of
the Company's product at retail vs. food service.
"Selling and Marketing Expenses." Selling and marketing expenses for 1998
increased 48% to $181,000 from $122,000 in 1997 and as a percentage of net sales
it increased to 92% from 90%. The increase in selling and marketing expenses
primarily was due to an increase in advertising expenses, distributor support
programs, and retail test market introductions. This increase was partially
offset by a decrease in promotional expenses.
"General and Administrative expenses." General and administrative expenses for
1998 increased by 102% to $439,000 from $217,000 in 1997 and increased as a
percentage of sales to 223% from 160%. The primary reason for the increase of
the general and administrative expenses is the increased staffing by the Company
as part of its conversion from a development company to an operating company.
"Operating Income." Operating losses for 1998 increased 98% to $523,000 from
$264,000 in 1997 and the loss increased as a percentage of sales to 265% from
194% in 1997. The increase in the dollar amount of the operating loss was due to
the additional staffing by the Company and the increased selling and marketing
expenses incurred by the Company as part of its conversion into an operating
company.
"Income Taxes." The Company has a net loss for the year therefore incurring no
tax liability.
"Interest Expense." Interest expense for 1998 decreased 83% to $15,000 from
$88,000 in 1997 primarily due to the conversion of debentures to equity at the
time of the Company's public listing in December of 1997 of its common stock on
the OTC Bulletin Board.
"Net Income." Net losses for 1998 increased 88% to $510,000 from $271,000 in
1997 and the loss increased as percentage of sales to 259% from 177%. This
increase in the dollar losses is due to the factors discussed above under
"operating income".
"Cash and cash equivalent" The ending cash balance as of 1998 was a negative
$7000 compared to $10,000 in 1997. This decrease was due to the rapid growth of
the Company.
"Accounts Receivable" Accounts receivable decreased from $137,000 at the end of
1997 to $42,000 as of December 31, 1998. This decrease was due to grant income
booked in 1997, which was received in 1998, plus additional allowances for bad
debt.
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"Inventory" As a result of a growth in sales, the Company increased its
inventory level from $3,000 in 1997 to $21,475 as of December 31, 1998.
"Capitalized Planting Costs" To build up its long-term production capacity, the
Company invested $200,105 more in field planting in 1998. Accordingly,
capitalized planting costs increased from $43,256 to $243,361.
Results of Operations - Nine Months Ending September 30, 1999
"Net Sales." Net sales for the nine months ending September 30, 1999 increased
71% to $280,000 from $164,000 during the same period of 1998. These increases
were attributable to increases in the Company's retail sales, Internet sales and
ingredient sales. This increase in sales volume reflects the fact that 1999 was
the Company's first partial year of functioning as an operating company. The
opening of retail accounts in the Northeast, the hiring of brokers and
distributors to represent the products in grocery and health food accounts, the
increase of Internet sales, as well as the direct ingredient sales have all
contributed to the increased revenues.
"Cost of sales" Cost of sales for the first nine months of 1999 increased to
$115,554 from $32,820 in the same period of 1998. This was due to increased net
sales and the corresponding increase in cost of sales. These costs include raw
materials, processing and packaging costs.
"Gross Profit." As a result of the Company's increase in net sales, gross profit
for the nine months of 1999 increased 25% to $164,000 from $131,000 during the
same period in 1998. The Company's gross profit margin of 59% was down 21% from
1998 primarily due to the increase in packaging and inventory costs for the
retail sales of the Company's chocolate products.
"Selling and Marketing Expenses." Selling and marketing expenses for the nine
months of 1999 increased 65% to $235,000 from $142,000 during the same period in
1998 with the percentage of net sales down 2.8% from 86% in 1998. The increase
in selling and marketing expenses primarily was due to an increase in
advertising expenses, distributor support programs, the cost of sales personnel
hired to expand the retail market, the cost of retail test market introductions,
and the cost of promotions to encourage the use of the product as a co-branded
ingredient.
"General and Administrative Expenses." General and administrative expenses for
the first nine months of 1999 increased by 43% to $447,000 from $312,000 during
the same period in 1998 and decreased as a percentage of sales to 160% from
190%. The primary reason for the increase of the general and administrative
expenses is the increased staffing by the Company to support the Company's
national sales effort.
"Operating Income." Operating losses for the first nine months of 1999 increased
53% to $549,000 from $358,000 during the same period in 1998 and decreased as a
percentage of sales to 196% from 218% during the similar period in 1998. The
percentage decrease was due primarily to the increased revenues of the Company
from its retail efforts while the dollar increase was due to increased selling,
marketing and administrative costs.
"Income Taxes." The Company anticipates a net loss for fiscal 1999 therefore
incurring no tax liability. The company expects its net operating loss carry
forwards to offset any tax liabilities in the year 2000.
"Interest Expense." Interest expense for the first nine months of 1999 remained
constant at $10,000 compared to the similar period in 1998.
"Net Income." Net losses for the first nine months of 1999 increased by 60% to
$535,000 from $334,000 in 1998 and decreased as percentage of sales to 191%
11
<PAGE> 12
from 204%. This improvement in the net income of the Company as a percentage of
sales was due primarily to its expanding sales revenue and the increase in the
dollar amount of the net loss was due to the increase staffing both at the sales
level and the administrative level to support the national sales effort and the
trade promotions necessary to build sales.
"Cash and cash equivalent" The Company increased its cash flow position to
$72,000 by September 30, 1999 compared to a negative $7,000 for the same period
of 1998. This was a result of equity financing as well as increased sales in the
first nine months of 1999.
"Accounts Receivable" Accounts receivable increased to $133,000 by September 30,
1999 compared to $42,000 for the same period of 1998. This was caused by the
growth in national sales.
"Inventory" As a result of the growth in sales, inventory increased to $194,000
at September 30, 1999 compared to $21,000 for the same period in 1998.
"Capitalized Planting Costs" To strengthen its production capacity the Company
continued to invest in field planting. Capitalized Planting Costs increased to
$317,132 as of September 30, 1999 from $243,361 for the same period in 1998.
Seasonality and Stores Openings
The Company's business is seasonal and its quarterly results of operations
reflect seasonal trends resulting from increased demand for the Company's
chocolate products during the Christmas and Valentine's Day seasons. The Company
has experienced quarterly fluctuations in sales volume and operating results
when compared to previous years due to a number of factors, including the timing
of trade promotions, advertising and consumer promotional expenditures. The
Company, as is common in the chocolate industry, offers trade promotions for
limited time periods on specific items in order to provide incentives for the
purchase and promotion of products. The impact on chocolate sales from period to
period due to the timing and extent of such trade promotions can be significant.
In addition, the Company believes that quarterly results will be affected by the
timing of new store openings; therefore results for any quarter are not
necessarily indicative of results that may be achieved in other quarters or for
a full fiscal year.
Liquidity and Capital Resources
As of September 30, 1999, working capital was $293,000 compared with
($245,000) as of September 30, 1998. This increase is primarily due to the
private sale of the Company's common stock in 1999. Cash and cash equivalent
balances increased from ($21,000) on September 30, 1998 to $72,000 on September
30, 1999 as a result of cash flows in excess of operating and financing costs.
The Company's current ratio was 2.50 on September 30, 1999 as compared to 0.40
on September 30, 1998. The Company has no long-term debt.
The operations of the Company historically have been funded with a combination
of internally generated funds and external private sales of equity. Purchases of
inventory, marketing expenditures and support of account receivable have been,
and are expected to remain, the Company's principal recurring uses of funds for
the foreseeable future. The Company's other principal use of funds in the future
will be the development of new products, the possible acquisition of brands,
product lines or other business activities, the development of corporate stores
and increased staffing costs. The Company has incurred significant operating
loss from its operations through September 30, 1999. The Company's working
capital requirements have been and will continue to be significant. The Company
expects its primary sources of financing for its
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<PAGE> 13
future business activities will be funds from operations and the additional sale
of common stock. The Company currently believes that funds from operations and
the possible sale of equity are likely to be sufficient to meet operating and
capital requirements unless a significant acquisition or store expansion is made
during fiscal 2000 beyond the projected new store expansion described in this
registration statement. The Company cautions, however, that there is no
assurance that these assumptions will prove to be accurate.
2000 Outlook
The Company anticipates as its products move through the distribution
channels planned for 2000 that its gross margins will drop due to pricing
pressures. The Company's forecasts call for gross profit margins of
approximately 75% in 2000.
The Company opened a prototype retail store in late September of 1999 that
will serve as the model for corporate expansion of Company owned stores in 2000.
The Company's retail expansion plans project five new corporate stores for 2000.
