Item 405 of Regulation S-B
is
contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. o
Issuer's
revenues for its most recent fiscal year: $4,509,070
As
of
July 17 2008, there were 81,338,801 shares of the Company's common stock issued
and outstanding, and the aggregate market value of such common stock held by
non-affiliates was approximately $9,926,000, based on the average of the bid
and
ask prices of such stock on that date of $0.25.
Table
of Contents
DRINKS
AMERICAS HOLDINGS, LTD.
FORM
10-KSB ANNUAL REPORT
Table
of
Contents
|
Item
1.
|
Description
of Business
|
|
|
Item
2.
|
Description
of Property
|
|
|
Item
3.
|
Legal
Proceedings
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Shareholders
|
|
|
PART
II
|
||
|
Item
5.
|
Market
for Common Stock and Related Shareholder Matters and Small Business
Issuer
Purchase of Equity Securities
|
|
|
Item
6.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
Item
7.
|
Financial
Statements
|
|
|
Item
8.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
|
|
Item
8A.
|
Controls
and Procedures
|
|
|
Item
8B.
|
Other
Information
|
|
|
PART
III
|
||
|
Item
9.
|
Directors,
Executive Officers, Promoters and Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
|
|
|
Item
10.
|
Executive
Compensation
|
|
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
|
|
|
Item
12.
|
Certain
Relationships and Related Transactions
|
|
|
Item
13.
|
Exhibits
|
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
|
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SIGNATURES
|
||
Explanatory
Note
Unless
otherwise indicated or the context otherwise requires, all references below
in
this Report on Form 10-KSB to the "Company", "us", "our" and "we" refer to
(i)
Drinks Americas Holdings, Ltd. (ii) our 100% owned Delaware subsidiary, Drinks
Americas, Inc., (iii) our 100% owned Delaware limited liability company,
Maxmillian Mixers, LLC, (iv) our 90% owned New York limited liability company,
Drinks Global Imports, LLC, and (v) our 100% owned New York Limited Liability
Company, DT Drinks, LLC.
Cautionary
Notice Regarding Forward Looking Statements
Our
disclosure and analysis in this Report contain some forward-looking statements.
Certain of the matters discussed concerning our operations, cash flows,
financial position, economic performance and financial condition, including,
in
particular, future sales, product demand, competition and the effect of economic
conditions include forward-looking statements within the meaning of section
27A
of the Securities Act of 1933, referred to herein as the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, referred to herein as the
Exchange Act.
Statements
that are predictive in nature, that depend upon or refer to future events or
conditions or that include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates" and similar expressions are forward-looking
statements. Although we believe that these statements are based upon reasonable
assumptions, including projections of orders, sales, operating margins,
earnings, cash flow, research and development costs, working capital, capital
expenditures, distribution channels, profitability, new products, adequacy
of
funds from operations and other projections, and statements expressing general
optimism about future operating results, and non-historical information, they
are subject to several risks and uncertainties, and therefore, we can give
no
assurance that these statements will be achieved.
Readers
are cautioned that our forward-looking statements are not guarantees of future
performance and the actual results or developments may differ materially from
the expectations expressed in the forward-looking statements.
As
for
the forward-looking statements that relate to future financial results and
other
projections, actual results will be different due to the inherent uncertainty
of
estimates, forecasts and projections and may be better or worse than projected.
Given these uncertainties, you should not place any reliance on these
forward-looking statements. These forward-looking statements also represent
our
estimates and assumptions only as of the date that they were made. We expressly
disclaim a duty to provide updates to these forward-looking statements, and
the
estimates and assumptions associated with them, after the date of this filing
to
reflect events or changes in circumstances or changes in expectations or the
occurrence of anticipated events
We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any additional disclosures we make in our Form
10-KSB, Forms 10-QSB and Forms 8-K reports to the SEC. Also note that we provide
a cautionary discussion of risk and uncertainties under the caption "Risk
Factors" in this report. These are factors that we think could cause our actual
results to differ materially from expected results. Other factors besides those
listed here could also adversely affect us. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of
1995.
ITEM
1. DESCRIPTION OF BUSINESS
HISTORY
OF COMPANY
As
of
March 9, 2005, the shareholders of Drinks America, Inc. ("DA"), acquired control
of Gourmet Group, which had become a Delaware corporation and changed its name
to Drinks Americas Holdings, Ltd. Prior to entering into this share exchange,
as
Gourmet Group, Inc. ("Gourmet Group"), we were a company pursuing the
acquisition of various operating businesses since our sale of Jardine Foods,
Inc., our previous operating entity, in May 2002. As described below, as of
March 9, 2005, DA's shareholders acquired approximately 87% of Gourmet Group's
common stock in exchange for all of DA's outstanding common shares and DA’s
business.
