----------------------------------------------------
As filed with the Securities and Exchange Commission
on July 15, 2002
Registration Statement No. 333-72198
----------------------------------------------------
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
REED'S, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
2086
(Primary Standard Industrial Classification Code
Number)
95-4348325
(IRS Employer Identification No.)
13000 South Spring Street,
Los Angeles, California 90061
Telephone: (310) 217-9400
(Address and telephone number
of principal executive offices)
13000 South Spring Street,
Los Angeles, California 90061
(Address of principal place of business
or intended principal place of business)
Christopher J. Reed
Reed's, Inc.
13000 South Spring Street,
Los Angeles, California 90061
Telephone: (310) 217-9400
(Name, address and telephone
number of agent for service)
Copies of all communications to:
Edward T. Swanson, Esq.
1135 17th Street, Suite E,
Santa Monica, California 90403
(310) 283-1035
Approximate date of proposed sale to the public:
As soon as practicable after the effective date
of this registration statement.
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b)
under the Securities Act of 1933, please check the
following box and list the Securities Act registration
statement number of the earlier effective registration
statement for the same offering. []
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act of
1933, check the following box and list the Securities
Act of 1933 registration statement number of the
earlier effective registration statement for the same
offering. []
If this Form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act of
1933, check the following box and list the Securities
Act registration statement number of the earlier
effective registration statement for the same
offering. []
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following
box.[]
CALCULATION OF REGISTRATION FEE
---------------------------------
Title of each class of Common stock,
securities to be registered $.0001 par value
Proposed maximum
aggregate offering price (1) $18,000,000.00
Amount of registration fee (1) $4,500.00 (2)
(1) Estimated solely for purposes of calculating the
registration fee in accordance with Rule 457(o) under
the Securities Act of 1933, as amended.
(2) Previously paid.
The Registrant hereby amends this registration
statement on such date or dates as may be necessary to
delay its effective date until the Registrant shall
file a further amendment which specifically states
that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such
date as the Commission, acting pursuant to said
Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL
THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE
NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (SUBJECT TO COMPLETION)
DATED July 15, 2002
[logo]
REED'S, INC.
Offering of 3,000,000 common shares
of Reed's, Inc. at $6.00 / share.
-----------------------------------------
We develop, market and distribute gourmet natural non-
alcoholic beverages, as well as candy, ice cream and
cookies.
We are offering 3,000,000 shares of our common stock.
No public market currently exists for our shares. The
public offering price is $6.00 per share.
The shares are offered on a best efforts basis
through Blue Bay Capital, Ltd., a member of the
National Association of Securities Dealers, Inc., for
a commission equal to 10% (before expenses) of all
sales through Blue Bay In addition, Blue Bay will
receive a non-accountable expense allowance equal to
0.5% of all sales through Blue Bay. There is no public
trading market for our securities, and if a market
develops for our securities, it will most likely be
limited, sporadic and highly volatile.
Investing in our common stock involves a high degree
of risk. See "Risk Factors" beginning on page 5 to
read about factors you should consider before buying
shares of the common stock.
Per Share If If If
300,000 1,500,000 3,000,000
shares shares shares
are sold are sold are sold
Proceeds to
the Company $6.00 $1,800,000 $9,000,000 $18,000,000
Selling Agent
Commission $0.60 $ 180,000 $ 900,000 $ 1,800,000
Proceeds to
the Company
before estimated
expenses of
the offering $5.40 $1,620,000 $8,100,000 $16,200,000
Proceeds to
the Company
after estimated
expenses of
the offering $5.23 $1,511,000 $7,905,000 $15,910,000
There is no minimum offering amount. Offering proceeds
will not be placed in escrow. However, sales will not
be accepted from Arizona until minimum sales
requirements have been satisfied. See "Business. Upon
receipt, offering proceeds will be deposited into the
operating account of Reed's and used to conduct the
business affairs of Reed's. The offering will
terminate nine months after the effective date of this
prospectus unless terminated sooner by us.
The Securities and Exchange Commission and state
securities regulators have not approved or disapproved
these securities, or determined if this prospectus is
truthful or complete. Any representation to the
contrary is a criminal offense.
The Selling Agent for this Offering is Blue Bay
Capital, Ltd.
The date of this prospectus is _____________
TABLE OF CONTENTS
Section Page #
---------------------------------------------
Prospectus Summary.........................3
Risk Factors...............................5
Forward Looking Statements................10
Use Of Proceeds...........................11
Dividend Policy...........................12
Capitalization............................13
Dilution..................................13
Management's Discussion And Analysis
Of Financial Condition And Results Of
Operations................................14
Business..................................18
Management................................32
Certain Transactions......................35
Principal Shareholders....................36
Description Of Securities.................37
Shares Available For Future Resale........38
Plan of Distribution......................39
Legal Matters.............................40
Experts...................................40
Additional Information....................40
Index To Financial Statements.............41
Appendix A. Subscription Agreement
PROSPECTUS SUMMARY
This summary highlights information found in greater
detail elsewhere in this prospectus. This summary is
not complete and does not contain all of the
information you should consider before investing in
our common stock. You should read the entire
prospectus carefully, including the section titled
"Risk Factors." This prospectus describes our
company, finances and products. Federal and state
securities laws require that we include in this
prospectus all the important information that you will
need to make an investment decision.
About Our Company
Reed's, Inc. is a Delaware corporation with its main
offices in Los Angeles, California. We changed our
name to "Reed's, Inc." from "Original Beverage
Corporation" and our state of incorporation from
Florida to Delaware in October of 2001. We began
operations in June of 1987 as a sole proprietorship
founded by Christopher J. Reed.
We are primarily in the business of manufacturing and
marketing gourmet natural non-alcoholic beverages, as
well as candy, ice cream and cookies. We currently
offer 19 beverages, including six varieties of Reed's
Ginger Brews, Virgil's Root Beer, two varieties of
China Cola, six varieties of Malibu Teaz and four
varieties of Reed's Ginger Juice Brews. However,
we consider our core business to be ginger products
rather than strictly beverages. Our more recent
products include Reed's Crystallized Ginger Candy,
Reed's Crystallized Ginger Baking Bits, Reed's Ginger
Candy Chews, Reed's Original Ginger Ice Cream, Reed's
Chocolate Ginger Ice Cream, and Reed's Green Tea
Ginger Ice Cream. We expect to be launching our
Reed's Ginger Cookie line during 2002. We sell our
products primarily in upscale gourmet and natural food
stores in the United States and Canada. Most of our
products are sold in the natural food industry.
The Offering
Common Stock being offered...........3,000,000 shares
Offering Price.......................$6.00 per share
Common stock outstanding:
Prior to this offering............... 4,720,591 shares
After this offering:
if 300,000 shares are sold............5,020,591 shares
if 1,500,000 shares are sold..........6,220,591 shares
if all shares offered hereby are sold.7,720,591 shares
Use of proceeds
We plan to use the first $420,000 of net proceeds to
repay outstanding debt, and any balance for hiring
additional sales representatives, new product
launches, retail slotting, brand advertising, and
placing coolers and vending machines, with the amount
of proceeds depending on the number of shares sold.
If at least 1,500,000 shares are sold, we also intend
to use a portion of the proceeds to construct an east
coast production facility and for working capital.
Summary Financial Information
March 31, December 31,
2002 2001 2001 2000
(unaudited)(unaudited)
---------------------- -------------------
Statements of Income Data:
Sales $1,465,024 $1,379,451$6,188,221$5,728,153
Gross profit
385,695 227,397 1,277,013 1,164,673
Selling, general and
administrative
expenses 357,021 435,719 1,595,518 1,614,830
Income (Loss) from
Operations 28,674 (208,322) (318,505) (450,157)
Loss before income
taxes and cumulative
effect of change in
accounting principles
(34,821) (238,996) (521,456) (483,813)
Provision for income
taxes (benefit)
800 4,800 (13,200) (40,310)
Loss before cumulative
effect of change in
accounting principles
(35,621) (243,796) (508,256) (443,503)
Cumulative effect of
change in accounting
principle (11,973) -- -- --
Net loss (47,594) (243,796) (508,256) (443,503)
Loss per share
(0.01) (0.05) (0.11) (0.11)
Weighted average shares
used to compute
loss per share
4,720,591 4,686,312 4,702,208 4,010,904
March 31, 2002 December 31, 2001
(unaudited)
------------------ -----------------
Balance Sheet Data:
Total assets $ 4,027,202 $ 4,212,927
Current liabilities
1,083,256 1,221,265
Long-term liabilities,
less current portion
1,406,851 1,406,973
Stockholders' equity
1,537,095 1,584,689
RISK FACTORS
An investment in our common stock is very risky. You
should carefully consider the risk factors described
below, together with all other information in this
prospectus, before making an investment decision.
The trading price of our common stock could decline
due to any of these risks, and you could lose all or
part of your investment. You also should refer to
the other information set forth in this prospectus,
including our financial statements and the related
notes thereto.
IF WE ARE NOT ABLE TO RETAIN OUR PRESIDENT AND CEO, IT
WILL BE MORE DIFFICULT FOR US TO MANAGE OUR OPERATIONS
AND OUR OPERATING PERFORMANCE WOULD SUFFER.
Our business is dependent, to a large extent, upon the
services of Christopher J Reed, our founder,
President, CEO and Chairman of the Board. Mr. Reed is
in charge of all of our day-to-day operations. In the
event of the loss or unavailability of Mr. Reed to us,
there can be no assurance that we would be able to
timely locate or employ qualified personnel to replace
him. We do not have a written employment agreement
with Mr. Reed. As a result, there is no assurance
that Mr. Reed will remain in our employ.
DESPITE OUR DEPENDENCE ON MR. REED, WE DO NOT
MAINTAIN KEY MAN LIFE INSURANCE ON HIM.
In the event of Mr. Reed's death, for at least a short
period our revenues and any profits could decrease
substantially without life insurance benefits to
offset at least a portion of such decrease.
THE BEVERAGE BUSINESS IS HIGHLY COMPETITIVE.
We compete primarily with other natural soda
companies including SoBe, Snapple, Mystic, Arizona,
Hansen's, and Knudsen & Sons. Several of our
competitors and potential competitors have financial
resources superior to ours. These greater resources
permit our competitors to implement extensive
advertising and promotional programs, which we have
not been, and may not be, able to match. As these
competitors enter the field, our market share may fail
to increase or may decrease despite our efforts to
continue to produce superior products through the use
of higher quality ingredients and a brewing process
that we believe remains a trade secret. See
"Business - Competition"
Competitors in the soft drink industry include
bottlers and distributors of nationally advertised and
marketed products as well as chain store and private
label soft drinks. The principal methods of
competition include: brand recognition, price and
price promotion, retail space management, service to
the retail trade, new product introductions, packaging
changes, distribution methods and advertising.
IF OUR COMPETITORS MISAPPROPRIATE OUR UN-PATENTED
PROPRIETARY KNOW-HOW, TRADE DRESS AND TRADE SECRETS,
WE WILL HAVE GREATER DIFFICULTY IN COMPETING WITH THEM
FOR BUSINESS.
We rely primarily on proprietary know-how (trade
secrets) in the production of our beverages, as well
as on confidentiality agreements with the companies
that produce our beverages and with our employees.
If our competitors develop substantially equivalent
proprietary information or otherwise obtain access to
our know-how, we will have greater difficulty in
competing with them for business, and our market share
could shrink.
We regard the protection of our trademarks, trade
dress and trade secrets as critical to our future
success. We have registered our trademarks in the
United States. We also rely on a combination of laws
and contractual restrictions, such as confidentiality
agreements, to establish and protect our proprietary
rights, trade dress and trade secrets. However, laws
and contractual restrictions may not be sufficient to
prevent misappropriation of our proprietary rights,
trade dress or trade secrets. See "Business -
Proprietary Rights."
ANY DECREASE IN THE SUPPLY OF GINGER OR OTHER KEY
INGREDIENTS OR INCREASE IN THE PRICES OF SUCH
INGREDIENTS COULD SIGNIFICANTLY INCREASE OUR COSTS AND
REDUCE PROFITS.
We depend upon an uninterrupted supply of ginger and
certain other ingredients. See "Business - Raw
Materials." Any decrease in the supply of these
ingredients or increase in the prices of these
ingredients as a result of any adverse weather
conditions, pests or fungal disease could
substantially increase our costs and consequently
reduce profits.
AN INCREASE IN THE COSTS OF PACKAGING FOR OUR PRODUCTS
COULD DECREASE PROFITS.
We spend significant amounts on packaging for our
Products because we consider packaging to be an
important component in the sale of our products. If
the costs of our packaging increases significantly,
the total cost of our products would increase
significantly and our profits would decrease.
THE LOSS OF EITHER OF OUR TWO LARGEST CUSTOMERS WOULD
SUBSTANTIALLY REDUCE OUR REVENUES.
During the year 2001, Trader Joes and Mountain Peoples
accounted for approximately 12% and 10%, respectively,
of our sales. The loss of either customer would
substantially reduce our revenues.
WE DETERMINED THE OFFERING PRICE FOR THE SHARES BEING
OFFERED ARBITRARILY. THE MARKET PRICE FOR THE COMMON
STOCK AFTER THE OFFERING MAY VARY FROM THE OFFERING
PRICE.
Prior to this offering, there was no public market for
our common stock. We arbitrarily determined the
offering price for the shares being offered. The
price bears no direct
relationship to our assets, earnings, book value or
other such criteria of value.
For this reason, the market price after the offering
may vary from the initial offering price. As a result,
shareholders may not be able to re-sell their stock or
may have to sell at prices substantially lower than
the price they paid for it.
SINCE THERE IS NO MINIMUM NUMBER OF SHARES WHICH MUST
BE SUBSCRIBED FOR BEFORE WE CAN USE THE PROCEEDS FROM
SALES, OUR EXPANSION PLANS COULD BE AFFECTED BY THE
NUMBER OF SHARES ACTUALLY SOLD.
If we only sell a limited number of the shares
pursuant to this offering, our ability to implement
the expansion plans described under "Use of Proceeds"
could be delayed, unless other funds are available to
us for such purposes.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price is expected to be
substantially higher than the net tangible book value
of each outstanding share of common stock. Purchasers
of common stock in this offering will suffer immediate
and substantial dilution. The dilution will be $3.88
per share, or 65%, in the net tangible book value of
the common stock from the public offering price if all
shares offered hereby are sold. Such dilution will be
$4.66 per share (78%) if only 1,500,000 shares are
sold, and $5.61 per share (94%) if only 300,000 shares
are sold. If the outstanding options and warrants to
purchase shares of common stock were exercised (which
have an exercise price ranging from $0.02 to $3.00 per
share),there would be further dilution. See "Dilution"
IF WE CONTINUE TO INCUR OPERATING LOSSES, WE
EVENTUALLY MAY HAVE INSUFFICIENT WORKING CAPITAL TO
MAINTAIN OPERATIONS.
During the year 2001, we had a loss from operations of
$318,505. If we are not able to begin to earn an
operating profit at some point in the future, we
eventually may have insufficient working capital to
maintain operations.
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS
OUR ABILITY TO OBTAIN FURTHER FINANCING, IF REQUIRED.
We currently anticipate that our available cash
resources combined with the net proceeds from this
offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements
for at least 24 months after the date of this
prospectus. We may need to raise additional funds to
respond to business contingencies, which may include
the need to:
* Fund more rapid expansion,
* Fund additional marketing expenditures,
* Enhance our operating infrastructure,
* Respond to competitive pressures, or
* Acquire complementary businesses.
We cannot assure you that additional financing will be
available on terms favorable to us, or at all. If
adequate funds are not available or are not available
on acceptable terms, our ability to fund our
operations, take advantage of opportunities, develop
products or services or otherwise respond to
competitive pressures could be significantly limited.
FUTURE FINANCINGS COULD ADVERSELY AFFECT YOUR
OWNERSHIP INTEREST AND RIGHTS IN COMPARISON WITH THOSE
OF OTHER SHAREHOLDERS.
If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage
ownership of our shareholders will be reduced, and
these newly-issued securities may have rights,
preferences or privileges senior to those of existing
shareholders, including, those acquiring shares in
this offering.
WE MAY INCUR SUBSTANTIAL LOSSES AS A RESULT OF PRODUCT
RECALL AND PRODUCT LIABILITY.
We may be liable if the consumption of any of our
products causes injury, illness or death. We also may
be required to recall some of our products if they
become contaminated or are damaged or mislabeled. A
significant product liability judgment against the
Company or a widespread product recall, to the extent
either such event was in excess of the limits of our
product liability insurance, could substantially
impair our business, financial condition and results
of operations.
WE NEED TO MANAGE OUR GROWTH AND MAINTAIN PROCEDURES
AND CONTROLS.
We are in a period of significant growth in our
operations and market opportunities. This expansion
is expected to place a significant strain on our
management, operational and financial resources. We
expect to increase our employee base. Such growth may
require improvements in our operational, accounting
and information systems, procedures and controls.
OUR MANAGEMENT HAS BROAD DISCRETION IN THE APPLICATION
OF THE NET PROCEEDS FROM THIS OFFERING.
Our management presently intends to utilize a
substantial portion of the net proceeds of this
offering for the specific purposes set forth in "Use
of Proceeds." However, we have broad discretion with
respect to redirecting the application and allocation
of the net-proceeds of this offering in light of
changes in circumstances and the availability of
certain business opportunities. As a result, any
return on investment to investors will be
substantially dependent upon the discretion and
judgment of our management with respect to the
application and allocation of the net proceeds of the
offering. See "Use of Proceeds"
OUR BOARD OF DIRECTORS HAS THE POWER TO ISSUE
ADDITIONAL SHARES OF COMMON STOCK.
Our board of directors has the power to issue any or
all of such additional common shares for general
corporate purposes without shareholder approval.
Potential investors should be aware that any such
stock issuances might result in a reduction of the
book value of the common shares. If we issue any
additional common shares, such issuance will reduce
the proportionate ownership and voting power of each
other shareholder.
WE DO NOT INTEND TO DECLARE ANY CASH DIVIDENDS IN THE
FORESEEABLE FUTURE.
For the foreseeable future we expect that any
earnings, which may be generated from our operations,
will be used to finance our growth and that we will
not pay any cash dividends to shareholders. See
"Dividend Policy"
THE LOSS OF ANY OF OUR THIRD-PARTY SUPPLIERS OR
SERVICE PROVIDERS COULD IMPAIR OUR OPERATIONS AND
FINANCIAL RESULTS.
We rely on third parties to produce our beverages, to
produce our glass bottles and to bottle our beverages.
The loss of our third-party suppliers or service
providers could impair our
operations and substantially reduce our financial
results.
THE LOSS OF OUR THIRD PARTY DISTRIBUTORS COULD
INTERFERE WITH OUR OPERATIONS AND SIGNIFICANTLY REDUCE
OUR FINANCIAL RESULTS WHILE WE TRY TO REPLACE THE
DISTRIBUTORS.
We depend on distributors to distribute our beverages
and other products. Most of our distributors are not
bound by written agreements with us and may
discontinue their relationship with us on short
notice. The loss of our third party beverage
distributors could interfere with our operations and
consequently reduce our sales and financial results.
BECAUSE IT MAY BE IMPOSSIBLE TO EFFECT A CHANGE IN
CONTROL OF REED'S WITHOUT THE CONSENT OF CHRISTOPHER
J. REED, MANAGEMENT IS ENTRENCHED EVEN THOUGH
SHAREHOLDERS MAY BELIEVE OTHER MANAGEMENT MAY BE
BETTER AND A POTENTIAL SUITOR WHO OTHERWISE MIGHT BE
WILLING TO PAY A PREMIUM TO REED'S MAY DECIDE NOT TO
ATTEMPT AN ACQUISITION.
Christopher J. Reed, our President, CEO and
Chairperson of the Board, currently owns approximately
68% our outstanding voting stock. If all shares
offered hereby are sold, Mr. Reed
will hold approximately 42% of our outstanding voting
stock. If only 1,500,000 shares offered hereby (50%)
are sold, Mr. Reed will own 51.6% of the outstanding
voting stock, while if only 300,000 shares (10%) are
sold, he will own 64% of the outstanding voting stock.
Consequently, Mr. Reed may be able to control the
outcome on all matters requiring shareholder approval,
including the election and removal of directors and
any merger, consolidation or sale of all or
substantially all of our assets, and the ability to
control our management and affairs. See "Principal
Shareholders."
THERE IS NO PUBLIC TRADING MARKET FOR OUR
SECURITIES, AND IF A MARKET DEVELOPS FOR OUR
SECURITIES, IT WILL MOST LIKELY BE LIMITED, SPORADIC
AND HIGHLY VOLATILE.
As a result, if you purchase shares of our common
stock and later decide to sell the shares, you may
have difficulty selling the shares, and the price at
which you can sell the shares (if at all) could be
less than you might otherwise obtain if a broad public
market for the common stock existed.
A SUBSTANTIAL NUMBER OF OUR SHARES WILL BE AVAILABLE
FOR SALE IN THE PUBLIC MARKET AFTER THE OFFERING AND
SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Sales of a substantial number of shares of common
stock into the public market after this offering, or
the perception that such sales could occur, could
substantially reduce our stock price in any public
market and could impair our ability to obtain capital
through an offering of equity securities.
After the offering we will have
7,720,591 shares of common stock outstanding if all
shares offered hereby are sold, 6,220,591 shares
outstanding if half (1,500,000) of the shares offered
hereby are sold, and 5,020,591 shares outstanding if
ten percent (300,000) of the shares offered hereby are
sold. All of the shares of common stock to be sold in
this offering will be freely tradable without
restriction or further registration under the federal
securities laws.
Of the shares currently outstanding,
4,275,889 shares are "restricted securities" under the
Securities Act. Some of these "restricted securities"
will be subject to restrictions on the timing, manner
and volume of sales of such shares, as described under
"Shares Available For Future Resale."
OUR SELLING AGENT WAS FORMED RECENTLY AND IS
INEXPERIENCED.
Because Blue Bay Capital, Ltd. was organized on
October 24, 2001 and is inexperienced, it may not be
as able to assist us in selling the shares as a more
experienced broker-dealer.
OUR COMMON STOCK MAY BECOME SUBJECT TO PENNY STOCK
REGULATION THAT MAY AFFECT THE LIQUIDITY FOR OUR
COMMON STOCK.
Shares of our common stock may become subject to the
rules adopted by the Securities and Exchange
Commission that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny
stocks are generally equity securities with a price of
less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the
NASDAQ system, provided that current price and volume
information with respect to transactions in such
securities is provided by the exchange or system).
The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt
from those rules, deliver a standardized risk
disclosure document prepared by the Securities and
Exchange Commission, which contains the following:
a description of the nature and level of risk in the
market for penny stocks in both public offerings and
secondary trading;
a description of the broker's or dealer's duties to
the customer and of the rights and remedies available
to the customer with respect to violation to such
duties or other requirements of Securities' laws;
a brief, clear, narrative description of a dealer
market, including "bid" and "ask" prices for penny
stocks and significance of the spread between the
"bid" and "ask" price;
a toll-free telephone number for inquiries on
disciplinary actions; definitions of significant terms
in the disclosure document or in the conduct of
trading in penny stocks; and
such other information and is in such form (including
language, type, size and format), as the Commission
shall require by rule or regulation.
Prior to effecting any transaction in penny stock, the
broker-dealer also must provide the customer the
following:
the bid and offer quotations for the penny stock;
the compensation of the broker-dealer and its
salesperson in the transaction;
the number of shares to which such bid and ask prices
apply, or other comparable information relating to the
depth and liquidity of the market for such stock; and
to the depth and liquidity of the market for such
stock; and
monthly account statements showing the market value of
each penny stock held in the customer's account.
In addition, the penny stock rules require that prior
to a transaction in a penny stock not otherwise exempt
from those rules, the broker-dealer must make a
special written determination that the penny stock is
a suitable investment for the purchaser and receive
the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to
transactions involving penny stocks, and a signed and
dated copy of a written suitably statement. These
disclosure requirements may have the effect of
reducing the trading activity in the secondary market
for a stock such as our common stock that is subject
to the penny stock rules.
FORWARD LOOKING STATEMENTS
Some of the statements under the "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve
known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of
activity, performance, or achievements to be
materially different from any future results, levels
of activity, performance, or achievement expressed or
implied by such forward-looking statements. Such
factors include, among other things, those listed
under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking
statements by terminology such as "may," "will,"
"should," "could," "expects," "plan," "anticipates,"
"believes," "estimates," "predicts," "potential," or
"continue" or the negative of such terms or other
comparable terminology.
Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity,
performance, or achievements. Moreover, neither we nor
any other person assumes responsibility for the
accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking
statements after the date of this prospectus.
USE OF PROCEEDS
Our net proceeds from this offering, after deducting
the 10% sales commission and offering expenses
estimated to range from approximately $109,000 to
$390,000, will be from $0 to $15,810,000 depending
upon the number of shares sold. The offering is being
made on a best efforts basis, and we do not know how
many shares will be sold in the offering.
The primary purposes of this offering are to obtain
additional capital, create a public market for the
common stock, and facilitate future access to public
markets. In general, we intend to use the net
proceeds from this offering to retire indebtedness;
hire additional sales representatives; purchase and
place coolers, vending machines and other marketing
tools; and to continue launching new products. We
intend to use a small portion of the net proceeds to
provide for increased office staff and infrastructure.
We presently expect to use the proceeds from the
offering substantially as follows:
Proposed Use Estimated Estimated Estimated
Amount If Amount If Amount If
300,000 1,500,000 3,000,000
Shares Shares Shares
Are Sold Are Sold Are Sold
(%of Total) (%of Total) (% of Total)
Debt retirement $420,000 $420,000 $420,000
(23.6%) (4.7%) (2.3%)
Additional sales 250,000 1,100,000 1,800,000
representatives (13.9%) (12.2%) (10.0%)
New product 200,000 600,000 1,000,000
launches (11.2%) (6.7%) (5.6%)
Retail slotting 220,000 1,700,000 4,500,000
(12.2%) (18.9%) (25.0%)
Brand advertising 150,000 1,000,000 1,500,000
(8.3%) (11.1%) (8.3%)
Cooler/vending 50,000 2,000,000 5,200,000
program (2.8%) (22.2%) (28.9%)
Eastern production 0 745,000 745,000
facility (0%) (8.3%) (4.2%)
Working capital 151,000 260,000 645,000
(8.3%) (2.9%) (3.6%)
Sales commissions 180,000 900,000 1,800,000
(10.0%) (10.0%) (10.0%)
Expenses payable 9,000 45,000 90,000
to selling agent (0.5%) (0.5%) (0.5%)
Other offering 170,000 230,000 300,000
expenses (9.4%) (2.6%) (1.7%)
Total $ 1,800,000 $ 9,000,000 $18,000,000
(100.0%) (100.0%) (100.0%)
============ ============ ============
Depending on the number of shares sold pursuant to
this offering, we intend to repay some or all of the
$370,000 in loans from unrelated third parties and the
$50,000 loan from a related party that we are using to
fund this offering and the building of our first
production facility.
We currently have two sales representatives working
alongside our mainstream distributors. As a result of
these tests, we are anticipating expanding the number
of direct hired sales representatives to work along
side our mainstream distributors. Each sales
representatives is expected to cost the company
approximately $50,000 per year in salary and expenses.
New product launches cost from $25,000 to $100,000.
We currently intend to launch up to twenty or more new
products during the next twelve months. Strategic
expansions of the Virgil's line and the China Cola
line are planned. At least two more Ginger Brews are
in the works. Four ice creams, four cookies, ginger
chews and three more ginger candies round out the work
in progress and ahead.
Retail supermarkets require slotting fees to place
products on the shelf. Based on our successes to date
in supermarkets, we are planning to expand our
presence in supermarkets. The cost for a new placement
is normally between one case of free goods per store
per new item placed to $100 per store per new item
placed. We are planning to place 3 new items in up to
30,000 new accounts.
We are planning to use strategic consumer and trade
targeted advertising to build brand awareness. The
advertising will be employed to support existing and
new product placements. The advertising planned will
include print ads in both magazine and newspapers,
public relations and consumer event sponsorships where
our products can be sampled.
Marketing plans include placement of up to 2,000
Reed's branded refrigerated coolers and a similar
placement of Reed's branded vending machines
throughout the United States and Canada. We consider
coolers and vending machines to be very efficient and
proven marketing models.
