RECENT DEVELOPMENTS

Preferred Stock Financing

On February 17, 2006, we sold $20,204,000 in our Series A preferred stock and warrants to several institutional investors. We used the proceeds of this sale to repay the majority of our short-term borrowings and to purchase the Savannah, Georgia assets, and our cash reserves increased to approximately $4.0 million.

We are in the early stage of operations. We intend to significantly expand our manufacturing capacities, broaden our marketing presence through the deployment of an internal sales force and broker network and build the required infrastructure to support these activities. As described above, we have raised a significant amount of capital which has been primarily used to acquire our Savannah facility described below, retire certain debt obligations and related fees to the transaction. The remaining amount of approximately $4.0 million is available for working capital purposes. We are seeking additional amounts in to more fully implement our plans. We believe we have available avenues to proceed to secure such financing although no assurances can be made that such funding will be received. We do not believe that without the additional funding or a rapid increase in profitable sales that we have the necessary financing for the next twelve months. Our operations will continue to operate in a loss position as we build the required capacity and infrastructure to operate in this competitive industry.

Acquisition of the Savannah, Georgia Aseptic Facility Assets

On February 17, 2006, our wholly-owned Georgia subsidiary, Universal Food & Beverage Company of Georgia, purchased the assets of an aseptic bottling and packaging and distribution facility, which we call the Savannah facility and assets, in Savannah, Georgia from California Natural Products, or CNP, pursuant to the terms of an asset purchase agreement dated as of February 17, 2006. The cash purchase price for the Savannah facility and assets was $9,000,000. The Savannah production facility is approximately 120,000 square feet, is located on a 14 acre site and has 7 aseptic lines and 4 processing systems. The assets included real estate, buildings, operating assets, equipment and machinery, intellectual property, contract rights, business records, inventory and other personal property items.

The Amendment

On February 15, 2006, our board of directors:

  •   approved an amendment to Article VI of our Amended and Restated Articles of Incorporation to increase the authorized common stock from 100,000,000 to 300,000,000, which we call the “Amendment”,

  •   authorized the presentation of the Amendment to our stockholders on or before May 15, 2006 for adoption by the stockholders, and

  •   authorized the filing of the Amendment with the Secretary of State of the State of Nevada, following such stockholder approval and adoption.

By written consent dated effective March 1, 2006, shareholders owning 22,449,682 shares, or approximately 59.96% of the issued and outstanding shares of our common stock, approved the Amendment and the increase in our authorized common stock. The Amendment will become effective upon the filing with the Nevada Secretary of State of a Certificate of Amendment. As required by federal securities laws, we mailed an information statement relating to the Amendment to our stockholders on March 16, 2006, and we will file the Certificate of Amendment twenty days after that date, or on or after April 5, 2006, also in accordance with the federal securities laws.

OUR COMPANY

We develop, manufacture and distribute co-packed, private label and branded beverage products.

Our principal place of business is 3830 Commerce Drive, St. Charles, Illinois, 60174. Our telephone number is (630) 584-8670.

Corporate History

We are a Nevada corporation formed on August 20, 1996 under the name “Hayoton Company Incorporated” as a management company for resorts and hotel properties. On September 24, 1996, we changed our name from “Hayoton Company Incorporated” to “Hyaton Company Incorporated” and then to “Hyaton Organics Inc.” on October 21, 1999. On November 1, 2001, we changed our name to “Sun Power Corporation”. On December 30, 2003, we amended our articles and changed our name to “Cardinal Minerals, Inc.” On March 2, 2005, as more fully described below, we changed our name to “Universal Food & Beverage Company.”

Share Exchange

On September 28, 2004, we entered into a Share Purchase Agreement and Plan of Reorganization, as amended, which we call the reorganization agreement, with Universal Food & Beverage Company, a Delaware corporation (“Universal Delaware”), and its shareholders. A copy of the reorganization agreement was filed as an exhibit to our Form 8-K filed with the SEC on October 1, 2004.

