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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
The Children's Beverage Group, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 87-0459103
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
237 Melvin Drive, Northbrook, Illinois 60062
(Address of Principal Executive Offices Including Zip Code)
(847) 562-4040
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
(Title of Class)
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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-SB or that are otherwise made by or on behalf of the
Company. For this purpose, any statements contained in the Form 10-SB 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. Any forward-looking statements in this report should be evaluated
in light of the important risk factors beginning on page 6 of this registration
statement. The Company is also subject to other risks detailed herein or that
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, SHOULD BE READ IN
ITS 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.
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
Until November 1999, the Company's products were produced, packaged and
distributed from one 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. TCBG rented the
space in the facility at a cost of $0.15 cents per case. TCBG managed the
manufacture of its products in this facility. Discussions and negotiations with
Warrenton to re-initiate production are on-going.
The Company anticipates that manufacturing will commence in new facilities
in the third quarter of 2000 in Rochester, New York.
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New Product
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 the third quarter of 2000.
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. Many 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 aggressively
seeking 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 one contract manufacturer to produce juice products
for its sole customer. Production at this facility has ceased in November 1999
due to disagreements over production levels deemed unsatisfactory by the
Company. The contract manufacturer breached its contractual obligations, and
the Company has hired an attorney to represent it regarding any legal
ramifications that may ensue. The loss of this manufacturer has disrupted the
Company's operations, and is expected to continue to disrupt its operations,
until alternative manufacturers are obtained.
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 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 a royalty.
The initial royalty fee will be determined based upon an independent valuation
of the patent. Payment will be made through the issuance of common stock equal
to the value of the license. The license value will be periodically reevaluated
in the future, and if the value of the license has increased, additional common
stock will be issued. 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).
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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 are outsourced to a
contract manufacturer. As of September 30, 1999 the Company had seven (7) full-
time employees and two (2) part-time employees.
Reports to Securities Holders
Prior to filing this Form 10-SB, TCBG has not been required to deliver
annual reports to shareholders. However, once TCBG becomes a reporting company,
TCBG shall deliver annual reports to securities holders as required by the
Securities Exchange Act of 1934 (the "Exchange Act"). Such reports will contain
audited financial statements as required.
The public may read and copy any materials that TCGB files with the
Commission at the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission maintains an Internet site that contains reports, proxy and
information statements,
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and other information regarding issuers that file
electronically with the Commission. The Internet address of the Commission's web
site is http://www.sec.gov. The Company's Internet address is
http://www.TCBGInc.com. The information contained on our Internet site is not
incorporated in this registration statement.
Risk Factors
We are not producing any juice product, and all revenues have stopped. This
could impair our relationship with our sole customer, Wal Mart.
A contract manufacturer, whom we used to produce our beverage products,
discontinued production in November 1999. Discussions and negotiations are on-
going, but a satisfactory settlement cannot be assured. Furthermore, seeking an
alternative producer requires the release of major pieces of the equipment
supplied by us to the manufacturer. All of our owned and financed production
equipment is currently either held at this contract manufacturer's plant or with
another Canadian contract manufacturer that is currently in bankruptcy. If
alternative production sources for our beverage products are not obtained, the
Company will be seriously harmed and may be forced to declare bankruptcy.
We have limited revenues and will depend on one customer and additional
financing to stay in business.
From 1997 through 1998, our efforts were devoted to the development of our
principal product and raising capital. We have only recently started receiving
revenues from our product and accordingly, during 1999 we ceased to be a
development stage enterprise. As of November 1999, all revenues from sale of our
beverage products ceased with the termination of production. We have incurred
losses since inception, have negative working capital and cash flows from
operations. Our independent certified public accountants, in their report
regarding our 1998 financial statements, have noted that our losses since
inception and negative working capital and cash flows from operations raise
substantial doubt about our ability to continue as a going concern. Prior to
November 1999, we were losing money on our manufacturing operations for the
product we produced for Wal-Mart. Our ability to continue as a going concern is
contingent upon our ability to raise capital, obtain financing, re-initiate
production and sales and attain profitable operations. There can be no assurance
that we will be successful in raising additional capital and financing upon
terms that are acceptable to us or attain profitable operations.
We relied on one customer for all of our revenues, and with the termination of
our production in November 1999, we cannot assure that we will retain this
customer if and when we re-initiate production.
Until November 1999, we derived all of our revenues from sales to Wal-Mart.
Production has ceased and we are no longer filling Wal-Mart orders. We do not
have a written, long-term contract with Wal Mart, and this customer could
terminate purchases of our drink product at any time. In addition, if production
starts again, we expect to rely on a limited number of customers for
substantially all of our revenues. There can be no assurance that Wal Mart will
remain our customer or that we will be successful in obtaining significant
orders of our product from other customers.
The sector in which we operate is highly competitive and we may not be able to
compete effectively.
We compete with hundreds of other juice box and juice pouch beverage
producers. Our major competitors include Capri Sun, Hi-C Juice Drinks, Minute
Maid Premium Juice Drinks, Juicy Juice, Tang and MOTTS Juices. We face
competition from many entities with significantly greater financial resources,
well-established brand names and larger customer bases. We expect competition to
intensify in the future. To the extent these competitors are successful, we may
face difficulties in expanding our customer base. There can be no assurance that
we will be able to market our products successfully or compete effectively in
the children's beverage marketplace.
We lack financial controls.
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Until November 1999, we did not have any finance or accounting personnel,
which hindered our ability to monitor and manage our finances in-house.
In addition, we received a management letter from our independent certified
public accountants in connection with the 1998 audit of our financial
statements, which identified certain matters that they considered to be
"reportable conditions" involving our internal controls. Reportable conditions
involve matters relating to significant deficiencies in the design or operation
of internal control that could adversely affect our ability to record, process,
summarize and report financial data consistent with the assertions of management
in the financial statements.
We must attract and retain personnel in a tight labor market.
Currently, there is intense competition for personnel with the
qualifications we require. In addition, the loss of the services of key
management, such as Jon A. Darmstadter, or other personnel, or the failure to
attract additional personnel as required, could have a material adverse effect
on our business. Mr. Darmstadter does not devote his full working time to our
business, and his other obligations may impact the time he has available for our
business. We believe that our future success will depend in large part on our
ability to attract and retain a qualified chief financial officer and other
personnel.
Seasonality may cause fluctuations in our quarterly performance.
Our sales are 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 our financial position. Seasonal variations in demand may
cause significant variations in our results of operations and, in turn, the
price of our common stock.
Our quarterly revenues and operating results could be volatile and may cause our
stock price to fluctuate.
Our quarterly revenues and operating results may fluctuate significantly in
the future. Our operating results could be volatile and difficult to predict. As
a result, period-to-period comparisons of our operating results may not be a
good indication of our future performance. Our future quarterly operating
results may not meet the expectations of securities analysts or investors, which
in turn may have an adverse effect on the market price of our common stock.
