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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark one)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
FOR THE FISCAL YEAR ENDED December 31, 1999
Transition Report Pursuant to Section 13 or 15(d) of the
----- Securities Exchange Act of 1934
Commission File Number 0-28125
The Children's Beverage Group, Inc.
(Name of Small Business Issuer in its charter)
Delaware 87-0459103
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
237 Melvin Drive, 2nd Floor, Northbrook, IL 60062
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (847) 562-4040
N/A
(Former name, former address, and former fiscal year if changed
from last report)
Securities to be registered under Section 12(b) of the Exchange
Act: None
Securities to be registered under Section 12(g) of the Exchange
Act: Common Stock, par value $.0 0001 per share
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed under
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports, and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes X No
----- ----
State the issuer's revenue for its most recent fiscal year: $3,606,987.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and ask prices of such common equity as of February 29,
2000: $16,572,659
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
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- -----------------------------------------------------------------
Class Outstanding as of February 29, 2000
- -----------------------------------------------------------------
Common Stock, par value 29,462,504
$.0001 per share
- -----------------------------------------------------------------
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes No X
--- ---
The Children's Beverage Group, Inc.
FORM 10-KSB
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. Description of Business............................................. 3
ITEM 2. Description of Property............................................. 6
ITEM 3. Legal Proceedings................................................... 7
ITEM 4. Submission of Matters to a Vote of Security
Holders............................................................. 9
PART II
ITEM 5. Market for Common Equity and Other Stockholder
Matters............................................................. 9
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 11
ITEM 7. Financial Statements............................................... 16
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 31
PART III
ITEM 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16(a) of the Exchange Act.......................................... 31
ITEM 10. Executive Compensation............................................. 32
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management.............................................. 33
ITEM 12. Certain Relationships and Related Transactions..................... 34
ITEM 13. Exhibits and Reports on Form 8-K................................... 34
Signatures................................................................... 35
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FORWARD-LOOKING STATEMENTS
The Company's management cautions readers that certain important factors
may affect the Company's actual results and could cause such results to differ
materially from any forward-looking statements that may be deemed to have been
made in this Form 10-KSB or that are otherwise made by or on behalf of the
Company. For this purpose, any statements contained in the Form 10-KSB that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "expect," "believe," "anticipate," "intend," "could," "estimate,"
"plans," or "continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. Factors that
may affect the Company's results include, but are not limited to, the Company's
limited operating history, its ability to re-initiate productions and produce
additional products, its dependence on one customer and key executive
management, its need for additional financing and competition from its
competitors. The Company is also subject to risk factors that have been and will
be set forth from time to time in the Company's filings with the Commission. FOR
A COMPLETE UNDERSTANDING OF SUCH FACTORS, THIS ENTIRE DOCUMENT, INCLUDING THE
FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES AND THE COMPANY'S FORM 10-SB,
SHOULD BE READ IN THEIR ENTIRETY.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
The Children's Beverage Group is a Delaware corporation incorporated on
August 17, 1988 ("TCBG" or the "Company"). TCGB began operating in the
children's beverage market in March 1997. The Company's corporate headquarters
are located in Northbrook, Illinois at 237 Melvin Drive, Northbrook, Illinois,
60062. The Company manufactures and markets juice pouch products for the
children's beverage market, although production and sales have been discontinued
as of November 1999. The Company is pursuing avenues to re-initiate production
of its beverage products, but no assurances can be given that production will be
re-initiated.
The Company focuses on providing low-cost juice drink products to major
supermarket chains and mass merchandisers throughout the United States. Until
November 1999 when production halted, the Company contracted with a manufacturer
to make juice drink pouches and then fill the pouch with any flavor of juice
drink requested by its customer. The product was then shipped to the customer,
where it was sold under the private label of the customer. The Company works in
tandem with the customer to ensure that the packaging, graphic design of the
label, and the juice flavors meet customer specifications.
Company History
The Company was incorporated under the laws of the State of Delaware in
August 1988 and had no material operations until 1993. On March 25, 1997, the
Company purchased all of the business and assets of a sole proprietorship owned
by Jon A. Darmstadter, who was doing business as Water Pouch, Inc. ("Water
Pouch"). Water Pouch's principal business was manufacturing and distributing
plastic water containers. After purchasing Water Pouch, the Company changed its
name to The Children's Beverage Group, Inc. in May 1997 and began conducting
business in the children's beverage market.
Subsequent to December 31, 1999, the Company expanded its strategy from
one of producing private label beverage products for various retail outlets by
capitalizing on its patented straw in pouch technology by offering long-term
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licensing of this technology to existing beverage makers. This shift is a result
of what Management feels is greater opportunity and a greater chance of
achieving profitable operations on a long-term basis.
Principal Product
Until November 1999, the Company produced all of Wal-Mart's private label
fruit juice pouch product line, including Great Values and BackPak. BackPak was
available in four flavors, Wild Cherry, Fruit Punch Splash, Slam Dunk Grape and
Kickin Orange, and was sold in a "stand up" aseptic pouch package. Made of PET
film and a foil lamentation, these packages are graphically striking with up to
six colors on each package.
The Company's juice pouches include a patented, self-contained fluid
dispensing system known as the "rip it sip it" drink system. The system consists
of a built-in straw that is inserted directly into the product-filled pouch
during the manufacturing process. The straw is then accessed via a laser score
line. The consumer simply tears the film and pushes the straw up from the bottom
of the pouch.
Manufacturing
Starting in December 1998, the Company began production, packaging and
distribution of its beverage products at a facility located near Toronto Canada.
This facility housed three of the Company's Volpak 240 DF machines, which were
used to manufacture its juice products. The Company leases two of these machines
and owns the third machine. Due to manufacturing problems and believing that
this manufacturer had breached its contractual duties, the Company caused
manufacturing at this location to cease in September 1999. The manufacturer
refused to allow the Company to remove its equipment and soon thereafter filed
for bankruptcy. See Legal Proceedings, below.
From July 1999 and until November 1999, the Company's products were
produced, packaged and distributed from an off-site facility located in the
Warrenton Products, Inc. facility in Warrenton, Missouri. This facility houses
three of the Company's Volpak 240 DF machines, which are used to manufacture its
juice products. The Company owns two of these machines and leases a third
machine. The Company rented the space in the facility at a cost of $0.15 cents
per case. The Company managed the manufacture of its products in this facility.
Discussions and negotiations with Warrenton to re-initiate production failed.
The Company has filed a law suit in January 2000 against this manufacturer. See
Legal Proceedings, below.
The Company anticipates that manufacturing will commence in new facilities
in late 2000 in Rochester, New York. In February 2000, the Company entered into
a contract for the purchase of an 80,000 square foot manufacturing facility on a
7 1/2 acre site for $975,000. The purchase is subject to satisfactory
environmental contamination testing, approval by the County of Monroe Industrial
Development Agency, and funding by the U.S. Department of Housing and Urban
Development, which is to be completed by April 30, 2000.
New Products
The Company has developed a new product known as "Pack-A-Snack." Pack-A-
Snack is a prepackaged plastic food box containing an assortment of snacks for
children, including a 6.75 ounce juice drink pouch. The Pack has a 12-month
shelf life and will be sold directly to grocery stores and mass merchandisers in
the same manner as TCBG's juice drink products. TCBG currently has no contracts
to distribute Pack-A-Snack. The product is not expected to be available in
stores until 2001.
The Company has also begun the planning and evaluation process for offering
its pouch-based technology to existing beverage drink manufacturers ("Charter
Members") utilizing a manufacturing licensing arrangement. The long history of
the use of flexible pouch products in Europe provides a framework for
anticipating potential demand in the United States. Utilizing its licensed
patent agreement for the "Self-Contained Fluid Dispensing System" known in the
trade as the "rip it sip it"(TM) package, the Company is uniquely positioned to
provide an opportunity for existing beverage drink producers to utilize this
technology. The Company has
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determined that developing strategic vendor agreements to provide a "turnkey"
pouch manufacturing solution will enhance introduction of this product.
Furthermore, part of the Rochester manufacturing facility will possibly be
allocated for use as a test bed for Charter Members to test the efficiency and
reliability of medium-term (approximately six months) pouch filling operations.
No potential beverage producers have yet been approached with this offering.
Adequate production capacity is necessary for implementing of either or
both of these initiatives. Accordingly, since the Company does not have
production facilities in place nor the financial resources to open a Rochester
manufacturing facility, these new products may never be produced.
Competition
The market for juice boxes and juice pouch beverages is intensely
competitive. The competitive factors affecting the market for the Company's
juice product include: vendor and product reputation, availability, ease of use,
product quality, price and the effectiveness of marketing and sales efforts. The
relative importance of each of these factors depends on the market segment. The
Company's major competitors include Capri Sun, Hi-C Juice Drinks, Minute Maid
Premium Juice Drinks, Juicy Juice, Tang and MOTTS Juices. Most of the Company's
competitors have greater capital resources and experience in the children's
beverage industry than the Company. There can be no assurance that the Company
will be able to compete successfully in the children's beverage industry.
Competitive pressures faced by the Company could materially affect its business,
operating results and financial condition. TCBG, however, is continuing to
develop private label packaging opportunities and expects this part of the
business to increase in the next few years.
Suppliers and Contract Manufacturers
The supplies used in the production and manufacture of the Company's
products include, but are not limited to, water, concentrates, syrups, closures,
lamination and other packaging materials. The Company is not dependent upon any
one supplier. Management believes that there are numerous alternative suppliers
for these materials, therefore the loss of a supplier is not likely to disrupt
the Company's operations.
The Company relied on two contract manufacturers to produce juice products
for its sole customer. Production at these facilities ceased in 1999 due to
disagreements over production levels deemed unsatisfactory by the Company. On
January 28, 2000, the Company filed a lawsuit against one of these contract
manufacturers in the U.S. District Court in the Eastern District of Missouri.
The suit alleges that the contract manufacturer has failed to comply with its
contract with the Company and a subsequent letter of intent between the parties,
thereby causing the Company irreparable harm. The loss of this manufacturer has
disrupted the Company's operations, and is expected to continue to disrupt its
operations, until alternative manufacturing arrangements are consummated.
One Customer
Through November 1999, Wal-Mart was the Company's sole customer. Because
the Company is no longer producing any juice product, Wal-Mart may seek other
sources for its private label juice products. The Company cannot give
assurances that Wal-Mart will become a customer of the Company again, if and
when manufacturing commences. The loss of Wal-Mart as a customer would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Patents and Trademarks
The Company has been granted a worldwide license to use the U.S. patent on
the "rip it sip it" drink system. The patent was applied for and issued to Jon
A. Darmstadter, the President and Chief Executive Officer of the Company in
August 1999. The patent is used in TCBG's production of its juice products. Mr.
Darmstadter has entered into a license agreement with the Company (the "License
Agreement") allowing the Company to use the patent in exchange for $1.00 per
year. Under the License Agreement, the Company maintains the exclusive right to
use the patent in
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its production of juice pouch products for the life of the patent (approximately
20 years).
Although intellectual property may derive the Company some value, at the
present time, management believes that other factors, such as product
innovations, are of more significance in the Company's particular industry. TCBG
avoids infringing on patents of others by monitoring on a regular basis patents
issued with respect to food and beverage packaging.
TCBG has applied for exclusive use of the trademark "Pack-A-Snack" and "Rip
it Sip it." The Company has also applied for exclusive use of the trademark
"Cool Kid," which may be licensed to customers who want the product produced
under this brand name.
Government Regulation
The manufacturing, packaging, labeling, advertising, distribution and sale
of TCBG's products are subject to one or more federal agencies including the
Federal Food, Drug and Cosmetic Act, the Occupational Safety and Health Act and
various federal and state statutes regulating the production, sale, safety,
advertising, labeling and ingredients of such products. The Company is not
subject to any state or federal approvals. To the best of management's
knowledge, the Company complies with applicable state and federal laws necessary
to operate a beverage production and distribution company.
The Company intends to manufacture certain products pursuant to contracts
with customers who will distribute the products under their own or other
trademarks. Such customers are subject to the governmental regulations discussed
in this section in connection with their purchase, marketing, distribution and
sale of such products, and the Company will be subject to such regulations in
connection with the manufacture of such products and its delivery of services to
such customers. However, although the Company's customers are independent
companies, and their labeling, marketing and distribution of such products is
beyond the Company's control, the failure of these customers to comply with
applicable laws or regulations could have a material adverse effect on the
Company. Governmental regulations in foreign countries where the Company plans
to sell products may prevent or delay entry into the market or require the
reformulation of certain of the Company's products. Compliance with such foreign
governmental regulations generally will be the responsibility of the Company's
customers in those countries. Those customers are independent companies over
which the Company will have no control.
TCBG cannot predict the impact of possible changes that may be required in
response to future legislation, rules or inquiries made from time to time by
governmental agencies. Food and Drug Administration regulations may, in certain
circumstances, affect the ability of the Company, as well as others in the
industry, to develop and market new products. However, TCBG does not presently
believe that existing applicable legislative and administrative rules and
regulations will have a significant impact on operations.
Employees
All production and distribution of TCBG's products have been outsourced to
contract manufacturers. In the future, the Company plans on hiring its own
production and distribution employees in conjunction with the opening of its
Rochester, New York manufacturing facility, see Description of Property, below.
As of December 31, 1999, the Company had six full-time employees and three part-
time employees.
Industry Segments
No information is presented as to industry segments. The Company is
presently solely engaged in the principal business of manufacturing children's
beverage products.
ITEM 2. DESCRIPTION OF PROPERTY
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TCBG owns no real property. The Company headquarters occupy approximately
2,100 square feet of office space located at 237 Melvin Drive, Northbrook,
Illinois 60062. The Company leases this space under a noncancellable operating
lease through December 14, 2003. Total rent for 1999 was $22,650, which includes
a prior office lease under which payments were made on a month-to-month basis.
The future minimum rent for the remaining term of the lease is approximately
$125,500.
The Company closed on an Industrial Revenue Bond issuance in October 1999
relating to opening its own plant in Rochester, New York (the "Rochester
Plant"), currently planned to begin operations by late 2000. Additional debt
and/or equity financing will likely be needed to begin operations at the
Rochester Plant. No assurance can be given that the Company will be able to
arrange for interim production before the fourth quarter of 2000 or that the
Rochester Plant will be operational by that date.
In February 2000, the Company entered into a contract for the purchase of
an 80,000 square foot manufacturing facility on a 7 1/2 acre site for $975,000
in Rochester, New York. The purchase is subject to satisfactory environmental
contamination testing, approval by the County of Monroe Industrial Development
Agency, and funding by the U.S. Department of Housing and Urban Development,
which is to be completed by April 30, 2000.
Renovation of this property and additional capital investment will be
necessary to meet its intended purpose. The City of Rochester (New York) has
proposed the use of $2,566,000 of Section 108 U.S Department of Housing and
Urban Development (HUD) financing for the purpose of purchasing a building
within the City and proposed to separately arrange for $1,000,000 of working
capital financing. Approximately $1.5 million of the unused Rochester
Industrial Revenue Bond offering is available for investment in equipment for
this facility. Other financing would have to be arranged to complete readying
this property for its intended use. No financing commitments are currently in
place, but discussions are taking place.
ITEM 3. LEGAL PROCEEDINGS
Flavorchem Corporation Dispute
Flavorchem Corporation ("Plaintiff") v. The Children's Beverage Group, Inc.
and Jon Darmstadter, Case No. 98 M1-165579, filed in the Chancery Division of
the Circuit Court of Cook County, Illinois in December 1998. Flavorchem
Corporation is seeking $42,542.53, alleging breach of contract and losses
(interest) related thereto. The dispute arises out of an alleged breach of
contract (entered in 1996) between Beverage Pouch Systems, Inc. and Flavorchem
concerning certain flavoring ingredients. The claim alleges that the Company is
legally responsible for the alleged liability associated with the aforementioned
Beverage Pouch System contract with Flavorchem.
An appearance and answer have been filed on behalf of the Company. Pursuant
to a Motion to Strike Plaintiff's Affirmative Defenses, the Company filed
Amended Affirmative Defenses, which have not been answered or objected to as of
March 30, 2000. Additionally, the Company has initiated discovery with an
appearance scheduled for March 2000. The Company continues to vigorously defend
itself in this matter.
Sweet Ripe Drinks, Ltd. Dispute
The Company had a contractual relationship with Sweet Ripe Drinks, Ltd.
("Sweet Ripe"), a Canadian company, whereby Sweet Ripe bottled and packaged the
Company's beverage product using machinery provided by the Company. During the
course of dealing, there arose certain disputes between the parties as to a
variety of continuing manufacturing problems. Believing Sweet Ripe to be in
breach of its contractual duties, having provided an opportunity to cure, the
Company caused its bottling and packaging at Sweet Ripe to cease. In response,
Sweet Ripe refused to allow the Company to remove its machinery. Shortly
thereafter, Sweet Ripe filed a Notice of Intention to File a Proposal under the
Canadian Bankruptcy and Insolvency Act, which in effect, caused a stay of
proceedings. The Company then petitioned a Master of the Superior Court of
Justice to lift the stay of proceedings so that the
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Company could proceed with an action to recover the manufacturing equipment. In
arguing against the stay of proceedings, Sweet Ripe asserted that the Company
owes approximately $700,000 to Sweet Ripe. The Master did not agree to lift the
stay of proceedings but rather adjourned that matter subject to any orders that
the Bankruptcy Court might make with regard to the matter. The Bankruptcy Court
required the filing of a monetary proof of claim which was filed in late January
2000 and the claim was denied due to Sweet Ripe's counterclaim. The Company
appealed that decision and the matter will be sent to trial with a trial date to
set by April 16, 2000. The equipment at issue is valued at approximately $1.5
million. Two of the three major pieces of equipment at issue are leased and the
remaining equipment is owned by the Company. The Company has engaged outside
legal counsel to handle its legal representation with respect to any related
proceedings.
