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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
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, Northbrook, Illinois 60062
(Address of Principal Executive Offices)
(847)562-4040
(Issuer's telephone number)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Outstanding as of
Class November 1, 2000
Common Stock, $.0001 par value 29,462,504*
* Excludes 5,000,000 shares issued as collateral against a promissory note, see
Part II, Item 2 herein. Though issued, treated herein as not outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X .
--- ---
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TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements 3
Independent Accountants' Review Report 3
Condensed Balance Sheets - September 30,
2000 and December 31, 1999 4
Condensed Statements of Operations -
three months ended September 30, 2000 and 1999 5
Condensed Statements of Operations -
nine months ended September 30, 2000 and 1999 6
Condensed Statements of Cash Flows -
nine months ended September 30, 2000 and 1999 7
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis
and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
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PART I
Item 1. FINANCIAL STATEMENTS
ACCOUNTANTS' REVIEW REPORT
The Children's Beverage Group, Inc.
Northbrook, Illinois
We have reviewed the accompanying condensed balance sheet of The Children's
Beverage Group, Inc. as of September 30, 2000, and the related condensed
statements of operations for the three months and nine months ended September
30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000
and 1999. All information included in these financial statements is the
representation of the management of The Children's Beverage Group, Inc.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review consists principally of
inquiries of Company personnel and analytical procedures applied to financial
data. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
The condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial statements as
modified by the instructions to Form 10-QSB by Regulation S-K. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
Based on our review, with the exception described in the preceding paragraph, we
are not aware of any material modifications that should be made to the
accompanying condensed financial statements reviewed by us, in order for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1999 and the related statements
of operations, stockholders' equity and cash flows for the year then ended (not
presented herein). In our report dated March 17, 2000, we expressed an
unqualified opinion on those financial statements, but we have not performed any
auditing procedures since that date.
/s/ DIROCCO & DOMBROW, P.A.
DiRocco & Dombrow, P.A.
November 20, 2000
Fort Lauderdale, Florida
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The Children's Beverage Group, Inc.
Condensed Balance Sheets
===============================================================================
September 30, December 31,
2000 1999
(Unaudited) (Audited)
-------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ -- $ 9,653
Restricted investments (Note 5) -- 500,000
Accounts receivable -- 6,176
Inventories -- 94,460
-------------------------------------------------------------------------------
Total Current Assets -- 610,289
-------------------------------------------------------------------------------
Property and Equipment, Net 4,000,673 4,851,163
Other Assets 581,725 624,137
-------------------------------------------------------------------------------
$ 4,582,398 $ 6,085,589
===============================================================================
Liabilities and Stockholders' (Deficit)
Current Liabilities
Accounts payable $ 1,521,113 $ 1,327,578
Accrued expenses 474,733 150,976
Capital lease obligations 766,998 766,998
Notes payable - bank (Note 5) -- 550,000
Notes payable - stockholder 89,980 --
Notes payable - officer 573,066 447,899
-------------------------------------------------------------------------------
Total Current Liabilities 3,425,890 3,243,451
-------------------------------------------------------------------------------
Long-Term Liabilities
Industrial revenue bonds 6,500,089 5,080,254
-------------------------------------------------------------------------------
Total Long-Term Liabilities 6,500,089 5,080,254
-------------------------------------------------------------------------------
Total Liabilities 9,925,979 8,323,705
-------------------------------------------------------------------------------
Commitments and Contingencies (Notes 2 - 8)
Stockholders' (Deficit) (Notes 6 - 7)
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, (Note 7) 2,946 2,946
Additional paid-in capital 6,629,751 6,629,751
Accumulated deficit (11,977,278) (8,871,813)
-------------------------------------------------------------------------------
Total Stockholders' (Deficit) (5,343,581) (2,238,116)
-------------------------------------------------------------------------------
$ 4,582,398 $ 6,085,589
===============================================================================
See accompanying summary of notes to unaudited condensed financial statements.
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The Children's Beverage Group, Inc.
Condensed Statements of Operations
For the Three Months Ended September 30, 2000 and 1999
================================================================================
2000 1999
(Unaudited) (Unaudited)
================================================================================
Net Sales $ - $ 1,603,057
Cost of Sales 63,417 2,298,018
--------------------------------------------------------------------------------
Gross Loss (63,417) (694,961)
Selling, General and Administrative Expenses 264,796 1,074,364
--------------------------------------------------------------------------------
Loss From Operations (328,213) (1,769,325)
Loss on Disposal of Equipment (Note 2 and 8) (1,374,007) -
Other Income 30,000 -
Interest Income 14,838 10,860
Interest Expense (204,710) (181,619)
--------------------------------------------------------------------------------
Net Loss $(1,862,092) $(1,940,084)
================================================================================
Basic and Diluted Net Loss Per Common Share $ (0.06) $ (0.07)
===========================================
Weighted Average Common
Shares Outstanding 29,462,504 29,049,504
=========================================== =============================
See accompanying summary of notes to unaudited condensed financial statements.
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The Children's Beverage Group, Inc.