We believe that our operations become more efficient
with each brewing and bottling facility we open. We
plan in the next few years to open and outfit at least
three regional facilities in the United States and
Canada. Each additional facility costs about $745,000
to bring online including location, equipment and
personnel. Each facility creates greater efficiency in
production and distribution, direct savings in
shipping costs and greater exposure for our brands.
Most importantly, ownership of production protects
proprietary formulas, recipes, and procedures while
maintaining consistent, high quality control.
In the event that only a limited number of shares are
sold, we will reduce or eliminate the proposed uses as
described in the table above. The speed with which we
expand our marketing and advertising of our products,
and the number of products we offer to the public,
will depend in substantial part on the number of
shares of common stock sold pursuant to this offering.
If only a limited number of shares are sold, our
expansion plans will take substantially longer to
implement. This, in turn, could reduce our potential
profitability.
In June 2002, we entered into a revolving loan and
security agreement pursuant to which we are able to
borrow up to $500,000. See "Business - Loan
Agreement." We intend to use all or a portion of any
funds borrowed pursuant to this agreement, in addition
to the proceeds from the sale of the shares offered
hereby, for the uses described above.
DIVIDEND POLICY
We have never declared or paid any cash dividends on
our common stock and do not anticipate paying cash
dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance
operations and expansion of our business.
CAPITALIZATION
The following table sets forth our capitalization at
March 31, 2002.
Current liabilities:
Current portion of long-term debt $ 169,471
Line of credit 39,409
Other liabilities 874,376
----------
Total current liabilities 1,083,256
----------
Long-term liabilities
Long-term debt 1,145,732
Notes payable to related parties 261,119
----------
Total long-term liabilities 1,406,851
----------
Stockholders' equity:
Common stock - par value $.0001
per share: Authorized -
50,000,000 shares Issued and
outstanding - 4,720,591 shares 472
Additional paid-in capital 2,414,824
Retained (deficit) (878,201)
----------
Total stockholders' equity 1,537,095
----------
Total capitalization $4,027,202
==========
DILUTION
Our net tangible book value at March 31, 2002 was
$678,991, or $0.14 per share. Our net tangible book
value per share is determined by subtracting the total
amount of our liabilities from the total amount of our
tangible assets and dividing the remainder by the
weighted average number of shares of our common stock
outstanding.
The as adjusted net tangible book value per share
after this offering will be $2.12 if all shares
offered hereby are sold. Therefore, purchasers of
shares of common stock in this offering will realize
an immediate dilution of at least $3.88 per share or
about 65% of their investment. If fewer than all
shares offered hereby are sold, the dilution will be
greater. The following table illustrates this
dilution, assuming all shares offered hereby are sold:
Offering price per share of common stock $6.00
Net tangible book value per common share at March 31,
2002 $0.14
Increase per common share attributable to new
Investors $1.98
Net tangible book value per share of common stock
after the offering $2.12
Dilution per share of common stock to new
Investors $3.88
If only 1,500,000 shares of common stock are sold
pursuant to this offering, the as adjusted book value
per share after the offering will be $1.34, and
purchasers in this offering will realize an immediate
dilution of $4.66 per share (approximately 77% of
their investment). If only 300,000 shares of common
stock are sold pursuant to this offering, the as
adjusted book value per share after the offering will
be $0.39, and purchasers in this offering will realize
an immediate dilution of $5.61 per share
(approximately 94% of their investment).
Additional dilution will result to the extent that
outstanding options, warrants, and convertible debt to
purchase our common stock are exercised. As of March
31, 2002, we had outstanding options and warrants to
purchase an aggregate of 483,876 shares of common
stock at a weighted average exercise price of $1.06
per share. As of March 31, 2002, we had outstanding
convertible debt to purchase an aggregate of 90,770
shares of common stock at a weighted average exercise
price of $2.06 per share.
During the five years prior to the date of the
prospectus, the Company has sold shares of common
stock for prices ranging from $1.00 to $4.00 per
share. None of such persons were executive officers,
directors, affiliates or promoters of the Company at
the time of purchase.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
We are a premium, natural beverage company with a
small but growing line of non-beverage food items such
as ice cream and candy. Currently, our products are
being produced by third party co-packers that we
supply with our products raw materials and packaging.
We are in the process of constructing a production
plant on the west coast where we have bought a
warehouse and are retrofitting it for beverage
manufacturing. We expect to realize production,
freight and warehouse savings in excess to the related
increase in depreciation and amortization. We expect
to become a co-pack facility for other beverage
companies potentially increasing revenues.
In recent years the premium beverage business has
experienced the following trends:
Growing consumer demand for all-natural, health
oriented products;
Proliferation of new products including premium
beverages, bottled water and beverages enhanced with
herbal additives or vitamins; and
Consolidation/acquisition of beverage companies;
In July 2002, the Company executed an agreement which
provides a line of credit of up to $500,000. See
"Business - Loan Agreement."
Twelve Months Ended December 31, 2000 Compared To
Twelve Months Ended December 31, 2001
Net Sales. Net sales increased by $460,068 or 8.0%
from $5,728,153 in 2000 to $6,188,221 in 2001. The net
sales increase was primarily a result of sales growth
of existing products in existing accounts (3.8%), and
the new ginger ice cream line (4.2%).
Gross Profit. As a percentage of net sales, gross
profit increased from 20.3% in 2000 to 20.6% in 2001.
This increase was primarily the result of decreased
trade discounts.
Selling Expenses. Selling expenses decreased by
$23,524 or 3.5% from $681,513 in 2000 to $657,989 in
2001 and decreased as a percentage of net sales from
11.9% in 2000 to 10.6% in 2001. The decrease in
selling expenses was primarily due to a reduction in
promotion expenses(1.9%) and trade show
expenses(1.6%).
General And Administrative Expenses.General and
administrative expenses increased by $4,212 or 0.5%
from $933,317 in 2000 to $937,529 in 2001 and
decreased as a percentage of net sales from 16.3% in
2000 to 15.2% in 2001. Accounting expenses increased
82% from 2000 to 2001 due to this SB-2 filing.
Amortization and Depreciation increased 82% from 2000
to 2001 due to software, equipment purchases and
goodwill. Most other expenses decreased as cost
cutting measures have been implemented.
Interest and Other Expenses. In fiscal 2001, interest
expense was $204,457 and interest income was $2,894,
resulting in a net interest expense of $201,563. In
the previous fiscal year, interest expense was $62,299
and interest income was $13,051, for a net interest
expense of $49,248. The Company had lower interest
income due to the reduced cash in money market
accounts. Interest expenses were higher due to the
mortgage for the new production facility, a $74,340
non-cash expense associated with stock warrants for
the $420,000 loan in 2001, a $16,516 non-cash imputed
interest expense associated for the Virgil's purchase
loan which was interest free, actual interest on the
$420,000 loan in 2001 and discount on notes payable.
In 2001, we had other non-operating expenses of $1,388
was due to exchange rate losses from overseas
purchases. In 2000, we had non-operating income of
$15,592 due to a one time forgiveness of debt.
Liquidity And Capital Resources. We have financed our
operations to date through a public offering of common
stock, private sales of equity and convertible debt
securities, a line of credit from a financial
institution and a private debt offering. At December
31, 2001, we had working capital of $836,199, an
increase of $46,440 over our working capital balance
of $789,759 at December 31, 2000. The net increase in
working capital was primarily attributable to our
sales of corporate interest bearing notes. The Company
is reviewing an agreement from a new lender for a
$500,000 line of credit and expects to sign shortly.
Net cash provided by operating activities for the year
ending December 31, 2001 was $149,978, primarily a
result of the increase in accounts payable, and
collections on receivables.
Net cash used in investing activities of $211,514
primarily related to the purchase of property and
equipment.
Net cash provided by financing activities of $289,358
resulted primarily from the private placement in 2001
of corporate interest bearing notes. A building
improvement loan of $168,000 is still available from
the SBA and is expected to be used in 2002.
Twelve Months Ended December 31, 2000 Compared To
Twelve Months Ended
December 31, 1999
Net Sales. Net sales increased by $714,116 or 14.2%
from $5,014,037 in 1999 to $5,728,153 in 2000. The net
sales increase was primarily a result of the
acquisition of Virgil's Root Beer (7.8%), sales growth
of existing products in existing accounts (4.1%), and
new products (2.3%).
Cost of Goods Sold. Cost of goods sold increased by
$798,714 or 21.2% from $3,764,766 in 1999 to
$4,563,480 in 2000 and increased as a
percentage of net sales from 75.1% in 1999 to 79.7% in
2000. This 4.6% increase in cost of goods sold was
primarily the result of increased trade discounts
(2.1%) reducing net sales and increased freight costs
(2.5%). Freight costs increased due to fuel prices
increasing and trade promotions and discounts
increased due to new product launches.
Selling Expenses. Selling expenses increased by
$314,448 or 85.7% from $367,065 in 1999 to $681,513 in
2000 and increased as a percentage of net sales from
7.3% in 1999 to 11.9% in 2000. The increase in selling
expenses was primarily due to increased use of brokers
(21.4%), additional direct hire sales representatives
(23.2%), increased trade show expenses and promotion
expenses (27.4%). These costs were incurred in an
effort to expand our sales both beyond our traditional
markets and geographically.
General And Administrative Expenses. General and
administrative expenses increased by $241,330 or 34.9%
from $691,987 in 1999 to $933,317 in 2000 and
increased as a percentage of net sales from 13.8%
in 1999 to 16.3% in 2000. The increase in general and
administrative expenses is primarily a result of an
increase in amortization (3.6%), payroll (9.0%),
travel (8.3%), telephone (1.7%) and storage and
moving. These expenses increased due to increased
staff to support our expanded marketing efforts.
Interest and Other Expenses. In fiscal 2000, interest
expense was $62,299 and interest income was $13,051,
resulting in a net interest expense of $49,248. In the
previous fiscal year, interest expense was $44,840 and
interest income was $104, for a net interest expense
of $44,736. The Company had higher interest income due
to the equity investments of the SCOR offering.
Interest expenses were higher due to the purchase of
Virgil's Root Beer.
In 1999, we had other non-operating expenses of
$142,175 less non-operating income of $5,000. In 2000,
we had non-operating income of $15,592 and no non-
operating expenses. The non-operating expenses in
1999 were related to the company's first SCOR public
offering. The non-operating income from 1999 was for a
settlement income from a lawsuit and the $15,592 of
non-operating income in 2000 was for a onetime
forgiveness of debt.
Liquidity And Capital Resources. We have financed our
operations to date through a public offering of common
stock, private sales of equity and convertible debt
securities, a line of credit from a financial
institution and cash generated from operations. At
December 31, 2000, we had working capital of $789,759,
an increase of $483,243 over our working capital
balance of $306,516 at December 31, 1999. The net
increase in working capital was primarily attributable
to our use of the proceeds from the common stock sales
to invest in inventory and pay down certain current
liabilities.
Net cash used by operating activities for the year
ended December 31, 2000 was $688,076, primarily a
result of the net loss and an increase in inventories.
Net cash used in investing activities of $423,730
primarily related to the purchase of property and
equipment.
Net cash provided by financing activities of
$1,108,973 resulted primarily from the sale of the
Company's common stock.
Three Months Ended March 31, 2001 Compared To Three
Months Ended March 31, 2002
Net Sales. Net sales increased by $85,573 or 6.2%
from $1,379,451 in the first three months of 2001 to
$1,465,024 in the first three months of 2002. The net
sales increase was primarily a result of sales growth
of existing products (3.0%) and the introduction of
new products (3.2%).
Gross Profit. As a percentage of net sales, gross
profit increased from 16.5% in the first three months
of 2001 to 26.3% in the first three months of 2002.
This increase was primarily the result of decreased
trade discounts thereby increasing the net sales per
case (4.5%) and by the negotiating of better pricing
from suppliers for most of the raw materials and
packaging used in the finished goods sold (5.3%).
Selling Expenses. Selling expenses decreased by
$64,358 or 33.1% from $194,244 in the first three
months of 2001 to $129,886 in the first three months
of 2002, and decreased as a percentage of net sales
from 14.1% in the first three months of 2001 to 8.9%
in the first three months of 2002. The decrease in
selling expenses was primarily due to reduction in
the sales force (15.3%), which reduced travel
expenses(8.4%). Also, promotional expenses decreased
(9.4%). The company reduced staff and promotional
expenses in certain markets until new funding was
available.
General And Administrative Expenses. General and
administrative expenses decreased by $14,340 or 5.9%
from $241,475 in the first three months of 2001 to
$227,135 in the first three months of 2002, and
decreased as a percentage of net sales from 17.5% in
the first three months of 2001 to 15.5% in the first
three months of 2002. Expenses are continuing to run
much higher than normal due to the increased
professional expenses due to the this offering,
approximately 32%. Normal general and administrative
expenses have been relatively constant. The first
three months of 2001 reflected an additional expenses
due to the issuance of stock given to employees as a
year end bonus.
Interest And Other Expenses. In the first three months
of 2001, interest expense was $30,681 and interest
income was $7, resulting in a net interest expense of
$30,674. In the first three months of 2002, interest
expense was $65,657 and interest income was $165 for
a net interest expense of $65,492. The Company had
higher interest expenses due to the interest on the
$420,000 loan in 2001.
In the first three months of 2002 we had a non-
operating income of $1,997 due to exchange rate gains
in connection with overseas purchases.
Liquidity And Capital Resources. At March 31, 2002,
we had working capital of $770,662, a increase of
$248,772 over our working capital balance of $521,890
at March 31, 2001. The net increase in working
capital was attributable to long term debt financing
in June 2001. Subsequent to March 31, 2002, the
Company executed an agreement from a new lender for a
$500,000 revolving line of credit. The SBA building
improvement loan is still active and is approximately
55% utilized. This funding is covering the cash needs
to improve the warehouse used for the Company's new
west coast production facility.
Net cash used in by operating activities for the three
months ended March 31, 2002 was $153,455 consisting
primarily of the Company incurring expenses that were
not currently due offset by an increase in accounts
receivable representing sales made that had not yet
been collected.
Net cash used in investing activities of $41,182
primarily related to the purchase of property and
equipment and acquisition of intangible assets.
Net cash used in financing activities of $12,191
resulted primarily from short-term borrowings.
BUSINESS
Background
We are a growing specialty developer, marketer
and seller of gourmet natural non-alcoholic beverages,
as well as candy, ice cream and cookies. We currently
offer 19 beverages, including six varieties of Reed's
Ginger Brews, Virgil's Root Beer, two varieties of
China Cola, six varieties of Malibu Teaz and four
varieties of a new line of ginger brews called the
Reed's Ginger Juice Brews. However,
we consider our core business to be ginger products
rather than strictly beverages. Our recent
products include Reed's Crystallized Ginger Candy,
Reed's Crystallized Ginger Baking Bits, Reed's Ginger
Candy Chews, Reed's Original Ginger Ice Cream, Reed's
Chocolate Ginger Ice Cream, and Reed's Green Tea
Ginger Ice Cream. We expect to be launching our
Reed's Ginger Cookie line during 2002.
We sell our products primarily in upscale gourmet and
natural food stores in the United States and Canada.
Most of our beverages are sold in the natural food
industry.
Our business strategy is to increase sales by
expanding distribution of our internally developed
brands in new and existing markets, stimulating
consumer trial of our products and increasing consumer
awareness of, and brand loyalty to, our unique brands
and products. Key elements of our business strategy
include:
*Creating strong distributor relationships,
*Stimulating strong consumer
demand for our existing brands and products, and
*Developing unique alternative beverage brands and
other products.
At this time, we use contract packers to prepare,
bottle and package our internally developed products,
continually reviewing our contract packing needs in
light of regulatory compliance and logistical
requirements. Currently, our primary contract packer
is located in Pennsylvania. Substantially all of the
raw materials used in the preparation, bottling and
packaging of our products are purchased by us or by
our contract packers in accordance with our
specifications. We have begun outfitting our own
brewery and bottling plant.
Our expansion plans will be contingent to a great
extent by the success of this offering. If all or
most of the shares being offered hereby are sold, we
will be able to substantially increase our marketing,
advertising and distribution, as well as the products
we offer. If only a limited number of shares are
sold, we will need to expand at a much slower rate.
During the year 2001, Trader Joes and Mt. Peoples
accounted for approximately 12% and 10%, respectively,
of our sales. The loss of either customer would
substantially reduce our revenues.
Historical Development
We began operations in June of 1987 as a sole
proprietorship founded by Christopher J. Reed. The
first two years were dedicated to developing and
organizing production of our first product, the award-
winning Reed's Original Ginger Brew.
In June 1989, production started with a test batch of
50 cases. A local sales effort in the Los Angeles area
was immediately successful. The initial test market
included ten health and specialty food stores and
several restaurants. Through these outlets the product
met and passed the critical test for commercial
success, as consumers enthusiastically came back for
repeat purchases.
Reed's presented what we believe was a new category of
beverages: a
premium gourmet soda manufactured by ancient methods
without additives or preservatives. We sought an
original image as well. We believe we were the first
to place soda in a longneck beer bottle. We also
believe that our brewing method has not, to date, been
successfully reproduced by others. We also strive to
provide a utilize an eye-catching packaging concept
that will stand out on the market shelf.
In 1991, we moved our production to a large regional
contract brewing and bottling facility and we began
exhibiting at the national natural and specialty food
shows. This resulted in more distributors climbing on
board to sell the Company's products. These included
east coast and Midwestern American natural food
distributors, several specialty food distributors and
the Company's first mainstream supermarket
distributor. Sales reached $0.51 million. In the
following years, we continued to expand our
distribution and added additional flavors of our
ginger beverages.
In 1997, we began selling Reed's Crystallized Ginger
Candy. The candy, manufactured in Fiji under a
proprietary, natural, non-sulfured process,
represented our first venture outside the beverage
industry.
In 1998, we launched what we believe was the nation's
first organic agave sweetener, Sweet Cactus Farms
Organic Agave Nectar, under license from Malibu Teaz.
During that year, we also hired our first outside
sales representative.
In 1999, we purchased the Virgil's Root Beer brand
from Crowley Beverage Company in an asset purchase
agreement for $371,000 cash and a promissory note for
$500,000 and payable in five annual installments of
$100,000. In our opinion, Virgil's Root Beer
generally is recognized throughout the natural foods
and specialty foods industries as one of the crown
jewels of root beers. The brand has won numerous
awards in the United States, Canada and Europe for
excellence, quality and taste. Because the Virgil's
brand is partially produced under our auspices in
Europe, this purchase also secures duty free entree to
the European Union for our entire line of products.
The year 2000 was a watershed year for us as revenues
reached about $5.7 million. In a limited public
offering under SCOR regulations, we sold nearly
450,000 common shares at $2.00 between approximately
April 1999 and April 2000, raising approximately
$900,000 for expansion of our product lines and
acquisition of production facilities both of which
have been accomplished according to plan.
In April of 2000, we undertook the first test
marketing of Reed's Original Ginger Ice Cream. We
considered the initial reactions within the industry
and at the Las Vegas Natural Foods Show to be
phenomenal. By the end of the Year, two more
varieties, Reed's Chocolate Ginger Ice
Cream and Reed's Green Tea Ginger Ice Cream, were in
development and on their way to launch.
In June 2000, we launched Reed's Cherry Ginger Brew.
At the same time, we introduced a beautiful designer
gift tin of the Reed's Crystallized Ginger Candy.
In December 2000, we acquired our licensee, China
Cola, for 130,000 shares of our common stock and
royalty payments of $0.75/case sold over the two year
period commencing July 1, 2000. Also in December, we
purchased an 18,000 square foot warehouse property in
a Los Angeles County enterprise zone. This means
the county participates in wages, training and
benefits for all new employees. The enterprise zone
also qualifies us for low interest loans and a variety
of beneficial tax breaks. This property now houses our
executive offices and serves as our Southern
California warehouse facility. We have begun plans to
construct our own brewery and bottling plant on the
property.
In the spring of 2001, we began the national launch of
Reed's Chocolate Ginger Ice Cream and Reed's Green Tea
Ginger Ice Cream to join Reed's Original Ginger Ice
Cream in the retail freezer. Less than a month after
launch, we received orders for more than 4,700 cases
of our ice cream.
In June 2001, we expanded our candy line with two new
products: Reed's Crystallized Ginger Baking Bits and
Reed's Ginger Candy Chews. The package for Reed's
Ginger Candy Chews resembles an old style, 1930's
cigarette pack and in our opinion has found immediate
cachet and enthusiastic acceptance with distributors
and retailers alike.
In the beginning of May 2002, we launched our Reed's
Ginger Juice Brews lines, with four flavors of juice
blends. These products are made from organic ginger
and are organically sweetened.
We were incorporated in 1991 in Florida as Original
Beverage Corporation. In October 2001, we changed our
state of incorporation to Delaware and changed our
name to Reed's, Inc.
Industry Overview
Our beverages are classified as "new age" or
"alternative" beverages, a category that includes
natural soda, fruit juices and fruit drinks, ready-to-
drink teas, sports drinks, and water. From 1992 to
1999, the alternative beverage market has experienced
significant growth, with volumes more than doubling to
1.4 billion cases. The alternative beverage category
is the fastest growing segment of the beverage
marketplace, with sales estimated to have reached
approximately $9.7 billion at wholesale in 2000 with a
growth rate of approximately 11% over the prior year.
(Source: Beverage Marketing Corporation) The
Alternative Beverage category is a small portion of
the non-alcoholic beverage market, which has sales in
excess of $80 billion.
The candy industry in the United States exceeds $23
billion in sales annually, of which approximately 40%
is non-chocolate candy. In pounds, Americans consume
over 25 pounds of candy per person per year. (Source:
National Confectioners Association)
The ice cream industry in the United States generates
more than $20 billion in annual sales. (Source:
International Dairy Foods Association and the United
States Dairy Association) The packaged ice cream
industry includes economy, regular, premium, and super
premium products.
Super-premium ice cream such as Reed's Ginger Ice
Creams is generally characterized by a greater
richness and density than other kinds of ice cream.
This higher quality ice cream generally costs more
than other kinds and is usually marketed by
emphasizing quality, flavor selection, texture and
brand image. Based on supermarket sales, super
premium sales in were $600 million, or approximately
3% of all ice cream sales. (Source: AC Nielsen Scan
Trak) The highest supermarket sales increases in 1999
were seen by the premium and super premium higher fat
varieties. Gallon sales of super premium ice cream
grew 14% in 1999 versus 1998. (Source: International
Dairy Foods Association)
In 2000, Americans spent over $4.56 billion on cookies
in all retail outlets combined, according to AC
Nielsen.
Ginger
Ginger products, rather than beverages, are in fact
our core business. We have found friends and
advocates among alternative, holistic, naturopathic
and homeopathic medical practitioners, dieticians and
medical doctors. This is not surprising, as our
beverages contain a high volume of ginger. A number of
practitioners have contacted us of their own accord,
telling us of their habit of recommending Reed's Extra
Ginger Brew for their patients as a simple way to
ingest a known level of ginger. Reed's Ginger Brews
contain between 8 and 26 grams of fresh ginger in
every 12-ounce bottle. Very simply said, Reed's
drinkers are mega-dosing a spice that is considered by
many persons to be quite beneficial.
Among the applications frequently cited in articles on
ginger are:
*Recommended use for prevention
and relief of motion sickness,
*A preferred alternative to aspirin
in heart attack prevention,
*A safe and effective alternative
to pharmaceutical anti-ulcer drugs,
*Anti-inflammatory treatment for arthritis,
*Treatment for a variety of digestive disorders,
including both constipation and diarrhea,
*Natural therapy for menstrual discomfort,
nausea, cold, parasites and more, and
*Daily tonic to increase general well being.
Our Products
We manufacture and sell 19 beverages and
other products. All of our products are made using
premium all natural ingredients. Most of our beverage
sales are in the natural foods industry. As of the
date of this prospectus, approximately 70% of our
sales are through this natural food channel of
distribution.
According to Spence Information Services (SPINS),
which is the only sales information service catering
to the natural food trade, Reed's Brews and Virgil's
Root Beer hold the #1, 2, 3, 5, 7 and 9 positions
among all beverages in the natural foods industry.
Our products include:
Reed's Ginger Brews
Ginger ale is the oldest known soft drink. Before
modern soft drink technology existed, non-alcoholic
beverages were brewed at home directly from herbs,
roots, spices and fruits. These handcrafted brews were
then aged like wine and highly prized for their taste
and their tonic, health-giving properties. Reed's
Brews are a revival of this home brewing art and
are made the original way using the finest fresh
herbs, roots, spices and fruits. Each batch is
carefully brewed and aged with great pride by our
expert brew masters under the supervision of our
founder, Christopher J. Reed.
We believe that Reed's Ginger Brews are the only
naturally brewed soft drink line in the United States.
Reed's Brews derive their distinctive tastes from the
brewing of fresh herbs, roots and spices from around
the world. No refined sugars are used for sweetening.
The products differ from commercial soft drinks in
three particular characteristics: sweetening,
carbonation and coloring. Reed's Ginger Brews present
20% less sweetness for greater adult appeal.
Carbonation, rather than being injected, is produced
naturally through slower, beer-oriented techniques,
which produce smaller, longer lasting bubbles that do
not dissipate as rapidly upon opening the bottle. No
coloring is added; the color comes naturally from the
herbs, fruits, spices, roots and juices. In addition,
since Reed's Brews are pasteurized and fire brewed,
they do not require or contain any preservatives.
In contrast, modern commercial soft drinks generally
are produced using natural and artificial flavor
concentrates prepared by flavor laboratories, tap
water and refined sweeteners. Typically, manufacturers
make a centrally processed concentrate that will lend
itself to a wide variety of situations, waters and
filling systems. The end product is generally cold-
filled and thus requires preservatives for stability.
Finally, colors tend to be synthetically altered.
We currently manufacture and sell six varieties of
Reed's Ginger Brews:
* Reed's Original Ginger Brew was our first creation,
and is a Jamaican recipe for homemade ginger ale using
17 grams of fresh ginger root, lemon, lime, honey,
fructose, pineapple, herbs and spices. Reed's Original
Ginger Brew is 20% fruit juice.
* Reed's Extra Ginger Brew is the same approximate
recipe, with 26 grams of fresh ginger root for a
stronger bite. Reed's Extra Ginger Brew is 20% fruit
juice.
* Reed's Premium Ginger Brew is the no-fructose
version of Reed's Original Ginger Brew, and is
sweetened only with honey and pineapple juice. Reed's
Premium Ginger Brew is 20% fruit juice.
* Reeds Raspberry Ginger Brew is brewed from 17 grams
of fresh ginger root, raspberry juice, and lime. It is
20% raspberry juice and is sweetened with fruit juice
and fructose.
* Reed's Spiced Apple Brew uses 8 grams of fresh
ginger root, the finest tart German apple juice, and
such apple pie spices as cinnamon, cloves, and
allspice. Spiced Apple Brew is 50% apple juice and
sweetened with fruit juice and fructose.
* Reed's Cherry Ginger Brew is the newest addition to
our Ginger Brew family, and is naturally brewed from:
filtered water, fructose, fresh ginger root, cherry
juice from concentrate, and spices. Reed's Cherry
Ginger Brew is 23% cherry juice.
All six Reed's Ginger Brews are offered in 12-ounce
bottles are sold in stores as singles, in four-packs
and in 24-bottle cases. Reed's Original Ginger Brew is
sold in select Costco stores in a special 12-pack.
Virgil's Root Beer
Virgil's Root Beer has a steady, growing cadre of fans
and long-time aficionados who gladly pay as much as
$5.00 for a single ceramic topped, pint bottle. Over
the years Virgil's has won numerous awards, and is
considered by many to be the best root beer made
anywhere. Virgil's Root Beer has been voted
"Outstanding Beverage" at the International
Fancy Food and Confection Show three times and named
by the Canadian Fancy Food Industry as 'Best Imported
Food Product'. Virgil's Root Beer has also been named
"Best Beverage" by Bon Appetit magazine. Originally
brewed in the north of England, Virgil's is a
delicious micro-brewed root beer. With the exception
of Bavarian Pints and Kegs, we now make Virgil's in
the United States from imported ingredients.
Virgil's is a gourmet root beer.
We use these all-natural ingredients:
* Filtered water,
* Unbleached cane sugar,
* Anise from Spain,
* Licorice from France,
* Bourbon vanilla from Madagascar,
* Cinnamon from Ceylon,
* Clove from Indonesia,
* Wintergreen from China,
* Sweet birch and molasses
from the southern United States,
* Nutmeg from Indonesia,
* Pimento berry oil from Jamaica,
* Balsam oil from Peru, and
* Cassia oil from China
These ingredients are collected worldwide and gathered
together at the brewing and bottling facilities we use
in the United States and Germany. At the breweries,
the ingredients are then combined and brewed under
strict specifications, and finally heat pasteurized to
insure quality.