An active market for our common stock cannot be assured.
Our common stock currently trades on the OTC Bulletin Board and has
relatively small volume. There can be no assurance that an active market for the
common stock will develop or be sustained. Our investors are likely to find it
more difficult to dispose of or obtain accurate price quotations regarding our
common stock than stocks listed on an exchange or the Nasdaq National Market.
Our President and Chief Executive Officer has voting control of the Company.
Jon A. Darmstadter beneficially owns approximately 22% of our outstanding
common stock and 100% of our outstanding preferred stock. Each share of
preferred stock owned by Mr. Darmstadter provides him with 25 votes in
comparison to one vote for each share of common stock held. Mr. Darmstadter's
combined ownership of common stock and preferred stock gives him control over
58.22% of the votes that can be cast by stockholders. Accordingly, Mr.
Darmstadter has the ability to control the Company and direct its business and
affairs, including the election of directors and approval of significant
corporate transactions. The concentration of ownership may also have the effect
of delaying or preventing a change in control of the Company.
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ITEM 2. 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 registration statement.
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, 1997 and 1998, the Company experienced a net loss of $404,972 and
$1,985,420, respectively. As of December 31, 1998, the Company has a working
capital deficit of $1,198,773. For the nine-month periods ended September 30,
1998 and 1999, the Company experienced a net loss of $1,458,070 and $4,518,577,
respectively. As of September 30, 1999, the Company has a working capital
deficit of $3,960,154.
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 the first quarter of 2000. A contract manufacturer,
whom the Company was utilizing to produce its beverage products, discontinued
production in November 1999. Discussions and negotiations are on-going, but a
satisfactory settlement cannot be assured. Furthermore, seeking an alternative
producer requires the release of major pieces of the equipment supplied by the
Company to the contract manufacturer. All Company-owned and financed major
pieces of equipment are currently either held at this 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 in the latter part of
January 2000. 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 scheduled to begin operations in the third quarter
of 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 third 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, including the contract manufacturer described above.
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.
The Company's sales are 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
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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 nine-month period ended September 30, 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
Nine months Ended September 30, 1999 Compared to Nine months Ended September 30,
1998
Net Sales. Net sales increased to $3,390,323 for the nine months ended
September 30, 1999 from $42,352 for the nine months ended September 30, 1998.
The increase is primarily attributable to an increase in the number of orders
from the Company's sole customer, Wal-Mart, for its Back Pak product.
Cost of Sales. Cost of sales increased to $4,282,841 for the nine months
ended September 30, 1999 from $78,161 for the nine months ended September 30,
1998. The increase is primarily attributable to the costs to produce the
increased number of orders from the Company's sole customer, Wal-Mart, for its
Back Pak product.
Selling, General and Administrative Expenses ("SG&A"). Selling, general and
administrative expenses consist primarily of expenses related to sales
promotion, costs associated with executive management, professional fees, and
other general and administrative expenses. SG&A expenses increased to $2,968,655
for the nine months ended September 30, 1999 from $1,420,253 for the nine months
ended September 30, 1998. The increase for the nine months ended September 30,
1999 was due primarily to an increase in sales promotion of $712,500, which was
related to the sponsorship of an Indy Racing League car team, as well as an
increase in professional fees and salaries.
Interest Expense. Interest expense increased to $678,187 for the nine
months ended September 30, 1999 from $8,707 for the nine months ended September
30, 1998. The increase in interest expense was due primarily to a charge of
$395,267 related to the favorable conversion of notes payable to common stock
and increased borrowings in the period ending September 30, 1999.
Net Loss. The Company's net loss increased to $4,518,577 for the nine
months ended September 30, 1999 from $1,458,070 for the nine months ended
September 30, 1998. The 1999 period was impacted by the costs associated with
increased operating and promotion activity.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998
Net Sales. Net sales increased to $145,954 for the year ended December 31,
1998 from $90,737 for the period ended December 31, 1997. The increase in net
sales is attributable to the increased production and orders from the Company's
sole customer, Wal-Mart.
Operating Expenses. Operating expenses increased to $2,114,714 for the year
ended December 31, 1998 from $509,241 for the year ended December 31, 1997. The
1997 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 operating expenses
in 1998 was primarily attributable to a sales promotion expense of $1,300,000,
which was related to the sponsorship of an Indy Racing League car team and to an
the increase in cost of goods sold, selling, general and administrative
expenses, which were limited to general corporate expenses in 1997.
Interest Expense. Interest expense increased to $16,660 for the year ended
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December 31, 1998 from $1,977 for the year ended December 31, 1997. The increase
was due to incremental borrowing in the latter part of 1998.
Net Loss. The Company's net loss increased to $1,985,420 for the year ended
December 31, 1998 from $404,972 for the year ended December 31, 1997. The
increase in the Company's net loss reflects the acceleration of its development
activities, along with building corporate infrastructure to support initial
manufacturing operations and expected growth.
Liquidity and Capital Resources
As of the date of this Form 10-SB/A, the Company has only started to
generate significant revenues from its own operations in the last nine months,
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 private placements of its equity securities and 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
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 $417,000 were
outstanding on the lines as of September 30, 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 is displayed on the racing
team's car and provides advertising for the Company.
Jon A. Darmstadter has made various advances to the Company that total
$724,619 (including unpaid interest of $36,619) with one year maturity dates.
Interest is accrued monthly at 12%. As of September 30, 1999, $52,500 of
principal had been repaid but no payments on interest had been made by 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. In connection with the Bond
deal, the Company will receive $2.56 million, which is a combination of Section
108 and EDI loans and a State of New York grant. The blended rate on the $9.98
million in bond and related financing is 4.6% for a 10-year term. The original
project terms have changed and the Company is currently exploring options for
its manufacturing facility in Rochester, New York.
Net cash used for the Company's operations was $743,351 and $396,397 for
the fiscal year ended December 31, 1998 and the period from inception to
December 31, 1997, respectively, and $842,539 and $514,464 for the nine-month
periods ended September 30, 1999 and 1998, respectively. The increase in net
cash used for operating activities in fiscal 1998 was primarily due to a larger
net loss, net of a $1.5 million noncash equity transactions charged to
operations. The increase in net cash provided by operating activities for the
nine-month period ended September 30, 1999 was primarily due to an increase in
accounts payable and accrued expenses plus $2.2 million noncash equity
transactions charged to operations.
Cash used in investing activities was for purchases of property and
equipment. Cash used was $397,785 and $164,288 for fiscal year ended December
31,
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1998 and the period from inception to December 31, 1997, respectively, and
$275,441 and $441,734 for the nine-month periods ended September 30, 1999 and
1998, respectively.