On March 2, 2005 as a result of the share exchange and other transactions contemplated by the reorganization agreement and accounting for the ten-for-one reverse stock split we effected immediately prior to the share exchange:

  •   Universal Delaware became our wholly owned subsidiary;

  •   the former Universal Delaware shareholders collectively were issued approximately 90.19% of our issued and outstanding common stock;

  •   the outstanding rights, warrants and options to acquire Universal Delaware common stock became rights, warrants and options to acquire our common stock;

  •   our former officers and directors resigned their positions;

  •   we appointed new officers and directors;

  •   we amended our Articles of Incorporation and changed our name to “Universal Food & Beverage Company”; and

  •   the trading symbol of our common stock on the OTC Bulletin Board became, and continues to be, UFBV.OB

At the time of the share exchange, we had no other business operations.

Acquisition of the IWG Water Bottling Assets

At the time of the share exchange, Universal Virginia, a wholly-owned subsidiary of Universal Delaware, managed the operations of certain water bottling equipment, buildings and water rights in Independence, Virginia owned by Independence Water Group, LLC, or IWG. Under this management agreement, among other things: Universal Virginia managed the day to day operations of the water bottling business and the related improved land; conducted, directed and supervised the water bottling business and its operating and maintenance activities; obtained all necessary operating permits and complied with all environmental and other regulatory matters; and marketed and sold the products of the water bottling business.

On March 31, 2005, Universal Delaware, purchased the following assets of the IWG water bottling business and related improved land:

  •   approximately 620 acres of forestland including an aquifer with net recharge of 204 million gallons per year;

  •   two buildings of approximately 8000 sq. ft. each for bottling, warehousing and distribution;

  •   one operational bottling line and other related equipment;

  •   a 6,500 square foot home on the premises, and

  •   business records, intellectual property and contract rights.

The aggregate purchase price of approximately $7.2 million was paid primarily in cash (including the payoff of a seller mortgage note), shares of our common stock, warrants to acquire shares of our common stock and a note payable to the seller.

OUR SUBSIDIARIES (March 27, 2006)

We are a holding company for Universal Food & Beverage Company, a Delaware corporation, which we call Universal Delaware and Universal Food & Beverage Company of Georgia, a Georgia corporation, which we call Universal Georgia. Universal Delaware owns 100% of Universal Food & Beverage Company of Virginia, a Virginia Corporation, which we call Universal Virginia and 100% of Universal Food & Beverage Company of Georgia, which we call Universal Georgia.

Universal Delaware

Universal Delaware was formed July 19, 2004. Prior to the share exchange, Universal Delaware, through Universal Virginia, managed the operations of certain water bottling equipment, buildings and water rights in Independence, Virginia owned by Independence Water Group, LLC, or IWG, which we call the IWG Assets. Under this management agreement, Universal Delaware among other things:

  •   managed the day to day operations of the water bottling business and the related improved land;

  •   conducted, directed and supervised the water bottling business and its operating and maintenance activities;

  •   obtained all necessary operating permits and complied with all environmental and other regulatory matters; and

  •   marketed and sold the products of the water bottling business.

Universal Delaware was responsible for all expenses of the operation of the water bottling business, including all employee costs, current debt service and all normal and regular recurring, operating expenses for the production, delivery and sale of the products, such as well maintenance, materials, shipping, etc. Universal Delaware was responsible for these expenses without regard to the revenues generated by the water bottling business, though it received all proceeds from product sales of the water bottling business.

Universal Virginia

Universal Virginia was formed on October 13, 2004 to acquire and operate the IWG assets.

Universal Georgia

We formed Universal Georgia on January 27, 2006 to acquire and operate the Savannah facility and assets.

OUR BUSINESS

We provide a variety of beverage bottling services to branded beverage companies and private label customers; as well as the development, marketing and manufacture of our own branded products. In addition, we provide turn key solutions for product development including bottle design, labels, formula development and collateral material.

