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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Report For Period January 1, 2003 to December 31, 2003
BRAVO! FOODS INTERNATIONAL CORP.
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(Name of Small Business Issuer in its Amended Charter)
Commission File Number 0-20549
Delaware 62-1681831
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, Suite 202, North Palm Beach, Florida 33408 USA
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(Address of principal executive offices) (Zip Code)
Telephone number: (561) 625-1411
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act
Common Stock, $.001 par value
(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.[ ]
The issuer's revenues for its most recent fiscal year were $1,200,142.
The aggregate market value of the voting stock held by non-affiliates of
the issuer on April 2, 2004, based upon the $0.15 per share average bid and
asked prices of such stock on that date, was $4,210,799, based upon
28,071,996 shares held by non-affiliates of the issuer. The total number of
issuer's shares of common stock outstanding held by affiliates and non-
affiliates as of April 2, 2004 was 31,598,580.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's prospects and strategies and its expectations about growth
contained in this report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's present expectations or
beliefs concerning future events. The Company cautions that such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, the uncertainty as to
the Company's future profitability; the uncertainty as to whether the
Company's new business model can be implemented successfully; the accuracy
of its performance projections; and the Company's ability to obtain
financing on acceptable terms to finance its operations until
profitability.
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
The Company
The Company is a Delaware corporation, which was formed on April 26,
1996. The Company formerly owned the majority interest in two Sino-American
joint ventures in China, known as Green Food Peregrine Children's Food Co.
Ltd. and Hangzhou Meilijian Dairy Products Co., Ltd. These two joint
ventures processed milk products for local consumption in the areas of
Shanghai and Hangzhou, China, respectively. The Company closed Green Food
Peregrine in December 1999 and sold its interest in Hangzhou Meilijian
Dairy in December 2000.
In December 1999, the Company obtained Chinese government approval
for the registration of a new wholly owned subsidiary in the Wai Gao Qiao
"free trade zone" in Shanghai, China. The Company formed this import-export
company to import, export and distribute food products on a wholesale level
in China. In addition, China Premium (Shanghai) is the Company's legal
presence in China with respect to
1
contractual arrangements for the development, marketing and distribution of
branded food products. The Company has announced that it plans to cease all
business activities of this Chinese subsidiary in April 2004, owing to low
sales volume and insufficient financial or logistic resources to market the
Company's products profitably in mainland China.
In December of 1999, the Company formed Bravo! Foods, Inc., a wholly
owned Delaware subsidiary, which the Company utilized to advance the
promotion and distribution of branded Looney Tunes(TM) products in the
United States, through production agreements with local dairy processors.
At the end of 2001, the Company assumed this business, and its U.S.
subsidiary ceased functioning as an operating company at that time.
On February 1, 2000, the Company changed its name from China
Peregrine Food Corporation to China Premium Food Corporation, and on March
16, 2001 the Company changed its name to Bravo! Foods International Corp.
The Business
The Company's business involves the development and marketing of a
Company owned Slammers(R) trademarked brand, the obtaining of license
rights from third party holders of intellectual property rights to other
trademarked brands, logos and characters and the granting of production and
marketing rights to processor dairies to produce branded flavored milk
utilizing the Company's intellectual property. The Company generates
revenue primarily through the sale of "kits" to these processors. In the
United States, the Company also generates revenue from the unit sales of
finished branded flavored milks to retail consumer outlets.
"Kits" sold to processors consist of flavor ingredients that are
developed and refined by the Company and the grant of production rights to
processors to produce the flavored milks. The consideration paid to the
Company under these production contracts consists of fees charged for the
Company's grant of production rights for the branded flavored milks plus a
charge for flavor ingredients. The fees charged by the Company for the
production rights have been formulated to match its royalty costs for its
intellectual property licenses.
Warner Bros. Licenses
---------------------
In January 1999, the Company commenced a licensing agreement with
Warner Bros. Consumer Products, permitting the Company to produce and
distribute a line of high quality, flavored milks branded with the Warner
Bros. Looney Tunes(TM) logos, characters and names in the Shanghai and
Hangzhou greater metropolitan areas. To obtain this license, the Company
agreed to pay 3% royalty fees of net invoiced price of each licensed
product with a minimum guaranteed royalty of $300,000. In the summer of
2000, the Company agreed to pay an additional $100,000 for an expanded
license for all of mainland China and an extension of the expiration date
to June 2003. Thereafter, the parties agreed to extend the license to
October 29, 2003, at which time the license expired.
On July 27, 2000, the Company executed a licensing agreement with
Warner Bros. to use Looney Tunes(TM) characters and names on milk products
in the United States. This licensing agreement obligated the Company to pay
a guaranteed royalty of $500,000, and granted to the Company the right to
use the cartoon characters of Bugs Bunny, Tweety, Tasmanian Devil, Road
Runner, Wile E Coyote, Lola Bunny, Marvin the Martian, Sylvester and Daffy
Duck on milk products for sale in specified retail outlets in the fifty
United States, Puerto Rico and the United States Virgin Islands. The
initial term of the agreement was for 3 years, from January 1, 2000 through
December 31, 2002. In early 2002, the parties agreed to extend the term of
this license for an additional year to December 31, 2003. This extension
was part of a
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promotional license for the Warner Bros. "Taz Atti-Tour" for the period
March 13, 2002 to December 31, 2002, for which the Company paid an
additional $250,000 guaranteed royalty.
On November 7, 2001, the Company executed a licensing agreement with
Warner Bros. to use Looney Tunes(TM) characters and names on milk products
in Mexico. This licensing agreement grants the Company the right to use the
Warner Bros. cartoon characters on milk products for sale in specified
retail outlets throughout Mexico. The initial term of the agreement is for
3 years, from June 1, 2001 through May 31, 2004.
On May 28, 2002, the Company executed a licensing agreement with
Warner Bros. to use Looney Tunes(TM) characters and names on milk products
in Canada. This licensing agreement grants the Company the right to use the
Warner Bros. cartoon characters on milk products for sale in specified
retail outlets throughout Canada. The initial term of the agreement was for
25 months, from March 1, 2002 through March 31, 2004.
All of the Company's licensing agreements recognize that the Company
will use third party production agreements for the processing of flavored
milk products, and that the milk products will be produced and may be sold
directly by those processors. The Company's responsibilities under its
third party production agreements are to design and provide Warner Bros.
approved packaging artwork, to help determine the best tasting flavors for
the particular market and to assist in the administration, promotion and
expansion of the Looney Tunes(TM) branded milk program. Ingredients for the
flavored milks are formulated to the Company's specifications and supplied
on an exclusive basis by Givaudan Roure. In the United States, the Company
assumes the responsibility for sales and marketing of the Looney Tunes(TM)
flavored milks produced by Jasper Products and Shamrock Farms.
Under the Company's United States license, the Company agreed to a
royalty rate of 5% on the amount invoiced to the producer dairies for
"kits". In Mexico, the Company agreed to a sliding scale royalty rate
initially equal to 5% on the amount invoiced, with rate increases to 5% and
7%, respectively for the second and third contract years. The Company
agreed to a 5% royalty rate on the amount invoiced to the producers in
Canada and a 3% royalty rate in China.
Non-Renewal of Warner Bros. Licenses.
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The history of the Company with all of the Warner Bros. licenses, as
a function of sales of the flavored milks, has not supported the guaranteed
royalty structure required by Warner Bros. for its licenses. As a result,
the Company developed its own Slammers(R) brand in 2003 and executed
licenses with Marvel Comics and Moon Pie in 2004. For these reasons, in the
fourth quarter 2003, the Company decided not to seek the renewal for the
China license and not accept the offer of Warner Bros. to renew the U.S.
license. In addition, the Company decided not to renew its licenses with
Warner Bros. for Canada and Mexico.
Production Contracts
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Prior to 2000, the Company's business primarily involved the
production and distribution of milk in China. In the third quarter of 2000,
the Company began to refocus the Company's business away from the
production - distribution aspect of the value chain by implementing a
business model that involved the branding, marketing, packaging design and
promotion of branded flavored fresh milk in the United States. During the
middle of 2001, this refocused business was implemented in China, in
December 2001 in Mexico and in the third quarter of 2002 in Canada.
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United States
The initial dairy processors with which the Company had production
contracts were members of Quality Chekd Dairies, Inc., a national
cooperative with over 40 member dairies that process fresh milk on a
regional basis. This business, while viable, proved to have limited sales
expansion capabilities in the US owing to the inherent regional
distribution limitations of a "fresh" milk product with a short shelf life.
The advent of extended shelf life (ESL) and aseptic long life milk
presented the Company with the opportunity to increase dramatically sales
on a national basis. In the third quarter of 2001 and the first quarter of
2002, the Company entered into production contracts with Shamrock Farms,
located in Phoenix, Arizona and Jasper Products, of Joplin, Missouri, and
began to market branded ESL and aseptic flavored milks to large national
chain accounts.
Significantly, with ESL and aseptic milks, the Company is no longer
dependent upon regional processor dairies to promote the sale of the
Company's branded flavored milks. Since distribution issues do not limit
ESL and aseptic milk sales to the accounts of regional dairy processors,
the Company has assumed responsibility for promoting sales either directly
or through food brokers who represent the Company with both national and
regional accounts. This business model, coupled with the production
capacity of these two ESL dairy processors, allowed the Company to seek
national accounts in an aggressive fashion, resulting in arrangements to
supply flavored milk products to over 11,000 stores nationally at the end
of 2002.
Under the Company's current U.S. business model, the Company's
revenue source is derived not only from "kit" sales, but also from the
differential between the cost to the Company of producing the ESL and long
life aseptic products and the wholesale price to the Company's accounts for
unit sales of the finished Looney Tunes(TM) flavored milks.
In June 2002, the Company entered into a production contract with a
division of Parmalat USA Corp. to produce, market and sell the Looney
Tunes(TM) brand flavored milks. Under this agreement, Parmalat is the
exclusive producer and distributor of Bravo! Foods' new Looney Tunes(TM)
brand fortified aseptic milk, packaged in Tetra-Brik(TM) format under the
Company's Slammers Fortified Reduced Fat Milk(TM) logo in the United
States. The Company's agreement with Parmalat gives the Company an expanded
presence in supermarkets through the use of shelf stable aseptic milk that
is processed, sold and distributed by Parmalat. In addition, under this
agreement the Company retained responsibility for aseptic product sales in
the food service sector, either directly or through food brokers who
represented the Company with both national and regional accounts. The
Company's agreement with Parmalat expired with the non-renewal of the
Warner Bros. license for the United States.
Mexico
In December 2001, the Company commenced its contractual relationship
with Neolac S.A, a national dairy processor located in central Mexico. The
Company sells kits to Neolac, including production rights for its branded
flavored milk for all of Mexico. The Company's responsibilities are to
design and provide approved packaging artwork, to help determine the best
tasting flavors for the particular market and to assist in the
administration, promotion and expansion of the branded flavored milk
program. Ingredients for the flavored milks are formulated to the Company's
specifications and supplied on an exclusive basis by Givaudan Roure. The
Company does not have any responsibility for or participation in sales or
distribution in Mexico.
4
Canada
In April 2002, the Company commenced its contractual relationship
with Farmers Dairy, a dairy processor located in Halifax, Nova Scotia,
Canada. The Company sells kits to Farmers Dairy, including production
rights for the branded flavored milk products. The Company's
responsibilities are to design and provide approved packaging artwork, to
help determine the best tasting flavors for the particular market and to
assist in the administration, promotion and expansion of the branded
flavored milk program. Ingredients for the flavored milks are formulated to
the Company's specifications and supplied on an exclusive basis by Givaudan
Roure. The Company does not have any responsibility for or participation in
sales or distribution in Canada.
China
The Company's withdrawal from milk production in China in 2000
resulted in the signing of supply agreements with Hangzhou Meilijian and
Huai Nan Dairy to produce branded traditional white and flavored milks,
which the Company sold in Shanghai, Hangzhou, Ningbo, Nanjing, Fuzhou, Wuxi
and Suzhou. The administration of supply, distribution, marketing and sales
of the branded flavored milk products in China was the responsibility of
China Premium Food Corp (Shanghai) Co, Ltd., the Company's wholly owned
Chinese registered subsidiary.
In October 2001, China Premium Food Corp (Shanghai) Co, Ltd .began to
implement the Bravo! "kit sales" model with the execution of a production
contract with Kunming Xuelan Dairy, located in Kunming City in Southwest
China. From October 2001, through the third quarter 2002, Kunming Dairy
produced the Company's branded flavored milks in 250ml single serve gable
top packaging. In January 2002, Heilongjiang Wan Shan Dairy (Wonder Sun
Dairy) began producing the vanilla Looney Tunes(TM) flavored milk. This
dairy is located in Harbin City in Northeast China and has distribution
rights to Heilongjiang, Jilin, Liaoning and Hebei provinces as well as
Beijing and Tianjin municipalities.
As of December 31, 2003, China Premium Food Corp (Shanghai) Co, Ltd.
ceased business activities in China. The Company anticipates closing all
operations of this subsidiary in the second quarter of 2004.
Products
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Commencing in September of 2000, the Company implemented the "kit"
sales program with third party dairy processors in the United States, for
the production and sale of fresh branded flavored milk in single serve
plastic bottles. This product, as with all of the Company's U.S. products
up to September 2000, had a limited shelf life of, generally, 21 days.
In early 2002, the Company developed branded extended shelf life and
aseptic long life flavored milk products. The extended shelf life product
was sold in 11.5oz single serve plastic bottles and must be refrigerated.
The shelf life of this product is 90 days. The Company's aseptic product
does not require refrigeration and has a shelf life of 8 months. This
product is packaged in an 11.2oz Tetra Pak Prisma(TM) sterile paper
container. Both of these products were introduced to the public in the
second and third quarters of 2002.
Commencing in May 2002, the Company developed a new branded fortified
flavored milk product under the "Slammers Fortified Reduced Fat Milk(R)"
brand name. The Company's Slammers brand is used in conjunction with the
Company's licensed third party trademarks. Slammers(R) is made from 2
percent fat milk and is fortified with 11 essential vitamins. The
introduction of this new product and the phase out of the Company's
"regular" branded milks occurred in the fourth quarter of 2002. The
Company's Slammers(R) flavored milks are sold in the United States in
single serve extended shelf life
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11.5 oz plastic bottles, as well as the long life 11.2oz aseptic Tetra Pak
Prisma(TM) package. The Company's Slammers(R) flavored milks are sold in
Mexico and Canada in single serve extended shelf life 11.5 oz plastic
bottles.
In October 2002, Parmalat introduced Looney Tunes(TM) brand fortified
aseptic milk, packaged in an 8oz Tetra-Brik(TM) format under the Company's
Slammers Fortified Reduced Fat Milk(R) logo pursuant to a production
agreement with the Company executed in June 2002. The 8oz Tetra Brik
Slammers(R) does not require refrigeration and has a shelf life of 6
months. Currently, this product is no longer available.
In November 2002, the Company introduced Slim Slammers Fortified
Milk(R), a low calorie version of the Company's Slammers Fortified Reduced
Fat Milk(R). Slim Slammers Fortified Milk(R) has no sugar added and is
sweetened with sucralose, a natural sweetener made from sugar. Slim
Slammers Fortified Milk(R) is made from 1 percent fat milk, is fortified
with 11 essential vitamins and is available in the same flavors as the
Company's Slammers(R) brand. The Company will reintroduce this product in
the United States with a new package and formulation in 2004.
New Products
------------
In the third quarter 2003, the Company commenced an analysis of the
Looney Tunes(TM) brand performance within the context of the possible
renewal of its Warner Bros. licenses for United States, Mexico, China and
Canada. In the fourth quarter 2003, the Company concluded that, as a
function of the sales of flavored milks, the Looney Tunes(TM) brand has not
supported the guaranteed royalty structure required by Warner Bros. for its
licenses. In the fourth quarter 2004, the Company decided not to renew its
license agreements with Warner Bros. and began to develop new products in
anticipation of the consummation of other license relationships for co-
branded flavored milk with Marvel Comics and MoonPie, as well as a new
single Slammers(R) brand. The Company plans to launch these products in the
second quarter 2004 on a co-branded basis with Marvel Comics and a separate
co-branded line with MoonPie.
Industry trends
---------------
The dairy industry in the western world is a very mature industry
with slow growth and, to a large extent, commodity like margins. The "got
milk" campaign has helped heighten awareness of the nutritional benefits of
dairy products but, even with this promotion, the US consumption of milk
was basically flat two years ago.
Flavored milk was the only area of growth in the past two years and,
when promoted aggressively, the sales of flavored milk actually increased
the sales of traditional white milk. The International Dairy Foods
Association reported that flavored milks represent the only category for
price and margin gains. As a result, Nestles, Dean's, Hershey and Borden
all promote their brand of refreshment drinks. Sales of flavored milks for
the last two years continued to have a 7% gain in product volume and a 12%
increase in sales measured in dollars. Growth of this nature is welcome to
this industry and validates the interest by the trade in products like the
Company's Slammers brand Looney Tunes(TM) milk. The Beverage Marketing
Corp. projects that growth in white milk will be flat to .5%, with growth
in flavored milks from 4% to 8% per year over the next five years. Growth
in the distribution of single serve milk products is projected by this
research group at from 10% to 20%.
Market analysis
The flavored milk business is a relatively new category in the dairy
field. The flavored "refreshment" segment is both the fastest growing and
most profitable category in the industry and is
6
receiving the most attention in the industry today. Pioneered by Nestle
with the NesQuik line and Dean Foods with the Chug brand, this "good for
you" segment is in demand both in the U.S. and internationally.
The International Dairy Foods Association reports that, although
flavored milk currently amounts to only 5 to 6 percent of milk sales, it
represents over 59% of the growth in milk sales. With the total milk
category exceeding $9.3 billion in 2002, the flavored segment was
approximately $496 million. Statistically, as the flavored segment grows,
the entire category grows as well. Selling more flavored milks has resulted
in more sales of white milk as well.
In addition, the International Dairy Foods Association and Dairy
Management Inc. have reported on studies suggesting that dairy products may
help in weight loss efforts when coupled with a reduced calorie diet, based
on data associating adequate calcium intake with lower body weight and
reduced body fat.
The Company continues to develop a niche in the single serve flavored
milk business by utilizing strong, national branding as part of the
promotion of the Company's Slammers(R) and Slim Slammers(R) products. This
niche has as its focus the increased demand for single serve, healthy and
refreshing drinks.
Market segment strategy
The Bravo! model addresses a very clear and concise target market.
The Company knows from experience that the largest retailers of milk
products are demanding new and more diverse refreshment drinks,
specifically in the dairy area in response to consumer interest and demand.