Warrenton Products, Inc. Dispute
The Company had a contractual relationship with Warrenton Products, Inc.
("WPI"), a Missouri corporation, whereby WPI bottled and packaged the Company's
beverage product using machinery provided by the Company. During the course of
dealing, certain disputes arose between the parties about a variety of
manufacturing problems, including disagreements over production levels deemed
unsatisfactory by the Company. In November 1999, WPI unilaterally decided to
discontinue manufacturing the Company's product for its sole customer. The
Company contended that WPI breached its contractual obligations to the Company.
The Company entered into a letter of intent with WPI in December 1999 that would
subsequently allow for the reinitiating of production at WPI's facilities. Based
on WPI's unwillingness to cure conditions as provided for in either document,
the Company engaged outside legal counsel to handle its legal representation
with respect to any related proceedings.
On January 28, 2000, the Company filed a lawsuit against WPI in the U.S.
District Court in the Eastern District of Missouri. Besides recovering the
damages caused by WPI's discontinuing production, the Company has requested the
Court to release the three major pieces of the Company's production equipment
located at WPI which are valued at approximately $1.5 million. Two of the three
major pieces of equipment are owned and the remaining equipment is leased by the
Company. WPI has offered to release this equipment, but the Company is
negotiating a settlement amount with WPI for the release of the equipment.
On February 3, 2000, WPI filed a lawsuit against the Company in the Circuit
Court of Warren County, Missouri. This lawsuit alleges breach of contract,
promissory estoppel and fraudulent misrepresentation, which alleges damages of
approximately $2.0 million plus interest and costs and also seeks punitive
damages. The Company intends to vigorously defend against the WRI claim and
prosecute its claim.
Capri Sun Dispute
In February 2000, Capri Sun, Inc. ("Capri Sun") and Rudolph Wild GMBH & Co.
KG, a German limited partnership, (collectively, "Plaintiffs") filed a Motion to
Reinstate Case and Enforce Settlement Agreement in the Northern District of
Illinois, old case no. 97 C 1961 (Settlement Agreement). The Company has filed
its response to the Motion, and Plaintiffs' reply was filed on March 28, 2000.
The nature of the Motion is breach of contract. The contract in dispute is
a Settlement Agreement dated August 29, 1997 by and among Plaintiffs and Jon A.
Darmstadter (the Company's President and CEO) and the predecessors to the
Company (collectively, the "Defendants"). Pursuant to the Settlement Agreement,
the Defendants agreed to, among other things, refrain from using a pouch with
characteristics similar to Capri Sun's products. In this Motion, Plaintiffs
allege four purported breaches of the Settlement Agreement: (1) the relative
dimensions of the Company's pouches are different than allowed in the Settlement
Agreement; (2) the pouches are housed in cardboard boxes that look too much like
the rectangular-shaped boxes of Capri Sun; (3) the Company's website
misleadingly implies that the Company has a trademark license from Capri Sun;
and (4) the pouches use the color blue in contravention of the Settlement
Agreement. Plaintiffs allege no purported monetary injury as a result of any
alleged breaches, and only seeks "specific performance" of the Settlement
Agreement as their remedy. More specifically,
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Plaintiffs have requested that the Company be ordered by the Court to
discontinue the four alleged breaches.
The Company is vigorously defending the litigation. The Company has argued
in response to Plaintiffs' motion that the first three "breaches" are not
breaches at all since the Settlement Agreement does not address these issues
while the fourth breach would be cured by the Company removing the color blue on
all future press runs of the pouches.
The Company is involved in various other litigation incident to its
business. It is the opinion of management that the outcome of such litigation
will not have a material adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 22, 1999, Jon A. Darmstadter, the sole owner of 6,469,504
outstanding shares of Common Stock and 1,000,000 outstanding shares of Series A
Preferred Stock (58.22% of the total votes entitled to be cast), took action by
less than unanimous written consent of the stockholders to amend and restate the
Company's Certificate of Incorporation. This amendment reduced the conversion
rate of the Company's Series A Preferred Stock from 1-for-25 to 1-for-5.
Therefore, on a change in control of ownership of the Company, the Series A
Preferred Stock holder will automatically receive five shares of Common Stock
for each share of Preferred Stock that he holds.
PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND OTHER RELATED SHAREHOLDER MATTERS
Market Information
Prior to the filing of its registration statement (Form 10-SB/A), on
January 15, 2000, no shares of the Company's Common Stock had been registered
with the Securities and Exchange Commission (the "Commission") or any state
securities agency of authority. The Company's Common Stock has been traded on a
limited basis in the over-the-counter market and quotations are published on the
OTC Bulletin Board under the symbol "TCBG", and in the National Quotation
Bureau, Inc. "pink sheets" under The Children's Beverage Group, Inc.
The following table sets forth the range of high and low bid prices of
the Common Stock for each fiscal quarterly period. Prices reported represent
prices between dealers, do not include retail markups, markdowns or commissions
and do not represent actual transactions.
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FISCAL YEAR
1999 1998
High Low High Low
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First Quarter $2.97 $1.09 (1) (1)
Second Quarter $1.59 $1.31 (1) (1)
Third Quarter $1.97 $0.84 $1.88 $0.66
Fourth Quarter $1.19 $0.56 $1.84 $0.75
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(1) The price information above was obtained from an independent
quotation service. Although the Company is aware that its
shares did trade on a limited basis during the first and
second quarters commencing in March 1998, there is no
meaningful price information for those periods and thus none
is presented.
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The ability of individual shareholders to trade their shares in a
particular state may be subject to various rules and regulations of that state.
A number of states require that an issuer's securities be registered in their
state or appropriately exempted from registration before the securities are
permitted to trade in that state. Presently, the Company has no plans to
register its securities in any particular state. Further, most likely the
Company's shares will be subject to the provisions of Section 15(g) and Rule
15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. Rule 3a51-1 provides that any equity security is considered to be a
penny stock unless that security is: registered and traded on a national
securities exchange meeting specified criteria set by the Commission; authorized
for quotation on The NASDAQ Stock Market; issued by a registered investment
company; excluded from the definition on the basis of price (at least $5.00 per
share) or the issuer's net tangible assets; or exempted from the definition by
the Commission. If the Company's shares are deemed to be a penny stock, trading
in the shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors, generally persons with assets in excess of $1,000,000
or annual income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such securities and must
have received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker-dealers to
trade and/or maintain a market in the Company's Common Stock and may affect the
ability of shareholders to sell their shares.
Holders
As of February 29, 2000, there were approximately 570 record holders of the
Company's common stock. This amount does not take into account those
shareholders whose certificates are held in the name of broker-dealers or
otherwise in street or nominee name.
Dividend Policy
During 1998, the Company declared a one-for-eight stock dividend and issued
2,550,030 shares of Common Stock. The Company has never paid cash dividends on
its capital stock and does not intend to do so in the foreseeable future. TCBG
currently intends to retain its earnings for the operation and expansion of the
business. The Company's continued need to retain earnings for operations and
expansion are likely to limit its ability to pay dividends in the future.
Dividends, if any, will be contingent upon the Company's revenues and
earnings, if any, capital requirements and financial conditions. The payment of
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dividends, if any, will be within the discretion of the Company's Board of
Directors.
TRANSFER AGENT
The Company has designated Atlas Stock Transfer Corporation 5899 South State
Street, Ste. 24, Salt Lake City, UT 84107, as its transfer agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read with the Company's financial statements, including
the notes, included elsewhere in this Form 10-KSB.
Overview
The Company has experienced recurring losses since inception and has
negative working capital and cash flows from operations. For the periods ended
December 31, 1998 and 1999, the Company experienced a net loss of $1,985,420,
and $6,481,421 respectively. As of December 31, 1999, the Company has a working
capital deficit of $2,633,163.
The Company's ability to continue as a going concern is contingent upon its
ability to secure additional financing, re-initiate productions and product
sales and attain profitable operations. In addition, the Company's ability to
continue as a going concern must be considered in light of the problems,
expenses and complications frequently encountered by entrance into established
markets and the competitive environment in which the Company operates.
Management is pursuing various sources of debt and equity financing.
Although the Company plans to pursue additional financing, there can be no
assurance that the Company will be able to secure financing when needed or
obtain financing on terms satisfactory to the Company. Failure to secure such
financing may result in the Company rapidly depleting its available funds.
Without such funds the Company would be unable to comply with its payment
obligations under its bank loans and with its vendors.
Additionally, the Company is pursuing avenues to re-initiate production of
its beverage products in 2000. A U.S. contract manufacturer, whom the Company
was utilizing to produce its beverage products, discontinued production in
November 1999. The Company has sued this U.S. contract manufacturer for breach
of contract. Furthermore, seeking an alternative producer requires the release
of major pieces of the equipment. All Company-owned and financed major pieces of
equipment are currently either held at the U.S. contract manufacturer's plant
(three major pieces of equipment) or with another Canadian contract manufacturer
(another three major pieces of equipment) who is currently in bankruptcy. The
Company's legal representatives in the bankruptcy proceedings believe that the
equipment in Canada should be released late in the second quarter of 2000, and
the Company is negotiating the release of the remaining equipment held by the
U.S. contract manufacturer. The Company anticipates that these six pieces of
equipment will need to be retrofitted upon release in order to increase the
production to expected rates. The Company is currently negotiating with the
manufacturer to have this equipment improved.
The Company closed on an Industrial Revenue Bond issuance in October 1999
relating to opening its own plant in Rochester, New York (the "Rochester
Plant"), currently planned to begin operations by late 2000. Additional debt
and/or equity financing will likely be needed to begin operations at the
Rochester Plant. No assurance can be given that the Company will be able to
arrange for interim production before the fourth quarter of 2000 or that the
Rochester Plant will be operational by that date. The Company is aggressively
seeking alternative interim production sources for its beverage products.
11
<PAGE>
The Company has used approximately $1.3 million from the bond proceeds to
order eight additional pieces of production equipment, expected to cost a total
of approximately $4.5 million. Although the manufacturer has indicated that all
machines will be completed by August 2000, the Company is currently negotiating
with the manufacturer about certain alleged inadequacies with the machines. The
Company can make no assurances that its current dispute with the manufacturer
will be resolved in the foreseeable future or that the Company will have
machines that meet its production requirements. If the manufacturing problems
are not resolved soon, it is unlikely that production will commence in Rochester
as anticipated unless the other six machines are obtained from Sweet Ripe and
Warrenton.
In order to meet anticipated expenses over the next twelve months, the
Company intends to seek additional capital through the sale of common shares.
The Company is currently registered on the OTC Bulletin Board. No underwriter,
agent or other person has agreed to assist the Company in distributing any of
its common shares, and no actions have been taken to ascertain whether to
register such shares under the Securities Act of 1933, as amended (the
"Securities Act") or rely on exemptions from registration to distribute such
shares. No assurance can be given that the Company will be able to sell
securities or raise additional financing to meet its operating needs, or that if
available, such sales could be effected on terms acceptable to the Company. If
the Company is not able to sell additional securities or raise additional
financing to meet its operating expenses, there is substantial doubt that the
Company will be able to continue as a going concern.
When the Company is operating, it expects sales to be seasonal. The juice
drink beverage industry generally experiences its highest sales by volume during
the spring and summer months and its lowest sales by volume during the winter
months. As a result, working capital requirements and cash flow vary
substantially throughout the year. Consumer demand for products is affected by
weather conditions. Cool, wet spring or summer weather could result in decreased
sales of product and could have an adverse effect on the Company's financial
position, cash flows and results of operations.
During the twelve-month period ended December 31, 1998, the Company's
activities were primarily directed to the development of the Company's business
plan, organizational structure, negotiations, financing, project evaluations and
relationship building. During the twelve-month period ended December 31, 1999,
the Company's activities expanded to include significant contract manufacturing
and distribution operations, thus, the Company ceased to be a development-stage
enterprise.
Results of Operations
The following selected financial information has been derived from the
Company's financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
in this Form 10-KSB.
The following table sets forth the percentage relationships to net sales of
principal items contained in the Company's Statements of Operations for the two
years ended December 31, 1999 and 1998. The percentages discussed throughout
this analysis are stated on an approximate basis.
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998
-------- ---------
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of Sales 139.4% 117.3%
------ -------
Gross Profit (39.4%) (17.3%)
Selling, general and
administrative expenses 115.3% 1,331.6%
------ -------
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Operating loss (154.7%) (1348.9%)
Interest income 0.6% -%
Interest expense (25.6%) (11.4%)
------ -------
Net loss (179.7%) (1360.3%)
====== =======
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales. Net sales increased to $3,606,987 for the year ended December
31, 1999 from $145,954 for the year ended December 31, 1998. The increase in net
sales is attributable to the Company ceasing to be a development stage
enterprise and correspondingly increasing production and orders from the
Company's sole customer, Wal-Mart. Sales and production ceased in November 1999.
Cost of Sales. Cost of sales increased to $5,027,152 for the year ended
December 31, 1999 from $171,268 for the year ended December 31, 1998. The
increase in cost of sales is attributable to the Company ceasing to be a
development stage enterprise and correspondingly increasing production and
orders from the Company's sole customer, Wal-Mart. Primary components of cost of
sales in 1999 were co-packing fees, ingredients, packaging, freight costs and
equipment repairs.
Selling, General and Administrative Expenses. Selling general and
administrative expenses increased to $4,160,697 for the year ended December 31,
1999 from $1,943,446 for the year ended December 31, 1998. The 1998 expenses
were limited to personnel, overhead, office equipment and professional fees
incurred in formulating a business plan, developing its marketing strategy and
initial sales efforts. The increase in selling, general and administrative
expenses in 1999 was primarily attributable to an increase in sales promotion
expense of $1,200,000, which related to the sponsorship of an Indy Racing League
car team and to legal fees.
Interest Income. Interest income increased to $20,782 for the year ended
December 31, 1999 from $ -0- for the year ended December 31, 1998. The increase
was attributable to a full year of funds invested in bank certificates of
deposit as required under the Company's bank line of credit arrangements.
Interest Expense. Interest expense increased to $921,343 for the year
ended December 31, 1999 from $16,660 for the year ended December 31, 1998. The
increase was due to increasing bank line of credit utilization during 1999,
incurring a full year of interest expense on a $1,180,716 capital lease
arrangement entered into late in 1998 and covering major equipment lines,
drawing down $5,080,254 of an Industrial Revenue Bond in October, 1999 and
incurring $395,267 of interest expense related to converting $592,900 of
stockholder notes payable into common stock with a value of $988,167.
Net Loss. The Company's net loss increased to $6,481,421 for the year
ended December 31, 1999 from $1,985,420 for the year ended December 31, 1998.
The increase in the Company's net loss reflects the building of corporate
infrastructure to support initial manufacturing operations and expected growth
and loss on production related to inefficiencies related to the use of contract
manufacturers.
Liquidity and Capital Resources
The Company's ability to continue as a going concern is contingent upon its
ability to secure additional financing and attain profitable operations. In
addition, the Company's ability to continue as a going concern must be
considered in light of the problems, expenses and complications frequently
encountered by entrance into established markets and the competitive environment
in which the Company operates. In order to meet anticipated expenses over the
next twelve months, the Company intends to seek additional capital through the
sale of common shares. The Company is currently registered on the OTC Bulletin
Board. No underwriter, agent or
13
<PAGE>
other person has agreed to assist the Company in distributing any of its common
shares, and no actions have been taken to ascertain whether to register such
shares under the Securities Act of 1933, as amended (the "Securities Act") or
rely on exemptions from registration to distribute such shares. No assurance can
be given that the Company will be able to sell securities or raise additional
financing to meet its operating needs, or that if available, such sales could be
effected on terms acceptable to the Company. If the Company is not able to sell
additional securities or raise additional financing to meet its operating
expenses, there is substantial doubt that the Company will be able to continue
as a going concern. Management believes that sufficient capital resources will
be generated from equity investment and debt financing to provide necessary
working capital for fiscal year 2000.
The Company's principal cash requirements are for capital requirements for
building out its Rochester, New York plant, funding of ingredient and packaging
inventory necessary to fuel beginning operations, funding of accounts receivable
as a result of re-initiating operations, selling, general and administrative
expenses and employee costs. The Company's primary sources of cash have been
from sales of its children's beverage product which reduced the cash used in
operations and the proceeds from the issuance of Industrial Revenue Bonds
designated to and supporting the build-out of the Rochester, New York plant. The
Company is investigating various sources for additional financing, including
both equity infusion and debt facility arrangements, though no representation is
made as to the Company's ability to secure either forms of financing, or if
successful, whether may be dilutive to existing shareholders.
The Company has only started to generate significant revenues from its own
operations in the first eleven months of 1999, however, production and product
sales ceased in November 1999. Prior to the commencement of these operations,
the Company had nominal revenues due to the start-up nature of such operations,
substantial ongoing investment in business development efforts, and expenditures
to build the appropriate infrastructure to support its expected growth.
Consequently, the Company has been substantially dependent on debt financing to
fund its cash requirements.
The Company has two credit facilities under secured notes payable with
maturity dates of January 9, 2000 and September 5, 2000, respectively. The
January 9th note has been replaced with a note maturing July 9, 2000. The
Company can borrow a maximum of $500,000 and $50,000, respectively, under these
agreements. Borrowings are collateralized by substantially all the Company's
assets. Interest is paid monthly at the prime rate (currently 8.5%) and the
prime rate plus 1% (currently 9.5%), respectively. Borrowings of $550,000 were
outstanding on the lines as of December 31, 1999.