As
of
March 9, 2005, we, as Gourmet Group, issued an aggregate of approximately
42,963,792 shares of our common stock (or approximately 87.28% of the
outstanding common stock on a fully-diluted basis) to DA's shareholders, an
additional 1,800,000 total shares of our common stock (or approximately 3.66%)
to two advisors to DA and a total of 400,000 shares of our common stock (or
approximately .8%) to the four members of Maxmillian Mixers, LLC, a Delaware
limited liability company affiliated with DA ("Mixers"). Immediately prior
to
issuing such shares, the Company (which had previously been a Nevada
corporation), by way of merger into a newly formed Delaware corporation, became
a Delaware corporation, changed its name to Drinks Americas Holdings, Ltd.,
effectively reverse split its outstanding shares one-for-ten, and authorized
up
to 1,000,000 shares of "blank check" preferred stock in its new certificate
of
incorporation. In return for such issuances of shares, we, as Gourmet Group,
received all of the outstanding shares of capital stock of DA and all of the
membership interests in Mixers. Thus, DA and Mixers became our wholly-owned
subsidiaries and the business of those subsidiaries constitutes substantially
all of our operations at that time. Prior to the share exchange transaction
described above, Maxmillian Partners, LLC ("Partners") owned approximately
99%
of the outstanding capital stock of DA and immediately after the share exchange
became our majority shareholder. Subsequently, Partners distributed its shares
pro rata to its 21 members as part of a plan of liquidation. For financial
accounting purposes, this share exchange has been recognized as a reverse
merger, and accordingly we changed our fiscal year end from June 30 to DA's
year
end of April 30th, and all of our historical financial statements prior to
the
share exchange are those of DA.
OVERVIEW
Based
in
Wilton, Connecticut, we were founded in 2002 by an experienced team of beverage,
entertainment, retail and consumer product industry professionals, led by J.
Patrick Kenny, a former executive at Joseph E. Seagram & Sons. We specialize
in the marketing and distribution of premium alcoholic and nonalcoholic
beverages with icon entertainers and celebrities.
We
develop, produce (primarily through contracts with independent contractors
called co-packers), market and/or distribute alcoholic and non-alcoholic
beverages for sale primarily in the continental United States and have recently
expanded our distribution network to certain international and duty free
markets. While in certain cases we own the trademarks or have developed the
formula for a product that we distribute, in other cases we only have the right
to distribute the products and have been granted licenses of the trademark
to
allow us to do so.
We
own
certain of our products jointly with celebrities, or their affiliates. We refer
to all of the products we distribute as "our products" throughout this
report..
Over
the
past 12 months we have acquired and developed additional brands and distributed
existing products, and reallocated marketing support for certain of these
brands. Our production capacity is primarily through third party independent
contract packers known as "co-packers". The expansion of our business has been
negatively affected by insufficient working capital. As a result, we have
regularly made judgments as to inventory levels in general and whether to
maintain inventory for any particular product based on available working
capital, rather than maintaining the optimum levels required to grow our
business. We have tried to focus on the most efficient growth opportunities.
Although our working capital position has improved as a result of our December
2007 Private Placement of our preferred stock , we will continue to carefully
manage our working capital and focus on brand and business opportunities that
we
believe offer the most strategic sense and most efficient return on investment.
We expect that business decisions will continue to be influenced by the
availability of working capital.
Our
strategy is to take advantage of icon celebrity brands and the strategic
relationships our management team has developed throughout their careers. We
distribute our products through established distributors, virtually all of
which
are well known to our management team from prior business dealings with them
in
the beverage industry. We have
expanded the number of distributors we do business with in certain markets
where
we believe it is appropriate. Our distributors buy our products from us for
resale. Our products are produced by independent co-packers, typically, pursuant
to our specifications. Our management's relationships with manufacturers,
distillers, development/research companies, bottling concerns and certain
customers provide the foundation through which we expect to grow our business
in
the future.
We
believe that our organizational approach will also minimize the need to invest
heavily in fixed assets or factories and will allow us to operate with modest
overhead because of the historic relationship between members of our management
team and co-packers, distilling and bottling and production firms and other
industry participants.
We
also
rely on distributors who handle direct store delivery sales, which also allows
us to control our overhead. We have formed an independent network of contract
sales and regional managers, a promotional support team and several market
segment specialists who are paid on a variable basis.
We
currently market and distribute, and in most cases also produce (through
co-packers), 8 unique beverage brands.
Our
major
alcoholic beverages are:
Trump
Super Premium Vodka, produced in Holland, a product developed by master
distiller Jacq DeLac which was recently awarded a Four Star Highly Recommended
Rating from Paul Paucult in a respected spirits journal and received a “90-95”,
“Superb Highly Recommended” rating from the respected Wine Enthusiast Magazine
in its March 2008 Buying Guide issue. Trump Flavored Vodka, which we began
selling in February 2008, are crafted at the Wanders Distillery in Holland,
is
comprised of Trump Premium Citron, Grape, Orange, and Raspberry, distilled
with
all natural fruit flavors combined with the award-winning Trump Super Premium
Vodka ; Old Whiskey River Bourbon (R), an award winning small batch 6 year
old
bourbon (sometimes referred to in this Report as "Old Whiskey River "); Cohete
Rum, an award winning smooth sipping rum in the Cuban style, infused with
Guarana (sometimes referred to in this report as "Cohete"); Aguila Tequila,
a
100% tequiliana weber blue agave reposado tequila (sometimes referred to in
this
Report as "Aguila"); Damiana, a Mexican liqueur made from the Damiana root
and
at times given in Mexican culture as a wedding gift because of its perceived
aphrodisiac characteristics; premium select-label wines from selected vineyards
principally in France and Italy, and Casa Bo Margo wines from selected vineyards
in Italy. In addition, as part of our recent joint venture with Grammy
Award-winning producer and artist, Dr. Dre we will soon launch a super premium
cognac and a unique sparkling vodka.