Virgil's Root Beer is sold in 12-ounce bottles as
singles, in four-packs, in 24-bottle cases, in a
special ceramic-swing-capped Grolsch-style pint bottle
as a single and 12 bottle cases of the 'pints' as well
as in 5 liter self-tapping party kegs.
China Cola
An authentic herb master in China developed the herb
formula in both Original China Cola and Cherry China
Cola. The formula was taken to an American beverage
master who had worked on the original colas in the
early 1900's. The result is what we consider to be the
best tasting and most natural cola in the world. Now
sweetened with raw cane, China Cola has been restored
to its original delicious blend of imported Chinese
herbs, essential oils and natural spices. China Cola
contains no caffeine. It comes in two varieties,
Original Tianfu China Cola and Cherry China Cola.
* Original China Cola is made from filtered water, raw
cane sugar, Szechwan peony root, cassia bark,
Malaysian vanilla, oils of lemon, oil of lime, oil of
orange, nutmeg, clove, licorice, cardamom, caramel
color, citric acid and phosphoric acid.
* Cherry China Cola is made from filtered water, raw
cane sugar, Szechwan peony root, cassia bark,
Malaysian vanilla, oils of lemon, oil of lime, oil of
orange, nutmeg, clove, licorice, cardamom, natural
cherry flavor, caramel color, citric acid and
phosphoric acid.
China Cola and Cherry China Cola are sold as singles,
in four-packs and in 24-bottle cases.
Malibu Teaz
We believe that Malibu Teaz is the only truly organic
line of RTD (ready to drink) teas currently on the
market. They are sweetened exclusively with organic
agave nectar, a whole, unrefined sweetener with
recognized health benefits. Agave nectar is a highly
efficient sweetener, so very little is found in each
serving of the Teaz. Malibu Teaz are brewed from 100%
certified organic, non-irradiated herbs with organic
juice concentrates and pure mountain spring water in a
natural slow-brewing process.
In comparison to regular commercial RTD teas,
Malibu Teaz is:
* Brewed with hot Mountain Spring Water instead of
filtered, cold tap water,
* Made from organic wild crafted herbs instead of tea
concentrates or herbal extracts,
* Made with real organic fruit juices from concentrate
instead of fruit flavors,
* Made with no added colorings instead of chemical
dyes and colors, and
* Sweetened with a whisper of organic agave nectar
instead of corn syrup or aspartame.
All this makes Malibu Teaz a delicious, healthful
alternative to commonplace, commercial ready-to-drink
teas.
The six Malibu Teaz are:
* Heavenly Hibiscus-Berry, which is made from mountain
spring water, non-irradiated organic herbs (hibiscus,
lemongrass, rosehips, alfalfa), organic raspberry
juice from concentrate and organic agave nectar.
* Luscious Lemon-Rose, which is made from mountain
spring water, non-irradiated organic herbs (rosehips,
lemongrass, alfalfa, chamomile), organic agave nectar
and citric acid.
* Miraculous Mints, which is made from mountain spring
water, non-irradiated organic herbs (peppermint,
spearmint, chamomile, alfalfa), organic agave nectar
and citric acid.
* Precious Passion Fruit, which is made from mountain
spring water, non-irradiated organic herbs (rosehips,
hibiscus, chamomile, lemongrass, alfalfa), organic
passion fruit juice from concentrate and organic agave
nectar.
* Comforting Chamomile, which is made from mountain
spring water, non-irradiated organic herbs (chamomile,
hibiscus, rosehips), organic agave nectar and citric
acid.
* Mellow Mocha Spice, which is made from mountain
spring water, non-irradiated organic herbs and spices
(roasted barley, carob, cinnamon), organic agave
nectar, organic vanilla and citric acid.
The six varieties of Malibu Teaz are sold as singles
in pint bottles and in 24-bottle cases.
* Reed's Ginger Candies
Reed's Crystallized Ginger was the first to be
sweetened with raw cane instead of white sugar. Tender
Reed's Crystallized Ginger is custom-made for Reed's
Inc. in the South Pacific Islands of Fiji.
The process is an ancient one that hasn't changed much
through time excepting a slight variation. After
harvesting baby ginger (the most tender kind), the
root is diced and soaked in a strong salt brine to
soften the fibrous core of the ginger. After a very
thorough fresh water rinsing cycle, the soft, diced,
baby ginger root is then steeped in large vats filled
with simmering raw cane syrup. Steeping for several
days, the ginger is then removed and allowed to
crystallize into soft, delicious nuggets in the Fijian
sun. Islanders have long enjoyed these treats for
health and pleasure, as do Reed's customers. Reed's
Ginger Baking Bits are smaller pieces of Reed's
Crystallized Ginger Candy.
*Reed's Crystallized Ginger Candy and Reed's
Crystallized Ginger Baking Bits are made for us in
Fiji from diced baby ginger and raw cane sugar.
Reed's Crystallized Ginger Candy is sold in 4 oz.
bags, 8 oz. enameled, rolled steel gift tins, 16 oz.
resealable Mylar bags, 16 oz. resealable plastic tubs
and in bulk-bins. Reed's Crystallized Ginger Baking
Bits are sold in the bulk-bins.
*Reed's Ginger Candy Chews
For a hundred years or more residents of Southeast
Asia from Indonesia to Thailand have enjoyed soft,
gummy ginger candy chews. Individually wrapped, ten to
a 'Lucky Strike' style soft-pack, Reed's has taken
them a step further, adding more ginger, using no
gelatin (vegan-friendly), and making them slightly
easier to unwrap than their Asian counterparts.
*Reed's Ginger Candy Chews are made for us in
Indonesia from: Sugar, maltose (malt sugar), ginger,
and tapioca starch.
Reed's Ginger Candy Chews are sold individually
wrapped in Soft-packs of ten candies and as
individually wrapped loose pieces in bulk.
Reed's Ginger Ice Creams
Reed's Ginger Ice Creams are made 100% naturally using
the finest rGBH free cream and milk. (The dairy has
filed for organic status.) The milk and cream are
combined with the finest natural ginger extract from
Fiji, Reed's Crystallized Ginger Candy and natural raw
cane sugar to make a delicious ginger ice cream with a
super premium, ultra-creamy texture and Reed's
signature spicy-sweet bite.
The three Reed's Ginger Ice Creams are:
*Reeds Original Ginger Ice Cream
Ingredients: milk; cream, raw cane sugar, Reed's
Crystallized Ginger Candy (finest ginger root, raw
cane sugar), ginger puree, and guar gum (a natural
vegetable gum)
*Reed's Chocolate Ginger Ice Cream
Ingredients: milk; cream, raw cane sugar, finest
Belgian Cocoa (used to make Belgian Chocolate), Reed's
Crystallized Ginger Candy (fresh baby ginger root, raw
cane sugar), chocolate shavings (sugar, unsweetened
chocolate, Belgian Cocoa, soy lecithin and real
vanilla), natural ginger extract, and guar gum (a
natural vegetable gum) combine creating the ultimate
chocolate ginger ice cream.
* Reed's Green Tea Ginger Ice Cream
Ingredients: Milk, cream, the finest Green Tea, raw
cane sugar, Reed's Crystallized Ginger Candy (fresh
baby ginger root, raw cane sugar), and guar gum (a
natural vegetable gum) combine to make the ultimate
green tea ginger ice cream.
Reed's Ginger Ice Creams are sold in pint-containers
and cases of eight pints. We plan to supply Reed's
Ginger Ice Creams in foodservice volume-packaging as
well.
Reed's Ginger Juice Brews
In the beginning of May 2002 we launched a new line of
ginger brews called the Reed's Ginger Juice Brews.
They are 100% juice products that are non-carbonated
and brewed from an organic juice sweetener and organic
fresh ginger root. These drinks are in a 16 oz
juice bottle. We have seen a strong trend toward
organic ingredients and toward non-carbonated
beverages in the marketplace. We have wanted to extend
the ginger brew line and have decided that these new
flavors will cater to the growing market for organic
non-carbonated beverages.
The four Reed's Ginger Juice Brews are:
* Reed's Lemon Guava Ginger Juice Brew, which is
brewed from filtered water, sweetened by organic white
grape juice, organic fresh ginger root, guava juice
and lemon juice from concentrate.
* Reed's Strawberry Kiwi Ginger Juice Brew, which is
brewed from filtered water, sweetened by organic white
grape juice, organic fresh ginger root, strawberry
juice and kiwi juice from concentrate.
* Reed's Pineapple Orange Ginger Juice Brew, which is
brewed from filtered water, sweetened by organic white
grape juice, organic fresh ginger root, pineapple
juice, orange juice and lime juice all from
concentrate.
* Reed's Cranberry Raspberry Ginger Juice Brew, which
is brewed from filtered water, sweetened by organic
white grape juice, organic fresh ginger root,
cranberry and raspberry juice from concentrate.
These new ginger juice brews have already been
accepted as new items by a number of our largest
distributors. A full national rollout to our customers
is currently underway with product samples and
literature going out to key industry buyers.
Our Primary Markets
We sell the majority of our products in upscale
gourmet and natural food stores in the United States
and Canada. The products are currently sold on an
increasing basis in restaurants, delicatessens,
neighborhood grocery markets, and supermarkets. A
limited market has been developed for our products in
Europe and Asia, although it currently represents less
than 1% of our total sales. Most of our beverage sales
are in the natural food industry. We expect this
to change as our mass-market promotions mature.
Sales, Marketing and Distribution
We utilize a number of strategies in bringing our
products to market. These can be broken down into
marketing to distributors (our direct customers),
marketing to retail stores (our distributors'
customers) and marketing to consumers (the retail
store's customers). We also offer our products and
promotional merchandise direct to consumers via the
Internet on our website, www.reedsgingerbrew.com. We
also plan to introduce vending machines and
proprietary coolers in the near future.
Marketing to Distributors
We market to distributors using a number of marketing
strategies, including direct solicitation,
telemarketing, trade advertising, and trade show
exhibition. These distributors, who may also have
relationships with our competitors, include natural
food, gourmet food and mainstream distributors. Direct
contact with the distributors is by in-house sales
representatives, food brokers and outside
representatives. In early 2001, we shifted our
primary focus toward mainstream distribution. Such
mainstream distributors include Big Geyser for New
York City, Southern Wine and Spirits for Arizona, and
Beverage Express for Colorado.
Marketing to Retail Stores
We market to stores by utilizing trade shows, trade
advertising, telemarketing, direct mail pieces, and
direct contact with the store. We have representatives
and brokers who visit stores to sell more directly in
many regions. Sales to retail stores are coordinated
through our distribution network and our regional
warehouses. Parts of the proceeds of this offering are
earmarked for expansion of direct personal sales
contact.
We intend to create our direct distribution
organization on a market-by-market basis. In this way,
we anticipate a smooth transition over a couple of
years. This approach will allow the growing team of
in-house marketers to 'get the bugs out' before moving
on to each successive market. The first effort of this
sort is expected to begin in 2002 in our home
market of western Los Angeles.
Marketing to Consumers
We utilize several marketing strategies to market
directly to consumers. Advertising in targeted
consumer magazines such as "Vegetarian Times" and "New
Age" magazine, in-store discounts on the products, in-
store product demonstration, street corner sampling,
coupon advertising, consumer trade shows, event
sponsoring and our website www.reedsgingerbrew.com are
all among current consumer-direct marketing devices.
Vending Machines
In the mass-marketplace to date, we believe that no
independent manufacturer of soft drinks other than
Coca-Cola and PepsiCo has placed fully branded,
backlit vending machines nationwide. We believe we are
the first natural soft drink manufacturer to create
its own vending machine. We believe that the Reed's
Vending Machine is also the first vending machine to
vend glass bottles in over twenty years. We intend to
expand direct consumer distribution through placement
of these vending machines in publicly accessible
locations across the USA and Canada.
Vending machines present several advantages. As an
outdoor source of product, a vending machine acts as a
twenty-four hour a day, seven days a week point of
sale and consumer self-demonstration device. Using
modern cellular technology, we will be able to track
performance of each machine and the individual
products within the machine. This means if Extra
Ginger Brew, for example, were outselling other
varieties to a great extent, we would see this in real
time and be able to respond in plenty of time to avert
a sold out message on the machine. Such data would
also be invaluable as a tracking demographic, allowing
us to place more of what sells best in a particular
neighborhood in a responsive fashion or, in the case
of a low performance location, to relocate the
machine.
Proprietary Coolers
In-store placements of branded refrigerated coolers by
Snapple, SoBe and Jones Soda, among others, have shown
a significant return on investment. SoBe created its
pervasive presence in the mass-marketplace almost
entirely on a backbone of cooler placements. Jones saw
a doubling of business in just 18 months based upon
this concept. We are currently testing our own Reed's
branded coolers in a number of locations and hope to
see comparable results.
Manufacture of Our Products
We presently produce the Reed's beverage line at a
contract brewery in Pennsylvania. China Cola and
Virgil's are produced at our Pennsylvania contract
plant as well. Virgil's has a contract production
facility in Germany for some of its products. Malibu
Teaz is brewed in Northern California at a contract
packaging facility. The majority of this production
will be supplanted by our own Los Angeles brewery,
which the Company is currently outfitting. We believe
our brewery facility will create efficiencies of
supply and production, which will create a net effect
of raising the gross margin of profit for the entire
enterprise.
Reed's Crystallized Ginger is custom made for us in
the South Pacific Islands of Fiji.
Reed's Ginger Candy Chews are prepared to our
specifications in Indonesia.
Reed's Ginger Ice Creams are made according our recipe
by a contract dairy in the United States.
Raw Materials
The ingredients used in our products generally are
obtained from domestic suppliers and each ingredient
has several reliable suppliers. We have no major
supply contracts with any of our suppliers. As a
general policy, we pick ingredients in the development
of our products that have multiple suppliers. This
provides a level of insurance against a major supply
constriction or calamity.
We import our ginger candies in bulk from the South
Pacific and have it repackaged in the United States.
Product Development & Expansion Plans
Our plans for future product development and expansion
include the following:
Mainstream Distribution
One of our first priorities in current brand placement
expansion is to give attention to and expand marketing
efforts with our current mainstream accounts and
distributors.
New Ginger Products
We will continue to expand the Reed's Ginger Brew,
Reed's Ginger Juice Brew, Reed's Ginger Ice Cream,
Reed's Ginger Candy, and Reed's Ginger Cookie lines
with great vigor. Other Reed's Ginger Product concepts
and lines are under consideration.
Mainstream Supermarkets
We target a niche in the soft drink industry known as
'New Age Beverages'. New Age Beverages are generally
characterized as being made more naturally, utilizing
upscale packaging, and often creating and utilizing
new and unique flavors and flavor combinations. The
New Age Beverage Segment has grown from $620 million
in annual sales for 1989 to over $8 billion in annual
revenues for 2000 (Source: Beverage Marketing
Corporation).
This niche is sold both through the fast-growing
natural food industry, where we believe our lines have
achieved a dominant position in their category, and
through the much larger mainstream supermarket
industry. We are seeking to increase our position in
the mainstream supermarket industry.
Typically, supermarket chains and prominent local
supermarkets impose slotting fees as a one-time
payment before the products are permitted in the store
or chain. We are pursuing broad-based slotting in
supermarket chains throughout the United States and
Canada.
We are currently slotted in 110 Safeway stores in
Oregon and all 130 Raley's stores in Northern
California. Safeway and Raley's data show Reed's
Ginger Brews, with minimal ads and promotions,
performing in the 'middle of the pack' in the New Age
Beverage Set.
The New Age Beverage Set includes SoBe (1999 revenues-
$166.4 million), Snapple (1999 revenues-$854 million),
Arizona (1999 revenues-estimated over $200 million)
and Hansen's (2000 Revenues-$79 million) among others.
(Sources: BevNet, Beverage World, and SEC Filings)
These brands have the advantage of being seen
everywhere in the national market and being commonly
well known for years through well funded ad campaigns.
In spite of having a higher price, no mass advertising
and a relatively small presence in mass market, we
believe that results to date demonstrate that Reed's
Ginger Brews hold up well among these significantly
larger brands. We intend to build on this success by
placing Reed's, Virgil's and the rest of our lines in
the New Age Set in as many of the nation's 35,000
supermarkets as possible.
To date, our presence in supermarkets includes the
following:
Supermarket Chain Location in Which
Our Products Are Sold
Acme Philadelphia
AJ's Arizona
Albertson's Texas
Big Save Hawaii
Byerly's Minnesota
Foodarama New England
Fred Meyers Northwestern US
Gelson's Southern California
Giant Food Maryland
Kroger Cleveland
Larry's Markets Seattle
Overwaitea/Save-On Foods Western Canada
Patrini's San Francisco
Publics Florida
QFC Northwestern US
Raley's/Nob Hill Northern California
Randall's Houston
Rice's Houston
Safeway Northern California
Safeway Oregon
Safeway Western Canada
Sentry Foods Milwaukee
Smith's Utah
Super Fresh Philadelphia
Thriftway Northwest
Treasure Island Chicago
Winn-Dixie New Orleans
International Marketing and Distribution
Discussions are being held with trading companies and
import/export companies for the distribution of our
products throughout Japan, China and the rest of Asia.
These areas are a natural fit for Reed's Ginger
products, as ginger of quality is a cultural paradigm
throughout those lands.
The European Union is an open market for Reed's with
access to that market due in part to the ongoing
production of Virgil's Special Extra Nutmeg Root Beer
in Germany. Reaction to the Reed's brands at Natural
Products Exposition Europe in June 2000 was very
positive. Some success has already been realized in
Europe through our distributor in Amsterdam. The UK
distributor of our lines has also expressed a great
enthusiasm for a mass-market push.
Foodservice
On-premise activity in commercial and non-commercial
locations is an increasing component of total beverage
sales. (Source: Beverage Marketing Corporation) In
recognition of this trend, we are marketing
aggressively to bars and restaurants. Placement of
our products in stadiums, sports arenas, concert
halls, theatres, and other cultural centers is another
long term marketing priority. In addition, we are
currently seeking placement of our ice cream in
restaurants nationwide.
Competition
Our premium beverage products compete generally with
all liquid refreshments and in particular with
numerous other "new age" beverages, including SoBe,
Snapple, Mystic, Arizona, Hansen's, and Knudsen &
Sons. Many of these brands have the advantage of being
seen everywhere in the national market and being well
known for years through well funded ad campaigns, so
that they are better-established in terms of brand
recognition. In addition, the companies manufacturing
these products generally have greater financial
resources than we do and have greater access to
additional financing.
The Virgil's and China Cola lines compete with a
number of other natural soda companies including
Stewarts, IBC, Henry Weinhard, Blue Sky, Natural Brews
and Journey. Malibu Teaz competes with Tazo Teas and
Honest Teas and private label store brands at Whole
Foods and Wild Oats. Many of these companies are
better-established in terms of brand recognition and
access to financing. We believe that Malibu Teaz is
the only truly natural, organic RTD Tea on the market.
We believe our success to date is due in great part to
our innovative beverage recipes and packaging,
superior ingredients and to a brewing process that
remains a trade secret. We believe our commitments to
highest quality and brand innovation are key to our
success. We will not allow these aspects of our
corporate culture to be altered.
Reed's Crystallized Ginger Candy competes with other
candies and snacks in general and in particular with
other ginger candies. The main competitors are Royal
Pacific, the U.S. marketing company for Australia's
Buderim Ginger Company, and Frontier Herbs. These
companies generally have better brand-recognition and
greater financial resources than we do.
Most varieties of crystallized ginger candy in the
marketplace contain sulfur dioxide as a curing and
preservative agent; Reed's Ginger Candies do not. Our
proprietary curing process for Reed's Crystallized
Ginger Candies creates, in our opinion, a vastly
superior product to that of our competitors at a
competitive price.
Our Reed's Ginger Ice Creams will face competition
both from other "premium" and "super premium" ice
cream. Our principal competitors in the ice cream
business are The Haagen-Dazs Company, Inc., Ben &
Jerry's, Godiva, Starbucks, and Dreyers. These
companies have greater brand recognition, market share
and access to financing than we do.
Our Reed's Ginger Cookies will compete with other
cookies and snacks in general and in particular with
other "premium" cookies. Our principal competitors
are expected to be Walkers of Scotland, Bahlsen of
Germany, Duchy Originals of Scotland, and Pamela's of
the USA. These companies have greater brand
recognition, market share and access to financing than
we do.
We compete with other companies not only for consumer
acceptance but also for shelf space in retail outlets
and for marketing focus by distributors, most of which
also distribute other beverage brands. The principal
methods of competition include product quality and
taste, brand advertising, trade and consumer
promotions, pricing, packaging and the development of
new products.
Licenses and Royalties
We have a license with Malibu Teaz for its RTD tea
line and its sweetener line. These licenses are
exclusive and renewed annually. Profits are equally
split between Malibu Teaz and us.
In connection with our acquisition of China Cola, we
agreed to pay the seller royalties equal to $0.75 per
case sold. The minimum payments per agreement year are
$18,750. The royalties expire on July 1, 2002.
Proprietary Rights
We own several trademarks that are considered material
to our business, including Reed's, Virgil's and China
Cola. In addition, we consider our finished product
and concentrate formulae, which are not the subject of
any patents, to be trade secrets.
Our brewing process is a trade secret. This process
can be used to brew other flavors of beverages other
than ginger ale/beer such as root beer, cream soda,
cola and other spice and fruit beverages. No patents
have been sought because we would be required to
disclose our brewing process.
Three of our material trademarks are registered
trademarks in the U.S. Patent and Trademark Office:
Reed's, Virgil's, and China Cola. Registrations for
trademarks in the United States will last indefinitely
as long as the trademark owners continue to use and
police the trademarks and renew filings with the
applicable governmental offices. We have not been
challenged in our right to use any of our material
trademarks in the United States. We are in the
process of obtaining international registration of
certain trademarks under the Berne Convention.
Government Regulation
The production and marketing of our products are
governed by the rules and regulations of various
federal, state and local agencies, including the
United States Food and Drug Administration. The Food
and Drug Administration also regulates the labeling of
our products. We have not encountered any regulatory
action as a result of our operations, and no such
action is anticipated.
Environmental Matters
Our primary cost of environmental compliance at the
present time is in recycling fees, which are projected
at $40,000.00 for 2002. This is a standard cost
of doing business in the soft drink industry.
Employees
We currently employ seven persons full-time and three
part-time: one general management employee, four
sales and marketing support, and five in operations.
Additional persons are employed as needed on a part-
time basis. Consultants are employed as required by
circumstance. We have never participated in a
collective bargaining agreement. We believe our
relationship with our employees is good.
Property
In December 2000 we purchased an 18,000 square foot
warehouse property at 13000 South Spring Street in
unincorporated Los Angeles County. The purchase price
was $850,000 with a down payment of $102,000. We
financed the balance with US Bank with a Small
Business Administration loan; and obtained a building
improvement loan in the amount of $168,000.
Christopher J. Reed, our President and CEO, personally
guaranteed the loans. Both loans have 25-year terms,
with interest at the New York prime rate plus 1%,
adjusted monthly with no cap or floor. The combined
principal and interest payments are $8,660 initially
with annual adjustments. This property now houses our
executive offices and acts as our Southern California
warehouse facility.
A working brewery and bottling plant is being
outfitted on the property and will be called Reed's
Original Ginger Brewery. We expect the brewery to be
finished and operating during the third quarter of
2002. We believe that the brewery and plant will save
us freight, production and warehousing expenses. We
also expect to be able to produce other companies'
products under co-packing agreements.
The property resides in the Los Angeles County Mid-
Alameda Corridor Enterprise Zone. Businesses located
in the enterprise zone are eligible for economic
incentives designed to stimulate business investment,
encourage growth and development and promote job
creation. The incentives include a hiring credit for
wages paid to a qualified employee, up to $26,895 over
a five-year period; a credit for the sales or use tax
paid or incurred on the purchase of certain qualified
machinery or equipment; a business expense deduction
for the cost of qualified property (up to $20,000)
purchased for exclusive use in the enterprise zone;
the ability to carry up to 100% of net operating
losses over a maximum of 15 years to reduce the amount
of taxable enterprise zone income for those years; a
deduction from income on the amount of "net interest"
earned on loans made to a trade or business located
exclusively in the enterprise zone; and a 6% tax
credit for qualifying manufacturers (which includes
the Company).
Loan Agreement
In June 2002, we entered into a loan and security
agreement with ALCO Financial Services LLC, pursuant
to which we are able to borrow up to $500,000. The
actual amount which may be borrowed at any amount is
the lesser of (1) 75% of the net face amount of our
eligible accounts, less reserves determined by ALCO to
reflect negative events, conditions, contingencies or
risks, or (2) $500,000. As of May 31, 2002, the net
face amount of eligible accounts was over $900,000.
The loan is guaranteed by Christopher J. Reed and his
wife. The loan fee for the loan and security
agreement is $6,250. The interest rate for amounts
borrowed is the greater of 8% per annum in excess of
the prime rate, as reflected in the Wall Street
Journal, or 12.75% per annum, and the minimum monthly
interest is $3,500. Any loans pursuant to the loan
and security agreement will be secured by all present
and future accounts, chattel paper, goods (including
inventory and equipment), instruments, investment
property, documents, and general intangibles, and the
proceeds therefrom. The agreement will terminate on
its first anniversary, or such earlier date as the
lender elects to terminate the agreement pursuant to
the terms of the agreement. We can terminate the
agreement prior to its termination date, upon the
payment of the greater of (1) the total interest for
the immediately preceding three months, or (2)
$15,000.
In the event of an event of default, as defined in the
loan and security agreement, then, at the election of
the lender, (1) the agreement may be terminated, (2)
the lender may declare all obligations under the
agreement to be immediately due and payable, (3) all
obligations shall accrue interest at a default rate
equal to 10% per annum in excess of the interest rate,
and (4) the lender may, immediately and without
expiration of any period of grace, enforce payment of
all obligations under the agreement and exercise any
and all other remedies granted to it. An event of
default includes
any default by us in the payment of any obligations
under the agreement when due, whether at maturity,
upon acceleration, or otherwise;
such obligations at any time exceed the amount
allowable under the agreement;
any adverse change occurs with respect to our
financial condition of operations which results in a
material impairment of the prospect of repayment of
such obligations;
any guarantor defaults in the performance of its
obligations to the lender or notifies the lender of
its intention to rescind, modify, terminate or revoke
its guaranty or the guaranty shall cease to be in full
force and effect for any reason whatever;
an order for relief is entered against us or a
guarantor by a bankruptcy court, or we or a guarantor
does not generally pay its debts as they become due;
Christopher J. Reed ceases to own over 50% of our
voting stock;
any subordinating creditor fails to perform or observe
any of its obligations under any subordination
agreement, or notifies lender of an intention to
rescind, modify, terminate or revoke the subordination
agreement, or the subordination agreement ceases to be
in full force and effect for any reason whatever;
Christopher J. Reed fails to devote 100% of his
efforts in furtherance of our business affairs for any
one month, or ceases to be employed by us in his
current capacity;
any provision of this agreement or any of the loan
documents ceases for any reason to be valid and
binding on us; and
any other default which lender believes in good faith
will have a material adverse effect upon our ability
to repay the obligations under the agreement.
MANAGEMENT
General
The following table sets forth certain information
with respect to our directors, executive officers and
key employees:
Name Age Position
------------------ --- -------------------------------
Christopher J Reed 43 Founder, CEO, CFO & Chairperson
of the Board
Eric Scheffer 35 Vice President & National Sales
Manager
Kimiko Isogai 45 Chief Accountant
David Robinov 46 Director
Joseph R Grace 37 Director
Mark Panely 52 Director
Christopher J. Reed, the founder, has been with the
Company since its inception in 1987. Chris has been
responsible for the design of the Company and its
products including the original product recipes, the
proprietary brewing process, and the packaging and
marketing. Chris' instincts in branding and flavors
have produced top sellers in the natural foods
industry. Under Chris' leadership the Reed's label has
earned a reputation for quality. Chris' prior
experience was in the oil and gas industry as a
chemical engineer. He was involved in the design and
development of new technology in the field of natural
gas purification and liquefaction. He also worked four
years as a salesperson for an advertising agency.
Chris received a B.S. in Chemical Engineering in 1980
from Rennselaer Polytechnic Institute at Troy, N.Y.