The Company's primary sources of liquidity have been from the issuance of
common stock and borrowings from shareholders and the bank. 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
$1,636,636 and $561,000 for the fiscal year ended December 31, 1998 and the
period from inception to December 31, 1997, respectively, and $1,127,619 and
$1,483,571 for the nine-month periods ended September 30, 1999 and 1998,
respectively. The increase in fiscal 1998 was primarily due to additional
proceeds from the issuance of common stock and capital contributions, as well as
increased proceeds obtained from notes payable. The increase for the period
ended September 30, 1999 was due primarily to increased borrowings from
shareholders.
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 be corrected on a
timely basis, 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.
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 its
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. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. 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.
ITEM 3. DESCRIPTION OF PROPERTY
TCBG owns no real property. The Company headquarters occupy approximately
1,300 square feet of office space located at 237 Melvin Drive, Northbrook,
Illinois 60062. The Company leases this space under a noncancellable operating
lease through June 30, 2000. Total rent for 1998 was $27,168, which includes a
second office lease under which payments are made on a month-to-month basis. The
future minimum rent for the next two years is approximately $24,300 per year.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of voting
stock of TCBG, as of December 31, 1999, (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.
<PAGE>
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.
Common Stock
---------------------------
Beneficially Owned(a)(b)
Name and Address of Beneficial Owner No. of Shares % of Class
- ------------------------------------ ------------- -------------
<TABLE>
<CAPTION>
<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 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions of the
Company's executive officers and directors as of September 30, 1999:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---------------------------------------------------------------------
<S> <C> <C>
Jon A. Darmstadter 47 President and Chief Executive
Officer, Director
Edward R. Ferry 49 Vice President/Marketing, Director
</TABLE>
Current Officers
<PAGE>
Jon A. Darmstadter has served as the President and Chief Executive Officer
and a director of the Company since March 1997. 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 (1) 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
of the Company.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation earned by the Company's sole named executive officer in 1998. 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.
Summary Compensation Table
Name and Annual
Principal Position Compensation Bonus Other
- ------------------ ------------ ----- -----
Jon A. Darmstadter, $80,000 -- --
Chief Executive Officer
and President
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
<PAGE>
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 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On or about March 25, 1997, Jon A. Darmstadter, a sole proprietor doing
business as Water Pouch (and now the President and Chief Executive Officer of
the Company), assigned, transferred and conveyed to the Company, all of his
right, title and interest in and to all of the operating assets used in the
conduct of the business of Water Pouch, subject to all of his obligations and
liabilities relating thereto, in consideration for the issuance of 9 million
shares of common stock.
On November 21 1997, the Company authorized the issuance of 1 million
shares of the Company's Series A Preferred Stock to Jon A. Darmstadter at a
purchase price of par value. Because each share of this Preferred Stock has 25
votes, this transaction gave Mr. Darmstadter effective control of the Company.
These shares were issued in January 1999. Upon a change in control of the
Company, each share of this Preferred Stock is automatically converted into five
shares of Common Stock.
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") that allows the Company to use the patent in exchange for a $1.00
annual fee unless a change-in-control event occurs. In the event that the
control of the Company changes, Mr. Darmstadter would receive a royalty in the
amount of $0.0005 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).
ITEM 8. DESCRIPTION OF SECURITIES
This summary contains a description of all of the material terms of the
Company's capital stock. However, it does not describe every term of the capital
stock contained in the Company's amended and restated certificate of
incorporation. The Company refers you to the provisions of Delaware corporate
law and the Company's amended and restated certificate of incorporation and
amended and restated bylaws, which are attached hereto as exhibits.
Authorized and Outstanding Capital Stock
The Company's amended and restated certificate of incorporation authorizes
the Company to issue 250,000,000 shares of common stock, par value of $0.0001
per share, and 50,000,000 shares of preferred stock, with a par value of $0.001
per share. On December 31, 1999, there were 29,462,504 shares of the Company's
common stock outstanding, held of record by 570 stockholders, and there were
1,000,000 shares of preferred stock outstanding, held of record by one (1)
stockholder.
Common Stock
Voting Rights. Holders of common stock are entitled to one (1) vote per
share on all matters to be voted upon by the stockholders. The holders of common
stock are not entitled to cumulative voting rights with respect to the election
of directors.
Dividend Rights. Subject to preferences that may be applicable to any then
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends as may be declared by the board out of funds
legally available therefor.
Liquidation Rights. In the event of the Company's liquidation, dissolution or
winding up, holders of the common stock are entitled to share ratably in all
assets
<PAGE>
remaining after payment of liabilities and the liquidation preference of
any then outstanding preferred stock. Holders of common stock have no
preemptive, conversion or other rights to subscribe for additional securities of
the Company. No redemption or sinking fund provisions apply to the common stock.
All outstanding shares of common stock are validly issued, fully paid and
nonassessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 50,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and could decrease the likelihood that such holders will receive dividend
payments and payments upon liquidation and could have the effect of delaying,
deferring or preventing a change of control of the Company. Accordingly, the
issuance of shares of preferred stock may discourage offers for the Company's
common stock or may otherwise adversely affect the market price of the common
stock.
As of the date of this Registration Statement, there is one series of
preferred stock ("Series A Preferred Stock") outstanding with the following
rights, preferences and privileges:
Voting Rights. Holders of the Company's Series A Preferred Stock are
entitled to 25 votes per share on all matters to be voted upon by the
stockholders. The holder of Series A Preferred Stock is not entitled to
cumulative voting rights with respect to the election of directors.
Dividend Rights. Subject to preferences that may be applicable to any other
outstanding shares of another series of preferred stock, holders of Series A
Preferred Stock are entitled to receive ratably with holders of common stock
such dividends as may be declared by the Board out of funds legally available
therefor.
Liquidation Rights. In the event of the Company's liquidation, dissolution
or winding up, holders of Series A Preferred Stock are entitled to share ratably
in all assets remaining after payment of liabilities (and the liquidation
preference of any other then outstanding preferred stock) together with holders
of common stock.
Conversion Rights. 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. All outstanding shares of Series A
Preferred Stock are validly issued, fully paid and nonassessable.
Warrants
In April 1999, the Company issued a warrant to purchase 413,000 shares of
common stock, subject to anti-dilution provisions (the "Warrant"). The Warrant
was issued as part of a dispute settlement, and is exercisable for nominal
consideration until April 2000. This warrant was converted into 413,000 shares
of the Company's common stock in November 1999.
Registration Rights
In April 1999, the Company entered into a settlement agreement under which
it issued the Warrant. The Warrant holder has certain piggyback registration
rights covering the 413,000 shares of common stock issuable upon exercise of the
Warrant. At any time prior to the closing of an initial public offering, if the
Company proposes to register any of its securities under the Securities Act,
whether for its own account or for other stockholders, the Warrant holder is
entitled to have its shares of common stock registered by the Company as well,
unless the securities are to be issued pursuant to an employee compensation
program or dividend reinvestment plan or securities issued in a merger,
recapitalization, consolidation, acquisition or similar transaction. These
registration rights are subject to certain conditions and limitations. The
Company must pay expenses related to the registration and
<PAGE>
distribution of the
shares of common stock held by the Warrant holder under this registration rights
agreement.