Our
major
non-alcoholic beverages are:
Newman's
Own lightly sparkling fruit juice drinks, all natural juice drink products
(sometimes referred to in this report as "Newman's Own"). Newman's Own consists
of six sparkling fruit juice drinks and three fruit flavored, lightly sparkling
waters.
Our
Company is a Delaware corporation, our principal place of business is located
at
372 Danbury Road, Suite 163, Wilton, Connecticut 06897 and our telephone number
is (203) 762-7000.
STRATEGY
Our
long-term business strategy is to expand the sales and distribution of our
celebrity and icon alcoholic and non-alcoholic beverage portfolio and to add
branded beverage products into the largest and most profitable beverage
categories. Our business model takes into account the limited working capital
available for expansion of our business by leveraging the impact celebrities
have in generating public relations and consumer awareness for our brands across
all media platforms at comparatively low cost and investment. We often refer
to
entertainers and celebrities as “icons” in this report.
Since
we
were founded in 2002, the implementation of our business plan has been
negatively effected by the limited amount of working capital available to us
Our
working capital position has improved as a result of our December Private
Placement of our preferred stock. We will continue to carefully manage our
working capital and focus on our celebrity and icon brand strategy relying
on
public relations and strategically leveraging our marketing and production
partners’ resources and notoriety in order to implement our growth strategy
while also focusing on our current brand portfolio.
ALCOHOLIC
BEVERAGE DISTRIBUTION
We
have a
network of approximately 50 alcohol beverage distributors covering substantially
all of the states within the United States. Our distributors buy our products
from us for resale. We believe our most important distribution relationships
include Kendall Jackson Wine Company and its subsidiary Regal Wine Distributing,
which distribute our products in 11 states, and Phoenix Beehive the metro New
York Heineken Beer distributor. We believe our products are given greater
priority by these distributors than they would be given by larger spirits and
wine distributors which sell a substantially larger number of premium spirits.
Phoenix Beverages and Regal Wine Co., alcohol distributors, including
affiliates, accounted for approximately 12.9% and 9.5%, respectively, of our
sales in fiscal 2008.
NON-ALCOHOL
BEVERAGE DISTRIBUTION
We
have a
network of approximately 20 non-alcoholic beverage distributors focused
primarily in the east and west coasts of the United States. We have formed
a
joint venture with Tuscan Buyer Dairy for the delivery of our non-alcoholic
products focusing on the food service sector in the Metro New York area. This
gives us access to an additional distribution network in the Metro New York
Market. We have also entered into an distribution relationship for the retail
sector with SKI, a beverage and beer wholesaler in Metro New York, to assist
us
in expanding our non alcoholic and beer distribution access. On a national
basis, we are expanding our distribution of Newman's Own, adding distributors
in
California, Texas, Illinois, Vermont, Nebraska, and Washington, as well as
other
key markets, to our existing distribution areas of New York, Connecticut and
New
Jersey and Pennsylvania. We have organized a network of independent contractors
who are industry veterans and have assigned national coverage of our
distribution network to this team. Compensation to these individuals is on
a
variable success basis. We believe that we benefit from the sales and marketing
relationships that this team brings to the organization. We have also utilized
a
group of per diem merchandisers to focus on the Metro New York market in the
higher selling summer season.
WINE
AND SPIRITS INDUSTRY OVERVIEW
The
United States beverage alcohol market consists of three distinct
segments:
Beer,
wine and distilled spirits. Distilled spirits consist of three primary
categories: white goods, whiskey and specialties. White goods, consisting of
vodka, rum, gin and tequila, represents the largest category, accounting for
approximately 53.1% of industry volume in 2007. Vodka is the largest product
within the distilled spirits industry, accounting for 28.2% of distilled spirits
case sales in the United States in 2007. Despite a slowing economy, the
distilled spirits industry chartered its eighth consecutive year of growth,
with
sales increasing 5.6 percent, totaling $18.2 billion , and volume rising 2.4
percent to 181.5 million cases. We anticipate that the industry will realize
another year of growth in 2008, as the Distilled Spirits Council of the United
States forecasts sales growth of 4.6 percent to $19 billion with volume expected
to rise 1.9 percent to 185 million cases. Significant consolidation in the
global spirits industry has produced five primary large competitors: Diageo,
Allied Domecq, Pernod Ricard, Brown-Forman and Bacardi & Company,
Ltd.
Historically
growth in the United States spirits industry has been driven by favorable
demographic trends as the number of new young adults of legal drinking age
(21
to 24) increased. Current projections indicate an 11% increase in drinking
age
adults from 2005 to 2010.