Eric Scheffer has valuable experience in natural foods
and mainstream marketing. From 1995 to 1997 Eric was
employed by Vita Source and was their first sales
representative. While there, Eric played an integral
part in raising their revenues in one year from $5
million to $7 million. From 1997 to 1998, USA
Nutritionals employed Eric. Eric led a successful
effort bridging their marketing from natural foods to
mainstream stores. 1998 to 1999 were spent managing
the US and Canadian outside sales force for Earth
Science, Inc. From 2000 to mid 2001, Eric led the
sales team at Rachel Perry, the venerable alternative
cosmetics company, as Vice President and National
Sales Manager. By eliminating a large outside
distributor and broker and hiring an efficient in-
house broker, Eric lowered costs and managed to raise
an extra $20,000 per month from this single action.
Eric has been with us since May 2001.
Kimiko Isogai's seventeen years experience as a
Certified Public Accountant includes three years of
growth with international firm Price Waterhouse
Coopers from 1996 to 1999. 1999 to 2000 Kimiko acted
as an accounting consultant for various clients.
Desiring an entrepreneurial corporate atmosphere,
Kimiko joined Reed's in early 2001 and has proved a
valuable addition to the company. Kimiko has expertise
in payroll & corporate tax process, audit &
compilation reports, computer accounting, and
international issues such as foreign exchange, US and
foreign employment law.
David Robinov, in his more than 20 years in business,
has been the founder, developer, partner and CEO in
nearly a dozen successful ventures in the natural and
organic products industries. David started, developed
and sold at profit several successful health foods,
natural foods and alternative health retail concepts,
eventually merging into or selling to larger concerns.
David spent the last ten years developing the China
Cola line. China Cola is the most successful herbal
cola in natural foods. Reed's Inc. acquired China Cola
in December 2000. Recently, David has been involved in
launching a specialty and natural foods company,
Mediterranean Organics, which features the best of
organic products from around the Mediterranean Sea.
David became a director of Reed's in 2001.
Joseph Grace earned his B.S. in Computer Science from
Yale University in 1986. Joseph's experience includes
work on the ARPAnet (precursor to the internet) and
the internet well before the internet became a
household word. He also programmed and consulted on
NEXTstep (precursor to Apple's latest, award winning
operating system, OS X). From 1994 as an "angel
investor" and from 1997 to early 2000 as a game
researcher and developer, Joseph was a member of
Wizards of the Coast, a developer and marketer of the
popular trading card games, Magic: The Gathering and
Pokemon. Joseph enjoyed participating in the growth of
a garage startup into an industry leader with over
1,000 employees. Wizards was sold to Hasbro for over
$300 million in 1999. Joseph has been an independent
consultant since 2000. He currently consults on
distributed software applications, startup business
management,and continues to search for emerging
trends, quality products, and business opportunities.
Joseph became a director of Reed's in 2001.
Mark Panely has been the owner and Chief Executive
Officer of Journey Food and Beverage Company, Inc.
since 1994, where he created and marketed a line of
soft drinks and juice brews. Prior thereto, Mark
founded a company, helped it to eventually achieve $25
million in annual revenues, and sold the company to
J.M. Smucker Co. Mark has more than 30
years' experience in product development and
marketing. At the Build Brand Value CEO Forum in
1998, Mark won the "Brandy Award" for brand
personality. Mark earned a B.S. in Chemistry at Stony
Brook University in 1972. Mark became a director of
Reed's in 2002.
Executive Compensation
The following table sets forth for 2001 and 2000 each
component of compensation paid or awarded to, or
earned by, Christopher J. Reed, our President and CEO.
There were no other persons who were serving as
executive officers as of December 31, 2001.
Name And
Principal Position Year Salary Bonus
Annual Compensation
Christopher J. Reed, 2001 $150,000 $ --
President & CEO 2000 $150,000 $ --
_____________________
Mr. Reed's salary has not changed since 2001, and
there are no discussions underway as of the date of
this prospectus to increase his salary.
Director Compensation
At this time, we do not pay any compensation to
directors for the attendance at board meetings.
Option/SAR Grants and Exercises in 2001
The following table summarizes the stock option activity for
the year ended December 31, 2001:
Weighted Average
Options Exercise Price
Balance,
January 1, 2001 37,500 $ 2.00
Granted - 2001 17,500 3.00
Exercised - 2001 -- --
Forfeited - 2001 -- --
------
Balance,
December 31, 2001 55,000 $ 2.32
======
Employment Agreements
There are no written employment agreements with any of
our officers or key employees.
2001 Stock Option Plan
Pursuant to our 2001 Stock Option Plan, options to
purchase up to 500,000 shares of common stock are
authorized for issuance under the Plan. When a
stock award expires or is terminated before it is
exercised, the shares set aside for that award are
returned to the pool of shares available for
future awards. No options have been granted under
the Plan as of the date of this prospectus.
The plan permits the grant of options to our
employees, directors and consultants. The options
may constitute either "incentive stock options"
within the meaning of Section 422 of the Internal
Revenue Code or "non qualified stock options."
The plan is administered by the board of directors
or a committee appointed by the board. The board
currently administers the plan. The administrator
has full and final authority to select the
individuals to receive options and to grant such
options as well as a wide degree of flexibility in
determining the terms and conditions of options.
The option price cannot be less than 100% of the
fair market value per share of Common Stock on the
date of the grant of the option. The exercise
price of an incentive stock option granted to a
person owning more than 10% of the total combined
voting power of the common stock must be at least
110% of the fair market value per share of common
stock on the date of the grant.
Options may not be granted under the plan on or after
the tenth anniversary of the adoption of the plan.
Incentive stock options granted to a person owning more
than 10% of the combined voting power of the Common
Stock cannot be for more than five years.
Indemnification of Directors and Officers
As permitted pursuant to the corporate law of the
State of Delaware, our state of incorporation, the
Certificate of Incorporation requires that we
indemnify our directors and officers against certain
liabilities and expenses incurred in their service in
such capacities to the fullest extent permitted by
applicable law. These provisions would provide
indemnification for liabilities arising under the
federal securities laws to the extent that such
indemnification is found to be enforceable under, and
to be in accordance with applicable law. Additionally,
we have entered into an indemnity agreement with each
director and officer, which generally provides that
they are indemnified with respect to actions taken in
good faith. Furthermore, the personal liability of the
directors is limited as provided in our Certificate of
Incorporation.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our
directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities
and Exchange Commission such indemnification is
against public policy as expressed in the Securities
Act and is, therefore unenforceable.
Certain Transactions
The Company has two loans payable to Robert T. Reed
Sr., the father of our founder. The first loan was
made to us in 1991 to provide $94,000 in working
capital, and bears interest at 10% per annum. The
balance as of December 31, 2001 was $49,804. The
second loan was made in 1999 to provide $250,000 for
the acquisition of Virgil's Root Beer, and bears
interest at 8% per annum. The balance as of December
31, 2001 was $177,540. This note currently is
convertible into a maximum of 88,770 shares of common
stock at $2.00 per share until July 2005. We believe
that the terms of these transactions were as favorable
to us as those generally available from unaffiliated
parties.
Mark Reed, the brother of our founder, was owed $5,000
on December 31, 2000 for a loan to the Company. This
loan was subsequently converted into 8,889 shares of
common stock. We believe that the terms of this
transaction were as favorable to us as those generally
available from unaffiliated parties.
Christopher Reed, our founder and CEO, has a company
credit card. Mr. Reed is permitted to use the card
for personal purchases as well as for corporate
purposes. At the end of each year, Mr. Reed
reimburses the Company for the amount of any personal
purchases.
At the time of each of the transactions described
above, the Company had no independent directors to
ratify the transactions at the time the transactions
were initiated.
The Company has and will maintain at least two
independent directors on its board of directors who
are not officers of the Company and who do not own 5%
or more of the outstanding common stock of the
Company. All future material affiliated transactions
will be made or entered into on terms that are no less
favorable to the Company that those that can be
obtained from unaffiliated third parties. In
addition, all future material affiliated transactions
and loans, and any forgiveness of loans, must be
approved by a majority of the Company's independent
directors who do not have an interest in the
transactions and who had access, at the Company's
expense to the Company's or independent legal counsel.
If there are only two independent directors at the
time, both independent directors must be
disinterested and approve such transactions.
PRINCIPAL SHAREHOLDERS
The following table sets forth information (except as
otherwise indicated by footnote) as to common shares
owned as of April 30, 2002 or which can be
acquired in sixty days, by (i) each person known by
management to beneficially own more than five percent
(5%) of our outstanding common shares, (ii) each of
our directors and executive officers, and (iii) all
executive officers and directors as a group. On that
date, there were 4,720,591 shares outstanding.
Name & Address %Owned %Owned If %Owned If %Owned If
of Beneficial Before 300,000 1,500,000 3,000,000
Owner & Number Offering Shares Shares Shares
of Shares Owned Are Sold Are Sold Are Sold
--------------- -------- -------- -------- --------
Christopher J Reed
13000 South Spring St
Los Angeles, CA 90061
3,200,000 (1) 67.8% 63.7% 51.4% 41.4%
Joseph R Grace
PMB 158
1900 West Nickerson St
Suite 116
Seattle, WA 98119
500,000 (2) 10.6% 10.0% 8.0% 6.5%
Robert T Reed, Jr.
4411 Galesbury Lane
Chantilly, VA 20151
267,000 5.7% 5.3% 4.3% 3.5%
David Robinov
215 Katona Ave
Katonah, NY 10536
119,500 (3) 2.6% 2.5% 1.9% 1.6%
Mark Panely
4832 Blank Road
Sebastopol, CA 95472
0 0% 0% 0% 0%
----- ----- ----- -----
All officers and
directors as a
group (4 persons)
4,086,500 86.6% 81.4% 65.7% 52.9%
========= ===== ===== ===== =====
______________________________
(1) These shares were issued to Christopher Reed in
1991 in consideration for product formulas and
trademarks held by Mr. Reed.
(2) Of these shares, 250,000 shares were purchased in
April 2000 for $2.00 per share, and 250,000 shares
were purchased in October 2000 for $2.00 per share.
(3) Of these shares, 187,500 shares were purchased in
October 1991 for $0.27 per share, 50,000 shares were
purchased in May 1993 for $1.00 per share, 10,000
shares were purchased in December 1996 for $1.00 per
share, and 20,000 shares were purchased in February
2001 for $1.00 per share pursuant to the exercise of
options granted in 1993. These shares were issued to
Mr. Robinov in December 2000 in consideration for the
assets of China Cola.
DESCRIPTION OF SECURITIES
As of the date of this prospectus, we have the
authority to issue 50,000,000 shares of common stock,
$.0001 par value per share. There were 4,720,591
shares of common stock outstanding immediately prior
to this offering. Our certificate of incorporation
does not authorize our board of directors to issue
preferred stock.
Common Stock
* Holders of common stock are entitled to receive
dividends only if we have funds legally available and
the Board of Directors declares a dividend.
*Holders of common stock do not have any rights to
purchase additional shares.
*Holders of common stock are entitled to one vote per
share on all matters requiring a vote of shareholders.
*Since the common stock does not have cumulative
voting rights in electing directors, the holders of
more than a majority of the outstanding shares of
common stock can elect all of the directors whose
terms expire that year, if they choose to do so.
Christopher J. Reed, our President and CEO, holds a
majority of our outstanding common shares and may
continue to hold a majority of our outstanding common
shares if less than all shares offered hereby are
sold, and consequently may be able to elect all of our
directors.
*There is no public market for our common stock at the
present time.
Outstanding Options and Warrants
As of March 31, 2001, we had outstanding options and
warrants to purchase an aggregate of 483,876 shares of
common stock at an average price of $1.06 per share.
The options and warrants expire at various dates
between 2006 and 2007.
No additional options or warrants will be issued with
an expiration date greater than five years from the
date of grant.
Voting Requirements
Delaware corporate law and our by-laws require the
approval of the holders of a majority of our voting
securities for most actions requiring shareholder
approval. These actions include:
* Election of directors,
* Mergers,
* Sales of substantially all of our shares, and
* Amendment to our certificate of incorporation.
There are no provisions in our Articles of
Incorporation or by-laws that would delay, defer or
prevent a change in control of Reed's.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate
takeovers. This section prevents certain Delaware
corporations, under certain circumstances, from
engaging in a "business combination" with:
* A stockholder who owns 15% or more of our
outstanding voting stock (known as an "interested
stockholder"),
* An affiliate of an interested stockholder, or
* An associate of an interested stockholder, for three
years following the date that the stockholder became
an "interested stockholder." A "business combination"
includes a merger or sale of more than 10% of our
assets.
However, the above provisions of Section 203 do not
apply if:
* Our board approves the transaction that made the
stockholder an "interested stockholder," prior to the
date of that transaction,
* After the completion of the transaction that
resulted in the stockholder becoming an "interested
stockholder," the stockholder owned at least 85% of
our voting stock outstanding at the time the
transaction began, excluding shares owned by persons
who are our officers and directors, or
* On or subsequent to the date of the transaction, the
business combination is approved by our board and
authorized at a meeting of our stockholders by an
affirmative vote of at least 2/3 of the outstanding
voting stock not owned by the "interested
stockholder."
The provisions of this statute could prohibit or delay
mergers or other change and control attempts, and thus
may discourage attempts to acquire Reed's.
SHARES AVAILABLE FOR FUTURE RESALE
Sales of substantial amounts of our common stock in
the public market, or the perception that these sales
could occur, could adversely affect prevailing market
prices of our common stock. Those circumstances could
also adversely affect our ability to raise capital on
favorable terms.
All of the shares issued in this offering will be
freely tradable without restriction or further
registration under the Securities Act of 1933, except
for shares, which may be purchased by our
affiliates. The term "affiliates" is defined in Rule
144 of the Securities Act of 1933. Of the 4,720,591
shares outstanding before this offering, 4,259,700
shares are restricted securities as that term is
defined in Rule 144. Restricted securities may be sold
publicly only if registered or if the sale qualifies
for an exemption under Rule 144. Of these 4,259,700
shares, 3,404,500 shares are held by our affiliates.
Under Rule 144, a person who has beneficially owned
restricted shares of our common stock for at least one
year can sell within any three month period a number
of shares that does not exceed the greater of:
* 1% of the shares of common stock then outstanding
(in our case, between 47,206 shares if no shares are
sold pursuant to this offering and 77,206 shares
immediately after this offering if all shares offered
hereby are sold); or
* The average weekly trading volume during the four
preceding weeks
Under Rule 144(k), a person who has not been our
affiliate for 90 days preceding a sale can sell shares
owned for at least two years without the volume
limitations referred to above.
Of the 4,259,700 restricted shares of our common stock
outstanding, 3,839,600 shares have been owned for at
least one year and 3,588,900 of these shares have been
owned for at least two years.
PLAN OF DISTRIBUTION
General
We are offering to sell, on a best efforts basis, up
to 3,000,000 newly issued shares of our common stock
at $6.00 per share. No minimum number of shares is
required to be sold. Sales will be made only in
states in which we have registered the offering and
only in states in which Blue Bay is registered to sell
securities.
This offering is being made through Blue Bay Capital
Ltd., a member of the NASD. For serving as a selling
agent for this offering, Blue Bay will receive a
selling commission equal to 10% of the purchase price
of the common stock sold through it. In addition, Blue
Bay will receive a non-accountable expense allowance
equal to 0.5% of the aggregate proceeds from sales
through it, as well as a five-year option to purchase
a number of shares of common stock equal to 15% of the
shares sold through Blue Bay in this offering. We
agreed to indemnify Blue Bay against certain
liabilities, including liabilities under the
Securities Act of 1933. Blue Bay is an underwriter of
this offering, and its compensation may be deemed to
be underwriting commission.
Blue Bay Capital, Ltd. is a general securities
broker/dealer registered with the NASD, and is
licensed with the NASD to sell corporate debt,
corporate equity OTC, mutual funds, private placements
of securities, and as an underwriter and/or selling
group participant for corporate securities other than
mutual funds. Blue Bay was formed in the State of
Washington in October 2001 and either is licensed or
has applied for licensing in all fifty states. Peter
Sharma, an affiliate of Blue Bay, has provided various
consulting services for us.
We will publish announcements of the offering on
certain of our products and on our web site, and will
mail and e-mail copies of the announcement to our
shareholders, customers and inquirers. An
announcement of the offering also will be published on
Blue Bay's web site. The announcements will provide
the very limited information permitted under
applicable securities laws and will give our telephone
number, mailing address and e-mail address for
requesting this prospectus. Similar announcements may
be published in other selected magazines.
Shares may be purchased by completing and delivering
to us the share purchase agreement attached hereto as
Appendix A, along with the purchase price by payment
instrument made payable to Reed's, Inc. The share
purchase agreement, among other things, requires the
potential investor to certify his or her state of
residence. In addition, investors will be able to
execute share purchase agreements on the Internet at
Blue Bay's web site and purchase shares via
credit/debit cards, electronic check, Western Union
Quick-Collect and wire transfer. Within 10 days after
our receipt of a share purchase agreement accompanied
by payment for the purchase price, a written
confirmation will be sent by electronic mail or first
class mail to notify the subscriber of the extent, if
any, to which such subscription has been accepted by
us.
The offering will begin on the date of this prospectus
and continue until either all of the shares have been
sold or we terminate the offering, but in no event
later than nine months after the date of this
prospectus. Subject to the foregoing, the timing of
the termination is at the discretion of our board of
directors.
Escrow of Promotional Shares
Certain persons who are deemed promoters have executed
a lock-up agreement with respect to all or some of
their common stock and/or options and pursuant to
which (i) they generally will be unable to transfer
the subject shares and/or options and (ii) in the
event of a dissolution, merger, consolidation,
reorganization, sale of exchange of the Company's
assets or securities with a person who is not a
promoter, they will not share in any distribution
until the public shareholders have received an amount
equal to $6.00 times the number of shares of common
stock that they purchased in this offering and which
they still hold at the time of such distribution
(adjusted for stock splits, stock dividends,
recapitalizations and the like). The latter
restriction can be waived by the vote of holders of a
majority of the outstanding common stock which is not
subject to the lock-up agreement. However, the voting
rights of the common stock subject to the escrow will
not be affected. Beginning one year from the
completion or termination of this offering, 2 1/2% of
the shares placed in escrow will be released each
quarter. All remaining promotional shares will be
released from escrow on the second anniversary of the
completion or termination of this offering. In
addition, the escrow will terminate if this offering
is terminated prior to the sale of any shares or if
the purchase price for any shares sold are returned to
the investors. The lock-up agreements relate to the
following:
Christopher Reed 3,200,000 shares
Robert Reed, Jr. 279,510 shares and options
Joseph Grace 303,922 shares
David Robinov 109,020 shares and options
Robert Reed, Sr. 262,500 options
MINIMUM SALES PRIOR TO SALES IN ARIZONA
In Arizona, no subscriptions will be accepted by the
Company unless the Company has sold a at least 200,000
of shares of common stock pursuant to this offering,
including any shares subject to the subscription(s).
LEGAL MATTERS
The validity of the securities offered hereby is being
passed upon for us by Edward T. Swanson, Esq. of Santa
Monica, California. Mr. Swanson previously was a
director of this company."
EXPERTS
Our financial statements which
appear in this prospectus and in the registration
statement have been audited by Sprayberry, Barnes,
Marietta & Luttrell with respect to the years ended
December 31, 2001 and 2000, and are included in
reliance upon the report of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2
with the SEC. This prospectus, which forms a part of
that registration statement, does not contain all of
the information included in the registration
statement. Certain information is omitted and you
should refer to the registration statement and its
exhibits. Statements contained in this prospectus
regarding the contents of any contract or any other
document to which reference is made are not
necessarily complete, and you should refer to the
exhibits attached to the registration statement for
copies of the actual contract or document. You may
review a copy of the registration statement at the
SEC's public reference room in Washington, D.C. at
Judiciary Plaza, 450 Fifth Street, Washington, D.C.
20549, and at the SEC's regional offices in Chicago,
Illinois and New York, New York. Please call the SEC
at 1-800-732-0330 for further information on the
operation of the public reference rooms.
The registration statement can also be reviewed by
accessing the SEC's Internet site at
http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding
registrants, such as Global Brands, that file
electronically with the Commission. As a result of
this offering, we will become subject to the
information and reporting requirements of the
Securities Exchange Act for at least twelve months
and, in accordance therewith, will file periodic
reports and other information with the SEC.
You should rely only on the information contained in
this prospectus. We have not authorized anyone to
provide you with information different from that,
which is contained in this prospectus.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report of
Sprayberry, Barnes, Marietta & Luttrell............42
Balance Sheet......................................43
Statements Of Operations...........................45
Statements Of Cash Flows...........................47
Statements Of
Changes In Stockholders' Equity....................50
Notes To Financial Statements......................53
[SPRAYBERRY, BARNES, MARIETTA & LUTTRELL LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Reed's, Inc.
We have audited the accompanying balance sheet of
Reed's, Inc. fka Original Beverage Corporation as of
December 31, 2001, and the statements of operations,
stockholders' equity, and cash flows for the years
ended December 31, 2001 and 2000. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards 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 audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to
above present fairly, in all material respects, the
financial position of Reed's, Inc. fka Original
Beverage Corporation as of December 31, 2001 and the
results of its operations and its cash flows for the
years ended December 31, 2001 and 2000, in conformity
with generally accepted accounting principles of the
United States of America.
As discussed in Note A-14 to the financial statements,
certain reclassifications and restatements have been
made to the Company's 2000 balances for additional
paid in capital, sales, cost of sales, and selling
expenses. These discoveries were made subsequent to
the issuance of the financial statements.
/s/ Sprayberry, Barnes, Marietta & Luttrell
Oxnard, California
March 21, 2002
REED'S, INC. (fka ORIGINAL BEVERAGE CORPORATION)
BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
------------ ---------------
(Unaudited)
CURRENT ASSETS:
Cash $ 21,844 $ 228,672
Trade accounts
receivable, net 458,148 378,378
Inventory 1,103,449 1,253,479
Prepaid expenses 73,022 30,519
Other receivables 17,982 7,178
Deferred stock
offering costs 179,433 159,238
--------- ---------
Total current assets 1,853,878 2,057,464
PROPERTY
AND EQUIPMENT, Net 1,315,220 1,296,487
INTANGIBLE ASSETS, Net 858,104 858,976
--------- ---------
$4,027,202 $4,212,927
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion
of long-term debt 169,471 119,037
Line of credit 39,409 40,966
Accounts payable 738,834 972,992
Accrued expenses 135,542 88,270
--------- ---------
Total current liabilities 1,083,256 1,221,265
--------- ---------
LONG-TERM LIABILITIES:
Notes payable
to related parties 261,119 256,694
Long-term debt - Other 1,145,732 1,150,279
--------- ---------
1,406,851 1,406,973
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - Par value $0.0001 per share:
Authorized-50,000,000 shares
Issued and outstanding -
4,720,591 shares at December 31, 2001
4,720,591 shares at March 31, 2002
472 472
Additional paid-in capital 2,414,824 2,414,824
Retained deficit (878,201) (830,607)
----------- ----------
1,537,095 1,584,689
----------- ----------
$4,027,202 $4,212,927
=========== ==========
REED'S, INC. (FORMERLY ORIGINAL BEVERAGE CORPORATION)
STATEMENTS OF OPERATIONS
Three months Year ended
March 31, December 31,
2002 2001 2001 2000
------------------------------------------------
(Unaudited)(Unaudited)
SALES $1,465,024 $1,379,451 $6,188,221 $5,728,153
COST
OF SALES 1,079,329 1,152,054 4,911,208 4,563,480
---------- --------- --------- ---------
GROSS
PROFIT 385,695 227,397 1,277,013 1,164,673
OPERATING EXPENSES:
Selling 129,886 194,244 657,989 681,513
General & Admini-
strative 227,135 241,475 937,529 933,317
--------- --------- --------- ---------
357,021 435,719 1,595,518 1,614,830
--------- --------- --------- ---------
INCOME (LOSS) FROM
OPERATIONS 28,674 (208,322) (318,505) (450,157)
--------- --------- --------- ---------
OTHER INCOME AND (EXPENSES):
Interest
income 165 7 2,894 13,051
Interest
expense (65,657) (30,681) (204,457) (62,299)
Other non-operating
expenses -- -- (1,388) --
Other non-operating
income 1,997 -- -- 15,592
--------- --------- --------- ---------
(63,495) (30,674) (202,951) (33,656)
LOSS BEFORE
INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLES (34,821) (238,996) (521,456) (483,813)
--------- --------- --------- ---------
PROVISION FOR INCOME TAXES
(BENEFIT) 800 4,800 (13,200) (40,310)
--------- --------- --------- ---------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES (35,621) (243,796) (508,256) (443,503)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING
PRINCIPLES (11,973) -- -- --
--------- --------- --------- ---------
NET LOSS ($47,594) ($243,796) ($508,256) ($443,503)
========= ========= ========= =========
LOSS PER SHARE - Basic and Diluted
LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING
PRINCIPLES $(0.01) $(0.05) $(0.11) $(0.11)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING
PRINCIPLES -- -- -- --
------ ------ ----- -----
NET LOSS $(0.01) $(0.05) $(0.11) $(0.11)
====== ====== ====== =====
The accompanying notes are an integral
part of these financial statements.
REED'S, INC. (FORMERLY ORIGINAL BEVERAGE CORPORATION)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------------------------------------
BALANCES
December 31,
1999 3,588,900 359 299,542 121,152 421,053
SALE OF COMMON STOCK, NET OF
EXPENSES 699,975 70 1,138,702 -- 1,138,772
STOCK ISSUED IN CONNECTION WITH ACQUISITION OF RIGHTS
TO CHINA COLA 130,000 13 259,987 -- 260,000
DEBT CONVERTED
TO EQUITY 200,000 20 149,980 -- 150,000
EXERCISE
OF WARRANTS 37,500 4 37,496 -- 37,500
STOCK ISSUED
FOR SERVICES -- -- 132,614 -- 132,614
STOCK ISSUED FOR
COMPENSATION 1,500 -- 3,000 -- 3,000
NET LOSS -- -- -- (443,503)(443,503)
--------- --- -------- -------- -------
BALANCES
December 31,
2000 4,657,875 466 2,021,321 (322,351)1,699,436
STOCK ISSUED FOR
COMPENSATION 14,500 2 28,998 -- 29,000
STOCK ISSUED FOR
SERVICES 3,200 - 6,400 -- 6,400
EXERCISE OF
WARRANTS 20,000 2 19,998 -- 20,000
DEBT CONVERTED
TO EQUITY 20,766 2 27,813 -- 27,815
SALE OF COMMON STOCK,
NET OF EXPENSES 4,250 -- 16,500 -- 16,500
WARRANTS ISSUED TO NON-EMPLOYEES
SERVICES -- -- 45,994 -- 45,994
WARRANTS ISSUED
WITH DEBT -- -- 247,800 -- 247,800
NET LOSS -- -- -- (508,256)(508,256)
--------- --- -------- -------- -------
BALANCES
December 31, 2001
4,720,591$472$2,414,824$(830,607)$1,584,689
--------- --- -------- -------- ---------
NET LOSS
(Unaudited) -- -- -- (47,594) (47,594)
--------- --------- --------- ---------
BALANCES March 31, 2002
(Unaudited)4,720,591$472$2,414,824$(878,201)$1,537,095
--------- --- -------- -------- ---------
The accompanying notes are an integral
part of these financial statements.