To that end, the Company has and will continue to differentiate the
Company's products from those of the Company's competitors through
innovative product formulations and packaging designs, such as those
implemented in the Company's Slammers fortified milk product line and the
Company's Slim Slammers(R) low calorie, no sugar added products.
The Company's Slammers(R) milk products have had promising results
penetrating this arena as consumers continue to look for healthy
alternatives to carbonated beverages. The positioning of the Company's
products as a healthy, fun and great tasting alternative refreshment drink
at competitive prices to more traditional beverages creates value for the
producer and the retailer alike. This "profit orientation" for the trade
puts old-fashioned milk products in a whole new light. The consumer is
happy, the retailer is happy and the producer is able to take advantage of
the value added by the brand and the resulting overall increase in milk
sales.
The Company has been and continues to pursue a strategic goal of
placing the Company's Slammers(R) milks in elementary, middle and high
schools through ala carte lunch programs and vending facilities in school
cafeterias and is promoting the Company's Slim Slammers milks as low
calorie, non-sugar added alternatives to traditional soft drinks
Penetration of this market segment has been limited by logistic and
economic concerns of school administrators in the push to remove
traditional carbonated soft drinks from schools in favor of milk and milk
based products.
Competition
There are definite differences in the various competitors approach to
this new segment. The differences address packaging, processing, marketing
and distribution. Bravo! has taken the course of least resistance while
producing a product that is positioned to reward all involved economically.
Dean Foods based their market entrance five years ago on a new
package called the Chug. This was an innovative new way to market milk in a
format that made it convenient to drink milk "on the fly". The "chug"
bottle was introduced in 8 oz and 16 oz plastic milk bottles. These bottles
have a wide mouth
7
opening and a very attractive screw top for convenience of sealing. The
graphic label on the bottle was a full wrap and was introduced in both
white and chocolate flavors. Currently, Dean is producing a flavored milk
line under a license from Hershey's.
Nestle launched their new line of flavored milks approximately four
years ago with a shaped bottle, the Nestle "bunny" and a broad line of
flavors. Nestle, branding Nesquick as a new name distinct from Nestle
Quick, produces a sterile aseptic product, which has long-life
characteristics enabling fast national penetration. This long shelf life
configuration offers considerable economic advantages in terms of shipping,
storage, returns and production economies but significantly impacts product
quality and taste.
The Company has settled on the kit approach in an effort to develop
and promote a taste tested ultra quality fresh product, while enjoying the
instant recognition of international brands. The Company has sought and
utilized what are believed to be well recognized families of intellectual
properties in the form of cartoon/comic book characters. The Company has
been able to enter into production contracts with several national and
international dairies and has moved from fresh milk to ESL and aseptic long
shelf life products to expand the market for the Company's branded
products.
The Company's resources for promotions have been limited, and the
Company runs significantly less promotional activities in comparison to the
Company's competitors. Where the Company is in direct competition with
Nestles and Hershey's, however, the Company has been able to maintain
competitive sales levels.
Employees
The Company has seven full time employees located at its North Palm
Beach corporate offices. China Premium Food Corp (Shanghai) Co. Ltd.,
ceased operations and does not maintain any employees in China.
ITEM 2 - DESCRIPTION OF PROPERTY
Neither the Company nor its subsidiaries currently own any real
property. As of February 1, 1999, the Company moved its corporate offices
from West Palm Beach to 11300 US Highway 1, Suite 202, North, Palm Beach,
Florida, pursuant to a lease with HCF Realty, Inc., having an initial term
of five years. The current aggregate monthly rent amounts to approximately
$6,393. The term of this lease has been extended for five years to May 31,
2009, at a 25% reduction in base rent.
The Company does not have a policy to acquire property for possible
capital gains or income generation. In addition, the Company does not
invest in securities of real estate entities or developed or underdeveloped
properties.
ITEM 3. LEGAL PROCEEDINGS
There currently are no claims or lawsuits against the Company for
which a report is required.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None in the fourth quarter 2003
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common stock market price
-------------------------
Of the 28,047,542 shares of common stock outstanding as of December
31, 2003, all but approximately 600,000 shares can be traded on the over-
the-counter trading on the OTC Electronic Bulletin Board, which trading
commenced October 24, 1997. Of this amount, 3,526,684 shares are held by
affiliates. The following quarterly quotations for common stock
transactions on the OTC Bulletin Board reflect inter-dealer prices, without
retail mark-up, markdown or commissions and may not represent actual
transactions.
QUARTER HIGH BID PRICE LOW BID PRICE
------- -------------- -------------
2002
Q1 (1/3 - 3/29) $0.52 $0.37
Q2 (4/1 - 6/28) $0.39 $0.21
Q3 (7/1 - 9/30) $0.38 $0.22
Q4 (10/1 - 12/31) $0.40 $0.24
2003
Q1 (1/3 - 3/28) $0.28 $0.20
Q2 (4/1 - 6/30) $0.23 $0.09
Q3 (7/1 - 9/30) $0.16 $0.09
Q4 (10/1 - 12/31) $0.12 $0.05
Equity holders at April 2, 2004
-------------------------------
Common stock 31,598,580 shares 1,900 holders (approximate)
Series B preferred stock 107,440 shares 1 holder
Series F preferred stock 120,515 shares 3 holders
Series G preferred stock 55,781 shares 4 holders
Series H preferred stock 100,500 shares 9 holders
Series I preferred stock 30,000 shares 2 holders
Series J preferred stock 200,000 shares 1 holder
Series K preferred stock 95,000 shares 1 holder
Dividends
---------
The Company has not paid dividends on its common stock and does not
anticipate paying dividends. Management intends to retain future earnings,
if any, to finance working capital, to expand its operations and to pursue
its acquisition strategy.
9
The holders of common stock are entitled to receive, pro rata, such
dividends and other distributions as and when declared by the Company's
board of directors out of the assets and funds legally available therefor.
The availability of funds is dependent upon dividends or distribution of
profits from the Company's subsidiaries and may be subject to regulatory
control and approval by the appropriate government authorities on either a
regional or national level.
The Company has accrued dividends for the Company's convertible
preferred stock in the amount of $266,666 at December 31, 2002 and $582,823
for the period ended December 31, 2003.
Sale of unregistered securities
-------------------------------
Quarter Ended December 31, 2003
On November 21, 2003, the Company entered into a Subscription
Agreement with Gamma Opportunity Capital Partners, LP for the sale of a
convertible note in the amount of $200,000 and warrants to purchase
5,000,000 shares of common stock. The convertible note is convertible into
shares of common stock of the Company at the lesser of $0.05 or 75% of the
average of the three lowest closing bid prices for the thirty trading days
prior to but not including the conversion date. During the 180 days
following the issuance of the convertible note, the conversion price shall
not be less that $.03 per share if no event of default exists. This 180 day
period shall be extended indefinitely if no event of default exists, the
closing trading price for any 15 day consecutive trading period is $0.20 or
higher, the daily trading volume for the 15 days is at least 300,000 and a
registration statement registering the convertible note is effective. In
connection with this transaction, the Company issued 400,000 shares of its
common stock and a warrant to purchase 2,000,000 shares of common stock at
$.05 per share.
On November 21, 2003, the Company entered into a Subscription
Agreement with Mid-Am Capital, LLC for the sale of a convertible note in
the amount of $200,000 and warrants to purchase 5,000,000 shares of common
stock. The convertible note is convertible into shares of common stock of
the Company at the lesser of $0.05 or 75% of the average of the three
lowest closing bid prices for the thirty trading days prior to but not
including the conversion date. During the 180 days following the issuance
of the convertible note, the conversion price shall not be less that $.03
per share if no event of default exists. This 180 day period shall be
extended indefinitely if no event of default exists, the closing trading
price for any 15 day consecutive trading period is $0.20 or higher, the
daily trading volume for the 15 days is at least 300,000 and a registration
statement registering the convertible note is effective.
Subsequent Events
On February 12, 2004, the Company held a special meeting of
shareholders at which the shareholders approved the increase of the
Company's authorized common stock from 50,000,000 shares to 300,000,000
shares.
On February 17, 2004, the Company converted 875 shares of Series G
Convertible Preferred Stock into 215,164 shares of common stock pursuant to
a January 12, 2004 notice of conversion from Nesher, LP, at a conversion
price of $0.0407. The conversion included accrued and unpaid dividends on
the converted preferred. The Company and the holder delayed processing this
notice in light of the Company's special meeting of shareholders held
February 12, 2004. The shares of common stock issued pursuant to this
conversion were retired and cancelled on March 5, 2004 and issued to third
parties on that date in accordance with the instructions of Nesher, LP.
On February 17, 2004, the Company converted 1,400 shares of Series G
Convertible Preferred Stock into 343,980 shares of common stock pursuant to
a January 12, 2004 notice of conversion from
10
Talbiya Investments, Ltd., at a conversion price of $0. 0407. The
conversion included accrued and unpaid dividends on the converted
preferred. The Company and the holder delayed processing this notice in
light of the Company's special meeting of shareholders held February 12,
2004. The shares of common stock issued pursuant to this conversion were
retired and cancelled on March 5, 2004 and issued to third parties on that
date in accordance with the instructions of Talbiya Investments, Ltd.
On February 17, 2004, the Company converted 700 shares of Series G
Convertible Preferred Stock into 172,162 shares of common stock pursuant to
a January 12, 2004 notice of conversion from The Keshet Fund, LP, at a
conversion price of $0. 0407. The conversion included accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's special meeting of
shareholders held February 12, 2004. The shares of common stock issued
pursuant to this conversion were retired and cancelled on March 5, 2004 and
issued to third parties on that date in accordance with the instructions of
The Keshet Fund, LP.
On February 17, 2004, the Company converted 2,025 shares of Series G
Convertible Preferred Stock into 497,951 shares of common stock pursuant to
a January 12, 2004 notice of conversion from Keshet LP, at a conversion
price of $0. 0407. The conversion included accrued and unpaid dividends on
the converted preferred. The Company and the holder delayed processing this
notice in light of the Company's special meeting of shareholders held
February 12, 2004. The shares of common stock issued pursuant to this
conversion were retired and cancelled on March 5, 2004 and issued to third
parties on that date in accordance with the instructions of Keshet, LP.
On March 1,2004, the Company issued 80,000 shares of non-voting
Series K 8% Convertible Preferred stock, to Mid-Am Capital, LLC, having a
stated value of $10.00 per Preferred K share, for the aggregate purchase
price of $800,000. Each preferred share is convertible to 100 shares of the
Company's common stock at a conversion price of $0.10, representing
8,000,000 shares of common stock underlying the preferred. In addition, the
following adjustments were made to prior issued warrants for the purpose of
facilitating future fund raising by the Company arising out of the exercise
of the warrants by Holder. The purchase price, as defined in the Warrant
No. 2003-B-002, has been reduced to $0.10, subject to further adjustment as
described in the warrant. The expiration date, as defined in the warrant,
remains as stated. This private offering was made to Mid-Am, an accredited
investor, pursuant to Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933.
On March 9, 2004, the Company converted 5,000 shares of Series F
Convertible Preferred Stock into 1,315,789 shares of common stock pursuant to
a January 8, 2004 notice of conversion from Esquire Trade & Finance Inc., at
a conversion price of $0.038. The conversion did not include accrued and
unpaid dividends on the converted preferred. The Company and the holder
delayed processing this notice in light of the Company's special meeting of
shareholders held February 12, 2004. The shares of common stock issued
pursuant to this conversion were issued to third parties on that date in
accordance with the instructions of Esquire Trade & Finance Inc.
On April 1 2004, the Company converted 5,000 shares of Series F
Convertible Preferred Stock into 1,315,789 shares of common stock pursuant to
a January 8, 2004 notice of conversion from Austinvest Anstalt Balzers, at a
conversion price of $0.038. The conversion did not include accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's special meeting of
shareholders held February 12, 2004. The shares of common stock issued
pursuant to this conversion were issued to third parties on that date in
accordance with the instructions of Austinvest Anstalt Balzers.
On April 2, 2004, the Company and Mid-Am Capital, LLC entered into
Supplement No.1 to the Series K Convertible Preferred Subscription
Agreement, by which the Company sold an additional 15,000
11
shares of its Series K Convertible Preferred Stock utilizing the proceeds
from a certain promissory note issued by the Company to Mid-Am in the face
amount of $150,000. With the consummation of this sale, the $150,000
promissory note was deemed paid in full by the Company.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's prospects and strategies and the Company's expectations about
growth contained in this report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the present expectations or beliefs
concerning future events. The Company cautions that such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the Company's actual results, performance or achievements
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the uncertainty as to the Company's
future profitability; the uncertainty as to whether the Company's new
business model can be implemented successfully; the accuracy of the
Company's performance projections; and the Company's ability to obtain
financing on acceptable terms to finance the Company's operations until
profitability.
OVERVIEW
The Company's business model includes the development and marketing
of a Company owned Slammers(R) trademarked brand, the obtaining of license
rights from third party holders of intellectual property rights to other
trademarked brands, logos and characters and the granting of production and
marketing rights to processor dairies to produce branded flavored milk and
generating revenue primarily through the sale of "kits" to these dairies.
The price of the "kits" consists of an invoiced price for a fixed amount of
flavor ingredients per kit used to produce the flavored milk and a fee
charged to the diaries for the production, promotion and sales rights for
the branded flavored milk. In the United States, the Company also generates
revenue from the unit sales of finished branded flavored milks to retail
consumer outlets.
The Company's new product introduction and growth expansion continues
to be expensive, and the Company reported a net loss of $3,016,987 for the
year ended December 31, 2003. As shown in the accompanying financial
statements, the Company has suffered operating losses and negative cash
flows from operations since inception and at December 31, 2003 has an
accumulated deficit, a capital deficit, is delinquent on certain debts and
has negative working capital. These conditions give rise to substantial
doubt about the Company's ability to continue as a going concern. As
discussed herein, the Company plans to work toward profitability in the
Company's U.S. and international business and obtain additional financing.
While there is no assurance that funding will be available or that the
Company will be able to improve the Company's operating results, the
Company is continuing to seek equity and/or debt financing. No assurances
can be given, however, that the Company will be successful in carrying out
the Company's plans.
CORPORATE GOVERNANCE
The Board of Directors
The Company's board has positions for nine directors that are elected
as Class A or Class B directors at alternate annual meetings of the
Company's shareholders. The Company presently has two
12
mid-term vacancies on the board. Six of the seven current directors of the
Company's board are independent. The Company's chairman and chief executive
officer are separate. The board meets regularly, at least four times a
year, and all directors have access to the information necessary to enable
them to discharge their duties. The board, as a whole, and the audit
committee in particular, review the Company's financial condition,
performance on an estimated vs. actual basis and financial projections as a
regular agenda item at scheduled periodic board meetings, based upon
separate reports submitted by the Company's chief executive officer and
chief financial officer. Directors are elected by the Company's
shareholders after nomination by the board or are appointed by the board
when a vacancy arises prior to an election. This year the Company has
adopted a nomination procedure based upon a rotating nomination committee
made up of those members of the director Class not up for election. The
board presently is examining whether this procedure, as well as the make up
of the audit and compensation committees, should be the subject of an
amendment to the by-laws.
Audit Committee
The Company's audit committee is composed of three independent
directors and functions to assist the board in overseeing the Company's
accounting and reporting practices. The Company's financial information is
booked in house by the Company's CFO's office, from which the Company
prepares financial reports. These financial reports are audited or reviewed
by Lazar Levine & Felix LLP, independent certified accountants and
auditors. The Company's chief financial officer reviews the preliminary
financial and non-financial information prepared in house with the
Company's securities counsel and the reports of the auditors. The committee
reviews the preparation of the Company's audited and unaudited periodic
financial reporting and internal control reports prepared by the Company's
chief financial officer. The committee reviews significant changes in
accounting policies and addresses issues and recommendations presented by
the Company's internal and external certified accountants as well as the
Company's auditors. Currently, there is one vacancy on the audit committee.
Compensation Committee
The Company's compensation committee is composed of three independent
directors and reviews the compensation structure and policies concerning
executive compensation. The committee develops proposals and
recommendations for executive compensation and presents those
recommendations to the full board for consideration. The committee
periodically reviews the performance of the Company's other members of
management and the recommendations of the chief executive officer with
respect to the compensation of those individuals. Given the size of the
Company, all such employment contracts are periodically reviewed by the
board. The board must approve all compensation packages that involve the
issuance of the Company's stock or stock options. Currently, there is one
vacancy on the compensation committee.
Nominating Committee
The nominating committee was established in the second quarter 2002
and consists of those members of the director Class not up for election.
The committee is charged with determining those individuals who will be
presented to the shareholders for election at the next scheduled annual
meeting. The full board fills any mid term vacancies by appointment.
13
CRITICAL ACCOUNTING POLICIES
Estimates
This discussion and analysis of the Company's consolidated financial
condition and results of operations are based on the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the Company to make
estimates and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates the Company's estimates, including those related to reserves for
bad debts and valuation allowance for deferred tax assets. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
result of which forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions. The Company's use of estimates,
however, is quite limited as the Company has adequate time to process and
record actual results from operations.
Revenue recognition
United States - Production Agreements with Jasper Products and Shamrock Farms
-----------------------------------------------------------------------------
The Company recognizes revenue in the United States at the gross
amount of its invoices for the sale of kits at the shipment of flavor
ingredients to processor dairies with whom the Company has production
contracts for extended shelf life and aseptic long life milk. This
recognition is based upon the Company's role as the principal in these
transactions, its discretion in establishing kit prices (including the
price of flavor ingredients and production right fees), its development and
refinement of flavors and flavor modifications, its discretion in supplier
selection and its credit risk to pay for ingredients if processors do not
pay ingredient suppliers. The revenue generated by the production contracts
under this model is allocated as follows: 90% to 95% of the revenue is for
the processors' purchase of flavor ingredients; the balance of 5% to10%
represents fees charged by the Company to the processors for production
rights. The price of production rights is formulated to cover the Company's
intellectual property licenses, which varies by licensor as a percentage of
the total cost of a kit sold to the processor dairy under the production
agreement. The Company recognizes revenue on the gross amount of "kit"
invoices to the dairy processors and simultaneously records as cost of good
sold the cost of flavor ingredients paid by the processor dairies to
ingredients supplier. The recognition of revenue generated from the sale of
production rights associated with the flavor ingredients is complete upon
shipment of the ingredients to the processor, given the short utilization
cycle of the ingredients shipped.