During 1999, the Company began to sell its accounts receivables under a
factoring agreement established with a financial institution. The sale of
accounts receivable stopped in November 1999 due to the discontinuance of
production and sales in November 1999.
The Company made a payment of 2.2 million shares of common stock valued at
$2.25 million in 1999, related to obligations under a sponsorship agreement with
an Indy Racing League car team. The Company's logo was displayed on the racing
team's car and provided advertising for the Company.
Jon A. Darmstadter has made various advances against a note to the Company
that total $749,259 (including interest of $54,259) due on demand. Interest is
accrued quarterly at 12%. As of December 31, 1999, payments of $275,920 of
principal and $25,440 of interest had been made by the Company. The balance as
of December 31, 1999 is $447,899.
In October 1999, the County of Monroe Industrial Development Agency (the
"Agency") issued $7.42 million of its Industrial Development Revenue Bonds,
Series 1999 (the "Bonds") under an Indenture of Trust dated as of October 1,
1999 (the "Indenture") by and between the Agency and the trustee. The Bonds were
issued by the Agency for the purpose of providing funds to the Company to
finance certain costs in connection with a project. The Company has received
$5,080,254 of the bond proceeds which has an interest rate of 8.75%. In
connection with the Bond deal, the Company has received a proposal for $2.56
million of financing representing a combination of
14
<PAGE>
Section 108 from the Department of Housing and Urban Development ("HUD") plus
$1.0 million of working capital financing. The original project terms were based
on a facility which had significant environmental clean-up issues. The Company
and the Agency have identified another facility in Rochester, New York. The
Company anticipates that manufacturing will commence in new facilities in late
2000. In February 2000, the Company entered into a contract for the purchase of
an 80,000 square foot manufacturing facility on a 7 1/2 acre site for $975,000.
The purchase is subject to satisfactory environmental contamination testing,
approval by the County of Monroe Industrial Development Agency, and funding by
the U.S. Department of Housing and Urban Development, which is to be completed
by April 30, 2000.
Net cash used for the Company's operations was $2,201,300 and $739,166 for
the years ended December 31, 1999 and 1998, respectively. The increase in net
cash used for operating activities in fiscal 1999 was primarily due to a larger
net loss, net of a $2.6 million noncash equity transactions charged to
operations and net of an increase in accounts payable and accrued expenses.
Cash used in investing activities was for purchases of property and
equipment totaling $2,862,227 for the year ended December 31, 1999 and for
purchases of property and equipment ($397,785) and an investment in certificates
of deposit ($500,000) totaling $897,785 for the year ended December 31 1998.
The increase in 1999 primarily was used for purchases of major pieces of
equipment integral in the manufacture of the Company's beverage products.
The Company's primary sources of liquidity have been from the issuance of
common stock and borrowings from shareholders, the bank and the proceeds from
the Industrial Revenue bond financing. Proceeds received from financing
activities were used for the Company's operations and purchases of property and
equipment. Net cash provided by financing activities was $5,073,180 and
$1,636,636 for the fiscal years ended December 31, 1999 and 1998, respectively.
The increase in 1999 was primarily due to additional proceeds from the issuance
of industrial revenue bonds of $4,511,204, as well as proceeds from notes
payable, net of repayments.
Year 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in Year 2000,
these date code fields will need to accept four digit entries in order to
distinguish 21/st/ century dates. All of the Company's computers comply with
"Year 2000" requirements. However, there can be no assurance that other
companies with which the Company transacts business will operate properly in
Year 2000 and beyond, or that failure by such third party entities to correct a
Year 2000 problem, or a correction which is incompatible with the Company's
information systems, would not have a material adverse effect on the Company's
operations or financial condition. Management believes it is Year 2000 ready.
The cost of the Company's efforts to prepare for the Year 2000 compliance was
not material. Nevertheless, because it is not possible to anticipate all future
outcomes, especially when third parties are involved, there could be
circumstances in which the Company is adversely affected by Year 2000 problems.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use, including the requirement to capitalize and amortize specific
costs. The adoption of this standard did not have a material effect on the
Company's capitalization policy.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. The Company does not expect the
adoption of this statement to have a significant impact on its results of
operations, financial position or cash flows. SFAS No. 133 has been amended by
SFAS No. 137, which
15
<PAGE>
delayed the effective date to periods beginning after June 15, 2000. The
Company, to date, has not engaged in derivative and hedging activities.
INFLATION
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements for The Children's Beverage Group, Inc. for the
years ended December 31, 1999 and 1998 have been audited to the extent indicated
in their reports (both of which contain an explanatory paragraph regarding the
Company's ability to continue as a going concern) by DiRocco & Dombrow, PA,
independent certified public accountants, for the year ended December 31, 1999
and BDO Seidman, LLP, independent certified public accountants, for the year
ended December 31, 1998, and have been prepared in accordance with generally
accepted accounting principles and pursuant to Regulation S-B as promulgated by
the Securities and Exchange Commission and are included herein in response to
Item 7 of this Form 10-KSB.
16
<PAGE>
Report of Independent Certified Public Accountants' for the year ended December
31, 1999
Board of Directors
The Children's Beverage Group, Inc.
Northbrook, Illinois
We have audited the accompanying balance sheet of The Children's Beverage Group,
Inc. as of December 31, 1999 and the related statements of operations, changes
in stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of 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
misstatement. An audit includes, examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 The Children's Beverage Group,
Inc, as of December 31, 1999 and the results of their operations and cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the summary of
accounting policies, the Company has incurred losses since inception, has
negative working capital and cash flows from operations, has numerous unresolved
legal matters, and has currently ceased operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in the summary
of significant accounting policies. These financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
DiRocco & Dombrow, P.A.
March 17, 2000
17
<PAGE>
Report of prior Independent Certified Public Accountants' for the year ended
December 31, 1998
The Children's Beverage Group, Inc.
Northbrook, Illinois
We have audited the accompanying balance sheet of The Children's Beverage
Group, Inc. (A Development Stage Company) as of December 31, 1998, and
the related statements of operations, changes in stockholders' equity and cash
flows for the year ended December 31, 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 The Children's Beverage Group,
Inc. (A Development Stage Company) at December 31, 1998 and the results
of its operations and cash flows for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the summary of
accounting policies, the Company is in the development stage and has incurred
losses since inception and has negative working capital and cash flows from
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in the summary of accounting policies. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Chicago, Illinois
June 3, 1999
18
<PAGE>
<TABLE>
<CAPTION>
The Children's Beverage Group, Inc.
Balance Sheets
- ---------------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------------
Assets (Note 2)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 9,653 $ -
Restricted investments 500,000 500,000
Accounts receivable 6,176 103,602
Inventories 94,460 151,255
- ---------------------------------------------------------------------------
Total Current Assets 610,289 754,857
- ---------------------------------------------------------------------------
Property and Equipment, Net (Notes 1 and 4) 4,851,163 1,717,714
Other Assets 624,137 26,983
- ---------------------------------------------------------------------------
$6,085,589 $ 2,499,554
===========================================================================
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $1,327,577 $ 211,594
Accrued expenses 150,976 -
Current portion of capital lease
obligations (Note 5) 766,998 1,079,636
Notes payable - bank (Note 2) 550,000 399,500
Notes payable - stockholder (Note 3) - 262,900
Notes payable - officer (Note 4) 447,899 -
- ----------------------------------------------------------------------------
Total Current Liabilities 3,243,452 1,953,630
- ----------------------------------------------------------------------------
Long-Term Liabilities
Capital lease obligations, less
current maturities (Note 5) - 53,786
Industrial revenue bonds (Note 6) 5,080,254 -
- ----------------------------------------------------------------------------
Total Long-Term Liabilities 5,080,254 53,786
- ----------------------------------------------------------------------------
Total Liabilities 8,323,705 2,007,416
- ----------------------------------------------------------------------------
Commitments and Contingencies
(Notes 4, 7, 8, 10, 11 and 12)
Stockholders' Equity (Deficit) (Note 9)
Preferred stock, $.001 par value,
50,000,000 shares authorized,
1,000,000 shares outstanding 1,000 1,000
Common stock - $.0001 par value; 250,000,000
shares authorized, 29,462,504 shares issued
and outstanding at December 31, 1999 and
25,761,337 shares issued and outstanding at
December 31, 1998, respectively 2,946 2,576
Additional paid-in capital 6,629,751 2,878,954
Accumulated deficit (8,871,813) (2,390,392)
- ----------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) (2,238,116) 492,138
- ----------------------------------------------------------------------------
$6,085,589 $ 2,499,554
============================================================================
</TABLE>
19
<PAGE>
See accompanying summary of accounting policies and
notes to financial statements.
The Children's Beverage Group, Inc.
Statements of Operations
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Year ended Year ended
December 31, December 31,
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Net Sales (Note 11) $ 3,606,987 $ 145,954
Cost of Sales 5,027,152 171,268
- -----------------------------------------------------------------------------
Gross Loss (1,420,165) (25,314)
Selling, General, and Administrative Expenses 4,160,697 1,943,446
- -----------------------------------------------------------------------------
Loss From Operations (5,580,862) (1,968,760)
Interest Income 20,782 -
Interest Expense (921,343) (16,660)
- -----------------------------------------------------------------------------
Net Loss $(6,481,421) $(1,985,420)
=============================================================================
Net Loss Per Common Share $(0.23) $(0.08)
=============================== =================================
Weighted Average Common
Shares Outstanding 28,126,196 23,977,885
=============================== =================================
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
The Children's Beverage Group Inc.
Statement of Changes in Stockholders' Equity (Deficit)
=================================================================================================================
Preferred Stock Additional
Series A Common Stock Paid-in
--------------------- ---------------------
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,000,000 $1,000 20,250,038 $2,025 $ 507,975
Issuance of shares of common stock for
cash (Note 9) - - 1,600,000 160 975,340
Capital contributions (Note 9) - - - - 96,030
Issuance of common stock for marketing
services (Note 9) - - 1,361,269 136 1,299,864
Stock dividend (Note 9) - - 2,550,030 255 (255)
Net loss - - - - -
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,000,000 $1,000 25,761,337 $2,576 $2,878,954
Issuance of warrants to purchase 413,000
shares of common stock in settlement of
negotiations with a manufacturing agent
(Note 7) - - - - 413,000
Issuance of shares of common stock for
conversion of warrants (Note 9) - - 413,000 41 (41)
Contribution of $592,900 of debt to shareholder
and officer of corporation (Note 9) - - 988,167 99 988,068
Issuance of common stock for manufacturing
services (Note 9) - - 100,000 10 99,990
Issuance of common stock for marketing
services (Note 9) - - 2,200,000 220 2,249,780
Net loss - - - - -
===============================================================================================================
Balance, December 31, 1999 1,000,000 $1,000 29,462,504 $2,946 $6,629,751
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
- ---------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1997 $ (404,972) $ 106,028
Issuance of shares of common stock for - 975,500
cash (Note 9)
Capital contributions (Note 9) - 96,030
Issuance of common stock for marketing
services (Note 9) - 1,300,000
Stock dividend (Note 9) - -
Net loss (1,985,420) (1,985,420)
- ---------------------------------------------------------------------------------
Balance, December 31, 1998 $(2,390,392) $ 492,138
Issuance of warrants to purchase 413,000
shares of common stock in settlement of
negotiations with a manufacturing agent
(Note 9) - 413,000
Issuance of shares of common stock for
conversion of warrants (Note 9) - -
Contribution of $592,900 of debt to shareholder
and officer of corporation (Note 9) - 988,167
Issuance of common stock for manufacturing
services (Note 9) - 100,000
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
Issuance of common stock for marketing
services (Note 9) - 2,250,000
Net loss (6,481,421) (6,481,421)
- ------------------------------------------------------------------------------
Balance, December 31, 1999 $(8,871,813) $(2,238,116)
==============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
The Children's Beverage Group Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
==========================================================================================================
Year ended Year ended
December 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows Used in Operating Activities
Net loss $(6,481,421) $(1,985,420)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 246,368 23,950
Noncash equity transaction charged to operations
(Note 9) 2,645,267 1,300,000
Changes in assets and liabilities
Decrease (increase) in accounts receivable 97,426 (103,602)
Decrease (increase) in inventories 56,795 (151,255)
Increase in other assets (32,694) (21,381)
Increase in accounts payable 1,115,983 198,542
Increase in accrued expenses 150,976 -
- -----------------------------------------------------------------------------------------------------------
Total adjustments 4,280,121 1,246,254
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,201,300) (739,166)
- -----------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (2,862,227) (397,785)
Restricted investments, pledged as collateral - (500,000)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,862,227) (897,785)
- -----------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from bank notes payable 150,500 612,400
Proceeds from notes payable and stockholder advances 1,203,820 -
Repayment of stockholder advances (275,920) -
Repayment of other notes payable (150,000) -
Capital lease obligation payments (366,424) (47,294)
Proceeds from Industrial Revenue Bonds, net of $569,050 of issuance costs 4,511,204 -
Proceeds from issuance of common stock and capital contributions - 1,071,530
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,073,180 1,636,636
- -----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 9,653 (315)
Cash and Cash Equivalents, at beginning of period - 315
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of period $ 9,653 $ -
===========================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 511,150 $ 16,660
===========================================================================================================
Supplemental Schedule of Noncash Investing and Financing Activities
During 1998, the Company incurred $1,180,716 of capital lease obligations
related to leases for new equipment.
During 1999, the Company converted $592,900 of stockholder notes payable
into common stock with a value of $988,167. Accordingly, the reduction
of debt was recorded with an increase to equity. The excess value of
the common stock at the time of conversion was recorded as interest
expense.
During 1999, the Company purchased machinery for $513,000 in exchange for
common stock and warrants. Accordingly, assets and equity were
recorded for this amount. Subsequently, the Company wrote-off $100,000
of this amount related to the Sweet-Ripe litigation.
During 1999, the Company paid for $2,250,000 of advertising through the
issuance of common stock. Accordingly, assets and equity were recorded
for this amount. The asset amount was ratably charged to operations
throughout the year.
===========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
22
<PAGE>
The Children's Beverage Group, Inc.
Summary of Accounting Policies
================================================================================
Description of Business
The Children's Beverage Group, Inc. (the "Company"), located in Northbrook,
Illinois, is engaged in the manufacture and distribution of children's beverages
to a single customer with locations throughout the United States. The Company's
products were manufactured through co-packing relationships with third party
manufacturers. One co-packer entered into bankruptcy during 1999 and held major
equipment owned or leased by the Company. A second co-packer discontinued
production of the Company's beverage product and also held major pieces of
Company equipment. Subsequent to year end, the Company and the second co-packer
agreed to release the major pieces of Company equipment held by them after
receiving payment for costs incurred which is being negotiated.
Basis of Presentation
Through December 31, 1998 the Company was a development stage enterprise
with minimal operations. During the period ended December 31, 1999 the Company
ceased to be a development stage enterprise.
The Company's financial statements are presented on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business.
The Company has experienced recurring losses since inception and has
negative working capital and cash flows from operations. For the years ended
December 31, 1998 and 1999, the Company experienced a net loss of $1,985,420 and
$6,481,421, respectively. At December 31, 1999, the Company has a working
capital deficit of $2,633,163.
The Company's ability to continue as a going concern is contingent upon its
ability to secure additional financing, reinitiate production and sale of its
products and attain profitable operations. In addition, the Company's ability to
continue as a going concern must be considered in light of the problems,
expenses and complications frequently encountered by entrance into established
markets and the competitive environment in which the Company operates
Management is pursuing various sources of debt and/or equity financing and
re-initiating production with a contract producer along with the build-out of a
plant in Rochester, New York utilizing financing through an Industrial Revenue
bond which closed in October 1999. Although the Company plans to pursue
additional financing and re-initiate production of its beverage product, there
can be no assurance that the Company will be able to secure financing when
needed or obtain such on terms satisfactory to the Company, if at all.
Furthermore, there can be no assurance that the Company will be able to
negotiate a contract with a manufacturing facility to produce its beverage
product as an interim measure until its Rochester plant is operational. Failure
to develop such an interim manufacturing arrangement may result in the Company
rapidly depleting available funds and may make sources of additional financing
reluctant to risk investing in the Company. Furthermore, failure to secure such
financing may result in the Company rapidly depleting its available funds and
not being able to comply with its payment obligations under its bank loans and
with vendors.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
highly liquid cash investments, including time deposits, as cash equivalents.
Restricted Investments
Restricted investments consists of certificates of deposit used as
collateral against a $500,000 note payable to the bank.
23
<PAGE>
Inventories
Inventories are stated at the lower of cost, or market, determined on the
first-in, first-out ("FIFO") method. At December 31, 1999 and 1998, inventories
consist primarily of raw materials.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the assets (three to 10 years) by the straight-
line method.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
because of the immediate or short-term maturity of these financial instruments.
The carrying amount reported for notes payable and long-term debt approximates
fair value because, in general, the interest on the underlying instruments
approximates market rates.
Use of Estimates
Preparation of the accompanying financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions about current and future events that affect the reported assets
and liabilities and the disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
costs and expenses during the reporting period. Actual results may differ from
those estimates.
Revenue Recognition
The Company recognizes revenue and the related costs when product is
shipped.
Advertising Costs
Advertising costs, aggregating $2,259,000 in 1999 and $1,300,000 in 1998,
are expensed as incurred.
Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities". This SOP requires that the costs of start-up activities, including
organization costs, be expensed as incurred. The Company has followed this
policy since inception.
Taxes on Income
Income taxes are accounted for using the asset and liability method under
which deferred income taxes are recognized for the estimated tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities and for the benefits, if any, of tax credit
or loss carryforwards. The amounts of any future tax benefits are reduced by a
valuation allowance to the extent such benefits are not expected to be realized.