Vodka
The
vodka
category is both the largest and fastest growing category of spirits in the
United States with sales of 51.2 million cases in 2007. Imported vodkas
flourished in the US market in 2007 as consumers gravitated to super-premium
brands The imported vodka sector has grown steadily for 14 consecutive years
with recent growth coming primarily from super-premium brands with an increase
in case sales of 14.2% over 2006 on case sales of 4.7 million. Grey Goose,
the
largest selling product in the super-premium category, reported sales of $53.4
million 2007, an increase of 19.3%
from 2006.
Whiskey
Whiskey
is an aged spirit generally distilled from barley, corn or rye. The whiskey
category consists of four major segments: Scotch, Irish, American and Canadian
and can be further broken down into blended and single malt subcategories.
Whiskey is the second largest spirits category in the United States accounting
for approximately 25.4% of distilled spirits case sales in 2007, with 46.2
million cases sold.
Rum
Rum
is a
distilled spirit made from sugar cane or molasses that can be bottled raw or
aged in casks. Rum can be broken into several categories: light, dark, flavored
and aged. Sales of rum accounted for approximately 13.0% of total U.S. spirits
case sales in 2007. Case sales grew at annual growth rate of 4.1% from 2006.
Two
brands, Bacardi and Captain Morgan, dominate this category with 2007 combined
U.S. sales of $298 million.
THE
NEW AGE OR ALTERNATIVE BEVERAGE INDUSTRY
Our
brands, which are classified as Alcoholic and Non-Alcoholic Ready to drink
beverages, as well as other unique brands and products that we may develop
in
the future, compete with beverage products of all types, including wines,
spirits, liqueurs, soft drinks, beer, and fruit juices. In its annual beverage
sale of the industry report for 2008, Beverage World magazine indicated that
non
alcoholic beverages remains a robust growing industry, charting 1.3 percent
growth last year. Beverage categories that have a healthy halo, ready-to-drink
teas and bottled water, and enhanced waters and energy drinks, are the principal
growth sectors.
New
Age
or alternative beverages are distinguishable from mainstream carbonated soft
drinks in that they tend to contain less sugar, less carbonation, and natural
ingredients. As a general rule, three criteria have been established for such
a
classification: (1) relatively new introduction to the market-place; (2) a
perception by consumers that consumption is healthy compared to mainstream
carbonated soft drinks and (3) the use of natural ingredients and flavors in
the
products. According to Beverage Marketing Corporation, for 2003, the New Age
or
alternative beverage category consists of the following segments: premium soda,
ready-to-drink ("RTD") coffee, RTD tea, RTD waters (nutrient-enhanced),
shelf-stable dairy (regular/diet), shelf-stable dairy (nutrient-enhanced),
single-serve-fruit beverages (regular/diet), single-serve-fruit beverages
(nutrient enhanced), smoothies, sparkling water, sports drinks, vegetable/fruit
juice blends and other New Age beverages.
PRODUCTS,
ACQUISTIONS AND ALLIANCES
CELEBRITY
AND ICON BASED BRANDS
We
are
executing a "celebrity and icon" based brand strategy, which we believe will
enhance consumer acceptance, lower ongoing marketing costs and strengthen our
access to distribution channels. We have entered into four ventures with icon
entertainers. Our business model leverages consumer identification with these
icons, focusing on high margin premium products. We believe the public relations
impact of our association with these icons and the resulting media opportunities
cuts across electronic and print media formats and delivers an exponential
impact in building brand awareness and consumer excitement.
ALCOHOLIC
BEVERAGE PRODUCTS
The
alcoholic products distributed by the Company are Trump Super Premium Vodka,
Trump flavored vodka, Old Whiskey River Bourbon, Aguila Tequila, Cohete Rum,
Damiana, Casa Bo Margo wines and a collection of select label, super premium
wines. In December 2002, we purchased 25% interest in Old Whiskey River
Distilling Company, LLC which owns or licenses the related trademarks and trade
names associated with the Old Whiskey River products. We hold the exclusive
worldwide distribution rights, through December 31, 2017, subject to an
indefinite number of five-year renewals, for Old Whiskey River Bourbon which
is
marketed in association with Willie Nelson, a renowned country western
entertainer. Our distribution agreement is subject to certain minimum sales
requirements. Old Whiskey River Bourbon has been featured on Food Channel's
Emeril Live as well as Celebrity Food Finds and other television programs.
This
line of products is available nationally at the Texas Roadhouse Restaurant
chain
as well as other outlets with specific Willie Nelson promotions. Old Whiskey
River is a featured item at Specs chain of liquor stores in Texas . We have
developed a marketing plan that focuses on Florida, North and South Carolina
and
Texas where Willie Nelsons’ brand image is high and bourbon consumption is
significant.
We
have
developed and own the trademark and formula for Cohete Rum, a Cuban style rum
produced in Panama. We launched this product in September, 2004. Cohete Rum
has
been awarded silver medals from the International Beverage Tasting Institute.
We
distribute Cohete Rum in Florida with a specific focus on the Hispanic
market.