In May 1999, the Company entered into a Debt Conversion Agreement under
which a corporation and shareholder (the "Lender") received 988,167 shares of
common stock in exchange for the cancellation of $565,000 plus accrued interest.
In addition, the Lender is entitled to piggyback registration rights with
respect to the shares of common stock that it owns. Each time the Company
proposes to register any of its securities under the Securities Act, whether for
its own account or for other stockholders, the Lender is entitled to have its
shares of common stock registered by the Company as well, unless the Company is
registering securities on Form S-4 or Form S-8. These registration rights are
subject to certain conditions and limitations. The Company must pay expenses
related to the registration and distribution of the shares of common stock held
by the Investor under this registration rights agreement.
Anti-Takeover Provisions
Although management is not presently aware of any takeover attempts, the
Company's Certificate of Incorporation defers to provisions in the Delaware
General Corporations Law (the "DGCL"), which may be deemed to be "anti-takeover"
in nature in that such provisions may deter, discourage or make more difficult
the assumption of control of the Company by another entity or person.
Delaware Anti-Takeover Law
The Company is subject to Section 203 of the DGCL (Section 203) which, subject
to certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) at or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66-2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
Section 203 defines business combinations to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation, (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder, (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder, or (v) the receipt by the
interested stockholder of the benefits of any loans, advances, guarantees,
pledges, or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owned 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock and the Series A
Preferred Stock is Atlas Stock Transfer and its address is 5899 South State,
Murray, Utah 84107.
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS OF REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
Market Information
The common stock of TCBG currently is trading on the OTC Bulletin Board
under the symbol "TCBG."
Set forth below are the high and low closing bid quotations for the
Company's common stock for the periods indicated as reflected on the electronic
bulletin board. Such quotations reflect interdealer prices without retail mark-
up, mark-down or commissions, and may not reflect actual transactions.
<TABLE>
<CAPTION>
2000 Low High
- -----------
<S> <C> <C>
January 1 through January 10, 2000 22/32 30/32
1999
- ----
October 1 through December 31, 1999 9/16 1-3/16
July 1 through September 30, 1999 27/32 1-31/32
April 1 through June 30, 1999 1-5/16 1-19/32
January 1 through March 31, 1999 1-3/32 2-31/32
1998
- ----
October 1 through December 31, 1998 3/4 1-27/32
July 1 through September 30, 1998 (first 5/8 1-7/8
available)
</TABLE>
Holders
As of December 31, 1999, there were approximately 570 record holders of the
Company's common stock. There is one (1) holder of the Company's outstanding
Series A Preferred Stock.
Dividends
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
dividends, if any, will be within the discretion of the Company's Board of
Directors.
ITEM 2. 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
<PAGE>
circuit Court of Cook County, Illinois. On March 8, 1999, the Company was
served with a complaint brought by Flavorchem Corporation 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
this date. Additionally, the Company has initiated discovery. The Company
continues to vigorously defend itself in this matter.
Dispute with Outlook Graphics Inc.
The Company and Outlook Graphics Inc. were involved in a dispute concerning
the amount owed for products that Outlook Graphics Inc. delivered to the Company
late and non-conforming to contractual specifications. A Settlement Agreement
and Mutual Release was entered by the parties on February 8, 1999, relating to
prior goods delivered. The Settlement Agreement and Mutual Release provided, in
part, that additional materials were to be delivered to the Company. As a result
of delivery delays and additional non-conforming goods, the parties have entered
into a binding arbitration mechanism (as provided for in the aforementioned
Settlement Agreement) concerning the final delivery of the additional goods with
a maximum liability of $76,673.41 plus the potential of arbitration fees. The
money at issue was placed in escrow upon entry of the Settlement Agreement.
On May 21, 1999, an arbitration decision was rendered awarding to the
Company $58,580.11, to be paid out of the escrowed funds. On or about September
1, 1999, the Escrow Agent released said funds to the Company. At the same time,
the Company entered into an Escrow Settlement Agreement with Outlook to address
the arbitrator fees and other related matters. The Escrow Settlement contained
broad mutual general releases.
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 will be filed in late January 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 McCarthy Tetrault to handle its legal
representation with respect to any related proceedings.
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 3. DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, the Company has sold the unregistered securities
listed below. These issuances were deemed exempt from registration under the
Securities Act in reliance on either (a) Section 4(2) of the Securities Act, as
transactions not involving a public offering, or (b) Rule 701 promulgated under
the Securities Act. No commissions were paid to any placement agent or
underwriter for any of theses issuances.
<TABLE>
<CAPTION>
Date of Amount
Purchase Title Sold Purchasers Consideration
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/97 Common Stock 9,000,000 Jon A. Darmstadter assets of Water Pouch, a
(director and sole proprietorship
executive officer)
5/97 Common Stock 2,000,000 Felicia Murray --
(former director
and executive
officer)
5/97 Common Stock 9,000,000 Rule 504 investors $511,000
4/98 Common Stock 150,000 individual $163,500
accredited investor
6/98 Common Stock 1,450,000 corporate $812,000
accredited investor
7/98 Common Stock 2,550,030 dividend to --
shareholders
10/98 Common Stock 1,361,269 marketing firm services valued at
$1,300,000
1/99 Series A 1,000,000 Jon A. Darmstadter --
Preferred Stock (executive officer)
3/99 Common Stock 2,200,000 marketing firm services valued at
$2,250,000
3/99 Common Stock 100,000 manufacturing firm settlement of $100,000
obligation
4/99 Warrant to 413,000 corporate settlement of $413,000
purchase accredited investor obligation
Common Stock
7/99 Common Stock 988,167 corporate conversion of $592,900 of
accredited investor Company debt to the
investor; valued at
$988,167
11/99 Common Stock 413,000 corporate conversion of warrants
accredited investor issued 4/99 for no
additional consideration
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation contains certain provisions permitted
under the DGCL relating to the liability of directors. The provisions eliminate
a director's liability for monetary damages for a breach of fiduciary duty,
except in certain circumstances involving wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. TCBG's Certificate of Incorporation
also contains provisions obligating the Company to indemnify its directors and
officers to the fullest extent permitted by the DGCL.