Net Loss Per Share
Net loss per share is calculated using the weighted average number of
common shares outstanding during the period.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use, including the requirement to capitalize and
amortize specific costs. The adoption of this standard did not have a material
effect on the Company's capitalization policy.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative
24
<PAGE>
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. The Company does not expect the
adoption of this statement to have a significant impact on its results of
operations, financial position or cash flows. SFAS No. 133 has been amended by
SFAS No. 137, which delayed the effective date to periods beginning after June
15, 2000. The Company, to date, has not engaged in derivative and hedging
activities.
Reclassifications
Certain amounts in the accompanying 1998 financial statements have been
reclassified to conform with the 1999 presentation.
The Children's Beverage Group, Inc.
Notes to Financial Statements
- ------------------------------------------------------------------------------
1. Property and Equipment
Property and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
-----------------------------------------------------------
<S> <C> <C>
Machinery and equipment (Note 4) $3,645,484 $1,669,662
Automobiles 43,775 43,775
Furniture and fixtures 36,882 17,000
Computers and peripherals 34,308 12,352
Construction in progress 1,357,567 -
-----------------------------------------------------------
5,118,016 1,742,789
Less accumulated depreciation (266,853) (25,075)
-----------------------------------------------------------
Total $4,851,163 $1,717,714
===========================================================
</TABLE>
2. Notes Payable - Bank
The Company has two credit facilities under secured notes payable with
maturity dates of July 9, 2000 and September 5, 2000, respectively. The Company
can borrow a maximum of $500,000 and $50,000, respectively, under these
agreements. Borrowings are collateralized by substantially all of the Company's
assets. Interest is paid monthly at 8.50% and 9.50%, respectively. Borrowings of
$500,000 and $50,000, respectively, are outstanding on the lines as of December
31, 1999 and borrowings of $349,500 and $50,000, respectively, are outstanding
on the lines as of December 31, 1998.
3. Notes Payable - Stockholder
The Company has two notes payable to a stockholder with maturity dates of
November 10, 1999 and December 20, 1999, respectively. Interest was paid
periodically at 12%. Borrowings of $150,000 and $112,900, respectively, are
outstanding as of December 31, 1998. The stockholder advanced an additional
$330,000 during the first quarter of 1999. During May 1999 the Company entered
into an agreement to convert approximately $592,900 of outstanding stockholder
notes payable into 988,167 shares of common stock which were issued during July
1999. The common stock had a value of $988,167. The excess value of the common
stock was recorded as interest expense at the time of conversion.
4. Notes Payable - Officer and Related Party Transactions
The Company's President and Chief Executive Officer of the Company and its
majority shareholder has advanced the Company $695,000 throughout 1999 based on
an
25
<PAGE>
interest bearing note with a rate of 12%. These advances have resulted in
interest expense of $54,259. Principal of $275,920 and interest of $25,440 has
been repaid on this note. As of December 31, 1999, the outstanding balance on
this note was $447,899.
During 1999, the Company reimbursed its president $5,500 on the purchase
of fixed assets made by him on the Company's behalf.
The Company has been granted a worldwide license to use the U.S. patent
on the "rip it sip it" drink system. The patent was applied for and issued to
Mr. Darmstadter in August 1999. The patent is used in the Company's production
of its juice products. In September 1999, Mr. Darmstadter entered into a license
agreement with the Company, which was amended in January 2000 (the "License
Agreement"), the License Agreement allows the Company to use the patent in
exchange for a $1.00 annual fee. Pursuant to the Employment Agreement between
the Company and Mr. Darmstadter, in the event that the control of the Company
changes, Mr. Darmstadter would receive a royalty in the amount of $0.005 per
pouch of children's beverage product sold by the Company. Under the License
Agreement, the Company maintains the exclusive right to use the patent in its
production of juice pouch products for the life of the patent (approximately 20
years).
5. Capital Lease Obligations
The Company leases certain machinery and equipment under capital leases.
As lessee, the Company assumes all taxes, maintenance costs, insurance and other
operating costs over the life of the lease. During the years ended December 31,
1999 and 1998, principal and interest payments under these leases amounted to
$430,606 and $56,641, respectively.
Property recorded under such leases at December 31 consist of:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $1,630,716 $1,583,422
Less accumulated depreciation 162,454 20,000
- ---------------------------------------------------------------------------
Total $1,468,262 $1,563,422
===========================================================================
</TABLE>
Future minimum lease payments, excluding operating costs, in the
aggregate and for the years succeeding December 31, 1999 are:
<TABLE>
<CAPTION>
Year ending December 31, Amount
- -------------------------------------------------------------------------------
<S> <C>
2000 $ 707,845
2001 108,424
- -------------------------------------------------------------------------------
Total future minimum lease payments 816,269
Less amount representing interest 49,271
- -------------------------------------------------------------------------------
Net capital lease obligation 766,998
Less current portion* 766,928
- -------------------------------------------------------------------------------
Long-term portion $ -
===============================================================================
</TABLE>
* Since the Company is in arrears on payment of the minimum lease payments, all
payments are treated as currently payable.
6. Industrial Revenue Bonds
The Company, as borrower, entered into a financing arrangement with the
County of Monroe Industrial Development Agency (serving Rochester, New York)to
issue $7,420,000 industrial development revenue bonds. The closing took place in
October, 1999 and $4,892,224 was released and $188,030 was applied to interest
on the bonds for a total obligation of $5,080,254 outstanding as of December 31,
1999. The bonds
26
<PAGE>
have a stated interest rate of 8.75% and are payable (net of Capitalized
Interest Fund payments of $301,066 and Reserve Fund interest), as follows:
<TABLE>
<S> <C>
2000 $ 461,803
2001 1,105,295
2002 1,106,983
2003 1,104,733
2004 1,103,545
2005 1,102,983
2006 1,106,607
2007 1,106,983
2008 1,105,233
2009 1,102,358
2010 1,102,920
</TABLE>
$1,484,710 of the bond proceeds remains available for purchasing equipment as of
December 31, 1999. The bonds are collateralized by nearly all the assets of the
Company.
Additionally, the City of Rochester (New York) has proposed the use of
$2,566,000 of Section 108 U.S Department of Housing and Urban Development (HUD)
financing for the purpose of purchasing a building within the City and proposed
to separately arrange for $1,000,000 of working capital financing.
7. Leases
The Company leases office space under a noncancellable operating lease
through December 14, 2003. Total rent expense for 1999 and 1998 was $22,650 and
$27,168, respectively, which included for 1998 and part of 1999 a prior office
lease under which payments were made on a month-to-month basis. The future
minimum rental payments required under this lease over the next four years is
$125,500 broken down as follows:
<TABLE>
<CAPTION>
December 31, Amount
------------------------------------------------------------
<S> <C>
2000 $ 30,000
2001 30,900
2002 31,800
2003 32,800
------------------------------------------------------------
Total $125,500
============================================================
</TABLE>
8. Income Taxes
The reasons for the differences between income taxes at the statutory
income tax rates and the provision (benefit) for income taxes are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Income tax benefits at statutory rate $(2,593,000) $(794,000)
Change in valuation allowance related to
deferred tax benefit carryforwards $ 2,593,000 $ 794,000
-------------------------
Income tax benefit $ - $ -
-------------------------
</TABLE>
Due to net operating losses and the uncertainty of realization, no tax
benefit has been recognized for operating losses.
At December 31, 1999, net operating losses of approximately $8.9 million
are available for carryforward against future years' taxable income and expire
through the year 2019. The Company's ability to utilize its net operating loss
carryforwards is uncertain and thus a valuation reserve has been provided
against the Company's net deferred tax assets.
27
<PAGE>
The net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 3,387,000 $ 956,000
Valuation allowance (3,387,000) (956,000)
----------------------------------------------------------------------
Net deferred tax assets $ - $ -
======================================================================
</TABLE>
9. Stockholders' Equity
Common Stock Issuances
Common stock was issued in 1998 and 1999, as follows:
a) Sales of common stock - In connection with private placements, the
Company sold 150,000 shares in April 1998 for $163,500 and sold
1,450,000 shares in July 1998 for $812,000.
b) Stock dividend - In July 1998, the Company declared a one-for-eight
stock dividend and issued 2,550,030 shares of common stock.
c) Services rendered - In October 1998, the Company issued 1,361,269
shares of common stock to a marketing firm for services rendered in
satisfaction of a $1,300,000 liability for advertising fees. Such
shares were issued, based on current market prices at the date of
issuance.
d) On September 17, 1999, the Company entered into a Patent License
Agreement ("the Agreement") with its Chairman. The patent was applied
for and issued to the Company's Chairman in August 1999. The Agreement
provides the Company the exclusive right to use the U.S. patent used
in the production of the Company's juice pouch products for the life
of the patent in exchange for a $1.00 annual fee unless a change-in-
control event occurs. In the event that a change-in-control event
occurs, the Chairman would receive a royalty in the amount of $0.0005
per pouch of children's beverage product sold by the Company.
e) On March 24, 1999, the Company issued 2,200,000 shares of common stock
to satisfy its $2,250,000 obligations under a sponsorship agreement
with an Indy Racing League car team.
f) On April 23, 1999, the Company entered into a Settlement Agreement
with a vendor, under which the Company issued the vendor warrants to
purchase 413,000 shares of common stock at par value in exchange for
machinery and equipment with a value of $413,000. In addition, on
March 24, 1999, the Company issued 100,000 shares of common stock to
another vendor as payment for an additional $100,000 of machinery and
equipment which because of bankruptcy of the vendor is not deemed
recoverable and has been written off.
g) During May 1999 the Company entered into an agreement to convert
approximately $592,900 of outstanding stockholder notes payable into
988,167 shares of common stock which were issued during July 1999. The
common stock had a value of approximately $988,000. The excess value
of the common stock was recorded as interest expense at the time of
conversion.
h) In November 1999, stock warrants issued to a vendor in April 1999 were
converted to 413,000 shares of the Company's common stock.
Capital Contributions
During 1998, the Company's Chairman made capital contributions of $96,030.
Preferred Stock
The Series A preferred stockholders shall be entitled to 25 votes for each
share owned by them on all matters required or permitted to be submitted to a
vote of stockholders of the Company. The Series A preferred stockholders also
share
28
<PAGE>
ratably with common stockholders in dividend (if any) declared by the Board of
Directors and in liquidation rights upon the Company's liquidation, dissolution
or winding up. In the event of a change in control of the Company, the Series A
Preferred Stock automatically converts into five shares of common stock, subject
to anti-dilution rights.
10. Commitments and Contingencies
The Company had a contractual relationship with Sweet Ripe Drinks, Ltd.
("Sweet Ripe"), a Canadian company, whereby Sweet Ripe bottled and packaged the
Company's beverage product using machinery provided by the Company. During the
course of dealing, there arose certain disputes between the parties as to a
variety of continuing manufacturing problems. Believing Sweet Ripe to be in
breach of its contractual duties, having provided an opportunity to cure, the
Company caused its bottling and packaging at Sweet Ripe to cease. In response,
Sweet Ripe refused to allow the Company to remove its machinery. Shortly
thereafter, Sweet Ripe filed a Notice of Intention to File a Proposal under the
Canadian Bankruptcy and Insolvency Act, which in effect, caused a stay of
proceedings. The Company then petitioned a Master of the Superior Court of
Justice to lift the stay of proceedings so that the Company could proceed with
an action to recover the manufacturing equipment. In arguing against the stay of
proceedings, Sweet Ripe asserted that the Company owes approximately $700,000 to
Sweet Ripe. The Master did not agree to lift the stay of proceedings but rather
adjourned that matter subject to any orders that the Bankruptcy Court might make
with regard to the matter. The Bankruptcy Court required the filing of a
monetary proof of claim which was filed in late January 2000 and the claim was
denied due to Sweet Ripe's counterclaim. The Company appealed that decision and
the matter will be sent to trial with a trial date to set by April 16, 2000. The
equipment at issue is valued at approximately $1.5 million. Two of the three
major pieces of equipment at issue are leased and the remaining equipment is
owned by the Company. The Company has engaged outside legal counsel to handle
its legal representation with respect to any related proceedings.
During 1999, the Company began to sell its accounts receivables under a
factoring agreement established with a financial institution. This agreement
enables the Company to sell accounts receivable to the financial institution
with recourse against the Company. During 1999, the Company has sold
approximately $1,857,500 of its accounts receivable to the financial institution
under this factoring agreement for approximately $1,773,800. Pursuant to the
provisions of SFAS 125,the Company reflected the transaction as a sale of assets
and established an accounts receivable from the financial institution for the
retained amount less the cost of the transaction and less any anticipated future
loss in the value of the retained asset. The retained amount is equal to 20% of
the total accounts receivable invoices sold to the financial institution less
administrative and finance fees charged by the financial institution. The sale
of accounts receivable stopped in November 1999 due to the discontinuance of
production and sales in November 1999 (see below).
The Company had entered into an arrangement with Warrenton Products, Inc.
("Warrenton") to bottle and manufacture the Company's beverage product using
machinery provided by the Company. Operations began in July 1999 with production
levels deemed unsatisfactory by the Company. Disagreements ensued between the
parties on a variety of manufacturing operations problems. Warrenton elected to
breach its contractual obligations in November 1999 and discontinued production
of the Company's beverage products. Accordingly, the Company continues to pursue
an amicable settlement of this situation, but it has also employed the services
of an outside law firm to handle any legal ramifications associated with these
discussions. Warrenton currently holds three major pieces of specialized
equipment valued at approximately $1.5 million. Two of the three major pieces of
equipment at issue are owned by the Company and the remaining equipment is
leased. See the subsequent events footnote, below.
The Company is involved in various other litigation incident to its
business. It is the opinion of management that the outcome of such litigation
will not have a material adverse effect on the Company's financial position or
results of operations.
29
<PAGE>
11. Sole Customer, Contract Manufacturer and Concentration of Risk
All of the Company's sales during 1999 and 1998 were to one customer.
Outstanding accounts receivable at December 31, 1999 and 1998 were due from such
customer. The Company has stopped shipping product to the customer. The loss of
this customer would have a material adverse effect on the Company's financial
condition and results of operations.
Currently, the Company relies on one contract manufacturer to produce juice
products for its sole customer. As described in note 8, above, the contract
manufacturer discontinued production in November 1999. This discontinuance has
disrupted the Company's operations and no product has been shipped to the
Company's only customer since November 1999. Discussions took place in an
attempt to re-initiate production, but lack of cooperation has resulted in the
filing of a complaint against this contract manufacturer. See the subsequent
events footnote, below.
Financial instruments that potentially subject the Company to credit risk
consist of cash and restricted investments in a financial institution, which
exceeds the $100,000 federally insured limit. Cash and restricted investments
exceeding federally insured limits totaled $409,510 at December 31, 1999 and
$393,586 at December 31, 1998.
12. Subsequent Events
On January 28, 2000, legal counsel for the Company filed a complaint with
the United States District Court, Eastern District of Missouri against Warrenton
Products, Inc. ("WPI"), a Missouri corporation, alleging that WPI did not meet
its contractual obligations to perform its manufacturing of the Company's
product and refuses to allow the Company to remove its specialized equipment. On
February 3, 2000, WPI filed a lawsuit against the Company alleging damages of
approximately $2.0 million plus interest, costs and punitive damages. The
Company intends to vigorously defend against the WPI claim and vigorously
prosecute its claim.
In February 2000, the Company initiated a Stock Option Plan (the "Plan")
that provides the ability to issue up to five million (5,000,000) of the
Company's common stock to its employees, directors or key service
providers/consultants with an exercise price above fair market value, as defined
in the Plan, at the date of grant. In conjunction with the Plan's adoption, the
board of directors approved the grant of incentive stock options, representing
2,033,200 shares of common stock, to all officers and full-time employees. These
options begin vesting within six (6) months after issuance and will be fully
vested at the second anniversary date of their grant, so long as the option
holder remains an employee of the Company. These issued options expire in
February 2005 and are exercisable at prices ranging from $0.62 to $0.68 per
share.
In February 2000, a contract was entered into to purchase an 80,000 square
foot manufacturing facility on a 7 1/2 acre site in Rochester, New York. This
contract provides for a $975,000 purchase price, with closing subject to
satisfactory environmental contamination testing, approval by the County of
Monroe Industrial Development Agency, and funding by the U.S. Department of
Housing and Urban Development to be completed by April 30, 2000.
In February 2000, Capri Sun, Inc. and Rudolph Wild GMBH & Co. KG, a German
limited partnership, (collectively, the "Plaintiffs") filed a Motion to
Reinstate Case and Enforce Settlement Agreement in the Northern District of
Illinois, old case no. 97 C 1961 (Settlement Agreement). The Company has filed
its response to the Motion, and Plaintiffs' reply was filed on March 28, 2000.
The Company has denied three of the four alleged breaches raised by Capri Sun
and offers to discontinue use of the color blue on all future press runs of its
pouches.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
30
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Executive Officers and Directors
As of December 31, 1999, the executive officers and directors of the
Company were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jon A. Darmstadter 47 President and Chief Executive
Officer, Director
Edward R. Ferry 49 Vice President/Marketing, Director
</TABLE>
None of the officers and/or directors of the Company are officers or
directors of any other publicly traded corporation, nor have any of the
directors and/or officers filed any bankruptcy petition, been convicted in or
been the subject of any pending criminal proceedings, or the subject or any
order, judgment, or decree involving the violation of any state or federal
securities laws within the past five years.