REED'S, INC. (FORMERLY ORIGINAL BEVERAGE CORPORATION)
STATEMENTS OF CASH FLOWS
Three months Year ended
March 31, December 31,
2002 2001 2001 2000
---------------------------------------
(Unaudited)(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($47,594) ($243,796) ($508,256) ($443,503)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and
amortization 11,350 26,191 111,380 65,469
Services in exchange for
common stock -- 35,400 35,400 3,000
Amortization of
note discount 37,170 -- 74,340 --
Amortization of consulting
contract 3,247 3,247 12,987 --
Impairment
loss 11,973 -- -- --
Imputed interest
expense 3,582 4,697 16,516 21,748
Deferred income
taxes -- 4,000 (14,000) 4,457
Changes in operating assets and liabilities:
Trade accounts receivable,
net (79,770) (112,031) 58,362 92,856
Inventory 150,030 251,781 83,123 (415,474)
Income tax
refund -- -- 50,567 24,692
Prepaid
expenses (45,750) (11,377) 29,122 (36,813)
Other
receivables (10,804) 15,568 9,511 (11,689)
Accounts
payable (234,158) 17,579 203,763 (20,822)
Accrued
expenses 47,269 (53,340) (12,837) 28,003
------- ------- -------- ------
Net cash used in operating
activities (153,455) (62,081) 149,978 (688,076)
------- ------- -------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment (27,948) (42,695) (204,144) (381,418)
Acquisition of intangible
assets (13,234) (3,462) (12,694) (33,821)
Increase (decrease) in restricted
cash -- -- -- (64,840)
Increase (decrease) in restricted cash
payable -- -- -- 64,840
Advances to
officer -- (426) (22,538) (20,193)
Payments received
from officer -- 9,000 27,862 11,702
------- ------- -------- ------
Net cash used by investing
activities (41,182) (37,583) (211,514) (423,730)
------- ------- -------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on
debt (5,068) (3,292) (110,626) (107,812)
Proceeds from issuance of common
stock -- 20,000 36,500 1,282,913
Proceeds from
borrowings 14,629 10,200 400,480 --
Net borrowing (repayment) on line
of credit (1,557) 47,291 40,966 (10,000)
Proceeds from borrowings-related
parties -- -- 50,000 --
Payments on debt to related
parties -- -- -- (70,846)
Payments for deferred stock issuance
costs (20,195) (6,628) (113,244) --
Bank
overdraft -- 54,933 (14,718) 14,718
--------- --------- -------- ------
Net cash provided by financing
activities (12,191) 122,504 289,358 1,108,973
--------- ------- -------- ------
NET INCREASE (DECREASE)
IN CASH (206,828) 22,840 227,822 (2,833)
CASH - Beginning
of period 228,672 850 850 3,683
------- ------- -------- ------
CASH - End
of period $21,844 $23,690 $228,672 $ 850
======= ======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
2001 2000
--------------------------------------
Interest $81,081 $44,741
======= =======
Income taxes $800 $800
======= =======
The accompanying notes are an integral
part of these financial statements.
Non-cash investing and financing activities:
In 2001, the Company:
converted debt and accrued interest in the amount of $27,815
into 20,766 shares of common stock.
issued 31,500 warrants with a value of $45,994 in connection
with efforts to sell common stock, which were
capitalized as deferred stock issuance costs.
granted 420,000 warrants with a value of $247,800 in
connection with a debt offering which has been
included as a discount upon the related debt.
In 2000, the Company:
incurred debt of $748,000 in connection with the
acquisition of a building.
issued 130,000 shares of common stock with a value of
$260,000 in connection
with the acquisition of intangible assets.
converted debt of $150,000 into 200,000 shares of
common stock.
issued 104,876 warrants with a value of $106,641 in
connection with the sale of common stock
issued 30,000 warrants with a value of $25,973 as
prepayment on a two-year consulting agreement
REEDS, INC.
fka
ORIGINAL BEVERAGE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of
Reeds,
Inc. fka Original Beverage Corporation (the "Company")
is presented to assist in understanding the Company's
financial statements. These accounting policies
conform to generally accepted accounting principles
and have been consistently applied in the preparation
of the financial statements.
1) Nature of Operations
The Company was organized under the laws of the state
of Florida in January 1991. In 2001, the Company
changed its name from Original Beverage Corporation to
Reed's, Inc. and changed its state of incorporation
from Florida to Delaware. The Company's primary
activity is manufacturing and marketing gourmet
natural non-alcoholic beverages. Its
home office is in California, with most of the
manufacturing function done at a contract facility in
Pennsylvania.
2) Concentrations of Credit Risk
The Company maintains its cash balance in two
financial institutions. The balances are insured by
the Federal Deposit Insurance Corporation up to
$100,000. Periodically throughout the year the
Company maintains balances in excess of federally
insured limits. At December 31, 2001 the Company's
uninsured balance totaled $127,472.
3) Revenue Recognition
Revenue is recognized on the sale of products when the
products are shipped and all significant contractual
obligations have been satisfied. Amounts paid by
customers for shipping and handling costs are included
in sales. Shipping, handling and warehousing costs
are included in costs of sales in the statement of
operations.
4) Accounts Receivable
The allowance for doubtful accounts is established
through a provision for bad debt charged to expense.
Receivables are charged off against the allowance when
management believes that the collectibility of the
account is unlikely. Recoveries of amounts previously
charged off are credited to revenues. Allowance for
doubtful accounts for the year ended December 31, 2001
was $6,300.
The allowance for returns and discounts is established
through a provision for returns and discounts charged
against sales. Receivables are charged off against
the allowance when payments are received or products
are returned. The allowance for returns and discounts
for the year ended December 31, 2001 was $3,150.
(A) Summary of Significant Accounting Policies
(Continued)
5) Deferred Stock Offering Costs
During the year ended December 31, 2001, the Company
has incurred costs in connection with its attempt to
undertake an initial public offering. Once sales of
common stock have occurred, these costs will be netted
against proceeds received. The costs incurred by the
Company included herein consist of attorney's fees,
accountant's fees, SEC filing fees, state filing fees,
and other consulting fees all related to the initial
public offering and future issuance of common stock.
6) Inventory
Inventory is valued at the lower of cost (first-in,
first-out) or market and is comprised of the following
at December 31, 2001:
Raw materials $ 434,359
Finished goods 819,120
----------
$1,253,479
==========
7) Property and Equipment and Related Depreciation
Property and equipment is stated at cost.
Depreciation is calculated using accelerated and
straight-line methods over the estimated useful lives
of the assets as follows:
Building and improvements 39 Years
Machinery and equipment 7 Years
Computers 3-5 Years
Automobiles 5 Years
Office equipment 7 Years
Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Under SFAS 121, "Accounting for the Impairment of
Long-lived Assets and Assets to be Disposed of" the
Company recognizes impairment losses on property and
equipment and intangible assets whenever events or
changes in circumstances indicate that the carrying
amount of long-lived assets, on an individual property
basis, may not be recoverable through undiscounted
future cash flows. Such losses are determined using
estimated fair value or by comparing the sum of the
expected future net cash flows to the carrying amount
of the asset. Impairment losses are recognized in
operating income, as they are determined. The Company
does not believe that a current impairment exists.
The Company has adopted FAS 144 "Accounting for
the Impairment of Disposal of Long-Lived Assets" as of
January 1, 2002. See note A-13 for further
discussion.
A)Summary of Significant Accounting Policies
(Continued)
8) Intangible Assets
Goodwill represents the excess of acquisition costs
over the fair market value of the net assets of
acquired businesses and is being amortized on the
straight-line basis over the estimated useful life of
20 years. Other intangible assets are being amortized
on the straight-line basis over their estimated useful
lives or their contractual terms as follows:
Design cost 10 years
Loan fee 25 years
Covenant not to compete 2 years
The Company has adopted FAS 141, "Business
Combination" and FAS 142 "Goodwill and Other
Intangible Assets" as of January 1, 2002. See Note A-
13 for further discussion of the natures of the
Statements. The Company is currently undergoing a
valuation to recognize its intangible assets that
arise from contractual or legal rights apart from
goodwill. These intangible assets will include trade
secrets, recipes, and trademarks. Estimated lives
will be determined upon completion of the valuation.
9) Advertising Costs
Advertising costs are expensed as incurred and are
Included in selling expenses, in the amount of
$107,499 and $79,784, for the years ended December 31,
2001 and 2000, respectively.
The EITF reached a final consensus on Issue
00-25, "Accounting for Consideration from a Vendor to
a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products" and Issued 01-9
"Accounting for Consideration Given by a Vendor to a
Customer or Reseller of the Vendor's Products." These
consensuses address the accounting treatment and
income statement classification for certain sales
incentives, including cooperative advertising
arrangements, buy downs and slotting fees. The
consensus requires that slotting fees be reclassified
as a reduction of gross sales. The Company had
accounted for certain sales incentives, including
slotting fees, as selling expenses. Although these
guidelines will not become effective for the Company
until the first quarter of the year ended December 31,
2002, the Company has elected early adoption and
has
restated the financial statements for the
years ended December 31, 2001 and 2000 to include
the required pro forma reclassifications of revenues
and selling expenses within the statements of
operations. Costs reclassified from selling expense as
a reduction of gross revenue totaled $368,866 and
$262,317 for the years ended December 31, 2001 and
2000, respectively. There has been no impact on the
reported net loss or loss per share.
10) Income Taxes
The Company accounts for income taxes using the
liability approach to financial accounting and
reporting. Current income taxes are based on the
year's income taxable for federal and state reporting
purposes. The difference between the financial
statement and tax bases of assets and liabilities is
determined annually.
Deferred income tax assets and liabilities are
computed for
those currently enacted tax laws and rates that apply
to the periods in which they are expected to affect
taxable income. Valuation allowances are established,
if necessary, to reduce deferred tax asset accounts to
the amounts that will more likely than not be
realized. A 100% valuation allowance has been placed
upon the deferred tax asset. See Note K for further
disclosure.
11) Stock Options
The Company accounts for employee stock options in
accordance with Accounting Principles Board Opinion
No. 25 (APB 25) "Accounting for Stock Issued to
Employees". Under APB 25, the Company recognizes no
compensation expense related to employee stock
options, because the option price per share will not
be less than the fair market value on the date of the
grant.
In 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation", became effective. SFAS No. 123, which
prescribes the recognition of compensation expense
based on the fair value of options on the grant date,
allows companies to continue applying APB 25 if
certain proforma disclosures are made assuming
hypothetical fair value method application. See Note
H for further disclosure.
12) Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles 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. Actual results could differ from those
estimates.
A)Summary of Significant Accounting Policies
(Continued)
13) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 141, "Business Combination" ("FAS 141")
and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("FAS
142"). FAS 141 requires all business combinations to
be accounted for using the purchase method of
accounting and is effective for all
business combinations completed after June 30, 2001.
The effect of this adoption on the Company's operating
results or financial condition is not currently known.
FAS 142 requires the use of a non-amortization
approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach,
goodwill and certain intangibles will not be amortized
into results of operations, but instead would be
reviewed for impairment and written down and charged
to results of operations only in the periods in
which the recorded value of goodwill and certain
intangibles is more than its fair value. The
provisions of each statement, which apply to goodwill
and certain intangibles acquired prior to June 30,
2001 will be adopted on January 1, 2002. The Company
expects the adoption of these standards will have the
impact of reducing its amortization of goodwill
commencing January 1, 2002. The effect upon adoption
is currently unknown, however impairment reviews may
result in write downs in both the adoption period and
in future periods. The unamortized goodwill was
$806,757 as of December 31, 2001. Amortization of
goodwill for the years ended December 31, 2001 and
2000 was $45,351 and $33,521, respectively.
In June 2001, Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement
Obligations" ("FAS 143") was issued. FAS 143
addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible
long-lived assets and the associated retirement costs
that result from the acquisition, construction, or
development and normal operation of a long-lived
asset. Upon initial recognition of a liability for an
asset retirement obligation, FAS 143 requires an
increase in the carrying amount of the related
long-lived asset. The asset retirement cost is
subsequently allocated to expense using a systematic
and rational method over the assets useful life. FAS
143 is effective for fiscal years beginning after June
15, 2002. The adoption of this statement is not
expected to have a material impact on the Company's
financial position or results of operations.
In October 2001, the FASB issued Statement No. 144,
"Accounting for the impairment of Disposal of Long-
Lived Assets" (FAS 144). FAS 144 replaces FAS
Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be
Disposed of" (FAS 121). FAS 144 develops one
accounting model, based on the framework established
in FAS 121, for long-lived assets to be disposed of by
sale. The accounting model applies to all long-lived
assets, including discontinued operations, and it
replaces the provisions of APB Opinion No. 30,
"Reporting Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for disposal of segments of
a business. FAS 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing
operations or in discontinued operations. FAS 144 also
broadens the definition of discontinued operations.
FAS 144 is effective for the Corporation's fiscal year
beginning January 1, 2002. Management believes that
FAS 144 will not have a
material impact on the Company's financial statements.
14) Reclassifications
Certain reclassifications have been made to the prior
year financial statements in order for them to conform
to the current year presentation. There has been no
effect on prior year's reported net loss or loss per
share.
Prior year's sales, cost of sales, and selling
expenses have been restated. Sales have decreased by
$262,317 due to early adoption of EITF 00-25 (see Note
A-9) and selling expenses have decreased by the same
amount. Cost of sales has increased by $295,155 due
to reclassification of shipping and handling cost and
selling expenses have decreased by this amount. This
has had an effect to decrease gross margin by
$557,472.
In 2000 two issuances of warrants to non-employees
were accounted for as options issued to employees.
These amounts have been reclassified as warrants and
accounted for in accordance with FAS 123. Both
issuances impacted the balance sheet only and there
was no effect on reported net loss or loss per share.
Additional paid in capital has had a net increase of
$25,973. The disclosures at Note H have been amended
accordingly.
(B) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at
December 31, 2001:
Building and improvements $ 515,846
Land 409,546
Machinery and equipment 384,177
Computers 84,003
Automobiles 50,580
Office equipment 14,935
-----------
1,459,087
Less: Accumulated depreciation 162,600
-----------
$1,296,487
===========
Depreciation expense for the years ended December 31,
2001 and 2000 was $48,239 and $30,383, respectively.
(C) INTANGIBLE ASSETS
Intangible assets are carried at cost and consist
of the following:
Goodwill and other intangibles $ 909,982
Design cost 36,586
Loan fee 18,614
Covenant not to compete 10,000
---------
975,182
Less: Accumulated amortization 116,206
---------
$ 858,976
=========
Amortization expense for the years ended December 31,
2001 and 2000 was $63,141 and $35,086, respectively.
(D) LINE OF CREDIT
The Company has an unsecured $50,000 line of credit
with a bank. Interest is payable monthly at the Wall
Street Journal prime rate plus 1.5%. The Company's
outstanding balance was $40,966 at December 31, 2001.
The interest rate in effect at December 31, 2001 was
6.5%.
(E) NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of the
following at December 31, 2001:
Note payable to a relative of the majority
stock- holder, unsecured, payable in monthly
installments of $7,500 beginning June 2003,
including interest at 8% per annum. until
paid in full. The note holder can convert
the outstanding balance of the note to common
stock at $2.00 per share. The note matures
July 2005. $177,540
Note payable to a relative of the majority
stock-holder, unsecured, payable in monthly
installments of $2,500, beginning June 2003,
including interest at 10% per annum until paid
in full. The note matures March 2005. 49,804
Note payable to a director of the Company,
unsecured, with interest at 8% per annum.
Warrants will be granted equal to 1 share
per dollar when the loan is repaid for a
maximum of 50,000 warrants to be issued.
The warrants will have an exercise price of
$3 and a term of 5 years. Principal and any
unpaid interest is due in February 2003. The
balance of the note, net of discount attributed
to the value of the warrants of $20,650 is 29,350
--------
256,694
Less: Current maturities --
--------
$256,694
========
The aggregate maturities of notes payable to related
parties for each of the next four years are as
follows:
Year Ending
December 31,
-------------
2002 $ --
2003 110,074
2004 110,149
2005 57,121
----------
277,344
Less unamortized discount (20,650)
----------
$ 256,694
==========
In connection with all three notes, the Company
incurred interest expense of approximately $19,400 and
$23,000 to relatives of certain stockholders and
$2,300 and $0 to a director of the Company for the
years ended December 31, 2001 and 2000, respectively.
In connection with the note payable issued with
warrants above, amortization of the discount included
in interest expense is $8,850 and $0 for the years
ended December 31, 2001 and 2000, respectively.
(F) LONG-TERM DEBT
Long-term debt consists of the following at December
31, 2001:
Note payable to SBA in the original amount
of $748,000 with interest at the Wall Street
Journal prime rate plus 1%, adjusted monthly
with no cap or floor. The combined principal
and interest payments are $4,725, subject to
annual adjustments. The interest rate in
effect at December 31, 2001 was 6%. The note
is secured by land and building and guaranteed
by the majority stockholder. The note matures
November, 2025. $ 737,595
Note payable for a business acquisition in the
original amount of $500,000, payable at
$100,000 per annum, including 5.37% imputed
interest. The note is collateralized by a
pledge of 3,200,000 shares of common stock
owned by the majority stockholder, who has
also personally guaranteed the obligation.
The note matures June 2004. The balance,
net of imputed interest of $21,674, is 278,326
Notes payable to various non-related parties,
unsecured, with interest at 8% per annum.
Principal and accrued interest are payable
in full at the end of the note term. Upon
repayment of the loan and any accrued
interest the debt holders will be entitled to
one warrant for each dollar of debt, for
maximum of 370,000 warrants. The warrants
will have an exercise price of $3 and a term
of 10 years. Principal and any unpaid interest
is due in February 2003. The balance of the note,
net of discount attributed to the value of the
warrants of $152,810 is 217,190
The Company obtained a building improvement
loan with a maximum draw of $168,000. It has
a 25 year term, with interest at the Wall
Street Journal prime rate plus 1%, adjusted
monthly with no cap or floor. The combined
principal and interest payments is $1,597,
subject to annual adjustments. The interest
rate in effect at December 31, 2001 was 6%.
The note is secured by land and building and
Guaranteed by the majority stockholder. The
Company has drawn only a portion of the total
at period end. 26,168
Notes payable to a non-related individual, due
on demand, unsecured, with interest at 10% per
annum. The notes are convertible to common
stock at 60% of the initial public offering
price or 75% of a private offering. Upon the
occurrence of the initial public offering,
the Company will recognize a beneficial
conversion feature in interest expense of $3,000.
The Company will recognize this expense regardless
of whether the loan is converted to equity. 9,000
Note payable to GMAC, secured by an automobile,
payable in monthly installments of $523
including interest at 2.9%. The note matures
February 2002. 1,037
----------
1,269,316
Less: Current maturities 119,037
----------
$1,150,279
==========
The aggregate maturities of long-term debt for each of
the next five years and thereafter are as follows:
Years Ending
December 31,
----------------
2002 $ 119,037
2003 479,886
2004 110,870
2005 11,962
2006 13,175
Thereafter 708,870
-----------
1,443,800
Less imputed interest (21,674)
Less unamortized discount (152,810)
-----------
$ 1,269,316
===========
In connection with the note payable for a business
acquisition above, amortization of imputed interest
included in interest expense is $16,516 and $21,748
for the years ended December 31, 2001 and 2000,
respectively.
In connection with the note payable issued with
warrants above, amortization of the discount included
in interest expense is $65,490 and $0 for the years
ended December 31, 2001 and 2000, respectively.
During the year ended December 31, 2001 two lenders
converted notes and accrued interest into shares of
common stock. One lender converted debt and accrued
interest of $10,000 in 8,889 shares of common stock at
a conversion price of $1.125 per share. The other
lender converted debt and accrued interest of $17,815
into 11,877 shares of common stock at a conversion
price of $1.50 per share.
During the year ended December 31, 2000 three lenders
converted notes totaling $150,000 into 200,000 shares
of common stock. The conversion price was $0.75 per
share.
(G) LOSS PER SHARE
Loss per share calculations are in accordance with
SFAS No. 128, "Earnings Per Share." Basic loss per
share is calculated by dividing net loss by the
weighted average number of common shares outstanding
for the year. Diluted loss per share is computed by
dividing net loss by the weighted average number of
common shares outstanding plus the dilutive effect of
outstanding common stock warrants and convertible
debentures.
Years Ended December 31,
2001 2000
--------- ----------
Numerator:
Net loss, $ (508,256) $ (443,503)
Denominator:
Weighted average
shares outstanding 4,702,208 4,010,904
Effect of dilutive
securities -- --
Earnings per share $(0.11) $(0.11)
Earnings per share -
assuming dilution $(0.11) $(0.11)
For the years ended December 31, 2001 and 2000, the
calculations of basic and diluted earnings per share
are the same because potential dilutive securities
would have an antidilutive effect. The potentially
dilutive securities consisted of the following at
December 31, 2001 and 2000:
2001 2000
------- -------
Warrants 375,594 278,625
Convertible notes 50,135 8,944
Options 21,135 --
------- -------
446,864 287,569
======= =======
(H) STOCK OPTIONS AND WARRANTS
(1) Stock Options
The Company has granted certain employees and other
individuals stock options to purchase the Company's
common stock under employment agreements. The options
generally vest immediately or when services are
performed and have a maximum term of 5 years.
In 2001, the Company adopted the Original Beverage
Corporation 2001 Stock Option Plan. The options shall
be granted from time to time by the Compensation
Committee. Individuals eligible to receive options
include employees of the Company, consultants to the
Company and directors of the Company. The options
shall have a fixed price, which will not be less than
100% of the fair market value per share on the grant
date.
The following table summarizes the stock option
activity for the years ended December 31, 2000 and
2001:
Weighted
Average
Exercise
Options Price
------ --------
Balance, January 1, 2000 20,000 $ 2.00
Granted - 2000 17,500 2.00
Exercised - 2000 -- --
Forfeited - 2000 -- --
------
Balance, December 31,
2000 37,500 2.00
Granted - 2001 17,500 3.00
Exercised - 2001 -- --
Forfeited - 2001 -- --
------
Balance, December 31,
2001 55,000 $ 2.32
======
Options exercisable 55,000 $ 2.32
======
A summary of the options outstanding and exercisable
at December 31, 2001 is as follows:
Weighted Weighted
Exercise Average Average
Price Remaining Contractual Exercise
Range Number Life Price
------------- ------------- ------------ --------
$2.00 37,500 104 months $2.00
$3.00 17,500 114 months $3.00
Had compensation cost for the plan been determined
based on the fair value of the options at the grant
date consistent with the methodology prescribed by
SFAS 123, the Company's net loss would have been the
pro forma amounts indicated below:
2001 2000
------------- ------------
Net loss
As reported $ (508,256) $ (444,503)
Pro forma $ (533,806) $ (460,703)
Loss per share
As reported $ (0.11) $ (0.11)
Pro forma $ (0.11) $ (0.11)
The following is a schedule of the weighted average
exercise price and weighted average fair value in
accordance with SFAS 123 for options granted in 2000:
Weighted Weighted
Average Average
Exercise price Fair value
------------------ ---------------
Exercise price:
Equals market price $2.00 $1.02
Exceeds market price -- --
Less than market price -- --
The following is a schedule of the weighted average
exercise price and weighted average fair value in
accordance with SFAS 123 for options granted in 2001:
Weighted Weighted
Average Average
Exercise price Fair value
---------------- -------------
Exercise price:
Equals market price $3.00 $1.46
Exceeds market price -- --
Less than market price -- --
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes options
pricing model with the following assumptions used for
grants in 2001 and 2000: no expected dividends, 49%
volatility, average risk - free interest rates ranging
from 4.81% to 6.30% and expected lives of five years.
For the years ended December 31, 2001 and 2000, there
were no compensation costs recognized in the net loss
because no options were issued for less than the
market value.
(2) Warrants
The Company grants warrants to non-employees. The
warrants are exercisable immediately or when services
have been performed and expire 5 to 10 years after
issuance.
A summary to the warrants outstanding and exercisable
at December 31, 2001 is as follows:
Weighted Weighted
Exercise Average Average
Price Remaining Contractual Exercise
Range Number Life Price
------------- ------------- ------------ --------
$0.02 262,500 42 months $0.02
$2.00 119,876 103 months $2.00
$3.00 466,500 119 months $3.00
The amounts above included all warrants accounted for.
However, 420,000 warrants have not been issued because
they will not be issued until the related debt has
been paid, which will be February 2003.
The fair value of each warrant grant is estimated on
the date of grant using the Black-Scholes options
pricing model. The following assumptions were used
for grants in 2000: no expected dividends, 49%
volatility, average risk - free interest rates ranging
from 5.17% to 6.30% and expected lives of five years.
The following assumptions were used for grants in
2001: no expected dividends, 49% volatility, average
risk - free interest rates ranging from 4.76% to 4.81%
and expected lives of five years.
For the year ended December 31, 2000, the Company
incurred costs of $132,614 related to the issuance of
warrants to non-employees. Of that amount, $106,641,
representing 104,876 warrants, was incurred in
relation to the sale of the Company's common stock and
the amount was netted against proceeds received from
the sale. The remaining $25,973, representing 30,000
warrants, was prepayment on a consulting contract
entered into in December 2000 with a two-year term.
This amount has been included in prepaid assets in
2000 and will be expensed over the life of the
agreement.
For the year ended December 31, 2001, the Company
incurred costs of $45,994 related to the issuance of
31,500 warrants to non-employees. These warrants were
issued in relation to the Company's initial public
offering. The cost has been included in deferred
stock issuance costs and will be netted against
proceeds received from the sale of common stock.
Also, during 2001, as discussed in Notes E and F,
the Company issued $420,000 of debt with warrants
attached at a ratio of 1 warrant per $1 of debt for a
total of 420,000 warrants. The warrants will be
issued upon repayment of the debt. The value assigned
to the warrants is $247,800, which was also the
discount on the related debt. In addition, the
Company recognized an expense of $12,987 as
amortization of the December 2000 consulting
contract, which had been prepaid through issuance of
warrants.
(I) CONCENTRATIONS
During the years ended December 31, 2001 and 2000, two
of the Company's customers together accounted for
approximately 22% of sales in each year. These two
customers accounted for 29% of outstanding accounts
receivable at December 31, 2001.
The sale of the Company's products is attributable to
the following product categories:
2001 2000
-------- --------
Gourmet non-alcoholic beverages 87% 91%
Other products 13% 9%
For the years ended December 31, 2001 and 2000,
approximately 98% of the Company's sales were to
customers in the United States of America. All of the
Company's long lived assets are located in the United
States of America.
The Company currently relies on a single contract
packer for a majority of its production and bottling
of beverage products. The Company has different
packers for their non-beverage products. Although
there are other packers and the Company is in the
process of outfitting their own brewery and bottling
plant, a change in packers may cause a delay in the
production process, which could ultimately affect
operating results.
(J) OTHER INCOME AND EXPENSE
Other income consists of the following:
2001 2000
------- -------
Forgiveness of interest $ -- $15,592
======= =======
Other expense consists of the followings:
2001 2000
-------- --------
Miscellaneous non-operating
expenses $ 1,388 $ --
======== ========
(K) INCOME TAXES
At December 31, 2001, the Company had available
Federal and state net operating loss carryforwards to
reduce future taxable income of approximately $993,000
and $635,000, respectively. Federal carryforwards
expire through 2021 and the state carryforwards expire
through 2006. The deferred tax asset is approximately
$369,000 at December 31, 2001; however, due to the
uncertainty as to whether the Company will realize the
benefit, a valuation allowance has been established
for 100% of the deferred tax asset.
The provision for income taxes is comprised of the
following at December 31, 2001:
Federal State Total
---------- --------- --------
Current $ -- $ 800 $ 800
Deferred (8,400) (5,600) (14,000)
--------- --------- --------
$ (8,400) $ (4,800) $(13,200)
========= ========= ========
The provision for income taxes is comprised of the
following at December 31, 2000:
Federal State Total
---------- --------- -------
Current $ (45,567) $ 800 $ (44,767)
Deferred 3,583 874 4,457
--------- --------- ---------
$ (41,984) $ 1,674 $ (40,310)
========= ========= =========
The components of the Company's net deferred tax
provision are as follows:
2001 2000
------------ ----------
Net operating loss$ (255,690) $ (120,085)
Depreciation and
amortization 3,612 10,518
Other (10,792) (6,061)
Valuation reserve 248,870 120,085
------------ ----------
$ (14,000) $ 4,457
============ ===========
The components of the Company's net deferred tax asset
are as follows:
Net operating loss $ 374,631
Other (5,676)
Valuation reserve (368,955)
----------
$ --
==========
A reconciliation of the provision for income taxes to
the amount computed at the Federal statutory rate is
as follows:
2001 2000
---------- --------
Federal income benefit at
statutory rate $(182,512) $(162,192)
State minimum tax 800 528
Permanent differences (80,358) 1,269
Change in valuation reserve248,870 120,085
--------- ---------
$ (13,200) $ (40,310)
========= =========
(L) COMMITMENTS
In connection with the acquisition of the rights to
China Cola, the Company entered into a royalty
agreement for a period from July 2000 to June 2002 for
$0.75 per case sold of China Cola products with a
minimum payment of $18,750 per year. The payments are
being made to the former owner of China Cola who is
now one of the Company's directors. Expenses incurred
under this agreement are classified as selling
expenses in the income statement. The expense
under this agreement totaled $20,174 and $8,077 for
the years ended December 31, 2001 and 2000,
respectively.