Based on the results of the new operations further expansion plans will be
considered in 2001. The Company plans to continue its retail rollout of product
by expanding its sales representation to the Midwest, South and Northwest in the
year 2000 and by expanding its food service distribution. The Company believes
that this trend of increased sales will continue through fiscal 2000. The
Company has announced its intentions of entering into a build-to-suit visitor
center/chocolate factory in Hawaii and anticipates completing the negotiations
with land owners/developers by the end of the third quarter of 2000. Operations
are projected to commence within nine months from the date of the contract. The
Company anticipates that the developer will provide the funding for this
project.
The Company believes that in 2000 the revenue increases will offset the
increased cost of personnel, promotions and advertising bringing the percentage
down in relation to total sales. The Company believes the trend of decreasing
administrative cost, as a percentage of sales will continue as a result of
increasing sales in the year 2000. However, administrative cost will continue to
increase to support the Company's expanded sales activities.
The Company believes that the impact of its expansion into the retail
market including the possibility of retail stores, corporate owned, and its
increased distribution in food service will cause the Company to have a positive
improvement in its operating income for the year 2000
The Year 2000 Matters
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of systems to recognize the date change from
December 31, 1999 to January 1, 2000. The year 2000 issue could result, at the
Company and elsewhere, in system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions or to engage in other normal business activities. The Company has
assessed its computer and business processes and has upgraded its computer
applications to provide for their continued functionality. To date the Company
has not incurred any material year 2000 problems.
The Company's operations are dependent on the year 2000 readiness of third
parties who do business with the Company. In particular, the Company's
information technology systems interact with commercial electronic transaction
processing systems to handle customer credit card purchases and other point of
sale transactions, and the Company is also dependent on third-party suppliers of
such infra structure elements as telephone services, electric power, water, and
banking facilities. The Company has contacted it relevant third parties.
Although the Company has not been put on notice that any known third party
problem will not be resolved, the Company has limited information and no
assurance of additional information concerning the year 2000 readiness of third
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<PAGE> 14
parties. The resulting risks to the Company's business are very difficult to
assess.
The Company believes that, with the modifications it has made to its operating
systems the year 2000 issue is not reasonably likely to pose significant
operational problems for the Company's information technology systems.
ITEM 3. PROPERTIES
The Company occupies office space for its executive offices of 1500 square
feet for $1.25 per sq. ft on a six-month renewable lease in downtown Honolulu,
Hawaii that it will continue to lease until it builds permanent facilities. The
Company leases 134 acres of land on the Big Island of Hawaii for the growing and
cultivation of its cocoa beans that is on a six-year agreement that is planned
to be converted into a 26 year term lease at $250.00 per acre/year. A factory
site in Hawaii of 1 acre and up to an additional 1000 farm acres is planned to
be leased or purchased in 2000/2001.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth information regarding
beneficial ownership as of December 31, 1999 of the Company's outstanding common
stock by any person who is known to the Company to be the beneficial owner of 5%
or more of the Company's common stock.
<TABLE>
<CAPTION>
Name and Address Class of Amount and Nature Percent
Of Beneficial Owner of Security of Beneficial Owner (1)(2) of Class (2)
- ------------------- ----------- -------------------------- ------------
<S> <C> <C> <C>
James Walsh Common 4,689,500(3) 53.17%(3)
615 Elepaio Street
Honolulu, HI 96816
DLS Financial Services Common 1,143,318(4) 12.60%(4)
519 Interstate 30
Suite 243
Rockwall, TX 75087
</TABLE>
(1) To the best knowledge of the Company, all shares are held of record with
sole voting and investment power. All calculations, unless otherwise noted,
are based on 8,568,471 shares of common stock outstanding as of December
31, 1999.
(2) Under Rule 13-d of the Exchange Act, shares not outstanding but subject to
options, warrants, rights, conversion privileges pursuant to which shares
may be acquired in the next 60 days are deemed outstanding for the purpose
of computing the percentage of outstanding shares owned by the persons
having such rights but not deemed outstanding for the purpose of computing
the percentage for such other persons.
(3) Total includes 5000 shares owned solely by Mr. Walsh, 4,434,500 shares
owned by WF Trust, an irrevocable trust of which Mr. Walsh is acting as
sole trustee on behalf of his family as beneficiaries, and 250,000 options
currently exercisable by Mr. Walsh at $2.00 per share. The calculation of
percent ownership includes the addition of the options to the total number
of shares outstanding, as if they were exercised.
(4) Total includes 643,318 shares owned by DLS Financial Services and 100,000
Class A Warrants exercisable at $2.50 per share, 200,000 Class B Warrants
14
<PAGE> 15
exercisable at $4.00 per share, and 200,000 Class C Warrants exercisable at
$6.00 per share. The warrants have been added to the shares outstanding for
the purpose of computing the percentage ownership as if the warrants have
been exercised.
The following table and notes thereto set forth certain information
regarding beneficial ownership as of December 31, 1999 of the Company's
outstanding common stock held by each director and executive officers of the
Company and by executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Name and Address Class of Amount and Nature Percent
Of Beneficial Owner of Security of Beneficial Owner (1)(2) of Class (2)
- ------------------- ------------ -------------------------- ------------
<S> <C> <C> <C>
Barry Zwick Common 342,501(3) 3.99%
925 De La Vina Street
Suite 102
Santa Barbara, CA 93101
Tyrie Jenkins Common 80,066 0.93%
1060 Young Street
Suite 216
Honolulu, HI 96814
Shep Gordon Common 48,500 0.56%
3274 S. Kihei Road
Kihei, HI 96753
James Walsh Common 4,689,500(4) 53.17%
615 Elepaio Street
Honolulu, HI 96816
Charles Cheng Common 0 0
330 Saratoga Drive
Honolulu, HI 96830
Honolulu, HI
Kristine Simonds Common 10000 0.11%
3212 Loulu
Honolulu, HI 96822
Executive Officers and Common 5,170,567(5) 58.63%
Directors As a Group
Consisting of 5 Persons
</TABLE>
(1) Except as otherwise noted, to the best knowledge of the Company, all
shares are held of record with sole voting and investment power. All
calculations, unless otherwise noted, are based on 8,568,471 shares
of common stock outstanding as of December 31, 1999.
(2) Under Rule 13-d of the Exchange Act, shares not outstanding but
subject to options, warrants, rights, conversion privileges pursuant
to which shares may be acquired in the next 60 days are deemed
outstanding for the purpose of computing the percentage of
outstanding shares owned by the persons having such rights but not
deemed outstanding for the purpose of computing the percentage for
such other persons.
(3) Total includes 5000 shares owned solely by Mr. Zwick, 233,334 shares
owned by Zwick Financial Corp. Profit Sharing Plan, of which Mr.
Zwick is sole trustee and 91% beneficiary, 79,167 shares owned by
15
<PAGE> 16
Zwick Financial Corporation, and the following amount owned by Mr.
Zwick's minor children: 25,000 shares.
(4) Total includes 5000 Common Shares owned solely by Mr. Walsh,
4,434,500 Common Shares owned by WF Trust, an irrevocable trust of
which Mr. Walsh is acting as sole trustee act on behalf of his
family as beneficiaries and 250,000 options currently exercisable by
Mr. Walsh at $2.00 per share. The calculation of percent ownership
includes the addition of the options to the total number of shares
outstanding, as if they were exercised.
(5) Total includes Mr. Walsh's 250,000 options exercisable at $2.00 per
share as if they were exercised and added to the total number of
shares outstanding as referenced in footnote (4).
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following list identifies the Company's directors and executive
officers, Directors are elected annually at the Company's annual meeting of
stockholders and hold office until their successors are elected and qualified.
The Company's officers are appointed annually by the Board of Directors and
serve at the pleasure of the Board.
Directors and Executive Officers:
<TABLE>
<S> <C>
Director: Tyrie Jenkins, 45
Director: Shep Gordon, 55
Director: Barry Zwick, 65
Director, Chairman, CEO: James Walsh, 48
CFO and Vice President: Charles Cheng, 43
Secretary of the Company: Kristine Simonds, 32
</TABLE>
Dr. Tyrie Jenkins, 45 has a BS degree from Mount Holyoke College and a MD
from Jefferson Medical School. Dr. Jenkins has been the Medical Director
of Laser Eye Institute of Hawaii since 1994. She has served on the Board
of Directors since September of 1997.
Shep Gordon, 55 is the founder and has served as the Chairman and CEO of
Alive Enterprises, Inc., an entertainment and culinary management
company, since 1980. Mr. Gordon has over 30 years of experience in the
entertainment and culinary industries. Mr. Gordon has served as a member
of the Board of Directors since September of 1997.
Barry Zwick, 65 has a BS degree from the U.S. Military Academy at West
Point and has an MBA from the University of Southern California. Mr.