The business experience of each of the persons listed above during the
past five years is as follows:
Jon A. Darmstadter has served as the President and Chief Executive Officer
and a director of the Company since March 1997. Mr. Darmstadter is also the
founder and president of Children's Net Logic, Inc., a privately held, internet
related start-up in Arizona. From 1995 to March 1997, Mr. Darmstadter was a
sole proprietor of a venture known as Water Pouch, which was purchased by the
Company in March 1997. Prior to his position with the Company, Mr. Darmstadter
held positions as Product Development/Brand Manager and National Sales Manager
for United Beverage of Ohio. Prior to working with United Beverage of Ohio, Mr.
Darmstadter was National Sales Manager for Bidderman Industries, a brand
marketer of men's designer clothing.
Edward R. Ferry has served as the Vice President/Marketing since May 1997
and a director of the Company since January 1999. From June 1990 to May 1997,
Mr. Ferry served as the President of Corporate Confectionary/Confection Werks, a
specialty chocolate manufacturing company that he owned. Prior to his
involvement with Corporate Confectionary/Confection Werks, he was the Midwest
Sales Manager for Ralph Lauren Ladies Wear.
Board Composition
Each member of the board is elected on an annual basis by the stockholders.
At each annual meeting of stockholders, directors are elected for the next year.
Each director serves for a one year term.
Each officer is elected by, and serves at the discretion of, the board.
There are no family relationships among any of the directors, executive officers
or key employees.
Board Committees
The board has not established any committees.
Compensation of Directors
Messrs. Darmstadter and Ferry receive no compensation for being directors
31
<PAGE>
of the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
None of the Directors, officers and beneficial owners of more than 10% of
the outstanding Common Stock (each a "Reporting Person") has failed to file on a
timely basis reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation earned by the Company's sole named executive officer. The table
excludes certain perquisites and other personal benefits received by this
officer that do not exceed the lesser of $50,000 or 10% of any such officer's
salary and bonus disclosed in the table.
The following table sets forth all compensation actually paid or accrued by
the Company for services rendered to the Company for the years ended December
31, 1997, 1998 and 1999 to the Company's Chief Executive Officer and President.
No other executive officer of the Company has earned a salary greater than
$100,000 annually for any of the periods depicted.
Summary Compensation Table
<TABLE>
<CAPTION>
ALL
OTHER
NAME AND PRINCIPAL COMPENSA
POSITION YEAR SALARY BONUS -TION
-------- ------ --------
<S> <C> <C> <C> <C>
Jon A. Darmstadter, 1997 $ -0- $ -0- $ -0-
President, C.E.O. 1998 $ 80,000 $ -0- $ -0-
1999 $104,000 $ -0- $ -0-
</TABLE>
Employment Agreement
The Company has entered into an employment agreement with Mr. Darmstadter
effective as of January 1, 1999. Mr. Darmstadter has been hired as the Company's
President and Chief Executive Officer. The agreement is for a term of five
years. The agreement provides for a base annual salary of $104,000 in 1999, and
he is eligible for performance based bonuses and equity-based compensation. In
the event of a change in control of the Company (as defined therein), the
Company has agreed to grant Mr. Darmstadter a royalty in the amount of $0.005
per pouch of children's beverage product sold by the Company, payable on a
quarterly basis. Mr. Darmstadter is not a full-time officer of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of voting
stock of the Company as of December 31, 1999, for: (i) each person known by
TCBG to beneficially own 5% or more of the shares of outstanding common stock;
(ii) each of TCBG's executive officers and directors; and (iii) all of TCBG's
executive officers and directors as a group. Except as otherwise indicated, all
shares are beneficially owned, and investment and voting power is held by the
persons named as owners.
Unless otherwise noted (1) each of the persons listed below has sole voting
and investment power with respect to the shares beneficially owned by him as set
forth opposite his name and (2) the address for each of the persons listed below
is: c/o The Children's Beverage Group, Inc., 227 Melvin Drive, Northbrook,
Illinois 60062.
32
<PAGE>
<TABLE>
<CAPTION>
Common Stock
--------------------------
Beneficially Owned(a)(b)
Name and Address of Beneficial Owner No. of Shares % of Class
- ------------------------------------ ------------- ------------
<S> <C> <C>
Jon A. Darmstadter(c) 6,669,731 22.64%
Felicia Murray(d) 2,464,313 8.36%
Edward R. Ferry(e) 45,000 *
All executive officers and directors as a
group (2 persons) 6,714,731 22.79%
</TABLE>
*Represents less than one percent of the total.
(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities, subject to community property
laws, where applicable.
(b) The calculations in this table of the percentage of outstanding shares are
based on 29,462,504 shares of the Company's common stock outstanding as of
December 31, 1999.
(c) Does not include 1,000,000 shares of Series A Preferred Stock, which have
25 votes per share, and automatically convert into five shares of common
stock upon a change-in-control event, subject to anti-dilution provisions.
Mr. Darmstadter owns 100% of the Company's outstanding preferred stock.
Includes 50,000 shares of common stock held by Mr. Darmstadter's son and
150,000 shares of common stock held in the name of his former wife. Mr.
Darmstadter's combined ownership of common stock and preferred stock gives
him control over 58.22% of the votes that can be cast in any meeting of
stockholders.
(d) Former officer and director of the Company.
(e) Includes 30,000 shares of common stock held in the name of Mr. Ferry's son.
Mr. Ferry is one of the Company's directors and serves as the Vice
President of Marketing.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has been granted a worldwide license to use the U.S. patent
on the "rip it sip it" drink system. The patent was applied for and issued to
Jon A. Darmstadter, the President and Chief Executive Officer of the Company in
August 1999. The patent is used in TCBG's production of its juice products. In
September 1999, Mr. Darmstadter entered into a license agreement with the
Company, which was amended in January 2000 (the "License Agreement"), the
License Agreement allows the Company to use the patent in exchange for a $1.00
annual fee. Pursuant to the Employment Agreement between the Company and Mr.
Darmstadter, in the event that the control of the Company changes, Mr.
Darmstadter would receive a royalty in the amount of $0.005 per pouch of
children's beverage product sold by the Company. See Item 10. - Executive
Compensation - Employment Agreement. Under the License Agreement, the Company
maintains the exclusive right to use the patent in its production of juice pouch
products for the life of the patent (approximately 20 years).
During the year ended December 31, 1999, the Company reimbursed Jon A.
Darmstadter, the President and Chief Executive Officer of the Company, $5,500 on
the purchase of fixed assets he made on the Company's behalf. Additionally, Mr.
Darmstadter advanced funds to the Company totaling $749,259 (including $54,259
of interest) to meet cash flow needs. These advances were made under a note with
interest accrued quarterly at a twelve percent (12%) annual rate. As of December
33
<PAGE>
31, 1999, payments of $275,920 of principal and $25,440 of interest had been
made by the Company leaving $447,899 owed as of December 31, 1999. Subsequent to
year end, $2,880 of interest has been paid, leaving a balance due of $445,019
plus accrued interest subsequent to December 31, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit No. Exhibit Name
----------- ------------
3.1 Amended and Restated Certificate of Incorporation
previously filed as Exhibit 3.1 to Form 10-SB dated
November 15, 1999
3.2 Amended and Restated By-Laws of Registrant previously
filed as Exhibit 3.2 to Form 10-SB dated November 15,
1999
3.3 Certificate of Designations of Series A Preferred Stock
previously filed as Exhibit 3.3 to Form 10-SB dated
November 15, 1999
4.1 Form of Common Stock Certificate previously filed as
Exhibit 4.1 to Form 10-SB/A dated January 14, 2000
4.2 Form of Series A Preferred Stock Certificate previously
filed as Exhibit 4.2 to Form 10-SB dated November 15,
1999
4.3 Registration Rights Agreement warrant holder dated
April 23, Exhibit 4.3 to Form 10-SB between the Company
and a 1999 previously filed as dated November 15, 1999
4.4 Debt Conversion Agreement between the Company and
Ranger Enterprises, Inc. dated May 10, 1999 previously
filed as Exhibit 4.4 to Form 10-SB dated November 15,
1999
10.1 Amended and Restated Employment Agreement between the
Company and Jon A. Darmstadter Exhibit 4.3 to Form 10-
SB dated previously filed as November 15, 1999 Exhibit
10.1 to Form 10-SB/A dated January 14, 2000
10.2 Patent License Agreement between the Company and Jon A.
Darmstadter dated September 14, Exhibit 10.2 to Form
10-SB dated 1999 previously filed as November 15, 1999
10.3 Assignment and Assumption Agreement between the Company
and Water Pouch dated January 11, 1999 previously filed
as dated November 15, 1999
10.4 Amendment to Patent License Agreement
10.5 Rochester Purchase Contract, February 2000
10.6 Jon A. Darmstadter Note dated January 2, 1999
10.7 Pledge & Assignment (Bond)
10.8 Payment in Lieu of Tax Agreement
34
<PAGE>
10.9 Security Agreement
27 Financial Data Schedule
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly organized.
The Children's Beverage Group, Inc.
(Registrant)
By: /s/ Jon A. Darmstadter
--------------------------------
Date: March 30, 2000 Jon A. Darmstadter
CEO, President, Chairman,
& Principal Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Name Position Date
- ---- -------- ----
CEO, President,
Chairman, &
Principal Financial
/s/ Jon A. Darmstadter Officer March 30, 2000
- ------------------------------- -------------------------- ---------------
Jon A. Darmstadter
/s/ Edward R. Ferry Director March 30, 2000
- ------------------------------- -------------------------- ---------------
Edward R. Ferry
35
<PAGE>
AMENDMENT NO. 1 TO
[LICENSE] AGREEMENT
This Amendment No. 1 to the Agreement (this "Amendment") is made and
entered into as of January 1, 2000, by and between Jon D. Darmstadter
("Licensor") and The Children's Beverage Group, a Delaware corporation
("Licensee").
RECITALS
A. Licensor and Licensee entered into that certain Agreement dated
September 14, 1999 (the "Contract").
B. Pursuant to Section 3 of the Contract, Licensor is entitled to certain
payments to be determined.
C. The parties desire to modify the provisions of the Contract as set
forth herein.
NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual
promises contained herein, Stockholders and Trustee agree as follows:
1. Amendment to Section 3 of the Contract. Section 3 of the Contract is
hereby amended by deleting subsections A. and B. and substituting therefor the
following:
"A. License Payment. For the license granted in Paragraph 2. of this
Agreement, the Licensee shall pay Licensor an annual fee equal to $1.00."
In addition, subsection 3.C. shall be renumbered and become subsection 3.B.
2. Effectiveness of Contract. Except as expressly provided herein,
nothing in this Amendment shall be deemed to waive or modify any of the
provisions of the Contract, or any amendment or addendum thereto. In the event
of any conflict between the Contract, this Amendment or any other amendment or
addendum thereof, the document later in time shall prevail.
3. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
By: /s/ Jon Darmstater
-----------------------------------
JON D. DARMSTADTER
THE CHILDREN'S BEVERAGE GROUP, INC.
By: /s/ Edward R. Ferry
-----------------------------------
Edward R. Ferry, Authorized Officer
<PAGE>
CONTRACT TO PURCHASE
THIS AGREEMENT, made this ______ day of February, 2000, is by and between
THE CHILDREN'S BEVERAGE GROUP, INC., 237 Melvin Drive, Northbrook, Illinois
60062, its successor or designee (the "Buyer"),and LEONE INDUSTRIES OF NY, INC.,
443 South East Avenue, Bridgeton, New Jersey 08302 (the "Seller"). In
consideration of the mutual promises and covenants contained herein, the parties
hereto agree as follows:
1. PROPERTY: Buyer agrees to buy and Seller agrees to sell that certain
--------
property, (together with all buildings, equipment, fixtures, improvements and
appurtenances thereto and thereon, excepting the trailer leased from G.E.
Capital, the RG&E 2500 Kva transformer and any personal property of the current
caretaker) situate in the City of Rochester, County of Monroe and State of New
York, and known as 860-888 Maple Street, Rochester, New York 14606, Tax Map
#120-240-0002-011-000-0000 and # 120-240-0002-010-000-0000 (hereinafter referred
to as the "Property") (For a more detailed description of the Property,
reference is made to the prior deed thereof to the Seller).
2. PURCHASE PRICE: The total purchase price for the Property shall be
--------------
Nine Hundred Seventy Five Thousand & 00/100 Dollars ($975,000) (the "Purchase
Price"), payable as follows:
(a) $10,000.00 deposit (the "Deposit'), to be paid to the Seller's
attorney upon acceptance hereof, and to be held by the Seller's attorney in
escrow, and shall become part of the purchase price or returned to Buyer, in
accordance with the provisions hereof,
(b) On the Closing Date (defined below), Buyer shall pay the full balance
of the Purchase Price, plus or minus prorations and adjustments in accordance
with the terms of this Agreement, to Seller in cash, bank wire, bank check or
certified check, less the Deposit.
(c) If Seller is unable to transfer its rights, title and interest to
Buyer in accordance with the terms of this Agreement, Seller's sole liability
shall be to refund the Deposit to Buyer, and upon such refund, Seller shall be
released from all liability under this Agreement. Notwithstanding the
foregoing, if Seller willfully defaults under this Agreement, Buyer shall have
the option of either receiving a refund of the Deposit or bringing an action for
specific performance. If Buyer shall fail to perform any of its obligations
hereunder and Seller is not in default hereunder, Seller's sole remedy shall be
to retain the Deposit as liquidated damages, and thereupon Buyer and Seller
shall each be released from all liability under this Agreement.
3. CLOSING DATE: Buyer shall obtain title from Seller, as provided
------------
herein, on a mutually agreed upon date and time not later than May 15, 2000 (the
"Closing"). At Closing, Seller shall deliver a full warranty deed conveying its
entire interest in the Property and a bill of sale conveying its entire interest
in any personal property located in or on the Property, each in form and
substance satisfactory to Buyer's counsel.
4. CONTINGENCIES: This Agreement and the offer contained herein are
-------------
expressly contingent and conditioned upon the following:
<PAGE>
-2-
(a) The authorization and approval in all respects of the County of Monroe
Industrial Development Agency to enter into this Agreement and undertake the
actions contemplated herein; and the receipt of the required funds for this
purchase from the United States Department of Housing and Urban Development by
way of loans and/or grants from the City of Rochester, New York (the "City").
If such authorization and funds are not obtained on or before April 30, 2000,
this Agreement will be of no further force or effect and any deposit will be
returned to the Buyer.
(b) Seller providing Buyer with all of the following documents in Seller's
possession, to the extent identified by Seller following reasonable inquiry:
(i) reports describing environmental investigations at the Property,
including any Phase I and Phase II reports; and
(ii) laboratory or other reports detailing analyses of any soil or
groundwater sampling at the Property, to the extent that such sampling relates
to environmental conditions at the Property.
In the event that Buyer identifies any information within the documents
provided by Seller under this provision that reveals environmental contamination
at the Property that materially and adversely affects the value of the Property,
then Buyer may, in its sole option, terminate this Agreement and the Deposit
will be returned to Buyer. Buyer's right of termination under this provision
expires on March 31, 2000.
(c) The results of a Phase I environmental site assessment of the
Property, conducted at Buyer's sole cost and expense. The environmental site
assessment shall be performed in accordance with ASTM Standard E 1527-97
governing Phase I investigations (the "Phase I Investigation"). In the event
that the Phase Investigations reveals environmental contamination at the
Property that materially and adversely affects the value of the Property, Buyer
may, in its sole option, terminate this Agreement and the Deposit will be
returned to Buyer. In the event that Buyer elects to terminate this Agreement
pursuant to this provision, then Buyer shall provide to Seller all copies of the
Phase I Investigation, and Buyer further agrees that it shall not disclose the
results of the Phase I Investigation to any person not a party to this
Agreement, except as required by applicable law. In the event that, by March
31, 2000, Buyer fails to complete a Phase I Investigation and notify Seller of
Buyer's election to terminate this Agreement pursuant to this provision, then
Buyer waives its right to terminate the Agreement.
(d) The approval of the United States Department of Housing and Urban
Development and/or the State of New York and/or the City to all actions and
undertakings contemplated herein. If such necessary approvals are required and
not obtained on or before April 30, 2000, this Agreement shall have no further
force or effect and the Deposit will be returned to the Buyer
5. REPRESENTATIONS AND WARRANTIES OF SELLER: Seller, in order to induce
----------------------------------------
Buyer to enter into this Agreement and to purchase the Property, represents and
warrants,
<PAGE>
-3-
to the best of its knowledge and without independent investigation except as
expressly stated, to Buyer as follows:
(a) At the Closing, Seller will have and will convey and transfer to
Buyer, good and marketable title to the Property free and clear of any monetary
liens, encumbrances, tenancies, licenses, judgments and security interests, but
subject to covenants, conditions, restrictions, rights of way and easements of
record or imposed by applicable law;
(b) There is not any pending condemnation, or similar proceeding affecting
the Property or any portion thereof and Seller has not heretofore received any
notice, and has no knowledge, that any such proceeding is contemplated;
(c) No person, firm, corporation or entity other than Buyer has, or as of
the Closing will have, any right or option to acquire the Property or any
portion thereof or any interest therein;
(d) Seller is not aware of any violations of any federal, state or
municipal laws, ordinances, orders, regulations or state requirements affecting
any portion of the Property, and no notice of any such violation has been issued
by any governmental authority having jurisdiction;
(e) On or before the date fourteen (14) days after the effective date of
this Agreement, Seller will provide Buyer with copies of all documents, reports
or other records in Seller's possession not subject to a recognized legal
privilege, to the extent that Seller identifies such documents, reports or
records after reasonable investigation, that: (1) report or describe
environmental investigations at the Property, including any Phase I and Phase II
reports; (2) laboratory or other reports detailing analyses of any soil or
groundwater sampling at the Property, to the extent that such sampling relates
to environmental conditions at the Property. Seller has no specific knowledge
of the presence at the Property of any contaminants regulated under federal and
state environmental law at concentrations that exceed any applicable standards
under federal and state environmental law, except to the extent identified in
the documents, reports and records disclosed by Seller pursuant to this
provision;
(f) Seller has full power, in accordance with law, to enter into this
Agreement and, upon the Closing, to consummate the sale provided for herein;
(g) The; Property is not in violation of any zoning, planning or land use
laws or ordinances imposed by the City;
(h) This is a sale of substantially all of the Seller's assets, and Seller
will provide evidence of shareholders' consent to such sale prior to Closing;
(i) There are no current leases or interim uses which encumber the
Property.