Jasper Products and Shamrock Farms, processor dairies for the
Company's products in 2003, charge the Company with the cost of producing
the Company's branded flavored milk. The Company is responsible for freight
charges from processor dairies to retail destinations, promotion costs and
product returns of product owing to defects and out of date products. In
addition, the Company pays the fee charged by food brokers retained by the
Company to generate sales of the branded flavored milk products to retail
outlets. In return, the Company is entitled to keep the difference between
the cost charged by processor dairies and the wholesale price determined by
the Company and charged to retail outlets. The Company treats this second
earning event as "unit sales revenue" when the revenue is realized or
realizable and accrues any estimated expenses which are related to the
Company's revenue at the end of each reporting period. Because the Company
benefits only from the price difference and does not own the inventory, it
recognizes the revenue generated through this model at net.
14
Commencing with the first quarter 2004, the Company will no longer
use the sale of "kits" as a revenue event in the United States. Rather, the
Company will take title to its branded flavored milks when they are
produced and placed in inventory by the Company's third party processors
and recognize as revenue the gross wholesale price charged to the Company's
wholesale customers. The Company's gross margin will be determined by the
reported wholesale price less the cost charged by the Company's third party
processors to produce the branded milk products. The sale of "kits" will
remain as the revenue model for the Company's international business.
International Sales and U.S. Sales to Parmalat
----------------------------------------------
In 2003, the Company sold "kits" to processors in Mexico, Canada,
China and to Parmalat in the United States, which kits include the cost of
flavor ingredients and rights to produce, market, distribute and sell the
Company's branded flavored milk to retail outlets. As a matter of
convenience, processors purchase the flavor ingredients for the kits
directly from a designated ingredients supplier and are invoiced by the
Company for the full price of the "kits" with a credit for the cost of
flavor ingredients purchased by the processors. The Company is directly
responsible for the administration of this model, including the collection
of kit receivables. Under this model, dairy processors are responsible for
production, marketing, distribution and sales of the branded flavored milk
to retail outlets. The normal production cycle for processors' utilization
of purchased flavor ingredients has ranged from 6 weeks in Mexico, 4 weeks
for Parmalat (U.S.) and 3 weeks for Canada.
The Company recognizes revenue at the gross amount of kit invoices
after shipment of flavor ingredients based upon the Company's role as the
principal in these transactions, its discretion in establishing kit prices
(including the price of flavor ingredients and production right fees), its
development and refinement of flavors and flavor modifications, its
discretion in supplier selection and the Company's credit risk to pay for
ingredients if processors do not pay ingredient suppliers. The Company
attributes the majority of the kit price to the sale of flavor ingredients
(90 % to 95% in the U.S., for example) and the balance to the Company's
grant of production rights to processor dairies. In this regard, the price
of production rights is formulated to cover the Company's costs of the
Company's intellectual property licenses. The Company's recognition of
revenue generated from the sale of production rights associated with the
flavor ingredients is upon shipment of the ingredients to the processor,
given the short utilization cycle of the ingredients shipped.
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Consolidated Revenue
The Company had annual revenues in 2003 of $1,200,142, with a cost of
goods sold of $192,498, resulting in a gross profit of $1,007,644. Of the
$1,200,142, $989,721 was generated in the U.S. and $21,314 from sales
recognized by the Company's wholly owned subsidiary, China Premium Food
Corp (Shanghai) Co., Ltd in China. The Company's revenue in 2003 decreased
by $572,828, a 32.31% decrease compared to revenue of $1,772,970 in 2002,
which consisted of $1,515,117 in the U.S. and $55,128 in China. This
decrease is the result of the reduction and ultimate cessation of the
penetration and distribution of Looney Tunes(TM) flavored milk products, as
well as the negotiation of new third party licenses to support the
development of new branded milk products, both domestically and
internationally. In addition, the Company's China business experienced
continuing difficulties with market penetration of its Looney(TM) branded
products, including what the Company perceived to be the licensor's
continuing overall lack of brand support in China.
15
In 2003, the Company's combined gross margin of $1,007,644 decreased
by $485,971, or 32.5%, from $1,493,615 in 2002.
Consolidated Cost of Goods Sold
The Company incurred cost of goods sold of $192,498 in 2003,
consisting of $127,647 in its U.S operations and $55,650 in Mexico and
Canada. The Company's cost of goods sold in 2003 decreased by $86,857, a
31% decrease compared to $279,355 in 2002, of which $184,022 was incurred
in the U.S. and $42,291 was incurred in the Canada and Mexico. The decrease
in the Company's cost of good sold resulted from decreased sales in 2003.
In Mexico, Canada, China and the United States, the Company's revenue
is generated in part by the sale of kits to dairy processors. Each kit
consists of flavor ingredients for the Company's Slammers(R) Looney
Tunes(TM) flavored milks and production rights to manufacture and sell the
milks. In line with the Company's revenue recognition policies, the Company
recognizes the full invoiced kit price as revenue and credits the processor
dairies with the cost of the raw flavor ingredients, which the Company
records as cost of goods sold. In addition to kit sales revenue, in the
United States the Company is responsible for the sale of finished
Slammers(R) Looney Tunes(TM) flavored milk (referred to as "units sales")
to retail outlets. For these unit sales, the Company also recognizes as
revenue the difference between the prices charged by the processor dairies
to produce the milks and the price that the Company charges to the retail
outlets that purchase the milks directly from the processor dairies. Since
the Company benefits from only the difference between two prices, it does
not record any costs of goods sold against this revenue event.
Segmented revenues and costs of goods sold (2003 and 2002)
The following table presents revenue by source and type against costs
of goods sold, as well as combined gross revenues and gross margins. China
sales are attributed to the Company's wholly owned Chinese subsidiary,
China Premium Food Corp. (Shanghai) Co., Ltd.; the Company's North America
operations generated the remaining revenue. Revenues from Canada are
generated by kit sales to Farmers Dairy, a Halifax dairy processor.
Revenues from Mexico are generated from kit sales to Neolac, a dairy
processor in central Mexico. In the United States, revenues are generated
by kit sales to Parmalat, which is responsible for marketing and sales and
kit sales to two dairy processors that produce extended shelf life and
aseptic long life Slammers(R) Looney Tunes(TM) product. Revenues from these
sales are recorded under "US Kit Sales" on the accompanying tables, and the
Company's revenue from the sale of ESL and aseptic is recorded as "Unit
Sales" on the following table:
United Total
2003 States Canada Mexico China Company
------ ------ ------ ----- -------
Revenue - unit sales $ 356,985 $ - $ - $ - $ 356,985
Revenue - net kit sales 2,737 - - - 2,737
Revenue - gross kit sales 629,999 43,745 145,362 21,314 840,420
--------- -------- -------- ------- ----------
Total revenue 989,721 43,745 145,362 21,314 1,200,142
Cost of goods sold (127,647) (10,403) (45,247) (9,201) (192,498)
--------- -------- -------- ------- ----------
Gross margin $ 862,074 $ 33,342 $100,115 $12,113 $1,007,644
========= ======== ======== ======= ==========
16
United Total
2002 States Canada Mexico China Company
------ ------ ------ ----- -------
Revenue -unit sales $ 232,595 $ - $ - $ - $ 232,595
Revenue -net kit sales 433,118 - - - 433,118
Revenue -gross kit sales 849,404 112,700 90,025 55,128 1,107,257
---------- -------- -------- -------- ----------
Total revenue 1,515,117 112,700 90,025 55,128 1,772,970
Cost of goods sold (184,022) (23,511) (18,780) (53,042) (279,355)
---------- -------- -------- -------- ----------
Gross margin $1,331,095 $ 89,189 $ 71,245 $ 2,086 $1,493,615
========== ======== ======== ======== ==========
United States (Jasper, Shamrock and Parmalat Sales)
---------------------------------------------------
Revenues in 2003 from kit sales in the United States decreased 50%
from approximately $1,282,500 in 2002 to approximately $632,700 in 2003. In
addition to kit sales, in 2003 the Company had revenues of approximately
$357,000 from selling finished product unit sales to retail outlets, a
53.5% increase of $124,390 from $232,595 in 2002. The decrease in revenues
from kit sales was the result of two factors:
* the reduction and ultimate cessation of the penetration and
distribution of Looney Tunes(TM) flavored milk products, which
resulted from the increasing weakness of the Looney Tunes(TM) brand,
and
* the Company's transition away from Looney Tunes(TM) to the
development of other branded flavored milk products, which resulted
in a period during which processors did not purchase kits owing to
the Company's decrease in and ultimate cessation of sales activities
for the Looney Tunes(TM) product, while generating marketing interest
in the new product line.
The increase in unit sales in 2003 was the result of the
implementation of greater efficiencies in the production and distribution
of the branded flavored milk and the reduced necessity to pay "slotting
fees" to already established wholesale customers. In 2002, certain
production/distribution costs and entry level slotting fees reduced the
gross revenue reported by the Company for unit sales owing to "contra-
revenue" accounting considerations.
In 2003, the Company's gross margin for U.S. sales of $862,074
decreased by $469,021, or by 35.2%, from $1,331,095 in 2002. The decrease
in gross profit was the result of the decrease in overall sales, as
discussed above.
Mexico and Canada
-----------------
Revenues in 2003 from kit sales in Mexico increased 61% from
approximately $90,000 in 2002 to approximately $145,300 in 2003. The
increase was the result of greater market penetration and brand awareness
in Mexico. The Company incurred cost of goods sold of approximately $45,000
in 2003 in connection with its Mexico sales, a 141% increase from
approximately $19,000 in 2002. This increase is consistent with the
increase in sales volume.
17
In 2003, the Company's gross profit of approximately $ 100,000 for
kit sales in Mexico increased by $29,000, or 41%, from approximately
$71,000 in 2002. The increase in gross profit is consistent with the
increase in sales volume.
Canada sales decreased 61% from approximately $113,000 in 2002 to
approximately $44,000. The decrease in sales was the result of lower
margins experienced by the Canadian processor, with commensurately fewer
resources available for marketing efforts directed at brand growth. The
Company incurred cost of goods sold of approximately $10,400 in 2003 in
connection with its Canada sales, a 56% decrease from approximately $23,500
in 2002. This decrease is consistent with the decrease in sales volume.
In 2003, the Company's gross profit of approximately $ 33,300 for kit
sales in Canada decreased by $55,700, or 63%, from approximately $89,000 in
2002. The decrease in gross profit is consistent with the decrease in sales
volume.
China
-----
Revenues in 2002 from kit sales in China decreased 61% from
approximately $55,000 in 2002 to approximately $21,300 in 2003. The
decrease was the result of the lack of sales in the retail area owing to
competition, poor brand support and production issues related to SARS. The
Company incurred costs of goods sold of approximately $9,200 in 2003 in
connection with its China sales, an 83% decrease from approximately $53,000
in 2002. This decrease is consistent with the decrease in sales volume.
In 2003, the Company's gross profit of approximately $12,000 for
sales in China increased by approximately $10,000, or 481%, from a gross
profit of approximately $2,000 in 2002.
Consolidated Operating Expense
The Company incurred selling expenses in 2003 of approximately
$1,740,000. The Company's selling expense increased in 2003 by
approximately $964,000, a 124% increase compared to selling expense of
approximately $776,000 in 2002. The increase in selling expenses in 2003
was due in part to the fact that the Company continues to implement its
refined business plan in the U.S. with respect to unit sales, where the
majority of the selling expenses are incurred. Of the increase of $964,000,
approximately $232,000 was incurred for freight and delivery expense,
approximately $35,000 was related to marketing, approximately $380,000 for
various reclamation costs and approximately $320,000 for the write off of
product packaging costs resulting from the discontinuance of the Warner
Bros. Looney Tunes(TM) branded products. As a percentage of total revenue,
the Company's selling expense increased from approximately 44% of total
revenue in 2002 to approximately 145% of total revenue in 2003. The
increase was in part due to the increase in reclamation costs in 2003.
The Company incurred product development costs in 2003 of
approximately $5,500. Product development expenses in 2003 decreased by
approximately $233,728, or 98% compared to approximately $239,000 in 2002.
The decrease was mainly the result of developing two new products and
corresponding new packaging designs in 2002.
The Company incurred general and administrative expenses in 2003 of
approximately $2,250,000 consisting of $2,133,400 in its North America
Bravo! operations and $116,278 in its China operations. The Company's
general and administrative expenses in 2003 decreased by approximately
$1,366,000, a 38% decrease compared to approximately $3,616,000 in 2002, of
which approximately $3,424,000 was incurred in the Company's North America
Bravo! operations and approximately $192,000 was incurred in
18
China. The decrease of approximately $1,290,000 in general and
administrative expenses in the Company's North America Bravo! operations in
2003 is the result of a reduction in expenses, including management
salaries and the reclassification of certain expense items as selling
expenses that were reported for a portion of 2002 as general and
administrative expenses. At the end of the first quarter 2003, two members
of senior management left the Company and were not replaced, and in the
last two quarters of 2003, three management personnel took an average 7%
voluntary reduction in salary. As a percentage of total revenue, the
Company's general and administrative expenses decreased from 204% in 2002
to 187% in 2003 due to the reduction of 2003 expenses.
Interest Expense
The Company incurred net interest expense in 2003 of approximately
$29,500,. The Company's interest expense increased by approximately $6,500,
a 29% increase, compared to approximately $23,000 in 2002. The increase of
$6,500 was due to outstanding and additional loans in 2003.
Loss Per Share
The Company recorded accrued dividends for approximately $902,000,
including deemed dividends, to various series of preferred stock during
2003. Compared to the total accrued dividends on a consistent basis, the
Company's accrued dividends decreased by approximately $110,000 due
primarily to the conversion of preferred stock in 2003. With the decrease
in net loss before accrued dividends of approximately $143,000, the
Company's current year loss per share was $0.15 per share. Compared to loss
per share of $0.23 in 2002, the loss per share in 2003 decreased by $0.08,
a 35% decrease, mainly due to the increase of common stock in 2003 by
8,275,373 shares in the weighted average number of common shares
outstanding.
Liquidity and Capital Resources
As of December 31, 2003, the Company reported that net cash used in
operating activities was approximately $1,562,000, net cash provided by
financing activities was approximately $1,427,000 and net cash used in
investing activities was approximately $31,000. The Company had a negative
working capital of approximately $ 2,972,000 as of December 31, 2003.
Compared to approximately $1,605,000 of net cash used in operating
activities in 2002, the Company's current year net cash used in operating
activities decreased by approximately $42,000 due mainly to the fact that
the Company used more equity to pay service providers in lieu of cash
payment in 2003. Included in the net loss in 2003 were depreciation and
amortization and stock compensation of approximately $195,000, compared to
approximately $725,000 in 2002. This decrease was due to more amortization
of the Company's license agreements in 2002. Changes in accounts receivable
in 2003 resulted in a cash increase of approximately $210,000, compared to
a cash decrease in receivables of approximately $83,000 in 2002; the net
result was an increase of approximately $293,000. The changes in accounts
payable and accrued expenses in 2002 contributed to a cash increase of
approximately $294,000, whereas the changes in accounts payable and accrued
expenses in 2003 amounted to approximately $1,285,000. This was due to the
fact that the Company paid off less accounts payable and accrued
liabilities in 2003. The Company has adopted and will keep implementing
cost cutting measures to lower the Company's costs and expenses and, where
appropriate, to pay the Company's accounts payable and accrued liabilities
by using cash and equity instruments. The Company's cash flow generated
through operating activities was inadequate to cover all of the Company's
cash disbursement needs in 2003, and the Company had to rely on equity
financing to cover expenses.
19
The Company's cash used in investing activities for furniture and
equipment was approximately $31,000 in 2003 primarily for computer
equipment in the U.S., compared to disbursements of approximately $9,400 in
2002. The increase was the result of the need for new computers to take
advantage of the latest graphic display software technologies.
The Company's net cash provided by financing activities in 2003 was
approximately $1,427,000. New cash provided by financing activities in 2002
was approximately $1,606,000 for a net decrease of approximately $179,000.
The decrease was the result of the Company's limited ability to attract
financing sources in 2003. The Company raised $1,000,000 in 2003 through
the issuance of Series J convertible preferred stock, for which it recorded
a deemed dividend charge of approximately $367,000. The proceeds from this
financing were used to pay critical payables and for general working
capital, including the marketing of new Slammers(R) products in early 2003.
Short term debt in the aggregate of $550,000 obtained in 2003 was utilized
for general working capital.
Going forward, the Company's primary requirements for cash consist of
(1) the continued development of the Company's business model in the United
States and on an international basis; (2) general overhead expenses for
personnel to support the new business activities; and (3) development,
launch and marketing costs for the Company's line of new aseptic branded
flavored milk products. The Company estimates that its need for financing
to meet cash needs for operations will continue to the fourth quarter of
2004, when cash supplied by operating activities will approach the
anticipated cash requirements for operation expenses. The Company
anticipates the need for additional financing in 2004 to reduce the
Company's liabilities, assist in marketing and to improve shareholders'
equity status. No assurances can be given that the Company will be able to
obtain additional financing or that operating cash flows will be sufficient
to fund the Company's operations.
The Company currently has monthly working capital needs of
approximately $220,000. The Company will continue to incur significant
selling and other expenses in 2004 in order to derive more revenue in
retail markets, through the introduction and ongoing support of its new
products. Certain of these expenses, such as slotting fees and freight
charges, will be reduced as a function of unit sales costs as the Company
expands its sales markets and increases its sales within established
markets. Freight charges will be reduced as the Company is able to ship
more full truck-loads of product given the reduced per unit cost associated
with full truck loads versus less than full truck loads. Similarly,
slotting fees, which are paid to warehouses or chain stores as initial set
up or shelf space fees, are essentially one-time charges per new customer.
Slotting fees reduced the Company's unit sales revenue by approximately
$50,000, marketing allowances in connection with the Company's kit sales
reduced revenues by approximately $47,000 in 2004. A continued increase in
sales to existing customers increases the Company's gross margins on those
sales. The Company believes that along with the increase in the Company's
unit sales volume, the average unit selling expense and associated costs
will decrease, resulting in gross margins sufficient to mitigate the
Company's cash needs. In addition, the Company is actively seeking
additional financing to support its operational needs and to develop an
expanded promotional program for the Company's products.
The Company is continuing to explore new points of sale for its
branded flavored milk. Presently, the Company is aggressively pursuing the
school and vending market through trade/industry shows and individual
direct contacts. The implementation of such a school base program, if
viable, could have an impact on the level of the Company's revenue during
2004. Similarly, the Company expects that the greater control over sales
resulting from its refined business model and the anticipated expansion
into bodega stores as well as national chains, such as 7-Eleven, will have
a positive impact on revenues in the second quarter of 2004.