Zwick has over 25 years experience in the securities business. Mr. Zwick
has been a member of the Midwest Stock Exchange and the Chicago Board of
trade. Since 1989 he has been a private investor. Prior to this period
Mr. Zwick was a Managing Director of Ladenburg, Thalman & Co., Inc. He
has been a member of the Board of Directors since September of 1997.
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<PAGE> 17
James Walsh, 48 founded Hawaiian Vintage Chocolate in 1993. He has served
as CEO and Chairman of the Board since the inception of the Company. From
1986 - 1992 Mr. Walsh was the managing partner of a cocoa research joint
venture with Amfac Sugar and Hershey Foods. Prior to that Mr. Walsh owned
and operated CI, Inc., a full service communication conglomerate that
included an advertising company, three printing firms, an merchandise and
travel incentive company and a computer service firm in Chicago. Mr.
Walsh also serves as a Director for Dallas Gold and Silver Exchange,
Inc., a NASDAQ listed corporation.
Mr. Cheng joined the Company as Chief Financial Officer in September
1999. Prior the joining the Company, Mr. Cheng was the Executive
Vice-President of UniChinal, Inc., a private firm providing international
financing, investment consulting, and business services from 1996 through
1999. From 1991 to 1996, he served as Chief Accountant and Comptroller of
Marc Hotels and Resorts, Inc. - Hawaii's third largest condominium hotel
management company. Mr. Cheng received a MBA degree from Chaminade
University of Honolulu.
Ms. Simonds has been the Secretary of the Company and Director of
Operations since 1997. For the past year she has split her time between
the development of the Company's operations and it's Internet presence.
For the preceding three years she was employed as a web designer and
developer by a private engineering firm. Ms. Simonds has a Bachelor's
Degree in Fine Arts from the University of Hawaii.
Significant Employees
Anthony Roth, 34 has been retained by the Company since May of 1999 to
develop and implement the Company's stated sales and marketing plan. For
three years prior to that period he was employed by Naturade, Inc.
("Naturade"), a manufacturer of health and nutrition products, as their
Vice President of Sales and Marketing. Naturade's common stock is
registered under section 12(g) of the Exchange Act and is traded on the
OTC Bulletin Board. Mr. Roth was President of Performance Nutrition,
Inc., a nutracuetical company for two years prior to his employment at
Naturade. Mr. Roth has a Bachelor's Degree in Agricultural Economics from
the University of Illinois.
Stuart Hersch, 54 has acted in the capacity of advisor to the Chairman.
His responsibilities include assisting in strategic development,
acquisitions, and corporate development. Mr. Hersch is Chairman and CEO
of aka.com, a web portal site he developed in 1999. His prior work
experience includes executive positions as Vice President of Universal
Records from 1996 through 1999, Executive Vice President of Time-Warner
from 1993 through 1996 and CEO of King World from 1988 through 1993.
ITEM 6. EXECUTIVE COMPENSATION
Executive Officers
On September 1, 1997, the Company entered into a seven-year employment contract
with James Walsh, its founder and Chief Executive Officer. This agreement was
amended on September 24, 1997 providing for, among other things, a base salary
of $175,000, annual bonuses to be determined by the Board of Directors,
contractual stock rights to match any additional purchases by third parties of
the Company's Common Stock at seventy-five percent (75%) of the offering price,
and $5000 per year for costs and expenses for professional, legal and/or
accounting services. It also provides a schedule for Mr. Walsh to
17
<PAGE> 18
annually receive options for the purchase of 125,000 shares of the Company's
Common Stock starting in 1997 at $2.00 per share. To date because of the
financial operations of the Company, Mr. Walsh has not drawn any salary or
bonuses from the Company and has forgiven the Company of its obligation. In
fiscal 1997 and 1998, Mr. Walsh was granted options for the purchase of 125,000
shares of the Company's common stock at an exercise price of $2.00 per share. He
has taken advances as described in Note 5 of the Financial Statements of the
Company included in this Registration Statement which are scheduled to be
liquidated over a five year period starting in fiscal 2000.
No other executive officer of the Company has an annual salary and
bonuses in excess of $100,000.
Directors:
Members of the Board of Directors do not receive cash compensation for
their services as Directors. Directors are not presently reimbursed for expenses
incurred in attending Board meetings. Starting in 1999, Board members receive
5000 shares of common stock annually for their services.
Employment Contracts, Termination of Employment and Change-in -Control
Arrangements:
Other than the employment contract of Mr. Walsh as referenced above in the
description of executive compensation, the Company has no other such contracts.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has a contractual agreement with its director, Shep Gordon, for
the promotion of its chocolate products among the celebrity chefs represented by
or known by Mr. Gordon or his firm, Alive Events. He receives an annual grant of
stock that varies depending on the level of sales to these chefs. Since the
inception of the Company he has received 20,040 shares of common stock under
this agreement.
Shares Issued to Corporate Directors
The Company has raised money through the sale of its securities to persons
who had a pre-existing business relationship with the Company and who were or
subsequently became directors of the Company. Mr. Zwick has participated in
these offerings through his purchase of 233,334, 66,667, and 25,000 restricted
shares of common stock at $.75, $.75, and $.50 per share respectively. Dr.
Jenkins purchased three debentures issued by the Company in 1996 and 1997
respectively for $25,000 each which were converted into 55,066 restricted shares
of common stock at the time of the Company's initial public listing of its
common stock on the OTC Bulletin Board. In 1998, Dr. Jenkins also subscribed and
purchased 20,000 restricted shares of the Company's common stock at $1.00 per
share. Mr. Gordon purchased one debenture issued by the Company in 1993 for
$25,000 which he converted into 30,107 restricted shares of common stock at the
time of the Company's initial public listing of it common stock on the OTC
Bulletin Board. All of these securities were sold and issued for investment
purposes in a "private transaction" exempt under section 4(2) of the Securities
Act of 1933 as amended (the "Act"). These securities have been treated by the
Company as "restricted securities" as defined in Rule 144 under the Securities
Act of 1933, as amended. These securities may not be offered for public sale
except under Rule 144, or otherwise pursuant to said Act.
ITEM 8. DESCRIPTION OF SECURITIES
The Company's Amended Articles of Incorporation currently provide that the
Company is authorized to issue 20,000,000 shares of common stock, par value
18
<PAGE> 19
.001. As of December 31, 1999, 8,568,471 shares of common stock were issued and
outstanding.
COMMON STOCK
All shares of common stock have equal voting rights and, when validly issued and
outstanding; are entitled to one vote per share in all matters to be voted upon
by shareholders. Cumulative voting is permitted with respect to the election of
the Directors. The shares of common stock have no preemptive, subscription,
conversion or redemption rights and may be issued only as fully- paid and
non-assessable shares. In the event of liquidation of the Company, each
shareholder is entitled to receive a proportionate share of the Company's assets
available for distribution to shareholders after payment of liabilities and
after distribution in full of preferential amounts, if any. All shares of the
Company's common stock issued and outstanding are fully paid and non-assessable.
Holders of the common stock are entitled to share pro rata in the dividends and
distributions with respect to the common stock, as may be declared by the Board
of Directors out of funds legally available therefor.
PART II
ITEM 1. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock trades on the OTC Bulletin Board under the
symbol "HWVI". The following table sets forth for the period indicated, the per
share high and low bid quotations for the common stock as reported by the Over
The Counter Market Report. The bid quotations are inter-dealer bid prices and do
not include mark-ups, mark-downs, or commissions. The number of record holders
of the Company's common stock at December 31, 1999 was 121. The company has not
declared any dividends with respect to its common stock. The Company intends to
retain all earnings to finance future growth; accordingly, it is not anticipated
that cash dividends will be paid to holders of the common stock in the
foreseeable future.
High and low stock prices for the last two years were:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ------------- -----------
High Low High Low High Low
------ ------ ----- ------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 3 3/8 1 3 3/8 1 1/4 - -
Second Quarter 1 15/16 1 3/32 3 7/8 1 3/4 - -
Third Quarter 2 3/8 1 1/4 3 1/4 1 27/32 - -
Fourth Quarter 1 3/4 1 2 3/8 1 13/16 2 1 1/2
</TABLE>
On December 31, 1999 the representative bid for the Company's common stock,
as reported by the OTC Bulletin Board was 1 3/4.
The company's transfer agent is Registrar and Transfer Company, 311 Cox
Street, Roselle, NJ 07203.
ITEM 2. LEGAL PROCEEDINGS
The Company has no material pending legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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<PAGE> 20
The company's principal accountant is Hollander, Lumer & Co., LLP of Los
Angeles, California. The firm's report for the period from January 1, 1997
through December 31, 1998 did not contain any adverse opinion or disclaimer, nor
were there any disagreements between management and the Company's accountants.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued and sold the following unregistered shares of its
common stock during the last three years. No underwriters were used in the sale
of any of the Company's securities.