Condensed Statements of Operations
For the Nine Months Ended September 30, 2000 and 1999
================================================================================
2000 1999
(Unaudited) (Unaudited)
================================================================================
Net Sales $ - $ 3,390,323
Cost of Sales 196,699 4,282,841
--------------------------------------------------------------------------------
Gross Loss (196,699) (892,518)
Selling, General and Administrative Expenses 949,838 2,968,654
--------------------------------------------------------------------------------
Loss From Operations (1,146,537) (3,861,172)
Loss on Disposal of Equipment (Notes 2 and 8) (1,374,007) -
Other Income 30,000 -
Interest Income 26,808 20,783
Interest Expense (641,729) (678,188)
--------------------------------------------------------------------------------
Net Loss $(3,105,465) $(4,518,577)
================================================================================
Basic and Diluted Net Loss Per Common Share $ (0.11) $ (0.16)
===========================================
Weighted Average Common
Shares Outstanding 29,462,504 27,766,604
=========================================== =============================
See accompanying summary of notes to unaudited condensed financial statements.
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The Children's Beverage Group, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
==============================================================================================================
2000 1999
(Unaudited) (Unaudited)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows Used in Operating Activities
Net loss $ (3,105,465) $(4,518,577)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 294,926 183,536
Amortization of Industrial Revenue Bond issuance costs 38,970 --
Write off of equipment held in Canada being sold under
court order (Note 2) 1,369,412 --
Noncash equity transaction charged to operations - 2,182,767
Changes in assets and liabilities
Decrease (increase) in accounts receivable 6,176 (68,749)
Decrease (increase) in inventories 94,460 (247,169)
Increase in prepaid expenses - (17,792)
Increase in other assets - (17,911)
Increase in accounts payable 193,536 1,432,150
Increase in accrued expenses 323,755 219,091
--------------------------------------------------------------------------------------------------------------
Total adjustments 2,321,235 3,665,923
--------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (784,230) (852,654)
--------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (810,405) (269,511)
--------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (810,405) (269,511)
--------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Payments of bank notes payable (550,000) (24,500)
Realization of restricted investments used towards payment of
bank notes payable 500,000 --
Proceeds from notes payable and stockholder advances 258,648 1,204,619
Repayment of stockholder advances (43,500) (52,500)
Proceeds from Industrial Revenue Bonds 1,419,834 -
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,584,982 1,127,619
--------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (9,653) 5,454
Cash and Cash Equivalents, at beginning of period 9,653 -
--------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of period $ -- $ 5,454
==============================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 228,632 $ 121,911
==============================================================================================================
Supplemental Schedule of Noncash Investing and Financing Activities
During the period ended September 30, 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 the period ended September 30, 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 with $1,687,500 recorded through the nine months
ending September 30, 1999 and $562,500 is included in prepaid expenses
at September 30, 1999.
During the period ended September 30, 1999, the Company acquired machinery
at a cost of $1,573,300. $1,423,300 of the amount is included in
accounts payable at September 30, 1999.
==============================================================================================================
</TABLE>
See accompanying summary of notes to unaudited condensed financial statements.
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NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Basis Of Presentation
The financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
statement of results for the interim periods. The accompanying financial
statements include estimated amounts and disclosures based on management's
assumptions about future events. Actual results may differ from those estimates.
The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year. Basic
and diluted earnings per share are the same due to the anti-dilutive nature of
the options.
The condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make information presented not misleading.
These financial statements should be read in conjunction with the
financial statements included in the Company's Form 10-KSB for the fiscal year
ended December 31, 1999, as filed with the Securities and Exchange Commission
and available under the EDGAR reporting system or from the Company.
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. Furthermore, the Company has recently been released from a bankruptcy
petition (see note 2, below). Additionally, the Company is in default on the
Industrial Revenue Bonds debt and interest thereon is being paid from the debt
service reserve fund that the Company is liable to replace. Unless financing is
obtained in the immediate future, the Company may face another bankruptcy
petition, which could result in a court ordered bankruptcy.
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 and through additional funding from
the City of Rochester's Economic Development Department, amounting to
$3,459,000, which has been approved by HUD. The Economic Development Department
has received the funds, but they have not defined how soon they might release
the funds. 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 make sources of additional financing reluctant to risk investing
in the Company. Furthermore, failure to secure such financing may result in the
Company not being able to comply with its payment obligations under its
Industrial Revenue Bond loans, capital equipment financing arrangement 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.
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2. Commitments and Contingencies
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 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 on
February 16, 2000. On October 25, 2000, the Ontario Superior Court of Justice
issued an ORDER, which includes the following:
This Court orders that pursuant to s. 101 of the Courts of Justice Act,
R.S.O. 1990, c. C-43 and s. 67 of the PPSA and effective 12:01 a.m. on
the date hereof, Ernst & Young, Inc. (the "Receiver") be and is hereby
appointed receiver and manager, without security, of the Equipment,
including any and all rights in and thereto,... and Subject to the
provisions hereof, the Receiver is hereby empowered and authorized,
but not obligated, to take possession and control of the Equipment and
any and all proceeds, receipts and disbursements arising out of or
from the Equipment, until further order of this court,...