In the third quarter 2003, the Company commenced an analysis of the
Looney Tunes(TM) brand performance within the context of the possible
renewal of its Warner Bros. licenses for United States,
20
Mexico, China and Canada. In the fourth quarter 2003, the Company concluded
that, as a function of the sales of flavored milks, the Looney Tunes(TM)
brand has not supported the guaranteed royalty structure required by Warner
Bros. for its licenses. In the fourth quarter 2004, the Company decided not
to renew its license agreements with Warner Bros., and began to develop new
products in anticipation of the consummation of other license relationships
with Marvel Comics and MoonPie for co-branded flavored milk, as well as a
new single Slammers(R) brand. The Company has developed new aseptic
products in anticipation of these licenses and its own singular brand. The
Company plans to launch the following new products in the second quarter
2004.
Brand Marvel-Slammers Moon Pie-Slammers Slim Slammers Pro-Slammers
----------------------------------------------------------------------------------------------------------------
Item Ultimate Milkshake Flavored milk; Low calorie, no Protein Shake
reduced fat 2% milk sugar added, low
carb 1% milk
----------------------------------------------------------------------------------------------------------------
Licensed Marvel Super Hero MoonPie logo and Slim Slammers Extreme Sports
Property comic book characters trade dress, and trademark athletes, and Pro
and Slammers mark Slammers mark (owned by Slammers mark
(owned by Bravo! Foods) (owned by Bravo! Bravo! Foods) (owned by Bravo!
Foods) Foods)
----------------------------------------------------------------------------------------------------------------
Packaging 16 oz bottles; 11.2 oz 16 oz bottles; 11.2 oz 16 oz bottles 16 oz bottles; 11.2
Tetra Prisma Tetra Prisma oz Tetra Prisma
----------------------------------------------------------------------------------------------------------------
Description Whole milk shake; 5 Chocolate and banana Chocolate Fudge Double protein
flavors; vitamin flavors; fortified with and French shake; 4 flavors;
fortification matches 10 essential vitamins Vanilla; calcium fortified with 10
Marvel Super Hero added essential vitamins
powers
----------------------------------------------------------------------------------------------------------------
Coincident with these new licenses, the Company executed a production
agreement with Saudia Dairy & Foodstuff Company, one of the largest Middle
East dairy processors, headquartered in Jeddah, Saudi Arabia. SADAFCO will
process the Company's Slammers (R) branded flavored milks, including the
Marvel line, for distribution in nine Middle East countries. SADAFCO has
the capacity to process the Company's branded milk products for
distribution throughout the European Community. The Company's international
business is facilitated by AsheTrade, the Company's international agent,
with offices in Miami, FL and Jeddah, Saudi Arabia.
DEBT STRUCTURE
As of December 31, 2003 the Company held three licenses for Looney
Tunes(TM) characters and names from Warner Bros. The Company accounts for
the guaranteed royalty payments under these licenses as debt and licensing
rights as assets. The following is a summary of the balances owed as of
December 31, 2003 and the license expiration dates:
Amount Expiration
License Guaranty Balance Due Past Due Date
-----------------------------------------------------------------
U.S. License $500,000 $ - $ - 12/31/03
U.S. TAZ $250,000 $ - $ - N/A
China $400,000 $147,115 $147,115 10/29/03
Mexico $145,000 $ - $ - 05/31/04
Canada $ 32,720 $ - $ - 03/31/04
21
The China license had been extended to October 29, 2003 by agreement
of the parties, and the Company did not seek another license from Warner
Bros. for China. This decision was based upon the lack of sales in the
Company's China markets and what the Company perceived to be the licensor's
continuing overall lack of brand support in China. The Company and Warner
Bros. dispute the contractual necessity of the payment of the balance owed
on the China license as a result of the above circumstances.
International Paper
-------------------
During the process of acquiring from American Flavors China, Inc. the
52% of equity interest in Hangzhou Meilijian, the Company issued an
unsecured promissory note to assume the American Flavors' debt owed to a
supplier, International Paper. The face value of that note was $282,637 at
an interest rate of 10.5% per annum, without collateral. The note has 23
monthly installment payments of $7,250 with a balloon payment of $159,862
at the maturity date of July 15, 2000. On July 6, 2000, International Paper
agreed to extend the note to July 1, 2001, and the principal amount was
adjusted due to different interest calculation. International Paper imposed
a charge of $57,000 to renegotiate the note owing the failure of Hangzhou
Meilijian to pay for certain packing material, worth more than $57,000 made
to order in 1999. The current outstanding balance on this note is $187,743.
The Company is delinquent in its payments under this note.
Individual Loans
----------------
On November 6 and 7, 2001, respectively, the Company received the
proceeds of two loans aggregating $100,000 from two offshore lenders. The
two promissory notes, one for $34,000 and the other for $66,000, were
payable February 1, 2002 and bear interest at the annual rate of 8%. These
loans are secured by a general security interest in all the Company's
assets. On February 1, 2000, the parties agreed to extend the maturity
dates until the completion of the anticipated Series H financing. On June
18, 2002, the respective promissory note maturity dates were extended by
agreement of the parties to December 31, 2002. On June 18, 2002, the
Company agreed to extend the expiration dates of warrants issued in
connection with the Company's Series D and F preferred until June 17, 2005
and to reduce the exercise price of certain of those warrants to $1.00, in
partial consideration for the maturity date extension. The holders of these
notes have agreed to extend the maturity dates on a demand basis.
On August 27, 2003, the Company received the proceeds of a loan from
Mid-Am Capital, L.L.C., in the amount of $150,000. The note is payable
November 25, 2003 and bears interest at the annual rate of 10%. This loan
is secured by a general security interest in all the Company's assets. On
April 2, 2004, this note was paid and cancelled.
EFFECTS OF INFLATION
The Company believes that inflation has not had any material effect
on its net sales and results of operations.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
The Company's Shanghai subsidiary is located in China. It buys and
sells products in China using Chinese renminbi as the functional currency.
Based on Chinese government regulation, all foreign currencies under the
category of current account are allowed to freely exchange with hard
currencies. During the past two years of operation, there were no
significant changes in exchange rates. However, there is no assurance that
there will be no significant change in exchange rates in the near future.
22
BRAVO! FOODS INTERNATIONAL CORP.
AND SUBSIDIARY
____________________________
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 and 2003
____________________________
F-1
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants - Current F-3
Report of Independent Certified Public Accountants - Predecessor F-4
Consolidated Financial Statements
Balance Sheets F-5
Statements of Operations and Comprehensive Loss F-7
Statements of Capital Deficit F-8
Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-10
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Bravo! Foods International Corp.
North Palm Beach, Florida
We have audited the accompanying balance sheet of Bravo! Foods International
Corp. as of December 31, 2003 and the related statements of operations
and comprehensive loss, shareholders' deficit and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bravo! Foods International
Corp. as of December 31, 2003 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company has incurred a net loss of $3,016,987 for the year
ended December 31, 2003 and as of that date had a working capital deficiency
of $2,971,505 and a shareholders' deficit of $3,719,291. The Company also
is delinquent in payment of certain debts. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the
Company cannot continue in existence. Management's actions in regard to these
matters are more fully described in Note 1.
------------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
April 2, 2004
F-3
Report of Independent Certified Public Accountants
To the Board of Directors
Bravo! Foods International Corp.
We have audited the accompanying consolidated balance sheets of Bravo! Foods
International Corp. and subsidiary as of December 31, 2002, and the related
consolidated statements of operations and comprehensive loss, shareholders'
deficit and cash flows for the year ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bravo!
Foods International Corporation and subsidiary as of December 31, 2002, and
the results of their operations and their cash flows for the year ended
December 31, 2002 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
the summary of accounting policies in the consolidated financial statements,
the Company has a limited operating history, has incurred substantial losses
since its inception, and at December 31, 2002, has a working capital
deficiency, is delinquent on certain of its debts and has negative net
assets, all of which 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 same section. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Los Angeles, California
March 14, 2003
F-4
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
2002 2003
-------- --------
Assets
Current assets:
Cash and cash equivalents $224,579 $ 58,859
Accounts receivable, net 236,149 25,921
Other receivables 14,662 6,331
Advance to vendor 8,719 -
Inventories 55,062 54,995
Prepaid expenses 7,605 201,617
-------- --------
Total current assets 546,776 347,723
Furniture and equipment, net 89,602 68,623
License rights, net of accumulated amortization 88,104 24,065
Deferred product development costs - 41,711
Deposits 15,000 10,736
-------- --------
Total assets $739,482 $492,858
======== ========
See accompanying notes
F-5
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2002 2003
------------ ------------
Liabilities and Capital Deficit
Current liabilities:
Note payable to International Paper $ 187,743 187,743
Notes payable to Alpha Capital 100,000 100,000
Notes payable to Mid-Am Capital LLC - 150,000
License fee payable to Warner Brothers 270,053 147,115
Accounts payable 1,039,313 2,123,705
Accrued liabilities 409,615 610,665
------------ ------------
Total current liabilities 2,006,724 3,319,228
Dividends payable 266,666 582,823
Other notes payable - 310,098
------------ ------------
Total liabilities 2,273,390 4,212,149
------------ ------------
Commitments and contingencies
Capital Deficit:
Series B convertible, 9% cumulative, and redeemable preferred
stock, stated value $1.00 per share, 1,260,000 shares authorized,
107,440 shares issued and outstanding, redeemable at $107,440 107,440 107,440
Series F convertible and redeemable preferred stock, stated value
$10.00 per share, 130,515 shares issued and outstanding 1,205,444 1,205,444
Series G convertible, 8% cumulative and redeemable preferred stock,
stated value $10.00 per share, 70,208 and 58,810 shares issued
and outstanding 624,115 520,604
Series H convertible, 7% cumulative and redeemable preferred stock,
stated value $10.00 per share, 175,500 and 165,500 shares issued
and outstanding 939,686 895,591
Series I convertible, 8% cumulative and redeemable preferred stock,
stated value $10.00 per share, 30,000 shares issued
and outstanding 72,192 72,192
Series J convertible, 8% cumulative and redeemable preferred stock,
stated value $10.00 per share, 100,000 and 200,000 shares issued
and outstanding 854,279 1,854,279
Common stock, par value $0.001 per share, 50,000,000 shares
authorized, 25,732,854 and 28,047,542 shares issued and outstanding 25,730 28,045
Additional paid-in capital 20,266,463 21,144,896
Accumulated deficit (25,629,016) (29,548,471)
Accumulated other comprehensive loss - translation adjustment (241) 689
------------ ------------
Total capital deficit (1,533,908) (3,719,291)
------------ ------------
Total liabilities and capital deficit $ 739,482 492,858
============ ============
See accompanying notes
F-6
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Years ended December 31,
---------------------------
2002 2003
----------- -----------
Revenue - unit sales $ 232,595 $ 356,985
Revenue - net kit sales 433,118 2,737
Revenue - gross kit sales 1,107,257 840,420
----------- -----------
Total revenue 1,772,970 1,200,142
Cost of sales (279,355) (192,498)
----------- -----------
Gross margin 1,493,615 1,007,644
Selling expense 776,090 1,739,850
Product development 239,298 5,570
General and administrative expense 3,615,674 2,249,678
----------- -----------
Loss from operations (3,137,447) (2,987,454)
Other income (expense):
Interest expense, net 22,984 29,533
----------- -----------
Loss before income taxes (3,160,431) (3,016,987)
Provision for income taxes - -
----------- -----------
Net loss (3,160,431) (3,016,987)
Dividends accrued for Series B preferred stock (9,803) (9,669)
Dividends accrued for Series D preferred stock (18,499) -
Dividends accrued for Series G preferred stock (60,279) (46,457)
Dividends accrued for Series H preferred stock (312,203) (120,818)
Dividends accrued for Series I preferred stock (302,610) (24,000)
Dividends accrued for Series J preferred stock (307,765) (138,960)
Deemed dividend on Series J preferred stock - (367,211)
Deemed dividend on Series F preferred stock - (195,353)
----------- -----------
Net loss applicable to common shareholders $(4,171,590) $(3,919,455)
=========== ===========
Weighted average number of common shares outstanding 18,503,849 26,779,222
=========== ===========
Basic and diluted loss per share $ (0.23) $ (0.15)
=========== ===========
Comprehensive loss and its components consist of the following:
Net loss $(3,160,431) $(3,016,987)
Foreign currency translation adjustment 231 930
----------- -----------
Comprehensive loss $(3,160,200) $(3,016,057)
=========== ===========
See accompanying notes
F-7
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
STATEMENTS OF CAPITAL DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002 and 2003
Preferred Stock Common Stock Additional Accumulated
-------------------- -------------------- Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Loss Total
------- ---------- ---------- ------- ----------- ------------ ------------- -----------
Balance, December 31, 2001 568,774 $3,872,078 14,681,008 $14,681 $16,028,980 $(21,457,425) $(472) $(1,542,158)
Issuance of common stock
for service - - 999,112 999 278,752 - - 279,751
Stock issued for options
exercised - - 1,000,000 1,000 329,000 - - 330,000
Conversion of preferred
stock (155,111) (1,469,880) 8,952,734 8,950 1,648,516 - - 187,586
Issuance of Series H
preferred stock 70,000 474,487 100,000 100 225,513 - - 700,000
Issuance of Series I
preferred stock 30,000 72,192 - - 215,796 - - 287,988
Issuance of Series J
preferred stock 100,000 854,279 - - 145,721 - - 1,000,000
Issuance of options
to consultants - - - - 161,612 - - 161,612
Extension of option terms - - - - 391,345 - - 391,345
Issuance of warrants
to a lender - - - - 4,051 - - 4,051
Beneficial conversion
feature of Series H
preferred stock - - - - 236,764 (236,764) - -
Beneficial conversion
feature of Series I
preferred stock - - - - 294,793 (294,793) - -
Beneficial conversion of
Series J preferred stock - - - - 305,721 (305,721) - -
Accrued Dividends -
Series B - - - - - (9,803) - (9,803)
Accrued Dividends -
Series D - - - - - (18,499) - (18,499)
Accrued Dividends -
Series G - - - - - (60,279) - (60,279)
Accrued Dividends -
Series H - - - - - (75,439) - (75,439)
Accrued Dividends -
Series I - - - - - (7,817) - (7,817)
Accrued Dividends -
Series J - - - - - (2,044) - (2,044)
Net Loss for 2002 - - - - - (3,160,431) - (3,160,431)
Translation Adjustment - - - - - - 231 231
------- ---------- ---------- ------- ----------- ------------ ----- -----------
Balance, December 31, 2002 613,663 3,803,156 25,732,854 25,730 20,266,464 (25,629,015) (241) (1,533,906)
Issuance of common stock
for services - - 100,000 100 27,900 - - 28,000
Conversion preferred stock (21,398) (147,606) 1,814,688 1,815 169,538 - - 23,747
Issuance of Series J
preferred stock 100,000 1,000,000 - - 367,211 (367,211) - 1,000,000
Finders' fees
for financing - - 400,000 400 65,029 - - 65,429
Issuance of warrants
for convertible notes - - - - 49,474 - - 49,474
Beneficial conversion
feature of convertible
notes - - - - 40,427 - - 40,427
SEC registration costs
for financing - - - - (36,500) - - (36,500)
Conversion price
changes for warrants - - - - 195,353 (195,353) - -
Accrued Dividends -
Series B - - - - - (9,669) - (9,669)
Accrued Dividends -
Series G - - - - - (46,457) - (46,457)
Accrued Dividends -
Series H - - - - - (120,818) - (120,818)
Accrued Dividends -
Series I - - - - - (24,000) - (24,000)
Accrued Dividends -
Series J - - - - - (138,961) - (138,961)
Net loss for 2003 - - - - - (3,016,987) - (3,016,987)
Translation adjustment - - - - - - 930 930
------- ---------- ---------- ------- ----------- ------------ ----- -----------
Balance, December 31, 2003 692,265 $4,655,550 28,047,542 $28,045 $21,144,896 $(29,548,471) $ 689 $(3,719,291)
======= ========== ========== ======= =========== ============ ===== ===========
See accompanying notes
F-8
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------
2002 2003
----------- -----------
Cash flows from operating activities:
Net loss $(3,160,431) $(3,016,987)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 671,243 101,207
Stock issuance for compensation and financing finder's fee 54,600 93,428
Options issued for compensation 557,008 -
Registration costs for financing - (36,500)
Loss on disposal of fixed assets - 15,134
Increase (decrease) from changes in:
Accounts receivable (83,467) 210,228
Other receivable (2,484) 8,331
Advance to vendors 12,279 8,719
Inventories 36,341 67
Prepaid expenses 16,501 (189,748)
Accounts payable and accrued expenses 293,652 1,285,443
Deferred product and development costs - (41,711)
----------- -----------
Net cash used in operating activities (1,604,758) (1,562,389)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (9,422) (31,323)
----------- -----------
Net cash used in investing activities (9,422) (31,323)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Series H preferred stock 700,000 -
Proceeds from issuance of Series I preferred stock 287,988 -
Proceeds from issuance of Series J preferred stock 1,000,000 1,000,000
Proceeds from exercise of stock options 330,000 -
Short term borrowing - 150,000
Notes payable - 400,000
Borrowings repayment (250,000) -
Payment of note payable, bank loan and license fee payable (461,500) (122,938)
----------- -----------
Net cash provided by financing activities 1,606,488 1,427,062
----------- -----------
Effect of changes in exchange rate on cash 231 930
----------- -----------
Net (decrease) in cash and cash equivalents (7,461) (165,720)
Cash and cash equivalents, beginning of year 232,040 224,579
----------- -----------
Cash and cash equivalents, end of year $ 224,579 $ 58,859
=========== ===========
Supplemental cash flow information
Cash paid during the year for interest $ 7,988 $ -
=========== ===========
Non-cash investing and financing activities:
Stock granted in exchange of debt and payables and services $ 225,151 $ 93,428
Preferred stock and accrued dividends converted to common stock $ 1,057,466 $ 171,353
Beneficial conversion feature $ 837,278 $ 133,611
=========== ===========
See accompanying notes
F-9
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization, Businesses and Going Concern Uncertainty
Bravo! Foods International Corp. (the Company), formerly known as China
Premium Food Corporation, was incorporated under the laws of the State of
Delaware on April 26, 1996. The Company is engaged in the sale of flavored
milk products and flavor ingredients in the United States, Puerto Rico, the
Middle East, Canada and Mexico and the co-production, marketing and
distribution of branded dairy products in the People's Republic of China.
In December 1999, the Company obtained Chinese government approval for the
registration of China Premium Food Corp (Shanghai) Co. Ltd., a wholly owned
subsidiary, in the Wai Gao Qiao free trade zone in Shanghai, China. This
subsidiary was formed to import, export and distribute food products and
flavored milk ingredients on a wholesale level in China. The Company has
announced that it plans to cease all business activities of this Chinese
subsidiary in the second quarter 2004.