(a) Convertible Debentures
The Company has three convertible debentures due September 15, 2000, one of
which was issued in 1996 and two were issued in 1994. These debentures were
issued to persons with a pre-existing business relationship with the Company who
acquired the debentures for investment purposes only. The Company designated
these debentures in an aggregate principal amount of $25,000 at an interest rate
of 13%. The Holder of the debenture is entitled, at his option, any time until
maturity to convert the debenture including interest due into shares of common
stock of the Company at a conversion rate of two dollars worth of stock for
every one dollar of value of the debenture at the time of conversion. The
conversion price will be the average of the bid and the ask price of the
Company's stock for the last 30 days prior to the date of the notice of
conversion. If the holder does not convert his debenture by the maturity date,
the Company can choose to reissue a new debenture for one year including accrued
interest or pay the note in its entirety. These debentures were issued pursuant
to Section 4(2) of the Securities Act of 1933.
(b) Stock Issuance
1. In connection with its merger with AGI in September of 1997 the
Bankruptcy Court approved the plan of reorganization which called for the
Company to issue shares of its common stock and warrants to parties in interest
in the Bankruptcy proceeding, including creditors of AGI, and original
shareholders of the Company. As a result securities of the Company were issued
pursuant to Section 1145 of the Bankruptcy Code with the approval of the
Bankruptcy Court, as follows: 549,993 shares of common stock to parties in
interest issued in consideration for the merger and in settlement of claims
against AGI with the shares valued at $.50 per share; three classes of warrants
to parties of interest in settlement of claims as follows: 200,000 Class A
Warrants at an exercise price of $2.50 per share which expire November 14, 2000
unless extended by action of the Board of Directors; 400,000 Class B Warrants at
an exercise price of $4.00 per share which expire on March 14, 2000 unless
extended by action of the Board of Directors; and 400,000 Class C Warrants at an
exercise price of $6.00 which expire on March 14, 2000 unless extended by action
of the Board of Directors, and 5,000,000 shares of common stock to the original
shareholders of the Company in exchange for the original securities of the
Company issued prior to the merger.
2. The Company issued in October of 1997, 60,300 restricted shares of
common stock to a class of loyal customers and suppliers in appreciation for
their past services and support of the Company. These persons were familiar with
the Company's operations and acquired the shares for investment purposes only in
private transactions exempt pursuant to section 4(2) of the Act. These shares
were issued with restrictive legends for consideration valued at $.50 per share.
3. In September of 1997 and in May 1998, the Company's entire class of
convertible debenture holders, other than noted in subparagraph(a) above,
consisting of twelve investors who were sophisticated investors with a
pre-existing business relationships with the Company, exercised their options to
convert their
20
<PAGE> 21
debentures into common stock of the Company. These convertible debentures had
been issued for investment purposes only in private transactions exempt pursuant
to section 4(2) of the Act. As a result, the Company issued 692,967 shares in
September 1997 and 134,828 shares in May 1998 to redeem these debentures. These
shares were issued pursuant to the exemption from registration afforded by
Section 4(2) of the Act. As of the date of this registration statement, all of
these shares of the Company's common stock are eligible for sale under Rule 144
promulgated under the Securities Act of 1933, subject to certain limitations
included in said Rule.
4. The following shares of common stock were purchased and issued for
investment purposes in "private transaction" exempt pursuant to section 4(2) of
the Act and are restricted securities as defined in Rule 144. In each instance
these shares were issued with restrictive legends to sophisticated investors who
had a pre-existing business relationship with the Company and who were
knowledgeable as to the Company's business operations. These shares may not be
offered for public sale except under Rule 144, or otherwise, pursuant to said
Act. All shares were sold for cash. The following are the names of the issuees,
the number of shares purchased, date purchased and purchase price.
<TABLE>
<CAPTION>
Price Per Total
Name Share Shares Date
- ---- --------- ------ ----
<S> <C> <C> <C>
DLS Financial Services, Inc. $ 0.75 213,334 10/20/97
Barry Zwick $ 0.75 233,334 10/20/97
Jeffery Ross $ 0.75 10,000 10/23/97
Jeniffer Ross $ 0.75 10,000 10/23/97
David R. McCoy $ 0.75 5,000 6/8/98
William H.Oyster $ 0.75 10,000 6/8/98
John Benson $ 0.75 5,000 6/8/98
Jeffery R. Boyd $ 0.75 5,000 6/8/98
Margaret Lindsley $ 0.75 5,000 6/8/98
Jeffery Ross $ 0.75 3,000 6/8/98
Zwick Financial Corp. $ 0.75 66,667 6/8/98
DLS Financial Services, Inc. $ 0.75 75,000 6/8/98
S.E.Smith $ 0.75 40,000 6/8/98
DLS Financial Services, Inc. $ 0.75 50,000 9/3/98
DLS Financial Services, Inc. $ 0.50 25,000 10/21/98
S.E. Smith $ 0.50 25,000 10/21/98
John Benson $ 0.75 5,000 6/23/98
DLS Financial Services, Inc. $ 0.50 35,000 11/19/98
L.S. Smith $ 0.50 60,000 11/19/98
K.E. Zwick $ 0.50 12,500 11/19/98
J.B. Zwick $ 0.50 12,500 11/19/98
Tyrie Jenkins $ 1.00 20,000 1/21/99
Anthony Roth $ 1.00 10,000 2/5/99
Scott Dmtrenko $ 1.00 10,000 2/12/99
James Desomento $1.125 100,000 7/28/99
Alan Johnson $1.125 100,000 7/28/99
Michael & Sharon Woodrow $1.125 10,000 9/8/99
Gary and Joyce Shaw $1.125 25,000 9/22/99
</TABLE>
5. Pursuant to an offering Memorandum dated February 10, 1999, the Company
accepted subscriptions and issued 693,000 shares of its common stock at prices
of $1.125 and $1.25 per share. These shares were issued under Rule 504 of
Regulation D and a Form D was filed with the United Sates Securities and
21
<PAGE> 22
Exchange Commission with respect to this offering. The following are the
names of the issuees, the number of shares purchased, date purchased and
purchase price.
<TABLE>
<CAPTION>
Price Per Total
Name Share Shares Date
- ---- --------- ------ ----
<S> <C> <C> <C>
Mac Allen Culver III $1.125 20,000 3/26/99
CFO Associates, Inc. $1.125 10,000 3/26/99
Hobson Global Marketing $1.125 40,000 3/26/99
George A. Surovik, II $1.125 40,000 3/26/99
Vincent De Bono, Jr. $1.125 7,000 3/26/99
Jeffrey M. Everson $1.125 40,000 3/26/99
Lafferty Trust $1.125 288,000 3/26/99
Joseph M. LaMotta $ 1.25 12,000 4/5/99
George Herbert Walker $ 1.25 40,000 4/5/99
Foundation
Kelley Bergstrom $ 1.25 25,000 4/5/99
Citizens Auto Corp $ 1.25 35,000 4/5/99
Richard Hurwitz $ 1.25 15,000 4/5/99
Gregory Mark $ 1.25 5,000 4/5/99
Thomas Rassieur $ 1.25 15,000 4/5/99
James Savage $ 1.25 35,000 4/5/99
Hagemeister Irvin $ 1.25 6,500 4/5/99
Ms.Hagemeister Irvin $ 1.25 6,500 4/5/99
Melissa Ann Irvin $ 1.25 6,500 4/5/99
Thomas Irvin $ 1.25 6,500 4/5/99
Hobson Global Marketing $ 1.25 20,000 4/5/99
Scott Dmtrenko $1.250 13,500 4/5/99
</TABLE>
6. In 1997, 1998 and 1999 the Company issued restricted shares of its
common stock for services as noted in the following table in private
transactions pursuant to section 4(2) of the Act to investors who had
pre-existing business relations with the Company and who were familiar with its
business operations. In each instance the shareholder acquired the shares for
investment purposes and not with a view to distribute them to the public. The
following are the names of the shareholders, the number of shares purchased,
date purchased, and consideration received by the Company.