Additionally,
This Court orders that the Receiver be and is hereby directed to:
(a) sell or attempt to sell, by lot or en bolc, all of the Equipment
by way of a sale by sealed tender substantially on the terms,
conditions and provisions of the of the Invitation to Tender and
Conditions of Sale...
(d) conduct the tender sale process substantially in accordance with
this Order, the Invitation to Tender...
The deadline for receipt of sealed tender offers is set for November 20, 2000
with the closing of sale pursuant to the tender offers scheduled for December
4-8, 2000.
The equipment at issue is valued at approximately $1.6 million. Two of
the three major pieces of equipment at issue are leased and the remaining
equipment is owned by the Company. The Company's has engaged outside legal
counsel resigned from representing the Company as a result of the bankruptcy
petition, described later herein. As a result of this ORDER, the Company deems
it unlikely that any of the proceeds will be returned to the Company and has
written off the remaining net book value of the equipment, approximately
$1,369,412.
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
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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, and 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. On June 8, 2000, the Federal Court ruled that the two lawsuits
are to be consolidated into one proceeding in the United States District Court
in St. Louis. As a result, the litigation pending in the Circuit Court of Warren
County has been removed to Federal Court. The parties are now beginning
discovery. The Company intends to vigorously defend against the WPI claim and
prosecute its claim.
On August 20, 2000, WPI joined with other parties in filing an
involuntary petition for relief under Chapter 7 of the Bankruptcy Code against
the Company. As explained below, the Court dismissed this petition in an Order
entered on October 20, 2000. In a Stipulation attached to the Order to dismiss
the involuntary petition, the Company waived all rights relative to the
Bankruptcy Code against WPI as a result of its filing this involuntary petition.
Furthermore, WPI agreed not to file or to induce or encourage the filing of an
involuntary petition against the company in the future.
Capri Sun Dispute
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.
On July 21, 2000, the presiding judge in this case issued a Memorandum
Opinion and Order refusing to reinstate the case, dismissing Plaintiffs Motion
and denying all relief. Specifically, on alleged breach number 4 (above), the
Court held that use of the color blue by the Company was de minimus and the
Company had agreed to discontinue use of the color.
Rochester, New York Plant Offer
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 ("HUD")to be completed by September 2000. The
Economic Development Department of the City of Rochester obtained approval from
the City Council to increase the proposed the HUD Section 108 loan from $2.0
million to $3,459,000. HUD has approved the loan. The Economic Development
Department has received the funds, but they have not defined how soon they might
release the funds.
Bankruptcy Petition
On August 30, 2000, Danisco Flexible Schupbach AG ("DFS"), P.S.
Custom Broker ("P.S. Custom"); Hub Group St. Louis L.P. ("Hub City") and
Warrenton Products, Inc. ("WPI") (collectively, the "Involuntary Petitioners")
filed an involuntary petition for relief under Chapter 7 of the Bankruptcy Code
against The
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Children's Beverage Group, Inc. ("TCBG") (the "Involuntary Petition"). On
September 20, 2000, TCBG filed 'the Motion To Dismiss seeking to dismiss the
Involuntary Petition or to have the Court abstain from the Involuntary Petition
on the grounds that (i) the Involuntary Petition was not properly filed because
certain of the Involuntary Petitioners' claims were subject to a bona-fide
dispute; and (ii) dismissal or abstention is in the best interest of creditors
and TCBG under section 305 of the Bankruptcy Code. On September 22, 2000,
Specialized Metal Services, Inc. ("Specialized Metal") filed a Motion To File
Joinder To Involuntary Petition (the "Joinder Motion") and TCBG objected to the
Joinder Motion. On September 29, 2000, TCBG sent notice of the Motion To Dismiss
to all of its known creditors. Due and proper notice of the Motion To Dismiss
was given and no other or further notice is required. The Court, based upon good
cause shown, had previously shortened the twenty (20) day notice period for the
hearing on the Motion To Dismiss. A reasonable opportunity to object or be heard
regarding the relief requested in the Motion to Dismiss has been given and no
objections having been made to the dismissal of the Involuntary Petition or any
objects having being overruled. DST, Hub City, PS Custom and Specialized Metal
have agreed to and consent to the dismissal of the Involuntary Petition. WPI has
agreed to and consents to the dismissal of the Involuntary Petition on the terms
and conditions of the Stipulation attached hereto as Exhibit A (the "WPI
Stipulation"). Specialized Metal has agreed to withdraw the Joinder Motion. TCBG
has agreed to waive fees, costs and damages under section 303 of the Bankruptcy
Code relating to the filing of the Involuntary Petition.
Based upon the Motion To Dismiss and the evidence presented,
dismissal of the Involuntary Petition is in the best interest of TCBG and its
creditors. Any agreements between any of the Involuntary Petitioners and TCBG
has been adequately disclosed to the Court. The following summary of the
dismissal order was entered on October 20, 2000:
THE COURT ORDERED THAT: The Involuntary Petition filed against TCBG,
Case No. 00 B 25342, is dismissed pursuant to section 305 of the
Bankruptcy Code; The Joinder Motion is withdrawn, with prejudice; The
Bankruptcy Court shall retain jurisdiction to enforce the terms of this
Order; The Bankruptcy Court shall retain jurisdiction to decide
disputes concerning the WPI Stipulation, its interpretation or
performance of the terms and conditions of the WPI Stipulation; and All
parties shall bear there own fees and costs with respect to the
Involuntary Petition.