Going Concern Uncertainty
As shown in the accompanying consolidated financial statements, the Company
has suffered operating losses and negative cash flow from operations since
inception and has an accumulated deficit of $29,548,471, a capital deficit of
$3,719,291, negative working capital of $2,971,505 and is delinquent on
certain of its debts at December 31, 2003. Further, the Company's auditors
stated in their report on the Company's Consolidated Financial Statements for
the year ended December 31, 2003, that these conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management
plans to increase gross profit margins in its U.S. business and obtain
additional financing and is in the process of repositioning its products with
the anticipated launch of four new product lines in the second quarter 2004.
While there is no assurance that funding will be available or that the
Company will be able to improve its profit margins, the Company is continuing
to actively seek equity and/or debt financing and has raised $1,350,000 in
the fourth quarter 2003 and first quarter 2004. No assurances can be given
that the Company will be successful in carrying out its plans. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of Bravo! Foods
International Corp. and its wholly owned subsidiary China Premium Food
Corp (Shanghai) Co., Ltd. (the "Company"). All significant intercompany
transactions have been eliminated.
Foreign Currency Transactions and Translations
Transaction gains and losses result from a change in exchange rates between
the functional currency and the currency in which a foreign currency
transaction is denominated. They represent an increase or decrease in (a) the
actual functional current cash flows realized upon settlement of foreign
currency transactions and (b) the expected functional currency cash flows on
unsettled foreign currency transactions. All transaction gains and losses are
included in other income or expense.
Assets and liabilities of China Premium Food Corp. (Shanghai) Co., Ltd. are
translated into the US dollar at the prevailing exchange rate in effect at
each period end. Revenue and expenses are translated into the US dollar at
the average exchange rate during the reporting period. Contributed capital is
translated into the US dollar at the historical exchange rate when capital
was injected. Any difference resulting from using the current
F-10
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rate, historical rate and average rate in determination of retained earnings
is accounted for as a translation adjustment and reported as part of
comprehensive income or loss in the equity section.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Among the more significant
estimates included in these financial statements are the estimated allowance
for doubtful accounts receivable and the deferred income tax asset allowance.
Actual results could differ materially from those estimates.
Fair Value of Financial Instruments
The carrying amount of cash, receivables, accrued liabilities and notes
payable are reasonable estimates of their fair value because of the short
maturity of these items.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
Accounts Receivable and Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk primarily consist of cash and accounts receivable.
During the normal course of business, the Company extends unsecured credit to
its customers who are located in various geographical areas. Typically credit
terms require payments to be made by the thirtieth day following the sale.
The Company regularly evaluates and monitors the creditworthiness of each
customer on a case-by-case basis. The Company provides an allowance for
doubtful accounts based on its continuing evaluation of its customers' credit
risk. As of December 31, 2003, the allowance of doubtful accounts aggregated
$39,226. The Company maintains its cash accounts with high credit quality
financial institutions. The FDIC insures total cash balances up to $100,000
per bank. Cash balances in any one financial institution were not in excess
of this limit at December 31, 2003.
Inventory
Inventory, which consists primarily of packing materials and other flavor
ingredients, is stated at the lower of cost on the first-in, first-out method
or market.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is computed
primarily utilizing the straight-line method over a period of seven years for
furniture and five years for equipment.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Additions and betterment to property and equipment are capitalized.
When assets are disposed of, the related cost and
F-11
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accumulated depreciation thereon are removed from the accounts, and any
resulting gain or loss is included in the statement of operations.
Impairment of Long-Lived Assets
Effective January 1, 2002, the Company began applying the provisions of
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable through the estimated undiscounted cash flows expected to
result from the use and eventual disposition of the assets. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by
which the carrying value exceeds the fair value. During 2002, the Company
determined that license rights in China having a net book value of $39,286
were impaired.
Revenue Recognition
The Company sells flavor ingredients and production rights (collectively
referred to as "kits") to processor dairies in the U.S., China, Canada and
Mexico and also sells flavored milk products in the U.S. Revenue is
recognized when the goods are shipped and title and the risk and reward of
ownership have been passed to the customer and possible return of goods can
be reasonably estimated. The criteria to meet this guideline are: 1)
persuasive evidence of an arrangement exists, 2) delivery has occurred or
services have been rendered, 3) the price to the buyer is fixed or
determinable and 4) collectibility is reasonably assured.
The Company follows the final consensus reached by the Emerging Issues Task
Force (EITF) 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent". Pursuant to EITF 99-19, sales of kits made directly to customers by
the Company are reflected in the statement of operations on a gross basis,
whereby the total amount billed to the customer is recognized as revenue.
Sales of kits made through intermediaries, in which the Company's role is
similar to that of an agent, are reflected on a net basis, which represents
the amount earned by the Company in the transaction.
The Company has production agreements with processors of dairy products
pursuant to which the Company sells flavored milk products to retail stores
(referred to as "unit sales"). The Company benefits from the difference
between the prices charged by the dairy processor to produce the product for
the Company and the price paid by retail stores to purchase the product. The
Company bears the responsibility for paying food brokers fees, transportation
and delivery expenses and sample expense, etc. The Company recognizes revenue
on the net basis and recognizes the aforementioned expenses as selling
expenses.
Shipping and Handling Costs
Shipping and handling costs incurred by the Company are included in selling
expenses and aggregated $273,362 and $504,971 for 2002 and 2003,
respectively.
Advertising and Promotion Costs
Advertising and promotion costs, which are included in selling expenses, are
expensed as incurred and aggregated $304,084 and $342,367 for 2002 and 2003,
respectively.
F-12
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes using the liability method, which
requires an entity to recognize deferred tax liabilities and assets. Deferred
income taxes are recognized based on the differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years. Further,
the effects of enacted tax laws or rate changes are included as part of
deferred tax expense or benefit in the period that covers the enactment
date. A valuation allowance is recognized if it is more likely than not that
some portion, or all, of a deferred tax asset will not be realized.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing loss
applicable to common stockholders by the weighted average number of common
shares outstanding for the period.
For the years ended December 31, 2002 and 2003, potential common shares
arising from the Company's stock options, stock warrants and convertible
preferred stock of 21,157,803 and 39,611,363, respectively, were not included
in the computation of diluted earnings per share because their effect was
antidilutive.
Stock-based Compensation
The Company has adopted the intrinsic value method of accounting for
employee stock options as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123)
and discloses the pro forma effect on net loss and loss per share as if the
fair value based method had been applied. For equity instruments, including
stock options, issued to non-employees, the fair value of the equity
instruments or the fair value of the consideration received, whichever is
more readily determinable, is used to determine the value of services or
goods received and the corresponding charge to operations.
The following table illustrates the effect on net loss and loss per share
as if the Company had applied the fair value recognition provision of SFAS
No. 123 to stock-based employee compensation.
Year ending December 31,
---------------------------
2002 2003
----------- -----------
Net loss applicable to common shareholders: as reported $(4,171,590) $(3,919,455)
Add: total stock based employee compensation expense
determined under fair value method for all awards - -
----------- -----------
Pro forma net loss $(4,171,590) $(3,919,455)
=========== ===========
Loss per share:
As reported $ (0.23) $ (0.15)
Pro forma $ (0.23) $ (0.15)
F-13
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
Adoption of SFAS 150
In May 2003, Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," was issued effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
adoption of SFAS No. 150 did not result in the reclassification of any
financial instruments in the Company's financial statements.
Adoption of SFAS 149
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued effective for contracts
entered into or modified after June 30, 2003, with certain exceptions. This
statement amends and clarifies financial accounting and reporting for
derivative instruments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activity." The Company does not
currently engage in hedging activities, and the adoption of this statement
did not have any effect on its financial statements.
Adoption of SFAS No. 148
In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for the Company's financial statements for
the year ending after December 15, 2002. As permitted by SFAS No. 148, the
Company has elected to retain the intrinsic value method of accounting for
stock-based awards granted to employees. Accordingly, the adoption of SFAS
No. 148 did not have a material effect on the Company's financial position or
results of operations.
Adoption of SFAS No. 146
In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for
Costs Associated with Exit or Disposal Activities," effective for activities
that are initiated after December 31, 2002, with early application
encouraged. This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The adoption of SFAS No. 146 is
not expected to have a material effect on the Company's financial position or
results of operations.
F-14
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adoption of SFAS No. 143
In June 2001, Financial Accounting Standards Board (FASB) issued Statement
No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations,"
effective for fiscal years beginning after June 15, 2002. The Statement
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The adoption of SFAS No. 143 is not
expected to have a material effect on the Company's financial position or
results of operations.
Adoption of FIN No. 46
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements."
FIN No. 46 explains how to identify variable interest entities and how an
enterprise assesses its interest in a variable entity to decide whether to
consolidate that entity. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among
parties involved. FIN No. 46 is effective immediately for variable interest
entities after January 31, 2003, and to variable interest entities in which
an enterprise obtained an interest after that date. FIN No. 46 applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The adoption of FIN No. 46 is not
expected to have a material effect on the Company's financial position and
result of operations.
Adoption of FIN No. 45
In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being
superseded. FIN No. 45 will affect leasing transactions involving residual
guarantees, vendor and manufacturer guarantees and tax and environmental
indemnities. All such guarantees will need to be disclosed in the notes to
the financial statements starting with the period ending after December 15,
2002. For guarantees issued after December 31, 2002, the fair value of the
obligation must be reported on the balance sheet. Existing guarantees will be
grandfathered and will not be recognized on the balance sheet. The Company
believes that there will be no impact on our financial position and results
of operations due to the application of FIN No. 45.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 2003 presentation.
F-15
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Fixed Assets
Fixed assets are comprised of the following:
2002 2003
--------- ---------
Furniture and fixtures $ 79,841 $ 79,841
Office equipment 164,099 166,179
Leasehold improvements 21,321 21,321
--------- ---------
265,261 267,341
Less: accumulated depreciation and amortization (175,659) (198,718)
--------- ---------
$ 89,602 $ 68,623
========= =========
Depreciation and amortization expense aggregated $42,919 and $37,168 for 2002
and 2003, respectively.
Note 3 - Licensing Agreements with Warner Brothers Consumer Products Co.
Licensing Agreement in China
On January 1, 1999, the Company entered into a licensing agreement (the
Original Agreement) with Warner Brothers Consumer Products Co. (Warner) for
the right to utilize Looney Tunes(TM) images and names, as defined in the
Agreement, on its products in Shanghai and Hangzhou, China. The Company
agreed to pay a 3% royalty fee on the net invoiced price of each licensed
article with a minimum guaranteed consideration of $300,000 of which
$45,000 was paid at inception of the Agreement, and the balance to be paid
in ten quarterly installments of $21,250 starting on September 30, 1999
with a final payment of $42,500 on or before March 31, 2002. The Company
recorded license rights of $300,000 and amortized the rights over a period
of three years.
On November 21, 2000, the Company entered into an amendment of the Original
Agreement with Warner. Per the amendment, the term of the agreement was
extended to June 30, 2003 with the guaranteed consideration being increased
to $400,000. The Original Agreement, as amended, was extended to October 29,
2003, at which time it expired. As of December 31, 2003, the outstanding
obligation under this agreement was $147,116.
The Company decided not to seek another license from Warner Bros. for China
beyond the October 2003 expiration based upon the lack of sales in the
Company's China markets and what the Company perceived to be the licensor's
continuing overall lack of brand support in China. The Company and Warner
Bros. dispute the contractual necessity of the payment of the balance owed on
the China license as a result of the above circumstances. As of December 31,
2003, the Company reserved $152,448 for this obligation, representing the
$147,116 balance of guaranteed royalties plus $5,332 for the legally
allowed default penalty.
Licensing Agreement in the United States
On July 26, 2000, the Company entered into a license agreement with Warner
Bros. and obtained rights to utilize Looney Tunes(TM) character images and
names in the U.S. in connection with specified categories of products sold by
Bravo!. The license agreement was originally effective from January 1, 2000
to December 31, 2002. In April 2002, the Company and Warner Bros. reached an
agreement to extend this license
F-16
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement until December 31, 2003. The Company recorded the gross amount of
$500,000 as licensing costs and an obligation for the licensing agreement of
$500,000 simultaneously.
In May 2002, the Company entered into a licensing agreement with Warner to
utilize licensed property in connection with the 2002 Taz Atti-Tour events
for the period March 13, 2002 to December 31, 2002. The Company recorded a
non-refundable minimum guaranteed payment of $250,000. The guaranteed payment
was amortized over the term of the license agreement. The Company recorded
amortization expense of $250,000 for the year ended December 31, 2002. At
December 31, 2002, $83,333 was due for payment under the terms of the
agreement, which was paid on February 26, 2003.
The history of the Company with Warner Bros. licenses, as a function of sales
of the flavored milks, has not supported the guaranteed royalty structure
required by Warner Bros. for its licenses. As a result, the Company decided
to exploit its own Slammers(R) brand, which has been developed in 2003, and
commenced negotiations for licenses with Marvel Comics and Moon Pie. For
these reasons, the Company decided not to accept the offer of Warner Bros. to
renew the U.S. license.
Licensing Agreement in Mexico
In September 2001, the Company entered into a licensing agreement with Warner
for the right to utilize Looney Tunes(TM) character images and names, as
defined in the agreement, on its products sold in Mexico. The Company agreed
to pay royalties of 5% on net sales, defined as the gross invoice price
billed to the dairy producing, distributing and selling the licensed
products, from June 1, 2001 through May 31, 2002; 7% on net sales from June
1, 2002 through May 31, 2003; and 10% on net sales from June 1, 2003 through
May 31, 2004; with a minimum total guaranteed consideration of $145,000.
The licensing agreement is effective through May 31, 2004. The Company
recorded license rights of $145,000 to be amortized over a period of three
years. Amortization expense for the year ended December 31, 2003 and 2003 was
$48,333 for each year. As of December 31, 2003, no outstanding obligation
remained under this agreement. Based upon the Company's analysis of the cost
of this license as a function of sales of the flavored milks, the Mexico
license will not by renewed by the Company.
Licensing Agreement in Canada
In May 2002, the Company entered into a licensing agreement with Warner to
utilize Looney Tunes(TM) characters and names on milk products sold in
specified retail outlets throughout Canada, for the period March 1, 2002 to
March 31, 2004. The Company recorded a license right of $32,720 upon
execution of the agreement. The guaranteed payment is amortized over the term
of the license agreement. The Company recorded amortization expense for the
year ended December 31, 2002 and 2003 of $13,088 and $15,706, respectively.
Based upon the Company's analysis of the cost of this license as a function
of sales of the flavored milks, the Canada license will not by renewed by the
Company.
Note 4 - Default of Note Payable to International Paper
In 1999, the Company issued a promissory note to assume existing debt owed by
its then Chinese joint venture subsidiary to a supplier, International Paper.
The face value of that unsecured note was $282,637 at an interest rate of
10.5% per annum. The note originally required 23 monthly payments of $7,250
and a balloon payment of $159,862 due on July 15, 2000. During 2000, the
Company negotiated an extension of this note to July 1, 2001. International
Paper imposed a charge of $57,000 to renegotiate the note, which
F-17
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount represents interest due through the extension date. The current
balance due on this note is $187,743 at December 31, 2003, all of which is
delinquent. The Company has not had any communication with International
Paper during the last three years. Although International Paper has not
pursued collection of the note, it is possible that they could do so in the
future and, if they do, such collection effort may have a significant adverse
impact on the liquidity of the Company. The Company has not accrued interest
as of December 31, 2002 and December 31, 2003.
Note 5 - Notes Payable to Individual Lenders
On November 6 and 7, 2001, respectively, the Company received the proceeds of
two loans aggregating $100,000 from two offshore lenders. The two promissory
notes, one for $34,000 and the other for $66,000, were payable on February 1,
2002 with interest at an annual rate of 8%. These loans are secured by a
general security interest in all the assets of the Company. These lenders
have agreed to extend the notes without default on a demand basis. Interest
accrued and unpaid as December 31, 2003 aggregated $17,380.
Note 6 - Capital Deficit
2002
During 2002, the Company issued 70,000 shares of its Series H convertible
preferred stock, having a conversion price of $0.40 per share of common
stock, and warrants for 1,750,000 shares at $0.50 per share. The Series H
convertible preferred stock and warrants were priced at $10.00 per unit, and
resulted in proceeds of $700,000 in cash. In accordance with EITF 00-27, the
Company allocated $225,513 to the warrants, $474,487 to the underlying
preferred stock and recorded deemed dividends of $236,764 related to the
beneficial conversion features.
In connection with the above private placement of Series H Preferred stock,
the Company issued 100,000 shares of common stock as finder fees.
On June 17, 2002, the Company issued 30,000 shares of its Series I
convertible and 8% cumulative and redeemable preferred stock and warrants for
2,000,000 shares of common stock at $0.50 per share, exercisable three years
from issue, to two sophisticated and accredited investors, pursuant to Rule
506, Regulation D and Section 4(2) of the Securities Act of 1933. The
conversion of the preferred into common stock shall be at a per common share
conversion price of either $0.40 or 75% of the average of the three lowest
closing bid prices for the thirty day period immediately preceding
conversion, at the option of the holder. The conversion price is subject to a
maximum of $0.50 per share and a minimum of $0.30 per share, which minimum
conversion price shall govern for the 270 days immediately following the
issue date of the Series I preferred shares. The minimum conversion price
shall be extended indefinitely upon the occurrence of certain defined events,
including the effectiveness of a registration statement for the resale of the
common stock underlying the preferred and a trading price of the Company's
common stock at $0.50 or higher for fifteen consecutive days. The Series I
convertible preferred stock and warrants were priced at $10.00 per unit, and
resulted in gross cash proceeds of $300,000, less expenses of $12,012.
In accordance with EITF 00-27, the Company allocated $215,796 to the 2 million
warrants and $72,192 to the underlying preferred stock and recorded deemed
dividends of $294,793 arising from a beneficial conversion feature.
On September 30, 2002, the Company issued 100,000 shares of non-voting Series
J Convertible and 8% cumulative and redeemable Preferred stock, having a
stated value of $10.00 per share, and common stock
F-18
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
warrants to Mid-Am Capital, L.L.C. ("Mid-Am") for the aggregate purchase
price of $1,000,000. Each preferred share is convertible to 40 shares of the
Company's common stock at a conversion price of $0.25 per share,
representing 4,000,000 shares of common stock underlying the preferred stock.