5-A. BUYER'S REPRESENTATION: Buyer represents and warrants to Seller
----------------------
that, as of the date hereof, Buyer has full power and authority to enter into
this Agreement and perform Buyer's obligations under this Agreement.
<PAGE>
-4-
6. SURVEY, SEARCHES, TAXES, AND TITLE: At least thirty (30) days prior
----------------------------------
to Closing, Seller shall be required to deliver to Buyer a ten (10) year tax
search, current tax receipts, an up to date instrument survey, and a forty (40)
year abstract of title commencing with a warranty deed and showing the Property
free and clear of all liens and encumbrances except buildings and use
restriction, pole and wire easements of record, and subject to zoning ordinance
and to any taxes for local improvements not completed. Buyer may object to any
title defects within fourteen (14) days of receipt of completed searches.
Seller shall remedy such defects, or undertake, in writing, to remedy such
defects with the proceeds of sale of the Property, within seven (7) days of
receipt of Buyer's title objections or this Agreement shall be null and void and
Buyer's deposit shall be returned.
7. TITLE: At the time of Closing, Seller shall transfer to Buyer good
-----
and marketable title to the Property, free and clear of all liens and
encumbrances, except as herein provided. All municipal taxes, assessments and
charges shall be fully paid prior to or at the time of Closing.
8. POSSESSION: Possession of the Property shall be delivered by Seller
----------
to Buyer upon Closing.
9. ADJUSTMENTS: All adjustments, if any, including real property taxes,
-----------
water and other utility charges, shall be pro-rated and adjusted as of the date
of Closing.
10. ACCESS TO PROPERTY: Seller grants to Buyer, and its duly authorized
------------------
agents and employees, the right, to enter in and upon the Property, at
reasonable times, to inspect and examine the same and to make such surveys,
tests and measurements thereof as Buyer shall reasonably deem necessary,
provided however, that Buyer shall provide Seller with at least three (3)
business days advance notice of buyer's intention to access the Property in
order that Seller may elect to have a representative present at the Property
during Buyer's access. Notwithstanding the foregoing, with respect to any
environmental investigation of the Property, Buyer's right to inspect and
examine the Property hereunder shall be limited to a Phase I Investigation in
accordance with paragraph 4(c) hereof. In the event that, based upon the
results of the Phase I investigation, Buyer elects to perform any additional
environmental investigation of the Property, then Buyer shall provide Seller,
for Seller's review and approval, a plan, including a schedule, for the
performance of such additional environmental investigation. The results of any
such additional environmental investigation shall be subject to the
confidentiality provisions specified in 4(c) hereof. In the event Buyer does
enter onto the Property pursuant to this provision, Buyer shall indemnify and
hold harmless Seller, its officers, directors, agents, employees and
representatives, from and against all claims, causes of action, fines,
penalties, damages, liability losses or expenses, including reasonable
attorneys' fees, of any kind or character, cause by or arising from any actions
or activities of Buyer and its agents and employees on the Property. Except as
otherwise provided in this Agreement, Buyer's right of access hereunder shall
terminate of April 30, 2000, unless extended in writing by Seller.
11. ACCESS TO DOCUMENTS: Seller grants to Buyer and its duly authorized
-------------------
agents and employees, the right, at reasonable times after the effective date of
this Agreement, to review and copy all documents or other records detailing any
tests, studies, and measurements
<PAGE>
-5-
performed on the Property, except to the extent that any such document is
subject to a legal privilege.
12. RECORDING EXPENSES: Seller shall pay all fees, deed stamps, taxes
------------------
and charges customarily the responsibility of sellers. Buyer shall pay the cost
of recording the deed, and other fees customarily the responsibility of buyers.
13. RISK OF LOSS: Buyer agrees to buy Property "as is" as of the date
------------
hereof Seller and Buyer agree that the risk of loss or damage to the Property
from any cause remains with the Seller until Closing. In the event that the
Premises shall be damaged or destroyed, whether in whole or part, by fire or any
other casualty or act of God between the date of execution hereof and the
Closing Date which would materially adversely effect Buyer's ability to use the
Premises, Buyer shall have the sole option of (i) terminating this Agreement and
receiving a refund of the Deposit, or (ii) proceeding with this transaction and
assuming all of Seller's rights to receive any insurance proceeds. Buyer shall
have thirty (30) days after the date the Premises is damaged or destroyed to
exercise the foregoing option by delivering written notice thereof to Seller.
If Buyer does not notify Seller within such thirty (30) day period, then Buyer
shall be deemed to have elected the option described in clause (ii) above.
14. PERSONS BOUND: This document, when authorized and properly signed by
-------------
all parties, shall be a binding contract. It shall bind the parties hereto and
their estates, heirs, successors, and assigns. This Agreement contains the
entire agreement of the parties, may not be changed orally, and may be modified
only in a writing signed by both parties.
15. INDEMNIFICATION: (a) Each party shall indemnify, defend and hold
---------------
the other harmless from and against any and all claims, actions, costs, damages,
liability and expense incurred with respect to the breach of any representation
or warranty by the breaching party, or nonperformance of any covenant.
(b) Buyer shall indemnify, defend and hold Seller, its officers,
directors, agents, representatives and employees harmless from and against any
all claims, causes of action, costs, damages, liability, fines, penalties and
expenses, including attorneys' fees, of any kind or character, incurred after
closing with respect to, or arising from the presence after Closing at, on or
under or from the Property of any chemical, contaminant, waste or other
material, including without limitation, petroleum, petroleum derivatives and
petroleum products, which are regulated in any manner under federal or state
law.
16. MISCELLANEOUS: (a) Notice and Addresses. All notices and
------------- --------------------
correspondence under this Agreement shall be mailed to the Parties at their
respective addresses or delivered in person. Each Party may change the address
to which correspondence and notices relating to this Agreement are to be sent by
written notice to the other Party. The change shall become effective upon the
receipt of the notice. Notices shall be as follows:
<PAGE>
-6-
To the Buyer:
-------------
Children's Beverage Group, Inc.
237 Melvin Drive
Northbrook, Illinois 60062
Attention: Jon Darmstadter, President
with a copy to:
---------------
Timothy R. Curtin, Esq.
St. John & Curtin, L.L.C.
1530 First Federal Plaza
Rochester, New York 14614
To the Seller:
--------------
Leone Industries of NY, Inc.
443 South East Avenue
Bridgeton, New Jersey 08302
Attention: President
with a copy to:
---------------
Elyse Lubin Gilman, Esq.
Nixon Peabody LLP
Clinton Square
Rochester, New York 14604
(b) Severabilily. Each provision hereof is intended to be severable, and
------------
the invalidity or illegality of any provision of this Agreement shall not affect
the validity or legality of the remainder hereof
(c) Captions. Paragraph captions contained in this Agreement are inserted
--------
only as a matter of convenience and for reference and in no way define, limit,
extend, or describe the scope of this Agreement or the intent of any provision
hereof.
(d) Binding Agreement and Assignment The terms and provision of this
--------------------------------
Agreement shall be binding upon, and inure to the benefit of the successors,
assigns, personal representatives, estates, heirs, and legatees of the
respective Parties.
(e) Applicable Law. Notwithstanding the place where this Agreement may be
--------------
executed by any of the Parties hereto, the Parties expressly agree that all the
terms and provisions hereof shall be construed under and governed by the laws of
the State of New York.
<PAGE>
-7-
(f) Entire Agreement. This Agreement and the Exhibits attached hereto
----------------
constitute the entire agreement of the Parties with respect to the matters set
forth herein and supersedes any prior understanding or agreement, oral or
written, with respect hereto.
(g) Agreement in Counterparts. This Agreement may be executed in several
-------------------------
counterparts and all the Parties hereto, notwithstanding that all the Parties
are not signatories to the original or the same counterpart.
(h) Survival of Representations, Warranties, Covenants, and
-------------------------------------------------------
Indemnifications. The representations, warranties, covenants, and
- ----------------
indemnifications made by the Parties, each to the other, shall survive the
Closing and the passing of title from Seller to Buyer for a period of six (6)
months.
(i) Use of Singular or Masculine. At times this Agreement the masculine
----------------------------
singular gender maybe be used even though it is clear that the reference is to
either more than one party or person, to a female person or an entity. This is
done solely for the ease of preparation and reading of the Agreement and the
reference is to be understood as referring to the persons or entities that fit
the context, whether male, female, an entity, singular, plural or a combination
of these.
17. REAL ESTATE BROKER: Buyer and Seller agree that Buyer's real estate
------------------
broker brought about this contract and the eventual sale of the property and, at
Closing, Buyer's broker shall be paid a real estate sales commission by Seller
equal to two percent (2%) of the sale price of the Property ($19,500). No other
Broker has been involved in this sale.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
BUYER: THE CHILDREN'S BEVERAGE GROUP, INC.
By: /s/ Jon Darmstadter
---------------------------------------
Jon Darmstadter
Its: President
SELLER: LEONE INDUSTRIES OF NY, INC.
By: /s/ Peter Leone
---------------------------------------
Peter Leone
Its: President
<PAGE>
The Children's Beverage Group, Inc.
PROMISSORY NOTE
Date of Note: January 2, 1999
Borrower: The Children's Beverage Group, Inc.
330 Melvin Drive
Northbook, Illinois 60062
Leader: Jon A. Darmstadter
c/o The Children's Beverage Group, Inc.
330 Melvin Drive
Northbook, Illinois 60062
Principal Amount: Varying, see below
Interest Rate: 12.0%, compounded quarterly
Promise to Pay: The Children's Beverage Group, Inc. ("Borrower") promises to pay
to Jon A. Darmstadter ("Lender"), on order, in lawful money of the United States
of America, the Principal Amount, as hereinafter defined, together with interest
on the unpaid outstanding Principal Balance as demanded by Lender. Interest
shall be calculated from the date of each advance until repayment of each
advance with compounding as of the quarterly dates, as follows: March 31/st/,
June 30/th/, September 30/th/, and December 31/st/ (the "Compounding Date" or
"Compounding Date").
Principal Balance: The Principal Balance is defined as of any date as
representing the sum of amounts advanced by the Lender up to that date and shall
be reduced by any repayments of the Principal Balance or interest made by the
Borrower as of that date. If the date of calculation corresponds with a
Compounding Date, the Principal Balance will also include the interest accrued
as of that Compounding Date.
General Provisions: This Promissory Note is payable on demand. The Borrower
promises to pay all reasonable attorney's fees incurred by the Lender in
enforcing any right or remedy hereunder. All parties agree that Lender may
modify this Promissory Note without the consent of or notice to anyone other
than the Borrower with whom such modification shall be made in writing, signed
by both parties.
Agreed and signed this 2/nd/ day of January, 1999.
Dated
Borrower: The Children's
Beverage Group, Inc.
by Edward Ferry
Vice President /s/ Edward R. Ferry
-------------------------------------
Lender: Jon A. Darmstadter /s/ Jon A. Darmstadter
-------------------------------------
36
<PAGE>
PLEDGE AND ASSIGNMENT
THIS PLEDGE AND ASSIGNMENT (the "Pledge and Assignment") dated as of
October 1, 1999 from the COUNTY OF MONROE INDUSTRIAL DEVELOPMENT AGENCY, a
public benefit corporation of the State of New York having an office for the
transaction of business located at 8100 City Place, 50 West Main Street,
Rochester, New York 14614 (the "Issuer"), to UNITED STATES TRUST COMPANY OF NEW
YORK, a corporation with trust powers duly organized and existing under the laws
of the State of New York having its principal at 114 West 47th Street, New York,
New York 10036, as trustee (the "Trustee") for the holders of the Issuer's
Industrial Development Revenue Bonds (The Children's Beverage Group, Inc.
Project), Series 1999 in the aggregate principal amount of $7,420,000 (the
"Bond" or "Bonds") issued pursuant to a Bond Placement Agreement dated October
7, 1999 (the "Bond Placement Agreement") by and between the Issuer and Roosevelt
& Cross, Incorporated (the "Placement Agent") and an indenture of trust dated as
of October 1, 1999 (the "Indenture") by and between the Issuer and the Trustee.
All capitalized terms used herein, unless otherwise defined, shall have the
meanings ascribed to such terms in Schedule A of the Indenture, which Schedule A
is hereby incorporated by reference in this Pledge and Assignment and made a
part hereof.
For value received, the receipt of which is hereby acknowledged, the Issuer
hereby pledges, assigns, transfers and sets over to the Trustee, and hereby
grants the Trustee a lien on and a security interest in, any and all moneys due
or to become due and the other rights and remedies of the Issuer under or
arising out of an Installment Sale Agreement dated as of October 1, 1999 (the
"Installment Sale Agreement") by and between the Issuer and the Company (except
for the "Unassigned Rights", as defined therein, and moneys payable pursuant to
the Unassigned Rights), which Installment Sale Agreement is intended to be
recorded immediately prior to the recordation hereof; provided, however, that
the assignment made hereby shall not permit the amendment of the Installment
Sale Agreement without the prior written consent of the Issuer.
The Trustee shall have no obligation, duty or liability under the
Installment Sale Agreement, except as specifically set forth therein and
accepted pursuant to the Acceptance herewith, nor shall the Trustee be required
or obligated in any manner to fulfill or perform any obligation, covenant, term
or condition of the Issuer thereunder or to make any inquiry as to the nature or
sufficiency of any payment received by it, or to present or file any claim, or
to take any other action to collect or enforce the payment of any amounts which
may have been assigned to it or to which it may be entitled hereunder at any
time or times.
The Issuer hereby irrevocably constitutes and appoints the Trustee its true
and lawful attorney, with power of substitution for the Issuer and in the name
of the Issuer or in the name of the Trustee or otherwise, for the use and
benefit of the Trustee to ask, demand, require, receive, collect compound and
give discharged and releases of all claims for any and all moneys due or to
<PAGE>
become due under or arising out of the Installment Sale Agreement (except for
claims relating to moneys due or to become due with respect to the Unassigned
Rights) and to endorse any checks in connection therewith, and, if any Event of
Default specified in the Indenture shall occur, (a) to settle, compromise,
compound and adjust any such claims (except for claims arising pursuant to the
Unassigned Rights); (b) to exercise and enforce any and all claims, rights,
powers and remedies of the Issuer under or arising out of the Installment Sale
Agreement (except for rights of the Issuer and moneys payable pursuant to the
Unassigned Rights); (c) to file, commence and prosecute any suits, actions and
proceedings at law or in equity in any court of competent jurisdiction to
collect any such sums assigned to the Trustee hereunder and to enforce any
rights in respect thereto and all other claims, rights, powers and remedies of
the Issuer under or arising out of the Installment Sale Agreement (except for
rights of the Issuer and moneys payable pursuant to the Unassigned Rights), and
(d) generally to sell, assign, transfer, pledge, make any agreement with respect
to and otherwise deal with any of such claims, rights, powers and remedies as
fully and completely as though the Trustee were the absolute owner thereof for
all purposes, and at such times and in such manner as may seem to the Trustee to
be necessary or advisable in its absolute discretion.
The Issuer further agrees that at any time and from time to time, upon the
written request of the Trustee, and at the sole cost and expense of the Company,
the Issuer will promptly and duly execute and deliver any and all such further
instruments and documents as the Trustee may deem desirable in order to obtain
the full benefits of this Pledge and Assignment and all rights and powers herein
granted.
The Issuer hereby ratifies and confirms the Installment Sale Agreement and
does hereby warrant and represent (a) that the Installment Sale Agreement is in
full force and effect, (b) that the Issuer is not in default under the
Installment Sale Agreement, and (c) that the Issuer has not assigned or pledged,
and hereby covenants that it will not assign or pledge, so long as this Pledge
and Assignment shall remain in effect, the whole or any part of the moneys,
rights or remedies hereby assigned to any one other than the Trustee.
All moneys due and to become due to the Trustee under or pursuant to the
Installment Sale Agreement shall be paid directly to the Trustee at 114 West
47th Street, New York, New York 10036, Attention: Corporate Trust Department or
at such other address as the Trustee may designate to the Company in writing
from time to time.
If the Issuer shall pay or cause to be paid, or there shall be paid to the
Trustee or its successors and assigns as the trustee for the holder of the Bonds
or any part thereof, the principal of, premium, if any, and interest on the
Bonds and all other sums due or to become due pursuant to the Indenture and this
Pledge and Assignment, then this Pledge and Assignment and the estate and rights
created hereby shall cease, terminate and be void, and thereupon the Trustee
shall cancel and discharge the lien of this Pledge and Assignment and execute
and deliver to the Issuer, and record, if necessary, such instruments in writing
as shall be requisite to release the lien hereof, and shall reconvey, release,
assign and deliver unto the Issuer the estate, right, title
2
<PAGE>
and interest in and to any and all property conveyed, sold, transferred,
assigned or pledged to the Trustee, or otherwise subject to the lien of this
Pledge and Assignment.
The Pledge and Assignment shall be binding upon the Issuer and its
successors and assigns and shall inure to the benefit of the Trustee and its
successors and assigns as trustee for the holders of the Bonds or any part
thereof.