The Company has an agreement with Malibu Teaz that
gives the Company license to manufacture and market
the product. The Company must pay Malibu Teaz 50% of
all profits from the sale of the product. Per the
agreement, profit is defined as actual revenue from
sales less actual expenses of the Company in effecting
or causing the manufacture, marketing, and shipment of
the products, including reasonable overhead. Expenses
incurred under this agreement are classified as
selling expenses in the income statement. The expense
under this agreement totaled $3,336 and $1,605 for the
years ended December 31, 2001 and 2000, respectively.
The Company leases two pieces of machinery under non-
cancelable operating leases. The first lease calls
for monthly payments of $1,795 and expires in October
2006. The Company has the option to renew the lease
for another eight months or purchase the equipment at
fair market value. The second lease calls for monthly
payments of $185 and expires in May 2004.
Future payments under these leases for each of the
next five years are as follows:
Years Ending
December 31,
---------------
2002 $ 23,760
2003 23,760
2004 22,465
2005 21,540
2006 17,950
----------
$ 109,475
==========
(M) SUBSEQUENT EVENT
In March 2002, the Company signed a letter of intent
to obtain a line of credit with Alco Financial
Services. The maximum available under the line of
credit would be $900,000. Payment terms, maturity
date, and the applicable interest rate are still being
negotiated.
REEDS, INC.
fka Original Beverage Corporation
Notes to Financial Statements
March 31, 2002 and 2001 (Unaudited)
(A) Basis Of Presentation
In the opinion of management, the accompanying
unaudited financial statements of Reed's, Inc. fka
Original Beverage Corporation (the "Company") include
all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly
its financial position as of March 31, 2002, and the
results of operations, and cash flows for the three
months ended March 31, 2002 and 2001. The results of
operations for the three months ended March 31, 2002
and 2001 are not necessarily indicative of the results
to be expected for the full year or for any future
period.
The financial statements and notes included herein
should be read in conjunction with the audited
financial statements and notes thereto.
(B) Summary of Significant Accounting Policies
(1) Inventory
Inventory is valued at the lower of cost (first-in,
first-out) or market and is comprised of the
following:
March 31, 2002
------------------
Raw materials $ 479,133
Finished goods 624,316
----------------
$1,103,449
==========
(2) Earnings per share
The Company accounts for its earnings per share and
earnings per share - with dilution in accordance with
Statement of Financial Accounting Standards No. 128
"Earnings per Share" (SFAS no. 128).
(B) Summary of Significant Accounting Policies
(Continued)
(2) Earnings per share (Continued)
The following table sets forth the computation of
earnings per share:
March 31,
2002 2001
Numerator
Net loss $(47,594) $(243,796)
Denominator
Weighted average shares outstanding
4,720,591 4,686,312
Loss per share $(0.01) $ (0.05)
For the three months ended March 31, 2002 and 2001 the
calculation of basic and diluted earnings per share
amounts are the same because potential dilutive
securities would have had an anti-dilutive effect.
Potentially dilutive securities consists of the
following at March 31, 2002 and 2001.
2002 2001
Warrants 424,875 278,625
Stock options 23,125 --
Convertible notes 50,135 --
------- -------
498,135 278,625
======= =======
(C) Intangibles
On January 1, 2002, the Company adopted SFAS 141
"Business Combinations" and SFAS142 "Goodwill and
Other Intangible Assets". These standards change the
accounting for business combinations by, among other
things, prohibiting the prospective use of pooling-of-
interests accounting and requiring companies to stop
amortizing goodwill and certain intangible assets with
an indefinite useful life. Instead, goodwill and
intangible assets deemed to have an indefinite useful
life will be subject to an annual review for
impairment.
(C) Intangibles (Continued)
The Company performed a valuation on goodwill and
other intangible assets. It was determined that
amounts previously reported as goodwill were
attributable to the trade names Virgil's and China
Cola.
Upon adoption of SFAS 142 in the first quarter of 2002
and subsequent valuation, the Company recorded a one-
time, non-cash charge of $11,973 to reduce the
carrying value of the trade name for China Cola. Such
charge is
non-operational in nature and is reflected as a
cumulative effect of an accounting change in the
accompanying consolidated statement of operations. In
calculating the impairment charge, the fair value of
the trade name was estimated using a discounted cash
flow methodology.
The changes in the carrying amount of goodwill for the
three months ended March 31, 2002, are as follows:
Balance as of
January 1, 2002 $ 812,174
Reclassification to
trade names (812,174)
--------------
Balance as of
March 31, 2002 $ --
=========
As of March 31, 2002 and December 31, 2001, the
Company's intangible assets and related accumulated
amortization consisted of the following:
As of March 31, 2002
Accumulated
Gross Amortization Net
Intangible assets subject to
amortization
Design costs $49,820 $(12,934) $36,886
Loan fee 18,614 (930) 17,684
Covenant not to
compete 10,000 (6,667) 3,333
-------- --------- --------
$78,434 $ (20,531) $ 57,903
======== ======== ========
(C) Intangibles (Continued)
Intangible assets not subject
to amortization
Trade name-Virgil's Root Beer $ 576,201
Trade name- China Cola 224,000
----------
$ 800,201
==========
As of December 31, 2001
Accumulated
Gross Amortization Net
Intangible assets subject to
amortization
Design costs $36,586 $(12,056) $24,530
Loan fee 18,614 (925) 17,689
Covenant not to
Compete 10,000 (5,417) 4,583
-------- --------- --------
$ 65,200 $(18,398) $46,802
======== ======== ========
Intangible assets not subject to
amortization
Goodwill $909,982 $(97,808) $812,174
======== ======== ========
The Company recorded amortization expense of $2,135
during the first quarter of 2002 compared to $3,044 on
a pro forma basis (no amortization of goodwill) during
the first quarter of 2001.
Based on the current amount of intangible assets
subject to amortization, the estimated amortization
expense for each of the succeeding 5 years are as
follows:
December 31, 2002 $ 9,441
2003 4,858
2004 4,858
2005 4,858
2006 4,858
(C) Intangibles (Continued)
As acquisitions and dispositions occur in the future,
these amounts may vary.
During the first quarter of 2002, the Company acquired
the following intangible assets:
Weighted Average
Amortization Period
Design costs $13,234 10 years
The 2001 results on a historical basis do not reflect
the provisions of FAS 142. Had the Company adopted FAS
142 on January 1, 2001, the historical net loss would
have been changed to the adjusted amounts indicated
below:
Three months ended Years ended
March 31, 2001 December 31,
(Unaudited) 2001 2000
Net loss as reported$(243,796) $(508,256) $(443,503)
Add:
Goodwill amortization 6,989 45,351 33,521
--------- --------- ---------
Adjusted net loss $(236,807) $(462,905) $(409,982)
========== ========= =========
Three months ended Years ended
March 31, 2001 December 31,
(Unaudited) 2001 2000
Basic and diluted earnings per share
Net loss as reported $ (0.05) $ (0.11) $(0.11)
Add:
Goodwill amortization -- 0.01 0.01
---------- -------- --------
Adjusted net loss $ (0.05) $ (0.10) $(0.10)
========== ========= =========
(D) Long-Term Debt
Long-term debt consists of the following at March 31,
2002:
Note payable to SBA in the original amount of
$748,000 with interest at the Wall Street Journal
prime rate plus 1%, adjusted monthly with no cap or
floor. The monthly combined principal and interest
payments
are $4,725, subject to annual adjustments. The interest
rate in effect at March 31, 2002 was 5.75%. The note
is secured by land and building and guaranteed by the
majority stockholder. The note matures November, 2025.
$ 733,954
Note payable for a business acquisition in the
original amount of $500,000, payable at $100,000
per annum, including 5.37% imputed interest. The note
is collateralized by a pledge of 3,200,000 shares of
common stock owned by the majority stockholder, who
has
also personally guaranteed the obligation. The note
matures June 2004. The balance, net of imputed
interest of $18,092, is 281,908
Notes payable to various non-related parties,
unsecured,
with interest at 8% per annum. Principal and accrued
interest are payable in full at the end of the note
term. Upon repayment of the loan and any accrued
interest the debt holders will be entitled to one
warrant for each dollar of debt, for maximum of
370,000 warrants. The warrants will have an exercise
price of $3 and a term of five years. Principal and
any unpaid interest is due in February 2003. The
balance of the note, net of discount attributed to the
value of the warrants of $120,065 is 249,935
(D) Long-Term Debt (Continued)
The Company obtained a building improvement loan with
a maximum draw of $168,000. It has a 25 year term,
with interest at the Wall Street Journal prime rate
plus 1%, adjusted monthly with no cap or floor. The
combined principal and interest payments is $1,597,
subject to annual adjustments. The interest rate in
effect at March 31, 2001 was 5.75%. The note is
secured by land and building and guaranteed by the
majority stockholder. The Company has drawn only a
portion of the total at period end. 40,406
Note payable to a non-related individual, due on
demand, unsecured, with interest at 10% per annum.
The notes are convertible to common stock at 60%
of the initial public offering price or 75% of a
private offering. Upon the occurrence of the initial
public offering, the Company will recognize a
beneficial conversion feature in interest expense
of $3,000. The Company will recognize this expense
regardless of whether the loan is converted to equity.
9,000
---------
1,315,203
Less: Current maturities (169,471)
---------
$1,145,732
==========
See Note I regarding the extension of the due date for
$320,000 of loans by various non-related parties.
(E) Notes Payable To Related Parties
Notes payable to related parties consists of the
following at March 31, 2001:
Note payable to a relative of the majority
stockholder,
unsecured, payable in monthly installments of $7,500
beginning June 2003, including interest at 8%
per annum. until paid in full. The note holder can
convert the outstanding balance of the note to common
stock at $2.00 per share. The note matures
July 2005. $ 177,540
Note payable to a relative of the majority stock-
holder,
unsecured, payable in monthly installments of $2,500,
beginning June 2003, including interest at 10% per
annum until paid in full. The note matures
March 2005. 49,804
Note payable to a director of the Company, unsecured,
with interest at 8% per annum. Warrants will be
granted
equal to 1 share per dollar when the loan is repaid
for a maximum of 50,000 warrants to be issued. The
warrants will have an exercise price of $3 and a term
of five years. Principal and any unpaid interest is
due in February 2003. The balance of the note, net of
discount attributed to the value of the
warrants of $16,225 is 33,775
-------
261,119
Less: Current maturities --
-------
$261,119
========
See Note I Regarding the extension of the due date for
the $50,000 loan by a director of the Company.
(F) Other Income And Expense
Other income consists of the following:
2002 2001
Miscellaneous non-
operating income $ 1,997 $ --
======= =======
Interest expense consists of the following:
2002 2001
Amortization of
note discount $ 37,170 $ --
Imputed interest 3,582 4,697
Other 24,905 25,984
-------- -------
$ 65,657 $30,681
======== =======
(G) Commitments
In connection with the acquisition of the rights to
China Cola, the Company entered into a royalty
agreement
for a period from July 2000 to June 2002 for $0.75 per
case sold of China Cola products with a minimum
payment
of $18,750 per year. The payments are being made to
the
former owner of China Cola who is now one of the
Company's directors. Expenses incurred under this
agreement are classified as selling expenses in the
income statement. The expense under this agreement
totaled $3,645 and $8,812 for the three months ended
March 31, 2002 and 2001, respectively.
The Company has an agreement with Malibu Teaz that
gives
the Company license to manufacture and market the
product. The Company must pay Malibu Teaz 50% of all
profits from the sale of the product. Per the
agreement,
profit is defined as actual revenue from sales less
actual expenses of the Company in effecting or causing
the manufacture, marketing, and shipment of the
products, including reasonable overhead. Expenses
incurred under this agreement are classified as
selling
expenses in the income statement. The expense under
this
agreement totaled $0 and $346 for the three months
ended March 31, 2002 and 2001, respectively.
The Company leases two pieces of machinery under non-
cancelable operating leases. The first lease calls for
monthly payments of $1,795 and expires in October
2006.
The Company has the option to renew the lease for
another eight months or purchase the equipment at fair
market value. The second lease calls for monthly
payments of $185 and expires in May 2004.
(H) Stock Options And Warrants
(1) Stock Options
The Company has granted certain employees stock
options to purchase the Company's common stock under
employment agreements. The options generally vest
immediately or when services are performed and have a
maximum term of five years.
In 2001, the Company adopted the Original Beverage
Corporation 2001 Stock Option Plan. The options shall
be granted from time to time by the Compensation
Committee. Individuals eligible to receive options
include employees of the Company, consultants to the
Company and directors of the Company. The options
shall have a fixed price, which will not be less than
100% of the fair market value per share on the grant
date.
Options granted to employees are accounted for
according to APB 25. Options granted to non-employees
are treated as warrants and accounted for in
accordance with FAS 123.
The following table summarizes the stock option
activity for the three months ended March 31, 2002:
Weighted
Average
Exercise
Options Price
Balance, January 1, 2002 55,000 $ 2.32
Granted - 2002 -- --
Exercised - 2002 -- --
Forfeited - 2002 -- --
-------
55,000 $ 2.32
=======
Options exercisable 55,000 $ 2.32
=======
(H) Stock Options And Warrants (Continued)
(1) Stock Options (Continued)
A summary of the options outstanding and exercisable at
March 31, 2002 is as follows:
Weighted Weighted
Exercise Average Average
Price Remaining Contractual Exercise
Range Number Life Price
$2.00 37,500 41 months $2.00
$3.00 17,500 51 months $3.00
For the three months ended March 31, 2002 and 2001,
there were no compensation costs recognized in the net
loss and no proforma net loss as if options were
accounted for according to SFAS 123 because no options
were issued during the periods.
(2) Warrants
The Company grants warrants to non-employees. The
warrants are exercisable immediately or when services
have been performed and expire five years after
issuance.
A summary to the warrants outstanding and exercisable
at March 31, 2002 is as follows:
Weighted Weighted
Exercise Average Average
Price Remaining Contractual Exercise
Range Number Life Price
$0.02 262,500 39 months $0.02
$2.00 119,876 40 months $2.00
$3.00 466,500 59 months $3.00
(H) Stock Options And Warrants (Continued)
(2) Warrants (Continued)
The amounts above included all warrants accounted for.
However, 420,000 warrants have not been issued because
they will not be issued until the related debt has
been paid, which will be February 2003.
The fair value of each warrant grant is estimated on
the date of grant using the Black-Scholes options
pricing model. For the three months ended March 31,
2002 and 2001, there were no compensation costs
recognized in the net loss because no warrants were
issued.
(I) Subsequent Events
Subsequent to March 31, 2002, the Company was granted
due date extensions on certain debt. The Company has
$370,000 of notes payable to various non-related
parties. The notes were originally due in February
2003. The Company has been able to extend the due
date for $320,000 of these notes until July 2003. In
addition, the Company has $50,000 of notes payable to
a director of the Company which had an original due
date of February 2003. This note has also been
extended until July 2003. The current portion of
long-term debt has been adjusted accordingly.
Subsequent, to March 31, 2002, the Company was granted
changes in the expiration of its options and warrants.
Previously, some options and warrants expired in ten
years. The Company has changed the expiration of
these options and warrants to five years, with the
consent of the holders. Note H has been updated
accordingly for the new lives.
In June 2002, the Company executed an agreement for a
line of credit with Alco Financial Services. The
maximum available under the line of credit is
$500,000.
APPENDIX A
SUBSCRIPTION AGREEMENT
To Reed's, Inc.:
Please issue shares of your common stock in the
amounts and name(s) shown below. My signature
acknowledges that I have received the Prospectus dated
___________, 2002 (the "Prospectus") and am aware of
the risk factors contained therein. I represent that
I have relied solely upon the contents of the
Prospectus in making an investment decision with
regard to the shares offered thereby, and I have not
relied on any other statements made by or with regard
to Reed's, Inc. in connection with its anticipated
operations or financial performance.
I further represent that I am a resident of the state
of _______________ and that the broker-dealer through
whom I am making this purchase is Equityhound
Securities Corp. or, if another broker-dealer, the
following: ________________________.
I understand that Reed's Inc. and the broker-dealer
will be relying on the above representations by me.
___________________ _____________________
(Signature) (Date)
___________________ _____________________
(Signature) (Date)
Enclosed is payment for ________ shares at $6.00;
Total: $________*
Register the shares in the following name(s) and
amount(s):
(Please Print)
Name(s):_____________________________________________
Number of share(s): ________________
As (check one) [ ] Individual [ ] Joint Tenancy
[ ] Husband & Wife as community property
[ ] Tenants in Common [ ] Corporation [ ] Trust
[ ] Other:
For the person(s) who will be registered shareowners:
Mailing
Address:____________________________________________
City, State,
Zip:________________________________________________
Telephone:__________________________________________
Social Security or Taxpayer ID
Number(s):________________________
No Subscription Is Effective Until Acceptance. The
undersigned understands that this subscription may be
accepted or rejected in whole or in part by Reed's,
Inc. in its sole discretion and that this subscription
is and shall be irrevocable unless Reed's, Inc. for
any reason rejects this subscription
Subscription Accepted by Reed's, Inc.:
___________________________ __________
Christopher Reed, President Date
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24 Indemnification of Directors and Officers
Pursuant to our company's Bylaws, we may
indemnify our directors and officers under
certain circumstances against reasonable expenses
(including court costs and attorneys' fees),
judgments, penalties, fines, and amounts paid in
settlement actually and reasonably incurred in
connection with any action, suit or proceeding,
whether civil, criminal, administrative or
investigative, to which any of them is a party by
reason of his being a director, officer,
employee, or agent of our company if it is
determined that he acted in accordance with the
applicable standard of conduct set forth in such
statutory provisions. Thus, the indemnification
provisions will protect officers and directors
from liability only if the officer or director
meets the applicable standard of conduct and we
have the financial ability to honor the
indemnity.
Item 25. Other Expenses of Issuance and Distribution
The table below sets forth the estimated expenses of
the issuance and distribution of the securities which
are the subject of this registration statement.
Advertising expenses will vary depending on the
success of the offering: after initial advertising, we
will expend additional funds on advertising of the
offering as and if significant sales are being
achieved pursuant to the offering.
Description Amount if Amount if Amount if
300,000 1,500,000 3,000,000
Shares are Shares are Shares are
Sold Sold Sold
SEC Registration
Fees $4,500.00 $4,500.00 $4,500.00
Cost of Printing and Engraving Share Certificates
3,000.00* 3,000.00* 3,000.00*
Postage (mailing share certificates)
500.00* 500.00* 500.00*
Web Development (1)
40,000.00* 50,000.00* 50,000.00*
Advertising Expenses (2)
20,000.00* 70,000.00* 140,000.00*
Legal Fees 30,000.00* 30,000.00* 30,000.00*
Accounting Fees 50,000.00* 50,000.00* 50,000.00*
Blue Sky Fees and Expenses (State Registrations)
20,000.00* 20,000.00* 20,000.00*
Miscellaneous Expenses
2,000.00* 2,000.00* 2,000.00*
TOTAL $170,000.00* $230,000.00* $300,000.00*
_________________________
* Estimate
(1) Web development expenses include: Cost of
contracted design of web based disclosure documents,
banner ads (tombstones) for other websites, web based
cash transfer scenario development, secure server
setup and maintenance, and related tasks. We
anticipate that designers and technicians in this
arena will cost an average of $100.00/hour for
reliable workers and we are estimating $40,000.00 to
$50,000.00 for the performance of these tasks and
implementation of the programming so designed.
(2) Advertising Expenses include: Magazine space in
such magazines as Vegetarian Times, New Age Magazine,
and Natural Health. These ads generally cost a minimum
of $5,000.00 and can cost upwards of $10,000.00 each.
We may place as many as twenty such ads for a total
expenditure of up to $100,000 to $125,000. We also may
spend as much as $20,000 for banner advertisements on
both small and major sites.
Promotional materials affixed to product packaging are
expected to cost about $25,000. The advertising
expenses set forth above are estimates based upon our
experience and ad-rate shopping within the advertising
and development sectors that we plan to utilize.)
(3) Miscellaneous expenses include: Other expenses
which the Company may incur in connection with the
offering, including any outside clerical expenses
incurred in connection with the offering.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of unregistered securities
within the last three (3) years, which would be
required to be disclosed pursuant to Item 701 of
Regulation S-B, except for the following:
* In December 1998, a private placement offering was
conducted by the Company raising approximately
$213,150 from the sale of 142,100 shares of common
stock at a price of $1.50 per share. The Company
believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchasers, the lack of any
public solicitation, the investment intent of the
purchasers, and the restrictions on resales of the
securities acquired.
* From April 1999 to April 2000, a Rule 504 exempt
public offering was conducted by the Company raising
approximately $899,950 from the sale of 449,975 shares
of common stock at a purchase price of $2.00 per
share.
* In September 1999, the Company issued options to
purchase 20,000 shares of common stock to a manager of
the Company. The options have an exercise price of
$2.00 per share and expire in September 2010. No
compensation cost was recognized because the strike
price equaled the fair value of the stock at the
date of issuance. The Company believes that the
offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof as a
non-public sale of securities due to the absence of a
general solicitation, the general nature and
circumstances of the sale, including the
qualifications and sophistication of the purchaser,
the lack of any public solicitation, the
investment intent of the purchaser, and the
restrictions on resales of the securities acquired.
* In June 2000, the Company issued options to purchase
17,500 shares of common stock to a manager of the
Company. The exercise price of the options is $2.00
per share, and the options expire in June 2010. No
compensation cost was recognized because the strike
price equaled the fair value of the stock at the
date of issuance. The Company believes that the
offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof as a
non-public sale of securities due to the absence of a
general solicitation, the general nature and
circumstances of the sale, including thequalifications
and sophistication of the purchasers, the lack of any
public solicitation, the investment intent of the
purchasers, and the restrictions on resales of the
securities acquired.
* In June 2000, the Company issued warrants to
purchase 104,876 shares of common stock to Peter
Sharma, a consultant of the Company, in partial
consideration for services rendered to the Company.
The exercise price of the options is $2.00 per
share, and the options expire in June 2010. The fair
value of this warrant grant is estimated on the date
of grant using the Black-Scholes options pricing
model with the following assumptions used: no
expected dividends, 49% volatility, risk - free
interest of 6.30% and expected life of five years.
The value was calculated to be $1.02 per warrant for a
total value of $106,641.10. The warrants were issued
for services in connection with raising capital so the
amount was treated as a reduction of proceeds received
from issuances of commons stock. The Company believes
that the offering was exempt from registration under
the Securities Act by reason of Section 4(2) thereof
as a non-public sale of securities due to the absence
of a general solicitation, the general nature and
circumstances of the sale, including the
qualifications and sophistication of the purchasers,
the lack of any public solicitation, the investment
intent of the purchasers, and the restrictions on
resales of the securities acquired.
* In August of 2000, $500,000 was raised in a private
sale of 250,000 shares of common stock at $2 per share
to Joseph Grace, an existing shareholder of the
Company. The Company believes that the offering was
exempt from registration under the Securities Act by
reason of Section 4(2) thereof as a non-public sale
of securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchaser, the lack of any
public solicitation, the investment intent of
the purchaser, and the restrictions on resales of the
securities acquired.
* In December 2000 the Company issued 130,000 shares
of common stock to David Robinov in consideration for
the assets of China Cola. The Company believes that
the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof as a
non-public sale of securities due to the absence of a
general solicitation, the general nature and
circumstances of the sale, including the
qualifications and sophistication of the purchaser,
the lack of any public solicitation, the investment
intent of the purchaser, and the restrictions on
resales of the securities acquired.
* In December 2000, the Company issued 1,500 shares of
common stock as a year-end bonus to its employees.
The Company recognized $3,000 as compensation
expense. The Company believes that the offering was
exempt from registration under the Securities Act by
reason of Section 4(2) thereof as a non- public sale
of securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications of the
purchasers, and the restrictions on resales of the
securities acquired.
* In December 2000 Donald Hall, James Wade and Robert
Felton converted $150,000 worth of convertible debt
issued in 1991 into 200,000 shares of common stock.
The conversion price was $.75 per share. In addition,
Donald Hall exercised warrants for 37,500 shares of
common stock, which had been issued in connection
with the issuance of the debt at $1 per share. The
Company believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications of the
purchasers, and the restrictions on resale of the
securities acquired.
* In December 2000, the Company granted to an existing
shareholder of the Company warrants to purchase 15,000
common shares at an exercise price of $2.00 per share
and warrants to purchase 15,000 common shares at an
exercise price of $3.00 per share. The warrants expire
in December 2010. The warrants were issued as
prepayment for a two-year consulting contract. The
value has been treated as a prepaid assets which will
be expensed over the life of the contract. The fair
value of this warrant grant is estimated on the date
of grant using the Black-Scholes options pricing model
with the following assumptions used: no expected
dividends, 49% volatility, risk - free interest of
5.17% and expected life of five years. The value for
the warrants with a strike price of $2.00 was
calculated to be $0.98 per warrant. The value for the
warrants with a strike price of $3.00 was calculated
to be $0.75 per warrant. The total value of all
of the warrants is $25,973.30. The Company believes
that the offering was exempt from registration under
the Securities Act by reason of Section 4(2) thereof
as a non-public sale of securities due to the absence
of a general solicitation, the general nature and
circumstances of the sale, including the
qualifications and sophistication of the purchaser,
the lack of any public solicitation, the investment
intent of the purchaser, and the restrictions on
resales of the securities acquired.
* In January 2001, the Company issued 14,500 shares of
common stock as a yearend bonus to its employees. The
Company recognized $29,000 of compensation expense.
The Company believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and
circumstances of the sale, including the
qualifications of the purchasers, and the restrictions
on resales of the securities acquired.
* In January 2001, the Company issued 3,200 shares of
common stock in exchange
for services provided by two vendors. The Company
estimates that the value of the services provided in
exchange for the shares was approximately $2.00 per
share, so it has recognized $6,400 of expense. The
Company believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications of the
purchasers, and the restrictions on resales
of the securities acquired.
* In February 2001 Robert T. Reed Jr. exercised
warrants for 20,000 shares of the common stock at
$1/share. The warrants had been issued in 1992. The
Company believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchaser, the lack of any
public solicitation, the investment intent of the
purchaser, and the restrictions on resales of the securities acquired.
* In May of 2001, the Company sold 500 shares of
common stock at $3/share to an existing shareholder
who is not an affiliate of the Company. The Company
believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchaser, the lack of any
public solicitation, the investment intent of the
purchaser, and the restrictions on resales of the
securities acquired.
* In June 2001, the Company issued options to purchase
17,500 shares of common stock to a manager of the
Company. The exercise price of the options is $3.00
per share, and the options expire in June 2011 No
compensation cost was recognized because the strike
price equaled the fair value of the stock at the
date of issuance. The Company believes that the
offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof as a
non-public sale of securities due to the absence of a
general solicitation, the general nature and
circumstances of the sale, including the
qualifications and sophistication of the purchasers,
the lack of any public solicitation, the investment
intent of the purchasers, and the restrictions on
resales of the securities acquired.
* In June 2001, the Company issued warrants to
purchase 30,000 shares of common stock to a consultant
of the Company in partial consideration for services
rendered to the Company. The exercise price of the
options is $3.00 per share, and the options expire in
June 2011. The fair value of this warrant grant is
estimated on the date of grant using the Black-Scholes
options pricing model with the following assumptions
used: no expected dividends, 49% volatility, risk -
free interest of 4.81% and expected life of five
years. The value was calculated to be $1.46 per
warrant for a total value of $43,806.68. The total
value has been included in deferred stock offering
costs to be offset against the future sale of common
stock. The Company believes that the offering was
exempt from registration under the Securities Act by
reason of Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchasers, the lack of any
public solicitation, the investment intent of the
purchasers, and the restrictions on resales of the
securities acquired.
* In May, June, and July of 2001, the Company raised
$420,000 from the issuance of corporate debt to
fifteen persons who were existing shareholders or
otherwise familiar with the Company. This debt is due
in February 2003, and an annual coupon rate of 8%. The
investors also received warrants to purchase an
aggregate of 420,000 common shares at an exercise
price of $3.00 per share. The options expire ten years
from the date of issuance. The investors were:
William Robertson $159,000
Lucinda Robertson $30,000
David Robinov $50,000
Martin Shepard $20,000
Kapur Payson $30,000
Mark Johnson $30,000
Dan Keays $30,000
Bill Milligan $25,000
Shane Milligan $20,000
Brant Milligan $5,000
Billy Milligan $5,000
Shalee Milligan $5,000
Shannon Milligan $5,000
William Holiman $1,000
Jason Robertson $5,000
A portion of the loans proceeds has been allocated to
the value of the underlying warrants based on the
requirements of APB 14 which was calculated to be
$247,800. The Company believes that the offering was
exempt from registration under the Securities Act by
reason of Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchasers, the lack of any
public solicitation, the investment intent of the
purchasers, and the restrictions on resales of the
securities acquired.