Customer Arrangements

We have multiple types of customers. For the year ended December 31, 2005, one customer accounted for more than ten percent of our sales. We co-pack for a number of our customers who own proprietary brands. In this process, our customer is the marketer and distributor of the branded product to retail. We enter into a wide variety of agreements with our customers. In some instances, we may supply some or all of the materials, in other arrangements the customer may supply all of the materials. We perform a number of test runs to insure the quality of the formulation manufacturing process and final product. A number of the products are further tested though an extensive quality assurance program. We quote our services depending upon a number of factors including the complexity of manufacturing process, the cost of purchased raw materials and packing materials, testing protocols, and anticipated profit margin. The prices for our products and services will vary as a result of this quoting process.

We also perform private label manufacturing for retail customers. Similar to co-packing operations, we enter into agreements with such customers to manufacture branded beverage products owned and marketed by the retailer in their stores. Generally, the retailer will supply the formula and packaging artwork. We will perform test runs which require the retailer’s approval. We typically purchase all of the materials used in the manufacture of these products.

Proprietary Brands

We have developed brands and formulations for our owned products. We have commenced the initial marketing and sale of FROST 2 0 and SPORT 2 0. FROST 2 0 is a calorie free and sugar free enhanced flavored water beverage. Currently, the product is marketed in lemon, tropical citrus, peach and mixed berry flavors. We have initially launched this line of products using a 16.9 oz PET bottle (polyethylene terephthalate). SPORT 2 0 is a natural hydration energy drink formulated to replenish electrolytes, fluid and carbohydrate. SPORT 2 0 uses all natural ingredients to supply hydration and energy according to the recommendations of the National Academy of Science. The product has been introduced in four (4) favors – mixed

berry, lemon-lime, tropical punch and orange. In addition, we market a variety of all natural water products in varying sizes under the labels of COLD MOUNTAIN and GRAYSON MOUNTAIN SPRING WATER.

Aseptic Packaging

As a result of the recently purchased fully operational aseptic packaging and distribution center in Savannah, Georgia, we have significantly expanded our ability to package a wider range of products to a broader customer base. We plan to significantly expand our manufacturing capacities and speeds in order to be competitive in the marketplace and to attract larger customers. See below for further information concerning the Savannah acquisition.

Processing Methods

Beverage products are typically processed in one of three methods as follows;

Cold-Fill. In the cold-fill process liquids are bottled while at room temperature or below. To protect the product and to act as a preservative, chemicals such as sodium benzoate are added into the process. The use of these additives is approved by the FDA.

Our facilities in Independence, Virginia have a cold-fill line.

Hot Fill . In the hot fill process, product is heated to 185 degrees Fahrenheit. The hot product, which is now free of vegetative microorganisms, will also sanitize the container in the filling process. The vacuum formed after cooling provides additional protection from micro contaminants. After filling, the bottles are cooled slowly by water mist.

Our facilities in Independence, Virginia have a hot-fill line.

Aseptic. Flexible aseptic packaging is a beverage and liquid food system widely used in Europe and Asia for several decades and introduced to the United States in the early 1980s. This packaging system allows products once considered perishable to be distributed and stored without refrigeration for periods up to six months or more—even foods such as milk, soy beverages, juice and nectars.

The aseptic packaging system achieves this room-temperature shelf stability by filling a sterilized package with a sterile food product within the confines of a hygienic environment .

Aseptically processed liquid foods and beverages are sterilized outside the package using an ultra-high temperature process that rapidly heats, then cools, the product before filling. The processing equipment is designed to place the least amount of thermal stress on the product while ensuring safety and retain more nutritional value and exhibit more natural texture, color, and taste.

Our Savannah facility, purchased in February 2006, has aseptic packaging.