The Company is involved in various other litigation incidental 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.
3. Sole Customer, Contract Manufacturer and Concentration of Risk
All of the Company's sales during 1999 were to one customer. Outstanding
accounts receivable at September 30, 1999 was 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.
Also in 1999, the Company relied on one contract manufacturer to
produce juice products for its sole customer. As described in note 2, 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.
4. Stock Options
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
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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. As a result of the
involuntary bankruptcy petition against the Company (described in Note 2,
above), payment of employees by the Company was discontinued as of the week
ending September 29, 2000 and their employment status relative the granted stock
options is unclear.
5. Bank Loans
On July 19, 2000, the Company relinquished the $500,000 bank line of
credit utilizing the restricted investments of $500,000 as reflected on the
balance sheet as of June 30, 2000 to pay off this loan. On August 4, 2000, the
Company was forced to relinquish it remaining $50,000 bank line of credit. As a
result, the Company does not have any credit lines available.
6. Promissory Note and Common Stock Collateral
During March, 2000, the Company negotiated a Promissory Note
arrangement whereby the lender promises to provide debt financing of up to
$750,000, payable by March 12, 2001, at an interest rate of 12%. This Promissory
Note called for the issuance of 5,000,000 shares of the Company's common stock
into an escrow account for the benefit of the lender to act as collateral
("Collateral") which was issued at that time. The Collateral was to be returned
upon repayment of all principal and interest. As of September 30, 2000, no funds
had been issued against the Promissory Note. The Company has begun working with
the Escrow Agent to return the Collateral.
In August, 2000, the lender paid the Company $30,000 as "Good Faith"
earnest money in conjunction with his proposed purchase of the largest
shareholder's stock holdings. The lender did not make the additional "Good
Faith" payments as required by his agreement with the Company, and accordingly,
he relinquished any rights he might have to consummating the purchase of the
shareholder's stock. The $30,000 has been recorded as other income.
7. Common Stock Issued and Outstanding
The Company has 250,000,000 shares of $.0001 par value common stock
authorized. As of June 30, 2000, 34,462,504 are shown as issued and outstanding,
but as discussed in Note 5, above, 5,000,000 shares were issued as collateral
against a Promissory Note which represents a contingent issuance. The Company is
working with the escrow agent for the return of these shares issued as
collateral. Accordingly, only the remaining 29,462,504 shares of common stock
will be treated as issued and outstanding common stock as of September 30, 2000
for accounting purposes, including the determination of weighted average common
stock outstanding for determining basic and diluted net loss per share. As of
September 30, 1999, 29,049,504 shares of common stock were issued and
outstanding.
8. Subsequent Events
The Economic Development Department of the City of Rochester obtained
approval from the City Council to increase the proposed the HUD Section 108 loan
from $2.0 million to $3,459,000. HUD has approved the loan. The Economic
Development Department has received the funds, but they have not defined how
soon they might release the funds.
On October 20, 2000, an involuntary petition of bankruptcy against
the Company was dismissed in the United States bankruptcy court for the Northern
District of Illinois - Eastern Division was dismissed. See note 2, above, for an
explanation of this dismissal.
On October 25, 2000, the Ontario Superior Court of Justice -
Commercial List entered an ORDER whereby all the Company's equipment in Canada
related to the Sweet Ripe dispute was placed in receivership with the
stipulation that the
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receiver attempt to sell this equipment in settlement of certain claims related
to the Sweet Ripe bankruptcy case over which the court has jurisdiction.
Accordingly, the Company deems it unlikely that it will receive any of the
proceeds of sale and has written-off the remaining net book value of the
equipment, approximately $1,369,412. See note 2, above, for additional
information regarding this matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF 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-QSB.
Description of Business
The Children's Beverage Group, Inc. (the "Company"), located in
Northbrook, Illinois, intends to manufacture and distribute 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. In February 2000, 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. Currently, the Company is
not manufacturing or distributing any children's beverages.
Overview
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. As of September 30, 2000, the Company has a working
capital deficit of $3,425,890.
The Company's ability to continue as a going concern is contingent upon
its ability to secure additional financing, re-initiate production 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.
Furthermore, the Company has recently been released from a bankruptcy petition
(see note 2 to the financial statements). Additionally, the Company is in
default on the Industrial Revenue Bonds debt and interest thereon is being paid
from the debt service reserve fund that the Company is liable to replace. Unless
financing is obtained in the immediate future, the Company may face another
bankruptcy petition, which could result in a court ordered bankruptcy.