* In July 2001, Mark Reed converted $10,000 worth of
convertible debt issued in 1991 and accrued interest
into 8,889 shares of common stock, or a conversion
rate of $1.125 per share. The Company believes that
the conversion was exempt from registration under the
Securities Act by reason of Section 3(a)(9), since
the issuance was an exchange with existing security
holders exclusively and no commission or other
remuneration was paid or given directly or indirectly
for soliciting such exchange. In addition, the Company
believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non- public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchaser, the lack of any
public solicitation, the investment intent of the
purchaser, and the restrictions on resales of the
securities acquired.
* In July 2001, the Company issued warrants to
purchase 1,500 shares of common
stock to a consultant of the Company in partial
consideration for services rendered to the Company.
The exercise price of the options is $3.00 per share,
and the options expire in July 2011. The fair value of
this warrant grant is estimated on the date of grant
using the Black-Scholes options pricing model with the
following assumptions used: no expected dividends,
49% volatility, risk - free interest of 4.76% and
expected life of five years. The value was
calculated to be $1.46 per warrant for a total value
of $2,187.05. The total value has been included in
deferred stock offering costs to be offset against
the future sale of common stock. The Company believes
that the offering was exempt from registration under
the Securities Act by reason of Section 4(2)
thereof as a non-public sale of securities due to the
absence of a general solicitation, the general nature
and circumstances of the sale, including the
qualifications and sophistication of the purchasers,
the lack of any public solicitation, the investment
intent of the purchasers, and the restrictions on
resales of the securities acquired.
* In August of 2001, $15,000 was raised in a private
sale of a total of 3,750 shares of common stock at
$4.00/share to two existing shareholders of the
Company who are not affiliates of the Company. The
Company believes that the offering was exempt from
registration under the Securities Act by reason of
Section 4(2) thereof as a non-public sale of
securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchasers, the lack of
any public solicitation, the investment intent of the
purchasers, and the restrictions on resales of the
securities acquired.
* In October 2001, B.J. Green converted $17,815 worth
of convertible debt and interest into 11,877 shares of
common stock, or a conversion rate of $1.50 per
share. The convertible debt had been issued in 1991.
The Company believes that the conversion was exempt
from registration under the Securities Act by reason
of Section 3(a)(9), since the issuance was an exchange
with existing security holders exclusively and no
commission or other remuneration was paid or given
directly or indirectly for soliciting such exchange.
In addition, the Company believes that the offering
was exempt from registration under the Securities Act
by reason of Section 4(2) thereof as a non-public sale
of securities due to the absence of a general
solicitation, the general nature and circumstances of
the sale, including the qualifications and
sophistication of the purchaser, the lack
of any public solicitation, the investment intent of
the purchaser, and the restrictions on resales of the
securities acquired.
Item 27 Exhibits
Copies of the following documents are filed with
this registration statement as exhibits:
1. Selling Agent Agreement
3.1 Certificate of Incorporation
(Charter Document)*
3.2 Bylaws*
3.3 Amendment to Bylaws*
5.1 Legal opinion of Edward T. Swanson, Esq.
10.1 2001 Employee Stock Option Plan*
10.2 Brewing Agreement dated June 1, 2001 between
the Company and The Lion Brewery, Inc.*
10.3 License Agreement with Malibu Teaz*
10.4 Loan Agreement with ALCO Financial Services LLC
10.5 Form of Promotional Shares Lock-In Agreement
23.1 Consent of Sprayberry, Barnes, Marietta &
Luttrell
23.3 Consent of Edward T. Swanson, Esq.
(contained in Exhibit 5.1)
24.1 Power of Attorney (included in the signature page
to the Registration Statement)*
* Previously filed.
Item 28 Undertakings
A. Insofar as indemnification for liabilities
arising under the 1933 Act may be permitted to
directors, officers and controlling persons of
the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and
Exchange Commission such indemnification is
against public policy as expressed in the 1933
Act and is, therefore, unenforceable. In the
event that a claim for indemnification against
such liabilities (other than the payment by the
registrant of expenses incurred or paid by a
director, officer or controlling person of the
registrant in the successful defense of any
action, suit or proceeding) is asserted by such
director, officer or controlling person in
connection with the securities being registered,
the registrant will, unless in the opinion
of its counsel the matter has been settled by
controlling precedent, submit to a court of
appropriate jurisdiction the question whether
such indemnification by it is against public
policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
B. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment
to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the 1933 Act,
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
Registration Statement (or most recent post-
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental
change in the information set forth in the
Registration Statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would
not exceed that which was registered) and any
deviation from the low or high end of the
estimated maximum offering range may be reflected
in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (Section
230.424(b) of Regulation S-B) if, in the
aggregate, the changes in volume and price
represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective Registration Statement, and
(iii) To include any additional or changed
material information with respect to the plan of
distribution not previously disclosed in the
Registration Statement or any material change to
such information in the Registration Statement.
(2) That, for the purpose of determining any
liability under the 1933 Act, each such post-
effective amendment shall be deemed to be a new
Registration Statement relating to the securities
offered therein, and the offering of such
securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities
being registered which remain unsold at the
termination of the offering.
SIGNATURES
In accordance with the requirements of the Securities
Act of 1933, the registrant certifies that it has
reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized
this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Los Angeles,
California, on this 12 day of July, 2002.
REED'S, INC.
/s/Christopher J. Reed
By __________________________
(Christopher J. Reed, President)
In accordance with the requirements of the Securities
Act of 1933, this registration statement has been
signed by the following persons in the capacities and
on the date indicated.
/s/Christopher J. Reed
_______________________________
(Christopher J. Reed) Chief Executive Officer,
President, Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer),
Chairman of the Board and Director
July 12, 2002
_______________________________
(Joseph Grace) Director
July __, 2002
_____________*__________________
(David Robinov) Director
July 12, 2002
____________*___________________
(Mark Panely) Director
July 12, 2002
* By /s/Christopher J. Reed
Attorney in Fact
EXHIBIT 5.1
EDWARD T. SWANSON
Attorney At Law
1135 17th Street, Suite E
Santa Monica, California 90403
Phone: (310) 283-1035 Fax: (310) 828-6138
Email: etswanson@att.net
July 11, 2002
Reed's, Inc.
13000 South Spring Street
Los Angeles, California
Gentlemen:
This opinion is issued to Reed's, Inc. (the
"Company") in connection with the proposed offering
and sale of up to 3,000,000 shares of the Company's
Common Stock which are the subject of the Company's
Registration Statement on Form SB-2, Registration No.
333-72198, as amended (the "Registration Statement"),
filed with the Securities and Exchange Commission
under the Securities Act of 1933. Such shares are
hereinafter referred to as the "Shares."
In rendering our opinion herein, we have
assumed the satisfaction of the following conditions:
the issuance by any necessary regulatory authorities
of appropriate permits, consents, approvals,
authorizations and orders relating to the offering and
sale of the Shares in their respective jurisdictions;
the Registration Statement being declared effective;
the offering and sale of the Shares in the manner set
forth in the Registration Statement and pursuant to
said permits, consents, approvals, authorizations and
orders; and the receipt by the Company of the
consideration for the Shares as described in the
Registration Statement. We have reviewed such
documents and have made such inquiries as we have
deemed necessary and appropriate to render the opinion
set forth herein. We have assumed that all documents
that have been submitted to us as originals are true
and correct and those documents submitted to us, as
copies conform to the originals of those documents.
Based upon the foregoing, it is our opinion
that the Shares will be, when issued, legally issued,
fully paid and non-assessable.
We hereby consent to the filing of this
opinion as an exhibit to the Registration Statement
and to the reference to us under the heading "Legal
Matters."
Sincerely,
/s/ Edward T. Swanson, Esq.
EXHIBIT 10.4
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT, is entered into as
of June 25, 2002 by and between Reed's Inc., a
Delaware corporation ("Borrower"), and ALCO Financial
Services LLC ("Lender").
RECITALS
Borrower has requested that Lender provide financial
accommodations to Borrower as more fully set forth
herein and in the Loan Documents.
Borrower has requested that Guarantor(s) guaranty the
Obligations.
This Agreement is entered into and will be performed
in the Chosen State.
NOW, THEREFORE, in consideration of the premises, and
intending to be legally bound hereby, the Parties
hereby agree as follows:
AGREEMENT
Certain Definitions and Index to Definitions.
Accounting Terms. Unless otherwise specified herein,
all accounting terms used herein shall be interpreted,
all accounting determinations hereunder shall be made,
and all financial statements required to be delivered
hereunder shall be prepared in accordance with GAAP
consistently applied.
Definitions . All other terms contained in this
Agreement which are not specifically defined herein
shall have the meanings provided in the UCC to the
extent the same are used herein. All references
herein to the singular or plural shall also mean the
plural or the singular, respectively. As used herein,
the following terms shall have the following meanings:
"Administrative Fee" - 0.25%.
"Advances" - see Section 2.1.1 hereof.
"Agreement" - this Loan and Security Agreement,
together with all exhibits and schedules hereto, as
the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated,
or replaced.
"Allowable Amount" - the lesser of (i) the Borrowing
Base less Availability Reserves, if any and (ii) the
Maximum Amount.
"Anniversary Date" - the date which is one (1) year
from the date hereof.
"Audit Fee" - $850.00 per day.
"Availability Reserves" - as of any date of
determination, such amounts as Lender may from time to
time establish and revise in good faith reducing the
amount of Advances which would otherwise be available
to Borrower hereunder:
To reflect events, conditions, contingencies or risks
which, as determined by Lender in good faith, do or
may affect either (i) the Collateral or any other
property which is security for the Obligations or its
value, (ii) the assets, business or prospects of
Borrower or any Obligor, or (iii) the security
interest and other rights of Lender in the Collateral
(including the enforceability, perfection and priority
thereof);
To reflect Lender's good faith belief that any
collateral report or financial information furnished
by or on behalf of Borrower or any Obligor to Lender
is or may have been incomplete, inaccurate or
misleading in any material respect; or
In respect of any state of facts that Lender
determined in good faith constitutes an Event of
Default or may, with notice or passage of time or
both, constitute an Event of Default.
"Balance Subject to Interest" - The sum of the unpaid
balances of:
Advances;
Payments by Lender on account of Letters of Credit;
Other payments made by Lender arising hereunder for
which Borrower is liable to Lender.
"Borrower" - see Preamble hereof.
"Borrowing Base" - 75% of the Net Face Amount of
Borrower's Eligible Accounts.
"Borrowing Base Certificate" - a request for an
Advance, in a form acceptable to Lender.
"Business Day" - any day which is not a Saturday,
Sunday, or other day on which national banks are
authorized or required to be closed.
"Chosen State" - California.
"Clearance Days" - 3 banking days.
"Collateral" - All Borrower's present and future
Accounts, Chattel Paper, Goods (including Inventory
and Equipment), Instruments, Investment Property,
Documents, and General Intangibles, and the proceeds
thereof.
"Credit Accommodation" - any advance or other
extension of credit by Lender to or on behalf of
Borrower hereunder.
"Default Rate" - 10% per annum in excess of the
Interest Rate. To the extent the Default Rate is
calculated with reference to the Prime Rate, any
change in the Default Rate shall be effective as of
the date of any change in the Prime Rate.
"Delinquent Account" - see Section 1.2.20.1.
"Early Termination Fee" - the greater of (x) the total
interest for the immediately preceding three months;
or (y) $15,000.00 .
"Eligible Account" - an Account, excluding the
following:
any Account which remain uncollected for more than 90
days from invoice date (each a "Delinquent Account");
any Account due from an Account Debtor that is
insolvent;
any Account due from an Account Debtor affiliated with
Borrower in any manner;
any Account which is not unconditionally due and
owing;
any Account with respect to which the Account Debtor
is not a resident or citizen of, located in, or
subject to service of process in, the United States,
and which are not either (i) covered by credit
insurance in form and amount, and by an insurer,
satisfactory to Lender, or (ii) supported by one or
more letters of credit issued by a financial
institution, acceptable to Lender;
any Account due from an Account Debtor who is any
national, federal state or municipal government,
including, without limitation, any instrumentality,
division, agency, body or department thereof, except
where the Account Debtor is bound to make payment
directly to Lender;
Accounts due from an Account Debtor as to which 25%
percent or more of the aggregate dollar amount of all
outstanding Accounts owing from such Account Debtor
are Delinquent Accounts;
That portion of Accounts due from an Account Debtor
which is in excess of 20% percent of Borrower's
aggregate dollar amount of all outstanding Accounts
Receivable;
Accounts which are not free of all liens,
encumbrances, charges, rights and interest of any
kind, except in favor of Lender;
Accounts which are supported or represented by a
promissory note, post-dated check or letter of credit
unless Lender holds a first perfected security
interest therein;
Accounts that represent progress payments or other
advance billings that are due prior to the completion
of performance by Borrower of the subject contract for
goods or services;
Accounts for which Borrower is or may become indebted
to the Account Debtor; and
Accounts which are unsuitable as collateral, as
determined by Lender in the exercise of its reasonable
sole discretion.
"Event of Default" - see Section 11 hereof.
"GAAP" - means generally accepted accounting
principles set forth in the opinions and
pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants
and pronouncements of the Financial Accounting
Standards Board (or any successor authority) that are
applicable as of the date of determination.
"Guarantor(s)" - all entities now or hereafter
guaranteeing the Obligations, including Christopher J.
Reed and Judy Holloway Reed.
"Interest Rate" - the greater of 8% percent per annum
in excess of the Prime Rate or 12.75% percent per
annum. Any change in the Interest Rate shall be
effective as of the first day of the month following
the month in which the Prime Rate changes.
"Key Employees" - Christopher J. Reed.
"Lender" - See Preamble.
"Lending Office" - Lender's office described in the
Section 24.1.
"Loan Documents" - this Agreement, together with any
documents, instruments and agreements, executed and/or
delivered in connection herewith, as the same now
exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
"Loan Fee" - $6,250.00.
"Maximum Amount" - $500,000.
"Minimum Monthly Interest" - $3,500.
"Misdirected Payment Fee" - 15% percent of the amount
of any payment on an Account where said payment has
been received by Borrower and not delivered in kind by
Borrower to Lender within three (3) Business Days of
receipt thereof.
"Missing Notation Fee" - 15% of the Face Amount. .
"Monetary Collateral" - cash, checks or other proceeds
of Collateral in tangible form. .
"Net Face Amount" - with respect to an Account, the
gross face amount of such Account less all trade
discounts or other deductions and claims to which the
Account Debtor is entitled.
"Obligated Party" - any entity obligated with respect
to any Collateral.
"Obligations" - all present and future obligations
owing by Borrower to Lender whether or not for the
payment of money, whether or not evidenced by any note
or other instrument, whether direct or indirect,
absolute or contingent, due or to become due, joint or
several, primary or secondary, liquidated or
unliquidated, secured or unsecured, original or
renewed or extended, whether arising before, during or
after the commencement of any Bankruptcy Case in which
Borrower is a debtor, including but not limited to any
obligations arising pursuant to letters of credit or
acceptance transactions or any other financial
accommodations; and all principal, interest, fees,
charges, expenses, attorneys' fees and account-ants'
fees chargeable to Borrower or incurred by Lender in
connection with this Agreement and/or the
transaction(s) related thereto;
"Obligors" - Borrower and all Guarantors.
"Prime Rate" - as reflected in the Wall Street
Journal. If such rate is shown as a range, then the
"Prime Rate" shall be the highest value in such range.
"Special Credit Accommodation Fee" - 0.1% percent per
dayof the amount of any Special Credit Accommodation.
"Standard Fee Schedule" - the schedule of Lender's
standard fees for services.
"Subordinating Creditor" - any creditor of the
Borrower which has executed a Subordination Agreement.
"Subordination Agreement" - a subordination agreement
in form and substance acceptable to Lender whereby
Subordinating Creditor subordinates in favor of Lender
obligations owed to it by Borrower.
"Termination Date" - the earlier of (i) one year from
the date hereof, or (ii) the date on which Lender
elects to terminate this Agreement pursuant to the
terms herein.
"UCC" - The Uniform Commercial Code in effect in the
Chosen State at the date on which a determination
thereunder is to be made.
Credit Facilities.
Advances. Subject to the terms and conditions of this
Agreement, from the date on which this Agreement
becomes effective until the Termination Date:
Lender, shall , from time to time, at the request of
Borrower, make advances ("Advances") to Borrower, less
any Availability Reserves , so long as, before and
after such Advance, the Obligations do not exceed the
Allowable Amount.
Lender may, in its discretion, from time to time, upon
not less than five (5) days prior notice to Borrower,
reduce the Borrowing Base to the extent that Lender
determines in good faith that:
the dilution with respect to the Accounts for any
period (based on the ratio of (a) the aggregate amount
of reductions in Accounts other than as a result of
payments in cash to (b) the aggregate amount of total
sales) has increased in any material respect or may be
reasonably anticipated to increase in any material
respect above historical levels;
the general creditworthiness of Account Debtors has
declined; In determining whether to reduce the
Borrowing Base, Lender may consider events,
conditions, contingencies or risks which are also
considered in determining Eligible Accounts, Eligible
Inventory or in establishing Availability Reserves.
Special Credit Accommodations. Lender may, in its
sole and absolute discretion, from time to time,
extend Credit Accommodations to Borrower in excess of
the Allowable Amount (any Credit Accommodation
extended pursuant to this Section being a "Special
Credit Accommodation"). Each Special Credit
Accommodation shall be evidenced by a writing in form
and substance satisfactory to Lender in its sole
discretion (any such writing, an "Evidence of Special
Credit Accommodation"). Unless expressly stated to
the contrary in any Evidence of Special Credit
Accommodation, each Special Credit Accommodation shall
be payable on demand.
General Provisions.
Borrowing Base Certificate . Each request from
Borrower for a Credit Accommodation shall be
accompanied by a Borrowing Base Certificate, completed
and signed by Borrower.
Crediting Borrower's Account. All Credit
Accommodations by Lender may be made by deposits or
transfers to any demand deposit account of Borrower.
Authorization for Credit Accommodations. Subject to
the terms and conditions of this Agreement, Lender is
authorized to make Credit Accommodations:
upon telephonic, facsimile or other instructions
received from anyone purporting to be an officer,
employee or representative of Borrower; or
At the sole discretion of Lender, and notwithstanding
any other provision in this Agreement, if necessary to
meet any Obligations, including but not limited to any
interest not paid when due.
Limitations on Credit Accommodations. Notwithstanding
anything to the contrary contained herein, Lender
shall not be obligated to make a Credit Accommodation
if, before or as a result thereof, the Obligations
shall exceed the Allowable Amount.
Payments by Borrower.
In General.
Place of Payments. All payments hereunder shall be
made by Borrower to Lender at the Lending Office, or
at such other place as Lender may designate in
writing.
ACH Debits. In order to satisfy any of the
Obligations, Lender is hereby authorized by Borrower
to initiate electronic debit entries through the ACH
or other electronic payment system to any account
maintained by Borrower. At the Lender's request,
Borrower shall execute and deliver to Lender an
authorization agreement for ACH debits.
Interest and Fees.
Interest.
Basic Interest. Subject to Section 3.2.1.3 hereof,
interest on the Balance Subject to Interest shall be
payable monthly, in arrears, shall be computed at the
Interest Rate, and shall be due on the first (1st) day
of each month following the accrual thereof. Lender
is authorized to debit Borrower's loan account on the
first business day of each month for interest accrued
hereunder during the preceding month;
Minimum Monthly Interest. Any amount by which the
interest earned in any month (prorated for partial
months) is less than the Minimum Monthly Interest, to
be paid on the first day of the following month.
Default Interest. Immediately upon the occurrence of
an Event of Default, Borrower shall pay to Lender,
monthly until the first (1st) Anniversary Date on
which all Obligations have been fully paid, the
greater of (computed on a month by month basis) (i)
interest, before and after judgment at the :Default
Rate; (ii) the monthly average of all interest and
fees paid by Borrower to Lender hereunder for the
preceding one-hundred eighty (180) days (or portion
thereof if Obligations have not been outstanding for
at least one-hundred eighty (180) days) for each
applicable month or portion thereof; or (iii) The
Minimum Monthly Interest for each applicable month or
portion thereof. Lender's failure to assess interest
at the Default Rate as provided hereunder shall not be
deemed a waiver by Lender to charge such Default Rate.
Lender reserves the right to, and Borrower hereby
acknowledges that Lender may, recalculate interest at
the Default Rate.
Calculation of Interest. All interest charged
hereunder shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of
days elapsed.
Application of Collections. Lender shall, for the
purpose of the computation of interest due hereunder,
add the Clearance Days to any payments, which is
acknowledged by the parties to constitute an integral
aspect of the pricing of Lender's facility to
Borrower, and shall apply irrespective of the
characterization of whether receipts are owned by
Borrower or Lender. Should any check or item of
payment not be honored when presented for payment,
then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated
accordingly.
Fees.
Loan Fee. Borrower shall pay the Loan Fee to Lender
immediately upon the execution of this Agreement, and
upon each renewal or extension of this Agreement by
Lender whether such renewal or extension is for one
(1) year or for less than one year. Any portion not
paid when due shall accrue interest at the applicable
interest rate set forth herein.
Administrative Fee. Borrower shall pay an
Administration Fee each month on its average face
amount of outstanding Accounts, payable on the first
day of the following month.
Special Credit Accommodation Fee. Borrower shall pay
a Special Credit Accommodation Fee to Lender
simultaneously with the making by Lender of a Special
Credit Accommodation.
Misdirected Payment Fee. Borrower shall pay the
Misdirected Payment Fee to Lender immediately upon its
accrual.
Missing Notation Fee. Borrower shall pay the Missing
Notation Fee on any invoice that is sent by Borrower
to an Account Debtor that does not contain the notice
as required by Section 6.1.3 hereof.
Early Termination Fee. The Early Termination Fee if
Borrower terminates this Agreement, becomes subject to
a Bankruptcy proceeding, or prepays the Obligations
(whether by acceleration or otherwise), prior to the
termination date set forth herein, computed from the
date of termination to the date on which termination
is requested by Borrower hereunder.
Audit Fee. Borrower shall pay an Audit Fee, in
addition to Lender's related out-of-pocket expenses,
to Lender in connection with each audit Lender
performs or causes to be performed hereunder. Prior
to the occurrence of an Event of Default, Lender shall
not charge Borrower for more than 4 audits per year.
Grant of Security Interest. To secure the performance
of the Obligations, Borrower grants to the Lender a
security interest in the Collateral, and all proceeds
and products thereof.
Authorization to File Financing Statements.
The Borrower irrevocably authorizes the Lender to file
in any Uniform Commercial Code jurisdiction any
initial financing statements and amendments thereto
that:
indicate the Collateral as all assets of the Borrower
or words of similar effect, regardless of whether any
particular asset comprised in the Collateral falls
within the scope of Article 9 of the UCC, or as being
of an equal or lesser scope or with greater detail;
contain any other information required by part 5 of
Article 9 of the UCC for the sufficiency or filing
office acceptance of any financing statement or
amendment, including (i) whether the Borrower is an
organization, the type of organization, and any
organization identification number issued to the
Borrower and, (ii) in the case of a financing
statement filed as a fixture filing or indicating
Collateral as as-extracted collateral or timber to be
cut, a sufficient description of real property to
which the Collateral relates; and
contain a notification that the Borrower has granted a
negative pledge to the Lender, and that any subsequent
lienor may be tortuously interfering with Lender's
rights;
advises third parties that any notification of
Borrower's Account Debtors will interfere with
Lender's collection rights.
The Borrower agrees to furnish any of the foregoing
information to the Lender promptly upon request.
The Borrower ratifies its authorization for the Lender
to have filed any like initial financing statements or
amendments thereto if filed prior to the date hereof.
The Lender may add any supplemental language to any
such financing statement as Lender may determine to be
necessary or helpful in acquiring or preserving rights
against third parties.
Collection and Administration of Accounts.
Collection.
Lender may notify Borrower's customers that that the
underlying Account has been assigned to Lender and
that payment thereof is to be made to the order of
Lender and send directly to Lender.
Borrower shall direct its customers to send the
proceeds of Accounts to an address or deposit account
as directed by Lender.
Borrower shall, place a notification on its invoices
sent its Account Debtors that Monetary Collateral is
payable only to Lender and is to be sent to an address
designated by Lender;
Electronic Proceeds of Collateral. In the event
Borrower receives proceeds of Collateral in the form
of wire transfer or other intangible funds transfer
mechanism, Borrower shall immediately pay such
proceeds to Lender.
Lender's Powers. Borrower hereby authorizes Lender,
at Borrower's sole expense, to exercise at any time in
Lender's discretion all or any of the following
powers, which powers are irrevocable until all of the
Obligations have been paid in full:
receive, take, endorse, assign, deliver, accept and
deposit, in the name of Lender or Borrower, any and
all cash, checks, commercial paper, drafts,
remittances and other instruments and documents
relating to the Collateral or the proceeds thereof;
After an Event of Default:
Take or bring, in the name of Lender or Borrower, all
steps, actions, suits or proceedings deemed by Lender
necessary or desirable to effect collection of or
other realization upon any Collateral;
Change the address for delivery of Borrower's mail to
Lender and to receive and open mail addressed to
Borrower;
Extend the time of payment of, compromise, or settle
for cash, credit, return of merchandise, any and all
Monetary Collateral and discharge or release any
Obligated Party without affecting any of the
Obligations;
execute, file and serve, in its own name or in the
name of Borrower, mechanics lien or similar notices,
or claims under any payment or performance bond for
the benefit of Borrower and
Pay any sums necessary to discharge any lien or
encumbrance which is senior to Lender's security
interest in the Collateral, which sums shall be
included as Obligations hereunder, and which sums
shall accrue interest at the Default Rate until paid
in full.
Release. Borrower hereby releases and exculpates
Lender, its officers, employees, agents, designees,
attorneys, and accountants from any liability arising
from any acts under this Agreement or in furtherance
thereof, whether of omission or commission, and
whether based upon any error of judgment or mistake of
law or fact, except for gross negligence or willful
misconduct. In no event shall Lender have any
liability to Borrower for lost profits or other
special or consequential damages.
Conditions Precedent to All Advances. Subject to the
other terms and conditions contained herein, Lender's
obligation to make any Credit Accommodation available
to Borrower is subject to the satisfaction of, or
waiver of, immediately prior to or concurrently with
the making of such Credit Accommodation, the following
conditions precedent:
Representations and Warranties. The representations
and warranties contained in the Loan Documents shall
be true and correct in all respects on and as of the
date of such Advance.
No Event of Default. No Event of Default or event
that with the giving of notice or passage of time
would constitute an Event of Default shall have
occurred and be continuing on the date of such
Advance.
Payment of All Fees. Borrower shall have paid to
Lender all accrued and unpaid fees and other amounts
due and payable hereunder and pursuant to the terms
hereof.
Authorization to Lender. The Borrower irrevocably
authorizes Lender to take any and all appropriate
action and to execute any and all documents and
instruments, in the name of Borrower, that may be
necessary or desirable to accomplish the purposes of
this Agreement including, but not limited to:
upon the occurrence and during the continuance of an
Event of Default, generally to sell, transfer, pledge,
make any agreement with respect to, or otherwise deal
with any of the Collateral in such manner as is
consistent with the UCC and as though the Lender were
the absolute owner thereof, and to do at the
Borrower's expense, all acts which the Lender deems
necessary to protect, preserve, or realize upon the
Collateral and the Lender's security interest therein,
in order to effect the intent of this Agreement,
including, without limitation:
the filing and prosecuting of registration and
transfer applications with the appropriate federal or
local agencies or authorities with respect to
trademarks, copyrights and patentable inventions and
processes;
the execution, delivery, and recording, in connection
with any sale or other disposition of any Collateral,
of the endorsements, assignments, or other instruments
of conveyance or transfer with respect to such
Collateral; or
the filing on behalf of Borrower with such
governmental authorities as are appropriate such
documents (including, without limitation,
applications, certificates, and tax returns) as may be
required for purposes of having Borrower qualified to
transact business in a particular state or geographic
location.
Affirmative Covenants. Until full payment of the
Obligations and termination of this Agreement,
Borrower shall:
Financial Statements, Reports and Certifications.