Products

We presently produce a number of products that are either co-packed or private labeled for others. As noted above, the Company has commenced the marketing of its brands. The Company has additional products in development. In addition, several companies have asked us to assist them in the development of new or modified products.

Manufacturing

As of February 2006, we have manufacturing and distribution facilities in Virginia and Georgia.

The existing Virginia manufacturing and distribution facilities consist of two company-owned 8,000-square-foot buildings located at the water source in Independence, Virginia and one 52,500-square-foot leased building located 35 miles from the water source and near two major highways in Hillsville, Virginia. One Independence building is used for cold fill production and the other is used for the production of hot fill products. The Hillsville building currently houses raw material and finished goods inventory ready for distribution.

Our Savannah, Georgia manufacturing and distribution facilities, acquired in February 2006, consist of a company-owned 120,000 square-foot building housing the aseptic processing and packaging facility, as well as storage of raw material and finished goods ready for distribution.

Distribution

The majority of our arrangements with customers are on a FOB plant basis. As a further inducement to sale, we may on our owned branded products pay for delivery of our product to customers and adjust our selling price to include the delivery costs.

We continue to expand our relationships with brokers and distributors.

Sales and Marketing

The majority of our sales to date have come through customers seeking us out through “word-of mouth” We intend to develop a small internal sales force and utilize brokers to assist with sales to retailers in many of the markets.

Raw Materials

The products we produce and sell are made from various materials, including sweeteners, juice concentrates, water, glass and plastic bottles, paper, cartons and closures. We are not dependent on anyone supplier and believe that the loss of any supplier could be replaced without a significant loss of time or money. We generally use our own Artesian well in Independence, Virginia and filtered municipal water in Savannah. Substantially all of the materials and ingredients we purchase are presently available from several suppliers, although strikes, weather conditions, utility shortages, governmental control or regulations, national emergencies or other events outside our control could adversely affect the supply of specific materials. Our key raw materials, including plastic bottles and high fructose corn syrup, are derived from commodities. Therefore, pricing and availability tend to fluctuate based upon worldwide market conditions. Our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. In certain cases, we may elect to enter into multi-year agreements for the supply of these materials with one or more suppliers, the terms of which may include variable or fixed pricing, minimum purchase quantities, and/or the requirement to purchase all supplies for specified locations.

Seasonality

Our sales are seasonal with the highest volume typically realized during the summer months. As a result of our limited existing capacity and our plans to expand, we may not have the depth of operations to benefit from this seasonality in 2006.

Competition

According to Manufacturing News, Inc., there are approximately 484 bottling plants throughout the United States. The vast majority are Coca-Cola, Pepsi, and Dr. Pepper/ 7-Up plants. There are also a large number of dairy-only plants. The balance is comprised of regional plants that specialize in hot or cold fill lines. In addition, the majority of hot fill capacity is used to produce dedicated brands which limit the ability of most these plants to contract pack and/or introduce new products.

The beverage market is highly competitive and our competitive position varies in each of our market areas. Our products compete with many varieties of liquid refreshments, including carbonated beverages, coffee, milk, tea and water. We compete with bottlers and distributors of national, regional, and private label products. Several competitors, including the two that dominate the soft drink industry, PepsiCo, Inc. and The Coca-Cola Company, have significantly greater financial resources than we do and aggressive promotion of their products can adversely affect sales of our brands. Principal methods of competition in the beverage industry are price and promotional activity, advertising and marketing programs, point-of-sale merchandising, retail space management, customer service, product differentiation, packaging innovations and distribution methods.

Intellectual Property

No material portion of our business is dependent on a single or connected group of patents, licenses, industrial, commercial or financial contracts or new manufacturing processes.

We maintain registered trademarks for our brands in the United States. Grayson, Cold Mountain and Frost 2 O are among our trademarks. We maintain registrations of all of our significant trademarks and use the trademarks in the operation of our businesses.