In
fiscal
year 2005 we entered into a U.S. distribution contract giving us the exclusive
sales and marketing rights to Damiana a Hispanic liquor for the United States
market. We distribute this product on a national basis in approximately 35
states. We are pleased with the market reception to this product. We have
introduced point of sale marketing material aimed at expanding consumer brand
awareness for Damiana.
In
October 2005, we acquired ownership of a long-term license for (188 years)
for
the Rheingold trademark and other assets related to the Rheingold brand. We
believe Rheingold has a significant brand identity and awareness level within
the Metro New York and east coast markets. We believe this brand has the
potential to be an integral component of our Metro New York distribution base.
We are developing a new formula for this product with new packaging. We have
delayed the introduction of this project originally contemplated to occur in
the
fall of 2007. At this time, we have no specific launch date and the roll-out
of
this product will depend on our working capital position and the projected
return on the marketing investment required to launch this product. In May,
2006
we licensed the Rheingold trademark for use with various types of
clothing.
Also,
in
association with Bo Dietl, we have commenced the import and sale of selected
wines under the Casa Bo Margo brand in the metro New York and Connecticut
markets. We initiated the distribution of these products in November, 2006,
and
we intend to continue marketing this premium line of Italian wines with support
from Mr. Dietl a prominent radio television personality. This wine is currently
the house wine of several prominent New York City restaurants.
In
fiscal
2005, we formed Drinks Global Imports, LLC ("DGI"), a new subsidiary in which
we
own 90% of the outstanding membership units. This company imports premium wines
from around the world, and has to date focused on wines from France and Italy.
DGI commenced operations in September, 2005 and we expect its business will
continue to grow in the future. We currently distribute these products in the
Metro New York market New Jersey, Connecticut and other New England markets,
Kansas and Missouri.
In
November 2005, we signed a license agreement with Trump Mark, LLC to utilize
the
name Trump, until November 15, 2013, in connection with super premium vodka.
The
formula for this product was developed by master distiller Jacq DeLac. Bruni
Glass, Italy, designed a proprietary bottle for Trump Super Premium Vodka and
Milton Glaser designed a bottle decoration. The product was unveiled at the
2006
Wine and Spirits Wholesalers convention. We launched Trump Super Premium Vodka
on October 28, 2006 in the metro New York market. We subsequently expanded
distribution to 46 states. The product has been sold through several key
distributors including Phoenix Distribution and in 11 markets through Kendal
Jackson Wine Companies distribution organization and its affiliates. Market
reaction to this product has been excellent. Trump Super Premium Vodka was
recently awarded a Four Star Highly Recommended rating by a nationally prominent
spirits journal and received
a “90-95”, “Superb Highly Recommended” rating from the respected Wine Enthusiast
Magazine in its March 2008 Buying Guide issue. In February 2008, we commenced
sales of Trump flavored vodkas, which are comprised of Trump Premium Citron,
Grape, Orange, and Raspberry, distilled with all natural fruit flavors combined
with the award-winning Trump Super Premium Vodka.
In
February 2008 we entered into a joint venture with Grammy Award-winning producer
and artist, Dr. Dre. The Company and Dr. Dre have formed the joint venture
to
identify, develop, and market premium non-alcoholic beverages, The deal is
under
the umbrella of the agreement between the Company and Interscope Geffen A&M
Records. The joint ventures first beverages will be a super premium cognac
selection and a unique sparking vodka.
NON
ALCOHOLIC PRODUCTS
Our
non-alcoholic product offerings are Newman's Own lightly sparkling fruit juice
drinks and sparking fruit waters. Newman's Own lightly sparkling fruit juice
drinks are products developed by Paul Newman Foods in association with us.
We
have entered into an agreement to license Newman's Own name for distribution
of
this product in specified markets and have no ownership or other rights to
the
Newman's Own trademark. We have recently extended this agreement through October
2009. We successfully test marketed Newman's Own in the New York metropolitan
area during 2005. Our test marketing was focused on five fruit juices based
on a
proprietary formulas developed in conjunction with Paul Newman Foods. As a
result of the success of the test marketing, we have expanded the product line
of Newman's Own drinks to include six fruit sodas and three fruit flavored,
lightly sparkling waters. Newman's Own drinks are all natural, are certified
Kosher and are made with real fruit juice and pure sugar cane.
We
began
distributing Newman's Own in the New York metropolitan area, New Jersey and
Connecticut and have expanded distribution to California, State of Washington,
Texas, Illinois, Alabama, Alaska, Pennsylvania, Vermont and Nebraska markets.
Key grocery chains in the New York metropolitan area include Key Food, ShopRite,
and Shows and numerous independent chains are selling the product. Newman's
Own
has been successful in the independent and Korean owned retail market segment.
Newman's comes in 16 oz. glass bottles in lemonade, lemon lime, orange mango,
blackberry, natural cherry, and raspberry kiwi flavors as well as three fruit
flavored waters. Based upon on the market's reaction to this product, we hope
to
distribute this product throughout the United States. Expansion of the
territories for distribution of this product is by mutual agreement of the
parties. Given the market reception to these products, we will continue to
dedicate resources to the Newman's Own products and hope to increase the
distribution area for these products in the future.