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 and through additional funding from
the City of Rochester's Economic Development Department, amounting to
$3,459,000, which has been approved by HUD. The Economic Development Department
has received the funds, but they have not defined how soon they might release
the funds. 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 make sources of additional financing reluctant to risk investing
in the Company. Furthermore, failure to secure such financing may result in the
Company not being able to comply with its payment obligations under
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its Industrial Revenue Bond loans, capital equipment financing arrangement and
with 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 held at the U.S. contract manufacturer's plant (three
major pieces of equipment). The Company is negotiating the release of the
equipment held by the U.S. contract manufacturer. The Company anticipates that
these three pieces of equipment will need to be retrofitted upon release in
order to increase the production to expected rates.
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"). Additional funding from the City of Rochester's Economic Development
Department, amounting to $3,459,000, has been approved by HUD. is being
negotiated. The Economic Development Department has received the funds, but they
have not defined how soon they might release the funds. 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 or that the Rochester Plant will be operational. The Company
is aggressively seeking alternative interim production sources for its beverage
products.
The Company has used approximately $1.36 million from the bond proceeds
to order eight additional pieces of production equipment, expected to cost a
total of approximately $4.53 million. 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 until the other three machines are obtained from 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 quoted 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.
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<PAGE> 15
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-QSB.
The following table sets forth the percentage relationship to net
sales of principal items contained in the Company's Statements of Operations for
the three and nine month periods ended September 30, 1999. Since there were no
sales for the three and nine month periods ended September 30, 2000, no
reasonable basis for percentage relationships exist and accordingly none are
reflected within the table. Any percentages discussed throughout this analysis
are stated on an approximate basis.
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Net Sales N/A 100.0% N/A 100.0%
Cost of Sales N/A 143.4% N/A 126.3%
------- ------- ------- -------
Gross Profit N/A (43.4%) N/A (26.3%)
Selling, general and
administrative expenses N/A 67.0% N/A 87.6%
------- ------- ------- -------
Operating loss N/A (110.4%) N/A (113.9%)
Loss on disposal of equipment N/A -- N/A --
Other income N/A -- N/A --
Interest income N/A 0.7% N/A 0.6%
Interest expense N/A (11.3%) N/A (20.0%)
------- ------- ------- -------
Net loss N/A (121.0%) N/A (133.3%)
======= ======= ======= =======
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Net Sales. Net sales decreased to zero for the quarter ended September
30, 2000 from $1,603,057 for the quarter ended September 30, 1999. The decrease
in net sales is attributable to the Company's products being manufactured
through a co-packing relationship in 1999 with third-party manufacturers. One of
these co-packers entered into bankruptcy during 1999. The second co-packer
discontinued manufacturing the Company's product in November 1999. All
production and orders related to the Company's sole customer, Wal-Mart. Sales
and production ceased in November 1999.
Cost of Sales. Cost of sales decreased to $63,417 for the quarter ended
September 30, 2000 from $2,298,018 for the quarter ended September 30, 1999. The
decrease in cost of sales is attributable to the co-packing relationships
ceasing during 1999, as described above. Primary components of cost of sales in
1999 were co-packing fees, ingredients, packaging, freight costs and equipment
repairs. The incurrence of cost of sales in 2000 primarily reflects the cost of
packaging that cannot be utilized as a result of negotiated settlement with
Capri Sun.
Selling, General and Administrative Expenses. Selling general and
administrative expenses decreased to $264,796 for the quarter ended September
30, 2000 from $1,074,364 for the quarter ended September 30, 1999. The decrease
in selling, general and administrative expenses in 2000 was primarily
attributable to a decrease in sales promotion expense of $625,000 which related
to the sponsorship of an Indy Racing League car team and a reduction in sales
promotion expenses offset primarily by an increase in depreciation expense.
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<PAGE> 16
Interest Expense. Interest expense increased to $204,710 for the
quarter ended September 30, 2000 from $181,619 for the quarter ended September
30, 1999. The increase was primarily related to the incurrence of interest
expense for the whole quarter ended September 30, 2000 where none was recorded
in the third quarter of 1999 on the Industrial Revenue Bonds debt initiated in
October 1999. This increase was offset by the elimination of $550,000 of bank
debt during the third quarter of 2000, which was outstanding for the whole of
the third quarter of 1999.
Loss on Disposal of Equipment. Loss on disposal of equipment of
$1,374,007 was incurred in the quarter ended September 30, 2000 while none was
recorded in the quarter ended September 30, 1999. Nearly $1,370,000 of this loss
on disposal of equipment related to the write off of the net book value of
equipment held by a Canadian manufacturer who provided the Company's production
of children's beverages during the first nine months of 1999. This manufacturer
entered into bankruptcy in 1999 and disputes related to monies that the
manufacturer deemed were owed to them resulted in the manufacturer holding this
equipment. An involuntary petition for relief in the U.S. Bankruptcy Court by
certain of the Company's creditors resulted in the Company's Canadian attorneys,
who were handling the case, to resign just as this matter was going before the
Ontario Superior Court of Justice. As a result, counsel did not represent the
Company, and the equipment was placed in receivership and was ordered to be
sold. As the Company does expect to realize any of the proceeds from this sale,
the remaining net book value was written off.