We have filed for a patent on a bottle sterilization process. We have proven the technology in the pilot plant and are ready to move the process into practical application. The process allows for savings in the hot-fill process by lessening the required hot-fill temperature therefore allowing for a less substantial bottle than presently required. We believe this technology could make us more competitive with our own products and in co-packing for third-parties. We also believe that, if patented, we could license this technology to large hot-fill users.

Governmental Regulation

The production, distribution and sale of our products in the United States are subject to the Federal Food, Drug and Cosmetic Act; the Occupational Safety and Health Act; the Lanham Act; various environmental statutes; and various other federal, state and local statutes regulating the production, transportation, sale, safety, advertising, labeling and ingredients of such products. Our management believes that we are in compliance in all material respects with such existing legislation. Certain states and localities prohibit the sale of certain beverages unless a deposit or tax is charged for containers. These requirements vary by each jurisdiction. Similar legislation has been proposed in certain other states and localities, as well as by Congress. We are unable to predict whether such legislation will be enacted or what impact its enactment would have on our business, financial condition or results of operations.

All of our facilities in the United States are subject to federal, state and local environmental laws and regulations. Compliance with these provisions has not had any material adverse effect on our financial or competitive position. We believe that our current practices and procedures for the control and disposition of toxic or hazardous substances comply in all material respects with applicable law. However, compliance with or any violation of current and future laws or regulations could require material expenditures or otherwise have a material adverse effect. As of March 27, 2006, we have no knowledge of any liabilities relating to any environmental laws or regulations.

Insurance Coverage and Inspections

In accordance with FDA regulations, we have and will continue to maintain product liability insurance coverage of no less than $4 million.

We routinely inspect our facilities in accordance with FDA regulations and other clinical testing standards applicable to the beverage industry. We also inspect for maintenance and repair of the majority of equipment related to the bottling of beverage products.

Research and Development

We research the ‘value-added’ beverage market to identify consumer trends, or niche markets. We intend to develop specific formulations to target these markets. Management will use its contacts to seek out these formulations with the intent of obtaining low cost licenses to produce products that will fulfill projected market needs.

We are continually working with industry recognized leaders in food processing to find new and more efficient methods of formulating, sterilizing and bottling beverages and other food products. We believe that our technical expertise and innovation differentiate us from many of our competitors.

We are installing a “pilot” processing system, to be located in our St, Charles facility to accommodate the development of these new processes and products. The pilot plant will be available for internal product development as well as product development for our co-pack clients.

Employees

As of March 27, 2006, we employed approximately 115 people, none of which are covered by collective bargaining agreements. We believe that relations with employees are good.

RISK FACTORS

This Form 10-KSB contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by us, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our product sales, expenses, net income and earnings per share.

Risk Factors Relating to Our Business

Without additional financing or a rapid increase in profitable sales we may not have the necessary financing for the next twelve months.

We are in the early stage of operations. We intend to significantly expand our manufacturing capacities, broaden our marketing presence through the deployment of an internal sales force and broker network and build the required infrastructure to support these activities. As described above, we have raised a significant amount of capital which has been primarily used to acquire our Savannah facility described below, retire certain debt obligations and related fees to the transaction. The remaining amount of approximately $4.0 million is available for working capital purposes. We are seeking additional amounts in to more fully implement our plans. We believe we have available avenues to proceed to secure such financing although no assurances can be made that such funding will be received. We do not believe that without the additional funding or a rapid increase in profitable sales that we have the necessary financing for the next twelve months. Our operations will continue to operate in a loss position as we build the required capacity and infrastructure to operate in this competitive industry.

We have a history of net operating losses which may continue.