FLAVORS,
RESEARCH AND DEVELOPMENT RELATIONSHIP
We
have a
requirements contract with Wynn Starr Flavors, Inc. ("Wynn Starr"), a leading
supplier of flavors and similar product components through which, with certain
exceptions, we are required to acquire the flavors we require for our products.
Wynn Starr performs research and development for us with respect to the flavors
we need for new and/or proposed products. Wynn Starr became a DA shareholder
by
investing $250,000 in DA in 2002, and, under its agreement with us, has provided
research and development services for us thereby lessening the expenses we
would
otherwise incur. The relationship has been essential to us, and provides
a
significant research resource at relatively low cost, e.g. developing drinks
for
targeted markets. We expect that certain of our new products will utilize
patents developed and licensed by Wynn Starr. Wynn Starr has also assisted
us in
evaluating the product quality of various brands which we have considered
acquiring and/or distributing. Our
incremental product development expenses to date have not been
material.
CELEBRITY
MARKETING RESOURCES
We
intend
to continue to utilize our access to icon celebrity-based product endorsers,
through the contacts of our management and various advisors, to further promote
the branded identity of certain of the beverages we will develop or
acquire.
We
have
entered into agreements with DAS Communications, Ltd. and Shep Gordon of Alive
Enterprises. Both David Sonenberg, who controls DAS Communications, Ltd., and
Shep Gordon are our shareholders. We have also entered into a joint venture
(50%
each) with Interscope Geffen A&M, of Universal Music Group, to commercialize
and market jointly owned alcoholic and non alcoholic beverage products in
collaboration with artists under contract with Interscope Geffen A&M. We
believe that these persons can provide access to entertainment personalities
and
will help us to develop and access unique marketing and promotional
opportunities in spirits and beverages. Our relationship with Shep Gordon has
resulted in agreements with country music "icon" Willie Nelson and access to
various culinary icons and introductions to other promotional resources. Under
our agreement with Mr. Gordon, which we entered into in December 2002, he will
also provide us with marketing advisory services through June
2009..
TRADEMARK
DEVELOPMENT RESOURCES
In
March
2002, we entered into a consulting agreement with Marvin Traub, former Chief
Executive Officer of the Bloomingdales' department store chain, and an expert
in
trademark development. Mr. Traub provides ongoing advice and marketing expertise
to us pursuant to us under this agreement. He also serves on our Board of
Directors.
MARKETING,
SALES AND DISTRIBUTION
MARKETING
Our
marketing plan is based upon our strategy of icon branding. We successfully
launched Trump Super Premium Vodka by using the public relations activity across
numerous media platforms to generate a high level of brand awareness and
consumer interest. This model has also been used for Old Whisky River Bourbon
and Paul Newmans Sparkling Fruit Beverages. Our marketing and pricing policies
and programs take into consideration competitors' prices and our perception
of
what a consumer is willing to pay for the particular brand and product in the
retail environment. Our goal is to competitively price our products with the
other comparable premium brands and provide a higher quality product at the
selected price points. We believe our Icon strategy supports category premium
pricing.
Our
marketing for our alcoholic brands focuses on building brand recognition with
our distributors with the goal of a regional and, if demand warrants, a national
roll-out of most of our products, focusing on population centers. Our marketing
of our non-alcoholic brands has been focused on building the brands recognition
initially in the New York metropolitan area at the retail level and generally
developing market profile through promotion tasting at retail distribution
locations. Our marketing plan contemplates expanding distribution to the east
and west coast regions, focusing on population centers. Newman's Own has been
promoted with consumer tastings, tee-shirt promotions and consumer trials.
Our
marketing efforts in support of our non-alcoholic brands focuses largely on
promotion at key distribution points prior to the peak summer demand
period.
SALES
Our
products are sold predominantly in the continental United States primarily
in
the beverage sections of liquor stores, grocery stores, drug stores, convenience
stores, delicatessens, sandwich shops and supermarkets. Many of our beverage
products are sold nationally and our distribution model, depending on the
product, includes several national and regional chains, for example, Trump
Super
Premium Vodka is sold at Ralphs in California, and Walgreen's, ABC Liquor,
Albertsons and various other retail chains. Old Whiskey River is sold nationally
at Texas Roadhouse and at Specs in Texas. Newmans sparkling fruit beverages
and
waters are currently sold at several hundred grocery and retail chain stores
including Raley’s Food Stores, Shaws, ShopRite, Price Choppers, and Key
Food.
Our
sales
efforts are supported by two independent contractors each with in excess of
25
years experience in beverage brand building who have specific market
responsibility. These contractors manage a network of national brokers
responsible for local markets.
DISTRIBUTION
We
sell
the majority of our products through our distribution network, and we currently
have relationships with approximately 72 independent distributors throughout
North America. Our policy is to grant our distributors rights to sell particular
brands within a defined territory. Our distributors buy our products from us
for
resale. We believe that substantially all of our distributors also carry
beverage products of our competitors. Our agreements with our distributors
vary;
we have entered into written agreements with a number of our top distributors
for varying terms; most of our other distribution relationships are oral (based
solely on purchase orders) and are terminable by either party at
will.