<TABLE>
<CAPTION>
Number Dollar
Name Of Shares Date Consideration Value$
- ---- --------- ---- ------------- ------
<S> <C> <C> <C> <C>
Jim Johnson 1,000 12/22/97 Promotion 500
Mary Ann Grant 5,000 12/22/97 Employee award 2500
Sheldon Zane 5,000 12/22/97 Promotion 2500
Robb Walsh 250 12/22/97 Promotion 125
Adam Robinson 2,000 12/22/97 Promotion 1000
Kristine Simonds 5,000 5/6/98 Employee Award 2500
Pat Lafferty 19,344 5/6/98 Nursery work 9672
Steve Goss 2,000 6/8/98 Promotion 1000
Elizabeth Robertson 10,000 6/8/98 Promotion 5000
DLS Financial Services, Inc. 11,134 6/8/98 Consulting fee 8351
DLS Financial Services, Inc. 2500 9/3/98 Consulting fee 1875
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C>
DLS Financial Services, Inc. 2500 10/21/98 Consulting fee 1250
DLS Financial Services, Inc. 6000 11/19/98 Consulting fee 3000
5-Star Nursery 62500 12/9/98 500,000 seedlings 125000
Barry Zwick 5,000 3/3/99 Director fee 2500
Shep Gordon 5,000 3/3/99 Director fee 2500
Jim Walsh 5,000 3/3/99 Director fee 2500
Tyrie Jenkins 5,000 3/3/99 Director fee 2500
Marcus Bender 5,000 3/3/99 Finder's Fee 2500
L.S. Smith 4,000 3/3/99 Consulting Fee 2000
Starr Tech 4,000 4/8/99 Promotion 6129
Steve Goss 2,400 4/8/99 Promotion 3417
John Harmon 1,300 4/8/99 Promotion 1894
Jack Harmon 9,334 4/8/99 Promotion 14000
Rusty Robertson 2,100 4/8/99 Promotion 4043
Jeremy Railton 6,500 4/8/99 Promotion 8544
Philip Engle 8,000 4/8/99 Promotion 7478
Anthony Roth 7,882 5/19/99 Consulting Fee 3941
Kristine Simonds 5,000 5/19/99 Employee Award 2500
Emeril Lagasse 7,500 5/19/99 Promotion 3750
Robert Del Grande 4,300 5/19/99 Promotion 2150
Stephan Pyles 3,500 5/19/99 Promotion 1750
Shep Gordon 5,500 5/19/99 Consulting Fee 2750
Anthony Roth 2,812 7/28/99 Consulting Fee 1406
Eddie & Pattie Sherman 10,000 9/22/99 Promotion 5000
L.S. Smith 12,000 9/22/99 Consulting Fee 6000
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company indemnify and hold harmless any director or
officer who was or is threatened to be made party to any threatened, pending, or
completed action, suit, or proceeding, by reason of the fact that he or she is
or was a director or officer of the Company, to the fullest extent of the law as
it now exists or may subsequently be amended (but, in case of any such
amendment, only to the extent that such amendment permits the Company to provide
broader indemnification rights).
Section 415-5 of the Hawaii Business Corporation Act authorizes the
indemnification of an officer or director against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred if the person
acted in good faith and in a manner the person reasonable believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe the conduct of the
person was unlawful. Notwithstanding the preceding, no indemnification is
permitted in respect to any claim, issue or matter as to which the person has
been adjudged to be liable for negligence or misconduct in the performance of
the person's duty to the corporation unless and only to the extent that the
court in which the action or suit was brought shall determine upon application
that, despite the adjudication of liability, but in review of all circumstances
of the case, the person is fairly and reasonable entitled to indemnity for such
expense as the court deems proper.
In so far as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to officers or directors of the Company pursuant to
the foregoing, the Company has been informed that in the opinion of the
23
<PAGE> 24
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933, as amended, and is therefore
unenforceable.
24
<PAGE> 25
HAWAIIAN VINTAGE CHOCOLATE COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors F-1
Balance Sheets as of December 31, 1998 and September 30, 1999 (unaudited) F-2
Statements of Operations for the years ended December 31, 1997 and 1998
nine months period ended September 30, 1998 and 1999 (unaudited) F-3
Statements of Shareholders' Equity for the years ended December 31, 1997 and 1998
and nine month period ended September 30, 1999 (unaudited) F-4
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and nine months period ended September 30, 1998 and 1999 (unaudited) F-5
Notes to Financial Statements F-6
</TABLE>
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Hawaiian Vintage Chocolate Company, Inc.
We have audited the accompanying balance sheet of Hawaiian Vintage Chocolate
Company, Inc. as of December 31, 1998 and the related statements of operations,
shareholders' equity, and cash flows for years ended December 31, 1997 and 1998.
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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. 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 audit provides 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 Vintage Chocolate
Company, Inc. as of December 31, 1998, and the results of its operations and its
cash flows for the years ended December 31, 1997 and 1998 in conformity with
generally accepted accounting principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
October 28, 1999
F-1
<PAGE> 27
HAWAIIAN VINTAGE CHOCOLATE COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ 72,282
Accounts receivable - net of allowance for
doubtful accounts $30,273 in 1998
and $39,273 in 1999 42,282 133,118
Common stock subscription receivable -- 39,375
Advances -- 22,500
Inventory 21,475 194,039
Other current assets 10,099 27,638
----------- -----------
TOTAL CURRENT ASSETS 73,856 488,952
----------- -----------
PROPERTY AND EQUIPMENT 36,776 121,053
----------- -----------
OTHER ASSETS
Capitalized planting cost 243,361 317,132
----------- -----------
TOTAL OTHER ASSETS 243,361 317,132
----------- -----------
TOTAL $ 353,993 $ 927,137
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 7,731 $ --
Accounts payable - trade 105,452 65,015
Accrued expenses 89,077 125,983
Notes Payable -- 75,000
Other payable 4,502 4,502
----------- -----------
TOTAL CURRENT LIABILITIES 206,762 270,500
----------- -----------
LONG TERM LIABILITIES 75,000 --
----------- -----------
TOTAL LIABILITIES 281,762 270,500
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; authorized 20,000,000
Authorized - 20,000,000 shares
Issued and outstanding - 7,479,843 in 1998 and
8,568,471 in 1999 7,482 8,571
Additional paid-in capital 1,850,052 3,052,965
Due from officer (355,604) (439,597)
Accumulated deficit (1,429,699) (1,965,302)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 72,231 656,637
----------- -----------
TOTAL $ 353,993 $ 927,137
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
F-2
<PAGE> 28
HAWAIIAN VINTAGE CHOCOLATE COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
----------------------------- ------------------------------
December 31, December 31, September 30, September 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales - net $ 136,519 $ 196,993 $ 164,266 $ 280,013
Cost of sales 45,986 47,429 32,820 115,554
----------- ----------- ----------- -----------
Gross Profit 90,533 149,564 131,446 164,459
----------- ----------- ----------- -----------
Operating expenses
Sales and marketing 121,982 180,953 142,002 235,256
Product development -- 21,209 21,139 13,408
General and administrative 217,007 439,683 312,092 447,454
Depreciation 5,377 16,456 12,342 9,021
Bad debt 10,326 14,674 2,000 9,000
----------- ----------- ----------- -----------
Total operating expenses 354,692 672,975 489,575 714,139
----------- ----------- ----------- -----------
Loss from operations (264,159) (523,411) (358,129) (549,680)
Other income (expense)
Other income 69,734 6,010 17,019 250
Interest income 11,301 21,945 17,107 24,697
Interest expense (87,981) (14,949) (10,165) (10,870)
----------- ----------- ----------- -----------
Total other income (expense) (6,946) 13,006 23,961 14,077
----------- ----------- ----------- -----------
Net loss $ (271,105) $ (510,405) $ (334,168) $ (535,603)
=========== =========== =========== ===========
Weighted average shares outstanding 5,667,477 7,051,472 6,960,153 8,050,749
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.05) $ (0.07) $ (0.05) $ (0.07)
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements
F-3
<PAGE> 29
HAWAIIAN VINTAGE CHOCOLATE COMPANY, INC
STATEMENT OF SHAREHOLDERS' EQUITY
For years ended December 31, 1997, 1998 and nine
months ended September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ ADDITIONAL DUE ACCUMULATED SHAREHOLDERS
SHARES AMOUNT PAID-IN CAPITAL FROM OFFICER DEFICIT EQUITY
--------- ------------ --------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1,000 $ 1,000 $ 86,304 $ (226,014) $ (648,189) $ (786,899)
Issuance of shares in connection with
Reorganization Plan
Cancellation of old HVCC shares (1,000) (1,000) 1,000 0
Shares issued to old HVCC
shareholders 5,000,000 5,000 (5,000) 0
Shares issued to old AGI
creditors 299,993 300 (300) 0
Shares issued for merger
advisory services 250,000 250 (250) 0
Issuance of shares for debenture
conversion 692,967 693 865,515 866,208
Issuance of shares for cash
at $.75 per share 466,668 467 349,533 350,000
Issuance of shares for
promotional at $.50 71,550 71 35,704 35,775
Additional due from officer (116,131) (116,131)
Net loss in 1997 (271,105) (271,105)
--------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1997 6,781,178 6,781 1,332,506 (342,145) (919,294) 77,848
--------- ----------- ----------- ----------- ----------- -----------
Shares surrendered at $.50 per share (11,350) (11) (5,664) (5,675)
Issuance of shares for debenture
conversion at $.385 per share 134,828 135 51,774 51,909
Issuance of shares in exchange
of trees at $2.00 per share 62,500 63 124,937 125,000
Issuance of shares for cash 442,667 443 289,067 289,510
Issuance of shares for services 22,134 23 14,453 14,476
Issuance of share for warrant