Our new product introduction and growth expansion continue to be expensive and we reported a net loss of $5,643,319 for the year ended December 31, 2005. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we will continue to incur losses. We will continue to incur losses until we are able to establish significant sales. Our success is dependent upon the successful development and marketing of our products, as to which there is no assurance. Any future success that we might enjoy will depend upon many factors, including factors out of our control or which cannot be predicted at this time. These factors may include changes in or increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs, including costs of raw materials, personnel, marketing and promotions, reduced margins caused by competitive pressures and other factors. These conditions may have a materially adverse effect upon us or may force us to reduce or curtail operations. If the present funds prove sufficient and we are unable to generate adequate funds from operations or external sources, we would be required to curtail or cease operations.

Continuing the expansion of our operations, an important part of our business plan, will require significant capital expenditures which we may be unable to finance.

Although we completed a $20,204,000 convertible preferred stock offering on February 17, 2006, additional capital may be required to effectively support the operations and to otherwise implement our overall business strategy. However, there can be no assurance that financing will be available when needed on terms that are acceptable to us. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. Any additional equity financing may involve substantial dilution to our then existing shareholders.

We are dependent upon the proceeds of the convertible preferred stock offering and our existing working capital to complete our business objectives, cited herein. While management believes that these funds will be sufficient to meet our anticipated immediate cash requirements and provide us with capital sufficient to fund short-term needs, there is no assurance in this regard.

Our continued existence also will be dependent upon our ability to generate positive cash flows from operations to fund our working capital needs. We cannot at this time estimate the amount of capital that will be required in the future, the timing of such capital requirements or what valuation and pricing might be expected. If we cannot find adequate capital on reasonable terms, we may not be able to accomplish our business objectives.

We will require additional financing to further develop operations and there is no assurance that we will successfully obtain such financing on acceptable terms. The failure to obtain such financing could have a material adverse effect on the business.

Further, should we seek debt funding to satisfy additional funding requirements, such leverage poses the risks that we: may be unable to repay its debt due to a decline in revenues or disruption in cash flow; may be unable to obtain additional financing; must dedicate a substantial portion of cash flow from operations to servicing the interest and principal payments on debt, and any remaining cash flow may be inadequate to fund planned operations; has pledged substantially all of its inventory and accounts receivable as collateral; and may be more vulnerable during economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions.

We also intend to make offers to acquire bottling assets in the ordinary course of our business. If these offers are accepted, our capital needs will increase substantially. If we fail to obtain the funding that we need when it is required, we may have to forego or delay potentially valuable opportunities to acquire new bottling assets or default on existing funding commitments to third parties and forfeit or dilute our rights in existing bottling assets interests.

The beverage industry is highly competitive.

The beverage industry is highly competitive. Our products are sold in competition with all liquid refreshments. There can be no assurance that we will be able to compete successfully. Many of our competitors have far greater financial, operational and marketing resources and more established proprietary trademarks and distribution networks than we do. Furthermore, the beverage industry is characterized by rapid changes, including changes in consumer tastes and preferences, which may result in product obsolescence or short product life cycles. As a result, competitors may be developing products of which we are unaware which may be similar or superior to our products. Accordingly, there is no assurance that we will be able to compete successfully or that our competitors or future competitors will not develop products that render our products less marketable.

Our business is subject to changes in consumer preferences and tastes.

Maintaining our competitive position depends on our continued ability to offer products that have a strong appeal to consumers. Consumer preferences may shift due to a variety of factors, including changes in demographic and social trends, the availability and appeal of alternative beverages or packaging as well as general economic conditions. Any significant shift in consumer preferences coupled with our failure to anticipate and react to such changes could reduce the demand for certain products in our portfolio resulting in reduced sales or harm to the image of our brands. No assurance can be given that consumer demand for our products will exist, grow or will not diminish in the future.

Our key raw materials are derived from commodities and pricing and availability tend to fluctuate based upon worldwide market conditions.

Our key raw materials, including plastic bottles and high fructose corn syrup, are derived from commodities. Therefore, pricing and availability tend to fluctuate based upon worldwide market conditions. Our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. In certain cases, we may elect to enter into multi-year agreements for the supply of these materials with one or more suppliers, the terms of which may include variable or fixed pricing, minimum purchase quantities, and/or the requirement to purchase all supplies for specified locations.