We
generally require our independent distributors to place purchase orders for
our
products at least 14 days in advance of requested shipping dates. To the extent
we have product available in inventory, we will fulfill other purchase orders
when and as received. We and our distributors typically contract with
independent companies to have product shipped from our contract packers to
independent warehouses, and then on to our distributors. Distributors then
sell
and deliver our products either to sub-distributors or directly to retail
outlets, and such distributors or sub-distributors stock the retailers' shelves
with our products. We recognize revenue upon shipment to our distributors and
customers of our products, net of anticipated discounts and allowances. All
sales are final and we have a "no return" policy, although we occasionally
accept returned products.
PRODUCTION
CONTRACT
PACKING ARRANGEMENTS
We
currently use independent contract packers known as "co-packers" to prepare,
bottle and package our products. Currently,
our primary contract packers are WV Wanders in Holland, Heaven Hill Distilleries
in Kentucky, Cold Spring Brewing Company in Minnesota, Interamericana de Licores
in Panama, Tequila El Viejito S.A. in Guadalajara, Mexico, and Damiana S.A.
Mexico. We have an option to acquire WV Wanders production facility in Holland.
WV Wanders produces Trump Super Premium Vodka and Trump Flavors. In the event
our relationship with any of our co-packers is terminated, we believe we could
replace the co-packer with another of comparable quality. However, in such,
case
our business would be disrupted until a replacement co-packer was identified
and
commenced production.
We
continually review our contract packing needs in light of regulatory compliance
and logistical requirements and may add or change co-packers based on those
needs. We rely on and believe our co-packers comply with applicable
environmental laws.
RAW
MATERIALS
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. Typically, we rely on our contract packers to secure raw
materials that are not unique to us. The raw materials used in the preparation
and packaging of our products consist primarily of spirits, flavorings,
concentrate, glass, labels, caps and packaging. These raw materials are
purchased from suppliers selected by us or in concert with our co-packers or
by
the respective supplier companies. Bottle production for Trump Super Premium
Vodka and Trump flavored vodka transferred to China at the end of fiscal 2008.
We consider World Enterprises Sino, Ltd, which now supplies the bottles for
Trump Super Premium Vodka, and Wynn Starr to be a significant suppliers of
raw
materials, because they supply specialty products. We believe that we have
adequate sources of raw materials, which are available from multiple
suppliers.
QUALITY
CONTROL
We
attempt to use quality ingredients for our products. We seek to ensure that
all
of our products satisfy our quality standards. Contract packers are selected
and
monitored by our Chief Operating Officer in an effort to assure adherence to
our
production procedures and quality standards. Samples of our products from each
production run undertaken by each of our contract packers are analyzed and
categorized in a reference library.
For
every
run of product, our contract packers undertake extensive on-line testing of
product quality and packaging. For our non-alcoholic products this includes
testing levels of sweetness, carbonation, taste, product integrity, packaging
and various regulatory cross checks. Similar product testing is done on our
wines and spirits. For each product, the contract packer must transmit all
quality control test results to us upon request.
We believe that, working in concert with our internal management, the food
scientist resources of Newman's Own and Wynn Starr Flavors, and the in-house
quality control mechanisms of our winery and distillery partners assure that
our
standards are at least equal to those established in the industry
Testing
at each of our co-packers generally includes microbiological checks and other
tests to ensure the production facilities for our products meet the standards
and specifications of our quality assurance program. We believe the production
facilities inspection programs are at least equal to industry standards. We
request that water quality be monitored during production and at scheduled
testing times to ensure compliance with applicable government regulatory
requirements. Flavors are sourced from only qualified manufacturers. We are
committed to an on-going program of product improvement with a view toward
ensuring high quality of our products.
We
believe we select only those suppliers that use only quality components. We
have
a full-time senior executive who oversees all production processes with respect
to product distilling. We also inspect packaging suppliers' production
facilities and monitor their product quality.
REGULATION
The
production and marketing of our licensed and proprietary alcoholic and non
alcoholic beverages are subject to the rules and regulations of various Federal,
provincial, state and local health agencies, including in particular the U.S.
Food and Drug Administration ("FDA") and the U.S. Alcohol and Tobacco Tax and
Trade Bureau ("TTB"). The FDA and TTB also regulate labeling of our products.
From time to time, we may receive notification of various technical labeling
or
ingredient reviews with respect to our products. We believe that we have a
compliance program in place to ensure compliance with production, marketing
and
labeling regulations on a going-forward basis. There are no regulatory
notifications or actions currently outstanding. We have a specific manager
with
direct responsibility to insure regulatory compliance and retain a regulatory
law firm that oversees our submissions to various agencies.