Such indemnification provisions are intended to increase the protection
provided to directors and, thus, increase the Company's ability
to attract and
<PAGE>
retain qualified persons to serve as directors. Because directors liability
insurance is only available at considerable cost and with low dollar limits of
coverage and broad policy exclusions, the Company does not currently maintain a
liability insurance policy for the benefit of the Company's directors, although
the Company may attempt to acquire such insurance in the future. The Company
believes that the substantial increase in the number of lawsuits being
threatened or filed against corporations and their directors and the general
unavailability of directors liability insurance to provide protection against
the increased risk of personal liability resulting from such lawsuits have
combined to result in a growing reluctance on the part of capable persons to
serve as members of boards of directors of companies, particularly of companies
which intend to become public companies. TCBG also believes that the increased
risk of personal liability without adequate insurance or other indemnity
protection for the Company's directors could result in overcautious and less
effective direction and management of TCBG. Although no directors have resigned
or have threatened to resign as a result of TCBG failure to provide insurance or
other indemnity protection from liability, it is uncertain whether the Company's
directors would continue to serve in such capacities if improved protection from
liability were not provided.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to TCBG and its shareholders, but eliminates personal liability
for monetary damages for breach of that duty. The provisions do not, however,
eliminate or limit the liability of a director for failing to act in good faith,
for engaging in intentional misconduct or knowingly violating a law, for
authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interest of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that TCBG will
indemnify directors against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with any action, suit or proceeding arising out of the director's
status as a director of TCBG, including actions brought by or on behalf of the
Company (shareholder derivative actions). The provisions do not require a
showing of good faith. Moreover, they do not provide indemnification for
liability arising out of willful misconduct, fraud, or dishonesty, for "short-
swing" profits violations under the federal securities laws, or for the receipt
of illegal remuneration. The provisions also do not provide indemnification for
any liability to the extent such liability is covered by insurance. One purpose
of the provisions is to supplement the coverage provided by such insurance.
However, as mentioned above, TCBG does not currently provide such insurance to
directors, and there is no guarantee that TCBG will provide such insurance to
directors in the near future, although the Company may attempt to obtain such
insurance.
These provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers and
directors to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any shareholder derivative action. However,
the provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken. Also, because TCBG does not
presently have directors liability insurance and because there is no assurance
that TCBG will retain such insurance or that if such insurance is procured it
will provide coverage to the extent directors would be indemnified under the
provision, TCBG may be forced to bear a portion or all of the cost of the
director's claims for indemnification under such provisions. If TCBG is forced
to bear the cost for indemnification, the value of the Company's common stock
may be adversely affected.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of TCBG pursuant
to the foregoing provisions, or otherwise, TCBG has been advised that such
indemnification, in the opinion of the SEC, is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
The Company believes that these provisions will assist in attracting and
retaining qualified individuals to serve as directors.
<PAGE>
PART F/S
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Certified Public Accountants...............................F-1
Balance sheets as of December 31, 1997 and December 31, 1998.....................F-2
Statements of operations for the periods ended December 31, 1997 and December
31, 1998 and the cumulative amounts from date of inception (March 25, 1997)
through December 31, 1998........................................................F-4
Statements of changes in stockholders' equity for the periods ended December 31,
1997 and December 31, 1998.......................................................F-5
Statements of cash flows for the periods ended December 31, 1997 and December
31, 1998 and the cumulative amounts from date of inception (March 25, 1997)
through December 31, 1998........................................................F-6
Notes to audited financial statements............................................F-8
Unaudited balance sheet as of September 30, 1999.................................F-17
Unaudited statements of operations for the nine-month periods ended June 30,
1999
and September 30, 1998...........................................................F-18
Unaudited statement of changes in stockholders' equity (deficit) for the nine-
month
period ended September 30, 1999 ................................................F-19
Unaudited statements of cash flows for the nine-month periods ended September
30, 1999 and September 30, 1998.................................................F-20
Notes to condensed financial statements (unaudited) ............................F-21
</TABLE>
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation*
3.2 Amended and Restated By-Laws*
3.3 Certificate of Designations of Series A Preferred Stock*
4.1 Form of Common Stock Certificate
4.2 Form of Series A Preferred Stock Certificate*
4.3 Registration Rights Agreement between the Company and a warrant
holder dated April 23, 1999*
4.4 Debt Conversion Agreement between the Company and Ranger
Enterprises, Inc. dated May 10, 1999*
10.1 Amended and Restated Employment Agreement between the Company and
Jon A. Darmstadter
10.2 Patent License Agreement between the Company and Jon A. Darmstadter
dated September 14, 1999*
10.3 Assignment and Assumption Agreement between the Company and Water
Pouch dated January 11, 1999*
21.1 Subsidiaries*
27 Financial Data Schedule
*Previously filed.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this Registration Statement to be signed on
its behalf, by the undersigned, thereunto duly authorized.
Date: January 14, 2000
THE CHILDREN'S BEVERAGE GROUP, INC.
By: /s/ Jon A. Darmstadter
----------------------
Jon A. Darmstadter, President and Chief
Executive Officer
<PAGE>
Report of Independent Certified Public Accountants'
The Children's Beverage Group, Inc.