All covenant, stipulations, promises, agreements and obligations of the
Issuer contained in this Pledge and Assignment, the Indenture, the Bonds, the
Installment Sale Agreement, the Mortgage and the other documents and instruments
connected herewith or therewith, and in any documents supplemental thereto
(collectively, the "Financing Documents") shall be deemed to be the covenants,
stipulations, promises, agreements and obligations of the Issuer and not of any
member, officer, agent (other than the Company), servant or employee of the
Issuer in his individual capacity, and no recourse under or upon any covenant,
stipulation, promise, agreement or obligation in the Financing Documents
contained or otherwise based upon or in respect of the Financing Documents, or
for any claim based thereon or otherwise in respect thereof, shall be had
against any past, present or future member, director, officer, agent (other than
the Company), servant or employee, as such, of the Issuer or of any successor
public benefit corporation or political subdivision or any person executing the
Financing Documents on behalf of the Issuer, either directly or through the
Issuer or any successor public benefit corporation or political subdivision or
any person executing the Financing Documents on behalf of the Issuer, it being
expressly understood that the Financing Documents are solely corporate
obligations, and that no such personal liability whatever shall attach to, or is
or shall be incurred by, any such member, director, officer, agent (other than
the Company), servant, or employee of the Issuer or of any successor public
benefit corporation or political subdivision or any person executing the Finance
Documents on behalf of the Issuer because of the creation of the indebtedness
thereby authorized, or under or by reason of the covenants, stipulations,
promises, agreements or obligations contained in the Financing Documents or
implied therefrom; and that any and all such personal liability of, and any and
all such rights and claims against, every such matter, director, officer, agent
(other than the Company), servant or employee because of the creation of the
indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Financing Documents or implied
therefrom, are, to the extent permitted by law, expressly waived and released as
a condition of, and as a consideration for, the execution of the Financing
Documents and the issuance of the Bonds.
The obligations and agreements of the Issuer contained herein shall not
constitute or give rise to an obligation of the State of New York or the County
of Monroe, New York, and neither the State of New York nor the County of Monroe,
New York shall be liable thereon, and further such obligations and agreements
shall not constitute or give rise to a general obligation of the Issuer, but
rather shall constitute limited obligations of the Issuer payable solely from
the revenues of the Issuer derived and to be derived from the lease, sale or
other disposition of the Project Facility (except for revenues derived by the
Issuer with respect to the "Unassigned Rights", as defined in the Installment
Sale Agreement).
3
<PAGE>
Notwithstanding any provision of this Pledge and Assignment to the
contrary, the Issuer shall not be obligated to take any action pursuant to any
provision hereof unless (a) the Issuer shall have been requested to do so in
writing by the Company or the Trustee, and (b) if compliance with such request
is reasonably expected to result in the incurrence by the Issuer (or any member,
director, officer, agent (other than the Company), servant or employee of the
Issuer) in any liability, fees, expenses or other costs, the Issuer shall have
received from the Company security or indemnity satisfactory to the Issuer for
protection against all such liability, however, remote, and for the
reimbursement of all such fees, expenses and other costs.
(End of Document)
4
<PAGE>
ACCEPTANCE
United States Trust Company of New York (the "Trustee") hereby accepts the
foregoing Pledge and Assignment and agrees to fulfill all the duties and
obligations imposed on the Trustee under said Pledge and Assignment and the
provisions of the Installment Sale Agreement dated as of October 1, 1999 by and
between the County of Monroe Industrial Development Agency and The Children's
Beverage Group, Inc.
IN WITNESS WHEREOF, the Trustee has duly executed this Acceptance as of
October 1, 1999.
UNITED STATES TRUST COMPANY OF NEW YORK
as Trustee
By: /s/ H. William Weber
-----------------------------------
H. William Weber, Vice President
5
<PAGE>
PAYMENT IN LIEW OF TAX AGREEMENT
--------------------------------
THIS AGREEMENT made as of the 6th day of October, 1999, is by and between
the COUNTY OF MONROE INDUSTRIAL DEVELOPMENT AGENCY, a public benefit corporation
of the State of New York, having its offices at 8100 City Place, 50 West Main
Street, Rochester, New York 14614 ("the Agency"), and THE CHILDREN'S BEVERAGE
GROUP, INC., a Delaware Corporation duly organized and existing under the laws
of the State of Delaware, qualified to do business in the State of New York and
having an office at 330 Melvin Drive #1, Northbrook, Illinois 60062 (the
"Company").
WITNESSETH:
WHEREAS, the Agency was created by Chapter 55 of the Law of 1972 of the
State of New York pursuant to Title I of the Article 18A of the General
Municipal Law of the State of New York (collectively, the "Act") as a body
corporate and politic and as a public benefit corporation of the State of New
York; and
WHEREAS, the Agency has agreed to acquire a leasehold interest in an
approximately 100,000 square foot portion of the approximately 400,000 square
foot Lincoln Facility Building located on Lincoln Avenue, City of Rochester,
County of Monroe, State of New York (the "Land" and as more particularly
described in Exhibit "A"), and (ii) the acquisition and installation of certain
equipment and machinery (the "Equipment") consisting primarily of eight (8)
lines of manufacturing equipment (the Land and Equipment are hereinafter
collectively referred to as the "Facility"); and
WHEREAS, the Agency has agreed to sublease the Facility to the Company and
to grant to the Company an option which requires the Company to purchase the
Equipment; and
WHEREAS, pursuant to Section 874(1) of the Act, the Agency is exempt from
the payment of taxes and assessments imposed upon real property and improvements
owned by it; and
WHEREAS, the Agency, the Company and the County of Monroe deem it necessary
and proper to enter into an agreement making provisions for payments in lieu of
taxes by the Company to the Court of Monroe, the City of Rochester and the
Rochester City School District (collectively, the "Taxing Jurisdictions"); and
NOW, THEREFORE, in consideration of the Agency providing the Facility and
in consideration of the covenants herein contained, it is mutually agreed as
follow:
1(a). As long as the Agency leased the Facility and subleases it to the
Company, the Company agrees to pay annually to the Taxing Jurisdictions as
payment in lieu of taxes, an amount equal to 100% of the taxes, service charges,
special ad valorem levies, special assessments and improvements district charges
or similar tax equivalents, less the percentages of exemption set forth in
subdivisions 1(a) and 1(b) of Section 485 e of the New York Real
<PAGE>
Property Tax Law, as shown on the schedule below, with respect to taxes, special
ad valorem levies and service charges on that portion of the Facility within the
description contained in paragraph 2(a), 2(a)(i), 2(a)(ii) of Section 485e
(notwithstanding that the procedural steps to obtain an exemption may not have
been complied with) which would be levied upon or with respect to the Facility
by the Taxing Jurisdictions if the Facility were owned by The Company and not by
the Agency, following next applicable tax status date:
<TABLE>
<CAPTION>
YEARS OF EXEMPTION PERCENTAGE OF EXEMPTION
- --------------------------------------------------------------------------------
<S> <C>
1 100%
2 100%
3 100%
4 100%
5 100%
6 100%
7 100%
8 75%
9 50%
10 25%
</TABLE>
provided, however, that the Company need not comply with the procedures to
obtain such exemption as provided in Section 485e of the New York Real Property
Tax Law, and provided further that the Company and/or the Agency, at the request
of the Company, shall do all things necessary and shall make application and
follow such procedures to obtain such exemption to the extent that the Company
shall determine.
The tax benefits provided for herein shall be deemed to commence in the
first year in which the Company received any tax benefits relative to the
Facility, whether under this Agreement, another Agreement, or any statutory
exemption. In no event shall the Company be entitled to received tax benefits
relative to the Facility for more than ten (10) consecutive years. The Company
agrees that it will not seek any tax exemption for the Facility which would
provided benefits for more than ten (10) consecutive years.
1(b). Special district charges, unless otherwise exempt, and Monroe County
Pure Waters charges are to be paid in full in accordance with normal billing
practices.
1(c) The Company shall pay, within the applicable grace period and without
penalty, the amounts set forth in Paragraphs 1(a), 1(b), and 1(c), hereof
applicable taxes, service charges, special ad valorem levies, special
assessments or similar tax equivalents, less the percentages of exemption on
similar property subject to taxation by the Taxing Jurisdictions, as
appropriate.
1(d) The Company acknowledges and agrees that if payments are not made
within the applicable grace period each Taxing Jurisdiction any commence legal
action directly against the Company and shall be entitled to recover the amount
due, a late penalty of 5% of the amount due, interest of 1% per month, expenses,
costs and disbursements and attorneys' fees to prosecute the action, all
pursuant to General Municipal Section 874.
2
<PAGE>
2. In the event that the Facility is transferred from the Agency to the
Company, and the Company is ineligible for a continued tax exemption under some
other tax incentive program, the Company agrees to pay at the next tax lien date
(plus any applicable grace period) to each of the Taxing Jurisdictions an amount
equal to the taxes and assessments which would have been levied on the Facility
if the Facility had been classified as fully taxable, pro rata for the unexpired
portion of the year of transfer, less any amounts paid hereunder, for such
unexpired portion of the year of transfer.
3. The Company shall have all of the rights and remedies of a taxpayer
with respect to any tax, service charge, special benefit, ad valorem levy,
assessment, or special assessment or service charge in lieu of which the company
is obligated to make a payment pursuant to this Agreement, as if and to the same
extent as if the Company were the owner of the Facility.
4. The Company shall have all of the rights and remedies of a taxpayer as
if and to the same extent as if the Company were the owner of the Facility, with
respect to any proposed assessment or charge in assessment with respect to the
Facility by any of the Taxing Jurisdictions and likewise shall be entitled to
protest before and be heard by the appropriate assessors or Board of Assessment
Review, and shall be entitled to take any and all appropriate appeals or
initiate any proceedings to review the validity or amount of any assessment or
the validity or amount of any tax equivalent provided for herein.
5. To the extent the facility is declared to be subject to taxation or
assessments by an amendment to the Act, other legislative change, or by final
judgment of a Court of competent jurisdiction, the obligations of the company
hereunder shall, to such extent, be null and void.
6. If the Company enters into any written agreement with any taxing
Jurisdictions providing for payments in lieu of taxes by The Company to any or
all of them, so much of this Agreement as relates to the Taxing Jurisdiction
with which the Company has entered into said written agreement, and any such
written agreement shall be deemed to be incorporated herein by reference and
made a part hereof as an amendment or modification hereof. Should the Company
receive any exemption from any of the Taxing Jurisdictions this Agreement shall
be automatically modified to reflect the extent of such exemption.
7. If payments are not made as provided for herein, the Taxing
Jurisdictions, individually or collectively, shall be entitled to pursue any and
all remedies afforded them at law or in equity.
8. To the extent the Facility is declared to be subject to taxation or
assessment by an amendment to the Act, other legislative change, or by final
judgment of a Court of competent jurisdiction, the obligations of the Company
hereunder shall, to such extent, be null and void.
9. It is understood and agreed that, should the Company be obligated to
pay to any Taxing Jurisdiction any amounts in the nature of general taxes,
general assessments, service charges, or governmental charges of a similar
nature, with respect to the interest of the Agency or the Company, or their
respective successors and assigns, in the Facility, or the occupancy of
3
<PAGE>
the Facility by the Company but not including, by way of example, (i) special
assessments, special ad valorem levies or governmental charges in the nature of
utility charges, including but not limited to, water, solid waste, sewage
treatment, or sewer or other rents, rates and charges; (ii) sales taxes and
recording taxes; (iii) income taxes of the Company; the Company's obligation to
such Taxing Jurisdiction hereunder shall be reduced by the amount of such
amounts in the nature of general taxes, general assessments, service charges, or
other governmental charges of a similar nature which the Company shall be so
obligated to pay. The Company shall give the respective Taxing Jurisdictions
thirty (30) days prior written notice of its intention to claim any credit
pursuant to the provisions of this Section 9, if practicable.
10. If the Company enters into any written agreement with any Taxing
Jurisdiction providing for payments in lieu of taxes by the Company to any or
all of them, so much of this Agreement as relates to the Taxing Jurisdiction
with which the Company has entered into said written agreement, and any such
written agreement shall be deemed to be incorporated herein by reference and
made a part hereof as an amendment or modification hereof. Should the Company
receive any exemption from any of the Taxing Jurisdictions, this Agreement shall
automatically be modified to reflect the extent of such exemption.
11. If payments are not made as provided for herein, the Taxing
Jurisdictions, individually or collectively, shall be entitled to pursue any and
all remedies afforded them at law or in equity.
12. This Agreement shall be binding upon the parties hereto and their
respective successors, assigns, representatives and/or agents and shall inure to
the benefit of their respective successors, assigns, representatives and/or
agents.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COUNTY OF MONROE INDUSTRIAL
DEVELOPMENT AGENCY
By: /s/ Joseph Rubicon
-------------------------------
Joseph Rubicon, Chairman
THE CHILDREN'S BEVERAGE
GROUP, INC.
By: /s/ Jon Darmstadter,
-------------------------------
Jon Darmstadter, CEO
4
<PAGE>
SECURITY AGREEMENT
------------------
THE CHILDREN'S BEVERAGE GROUP, INC. ("Debtor"), a business corporation
organized and existing under the laws of the State of Delaware with offices at
330 Melvin Drive, Suite 1, Northbrook, Illinois 60062, for valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
hereby grants to UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee (the
"Secured Party"), a New York corporation with trust powers with its corporate
trust offices at 114 West 47th Street, New York, New York 10036, a first
priority security interest in and to the Debtor's rights to U.S. Department of
Commerce United States Patent No. 5,941,642 (self-contained fluid dispensing
system) (the "Patent"), and all collateral rights, benefits, products, goods and
revenues generated therefrom as further specified on Schedule A hereof
----------
(collectively, The "Collateral') and the Debtor hereby mortgages, sets over,
assigns, pledges and hypothecates to the Secured Party all the Debtor's interest
in the proceeds and properties of the Collateral including, without limitation,
the following:
(i) All proceeds and general intangibles (as defined in the Uniform
Commercial Code of the State of New York (the "UCC")), arising from the
Patent, and any product or mass into which any inventory shall be
manufactured, processed assembled or commingled and the proceeds and
general intangible arising therefrom (the "Inventory");
(ii) All accounts (as defined in the UCC) generated by utilization of the
Patent, now existing or hereafter acquired, and the proceeds thereof (the
"Accounts");
(iii) All chattel paper (as defined in the UCC) generated by utilization of the
Patent, now owned or hereafter acquired, and the proceeds thereof
("Chattel Paper");
(iv) All instruments (as defined in the UCC), now owned or hereafter acquired,
and the proceeds thereof (the "Instruments");
(v) All insurance covering the Collateral and Inventory against any risk of
damage, or loss whatsoever, now owned or hereafter acquired, together
with any and all claims of Debtor with respect thereto, and the proceeds
thereof;
(vi) All negotiable documents of title (as defined in the UCC) covering any
Inventory wherever located now owned or hereafter acquired, and the
proceeds thereof (the "Documents");
(vii) All of Debtor's right, title and interest in all of its books, records,
ledger sheets, files and other data and documents, now or hereafter
existing, relating to the Collateral, the Inventory, general intangibles
and Accounts;
(viii) All of Debtor's rights as a seller of goods under Chapter 2 of the UCC or
otherwise with respect to Inventory, and all goods represented by or
securing any of the Accounts, all of Debtor's rights therein, including,
without limitation, rights as an unpaid vendor or lienor and including
rights of stoppage in transit, replevin and reclamation, and the proceeds
thereof;
<PAGE>
(ix) All of Debtor's right, title and interest in and to any licenses,
permits, approvals and other certificates now or hereafter related to the
Patent and the Collateral including, without limitation, the Agreement,
as defined in the Consent and Collateral Assignment attached hereto;
(x) All of Debtor's right, title and interest in and to any contract, now or
hereafter in existence, together with any and all claims of Debtor with
respect thereto, and the proceeds and products thereof relating to the
Collateral;
(xi) All of the right, title and interest of Debtor in and to all leases,
tenancies, subleases, subtenancies and occupancies now or hereafter
affecting, the Collateral and all amendments, modifications, extensions
and renewals thereof (collectively, the "Assigned Leases") together with
all of the rents, issues and profits which may be or become due, or to
which Debtor may now or hereafter become entitled, arising, or issuing
out of the Assigned Leases;
(xii) All insurance proceeds heretofore and hereafter paid or to be paid by
reason of any loss or damage to the Collateral or any part thereof by
fire, flood or other casualty, which proceeds, together with any and all
claims of Debtor with respect thereto, are hereby assigned to and pledged
with Secured Party;
(xiii) All insurance proceeds heretofore and hereafter paid or to be paid by
reason of any loss of income from the operation of the Collateral, which
proceeds, together, with any and all claims of Debtor with respect
thereto, are hereby assigned to and pledged with Secured Party;
(xiv) All exclusive technological uses and applications rightfully within
Debtor's control by reason of registration of the Patent with the
Department of Commerce; and
(xv) All of the foregoing whether now owned or hereafter acquired and all
extensions, additions, attachments, accessories, accretions,
improvements, betterments, renewals, substitutions and replacements of
any of the foregoing collateral.
Notice is hereby given that the Debtor shall, at its sole cost and
expense, file from time to time Continuation Statements and such other
instruments as will continue the effectiveness of the filing of the financing
statements filed with respect to this Security Agreement.
1. This security interest is granted to secure payment of all obligations
(the "Obligations") due under that certain Installment Sale Agreement, dated as
of September 1, 1999 (the "Installment Sale Agreement"), by and between the
County of Monroe Industrial Development Agency (the "Issuer") and the Debtor.