Furnish to Lender, in form and substance satisfactory
to Lender:
Annual Financial Statements. As soon as possible
after the end of each fiscal year of Borrower, and in
any event within 90 days thereafter:
a complete copy of Borrower's financial statements,
including but not limited to (a) the management
letter, if any, (b) the balance sheet as of the close
of the fiscal year, and (c) the income statement for
such year, together with a statement of cash flows,
audited by a firm of independent certified public
accountants of recognized standing and acceptable to
Lender, or if permitted by Lender in writing, by
Borrower; and
A statement certified by the chief financial officer
of Borrower that Borrower is in compliance with all
the terms, conditions, covenants and warranties of
this Agreement.
Other Financial Statements. No later than 30 days
after the close of each month (an "Accounting
Period"):Borrower's balance sheet as of the close of
such Accounting Period and its income statement for
that portion of the then current fiscal year through
the end of such Accounting Period certified by
Borrower's chief financial officer as being complete,
correct, and fairly representing its financial
condition and results of operations;
Tax Returns. Copies of each of Borrower's:
federal income tax returns, and any amendments
thereto, within 10 days of the filing thereof with the
Internal Revenue Service; and
federal payroll tax returns within ten (10) days of
filing, together with proof, satisfactory to Lender,
that all taxes have been paid.
Inspections.
Permit Lender or any representatives thereof, during
usual business hours, without notice to Borrower, to
periodically:
have access to all premises where Collateral is
located for the purposes of inspecting (and removing,
if after the occurrence of an Event of Default) any of
the Collateral, including Borrower's books and
records; and
Permit Lender or its designees to inspect, audit, make
copies of, and make extracts from Borrower's records
as Lender may request.
Without expense to Lender, Lender may use any of
Borrower's personnel, equipment, including computer
equipment, programs, printed output and computer
readable media, supplies and premises for the
collection of accounts and realization on other
Collateral as Lender, in its sole discretion, deems
appropriate.
Expenses.
Generally. Pay all reasonable out-of-pocket expenses
of Lender (including, but not limited to, fees and
disbursements of Lender's counsel) incident to
(whether by judicial proceedings or otherwise, and
whether any resulting dispute resolution procedure
involving tort, contract or other claims):
the preparation, negotiation, execution,
administration and enforcement of the Loan Documents,
any amendments, extensions and renewals thereof, and
any other documents prepared in connection with any
transactions between Borrower and Lender, whether or
not executed;
any expenses incurred by Lender (whether or not for
the benefit of Borrower) under this Agreement,
including, without limitation, all expenses for
postage relating to the mailing of statements,
invoices, and verifications, and all expenses relating
to any audits of all or any portion of the Collateral;
the protection of Lender's rights under the Loan
Documents;
defending against any and all claims against Lender
relating to any of its acts of commission or omission
directly or indirectly relating to the Loan Documents;
Or in any way arising out of a bankruptcy proceeding
commenced by or against Borrower, including but not
limited to expenses incurred in enforcing or defending
Lender's claims against Borrower or the Collateral,
defending any avoidance actions, and expenses related
to the administration of said proceeding.
Indemnification. Indemnify and save Lender harmless
from any and all liability with respect to any stamp
or other taxes (other than transfer or income taxes)
which may be determined to be payable in connection
with the execution of the Loan Documents or any action
of Lender with respect to the Collateral, including,
without limitation, the transfer of the Collateral to
Lender's name or that of Lender's nominee or any
purchaser at a foreclosure sale.
Enforcement of Judgments. Reimburse Lender for all
costs and expenses, including attorneys' fees, which
Lender incurs in enforcing any judgment rendered in
connection with this Agreement. This provision is
severable from all other provisions hereof and shall
survive, and not be deemed merged into, such judgment.
Taxes and Expenses Regarding Borrower's Assets.
Make timely payment or deposit of all taxes,
assessments or contributions required of Borrower. If
Borrower fails to make any such payment or deposit or
furnish proof of such payment immediately upon
Lender's request, Lender may, in its sole discretion
and without notice to Borrower:
make payment of the same or any part thereof; or
Set up such reserves against the Obligations as Lender
deems necessary to satisfy the liability therefore, or
both.
Lender may conclusively rely on statements of the
amount owing or other official statements issued by
the appropriate governmental agency. Any payment made
by Lender shall constitute neither:
an agreement by Lender to make similar payments in the
future; nor
A waiver by Lender of any default under the Loan
Documents. Lender need not inquire into, nor contest
the validity of, any expense, tax, security interest,
encumbrance or lien, and the receipt of the usual
official notice requiring the payment thereof shall be
conclusive evidence that the same was validly due and
owing.
Change in Name. Give Lender written notice
immediately upon forming an intention to change its
name, state of organization or form of business
organization.
Maintenance of Insurance. The Borrower will maintain
with financially sound and reputable insurers
insurance with respect to its properties and business
against such casualties and contingencies as shall be
in accordance with general practices of businesses
engaged in similar activities in similar geographic
areas. Such insurance shall be in such minimum
amounts that the Borrower will not be deemed a co-
insurer under applicable insurance laws, regulations,
and policies and otherwise shall be in such amounts,
contain such terms, be in such forms and be for such
periods as may be reasonably satisfactory to the
Lender. In addition, all such insurance shall be
payable to the Lender under a Lender Loss Payable
Endorsement. Without limiting the foregoing, the
Borrower will:
Keep all of its physical property insured with
casualty or physical hazard insurance on an "all
risks" basis, with broad form flood and earthquake
coverage and electronic data processing coverage, with
a full replacement cost endorsement and an "agreed
amount" clause in an amount equal to 100% of the full
replacement cost of such property;
Maintain all such workers' compensation or similar
insurance as may be required by law;
Maintain, in amounts and with deductibles equal to
those generally maintained by businesses engaged in
similar activities in similar geographic areas,
general public liability insurance against claims of
bodily injury, death, or property damage occurring,
on, in or about the properties of the Borrower;
business interruption insurance; and product liability
insurance.
Negative Covenants. Borrower will not, after written
notice by Lender to Borrower, and automatically, after
an Event of Default:
grant any extension of time for payment of any
Accounts;
compromise or settle any Accounts for less than the
full amount thereof;
release in whole or in part any Account Debtor; or
grant any credits, discounts, allowances, deductions,
return authorizations, or the like with respect to any
Accounts.
Events of Default. Each of the following events or
conditions shall constitute an "Event of Default":
With respect to the following, the occurrence thereof,
which has not been cured within 5 days after receipt
of notice thereof by Borrower from Lender:
Borrower defaults in the payment of any Obligations
when due, whether at maturity, upon acceleration, or
otherwise;
The Obligations at any time exceed the Allowable
Amount;
An adverse change occurs with respect to the financial
condition or operations of Borrower which results in a
material impairment of the prospect of repayment of
the Obligations; and
Any Guarantor defaults in the performance of its
obligations to Lender or shall notify Lender of its
intention to rescind, modify, terminate or revoke the
its guaranty or it shall cease to be in full force and
effect for any reason whatever;
An order for relief is entered against any Obligor by
any United States Bankruptcy Court; or any Obligor
does not generally pay its debts as they become due
(within the meaning of 11 U.S.C. 303(h) as at any time
amended, or any successor statute thereto); or any
Obligor makes an assignment for the benefit of
creditors; or any Obligor applies for or consents to
the appointment of a custodian, receiver, trustee, or
similar officer for it or for all or any substantial
part of its assets, or such custodian, receiver,
trustee, or similar officer is appointed without the
application or consent of any Obligor; or any Obligor
institutes (by petition, application, answer, consent,
or otherwise) any bankruptcy, insolvency,
reorganization, moratorium, arrangement, readjustment
of debt, dissolution, liquidation or similar
proceeding relating to it under the laws of any
jurisdiction; or any such proceeding shall be
instituted (by petition, application, or otherwise)
against any Obligor; or any judgment, writ, warrant of
attachment, execution, or similar process shall be
issued or levied against a substantial portion of the
property of any Obligor;
Christopher J. Reed shall cease to own more than 50%
of the voting stock of Borrower;
Any Subordinating Creditor fails to perform or observe
any of such Subordinating Creditor's obligations under
any Subordination Agreement, or notifies Lender of the
Subordinating Creditor's intention to rescind, modify,
terminate or revoke the Subordination Agreement with
respect to future transactions, or the Subordination
Agreement ceases to be in full force and effect for
any reason whatsoever;
Any of the Key Employees fails to devote one hundred
(100%) percent of their efforts in furtherance of the
business affairs of Borrower for any one month, or
ceases to be employed by Borrower in the capacity that
such employee held as of the date of this Agreement;
Any provision of this Agreement or any of the Loan
Documents ceases, for any reason, to be valid and
binding on Borrower; and
Any default under the Loan Documents, other than as
specifically set forth in this Section 11, which
Lender in good faith believes will have a material
adverse effect upon the Borrower's ability to repay
the Obligations.
Remedies.
At Lender's option, following notice of the occurrence
of an Event of Default:
Lender may declare this Agreement and all of Lender's
obligations hereunder terminated;
Lender may declare all Obligations to be immediately
due and payable, without presentment, demand, protest,
or notice of any kind, all of which are hereby
expressly waived by Lender;
all Obligations shall accrue interest at the Default
Rate; and
Lender may, immediately and without expiration of any
period of grace, enforce payment of all Obligations
and exercise any and all other remedies granted to it
under the Loan Documents, at law, in equity, or
otherwise.
Borrower WAIVES ANY REQUIREMENT THAT Lender INFORM
Borrower BY AFFIRMATIVE ACT OR OTHERWISE OF ANY
ACCELERATION OF Borrower'S OBLIGATIONS HEREUNDER.
FURTHER, Lender'S FAILURE TO CHARGE OR ACCRUE INTEREST
OR FEES AT ANY "DEFAULT" OR "PAST DUE" RATE SHALL NOT
BE DEEMED A WAIVER BY Lender OF ITS CLAIM THERETO.
Standards for Exercising Remedies.
To the extent that applicable law imposes duties on
the Lender to exercise remedies in a commercially
reasonable manner, the Borrower acknowledges and
agrees that it is not commercially unreasonable for
the Lender:
to not incur expenses to prepare Collateral for
disposition or otherwise to complete raw material or
work in process into finished goods or other finished
products for disposition;
to fail to obtain third party consents for access to
Collateral to be disposed of, or to obtain or, if not
required by other law, to fail to obtain governmental
or third party consents for the collection or
disposition of Collateral to be collected or disposed
of;
to fail to exercise collection remedies against
Account Debtors or other persons obligated on
Collateral or to remove liens or encumbrances on or
any adverse claims against Collateral;
to exercise collection remedies against Account
Debtors and other persons obligated on Collateral
directly or through the use of collection agencies and
other collection specialists;
to advertise dispositions of Collateral through
publications or media of general circulation, whether
or not the Collateral is of a specialized nature;
to hire one or more professional auctioneers to assist
in the disposition of Collateral, whether or not the
collateral is of a specialized nature;
to dispose of Collateral by using Internet sites that
provide for the auction of assets of the types
included in the Collateral or that have the reasonable
capability of doing so, or that match buyers and
sellers of assets;
to dispose of assets in wholesale rather than retail
markets;
to disclaim all disposition warranties; or
to purchase insurance or credit enhancements to insure
the Lender against risks of loss, collection or
disposition of Collateral or to provide to the Lender
a guaranteed return from the collection or disposition
of Collateral.
The Borrower acknowledges that the purpose of this
Section 13 is to provide non-exhaustive indications of
what actions or omissions by the Lender would not be
commercially unreasonable in the Lender's exercise of
remedies against the Collateral and that other actions
or omissions by the Lender shall not be deemed
commercially unreasonable solely on account of not
being indicated in this Section. Without limitation
upon the foregoing, nothing contained herein shall be
construed to grant any rights to the Borrower or to
impose any duties on the Lender that would not have
been granted or imposed by this Agreement or by
applicable law in the absence of this Section 13.
Proceeds and Expenses of Dispositions The Borrower
shall pay to the Lender on demand any and all
expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Lender in
protecting, preserving, or enforcing the Lender's
rights under or in respect of any of the Obligations
or any of the Collateral. After deducting all of said
expenses, the residue of any proceeds of collection or
sale of the Obligations or Collateral shall, to the
extent actually received in cash, be applied to the
payment of the Obligations in such order or preference
as the Lender may determine, notwithstanding contrary
instructions received by Lender from the Borrower or
any other third party.
Liquidation Success Premium. If Borrower shall
substantially cease operating as a going concern, and
the proceeds of Collateral created after the
occurrence of an Event of Default (the "Default") are
in excess of the Obligations at the time of Default,
Borrower shall pay to Lender a liquidation success
premium of ten (10%) percent of the amount of such
excess. Notwithstanding the foregoing, such
liquidation success premium amount shall not exceed
10% of the Maximum Amount.
Termination.
This Agreement shall become effective upon the
execution and delivery hereof by Borrower and Lender
and shall continue in full force and effect for one
year from the date hereof.
Upon the Termination Date, the unpaid balance of the
Obligations shall be due and payable without demand or
notice.
Revocation of Borrower's Right to Sell Inventory Free
and Clear of Lender's Security Interest. Lender may,
upon the occurrence of an Event of Default, revoke
Borrower's right to sell Inventory free and clear of
Lender's security interest therein.
No Lien Termination without Release. In recognition
of Lender's right to have all its attorneys' fees and
other expenses incurred in connection with this
Agreement secured by the Collateral, notwithstanding
payment in full of all Obligations by Borrower, Lender
shall not be required to record any terminations or
satisfactions of any of its liens on the Collateral
unless and until each Obligor has executed and
delivered to Lender general releases in the form of
Exhibit A hereto. Borrower understands that this
provision constitutes a waiver of its rights under #9-
513(c) of the UCC.
Account Stated. Lender shall render to Borrower a
statement setting forth the transactions arising
hereunder. Each statement shall be considered correct
and binding upon Borrower, absent manifest error, as
an account stated, except to the extent that Lender
receives, within thirty (30) days after the mailing of
such statement, written notice from Borrower of any
specific exceptions by Borrower to that statement.
Retention of Records. Lender shall retain any
documents, schedules, invoices or other papers
delivered by Borrower only for such period as Lender,
at its sole discretion, may determine necessary, after
which time Lender may destroy such records without
notice to or consent from Borrower.
Notices to Third Parties. Lender shall have the right
at any time to give any Guarantor or Subordinating
Creditor notice of any fact or event relating to this
Agreement, as Lender may deem necessary or desirable
in Lender's sole discretion, including, without
limitation, Borrower's financial condition. Borrower
shall provide to each Guarantor and Subordinating
Creditor a copy of each notice, statement or report
required to be given to Lender under any of the
paragraphs of this section.
Information to Participants. Lender may furnish any
financial or other information concerning Borrower, or
any of its subsidiaries, heretofore or hereafter
provided by Borrower to Lender, pursuant to this
Agreement or otherwise, to any prospective or actual
purchaser of any participation or other interest in
any loans made by Lender to Borrower (whether under
this Agreement or otherwise), or to any prospective
purchaser of any securities issued or to be issued by
Lender.
Entire Agreement. This Agreement supersedes all other
agreements and understandings between the parties
hereto, verbal or written, express or implied,
relating to the subject matter hereof. No promises of
any kind have been made by Lender or any third party
to induce Borrower to execute this Agreement. No
course of dealing, course of performance or trade
usage, and no parole evidence of any nature, shall be
used to supplement or modify any terms of this
Agreement.
Miscellaneous.
Notices.
All notices required to be given to either party
hereunder shall be deemed given upon the first to
occur of: (a) deposit thereof in a receptacle under
the control of the United States Postal Service; (b)
transmittal by electronic means to a receiver under
the control of the party to whom notice is being
given; or (c) actual receipt by the party to whom
notice is being given, or an employee or agent of
thereof. For purposes hereof, the addresses of the
parties are as set forth below or as may otherwise be
specified from time to time in a writing sent by one
party to the other in accordance with the provisions
hereof:
BORROWER
Address: 13000 South Spring Street
Los Angeles CA 90061
Attention: Christopher J. Reed
Fax Number: 310-217-9411
LENDER
Address: 900 Larkspur Landing Circle
Larkspur CA 94939
Attention: Andrew Moulton
Fax Number: 415-925-9825
Survival. All representations, warranties and
agreements herein contained shall be effective so long
as any portion of this Agreement remains executory.
Amendment and Waiver. Neither this Agreement nor any
provisions hereof may be changed, waived, discharged
or terminated, nor may any consent to the departure
from the terms hereof be given, orally (even if
supported by new consideration), but only by an
instrument in writing signed by all parties to this
Agreement. Any waiver or consent so given shall be
effective only in the specific instance and for the
specific purpose for which given.
No Waiver. No failure to exercise and no delay in
exercising any right, power, or remedy hereunder shall
impair any right, power, or remedy which Lender may
have, nor shall any such delay be construed to be a
waiver of any of such rights, powers, or remedies, or
any acquiescence in any breach or default hereunder;
nor shall any waiver by Lender of any breach or
default by Borrower hereunder be deemed a waiver of
any default or breach subsequently occurring. All
rights and remedies granted to Lender hereunder shall
remain in full force and effect notwithstanding any
single or partial exercise of, or any discontinuance
of action begun to enforce, any such right or remedy.
The rights and remedies specified herein are
cumulative and not exclusive of each other or of any
rights or remedies that Lender would otherwise have.
Any waiver, permit, consent or approval by Lender of
any breach or default hereunder must be in writing and
shall be effective only to the extent set forth in
such writing and only as to that specific instance.
Choice of Law. This Agreement and all transactions
contemplated hereunder and/or evidenced hereby shall
be governed by, construed under, and enforced in
accordance with the internal laws of the Chosen State.
The parties waive the provisions of California Civil
Code #1654.
Waiver of Statute of Limitations. Borrower waives the
pleading of any statute of limitations with respect to
any and all actions in connection herewith. To the
extent that Borrower may now or in the future have any
claim against Lender, arising out of this agreement or
the transaction contemplated herein whether in
contract or tort or otherwise, Borrower must assert
such claim within one year of it accruing. Failure to
assert such claim within one year shall constitute of
waiver thereof. Borrower agrees that such period is
reasonable and sufficient for it to investigate and
act upon the claim. This Section shall survive any
termination of this agreement. A copy of the waiver
may be filed as a written consent in any judicial
proceeding.
Venue. The parties agree that any suit, action or
proceeding arising out of the subject matter hereof,
or the interpretation, performance or breach of this
Agreement, shall, if Lender so elects, be instituted
in the United States District Court in any District of
the Chosen State or any court of said state located in
the Chosen State (the "Acceptable Forums"), each party
agrees that the Acceptable Forums are convenient to
it, and each party irrevocably submits to the
jurisdiction of the Acceptable Forums, irrevocably
agrees to be bound by any judgment rendered thereby in
connection with this Agreement, and waives any and all
objections to jurisdiction or venue that it may have
under the laws of the Chosen State or otherwise in
those courts in any such suit, action or proceeding.
Should such proceeding be initiated in any other
forum, Borrower waives any right to oppose any motion
or application made by Lender as a consequence of such
proceeding having been commenced in a forum other than
an Acceptable Forum.
Waiver of Trial by Jury. IN RECOGNITION OF THE HIGHER
COSTS AND DELAY WHICH MAY RESULT FROM A JURY TRIAL,
THE PARTIES HERETO WAIVE ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A)
ARISING HEREUNDER, OR (B) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OF THEM WITH RESPECT HERETO, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND
EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY
SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH
ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR
HAS NOT BEEN WAIVED; AND EACH PARTY HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A
JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT
AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
Assignment. Lender may assign its rights and delegate
its duties hereunder. Upon such assignment, Borrower
shall be deemed to have attorned to such assignee and
shall owe the same obligations to such assignee and
shall accept performance hereunder by such assignee as
if such assignee were Lender.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed and delivered by
their respective officers thereunto duly authorized as
of the date first above written.
BORROWER: Reed's Inc.
By: /s/ Christopher J. Reed
Name: Christopher J. Reed
Title: Chief Executive Officer
LENDER: ALCO Financial Services LLC
By: /s/ Robert Weisberg
Name: Robert Weisberg
Title: President and Chief Executive
Officer
EXHIBIT A
GENERAL RELEASE
FOR GOOD AND VALUABLE CONSIDERATION, the receipt
and adequacy of which are hereby acknowledged, the
undersigned and each of them (collectively "Releasor")
hereby forever releases, discharges and acquits ALCO
Financial Services LLC ("Releasee"), its parent,
directors, shareholders, agents and employees, of and
from any and all claims of every type, kind, nature,
description or character, and irrespective of how,
why, or by reason of what facts, whether heretofore
existing, now existing or hereafter arising, or which
could, might, or may be claimed to exist, of whatever
kind or name, whether known or unknown, suspected or
unsuspected, liquidated or unliquidated, each as
though fully set forth herein at length, to the extent
that they arise out of or are in way connected to or
are related to that certain Loan and Security
Agreement dated .
Releasor agrees that the matters released herein
are not limited to matters which are known or
disclosed.
Releasor acknowledges that factual matters now
unknown to it may have given or may hereafter give
rise to Claims which are presently unknown,
unanticipated and unsuspected, and it acknowledges
that this Release has been negotiated and agreed upon
in light of that realization and that it nevertheless
hereby intends to release, discharge and acquit the
Releasee from any such unknown Claims.
Acceptance of this Release shall not be deemed or
construed as an admission of liability by any party
released.
Releasor acknowledges that either (a) it has had
advice of counsel of its own choosing in negotiations
for and the preparation of this release, or (b) it has
knowingly determined that such advise is not needed.
DATED:
Individual Releasor:
[Name of individual], individually
Entity Releasor: _
By:
Name:
Title:
EXHIBIT 10.5
PROMOTIONAL SHARES LOCK-IN AGREEMENT
This Promotional Shares Lock-In Agreement
("Agreement") is entered into as of the _____ day of
June, 2002 by and between Reed's, Inc., a Delaware
corporation ("Company"), and
_________________________________ ("Security Holder").
The Company has filed an application with the
Securities Administrator of certain states
("Administrators") to register certain of its Equity
Securities for sale to public investors who are
residents of those states ("Registration");
The Security Holder is the owner of shares of common
stock and/or possesses convertible securities,
warrants, options or rights which may be converted
into, or exercised to purchase shares of common stock
of Company, of which ______ shares of common stock and
options to purchase __________ shares of common stock
of Company (the "Promotional Shares") are the subject
of this Agreement.
As a condition to Registration, the Company and
Security Holder ("Signatories") agree to be bound by
the terms of this Agreement with respect to the
Promotional Shares.
THEREFORE, the parties hereto agree as follows:
1. Security Holder agrees not to sell, pledge,
hypothecate, assign, grant any option for the sale of,
or otherwise transfer or dispose of, whether or not
for consideration, directly or indirectly, any of the
Promotional Shares, and all certificates representing
stock dividends, stock splits, recapitalizations, and
the like, that are granted to, or received by, the
Security Holder with respect to the Promotional
Shares, while the Promotional Shares are subject to
this Agreement (collectively, the "Restricted
Securities"). Beginning one year from the completion
date of the public offering, two and one-half percent
(2 1/2%) of the Restricted Securities may be released
each quarter pro rata among the Security Holders. All
remaining Restricted Securities shall be released from
this Agreement on the anniversary of the second year
from the completion date of the public offering.
2. Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the
Company's assets or securities (including by way of
tender offer), or any other transaction or proceeding
with a person who is not a Promoter, which results in
the distribution of the Company's assets or securities
("Distribution"), while this Agreement remains in
effect that:
i. All holders of the Company's Equity Securities will
initially share on a pro rata, per share basis in the
Distribution, in proportion to the amount of cash or
other consideration that they paid per share for their
Equity Securities (provided that the Administrator has
accepted the value of the other consideration), until
the shareholders who purchased the Company's Equity
Securities pursuant to the public offering ("Public
Shareholders") have received, or have had irrevocably
set aside for them, an amount that is equal to one
hundred percent (100%) of the public offering's price
per share times the number of shares of Equity
Securities that they purchased pursuant to the public
offering and which they still hold at the time of the
Distribution, adjusted for stock splits, stock
dividends recapitalizations and the like; and
ii. All holders of the Company's Equity Securities
shall thereafter participate on an equal, per share
basis times the number of shares of Equity Securities
they hold at the time of the Distribution, adjusted
for stock splits, stock dividends, recapitalizations
and the like.
iii. The Distribution may proceed on lesser terms and
conditions than the terms and conditions stated in
paragraphs 1 and 2 above if a majority of the Equity
Securities that are not held by Security Holders,
officers, directors, or Promoters of the Company, or
their associates or affiliates vote, or consent by
consent procedure, to approve the lesser terms and
conditions.
B. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the
Company's assets or securities (including by way of
tender offer), or any other transaction or proceeding
with a person who is a Promoter, which results in a
Distribution while this Agreement remains in effect,
the Restricted Securities shall remain subject to the
terms of this Agreement.
C. Restricted Securities may be transferred by will,
the laws of descent and distribution, the operation of
law, or by order of any court of competent
jurisdiction and proper venue.
D. Restricted Securities of a deceased Security Holder
may be hypothecated to pay the expenses of the
deceased Security Holder's estate. The hypothecated
Restricted Securities shall remain subject to the
terms of this Agreement. Restricted Securities may not
be pledged to secure any other debt.
E. Restricted Securities may be transferred by gift to
the Security Holder's family members, provided that
the Restricted Securities shall remain subject to the
terms of this Agreement.
F. With the exception of paragraph 2A.iii above, the
Restricted Securities shall have the same voting
rights as similar Equity Securities not subject to the
Agreement.
G. A notice shall be placed on the face of each stock
certificate of the Restricted Securities covered by
the terms of the Agreement stating that the transfer
of the stock evidenced by the certificate is
restricted in accordance with the conditions set forth
on the reverse side of the certificate; and
H. A typed legend shall be placed on the reverse side
of each stock certificate of the Restricted Securities
representing stock covered by the Agreement which
states that the sale or transfer of the shares
evidenced by the certificate is subject to certain
restrictions until _________________ (insert date of
termination of the Agreement) pursuant to an agreement
between the Security Holder (whether beneficial or of
record) and the Company, which agreement is on file
with the Company and the stock transfer agent from
which a copy is available upon request and without
charge.
I. The term of this Agreement shall begin on the date
that the Registration is declared effective by the
Administrators ("Effective Date") and shall terminate:
i. On the anniversary of the second year from the
completion date of the public offering; or
ii. On the date the Registration has been terminated
if no securities were sold pursuant thereto; or
iii. If the Registration has been terminated, the date
that checks representing all of the gross proceeds
that were derived therefrom and addressed to the
public investors have been placed in the U.S. Postal
Service with first class postage affixed; or
iv. On the date the securities subject to this
Agreement become "Covered Securities," as defined
under the National Securities Markets Improvement Act
of 1996.
J. This Agreement maybe modified only with the written
approval of the Administrators.
3. The Company will cause the following:
A. A manually signed copy of the Agreement signed by
the Signatories shall be filed with the Administrators
prior to the Effective Date;
B. Copies of the Agreement and a statement of the per
share initial public offering price shall be provided
to the Company's stock transfer agent;
C. Appropriate stock transfer orders shall be placed
with the Company's stock transfer agent against the
sale or transfer of the shares covered by the
Agreement prior to its expiration, except as may
otherwise be provided in this Agreement;
D. The above stock restriction legends shall be placed
on the periodic statement sent to the registered owner
if the securities subject to this Agreement are
uncertificated securities.
Pursuant to the requirements of this Agreement, the
Signatories have entered into this Agreement, which
may be written in multiple counterparts and each of
which shall be considered an original.
The Signatories have signed the Agreement in the
capacities, and on the dates, indicated.
IN WITNESS WHEREOF, the Signatories have executed this
Agreement.
REED'S, INC.
By ______________________
Christopher Reed, President
SECURITY HOLDER:
_________________________
EXHIBIT 23.1
CONSENT OF INDPENDENT AUDITORS
To the Stockholders and Directors of
Reed's, Inc.
We hereby consent to the use in the Prospectus
constituting a part of this Registration Statement of
Form SB-2 of our report dated March 21, 2002 relating
to the financial statements of Reed's, Inc., as of
December 31, 2001 and for the years ended December 31,
2001 and 2000.
We also consent to the reference to us under the
caption "Experts" in the Prospectus.
Sprayberry, Barnes, Marietta & Luttrell
Bakersfield, California
July 12, 2002