Net Loss. The Company's net loss decreased to $1,862,092 for the
quarter ended September 30, 2000 from $1,940,084 for the quarter ended September
30, 1999. The decrease in the Company's net loss was primarily attributable to a
decrease in the loss on gross margin, a decrease in sales promotion expense of
$625,000, which related to the sponsorship of an Indy Racing League car team.
These reductions were offset by the write off of approximately $1,370,000
related to equipment being sold by order of the Ontario Superior Court of
Justice and recorded as loss on disposal of equipment.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Net Sales. Net sales decreased to zero for the nine months ended
September 30, 2000 from $3,390,323 for the nine months ended September 30, 1999.
The decrease in net sales is attributable to the Company's products being
manufactured through a co-packing relationship in 1999 with third-party
manufacturers. One of these co-packers entered into bankruptcy during 1999. The
second co-packer discontinued manufacturing the Company's product in November
1999. All production and orders related to the Company's sole customer,
Wal-Mart. Sales and production ceased in November 1999.
Cost of Sales. Cost of sales decreased to $196,699 for the nine months
ended September 30, 2000 from $4,282,841 for the nine months ended September 30,
1999. The decrease in cost of sales is attributable to the co-packing
relationships ceasing during 1999, as described above. Primary components of
cost of sales in 1999 were co-packing fees, ingredients, packaging, freight
costs and equipment repairs. The incurrence of cost of sales in 2000 primarily
reflects the write-off of inventory that has exceeded its safe usage date and
the cost of packaging which cannot be utilized as a result of negotiated
settlement with Capri Sun.
Selling, General and Administrative Expenses. Selling general and
administrative expenses decreased to $949,838 for the nine months ended
September 30, 2000 from $2,968,654 for the nine months ended September 30, 1999.
The decrease in selling, general and administrative expenses in 2000 was
primarily attributable to a decrease in sales promotion expense of $1,687,500
which related to the sponsorship of an Indy Racing League car team offset
primarily by an increase in depreciation expense.
Interest Income. Interest income increased to $26,808 for the nine
months ended September 30, 2000 from $20,783 for the nine months ended September
30, 1999. The increase was attributable to higher interest rates on funds
invested in bank certificates of deposit as required under the Company's bank
line of credit arrangements.
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<PAGE> 17
Interest Expense. Interest expense decreased to $641,729 for the nine
months ended September 30, 2000 from $678,187 for the nine months ended
September 30, 1999. The decrease was primarily due to the one-time incurrence of
approximately $395,000 in interest expense related to the conversion of
stockholder notes payable during the nine months ended September 30, 1999, plus
bank loans and notes payable decreased to approximately $663,000 at September
30, 2000 compared to approximately $1,197,000 at September 30, 1999 which
resulted in less interest expense thereon and offset primarily by an increase of
approximately $483,000 of interest expense related to the Industrial Revenue
Bonds debt initiated in October 1999.
Loss on Disposal of Equipment. Loss on disposal of equipment of
$1,374,007 was incurred during the nine months ended September 30, 2000 while
none was recorded during the nine months ended September 30, 1999. Nearly
$1,370,000 of this loss on disposal of equipment related to the write off of the
net book value of equipment held by a Canadian manufacturer who provided the
Company's production of children's beverages during the first nine months of
1999. This manufacturer entered into bankruptcy in 1999 and disputes related to
monies that the manufacturer deemed were owed to them resulted in the
manufacturer holding this equipment. An involuntary petition for relief in the
U.S. Bankruptcy Court by certain of the Company's creditors resulted in the
Company's Canadian attorneys, who were handling the case, to resign just as this
matter was going before the Ontario Superior Court of Justice. As a result,
counsel did not represent the Company, and the equipment was placed in
receivership and was ordered to be sold. As the Company does expect to realize
any of the proceeds from this sale, the remaining net book value was written
off.
Net Loss. The Company's net loss decreased to $3,105,465 for the nine
months ended September 30, 2000 from $4,518,577 for the nine months ended
September 30, 1999. The decrease in the Company's net loss was primarily
attributable to a decrease in sales promotion expense of $1,687,500, which
related to the sponsorship of an Indy Racing League car team in 1999, a
reduction of $695,000 in the loss at the gross margin level, and a reduction of
$350,000 in other selling, general and administrative expenses. These reductions
were offset by the write off of approximately $1,370,000 related to equipment
being sold by order of the Ontario Superior Court of Justice and recorded as
loss on disposal of equipment.
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 quoted 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. 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
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<PAGE> 18
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 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.
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
$6,500,089 of the bond proceeds which bears interest at 8.75%. In connection
with the Bond deal, the Company has received a proposal for $2.56 million of
financing representing a combination of 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 certain conditions prior to consummation: 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. The
contract has been amended to provide for closing consistent with HUD approval.
The Economic Development Department of the City of Rochester obtained
approval from the City Council to increase the proposed the HUD Section 108 loan
from $2.0 million to $3,459,000. HUD has approved the loan. The Economic
Development Department has received the funds, but they have not defined how
soon they might release the funds.