exercised at $2.50 per share 9,542 10 23,845 23,855
Issuance of share for promotional
purposes at $.50 per share 38,344 38 19,134 19,172
Additional due from officer (13,459) (13,459)
Net loss in 1998 (510,405) (510,405)
--------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1998 7,479,843 7,482 1,850,052 (355,604) (1,429,699) 72,231
--------- ----------- ----------- ----------- ----------- -----------
Issuance of shares for cash 968,000 968 1,114,032 1,115,000
Shares surrendered at $.50 per share (500) (1) (249) (250)
Issuance of shares for debt
settlement at $1.35 per share 33,634 34 45,471 45,505
Issuance of shares for
promotional at $.50 87,494 88 43,659 43,747
Additional due from officer (83,993) (83,993)
Net loss for 9 months period ended
September 30, 1999 (535,603) (535,603)
--------- ----------- ----------- ----------- ----------- -----------
Balance as of September 30, 1999 8,568,471 $ 8,571 $ 3,052,965 $ (439,597) $(1,965,302) $ 656,637
========= =========== =========== =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements
F-4
<PAGE> 30
HAWAIIAN VINTAGE CHOCOLATE COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
----------------------------- -------------------------------
December 31, December 31, September 30, September 30,
1997 1998 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (271,105) $ (510,405) $ (334,168) $ (535,603)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 5,377 16,456 12,342 9,021
Shares issued to convert debenture
interest to equity 175,836 1,903 -- --
Shares issued for services -- 14,476 10,226 --
Shares issued for promotional 35,775 13,506 12,497 43,497
Changes in Assets and Liabilities:
Accounts receivable (84,321) 95,424 68,599 (90,836)
Advances -- -- -- (22,500)
Inventory 2,544 (18,475) -- (172,564)
Other current assets (3,334) (1,223) 3,725 (17,539)
Bank overdraft -- 7,731 21,410 (7,731)
Accounts payable -trade (3,783) 74,374 50,182 5,068
Accrued expenses (105,250) 52,384 30,424 36,906
Other payables 5,162 (431) (599)
----------- ------- ------- ----------
NET CASH FROM OPERATING ACTIVITIES (243,099) (254,280) (125,362) (752,281)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (40,973) (14,075) (25,564) (93,298)
Capitalized planting cost (60,588) (42,018) (42,690) (73,771)
Advances to officer (116,130) (13,459) (45,216) (83,993)
----------- ------- ------- ----------
NET CASH USED BY INVESTING ACTIVITIES (217,691) (69,552) (113,470) (251,062)
CASH FLOWS FROM FINANCING ACTIVITIES
Private sales of common stocks 350,000 313,365 228,365 1,075,625
Proceeds from issuance of debentures,
net of debt repayment 116,250 -- -- --
----------- ------- ------- ----------
NET CASH PROVIDED FINANCING ACTIVITIES 466,250 313,365 228,365 1,075,625
NET DECREASE IN CASH AND CASH EQUIVALENT 5,460 (10,467) (10,467) 72,282
CASH AND CASH EQUIVALENT AT BEGINNING OF THE YEAR 5,007 10,467 10,467 --
CASH AND CASH EQUIVALENT AT END OF THE YEAR $ 10,467 $ -- $ -- $ 72,282
=========== =========== =========== ===========
OTHER CASH INFORMATION
Interest paid $ 23,806 $ 10,318 $ 14,600 $ 10,870
=========== =========== =========== ===========
NON CASH TRANSACTION
Shares issued for other than cash $ 901,983 $ 210,557 $ 78,398 $ 89,252
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements
F-5
<PAGE> 31
HAWAIIAN VINTAGE CHOCOLATE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business: Hawaiian Vintage Chocolate Company, Inc. (the Company) was
formed in July 14, 1993 as a Hawaii corporation to develop unique genetics and
grow cocoa beans on the Hawaiian Islands. Beginning 1998, the Company started
its transition from a research and development company to an operating company.
The principal business of the Company is to continue developing and growing
America's only homegrown cocoa beans, and to manufacture and sell aged cold bean
chocolate through distributions and its own retail stores.
The Company's Articles of Incorporation have been amended several times; the
last amendment was regarding the Company's merger with American Graphics
Industries, Inc. On September 30, 1997, Hawaiian Vintage Chocolate Company (Old
HVCC) entered into an Agreement of Merger with American Graphics Industries,
Inc. (AGI) pursuant to an Amended Plan of Reorganization filed with and approved
by the Bankruptcy Court (the Plan). The Plan provided a merger of AGI into the
Company. The management and board of Old HVCC replaced the management and board
of AGI. The merged companies continue under the name of Hawaiian Vintage
Chocolate Company, Inc. (New HVCC). (See Note 7).
Use of Estimates: The financial statements and related notes have been prepared
in conformity with generally accepted accounting principles and include some
amounts and disclosures which are estimated based on currently available
information and management's judgment of current facts and circumstances. Actual
results could differ from those estimates.
Allowance for Bad Debts: Allowance for doubtful accounts is provided on the
basis of the evaluation of the collectibilty of the accounts at the end of the
year.
Inventories: Inventories, consisting of cocoa beans and chocolate wafers, are
stated at the lower of cost or market. Cost is determined based on the weighted
average cost method.
Advertising Costs: Advertising expenditures relating to marketing are expensed
in the period the advertising initially takes place.
Fair Value of Financial Instruments: The Company's financial instruments consist
of cash equivalents, receivables, accounts payable, accrued expenses, notes
payable and due to related parties. The fair values of the Company's financial
instruments approximate the carrying value of the instruments.
Stock-Based Compensation: Statement of Financial Accounting Standard ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related Interpretations, under which no compensation cost
related to stock options has been recognized as the exercise price of each
option at the date of grant was equal to the fair value of the underlying common
stock.
Revenue Recognition: Sales are recognized net of trade discounts, when goods are
shipped.
Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation. Depreciation of property and equipment is computed
using double-declining balance methods based on the estimated useful lives of
the assets between 5 to 7 years.
F-6
<PAGE> 32
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterment are capitalized. When assets are retired or
otherwise disposed of, their carrying values and the related accumulated
depreciation are removed from the accounts and any resulting gains or losses are
reflected in operations for the year.
Capitalized Planting Cost: The cost of cacao tree nursery and field planting,
including direct labor and other related expenses are capitalized as incurred.
By the year the trees become producing, usually two to three years later, they
will then be reclassified as an amortizable asset and will be amortized over 40
years of the trees' useful lives.
Impairment of Long-lived Assets: The Company evaluates the carrying value of
long-lived assets whenever events or changes in circumstances indicate that the
carrying value of the asset may be impaired. An impairment loss is recognized
when estimated future cash flows expected to result from the use of the assets
including disposition, is less than the carrying value of the asset.
Share valuation: Shares issued without cash consideration are accounted for
based on the fair value of the consideration received or the fair market value
of the shares issued, whichever is more reliably measurable.
Basic and Diluted Net Loss per Common Share: The Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" which established
simplified standards for computing and presenting earnings per share
information. Basic EPS is calculated by dividing income available to common
stockholders (the "numerator") by the weighted-average number of common shares
outstanding (the "denominator") during the period. The computation of diluted
EPS is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares (that is, securities such as
options, warrants, convertible securities, or contingent stock agreements) had
been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back (a) any convertible preferred
dividends and (b) the after-tax amount of interest recognized in the period
associated with any convertible debt. The computation of diluted EPS shall not
assume conversion, exercise, or contingent issuance of securities that would
have an antidilutive effect on EPS.
Income Taxes: The Company utilizes the asset and liability method for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. In assessing the realizability of deferred tax
assets, the Company considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
New Accounting Pronouncement: In April 1998, the Accounting Standards Executive
Committee of the AICPA issued Statement of Position ("SOP") No. 98-5 "Reporting
on the Costs of Start-Up Activities." Costs of start-up activities, including
organization costs, should be expensed as incurred. This SOP is effective for
financial statements for the fiscal year beginning after December 15, 1998.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Dependence Upon Key Personnel: The success of the Company is largely dependent
on the personal efforts of Mr. Walsh, the President and Chief Executive Officer.
Mr. Walsh has entered into an executive employment agreement with the Company
that, among other things, precludes Mr. Walsh from competing with the Company
for a period of three years following termination of his employment with the
Company. The loss of the services of Mr. Walsh would have a material adverse
effect on the Company's business and prospects (See Note 7).