Northbrook, Illinois
We have audited the accompanying balance sheets of The Children's Beverage
Group, Inc. (A Development Stage Company) as of December 31, 1998 and 1997, and
the related statements of operations, changes in stockholders' equity and cash
flows for the year ended December 31, 1998, period ended December 31, 1997 and
the period from inception (March 25, 1997) through 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Children's Beverage Group,
Inc. (A Development Stage Company) at December 31, 1998 and 1997 and the results
of its operations and cash flows for the year ended December 31, 1998, period
ended December 31, 1997 and the period from inception (March 25, 1997) through
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
F-1
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Balance Sheets
=============================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Assets (Note 2)
Current Assets
Cash and cash equivalents $ 495,815 $ 315
Accounts receivable 103,602 -
Inventories 151,255 -
- -------------------------------------------------------------------
Total Current Assets 750,672 315
- -------------------------------------------------------------------
Property and Equipment, Net (Notes 1 and 4) 1,717,714 163,163
Other Assets 26,983 5,602
- -------------------------------------------------------------------
$ 2,495,369 $169,080
- -----------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
=============================================================================
</TABLE>
F-2
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 207,409 $ 13,052
Current portion of capital lease obligations (Note 4) 1,079,636 -
Notes payable - bank (Note 2) 399,500 50,000
Notes payable - stockholder (Note 3) 262,900 -
- -------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,949,445 63,052
- -------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Capital lease obligations, less current maturities (Note 4) 53,786 -
- -------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 53,786 -
- -------------------------------------------------------------------------------------------------------
Total Liabilities 2,003,231 63,052
- -------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 5 and 8)
Stockholders' Equity (Note 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,
25,761,337 shares issued and outstanding at December 31, 1998 and
20,250,038 shares issued and outstanding at December 31, 1997,
respectively 2,576 2,025
Additional paid-in capital 2,878,954 507,975
Accumulated deficit during the development stage (2,390,392) (404,972)
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 492,138 106,028
- -------------------------------------------------------------------------------------------------------
$ 2,495,369 $ 169,080
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-3
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Cumulative
Amounts from
Date of
Inception
(March 25,
1997)
Through Year ended Period ended
December 31, December 31, December 31,
1998 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Note 9) $ 236,691 $ 145,954 $ 90,737
- ---------------------------------------------------------------------
Operating Expenses
(Notes 5 and 7) 2,623,955 2,114,714 509,241
- ---------------------------------------------------------------------
Loss From Operations (2,387,264) (1,968,760) (418,504)
Other Income 15,509 - 15,509
Interest Expense (18,637) (16,660) (1,977)
- ---------------------------------------------------------------------
Net Loss $(2,390,392) $(1,985,420) $(404,972)
- ---------------------------------------------------------------------
Net Loss Per Common Share $(0.08) $(0.02)
- ---------------------------------------------------------------------
Weighted Average Common
Shares Outstanding 23,977,885 22,800,068
- ---------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-4
<PAGE>
The Children's Beverage Group Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Preferred Stock
Series A Common Stock Additional
-------- ----------- Paid-in
Shares Amount Shares Amount Capital
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares issued in connection with initial
recapitalization and capital contribution
(Note 7) 1,000,000 $ 1,000 20,250,038 $2,025 $507,975
Net loss - - - - -
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,000,000 1,000 20,250,038 2,025 507,975
Issuance of shares of common stock for 160 975,340
cash (Note 7) - - 1,600,000
Capital contributions (Note 7) - - - - 96,030
Issuance of common stock for marketing
services (Note 7) - - 1,361,269 136 1,299,864
Stock dividend (Note 7) - -
2,550,030 255 (255)
Net loss - - - - -
- --------------------------------------------------------------------------------
Balance, December 31, 1998 1,000,000 $1,000 25,761,337 $2,576 $2,878,954
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit
During the
Development
Stage Total
- ------------------------------------------------------------------------
<S> <C> <C>
Shares issued in connection with initial
recapitalization and capital contribution
(Note 7) $ - $ 511,000
Net loss (404,972) (404,972)
- ------------------------------------------------------------------------
Balance, December 31, 1997 (404,972) 106,028
Issuance of shares of common stock for - 975,500
cash (Note 7)
Capital contributions (Note 7) - 96,030
Issuance of common stock for marketing
services (Note 7) - 1,300,000
Stock dividend (Note 7) - -
Net loss (1,985,420) (1,985,420)
- ------------------------------------------------------------------------
Balance, December 31, 1998 $(2,390,392) $ 492,138
- ------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE>
The Children's Beverage Group Inc.
(A Development Stage Company)
Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Cumulative
Amounts from
Date of
Inception
(March 25,
1997)
Through Year ended Period ended
December 31, December 31, December 31,
1998 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows Used in Operating Activities
Net loss $(2,390,392) $(1,985,420) $(404,972)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 25,075 23,950 1,125
Noncash equity transaction charged to operations
(Note 7) 1,300,000 1,300,000 -
Changes in assets and liabilities
Increase in accounts receivable (103,602) (103,602) -
Increase in inventories (151,255) (151,255) -
Increase in other assets (26,983) (21,381) (5,602)
Increase in accounts payable 207,409 194,357 13,052
- --------------------------------------------------------------------------------------------------
Total adjustments 1,250,644 1,242,069 8,575
- --------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,139,748) (743,351) (396,397)
- --------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (562,073) (397,785) (164,288)
- --------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from notes payable 662,400 612,400 50,000
Capital lease obligation payments (47,294) (47,294) -
Proceeds from issuance of common stock and capital
contributions 1,582,530 1,071,530 511,000
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,197,636 1,636,636 561,000
- --------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 495,815 495,500 315
Cash and Cash Equivalents, at beginning of period - 315 -
- --------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of period $ 495,815 $ 495,815 $ 315
- --------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
The Children's Beverage Group Inc.
(A Development Stage Company)
Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Cumulative
Amounts from
Date of
Inception
(March 25,
1997)
Through Year ended Period ended
December 31, December 31, December 31,
1998 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $18,637 $16,660 $1,977
- ---------------------------------------------------------------------------------------
</TABLE>
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.
See accompanying summary of accounting policies and notes to financial
statements.
F-7
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
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 customers located
throughout the United States. The Company's
products are manufactured through co-packing
relationships with third party manufacturers.
Basis of Presentation Since its inception, the Company's efforts have
been devoted to the development of its principal
products and raising capital. The Company has
received nominal revenues from the sale of its
products. Accordingly, through the date of these
financial statements, the Company is considered to
be in the development stage and the accompanying
financial statements represent those of 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 periods ended
December 31, 1997 and 1998, the Company
experienced a net loss of $404,972 and $1,985,420,
respectively. At December 31, 1998, the Company
has a working capital deficit of $1,198,773.
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.
Management is pursuing various sources of debt
and/or 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 such on
terms satisfactory to the Company, if at all.
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.
F-8
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Summary of Accounting Policies
================================================================================
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.
Inventories Inventories are stated at the lower of cost, or
market, determined on the first-in, first-out
("FIFO") method. At December 31, 1998, inventories
consist primarily of raw materials.
Property, Equipment Property and equipment are stated at cost.
and Depreciation Depreciation is computed over the estimated useful
lives of the assets (three to 10 years) by the
straight-line method.
Fair Value of Financial The carrying amounts reported in the balance
Instruments 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.
Estimates Preparation of the accompanying financial
statements in accordance with generally accepted
accounting principles requires management to make
estimates, disclosures and assumptions about future
events. 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 $1,300,000 in 1998
and $0 in 1997, 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.
F-9
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Summary of Accounting Policies
================================================================================
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 In June 1997, the FASB issued SFAS No. 130,
Pronouncements "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive
income, its components and accumulated balances.
Comprehensive income is defined to include all
changes in equity except those resulting from
investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under
current accounting standards as components of
comprehensive income be reported in a financial
statement that is displayed with the same prominence
as other financial statements. The Company had no
items of comprehensive income (loss) in 1998 or
1997.
In June 1997, FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related
Information". This standard requires enterprises to
report information about operating segments, their
products and services, geographic areas and major
customers. This standard became effective in 1998.
As the Company operates within one segment, the
adoption of SFAS No. 131 by the Company in 1998 did
not have a material impact on the Company.
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
Company does not expect the adoption of this
standard to have a material effect on its
capitalization policy.
F-10
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Summary of Accounting Policies
================================================================================
In June 1998, the FASB 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. SFAS No.
133 is effective for fiscal years beginning after
June 15, 2000. 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.