The issued warrants entitle the holder to purchase 25 shares of common stock
for each share of Series J Convertible Preferred stock issued at an exercise
price of $0.40 per common stock share, representing 2,500,000 shares of
common stock underlying the warrants. The warrants are exercisable for a
five-year period. This private offering was made to Mid-Am, an accredited
investor, pursuant to Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933. In accordance with EITF 00-27, the Company allocated
$145,721 to the warrants, $854,279 to preferred stock and recorded deemed
dividends of $305,721 arising from a beneficial conversion feature. The value
of the warrants was determined using the Black Scholes Option Pricing Model
with the following inputs: Expected Volatility of 34.11%, Risk Free Rate of
Return of 4.24%, No Dividends and an Expected Life of 3.75 years.
During 2002, the Company issued a total of 5,081,830 shares of common stock
upon the conversion of 87,500 shares of Series D preferred stock.
During 2002, the Company issued a total of 2,320,224 shares of common stock
upon the conversion of 44,484 shares of Series F preferred stock.
During 2002, the Company issued a total of 1,550,680 shares of common stock
upon the conversion of 23,127 shares of Series G preferred stock.
In connection with the aforementioned conversion of preferred stock, a total
of $187,586 of accrued dividends payable was also converted into the
Company's common stock, of which $146,670 related to Series D and $40,916
related to Series G.
On June 10, 2002, the Company issued 1,000,000 shares of common stock in
exchange for cash of $330,000 due to exercise of the options.
On October 17, 2002, the Company issued a total of 999,112 shares of common
stock at the market price of $0.28 per share in lieu of cash payment of
$225,151 and recorded non-cash expense of $54,600.
2003
On January 2, 2003, the Company issued 100,000 shares of common stock to an
employee. This common stock will be registered under a Form S-8 registration
statement. In January 2003, the Company recorded $28,000 of compensation
expense based upon a signing bonus for this grant. In addition, the Company
granted options for 100,000 shares of common stock to the employee pursuant
to an employment contract. These options vested immediately, expire on
December 30, 2007 and have an exercise price of $0.40 per share. The Company
also granted options for 200,000 shares of common stock at an exercise price
of $0.40 per share and vest as follows: options for 100,000 shares on each of
December 31, 2003 and 2004, and 100,000 expire on each of December 30, 2008
and 2009, respectively.
On February 4, 2003, the Company issued 30,000 shares of common stock to
Keshet, LP, upon the conversion of 480 shares of Series G Convertible
Preferred stock, at a conversion price of $0.196. The conversion included
accrued and unpaid dividends on the preferred converted.
On February 21, 2002, the Company issued 50,000 shares of non-voting Series J
8% Convertible Preferred stock, having a stated value of $10.00 per Preferred
J share, and common stock warrants to Mid-Am Capital,
F-19
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L.L.C. ("Mid-Am") for the aggregate purchase price of $500,000. Each
preferred share is convertible to 40 shares of the Company's common stock at
a per common share conversion price of $0.25, representing 2,000,000 shares
of common stock underlying the preferred. The issued warrants entitle the
holder to purchase 33.33 shares of common stock for each share of Series J
Convertible Preferred stock issued at an exercise price of $0.30 per common
stock share, representing 1,666,667 shares of common stock underlying the
warrants. The warrants are exercisable for a five-year period. The February
21, 2003 closing market trading price was $0.23 per share. This private
offering was made to Mid-Am, an accredited investor, pursuant to Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933. In accordance
with EITF 00-27, the Company recorded a deemed dividend of $274,720 related
to a beneficial conversion feature.
On April 14, 2003, the Company issued 50,000 shares of common stock to
Keshet, LP, upon the conversion of 596 shares of Series G Convertible
Preferred, at a conversion price of $0.148. The conversion included accrued
and unpaid dividends on the preferred converted.
On April 22, 2003, the Company issued 50,000 shares of common stock to The
Keshet Fund, LP, upon the conversion of 595 shares of Series G Convertible
Preferred, at a conversion price of $0.148. The conversion included accrued
and unpaid dividends on the preferred converted.
On May 22, 2003, the Company issued 100,000 shares of common stock to Keshet,
LP, upon the conversion of 607 shares of Series G Convertible Preferred, at a
conversion price of $0.076. The conversion included accrued and unpaid
dividends on the preferred converted.
On May 22, 2003, the Company issued 100,000 shares of common stock to The
Keshet Fund, LP, upon the conversion of 607 shares of Series G Convertible
Preferred, at a conversion price of $0. 076. The conversion included accrued
and unpaid dividends on the preferred converted.
On May 29, 2003, the Company issued 50,000 shares of non-voting Series J 8%
Convertible Preferred stock, having a stated value of $10.00 per Preferred J
share, and common stock warrants to Mid-Am Capital, L.L.C. for the aggregate
purchase price of $500,000. Each preferred share is convertible to 50 shares
of the Company's common stock at a conversion price of $0.20, representing
2,500,000 shares of common stock underlying the preferred. The issued
warrants entitle the holder to purchase 40 shares of common stock for each
share of Series J Convertible Preferred stock issued at an exercise price of
$0.25 per common stock share, representing 2,000,000 shares of common stock
underlying the warrants. The warrants are exercisable for a five-year period.
The May 22, 2003 closing market trading price was $0.12 per share. In
addition, the following adjustments were made to prior issued warrants for
the purpose of facilitating future fund raising by the Company arising out of
the exercise of the warrants by Holder. The purchase price, as defined in the
Warrants No. 1 and 2, has been reduced to $0.25, subject to further
adjustment as described in the warrants. The warrant stock provided for in
Warrant No.1 has been increased by 1,500,000 shares. The warrant stock
provided for in Warrant No. 2 has been increased by 333,333 shares. The
expiration date, as defined in the respective warrants, remains as stated.
The trading price call option trigger set forth in Section 9 (b) of the
warrants has been reduced from $1.75 to $0.75 per share. This private
offering was made to Mid-Am, an accredited investor, pursuant to Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933. The value of the
warrants, $92,491, was determined using the Black-Scholes model.
On August 12, 2003, the Company issued 1,200,000 shares of common stock based
upon Series G notices of conversion received in June and July 2003. The
issuance of common stock was delayed in order to determine the accuracy of the
conversion variables contained in the respective notices of conversion, as
follows:
F-20
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company issued 200,000 shares of common stock to Keshet, LP, upon the
conversion of 1,209 shares of Series G Convertible Preferred, at a conversion
price of $0.076. The conversion included accrued and unpaid dividends on the
preferred converted.
The Company issued 200,000 shares of common stock to The Keshet Fund, LP,
upon the conversion of 1,209 shares of Series G Convertible Preferred, at a
conversion price of $0.076. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 150,000 shares of common stock to The Keshet Fund, LP,
upon the conversion of 773 shares of Series G Convertible Preferred, at a
conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 250,000 shares of common stock to Keshet, LP, upon the
conversion of 1,289 shares of Series G Convertible Preferred, at a conversion
price of $0.0653. The conversion included accrued and unpaid dividends on the
preferred converted.
The Company issued 200,000 shares of common stock to Talbiya B. Investments,
Ltd., upon the conversion of 1,031 shares of Series G Convertible Preferred,
at a conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 200,000 shares of common stock to Nesher. Ltd., upon the
conversion of 1,031 shares of Series G Convertible Preferred, at a conversion
price of $0.0653. The conversion included accrued and unpaid dividends on the
preferred converted.
On September 15, 2003, the Company issued 213,750 shares of common stock to
Michael Willms, upon the conversion of 7,500 shares of Series H Convertible
Preferred, at the fixed conversion price of $0.40. The conversion included
accrued and unpaid dividends on the preferred converted.
On September 29, 2003, the Company issued 70,938 shares of common stock to
The Dennis H. Willms Irrevocable Trust, Michael Willms, Trustee, upon the
conversion of 2,500 shares of Series H Convertible Preferred, at the fixed
conversion price of $0.40. The conversion included accrued and unpaid
dividends on the preferred converted.
On November 21, 2003, the Company entered into a Subscription Agreement with
Gamma Opportunity Capital Partners, LP for the sale of a convertible note in
the amount of $200,000 and warrants to purchase 5,000,000 shares of common
stock, at $1.00 per share. The convertible note is convertible into shares of
common stock of the Company at the lesser of $0.05 or 75% of the average of
the three lowest closing bid prices for the thirty trading days prior to but
not including the conversion date. During the 180 days following the issuance
of the convertible note, the conversion price shall not be less than $.03 per
share if no event of default exists. This 180 day period shall be extended
indefinitely if no event of default exists, the closing trading price for any
15 day consecutive trading period is $0.20 or higher, the daily trading volume
for the 15 days is at least 300,000 and a registration statement registering
the convertible note is effective. In connection with this transaction, the
Company issued 400,000 shares of its common stock and a warrant to purchase
2,000,000 shares of common stock at $.05 per share.
On November 21, 2003, the Company also entered into a Subscription Agreement
with Mid-Am Capital, LLC for the sale of a convertible note in the amount
of $200,000 and warrants to purchase 5,000,000 shares of common stock, at $1.00
per share. The convertible note is convertible into shares of common stock of
the Company at the lesser of $0.05 or 75% of the average of the three lowest
closing bid prices for the thirty
F-21
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
trading days prior to but not including the conversion date. During the 180
days following the issuance of the convertible note, the conversion price
shall not be less that $.03 per share if no event of default exists. This 180
day period shall be extended indefinitely if no event of default exists, the
closing trading price for any 15 day consecutive trading period is $0.20 or
higher, the daily trading volume for the 15 days is at least 300,000 and a
registration statement registering the convertible note is effective.
Note 7 - Stock Warrants and Options
2002
In March 2002, the Company issued to a lender, warrants to purchase 25,000
shares of common stock with an exercise price of $0.40 per share. The
warrants are immediately exercisable and have an expiration date of February
28, 2007. Based on a Black-Scholes option pricing model, the Company recorded
interest expense of $4,051. The value of the warrants was determined using
the Black Scholes Option Pricing Model with the following inputs: Expected
Volatility of 44%, Risk Free Rate of Return of 4.24%, No Dividends and an
Expected Life of 3.75 years.
In May 2002, the Company issued stock options to purchase 1,710,000 shares
of common stock, in the aggregate, as compensation to three consultants.
These options are exercisable for a one-year period. Of the 1,710,000
options, 1,150,000 options have an exercise price of $0.33 per share and
560,000 options have an exercise price of $0.50 per share. Based on a
Black-Scholes option pricing model, the Company recorded a non-cash expense
of $124,859. In June 2002, 1 million options with an exercise price of
$0.33 per share were exercised. The value of the warrants was determined
using the Black Scholes Option Pricing Model with the following inputs:
Expected Volatility of 64%, Risk Free Rate of Return of 4.24%, No Dividends
and an Expected Life of 1 year.
In April 2002 the Company extended options for 1,383,705 shares of common
stock issued on April 29 and April 30, 1997 to Tamarind Management, Ltd. (an
affiliate of Mr. Paul Downes, a founder of the Company) and options for
700,000 shares of common stock issued on April 1997 to Mr. Dale Reese (a
founder of the Company). These extended options are exercisable upon the
following conditions: The option expiration dates are extended for a two year
period, commencing upon the effective date of a registration statement for
the resale of the common stock underlying the options; the options will not
be exercised during a one year lockup period commencing on the 1st day after
the Company's common stock trades during a 90 day period at a moving average
of at least $1.00; the Company can call the options commencing on the 1st day
after its common stock trades during a 90 day period at a moving average of
at least $2.00.
In June 2002, the Company agreed to extend the expiration dates of warrants,
aggregating 6,089,777 shares of common stock, issued in connection with the
Company's Series D and F preferred stock until June 2005 and to reduce the
exercise price of certain of those warrants to $1.00. In consideration for
this warrant modification, the holders of two promissory notes executed by
the Company aggregating $100,000, agreed to extend the maturity dates of the
notes to December 31, 2002. In addition, the holders of the Company's Series
D and F preferred stock agreed to waive all potential penalties associated
with the Series D and F preferred stock, including the abandonment of a
certain SB-2 registration statement filed in connection with the resale of
the common stock underlying the Series D and F preferred stock. As a result
of extending the life and reducing the exercise prices of these warrants, the
Company remeasured the value of the warrants and recorded $391,345 as non-
cash expense.
F-22
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2002, the Company issued options to purchase 310,714 shares of
common stock to consultants and third party professional service providers
pursuant to written agreements with the Company. Of the options issued,
75,000 options have an exercise price of $1.00 per share and the remaining
235,714 options have an exercise price of $0.35 per share. The Company
recorded stock compensation of $36,753. The value of the warrants was
determined using the Black Scholes Option Pricing Model with the following
inputs: Expected Volatility of 70%, Risk Free Rate of Return of 3.8%, No
Dividends and an Expected Life of 3.75 years.
2003
On January 2, 2003, the Company granted options for 100,000 shares of common
stock to an employee pursuant to an employment contract. These options vested
immediately, expire on December 30, 2007 and have an exercise price of $0.40
per share. The Company also granted options for 200,000 shares of common
stock at an exercise price of $0.40 per share and vest as follows: options
for 100,000 shares on each of December 31, 2003 and 2004, and 100,000 expire
on each of December 30, 2008 and 2009, respectively.
On February 21, 2003, the Company issued a warrant for 1,666,667 shares of
common stock to Mid-Am in connection with the issuance of 50,000 shares of
non-voting Series J 8% Convertible Preferred stock, having a stated value of
$10.00 per Preferred J share, for the aggregate purchase price of $500,000.
The warrants have an exercise price of $0.30 per common stock share, and are
exercisable for a five-year period. The February 21, 2003 closing market
trading price was $0.23 per share. In accordance with EITF 00-27, the Company
recorded a deemed dividend of $274,720 related to a beneficial conversion
feature.
On May 29, 2003, the Company issued a warrant for 2,000,000 shares of common
stock to Mid-Am in connection with the issuance of 50,000 shares of non-voting
Series J 8% Convertible Preferred stock, having a stated value of $10.00 per
Preferred J share, for the aggregate purchase price of $500,000. The warrants
entitle the holder to purchase 40 shares of common stock for each share of
Series J Convertible Preferred stock issued at an exercise price of $0.25 per
common stock share, and are exercisable for a five-year period. The May 22,
2003 closing market trading price was $0.12 per share. In addition, the
following adjustments were made to prior issued warrants for the purpose of
facilitating future fund raising by the Company arising out of the exercise of
the warrants by Holder. The purchase price, as defined in the Warrants No. 1
(issued September 2002) and 2 (issued February 2003), was reduced to $0.25,
subject to further adjustment as described in the warrants. The warrant stock
provided for in Warrant No.1 was increased by 1,500,000 shares. The warrant
stock provided for in Warrant No. 2 was increased by 333,333 shares. The
expiration date, as defined in the respective warrants, remains as stated. The
trading price call option trigger set forth in Section 9 (b) of all of the
warrants has been reduced from $1.75 to $0.75 per share. The value of the
warrants, $92,491, was determined using the Black-Scholes model.
On November 21, 2003, the Company issued two "A" warrants for the aggregate
amount of 2,000,000 shares of common stock, and two "B" warrants for the
aggregate amount of 10,000,000 shares of common stock to Mid-Am Capital,
L.L.C. and Gamma Opportunity Capital Partners, LP, in connection with the
issuance of two convertible notes in the aggregate face amount of $400,000.
The "A" warrants have an exercise price of $0.05 per share and the "B"
warrants have an exercise price of $1.00 per share. In connection with this
transaction, the Company issued a warrant to purchase 2,000,000 shares of
common stock at $0.05 per share, as a finder's fee. All warrants issued in
connection with this transaction are exercisable for five years.
The assumptions used in the Black Scholes option pricing model in 2002 and
2003 were as follows:
F-23
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
------------------------------------
2002 2003
-------------- -----------------
Discount rate - bond yield rate 3.80 - 4.13% 2.35 - 4.9%
Volatility 34 - 70% 69 - 88%
Expected life 1 - 3.75 years 2.25 - 3.75 years
Expected dividend yield - -
A summary of the status of the Company's stock options and warrants as of
December 31, 2002 and 2003 with changes during the years then ended are
presented below:
Weighted
Average
Exercise
Shares Price
---------- --------
Total warrants and options outstanding at December 31, 2001 15,154,917 $ 0.74
Warrants and options granted 8,297,714 0.28
Warrants and options exercised (1,000,000) (0.33)
Warrants and options expired (1,294,828) (1.15)
---------- ------
Total warrants and options outstanding at December 31, 2002 21,157,803 0.70
Warrants and options granted 18,668,337 0.13
Warrants and options exercised -
Warrants and options expired (214,777) (1.03)
---------- ------
Total warrants and options outstanding at December 31, 2003 39,611,363 $ 0.28
========== ======
The following table summarizes information about stock options and warrants
outstanding at December 31, 2003:
Warrants/Options Outstanding Options/Warrants Exercisable
--------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life (Years) Price Exercisable Price
-------------- ----------- ------------ -------- ----------- --------
$0 to $0.75 37,054,658 2.9 $0.23 37,054,658 $0.23
$0.75 to $2.00 2,523,705 1.3 1.04 2,523,705 1.04
$2.00 to $3.00 33,000 0.7 2.75 33,000 2.75
---------- ---- ----- ---------- -----
39,611,363 2.42 $0.29 39,611,363 $0.28
========== ==== ===== ========== =====
F-24
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Income Taxes
The Company is subject to Federal income taxes. As the Company has
experienced operating losses for the years of 2002 and 2003, no income tax
has been provided for.
The Company has gross deferred tax assets of approximately $5.4 million and
$6.8 million at December 31, 2002 and 2003, respectively, relating
principally to tax effects of net operating loss carryforwards. In assessing
the recoverability of deferred tax assets, management considers whether it is
more likely than not that the assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of
historical taxable loss and projections for future taxable income over the
periods in which the deferred tax items are recognizable for tax reporting
purposes, it is more likely than not that the Company will not realize the
benefits of these differences at December 31, 2002 and 2003. As such,
management has recorded a valuation allowance for the full amount of deferred
tax assets at December 31, 2002 and 2003.
At December 31, 2003, the Company has available net operating losses of
approximately $17.7 million for federal income tax purposes, to offset future
taxable income, if any, which will expire at various dates through the year
2022 for federal income tax purposes. The utilization of net operating
losses, however, may be subject to certain limitations as prescribed by
Section 382 of the Internal Revenue Code.
Note 9 - Business Segment and Geographic Information
The Company operates principally in one industry segment. The following sales
information was based on customer location rather than subsidiary location.
The allocation of the cost of equipment and the current year investment in
new equipment and depreciation expense have been made on the basis of the
primary purpose for which the equipment was acquired. The following furniture
and equipment information was based on where the furniture and equipment was
used.