F-7
<PAGE> 33
Major Customers: The Company sold its product to several major customers. In
1997, 30% of the total net sales were derived from two customers (17% and 13%).
In 1998, 34% of the total net sales was derived from one customer. For the nine
months ended September 30, 1999, 39% of net sales were derived from three
customers (17%, 12% and 10%). As of December 31, 1997 and 1998, 59% of accounts
receivable were from three customers (25%, 22% and 12%) and 82% were from one
customer, respectively. As of September 30, 1999, 77% of accounts receivable
were from three customers (35%, 27%, and 15%).
Dependence on Supplier: Because Hawaiian Vintage Chocolates are produced from
unique cocoa beans, the Company is highly dependent on the farmers who grow and
harvest these unique cocoa trees. In 1998, the Company started planting its own
cocoa trees, but the trees will not be productive for the next two years.
The Year 2000 Matters: The Company's operations are dependent on the year 2000
readiness of third parties who do business with the Company. In particular, the
Company's information technology systems interact with commercial electronic
transaction processing systems to handle customer credit card purchases and
other point of sale transactions, and the Company is also dependent on
third-party suppliers of such infrastructure elements as telephone services,
electric power, water, and banking facilities. The Company has contacted it
relevant third parties. Although the Company has not been put on notice that any
known third parties problem will not be resolved, the Company has limited
information and no assurance of additional information concerning the year 2000
readiness of third parties. The resulting risks to the Company's business are
very difficult to assess. The Company has assessed its computer and business
processes and has upgraded its computer applications to provide for their
continued functionality. The Company believes that, with the modifications it
has made to its operating systems, the year 2000 issues is not reasonably likely
to pose significant operational problems for the Company's information
technology systems.
3. INVENTORY
As of December 31, 1998 and September 30, 1999 inventories consisted of the
following:
<TABLE>
<CAPTION>
September 30,
December 31, 1999
1998 (unaudited)
------------ ----------
<S> <C> <C>
Bulk primary products
Chocolate wafers $19,715 $ 59,032
Cocoa beans 1,760 2,416
Coffee beans -- 3,418
Packaging materials 44,104
Pack and ship materials 30,472
Retail packed primary products
Retail packed chocolate wafers 37,753
Retail packed coffee beans 19,844
------- --------
$21,475 $194,039
======= ========
</TABLE>
F-8
<PAGE> 34
At the end of 1998, the Company's bulk primary products, mainly chocolate wafers
and cocoa beans, were located at a vendor in California. In 1999, the Company
significantly increased its inventory, mainly in bulk primary products and
packaging materials due to the Company's substantial growth in sales and
anticipated demand in the moths ahead.
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and September 30, 1999 consisted
of the following:
<TABLE>
<CAPTION>
September 30,
December 31, 1999
1998 (unaudited)
---------- ----------
<S> <C> <C>
Automobiles $ 17,024 $ 31,790
Office equipment 11,315 19,712
Office furniture 21,234 24,487
Computer equipment 10,849 16,533
Warehouse equipment -- 25,177
Store furniture -- 36,020
-------- ---------
60,422 153,719
Less: accumulated
depreciation (23,646) (32,666)
-------- ---------
$ 36,776 $ 121,053
</TABLE>
Depreciation expenses charged to operation for the years ended December 31,
1997, 1998 and nine months ended September 30, 1999 (unaudited) were $5,377,
$16,456 and $9,021 respectively.
5. RELATED PARTY TRANSACTION
Employment Agreements: The Company is party to a seven-year employment agreement
with Mr. Walsh, the President and Chief Executive Officer. Based on the revised
agreement entered into as of September 24, 1997 his minimum base salary is
$175,000 per annum. As of September 30, 1999 Mr. Walsh has forgiven all prior
incurred salary. In recognition of his important role in the Company, he was
granted an exclusive preemptive right to acquire a number of common shares or
other securities of the Company at 75% of the net purchase price of any such
securities offered to any third party. This right extends for a period of
five-years from the conclusion of any third party offering. Should any
transaction be concluded involving options or warrants or other contingent
instruments, he can be granted an equal number of such instruments with an
exercise price equal to 75% of the exercise price offered to third-parties and
such instruments shall be exercisable at any time during the same term as the
third party, in whole or in part, on a cashless basis. Should he elect to
purchase shares or exercise options for cash or the equivalent, he is entitled
to pay for such purchases in the form of a 10-year term promissory note fully
amortized at 6% annual interest.
Stock Option Agreement: On September 28, 1998 the Board of Directors of the
Company adopted a stock option agreement. This agreement grants Mr. Walsh
nontransferable option to purchase up to 500,000 shares of common stock during
the option term at the option price of $2.00 per share. The option term is
determined starting from the grant date until 7 years from the date Mr. Walsh
ceases to be an employee of the Company. The option becomes exercisable in
installments of 25% per year from the grant date through the third anniversary
of the grant date. The issuance of the stock will not be registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933 and
are restricted securities. As of September 1999, none of these options have yet
been exercised.
F-9
<PAGE> 35
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock options. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. The compensation cost of the Company's stock
option agreement with Mr. Walsh and other issued stock options have been
determined based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net loss and loss per share would have been
increased by approximately $136,250 or $.02 per share in 1998. The fair value of
the options granted during 1998 is estimated to be $1.09 on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0%, volatility of 67.5%, risk-free rate of 4.25, and an
expected life of 3 years. Because changes in the subjective input assumptions
can materially affect the fair value estimate, in the opinion of the management,
the existing models do not necessarily provide a reliable single measure of the
fair value of the option.
Due from officer: Interest at 5% is charged at the beginning of each year for
the loan balances at the end of the prior year, including accrued interest.
Commencing January 1, 2000, the amount outstanding, principal and accrued
interest will be repaid in equal annual installments. The entire outstanding
balance will be due and payable in full on or before December 31, 2004.
<TABLE>
<CAPTION>
AS OF LOAN AMOUNT INTEREST BALANCE
- ------------------ ----------- -------- -------
<S> <C> <C> <C>
December 31, 1993 $ 7,789 0 $ 7,789
December 31, 1994 56,346 $ 389 64,524
December 31, 1995 90,678 3,227 158,429
December 31, 1996 59,664 7,921 226,014
December 31, 1997 104,830 11,301 342,145
December 31, 1998 (3,648) 17,107 355,604
September 30, 1999 83,993 439,597
</TABLE>
6. SHAREHOLDERS' EQUITY
Merger: On September 30, 1997, Hawaiian Vintage Chocolate Company (Old HVCC)
entered into an Agreement of Merger with American Graphics Industries, Inc.
(AGI) pursuant to an Amended Plan of Reorganization filed with the Bankruptcy
Court (the Plan). Old HVCC became the continuing accounting entity and all of
the Old HVCC's historical accounting was carried forward to the New HVCC.
Weighted average number of common shares outstanding and basic and diluted net
loss per share have been computed as if shares issued pursuant to the Amended
Plan of Reorganization had been outstanding at the beginning of the year, except
for the shares issued for merger advisory services were computed from the date
of merger.
After consummation of the merger, all shares owned by Old HVCC and AGI
shareholders were canceled and New HVCC had the following capital structure:
- 20,000,000 shares of common stock authorized, with $0.001 par value.
- 5,000,000 shares of common stock issued to the shareholders of Old
HVCC.
- 299,993 shares of common stock, 100,000 Class A Warrants, 200,000
Class B Warrants and 200,000 Class C Warrants were issued to the
creditors of AGI.
F-10
<PAGE> 36
- 250,000 shares of common stock, 100,000 Class A Warrants, 200,000
Class B Warrants and 200,000 Class C Warrants were issued to DLS
Financial Services, a professional advisor used in connection with the
merger.
Debt to equity conversion: The Company had issued unsecured convertible
debentures beginning May 1993. At September 1997, 692,967 shares of common
stocks were issued to convert $866,208 worth of these debentures into equity,
including accrued interest. Additional 134,828 shares were issued for the
debenture conversion in 1998. By the end of 1998, a total of 827,795 shares were
issued in connection with the conversion of $740,372 worth of debenture
principal plus $177,739 of accrued interest.
As of December 31, 1998 and September 30, 1999, the outstanding convertible
debentures were as follows:
Debt No. Issued Date Principal
- --------- ---------------- ---------
965281 May 6, 1996 $ 25,000
965282 May 6, 1996 25,000
119 December 2, 1994 25,000
--------
Total $ 75,000
========
These debentures carry a 13% annual interest rate with an initial term of
180-days from first issuance. Subsequently these debentures were extended up to
September 2000.
Private placements: During 1998, the Company, in private placements, raised
$289,510 through the issuance of 442,667 shares for $.50 to $.75 per share. In
relation to these private placements, the Company also granted the consultant
22,134 shares for financing services. These shares were valued at $14,476.