F-11
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Notes to Financial Statements
- ------------------------------------------------------------------------------
1. Property and Property and equipment are summarized by major
classification as follows:
Equipment
December 31, 1998 1997
----------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Machinery and equipment (Note 4) $1,669,662 $150,000
Automobiles 43,775 5,000
Furniture and fixtures 17,000 6,632
Computers and peripherals 12,352 2,656
---------- --------
1,742,789 164,288
Less accumulated depreciation (25,075) (1,125)
---------- --------
Total $1,717,714 $163,163
========== ========
</TABLE>
2. Notes Payable - Bank The Company has two credit facilities under
secured notes payable with maturity dates of
July 9, 1999 and September 5, 1999,
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 7.75% and 8.75%,
respectively. Borrowings of $349,500 and
$50,000, respectively, are outstanding on the
lines as of December 31, 1998 and $50,000 at
December 31, 1997.
3. Notes Payable - Stockholder The Company has two notes payable to a
stockholder with maturity dates maturity dates
of July 9, 1999 of November 10, 1999 and
December 20, 1999, respectively. Interest is
paid monthly at 12%. Borrowings of $150,000 and
$112,900, respectively, are outstanding as of
December 31, 1998.
4. 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 year ended
December 31, 1998, principal and interest
payments under these leases amounted to $56,641.
F-12
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Notes to Financial Statements
====================================================================
Property recorded under such leases at December 31 consist of:
1998
- --------------------------------------------------------------------
Machinery and equipment $ 1,583,422
Less accumulated depreciation 20,000
- --------------------------------------------------------------------
Total $ 1,563,422
====================================================================
Future minimum lease payments, excluding operating costs, in the
aggregate and for the years succeeding December 31, 1998 are:
Year ending December 31, Amount
- --------------------------------------------------------------------
1999 $ 1,192,665
2000 54,211
- --------------------------------------------------------------------
Total future minimum lease payments 1,246,876
Less amount representing interest 113,454
- --------------------------------------------------------------------
Net capital lease obligation 1,133,422
Less current portion 1,079,636
- --------------------------------------------------------------------
Long-term portion $ 53,786
====================================================================
F-13
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Notes to Financial Statements
================================================================================
5. Leases The Company leases office space under a noncancellable
operating lease through June 30, 2000. Total rent expense
for 1997 and 1998 was $18,644 and $27,168, respectively,
which includes a second office lease under which payments
are made on a month-to-month basis. The future minimum
rental payments required under these leases over the next
two years are as follows:
<TABLE>
<CAPTION>
December 31, Amount
--------
<S> <C>
1999 $16,200
2000 8,100
-------
Total $24,300
=======
</TABLE>
6. 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, 1998 1997
----------- -----------
<S> <C> <C>
Income tax benefits at statutory rate $(794,000) $(162,000)
Change in valuation allowance related to
deferred tax benefit carryforwards 794,000 162,000
--------- ---------
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, 1998, net operating losses of approximately
$2.4 million are available for carryforward against future
years' taxable income and expire through the year 2018. 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.
F-14
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Notes to Financial Statements
================================================================================
The net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Net operating loss carryforwards $ 956,000 $ 162,000
Valuation allowance (956,000 ) (162,000)
---------- ---------
Net deferred tax assets $ $
- -
========== =========
</TABLE>
7. Stockholders' Equity Business Reorganization - Reverse Merger
On March 25, 1997, the Company entered into an
asset purchase agreement (the "merger") with The
Children's Beverage Group, Inc. ("TCBG"), formerly
Savant Biotechnology, Inc., an inactive publicly
held shell corporation. Under the terms of this
agreement, the Company merged into TCBG with TCBG
being the surviving corporation. For accounting
purposes, the transaction has been treated as a
recapitalization of the Company, or reverse merger.
The Company had nominal operations prior to the
merger.
As of the date of the merger, the following shares
were issued:
a) 250,038 shares of common stock were the shares
outstanding with former shareholders of Savant.
b) 9,000,000 shares of common stock were issued to
the Company's founder.
c) 11,000,000 shares of common stock were issued
to new shareholders of TCBG in exchange for an
investment of $511,000.
Subsequently, the Company's Founder was issued
1,000,000 shares of preferred stock as part of the
merger.
Common Stock Issuances
In addition to the common stock issued through the
business reorganization, common stock was issued as
follows in 1998:
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 for $812,000.
F-15
<PAGE>
The Children's Beverage Group, Inc.
(A Development Stage Company)
Notes to Financial Statements
================================================================================
b) Stock dividend - During 1998, the Company
declared a one-for-eight stock dividend and
issued 2,550,030 shares of common stock.
c) Services rendered - 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
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.
8. Commitments and a) The Company is required to make payments in cash
Contingencies or common stock totaling $2,250,000 in 1999,
related to obligations under a sponsorship
agreement with an Indy Racing League car team.
b) The Company is involved in various 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.
9. Sole Customer All of the Company's sales during 1998 were to one
customer. Accounts receivable of $103,602 were due
from such customer at December 31, 1998. The loss
of this customer would have a material adverse
effect on the Company's financial condition and
results of operations.
F-16
<PAGE>
The Children's Beverage Group, Inc.
Balance Sheet
September 30,
1999
(Unaudited)
-----------
Assets
Current Assets
Cash and cash equivalents $ 505,454
Accounts receivable 172,351
Inventories 398,424
Prepaid expenses 580,292
-----------
Total Current Assets 1,656,521
Property and Equipment, Net 3,643,318
Other Assets 41,564
-----------
$ 5,341,403
===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 2,067,043
Accrued expenses 219,091
Current portion of capital lease obligations 1,133,422
Stockholder advances 672,119
Notes payable - bank 375,000
Notes payable - other 150,000
-----------
Total Current Liabilities 5,616,675
-----------
Stockholders' Equity (Deficit)
Preferred stock, $.001 par value; 50,000,000
shares authorized, 1,000,000 shares
outstanding 1,000
Common stock, $.0001 par value; 250,000,000
shares authorized, 29,049,504 shares issued
and outstanding at September 30, 1999 2,905
Additional paid-in-capital 6,629,792
Accumulated deficit (6,908,969)
-----------
Total Stockholders' Equity (275,272)
-----------
$ 5,341,403
===========
See accompanying notes to condensed financial statements (unaudited).
F-17
<PAGE>
The Children's Beverage Group, Inc.
<TABLE>
<CAPTION>
Statements of Operations
<S> <C> <C>
Nine Months Nine months
Ended Ended
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
Net Sales $ 3,390,323 $ 42,352
Cost of Sales 4,282,841 78,161
----------- -----------
Gross Loss (892,518) (35,809)
Selling, General, and Administrative Expenses 2,968,655 1,420,253
----------- -----------
Loss from operations (3,861,173) (1,456,062)
Interest Income 20,783 6,699
Interest Expense (678,187) (8,707)
----------- -----------
Net Loss $(4,518,577) $(1,458,070)
=========== ===========
Net Loss Per Common Share - Basic and Diluted $(0.16) $(0.07)
=========== ===========
Weighted Average Common Shares Outstanding 27,663,687 23,379,120
</TABLE>
See accompanying notes to condensed financial statements (unaudited).