Incident thereto; the Debtor agrees, covenants, represents and warrants
with and to the Secured Party as follows:
2
<PAGE>
A. The security interest granted to the Secured Party in the Collateral
shall constitute a first lien, and the Debtor is the lawful assignee
of the Patent and the owner of the balance of Collateral and has good
right to pledge, sell, consign, assign, transfer and create a security
interest in the same.
B. The Collateral shall continue to be free from all pledges, liens,
encumbrances and security interests or other claims in favor of
others, and that the Debtor will warrant and, at the Secured Party's
request, defend the same from all claims and demands of all persons.
C. Except in the ordinary course of business, or as otherwise specified
herein or with the Secured Party's prior written consent, Debtor will
not sell, assign, or otherwise transfer the Patent or any document,
instrument, or chattel paper related to the Collateral and will
neither create nor suffer to be created any security interests, liens,
encumbrances or claims in favor of others with respect thereto.
2. The Debtor agrees to comply with the requirements of all applicable state
and federal laws in order to grant to the Secured Party a valid perfected first
lien upon, and a security interest in, the Collateral described herein, or which
may be described in any amendment supplemental hereto.
3. The Debtor will pay, when due, all taxes, assessments and other charges
levied or assessed upon the Collateral or any part thereof.
4. The Debtor will have and maintain insurance at all times with respect to
the insurable Collateral against risks of fire (including so-called extended
coverage), theft, and such other risks (including war damage, if available) as
the Secured Party may require, in such form, for such periods, and written by
such companies as may be satisfactory to the Secured Party, such insurance to be
first payable, in case of loss, to the Secured Party; all policies of insurance
shall provide that the same shall not be canceled or amended without at least
(30) days' prior written notice to the Secured Party, and the Debtor shall
continually furnish the Secured Party with evidence satisfactory to the Secured
Party of compliance with the foregoing insurance provisions.
5. At its option, the Secured Party may discharge taxes, liens, or security
interests or other encumbrances at any time levied or placed on any of the
Collateral, may pay for insurance on the Collateral and may pay for the
maintenance and preservation of the Collateral. Debtor agrees to reimburse the
Secured Party on demand for any payment made, or any expense incurred by the
Secured Party pursuant to the foregoing authorization. Until default, the Debtor
may have possession of the Collateral and use it in any lawful manner not
inconsistent with this Security Agreement and not inconsistent with any policy
of insurance thereon.
6. Debtor shall be in default under this Security Agreement upon the happening
of any of the following events or conditions:
3
<PAGE>
A. Default in the payment or performance of any condition, obligation,
agreement covenant or liability secured hereby or contained or
referred to herein or in any agreement (including the Installment Sale
Agreement) continuing beyond applicable periods of grace, if any; or
B. Any warranty. representation or statement made or furnished to the
Secured Party or contained in the Installment Sale Agreement by or on
behalf of the Debtor proves to have been false in any material respect
when made or furnished; or
C. A default or event of default under or other failure to observe or
perform any condition, obligation, covenant or agreement contained
herein, or contained in or referred to in the Installment Sale
Agreement; or
D. Dissolution, termination of existence, insolvency, business failure,
appointment of a receiver of any part of the property of, assignment
for the benefit of creditors by, or the commencement of any proceeding
under any bankruptcy or insolvency laws by or against the Debtor or
any guarantor or surety for the Debtor.
7. (a) Upon the occurrence of such default, the Secured Party shall have all
of the rights, powers and remedies set forth in the Installment Sale Agreement,
this Security Agreement and any and all other documents or instruments
evidencing, securing an/or entered into with respect to the Installment Sale
Agreement, together with the rights and remedies of a secured party under the
Uniform Commercial Code of New York, including without limitation, the right to
sell, lease, or otherwise dispose of any or all of the Collateral, including the
Patent, and to take possession of the Collateral or any part thereof wherever
the same may be situated and remove the same therefrom and the Debtor will not
resist or interfere with such action. The Secured Party shall have full right
and authority to utilize the Patent technology and, without limitation, create,
sell, lease, assign and receive the proceeds of the Inventory, Accounts, Chattel
Paper, Instruments and Documents.
(b) Upon the occurrence of such default, the Secured Party shall have the
right to notify the account debtors obligated on any or all of the Debtor's
Accounts, Chattel Paper, Instruments or general intangibles to make payment
thereof directly to the Secured Party, and the Secured Party may take control of
all proceeds of any Accounts, Chattel Paper, Instruments or general intangibles.
The costs of collection and enforcement of Accounts, Chattel Paper, Instruments
or general intangibles including attorney's fees and out-of-pocket expense,
shall be borne solely by the Debtor, whether the same are not thereafter without
the Secured Party's written consent extend compromise, compound or settle any
Accounts, Chattel Paper, Instruments or general intangibles, or release, wholly
or partly, any person liable for payment thereof, or allow any credit or
discount thereon which is not customarily allowed by the Debtor in the ordinary
conduct of its business.
(c) Upon demand by the Secured Party after a default hereunder, the Debtor
will immediately deliver to the Secured Party all proceeds of Collateral, and
all original evidences of Accounts, Chattel Paper, Instruments, Documents or
general intangibles including, without limitation all checks, drafts, cash and
other remittances, notes, trade acceptances or other
4
<PAGE>
instruments or contracts for the payment of money, appropriately endorsed to the
Secured Party's order and, regardless of the form of such endorsement, the
Debtor hereby waives presentment, demand, notice of dishonor, protest and notice
of protest and all other notices with respect thereto; and the Debtor hereby
appoints the Secured Party to be the Debtor's agent and attorney-in-fact to make
such endorsement on behalf of and in the name of the Debtor. Pending such
deposit, the Debtor agrees that it will not commingle any such checks, drafts,
cash and other remittances with any of the Debtor's funds or property, but will
hold them separate and apart therefrom and upon an express trust for the Secured
Party until delivery thereof is made to the Secured Party.
(d) Effective immediately upon the occurrence of such default, the Debtor
hereby appoints the Secured Party to be the Debtor's true and lawful attorney,
with full power of substitution, in the Secured Party's name or the Debtor's
name or otherwise, for the Secured Party's sole use and benefit, but at the
Debtor's cost and expense, to exercise at any time all or any of the following
powers with respect to the Patent and all or any of the Accounts, Chattel Paper,
Instruments, Documents or general intangibles.
(i) to demand, sue for, collect, receive and give acquittance for any
and all moneys due or to become due upon or by virtue thereof,
(ii) to receive, take, endorse, assign and deliver any and all checks,
notes, drafts and other negotiable and non-negotiable instruments
taken or received by the Secured Party in connection therewith, and
the Debtor waives notice of presentment, protest and non-payment of
any instrument so endorsed or assigned;
(iii) to settle, compromise, compound, prosecute or defend any action or
proceeding with respect thereto;
(iv) to sell transfer, assign or otherwise deal in or with the same or
the proceeds or avails thereof or the relevant goods, as fully and
effectually as if the Secured Party were the absolute owner thereof;
(v) to make any reasonable allowance and other reasonable adjustments
with reference thereto;
(vi) to sign the Debtor's name on any Document, on invoices relating to
any Account, on drafts against customers, on schedules of
assignments of Accounts, on notices of assignment, financing
statements under the UCC and other public records, on verifications
of Accounts, and on notices to customers;
(vii) to file or record in any public office notices of assignment or any
other public notice required to effect this Security Agreement;
(viii) to notify the post office authorities to change the address for
delivery of the Debtor's mail to an address designated by the
Secured Party;
5
<PAGE>
(ix) to receive, open and dispose of all mail addressed to the Debtor, and
(x) to send requests for verification of Accounts to the Debtor's
customers.
The Debtor hereby ratifies and approves all acts of the attorney pursuant
to this Section 7(d), and neither the Secured Party nor the attorney will be
liable for any acts of commission or omission, nor for any error of judgment or
mistake of fact or law. This power, being coupled with an interest. is
irrevocable so long as any of the Obligations remain outstanding.
(e) Any proceeds of collection or sale of the Collateral shall be applied
to the payment of principal, interest or other Obligations and charges
comprising the Obligations in such order as the Secured Party may determine, and
any excess shall be returned to the Debtor. The Secured Parry shall so apply the
proceeds of collection or sale of the Collateral, if any, at least once during
each calendar month, and until so applied, shall retain such proceeds in a
special, non-interest bearing account maintained by the Secured Party and over
which the Secured Party alone shall have the power of withdrawal.
(f) The Secured Party may exercise its rights with respect to Collateral
without resorting to or regard to other Collateral or sources of reimbursement
for the Obligations.
(g) The exercise by the Secured Party or a failure to so exercise any
authority granted under this Section 7 shall in no manner affect the Debtor's
liability to the Secured Party, and provided, further, that the Secured Party
shall be under no obligation or duty to exercise any of the powers hereby
conferred upon it and it shall be without liability for any act or failure to
act in connection with the collection of, or the preservation of any rights
under any of the Collateral.
8. No waiver by the Secured Party of any default shall operate as a waiver of
any other default or of the same default on a future occasion. All rights of
the Secured Party hereunder shall inure to the benefit of its legal
representative, successors and assigns; and all Obligations of the Debtor shall
bind its successors, legal representatives and assigns.
9. In any exercise of rights of the Secured Party under this or any other
instrument, any combination or all of the property, rights or security given to
secure the Debtor's indebtedness to the Secured Party may be offered for sale
for one total price, and the proceeds of any such sale amounted for in one
amount without distinction between the items of security or without assignment
to them of any proportion of such proceeds, the Debtor hereby waiving the
application of any doctrine of marshaling.
10. Debtor agrees to take such action as Secured Party may require to
establish, perfect and maintain the security interest granted pursuant to
establish this Security Agreement, including, without limitation, the
preparation, execution and filing in all appropriate offices of financing
statements. At any time and from time to time, upon request of the Secured
Party, the Debtor will give, execute, file and/or record any notice, financing
statement, continuation statement, instrument, document or agreement that the
Secured Party may consider necessary or desirable to create, preserve, continue,
perfect or validate any security interest granted hereunder or which
6
<PAGE>
the Secured Party may consider necessary or desirable to exercise or enforce its
rights hereunder with respect to such security interest. Without limiting the
generality of the foregoing, the Secured Party is authorized: to file with
respect to the Collateral one or more financing statements, continuation
statements or other documents without the signature of the Debtor and to name
therein the Debtor as Debtor and the Secured Party as Secured Party; and correct
or complete, or cause to be corrected or completed, any financing statements,
continuation statements or other such documents as have been filed naming the
Debtor as Debtor and the Secured Party, on behalf of the Debtor, is hereby
appointed by the Debtor as its lawful attorney and agent to execute,
acknowledge, deliver, file and/or record any and all documents requiring
execution by the Debtor and necessary or desirable to effectuate or facilitate
the purposes of this Security Agreement and/or the Obligations or covenants of
Debtor hereunder. The power of attorney granted hereby is coupled with an
interest and is irrevocable. The Secured Party shall not be liable for its
failure to file, prepare or execute any financing statements, continuation
statements or other documents.
11. In addition to the financial assistance provided by the Issuer, as
evidenced by the Obligations, the City of Rochester, New York (the "City") has
agreed to provide financial assistance to the Debtor. The City's total financial
assistance is presently estimated to be approximately $2,566,000 (the "City
Loan"). The City Loan, through one or more sources, shall be secured essentially
by a first lien security interest in the assets financed with the proceeds of
the City Loan. The City Loan shall be additionally collaterally secured by a
proportionate co-equal security interest in the Patent. The Secured Party hereby
acknowledges and agrees that it shall consent to and execute a security
agreement (and ancillary documentation) spreading the security interest in the
Patent to or at the direction of the City to secure the City Loan. Proceeds of
the consolidated Patent security interest shall be shared between the Secured
Party and the City in a proportion which reflects the respective principal
balances outstanding between the Obligations and the City Loan against the total
secured indebtedness. Rights, remedies and options shall be exercised, between
the Secured Party and the City, by the entity whose secured indebtedness exceeds
fifty percent (50%) of the total secured indebtedness. The Secured Party shall
not execute any consent or agreement to a City Loan security agreement unless
such agreement shall contain the substance of the above requirements.
12. As used herein, the term "Secured Party" shall refer not only to the entity
referred to at the beginning of this instrument, but also to the obligor under
the Installment Sale Agreement secured hereby.
13. This Security Agreement is in addition to and without limitation of any
right of the Secured Party under the Installment Sale Agreement or any other
security agreement, mortgage or guaranty granted by the Debtor or any other
person to the Secured Party.
14. The Secured Party shall not be liable in any manner for exercising or
refusing or failing to exercise any such rights hereunder or any other rights or
remedies granted to it hereunder.
15. The Debtor agrees to stamp all books and records pertaining to the
Accounts, Chattel Paper, Instruments, general intangibles and Documents to
evidence the Secured Party's security
7
<PAGE>
interest therein in form satisfactory to the Secured Party immediately upon the
Secured Party's demand.
16. The Debtor waives demand, notice, protest, notice of acceptance of this
Security Agreement, notice of loans made, credit extended, collateral received
or delivered or other action taken in reliance hereto and all other demands and
notices of any description except as hereinbefore provided. The Debtor assents
to any extension or postponement of the time of payment or any other indulgence,
to any substitution, exchange or lease of Collateral, to the addition or release
of any party or person primarily or secondarily liable, to the acceptance of
partial payments thereon and the settlement, compromising or adjusting of any
thereof, all in such time or times as the Secured Party may deem advisable. The
Secured Party shall have no duty as to the collection or protection of
Collateral not in the Secured Party's Possession, and the Secured Party's duty
with reference to Collateral in its possession shall be to use reasonable care
in the custody and preservation of such Collateral but such duty shall not
require the Secured Party to engage in:
(i) the collection of income thereon;
(ii) the collection of debt; or
(iii) the taking of steps necessary to preserve rights against prior
parties, although the Secured Party is authorized to reasonably
undertake any such action if it deems appropriate.
17. No delay or omission by the Secured Party in exercising any of its rights
hereunder shall be deemed to constitute a waiver thereof. All rights and
remedies of the Secured Party hereunder and under the Bond Documents shall be
cumulative and may be exercised singularly or concurrently.
18. The Secured Party shall not be required to marshal any present or future
security for (including but not limited to this Security Agreement and the
Collateral pledged hereunder) or guarantees of payment of the Obligations or any
of them, or to resort to such security or guarantees in any particular order,
and all of its rights hereunder and in respect of such securities and guarantees
shall be cumulative and in addition to all other rights, however existing or
arising.
19. This Security Agreement may not be amended, changed, modified, altered or
terminated except by a written instrument executed and delivered by the parties
hereto.
20. This Security Agreement may be executed in several counterparts, each of
which shall be an original and all of which shall constitute but one and the
same instrument.
21. This Security Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
8
<PAGE>
22. In the event any provision of this Security Agreement shall be held invalid
or unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provision hereof.
23. This Security Agreement shall become effective when it is signed by the
Debtor.
IN WITNESS WHEREOF, the Debtor has caused this instrument to be dully
executed this ____ day of October, 1999.
DEBTOR:
WITNESS: THE CHILDREN'S BEVERAGE GROUP, INC.
/s/ unknown By: /s/ Jon A. Darmstadter, pres.
- ----------------------- -----------------------------------------
Jon A. Darmstadter
Its: President
SECURED PARTY
WITNESS: UNITED STATES TRUST COMPANY
OF NEW YORK, as Trustee
/s/ Lisa A. Geary By: /s/ H. William Webber
- ----------------------- -----------------------------------------
H. William Weber
Its: Vice President
CONSENT AND COLLATERAL ASSIGNMENT
1, Jon A. Darmstadter, am the registered owner of the herein described
Patent. I have granted an exclusive license to utilize my Patent to The
Children's Beverage Group, Inc. pursuant to a certain Agreement made September
14, 1999 (the "Agreement"). I hereby consent to the granting of a security
interest in such Patent by The Children's Beverage Group, Inc. to United States
Trust Company of New York, as Trustee. Further, I execute this certificate to
grant the Trustee a collateral assignment of the Patent and the balance of the
Collateral described herein in the event, for any reason, the term of the
Agreement expires or is terminated prior to the stated expiration date of the
Installment Sale Agreement. In such event, this Consent and Collateral
Assignment shall become a direct assignment of my rights in and to the Patent
and my interest in the balance of the Collateral directly to the Trustee.
Dated: 10/07/99 /s/ Jon Darmstadter
----------------- ----------------------------------------
JON A. DARMSTADTER
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 9,653 0
<SECURITIES> 500,000 500,000
<RECEIVABLES> 6,176 103,602
<ALLOWANCES> 0 0
<INVENTORY> 94,460 151,255
<CURRENT-ASSETS> 610,289 754,857
<PP&E> 5,118,016 1,742,789
<DEPRECIATION> 266,853 25,075
<TOTAL-ASSETS> 6,085,589 2,499,554
<CURRENT-LIABILITIES> 3,243,452 1,953,630
<BONDS> 5,080,254 0
0 0
1,000 1,000
<COMMON> 2,946 2,576
<OTHER-SE> (2,242,062) 488,562
<TOTAL-LIABILITY-AND-EQUITY> 6,085,589 2,499,554
<SALES> 3,606,987 145,954
<TOTAL-REVENUES> 3,606,987 145,954
<CGS> 5,027,152 171,268
<TOTAL-COSTS> 9,187,849 2,114,714
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 921,343 16,660
<INCOME-PRETAX> (6,481,421) (1,985,420)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,481,421) (1,985,420)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,481,421) (1,985,420)
<EPS-BASIC> (0.23) (0.08)
<EPS-DILUTED> (0.23) (0.08)
</TABLE>