Regulation D offering: In February, 1999, the Company commenced an offering
pursuant to Rule 504 of Regulation D pursuant to which 693,000 shares were sold
at prices of $1.125 and $1.25 per share.
Exercised warrants: During 1998, 9,542 shares of Class Warrants were excised for
the purchase of 9,542 shares of common stock at $2.50 per share. As of December
31, 1998, the Company's stock warrants' balance was as follows:
<TABLE>
<CAPTION>
WARRANTS
------------------------------------------------------------------------------------
Class A Class B Class C Total
------------------ ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Strike Price $2.50 $4.00 $6.00
Expiration Date November 14, 2000 March 14, 2000 March 14, 2000
Number Outstanding 190,455 399,996 399,994 990,445
</TABLE>
F-11
<PAGE> 37
Common stock subscription receivable: On September 1998 the Company received
subscription for 35,000 shares of common stock among which 25,000 shares were
already issued. In October 1999, all funds for stock receivables were collected.
7. GRANT
In 1996 the Company entered into two-year consultant services agreement with the
Research Corporation of the University of Hawaii. The Company provides technical
assistance to small farmers to accelerate cocoa production in Hawaii. For this
service, the Company was compensated for services rendered and costs incurred up
to $192,720. All expenses related to this project were offset against the income
received.
8. COMMITMENTS AND CONTINGENCIES
License Agreements: In August and November 1998, The Company entered into
three-year license agreements (with options to extend) with The Trustees of the
Estate of Bernice Pauahi Bishop to utilize a total of 115 acres of land located
at Umauma, North Hilo, Hawaii, for planting cocoa trees. Minimum annual payments
as of December 31, 1998 are as follows:
Years Ending December 31, Amount
------------------------- ---------
2000 $ 3,625
2001 5,438
2002 7,250
In addition to the license fee, the Company also has to pay certain royalty fees
based on the Company's adjusted gross income as defined by the agreement.
Marketing Agreement: In June 1999 the Company entered into a marketing agreement
with Hobson Marketing Co. Inc. for the establishment and operation of Hawaiian
Vintage Chocolate retail outlets including carts/kiosks. Hobson Marketing Co.,
Inc. will be licensed to operate retail locations subject to the Company's
written approval within the states of Illinois, Missouri and Indiana.
F-12
<PAGE> 38
Part III
ITEM 1. INDEX TO EXHIBITS
Exhibits are listed according to the Exhibit #s as Follows:
"Charter and Bylaws"
<TABLE>
<S> <C>
2.1 Articles of Incorporation - the Articles of Incorporation of Hawaiian Vintage
Chocolate Company, Inc.*
2.2 Articles of Amendment - The July 1994 Amended Article of Incorporation for Hawaiian
Vintage Chocolate Company, Inc.*
2.3 Bylaws of the Company - The Bylaws of Hawaiian Vintage Chocolate Company, Inc.*
2.4 Order of the Court re:AGI Merger - The Bankruptcy Court ruling approving the merger
of American Graphics Industries,Inc. with Hawaiian Vintage Chocolate.*
2.5 Agreement of Merger with AGI - The merger agreement between American Graphics
Industries, Inc. and Hawaiian Vintage Chocolate Company, Inc. dated September 30,
1997.*
2.6 Certificate of Merger with AGI - The merger certificate dated October 2, 1997.*
</TABLE>
"Instruments defining the Rights of Security Holders"
<TABLE>
<S> <C>
3.1 Specimen Stock Certificate*
3.2 Specimen Class A Warrant*
3.3 Specimen Class B Warrant*
3.4 Specimen Class C Warrant*
</TABLE>
"Material Contracts"
<TABLE>
<S> <C>
6.1 License Agreement - Bishop Estate - License Agreement for use of land for cocoa
planting on Hamakua Coast between the Company and the trustees of the Bishop Estate
dated August 1, 1998.*
6.2 License Agreement - Bishop Estate - License Agreement for use of land for cocoa
planting on Hamakua Coast between the Company and the trustees of the Bishop Estate
dated November 1, 1998.*
6.3 Harbor Court Lease - the lease of Hawaiian Vintage Chocolate Company's offices in
Honolulu between Harbor Court Associates and the Company dated December 5, 1997.*
6.4 Employment agreement - the employment agreement as amended between James Walsh and
the Company dated September 24, 1997.*
6.5 Stock Option Agreement - the stock option agreement between James Walsh and the
Company dated September 24, 1997.*
6.6 License Agreement with Hobson Marketing - the licensing agreement with Hobson Global
Marketing and the Company to establish retail kiosks in five Midwest states dated
June 2, 1999.*
</TABLE>
"Additional Exhibits"
<TABLE>
<S> <C>
12.1 Consent of Hollander, Lumer & Co., LLP, Independent Certified Public Accountants.*
12.2 Updated consent of Hollander, Lumer & Co. LLP, Independent Certified Public
Accountants.
27 Financial Data Schedule.
- ------------
* Previously filed with the Company's Form 10SB, filed on November 12, 1999.
</TABLE>
26
<PAGE> 39
ITEM 2. DESCRIPTION OF EXHIBITS
<TABLE>
<S> <C>
2.1 Articles of Incorporation - the Articles of Incorporation of Hawaiian
Vintage Chocolate Company, Inc.*
2.2 Articles of Amendment - The July 1994 Amended Article of Incorporation
for Hawaiian Vintage Chocolate Company, Inc.*
2.3 Bylaws of the Company - The Bylaws of Hawaiian Vintage Chocolate
Company, Inc.*
2.4 Order of the Court re:AGI Merger - The Bankruptcy Court ruling approving
the merger of American Graphics Industries with Hawaiian Vintage
Chocolate.*
2.5 Agreement of Merger with AGI - The merger agreement between American
Graphics Industries, Inc. and Hawaiian Vintage Chocolate Company, Inc.
dated September 30, 1997.*
2.6 Certificate of Merger with AGI - The merger dated October 2, 1997.*
3.1 Specimen Stock Certificate*
3.2 Specimen Class A Warrant*
3.3 Specimen Class B Warrant*
3.4 Specimen Class C Warrant*
6.1 License Agreement - Bishop Estate - License Agreement for use of land
for cocoa planting on Hamakua Coast between the Company and the trustees
of the Bishop Estate dated August 1, 1998.*
6.2 License Agreement - Bishop Estate - License Agreement for use of land
for cocoa planting on Hamakua Coast between the Company and the trustees
of the Bishop Estate date November 1, 1998.*
6.3 Harbor Court Lease - the lease of Hawaiian Vintage Chocolate Company's
offices in Honolulu between Harbor Court Associates and the Company
dated December 5, 1997.*
6.4 Employment agreement - the employment agreement as amended between James
Walsh and the Company dated September 24, 1997.*
6.5 Stock Option Agreement - the stock option agreement between James Walsh
and the Company dated September 24, 1997.*
6.6 License Agreement with Hobson Marketing - the licensing agreement with
Hobson Global Marketing and the Company to establish retail kiosks in
five Midwest states June 2, 1999.*
12.1 Consent of Hollander, Lumer & Co., LLP, Independent Certified Public
Accountants.*
12.2 Updated Consent of Hollander, Lumer & Co., LLP, Independent Certified
Public Accountants
27 Financial Data Schedule
</TABLE>
- ------------
* Previously filed with the Company's Form 10SB, filed on November 12, 1999.
27
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to its registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: January 31, 2000 Hawaiian Vintage Chocolate Company, Inc.
By: /s/ JAMES WALSH
-------------------------------------
James Walsh, Chairman and CEO
28
<PAGE> 1
EXHIBIT 12.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Registration Statement on Form 10-SB,
Amendment 1, of our report dated October 28, 1999 relating to the Financial
Statements of Hawaiian Vintage Chocolate Company, Inc. which appears in such
Registration Statement.
/s/ HOLLANDER, LUMER & CO. LLP
---------------------------------
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
February 1, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 72,282
<SECURITIES> 0
<RECEIVABLES> 172,391
<ALLOWANCES> 39,273
<INVENTORY> 194,039
<CURRENT-ASSETS> 488,952
<PP&E> 153,719
<DEPRECIATION> 32,666
<TOTAL-ASSETS> 927,137
<CURRENT-LIABILITIES> 270,500
<BONDS> 0
0
0
<COMMON> 8,571
<OTHER-SE> 648,066
<TOTAL-LIABILITY-AND-EQUITY> 927,137
<SALES> 280,013
<TOTAL-REVENUES> 280,013
<CGS> 115,554
<TOTAL-COSTS> 714,139
<OTHER-EXPENSES> (24,947)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,870
<INCOME-PRETAX> (535,603)
<INCOME-TAX> 0
<INCOME-CONTINUING> (535,603)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (535,603)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