F-18
<PAGE>
The Children's Beverage Group, Inc.
Statement of Changes in Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
Series A Common Stock Additional
-------- ----------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------------ ---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 1,000,000 $1,000 25,761,337 $2,576 $2,878,954 $(2,390,392) $ 492,138
Issuance of common stock
for goods and services - - 2,300,000 230 2,349,770 - 2,350,000
Issuance of warrants - - - - 413,000 - 413,000
Conversion of notes payable - - 988,167 99 988,068 - 988,167
Net loss - - - - - (4,518,577) (4,518,577)
--------- ------------ ---------- ------ ---------- ----------- -----------
Balance September 30, 1999 1,000,000 $1,000 29,049,504 $2,905 $6,629,792 $(6,908,969) $ (275,272)
</TABLE>
===============================================
See accompanying notes to condensed financial statements (unaudited).
F-19
<PAGE>
The Children's Beverage Group, Inc.
Statement of Cash Flows
Nine Month Nine Month
<TABLE>
<CAPTION>
Period-End Period-End
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows (Used in) Provided by Operating Activities
Net loss (4,518,577) (1,458,070)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 289,467 -
Noncash equity transactions charged to operations 2,082,767
Changes in assets and liabilities
Increase in accounts receivable (68,749) -
Increase in inventories (247,169) -
Increase in prepaid expenses (17,792) -
Increase in other assets (17,911) (18,342)
Increase in accounts payable 1,436,334 961,948
Increase in accrued expenses 219,091 -
---------- ----------
Total adjustments 3,676,038 943,606
---------- ----------
Net cash (used in) provided by operating activities (872,539) (514,464)
---------- ----------
Cash Flows From Investing Activities
Purchase of property and equipment (275,441) (441,734)
---------- ----------
Cash Flows From Financing Activities
Proceeds from (payments of) notes payable - bank (24,500) 414,000
Proceeds from notes payable and stockholder advances 1,204,619
Repayments of stockholder advances (52,500)
Advances to officer (1,959)
Proceeds from issuance of common stock and
capital contributions - 1,071,530
---------- ----------
Net cash provided by financing activities 1,127,619 1,483,571
---------- ----------
Net increase in Cash and Cash Equivalents 9,639 527,373
Cash and Cash Equivalents, at beginning of period 495,815 315
---------- ----------
Cash and Cash Equivalents, at end of period 505,454 527,688
========== ==========
</TABLE>
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 the period ended September 30, 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. Of the total payment,
$1,687,500 was charged to expense through 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.
See accompanying notes to condensed financial statements (unaudited).
F-20
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. The accompanying financial statements for the nine months ended September
30,
1999 and 1998 have been prepared, 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 the information
presented not misleading. The condensed financial statements and these
notes should be read in conjunction with the financial statements for the
year ended December 31, 1998 included in the Company's Registration
Statement on Form 10-SB, dated November 12, 1999.
Through December 31, 1998 the Company was a development stage enterprise
with minimal operations. During the period ended September 30, 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 nine months
ended September 30, 1998 and 1999, the Company experienced a net loss of
$1,458,070 and $4,518,577, respectively. At September 30, 1999, the Company
has
a working capital deficit of $3,960,154.
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 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. 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.
2. The information furnished herein reflects all adjustments (consisting only
of normal recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations for the interim period. Results of operations for the nine months
ended September 30, 1999 and 1998 are not indicative of results to be expected
for the entire years.
3. Inventories are stated at the lower of cost, or market, determined on the
first-in, first-out ("FIFO") method. At September 30, 1999, inventories
consist
primarily of raw materials.
4. Stockholder advances represent short-term borrowings from the Company's
Chairman with interest at 12%.
5. Stockholders' Equity
a) 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.
In exchange for the license, the Company will issue its Chairman
common stock equal to the value of the license granted in lieu of cash
or other compensation. The license value will then be reevaluated
periodically in the future and if the value of the license has
increased, additional common stock shall be issued to the President. As of
January 8, 2000 no shares have been issued nor has a determination of the
number of shares to be granted for use of the patent been determined.
b) 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.
c) 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.
d) 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.
6. Commitments and Contingencies
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 $1,645,000 of its accounts receivable to the financial
institution under this factoring agreement for approximately $1,245,000.
Pursuant to the provisions of SFAS 125,the Company reflected the transaction
as
a sale of assets and established an accounts receivable for 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 invoice 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.
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 will be filed in late January 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 an outside law firm to handle
its legal representation with respect to any related proceedings.
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 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.
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 result of operations.
7. Sole Customer and Contract Manufacturer
All of the Company's sales during 1999 and 1998 were to one customer.
Outstanding accounts receivable at September 30, 1999 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 6, 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 are taking place to
re-initiate production, but no resolution has been achieved, as yet.
8. Subsequent Events
a) In November 1999, the Company was informed by its contract manufacturer,
Warrenton Products, Inc. ("Warrenton") that it would cease producing the
Company's beverage products. Since then negotiations to re-initiate
production have been unsuccessful.
b) In October 1999, the Company entered into an agreement with 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. In connection with the Bond deal, the Company will receive $2.56
million, which is a combination of Section 108 and EDI loans and a State of New
York grant. The blended rate on the $9.98 million in bond and related financing
is 4.6% for a 10-year term. The original project terms have changed and the
Company is currently exploring options for its manufacturing facility in
Rochester, New York.
F-21
<TABLE> <S> <C>
<PAGE>
<CAPTION>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 505,454 495,815
<SECURITIES> 0 0
<RECEIVABLES> 172,351 103,602
<ALLOWANCES> 0 0
<INVENTORY> 398,424 151,255
<CURRENT-ASSETS> 1,656,521 750,672
<PP&E> 3,848,599 1,742,789
<DEPRECIATION> 205,281 25,075
<TOTAL-ASSETS> 5,341,403 2,495,369
<CURRENT-LIABILITIES> 5,616,675 1,949,445
<BONDS> 0 0
0 0
1,000 1,000
<COMMON> 2,905 2,576
<OTHER-SE> (279,177) 488,562
<TOTAL-LIABILITY-AND-EQUITY> 5,341,403 2,495,369
<SALES> 3,390,323 145,954
<TOTAL-REVENUES> 3,390,323 145,954
<CGS> 4,282,841 0
<TOTAL-COSTS> 7,251,496 2,114,714
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 678,187 16,660
<INCOME-PRETAX> (4,518,577) (1,985,420)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,518,577) (1,985,420)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,518,577) (1,985,420)
<EPS-BASIC> (0.16) (0.08)
<EPS-DILUTED> (0.16) (0.08)
</TABLE>