In March 2000, the Company entered into a Promissory Note arrangement
whereby the lender promises to provide debt financing of up to $750,000 payable
by March 12, 2001 at an interest rate of 12%. This Promissory Note calls for the
issuance of 5,000,000 shares of the Company's common stock into an escrow
account for the benefit of the lender to act as collateral ("Collateral") which
was issued at that time. The Collateral is to be returned upon repayment of all
principal and interest. As of September 30, 2000, no funds had been issued
against the Promissory Note. The Company has begun working with the Escrow Agent
to return the Collateral.
Net cash used for the Company's operations was $784,230 and $852,654
for the nine months ended September 30, 2000 and 1999, respectively. The
decrease in net cash used for operating activities in the 2000 period was
primarily due to a reduction in operating expenses.
Cash used in investing activities was for purchases of property and
equipment totaling $810,405 for the nine months ended September 30, 2000 and
$269,511 for the nine months ended September 30, 1999. The increase in 2000
primarily was used towards downpayments on major pieces of equipment integral in
the manufacture of the Company's beverage products for its Rochester, New York
plant.
The Company's primary sources of liquidity have been from borrowings
from shareholders, the bank and the proceeds from the Industrial Revenue bond
financing.
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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 $1,584,982 and $1,127,619 for the nine months ended
September 30, 2000 and 1999, respectively. The increase in 2000 was primarily
due to additional proceeds from the issuance of industrial revenue bonds of
$1,419,800 during 2000 offset by a reduction in borrowings from shareholders of
approximately $946,000.
Year 2000
The Company evaluated all its computer systems in the later half of
1999. It was determined and reported in the December 31, 1999 Form 10-KSB that
the Company believed that the computer systems were Y2K compliant. There have
been no known Y2K problems as of the date of this report and management believes
that none will be encountered.
Inflation
In the opinion of management, inflation has not had a material
effect on the operations of the Company.
Risk Factors and Cautionary Statements
Forward-looking statements in this report are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company wishes to advise readers that actual results may differ
substantially from such forward-looking statements. Forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements, including, but
not limited to, the following: the ability of the Company to provide for its
debt obligations and to provide for working capital needs from financing
sources, the ability of the Company to become operational utilizing either
co-packing arrangements or its plant in Rochester, New York and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission.
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PART II OTHER INFORMATION
Item 1. 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. This matter was dismissed for Want of Prosecution on March
27, 2000, but was reinstated on April 26, 2000. Plaintiff has filed a First
Request for Interrogatories and Documents. The matter was scheduled for
discovery status on June 21, 2000, but it has been delayed due to the illness of
one of the legal representatives 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 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 on
February 16, 2000. On October 25, 2000, the Ontario Superior Court of Justice
issued an ORDER, which includes the following:
This Court orders that pursuant to s. 101 of the Courts of Justice
Act, R.S.O. 1990, c. C-43 and s. 67 of the PPSA and effective
12:01 a.m. on the date hereof, Ernst & Young, Inc. (the "Receiver") be
and is hereby appointed receiver and manager, without security, of the
Equipment, including any and all rights in and thereto,... and subject
to the provisions hereof, the Receiver is hereby empowered and
authorized, but not obligated, to take possession and control of the
Equipment and any and all proceeds, receipts and disbursements arising
out of or from the Equipment, until further order of this court,...
Additionally,
This Court orders that the Receiver be and is hereby directed to:
(b) sell or attempt to sell, by lot or en bolc, all of the Equipment
by way of a sale by sealed tender substantially on the terms,
conditions and provisions of the of the Invitation to Tender and
Conditions of Sale...
(d) conduct the tender sale process substantially in accordance with
this Order, the Invitation to Tender...
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The deadline for receipt of sealed tender offers is set for November 20, 2000
with the closing of sale pursuant to the tender offers scheduled for December
4-8, 2000.
The equipment at issue is valued at approximately $1.6 million. Two of
the three major pieces of equipment at issue are leased and the Company owns the
remaining equipment. The Company's outside legal counsel resigned from
representing the Company as a result of the bankruptcy petition, described later
herein. As a result of this ORDER, the Company deems it unlikely that any of the
proceeds will be returned to the Company and has written off the remaining net
book value of the equipment, approximately $1,369,412.
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 Company leases the remaining
equipment. WPI has offered to release this equipment, and 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. On June 8, 2000, the Federal Court ruled that the two lawsuits
are to be consolidated into one proceeding in the United States District Court
in St. Louis. As a result, the litigation pending in the Circuit Court of Warren
County has been removed to Federal Court. The parties are now beginning
discovery. The Company intends to vigorously defend against the WPI claim and
prosecute its claim.
On August 20, 2000, WPI joined with other parties in filing an involuntary
petition for relief under Chapter 7 of the Bankruptcy Code against the Company.
As explained below, the Court dismissed this petition in an Order entered on
October 20, 2000. In a Stipulation attached to the Order to dismiss the
involuntary petition, the Company waived all rights relative to the Bankruptcy
Code against WPI as a result of its filing this involuntary petition.
Furthermore, WPI agreed not to file or to induce or encourage the filing of an
involuntary petition against the company in the future.
Capri Sun Dispute
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.