TRADEMARKS,
FLAVOR CONCENTRATE TRADE SECRETS AND PATENTS
We
own a
number of trademarks, including, in the United States, "Drinks Americas" (TM),
"Cohete" (TM), "Swiss T"(TM), " "Screaming Monkey" (TM) and "Aguila" (TM),
Casa
BoMargo (TM). Trademarks have been filed and pending with no opposition for
Drinks Americas (TM), "Monte Verde"(TM) and "Corcovado"(TM). In addition, we
have trademark protection in the United States for a number of other trademarks
for slogans and product designs, including "The Rooster Has Landed"(R), "Party
Harder"(TM), Success Distilled (TM) and The World's Finest Super Premium Vodka
(TM).
Our
license agreement for the Trump trademark provides for minimum royalty payments
through November 2012. The agreement provides for certain minimum royalty
payments, which if not paid, could result in termination of the
license.
Under
our
license agreement for Old Whiskey River, we are obligated to pay royalties
of
between $10 and $33 per case, depending on the size of the bottle. Under our
license agreement for Newman's Own, we are obligated to pay royalties of $.95
per twelve bottle case. Our Rheingold license requires us to pay the licensor
$3
per barrel for domestic sales and $10.33 for foreign sales. Under our license
agreement for Damaina Liqueur we are obligated to pay a percentage of gross
profits, less certain direct selling expenses through May 2008 and $3 per case
thereafter. Under our license agreement with Aguila Tequila we are obligated
to
pay $3 per case.
Under
our joint venture agreement with Dr. Dre we are
obligated to pay a percentage of gross profits, less certain direct selling
expenses.
We
consider our trademarks, patent and trade secrets to be of considerable value
and importance to our business. No successful challenges to our registered
trademarks have arisen and we have no reason to believe that any such challenges
will arise in the future.
COMPETITION
The
beverage industry is highly competitive. We compete with other beverage
companies, most of which have significantly more sales, significantly more
resources and which have been in business for much longer than we have. We
compete with national and regional beverage producers and "private label"
suppliers. Some of our alcohol competitors are Diageo, Pernod Ricard,
Brown-Forman, Castle Brands, Allied Biomes and Bacardi & Company, Ltd. On
the non-alcoholic front, some of our direct competitors include Cadbury
Schweppes (which produces Snapple and Mystic among other brands) Camper,
Boylands and Hansens. We believe it is a costly and difficult for large
companies to create new brands. As a result, we believe opportunities exist
for
smaller companies to develop high-quality, high-margin brands, which can grow
to
be very attractive acquisition candidates for the larger companies.
EMPLOYEES
As
of
July 17, 2008, we had twelve full-time employees and an additional five persons,
who were independent contractors working for us either in their individual
capacities or through professional service companies controlled by them. No
employee is represented by a labor union. Two of the independent contractors
have executed contracts with us and are paid on a variable success basis
depending upon sales generated by them.
Investment
in the Company involves a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and other
information and our consolidated financial statements and related notes included
elsewhere in this report. If any of the events described below actually occur,
our operating results would be dramatically adversely affected, which in turn
could cause the price of our common stock to decline, perhaps significantly.
Further, we may not be able to continue our operations. This means you could
lose all or a part of your investment.
CERTAIN
FACTORS THAT MAY AFFECT FUTURE RESULTS
FACTORS
RELATING TO OUR COMPANY AND OUR BUSINESS
WE
ARE A
DEVELOPING COMPANY AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF OUR SHORT
OPERATING HISTORY AND SHORTAGE OF WORKING CAPITAL.
We
are a
developing company with a very short operating history, having been incorporated
in September 2002. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by developing companies,
including dealing with a shortage of necessary funds in the very competitive
marketplace in which the alcoholic and non-alcoholic beverage business is
carried on, as well as the many risks commonly anticipated or experienced by
mature companies. Our ability to operate as a going concern and to achieve
profitable operations will be dependent on such factors as the success of our
business model and marketing strategy, market penetration of existing products,
competition, future brand additions, continued development of distribution
relationships and the availability of financing. No assurance can be given
that
we will be able successfully to develop our business under the foregoing
conditions.
Our
ability to establish a market for our brands and products in new geographic
distribution areas, as well as maintain and expand our existing markets,
is
dependent on our ability to establish and maintain successful relationships
with
reliable independent distributors strategically positioned to serve those
areas.
Many of our larger distributors sell and distribute competing products,
including non-alcoholic and alcoholic beverages, and our products may represent
a small portion of their business. To the extent that our distributors are
distracted from selling our products or do not expend sufficient efforts
in
managing and selling our products, our sales will be adversely affected.
Our
ability to maintain our distribution network and attract additional distributors
will depend on a number of factors, many of which are outside our control.
Some
of these factors include: (i) the level of demand for our brands and products
in
a particular distribution area; (ii) our ability to price our products at
levels
competitive with those offered by competing products and (iii) our ability
to
deliver products in the quantity and at the time requested
by
distributors.
There
can
be no assurance that we will be able to meet all or any of these factors in
any
of our current or prospective geographic areas of distribution. Further,
shortage of adequate working capital may make it impossible for us to do so.
Our
inability to achieve any of these factors in a geographic distribution area
will
have a material adverse effect on our relatio