Geographic Area Information:
United Total
2003 States Canada Mexico China Company
---------- -------- -------- ------- ----------
Revenue - unit sales $ 356,985 $ - $ - $ - $ 356,985
Revenue - net kit sales 2,737 - - - 2,737
Revenue - gross kit sales 629,999 43,745 145,362 21,314 840,420
---------- -------- -------- ------- ----------
Total revenue 989,721 43,745 145,362 21,314 1,200,142
Cost of goods sold (127,647) (10,403) (45,247) (9,201) (192,498)
---------- -------- -------- ------- ----------
Gross margin $ 862,074 $ 33,342 $100,115 $12,113 $1,007,644
========== ======== ======== ======= ==========
Furniture and equipment, net $ 62,407 $ - $ - $ 6,216 $ 68,623
========== ======== ======== ======= ==========
F-25
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United Total
2002 States Canada Mexico China Company
---------- -------- -------- ------- ----------
Revenue -unit sales $ 232,595 $ - $ - $ - $ 232,595
Revenue -net kit sales 433,118 - - - 433,118
Revenue -gross kit sales 849,404 112,700 90,025 55,128 1,107,257
---------- -------- -------- ------- ----------
Total revenue 1,515,117 112,700 90,025 55,128 1,772,970
Cost of goods sold (184,022) (23,511) (18,780) (53,042) (279,355)
---------- -------- -------- ------- ----------
Gross margin $1,331,095 $ 89,189 $ 71,245 $ 2,086 $1,493,615
========== ======== ======== ======= ==========
Furniture and equipment, net $ 63,405 $ - $ - $26,197 $ 89,602
========== ======== ======== ======= ==========
Note 10 - Commitments and Contingencies
Commitments
The Company leases office space at its corporate office in Florida under an
original operating lease expiring May 31, 2004. The Company has renewed the
operating lease for an additional five year period at a 25% reduction to the
cost of the original lease.
Future minimum rental payments required under the operating lease as of
December 31, 2003 are as follows:
Years ending December 31, Amount
------------------------- -------
2004 Partial old rate (5 months) $53,307
2005 $37,275
2006 $37,275
2007 $37,275
2008 $37,275
2009 Partial year $15,531
Rental expense for the years ended December 31, 2002 and 2003 was
$72,550 and $75,270, respectively.
Note 11 - Subsequent Events
On February 12, 2004, the Company held a special meeting of shareholders at
which the shareholders approved an increase of the Company's authorized
common stock from 50,000,000 shares to 300,000,000 shares.
On February 17, 2004, the Company converted 875 shares of Series G
Convertible Preferred Stock into 215,164 shares of common stock pursuant to a
January 12, 2004 notice of conversion from Nesher, LP, at a conversion price
of $0.0407. The conversion included accrued and unpaid dividends on the
converted preferred. The Company and the holder delayed processing this
notice in light of the Company's special meeting of shareholders held
February 12, 2004. The shares of common stock issued pursuant to this
F-26
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
conversion were retired and cancelled on March 5, 2004 and issued to third
parties on that date in accordance with the instructions of Nesher, LP.
On February 17, 2004, the Company converted 1,400 shares of Series G
Convertible Preferred Stock into 343,980 shares of common stock pursuant to a
January 12, 2004 notice of conversion from Talbiya Investments, Ltd., at a
conversion price of $0. 0407. The conversion included accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's special meeting of
shareholders held February 12, 2004. The shares of common stock issued
pursuant to this conversion were retired and cancelled on March 5, 2004 and
issued to third parties on that date in accordance with the instructions of
Talbiya Investments, Ltd.
On February 17, 2004, the Company converted 700 shares of Series G
Convertible Preferred Stock into 172,162 shares of common stock pursuant to a
January 12, 2004 notice of conversion from The Keshet Fund, LP, at a
conversion price of $0. 0407. The conversion included accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's special meeting of
shareholders held February 12, 2004. The shares of common stock issued
pursuant to this conversion were retired and cancelled on March 5, 2004 and
issued to third parties on that date in accordance with the instructions of
The Keshet Fund, LP.
On February 17, 2004, the Company converted 2,025 shares of Series G
Convertible Preferred Stock into 497,951 shares of common stock pursuant to a
January 12, 2004 notice of conversion from Keshet LP, at a conversion price
of $0. 0407. The conversion included accrued and unpaid dividends on the
converted preferred. The Company and the holder delayed processing this
notice in light of the Company's special meeting of shareholders held
February 12, 2004. The shares of common stock issued pursuant to this
conversion were retired and cancelled on March 5, 2004 and issued to third
parties on that date in accordance with the instructions of Keshet, LP.
On March 1,2004, the Company issued 80,000 shares of non-voting Series K 8%
Convertible Preferred stock, to Mid-Am Capital, LLC, having a stated value of
$10.00 per Preferred K share, for the aggregate purchase price of $800,000.
Each preferred share is convertible to 100 shares of the Company's common
stock at a conversion price of $0.10, representing 8,000,000 shares of common
stock underlying the preferred. In addition, the following adjustments were
made to prior issued warrants for the purpose of facilitating future fund
raising by the Company arising out of the exercise of the warrants by Holder.
The purchase price, as defined in the Warrant No. 2003-B-002, has been
reduced to $0.10, subject to further adjustment as described in the warrant.
The expiration date, as defined in the warrant, remains as stated. This
private offering was made to Mid-Am, an accredited investor, pursuant to Rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933.
On March 9, 2004, the Company converted 5,000 shares of Series F Convertible
Preferred Stock into 1,315,789 shares of common stock pursuant to a January
8, 2004 notice of conversion from Esquire Trade & Finance Inc., at a
conversion price of $0.038. The conversion did not include accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's special meeting of
shareholders held February 12, 2004. The shares of common stock issued
pursuant to this conversion were issued to third parties on that date in
accordance with the instructions of Esquire Trade & Finance Inc.
On April 1 2004, the Company converted 5,000 shares of Series F Convertible
Preferred Stock into 1,315,789 shares of common stock pursuant to a January
8, 2004 notice of conversion from Austinvest Anstalt Balzers, at a conversion
price of $0.038. The conversion did not include accrued and unpaid
F-27
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's special meeting of
shareholders held February 12, 2004. The shares of common stock issued
pursuant to this conversion were issued to third parties on that date in
accordance with the instructions of Austinvest Anstalt Balzers.
On April 2, 2004, the Company and Mid-Am Capital, LLC entered into Supplement
No.1 to the Series K Convertible Preferred Subscription Agreement, by which
the Company sold an additional 15,000 shares of its Series K Convertible
Preferred Stock utilizing the proceeds from a certain promissory note issued
by the Company to Mid-Am in the face amount of $150,000. With the
consummation of this sale, the $150,000 promissory note was deemed paid in
full by the Company.
F-28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
BDO Seidman, LLP, an independent accountant that was previously
engaged as the principal accountant to audit the Company's financial
statements, resigned effective March 10, 2004. BDO Seidman, LLP has not
offered any explanation for its resignation beyond the statement of
resignation contained in the resignation letter.
The principal accountants' reports on our financial statements for
the past two years contained an explanatory paragraph regarding going
concern uncertainty.
No disagreement with the former audit accountants occurred during the
two most recent fiscal years or the subsequent interim period on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountants, would have caused them to make
reference to the subject matter of the disagreements in connection with
their reports.
The independent certified public accounting firm of Lazar Levine &
Felix, LLP, 350 Fifth Avenue, New York, NY, has agreed to serve as the
Company's principal accountant to audit the Company's financial statements,
effective March 17, 2004. The Company did not consult with Lazar Levine &
Felix, LLP prior to the resignation of BDO Seidman, LLP. The decision to
change accountants was approved by the Audit Committee.
ITEM 8A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and the Company's principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-
14(c) and 15d-14(c) as of a date within 90 days of the filing date of this
report on Form 10-KSB (December 31, 2003), have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company and the Company's consolidated subsidiary would be made known to
them by others within those entities, particularly during the period in
which this report on Form 10-KSB was being prepared.
b) Changes in Internal Controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect the Company's disclosure controls and procedures
subsequent to the Evaluation Date, nor any significant deficiencies or
material weaknesses in such disclosure controls and procedures requiring
corrective actions. As a result, no corrective actions were taken.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors, executive officers and significant employees/advisors
as of December 31, 2003, are set forth below. The Company's directors serve
for staggered terms of two years or until their successors are elected.
* Nancy Yuan, the Company's Treasurer, resigned in March 2003 to
return to China with her family
23
* John McCormack, the Company's President & COO, resigned in March
2003 for personal reasons
* Michael Lucci, a director appointed in 1998, resigned in March
2003 for personal reasons
On March 6, 2003, the Board voted to reduce the board positions by
one to nine.
Year
Name of Officer and Age Position with the Company Appointed
----------------------- ------------------------- ---------
Bravo! Foods International Corp.
Stanley A. Hirschman 57 Chairman and Director 2000
Roy G. Warren 48 Director, Chief Executive Officer 1997/1999
Tommy E. Kee 55 Chief Financial Officer, Treasurer 2003
Roy D. Toulan, Jr. 58 Vice President, Corporate Secretary, General Counsel 2003
Michael Edwards 44 Vice President Sales 2000
Benjamin Patipa 48 Vice President, Schools/Vending 2002
Arthur W. Blanding 76 Director 1999
Robert Cummings 61 Director 1997
Paul Downes 42 Director 1997
John McCormack 45 Director 1997
Phillip Pearce 73 Director 1997
China Premium Food Corp (Shanghai) Co., Ltd. - Chinese subsidiary
Roy G. Warren 47 Director , Chairman 1999
Roy D. Toulan, Jr. 58 Director 2003
Michael Edwards 44 Director 2003
The experience and background of the Company's executive officers
follow:
Mr. Stanley A. Hirschman - Chairman and Director since September 2000
Mr. Hirschman is president of CPointe Associates, Inc., an executive
management and consulting firm specializing in solutions for emerging
companies with technology-based products. CPointe was formed in 1996. In
addition, he is a director of Longview International Equity Fund LP, Global
Marketing Partners, Inc. and AirNET Wireless, LLC. Prior to establishing
CPointe Associates, Mr. Hirschman was vice president of operations of
Software, Etc., Inc., a retail software chain, from 1989 until 1996. Mr.
Hirschman has also held senior management positions with retailers T.J.
Maxx, Gap Stores and Banana Republic. Mr. Hirschman currently serves on the
Audit Committee of the Company's board of directors.
Mr. Roy G. Warren - Chief Executive Officer since May 1999; Director since
1997
Mr. Warren serves as the Company's Chief Executive Officer and as a
director. As Chief Executive Officer, Mr. Warren continues to develop
strategy for the Company's growth and external financial matters.
For 15 years from 1981 through 1996, Mr. Warren was in the securities
brokerage industry. During those years, Mr. Warren acted as executive
officer, principal, securities broker and partner with brokerage firms in
Florida, most notably Kemper Financial Companies, Alex Brown & Sons and
Laffer Warren & Company. Mr. Warren currently serves on the Executive
Committee of the Company's board of directors.
24
Mr. Warren also serves as a director of the Company's U.S.
subsidiary, Bravo! Foods, Inc. and the Company's wholly owned Chinese
subsidiary, China Premium Food Corp (Shanghai) Co., Ltd.
Mr. Tommy E. Kee - Chief Financial Officer, Treasurer since 2003
Tommy Kee joined the Company in March 2003 as Chief Financial
Officer. He graduated with an MBA from the University of Memphis and a BS
degree in accounting from the University of Tennessee. Before joining the
Company, he served for several years as CFO for Allied Interstate, Inc. in
the West Palm Beach area. Prior to that, Mr. Kee served as CFO and Treasurer
for Hearx Ltd. a West Palm Beach, Florida public company. He also served 18
years as International Controller and Financial Director with the Holiday
Inns Inc. organization in Memphis and Orlando. Mr. Kee handles all financial
management and reporting for the Company and works closely with our
external auditors and general counsel for financial reporting and SEC
compliance.
Roy D. Toulan, Jr. - Vice President, Corporate Secretary, General Counsel
since 2003
Roy Toulan began with the original founders as outside corporate
counsel in 1997 and has been responsible for all of the Company's corporate
and business legal work, including securities matters. Mr. Toulan became
Corporate Counsel in October 2002, when he left his private legal practice
in Boston, and Vice President in January 2003. He received his law degree
from Catholic University in Washington D.C. and for the first 15 years of
his career practiced corporate and securities litigation with large law
firms in New York and Boston. Before joining the Company full time, he
spent the last 18 years in private practice in Boston, Massachusetts in
general corporate and securities law helping companies with corporate
structure and funding, both domestically and internationally.
Mr. Michael Edwards - Vice President Sales, since 2003
Mr. Edwards has been with the Company in a sales and marketing
capacity since 2000. Prior to that time, he worked for 5 years in beverage
marketing research for Message Factors, Inc., a Memphis, Tennessee
marketing research firm. Mr. Edwards has a BS degree from Florida State
University in Management and Marketing and spent 13 years in the banking
industry, leaving CitiBank to join Message Factors in 1995.
Dr. Benjamin Patipa - Vice President, Schools/Vending since 2002
Dr. Patipa is a pediatrician with over fifteen years of experience in
directing operations, marketing, sales and facilitating growth in both
public and private companies. In 1987, Dr. Patipa founded and served as the
chairman and CEO of Weight For Me, Inc., a company that developed a
proprietary program which pioneered the delivery of weight control and
nutrition services to the over 12 million obese children and adolescents in
America. Weight For Me earned national and international recognition as the
premier program for the control of obesity in children and adolescents. Dr.
Patipa also served at HEARx Ltd. as a member of the Executive Operating
Committee, Sonus USA, Inc., where he lead the company's franchise licensing
and buying group business in the Southeast United States. Most recently,
Dr. Patipa served as Senior Vice President and Operational Head of
eHDL/HealthNet Data Link, Inc., a national electronic healthcare
information company.
Mr. Arthur W. Blanding - Director Since November 1999
Mr. Blanding is president of The Omega Company, an international
dairy industry consulting company. Mr. Blanding has over 50 years
experience in management of dairy processing, sales and strategic planning
consulting. He graduated from Michigan State University in 1956, with a
degree in
25
food science, and in 1964 from Oregon State University with a degree in
Food Microbiology and attended Harvard Business School.
As President of The Omega Company for the past 20 years, Mr. Blanding
has completed over 200 projects successfully, both in the U.S. and abroad.
Clients of The Omega Company include Abbott International, Cumberland
Farms, Dairy Gold, Farm Fresh, Inc., Haagen Dazs, Labatt, Ross Laboratories
and Stop & Shop Company, among others. Mr. Blanding was a consultant for
the design and construction of the dairy processing facility built in
Shanghai by Green Food Peregrine. The Omega Company is a party to a
consulting contract with the Company concerning technical and production
issues.
Mr. Robert J. Cummings - Director Since 1997
Mr. Cummings' work experience includes ten years in purchasing at
Ford Motor Company. In 1975, he founded and currently operates J & J
Production Service, Inc., a manufacturing representative business, which is
currently responsible for over $300 million in annual sales.
Mr. Paul Downes - Director Since 1997
Mr. Downes is a director and, from August of 1997 to April of 1998,
served as the Company's Chairman. For the past 12 years, Mr. Downes has
managed his personal diverse portfolio of international investments with
concentration in the United Kingdom, Eastern Europe, North Africa and Asia.
In 1985, he founded a group of nursing homes for the elderly in Great
Britain, which he sold in 1990. Prior to that time, Mr. Downes spent
several years organizing golf tournaments and international golf matches in
Malaysia, Singapore, Thailand, Philippines, Indonesia and Hong Kong,
spending two years living in Southeast Asia. Mr. Downes is one of the
Company's "founders" and played a leading role in the Company's initial
raising efforts. From 2001, Mr. Downes has served as the Chairman of a
start up software company located in Delray Beach, Florida.
Mr. Phillip Pearce - Director Since 1997
Mr. Pearce is a "retired" member of the securities industry. Mr.
Pearce served as Chairman of the NASD during which time he was instrumental
in the founding of NASDAQ. Additionally, Mr. Pearce was a former Director
of E.F. Hutton and has served as Governor of the New York Stock Exchange.
Since his retirement in 1988, Mr. Pearce has remained active in the
securities industry as a corporate financial consultant. Mr. Pearce serves
on the compensation committee of the Company's board of directors. Mr.
Pearce also serves on the Company's audit committee. Mr. Pearce serves as a
director of Xybernaut Corporation, a reporting company.
ITEM 9 (COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT)
Based upon a review of the appropriate Forms 3, 4 and 5 and any
amendments to such forms filed pursuant to Section 16(a), the Company reports
the following delinquent filings. On December 23 and 30, 2003, Mr. Warren
purchased, in the aggregate, 100,000 shares of the Company's stock and
reported those purchases on January 5 and 16, 2004, respectively. On December
30, 2003, Mr. Kee purchased 5,000 shares of the Company's stock and reported
that purchase on January 21, 2004. Awaiting the receipt of individual CIK
numbers from the Commission caused a portion of the delay in each instance.
All officers and directors have been issued individual CIK numbers for future
reports.
The Company's directors and executive officers have not filed Form 4s
for options that have been authorized pursuant to compensation plans but not
issued.
26
ITEM 10. EXECUTIVE COMPENSATION
Compensation of directors
Directors were compensated for their travel expenses to and from
board of directors' meetings in 2001, 2002 and 2003. In 2002, there were
four in person meetings and three telephonic board meetings. In 2003, there
were three in person meetings and four telephonic board meetings. Directors
received options for 35,000 shares of common stock for each year as a
director through 2001. Each member of the executive committee has received
options for an additional 40,000 shares of common stock for their services
from 1998 through 2001. Directors received additional options for 25,000
shares for 2002 and 2003
Compensation of executive officers
The following table sets forth the compensation paid during the last
three fiscal years to the Company's Chief Executive Officer and the other
executive officers of the Company:
Summary Compensation
Long-Term
Compensation
Annual Compensation ---------------------
-------------------------------------------------- Restricted Stock All Other
Name & Position Year Salary Bonus (1) Other Awards and Options Compensation (2)
------------------------------------------------------------------------------------------------------------------------
Roy G. Warren 2001 $180,000 4% $12,000 170,000 options (3) $220,000 salary
President & CEO 2002 $180,000 EBITDA Medical 2,500,000 options (4) $12,000
Director 2003 $220,000 insurance (insurance)
Tommy E. Kee 2003 120,000 $12,000 300,000 options (5) $60,000 salary
Chief financial; Medical $12,000
Officer insurance (insurance)
Roy D. Toulan, Jr. 2003 180,000 $28,000 $8,900 300,000 options (6) $180,000 salary
Vice President Medical (part) $8,900
Secretary Life & (insurance)
Corporate Counsel disability
insurance
Mr. Warren has waived the 4% EBITDA bonus provision in his employment
contract. Mr. Toulan was granted 100,000 shares of common stock as a
signing bonus, valued at $28,000.