On July 21, 2000, the presiding judge in this case issued a Memorandum
Opinion and Order refusing to reinstate the case, dismissing Plaintiffs Motion
and denying all relief. Specifically, on alleged breach number 4 (above), the
Court
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held that use of the color blue by the Company was de minimus and the Company
had agreed to discontinue use of the color.
Rochester, New York Plant Offer
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 ("HUD")to be completed by September 2000. The
Economic Development Department of the City of Rochester obtained approval from
the City Council to increase the proposed the HUD Section 108 loan from $2.0
million to $3,459,000. HUD has approved the loan. The Economic Development
Department has received the funds, but they have not defined how soon they might
release the funds.
Bankruptcy Petition
On August 30, 2000, Danisco Flexible Schupbach AG ("DFS"), P.S.
Custom Broker ("P.S. Custom"); Hub Group St. Louis L.P. ("Hub City") and
Warrenton Products, Inc. ("WPI") (collectively, the "Involuntary Petitioners")
filed an involuntary petition for relief under Chapter 7 of the Bankruptcy Code
against The Children's Beverage Group, Inc. ("TCBG") (the "Involuntary
Petition"). On September 20, 2000, TCBG filed 'the Motion To Dismiss seeking to
dismiss the Involuntary Petition or to have the Court abstain from the
Involuntary Petition on the grounds that (i) the Involuntary Petition was not
properly filed because certain of the Involuntary Petitioners' claims were
subject to a bona-fide dispute; and (ii) dismissal or abstention is in the best
interest of creditors and TCBG under section 305 of the Bankruptcy Code. On
September 22, 2000, Specialized Metal Services, Inc. ("Specialized Metal") filed
a Motion To File Joinder To Involuntary Petition (the "Joinder Motion") and TCBG
objected to the Joinder Motion. On September 29, 2000, TCBG sent notice of the
Motion To Dismiss to all of its known creditors. Due and proper notice of the
Motion To Dismiss was given and no other or further notice is required. The
Court, based upon good cause shown, had previously shortened the twenty (20) day
notice period for the hearing on the Motion To Dismiss. A reasonable opportunity
to object or be heard regarding the relief requested in the Motion to Dismiss
has been given and no objections having been made to the dismissal of the
Involuntary Petition or any objects having being overruled. DST, Hub City, PS
Custom and Specialized Metal have agreed to and consent to the dismissal of the
Involuntary Petition. WPI has agreed to and consents to the dismissal of the
Involuntary Petition on the terms and conditions of the Stipulation attached
hereto as Exhibit A (the "WPI Stipulation"). Specialized Metal has agreed to
withdraw the Joinder Motion. TCBG has agreed to waive fees, costs and damages
under section 303 of the Bankruptcy Code relating to the filing of the
Involuntary Petition.
Based upon the Motion To Dismiss and the evidence presented,
dismissal of the Involuntary Petition is in the best interest of TCBG and its
creditors. Any agreements between any of the Involuntary Petitioners and TCBG
has been adequately disclosed to the Court. The following summary of the
dismissal order was entered on October 20, 2000:
THE COURT ORDERED THAT: The Involuntary Petition filed against TCBG,
Case No. 00 B 25342, is dismissed pursuant to section 305 of the
Bankruptcy Code; The Joinder Motion is withdrawn, with prejudice; The
Bankruptcy Court shall retain jurisdiction to enforce the terms of this
Order; The Bankruptcy Court shall retain jurisdiction to decide
disputes concerning the WPI Stipulation, its interpretation or
performance of the terms and conditions of the WPI Stipulation; and All
parties shall bear there own fees and costs with respect to the
Involuntary Petition.
The Company is involved in various other litigation incidental 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.
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Item 2. CHANGES IN SECURITIES
(c) During March, 2000, the Company negotiated a Promissory
Note arrangement whereby the lender promises to provide debt financing of up to
$750,000, payable by March 12, 2001, at an interest rate of 12%. This Promissory
Note called for the issuance of 5,000,000 shares of the Company's common stock
into an escrow account for the benefit of the lender to act as collateral
("Collateral") which was issued at that time. The Collateral was to be returned
upon repayment of all principal and interest. As of September 30, 2000, no funds
had been issued against the Promissory Note. The Company has begun working with
the Escrow Agent to return the Collateral.
Item 5. OTHER INFORMATION
In early August, 2000, the Company's Chairman, CEO and President,
Mr. Jon A. Darmstadter, has informed the Company that he has received an offer
to purchase his stock ownership in the Company representing 6,519,731 shares
(including 50,000 shares held under beneficial ownership) of the Company's
common stock and 1,000,000 of the Company's preferred stock. Since his ownership
represents effective voting control (i.e., over 50% of the eligible voting
shares outstanding), this transaction could represent a change in control of the
Company. In late August 2000, Mr. Darmstadter informed the Company that he
rejected this offer.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
NONE
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE CHILDREN'S BEVERAGE GROUP, INC.
Date: November 20, 2000 By /s/ Jon A. Darmstadter
------------------------
Jon A. Darmstadter, Chairman,
President, & Chief Executive Officer
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