Amount paid for termination of employment owing to change of control.
Five year options received as director; 145,000 options at $0.75,
25,000 options at $0.60.
Employment agreement incentive options: 1,000,000 options at $0.50,
1,000,000 options at $1.50; 100,000 at $0.75, 100,000 at $2.00,
100,000 at $3.00, 100,000 at $4.00, 100,000 at $5.00; all five year
options; last 400,000 options vest at trading price trigger equal to
exercise price.
Employment agreement incentive options; 100,000 at $0.10; balance at
market price; vesting of three 100,000 share tranches at July 1,
2003, December 31, 2003 and December 31, 2004, respectively.
27
Employment agreement incentive options at $0.40; vesting of three
100,000 share tranches at January 1, 2003, December 31, 2003 and
December 31, 2004, respectively.
Option Grants
The following table sets forth individual grants of stock options
made during the last completed fiscal year to each of the named executive
officers.
Option Grants In Last Fiscal Year
Individual Grants
---------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base
Name Granted in Fiscal Year (1) Price ($/Share) Expiration Date
---------------------------------------------------------------------------------------------------------------------
Roy G. Warren 25,000 $0.25 June 30, 2008
President & CEO 100,000 Aggregate 58% 0.75 October 24, 2005
Director 100,000 2.00 5 yrs from vesting
100,000 3.00 5 yrs from vesting
100,000 4.00 5 yrs from vesting
100,000 5.00 5 yrs from vesting
1,000,000 0.50 December 31, 2007
1,000,000 1.50 December 31, 2007
Tommy E. Kee 100,000 $0.10 (100,000) June 30, 2008
Chief Financial Officer 100,000 Aggregate 1.1% Market price at December 30, 2008
Treasurer 100,000 vesting December 30, 2009
(200,000)
Roy D. Toulan, Jr. 100,000 $0.40 (300,000) December 31, 2007
Vice President 100,000 Aggregate 1.1% December 30, 2008
Secretary 100,000 December 30, 2009
Corporate Counsel
Includes options for 25,000 shares granted to Mr. Warren as a
director.
Aggregated Option Exercises Table
None of the named executive officers exercised any stock options
during 2003. The following table provides information on the value of such
officers' unexercised options at December 31, 2003.
Aggregated Options Exercised in Last Fiscal Year
And Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at Money Options at 2003 Fiscal
Shares 2003 Fiscal Year-End Year-End
Acquired Value
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
-------------------------------------------------------------------------------------------------------------------------
Roy G. Warren - - 2,695.000 -
President & CEO -----------------------------
Director 2,295,000 400,000
exercisable unexercisable
-------------------------------------------------------------------------------------------------------------------------
28
Tommy E. Kee - - 300,000 -
Chief Financial Officer -----------------------------
Treasurer 200,000 100,000
exercisable unexercisable
-------------------------------------------------------------------------------------------------------------------------
Roy D. Toulan, Jr. - - 300,000 -
Vice President -----------------------------
Secretary 200,000 100,000
Corporate Counsel exercisable unexercisable
-------------------------------------------------------------------------------------------------------------------------
Compensation Plans
------------------
Directors
On March 27, 2001, the Company issued options to the Company's
directors, including Roy Warren, to purchase the aggregate of 925,000
shares of the Company's common stock. The options have an exercise price of
$0.75 and expire March 26, 2006. Directors received options for 35,000
shares for each full year of service and an additional 40,000 shares for
service on a board committee. On July 1, 2002, the Company issued 250,000
options to the Board of Directors, including Roy Warren, for services
rendered as directors. Each director received options for 25,000 shares of
common stock at an exercise price of $0.60. The options can be exercised
for five years.
On January 13, 2004, the Board of Directors adopted a plan to convert
on a one for one basis the options granted to the present employees of the
Company and the directors currently serving on the Board into a like number
of the Company's restricted shares of common stock. The issuance of such
common stock to any individual director or employee is conditioned upon the
execution of the "lockup" agreement by such director or employee, pursuant
to which the recipients of such common stock shall not sell, transfer,
pledge or hypothecate such common stock for a six month period, commencing
on the issue date of such common stock. The conversion plan adopted by the
Board of Directors will result in the issuance of 5,200,000 shares of the
Company's restricted common stock to the Company's present directors and
employees.
Employment contracts
* Roy G. Warren Chief Executive Officer
The Company had a one-year contract with Mr. Warren commencing
January 1, 2003, at an annual base salary of $220,000. The contract
provides for the grant of options for 1,000,000 shares of common stock at
$0.50 per share, options for 1,000,000 shares of common stock at $1.50 per
share and options for 100,000 shares of common stock at $0.75 per share.
During his employment, he also will receive five-year incentive options for
an additional 400,000 shares in tranches of 100,000, as the public trading
price for the Company's stock reaches $2.00, $3.00, $4.00 and $5.00,
respectively. The exercise price for these options will track the market
price for the Company's common stock when granted. Mr. Warren's employment
contract provides for the payment of one year's salary plus medical
insurance costs for termination of employment owing to change of control in
the Company.
Tommy E. Kee, Chief Financial Officer, Treasurer
Mr. Kee has an eighteen-month contract with the Company commencing
July 1, 2003 at an annual salary of $120,000. The Company granted options
for 300,000 shares of common stock as an incentive bonus pursuant to an
employment contract. The first 100,000 share options tranche vested on July
1, 2003 at an exercise price of $0.10 per share. The remaining options for
200,000 shares of
29
common stock vest as follows: options for 100,000 shares on each of
December 31, 2003 and 2004, respectively. All of these options expire five
years from vesting. Mr. Kee's employment contract provides for the payment
of six months' salary plus medical insurance costs for termination of
employment owing to change of control in the Company.
Roy D. Toulan, Jr., Vice President, General Counsel and Corporate
Secretary
Mr. Toulan has a two-year contract with the Company commencing
January 1, 2003 at an annual salary of $180,000. An incentive bonus of
100,000 common stock shares was granted to Mr. Toulan in January 2003,
valued at $0.28 per share. In addition, the Company granted options for
100,000 shares of common stock as part of the pursuant to an employment
contract. These options vested immediately, expire on December 30, 2007 and
have an exercise price of $0.40 per share. The Company also granted options
for 200,000 shares of common stock at an exercise price of $0.40 per share,
which vest as follows: options for 100,000 shares on each of December 31,
2003 and 2004. Options for 100,000 shares expire on each of December 30,
2008 and 2009, respectively. Mr. Toulan's employment contract provides for
the payment of one year's salary plus medical insurance costs for
termination of employment owing to change of control in the Company.
Securities authorized for issuance under equity compensation plans
------------------------------------------------------------------
The equity compensation reported in this section has been and will be
issued pursuant to individual compensation contracts and arrangements with
employees, directors, consultants, advisors, vendors, suppliers, lenders
and service providers. The equity is reported on an aggregate basis as of
December 31, 2003. The Company's security holders have not approved the
compensation contracts and arrangements underlying the equity reported.
Number of securities to Number of securities
be issued upon exercise Weighted average price remaining for future issuance
Compensation of outstanding options, of outstanding options, under equity compensation
Plan Category warrants and rights warrants and rights plans
-------------------------------------------------------------------------------------------------------
Directors 1,405,000 $0.72 350,000 director plan
-------------------------------------------------------------------------------------------------------
Management 1,036,667 $0.59 3,350,000 individual plans
-------------------------------------------------------------------------------------------------------
Founders 2,083,705 $1.00 0 individual plans
-------------------------------------------------------------------------------------------------------
Consultants 360,714 $0.54 0 individual plans
-------------------------------------------------------------------------------------------------------
Lender 25,000 $0.40 0 individual plan
-------------------------------------------------------------------------------------------------------
Total 4,911,086 $0.79 3,700,000
-------------------------------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's common stock as of April 2, 2004, as to
* each person known to beneficially own more than 5% of the
Company's common stock
* each of the Company's directors
* each executive officer
* all directors and officers as a group
The following conditions apply to all of the following tables:
30
* except as otherwise noted, the named beneficial owners have direct
ownership of the stock and have sole voting and investment power
with respect to the shares shown
* the class listed as "common" includes the shares of common stock
underlying the Company's issued convertible preferred stock,
options and warrants
Beneficial Owners
-----------------
Amount and Nature
Name and Address of of Beneficial
Title of Class Beneficial Owner (1) Ownership Percent of Class (2)
----------------------------------------------------------------------------------------------------
Common Amro International, SA (3) 3,502,698 9.99%
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Austinvest Anstalt Balzers
Landstrasse 938
9494 Furstentums Balzers,
Liechtenstein
Esquire Trade & Finance Inc.
Trident Chambers
P.O. Box 146
Road Town, Tortola, B.V.I.
----------------------------------------------------------------------------------------------------
Common The Keshet Fund LP (4) 3,502,698 9.99%
Keshet L.P.
Nesher Ltd
Talbiya B. Investments Ltd.
Ragnall House, 18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
----------------------------------------------------------------------------------------------------
Common Alpha Capital Aktiengesellschaft (5) 3,502,698 9.99%
Pradafant 7, Furstentums 9490,
Vaduz, Liechtenstein
----------------------------------------------------------------------------------------------------
Common Mid-Am Capital, L.L.C. (5) 3,502,698 9.99%
Northpointe Tower
10220 North Ambassador Drive
Kansas City, MO 64190
----------------------------------------------------------------------------------------------------
Common Explorer Fund Management, LLC (5) 3,502,698 9.99%
444 N. Michigan Ave.
Chicago, IL 60611
----------------------------------------------------------------------------------------------------
Common Dale Reese (6) 3,305,985 9.58%
125 Kingston Road
Media, PA
----------------------------------------------------------------------------------------------------
Common Mr. Larry Frisman 2,702,500 8.55%
7533 Isle Verde Way
Delray Beach, FL 33446
----------------------------------------------------------------------------------------------------
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. Shares of common
stock subject to options or warrants currently exercisable or
convertible, or exercisable or convertible within 60 days of April 2,
2004 are deemed outstanding for computing the percentage of the
person holding such option or warrant but are not deemed outstanding
for computing the percentage of any other person.
Percentage based on 31,598,580 shares of common stock outstanding
with respect to the common stock.
Amro International, S.A., Austinvest Anstalt Balzers and Esquire
Trade & Finance Inc. share a common investment representative,
attorney and subscription agreements for the Series D and Series F
convertible
31
preferred stock and are treated as a group for beneficial ownership
purposes. This group is contractually limited to a beneficial
ownership of the Company's equity not to exceed 9.99%. All of the
equity listed consists of convertible preferred and warrants.
The Keshet Fund L.P., Keshet L.P., Nesher Ltd. and Talbiya B.
Investments Ltd. share a common investment representative, attorney
and subscription agreements for the Series G convertible preferred
stock and are treated as a group for beneficial ownership purposes.
This group is contractually limited to a beneficial ownership of the
Company's equity not to exceed 9.99%. All of the equity listed
consists of convertible preferred and warrants.
This owner is contractually limited to a beneficial ownership of the
Company's equity not to exceed 9.99%. All of the equity listed
consists of convertible preferred and warrants.
The beneficial owner has the right to convert 107,440 shares of stock
preferred to 107,440 shares of common stock within 60 days.
Management Owners
-----------------
Name and Address of Amount and Nature
Title of Class Management Owner (1) of Ownership Percent of Class (2)
--------------------------------------------------------------------------------------------------
Common Roy G. Warren
11300 US Highway No.1
N. Palm Beach, FL 3,175,482 (3) 9.19%
--------------------------------------------------------------------------------------------------
Common Paul Downes
Tamarind Management Ltd.
20579 S. Charlestown
Boca Raton, FL 33434 288,000 (4) 0.91%
--------------------------------------------------------------------------------------------------
Common Robert Cummings
2829 N.E. 44th Street
Lighthouse Point, FL 33064 530,000 (5) 1.67%
--------------------------------------------------------------------------------------------------
Common John McCormack
8750 South Grant
Burridge, IL 60521 787,500 (6) 2.46%
--------------------------------------------------------------------------------------------------
Common Mr. Arthur W. Blanding
Janesville, WI 53545 177,889 (7) 0.56%
--------------------------------------------------------------------------------------------------
Common Phillip Pearce
6624 Glenleaf Court
Charlotte, NC 28270 231,000 (8) 0.73%
--------------------------------------------------------------------------------------------------
Common Stanley Hirschman
2600 Rutgers Court
Plano, Texas 75093 334,670 (9) 1.06%
--------------------------------------------------------------------------------------------------
Common Roy D. Toulan, Jr.
VP, General Counsel
6 Wheelers Pt. Rd
Gloucester, MA 515,000 (10) 1.62%
--------------------------------------------------------------------------------------------------
Common Tommy Kee
CFO, Treasurer
129 Eagleton Court
Palm Beach Gardens, FL 205,000 (11) 0.64%
--------------------------------------------------------------------------------------------------
Common Executive officers and directors
as a group 6,244,541 12.22%
--------------------------------------------------------------------------------------------------
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. Shares of common
stock subject to options or warrants currently exercisable or
convertible, or exercisable or convertible within 60 days of April 2,
2004 are deemed outstanding for computing the percentage of the
person holding such option or warrant but are not deemed outstanding
for computing the percentage of any other person.
32
Percentage based on 31,598,580 shares of common stock outstanding
with respect to the common stock.
Includes 170,000 shares of common stock that can be acquired within
60 days by the exercise of options; also includes options for
2,550,000 shares of common stock authorized by the Board of Directors
but not yet issued.
Includes 130,000 shares of common stock that can be acquired within
60 days by the exercise of options; also includes options for 50,000
shares of common stock authorized by the Board of Directors but not
yet issued.
Includes 170,000 shares of common stock that can be acquired within
60 days by the exercise of options; also includes options for 50,000
shares of common stock authorized by the Board of Directors but not
yet issued.
Includes 130,000 shares of common stock that can be acquired within
60 days by the exercise of options; also includes options for 50,000
shares of common stock authorized by the Board of Directors but not
yet issued.
Includes 95,000 shares of common stock that can be acquired within 60
days by the exercise of options; also includes options for 50,000
shares of common stock authorized by the Board of Directors but not
yet issued.
Includes 130,000 shares of common stock that can be acquired within
60 days by the exercise of options; also includes options for 50,000
shares of common stock authorized by the Board of Directors but not
yet issued.
Includes 25,000 shares of common stock that can be acquired within 60
days by the exercise of options; also includes options for 50,000
shares of common stock authorized by the Board of Directors but not
yet issued.
Includes options for 200,000 shares of common stock authorized by the
Board of Directors but not yet issued
Includes options for 200,000 shares of common stock authorized by the
Board of Directors but not yet issued
There currently are no arrangements that may result in a change of
ownership or control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
33
ITEM 13. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
--------
Exhibit Incorporated Filed
No. Document Description by Reference Herewith
-----------------------------------------------------------------------------------------
3.1 Articles of Incorporation (1)
3.2 Amended Articles (name change) (1)
3.4 Restated Bylaws (1)
4 Rights of Equity Holders
4.1 Common see Articles of Incorporation (1)
4.2 Preferred, Series B Designation (1)
4.3 Preferred, Series F Designation (2)
4.4 Preferred, Series G Designation (3)
4.5 Preferred, Series H Designation (6)
4.6 Preferred, Series I Designation (7)
4.7 Preferred, Series J Designation (8)
4.8 Preferred, Series K Designation X
10 Material Contracts
10.1 Warner Bros China License Agreement (5)
10.2 Warner Bros. China License Agreement (modified) (5)
10.3 Warner Bros. U.S. License Agreement. (5)
10.4 Warner Bros. Mexico. License Agreement (6)
10.5 Warner Bros. Canada. License Agreement (6)
10.6 MoonPie License Agreement X
10.7 Marvel License Agreement X
10.8 SADAFCO Production Agreement X
10.9 Real Estate Lease Amendment Extending Term X
16.1 Letter on change or certifying accountant (9)
21.1 Subsidiary Articles of Association (4)
31.1 Certification of CEO, Rules 13a-14(a) & 15d-14(a) X
31.2 Certification of CFO, Rules 13a-14(a) & 15d-14(a) X
32.1 Certification of CEO, 18 U.S.C. Sec 1350 X
32.2 Certification of CFO, 18 U.S.C. Sec 1350 X
99 Additional Exhibits
99.1 Employment Agreement - Roy G. Warren X
99.2 Employment Agreement - Tommy E. Kee X
99.3 Employment Agreement - Roy D. Toulan, Jr. X
Filed with Form 10SB/A First Amendment
Filed with Form 10K-SB for 12-31-99
Filed with Form 10QSB for 6-30-00
Filed with Form SB-2/A Second Amendment
Filed with Form SB-2/A Third Amendment
Filed with Form 10K-SB 2001
Filed with Form 10QSB for 6-30-02
Filed with Form 8-K for 10-02-02
Filed with Form 8-K for 3-26-04
34
(b) Reports on Form 8-K During the Last Quarter of 2003:
---------------------------------------------------
None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
----------
The aggregated fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the audit of
the Company's annual financial statements and review of financial
statements included in the Company's Form 10-QSB were $83,500 and $119,325,
respectively for 2002 and 2003.
Audit Related Fees
------------------
None
Tax Fees
--------
None
All Other Fees
--------------
None
Audit Committee Pre-Approval Policies
-------------------------------------
The audit committee makes reasonable inquiry as to the independence
of the Company's principal auditors based upon the considerations set forth
in Rule 2-01 of Regulation S-X, including the examination of representation
letters furnished by the principal accountant. The audit committee has not
approved any services beyond those required for the audit of the Company's
annual financial statements and review of financial statements included in
the Company's Form 10-QSB.
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, Bravo! Foods International Corp. has caused this report to be
signed on its behalf by the undersigned, thereunder duly authorized, this
April 14, 2004.
BRAVO! FOODS INTERNATIONAL CORP.
(Formerly China Premium Food Corporation)
By: /S/ Roy G. Warren, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, Bravo Foods
International Corp. has caused this report to be signed on its behalf by
the undersigned in the capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/S/ Roy G. Warren Chief Executive Officer April 14, 2004
/S/ Tommy E. Kee Chief Financial Officer, Treasurer April 14, 2004
35