Our business plans will require us to increase our sales through acquisitions and new product development.

Part of our strategy is to increase our sales through acquisitions of complementary businesses and products and the development of new beverage products. We cannot assure you that we will be able to identify and complete these acquisitions, or develop, market, and distribute future beverage products that will enjoy market acceptance. The failure to expand through acquisitions and/or the failure to develop new beverage products that gain market acceptance could have an adverse impact on our growth and materially adversely affect our financial condition.

The acquisitions we make could result in operating difficulties, dilution and other harmful consequences to our business and our stockholders.

The acquisition of the IWG water bottling business and Savannah facilities assets were, and other acquisitions we make could be, material to our financial condition and results of operations. In addition, the process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures and may not provide the benefits anticipated. The areas where we may face risks include:

  •   difficulties integrating operations, personnel, technologies, products and information systems of acquired businesses;

  •   potential loss of key employees of acquired businesses;

  •   adverse effects on our results of operations from acquisition-related charges and amortization of acquired intangible assets;

  •   increased fixed costs, which could affect profitability;

  •   inability to maintain the key business relationships and the reputations of acquired businesses;

  •   potential dilution to current shareholders from the issuance of additional equity securities;

  •   inability to maintain our standards, controls, procedures and policies;

  •   responsibility for liabilities of companies we acquire; and

  •   diversion of management’s attention from other business concerns.

Our sales are seasonal.

The beverage industry generally experiences its highest sales by volume during the spring and summer months and its lowest sales by volume during the winter months. As a result, our working capital requirements and cash flow vary substantially throughout the year. Consumer demand for our products is affected by weather conditions. Cool, wet spring or summer weather could result in decreased sales of our products and could have an adverse effect on our financial position. Additionally, due to the seasonality of the industry, results from any one or more quarters are not necessarily indicative of annual results or continuing trends.

In order to maintain the profit margin we require for success of our business plan, we rely on a limited number of key vendors.

The beverage industry is highly competitive and therefore the company can be subject to significant pricing pressure as well as increased cost of bottling and packaging materials, and production equipment. We are relying substantially upon our relationships with, and receiving favorable pricing arrangements from, a limited number of key vendors. Our success depends, to a significant extent, on the continued quality of the ingredients, bottles or products we require. In addition, any adverse change in the financial condition, production efficiency, product development, and management and marketing capabilities of the respective vendors could have a substantial impact on our business. In the event the operations of the key vendors were interrupted or discontinued, temporary inventory shortfalls, or disruptions or delays with respect to any unfilled purchase orders could be experienced. Although we believe that adequate alternate sources would be available that could replace a key vendor, there can be no assurance that such alternate sources will be available at the time of any such interruption or that alternative products will be available at comparable quality and prices.

We rely on a limited number of key customers for our revenue.

We rely on a limited number of key customers for a significant portion of our revenue. The loss of any one of these customers, without replacement, could significantly reduce our revenue and have a negative on our cash flow and results of operations.

Since we depend upon our key personnel providing significant business contacts, the loss of one or more of our management team may have a negative effect on our business.

Our performance and future success depends to a significant extent upon the continued service of some of senior management and certain executive officers and key personnel. In particular, the loss of the skills, experience, and continued efforts of Duane Martin, our CEO, or Marc Fry, our President of Production, or any other key personnel, could have a material adverse effect on business and prospects. We do not currently have key-man insurance on any of our executive officers.

We have employment agreements with our executive officers that provide for base salary and additional compensation in the form of bonus based upon stated objectives. In addition, our executive officers hold substantial amounts of our common stock.

There can be no assurance that the Company will retain its executive officers and key personnel.

We must manage our growth effectively and implement and maintain procedures and controls during a time of rapid expansion in our business.

The expansion necessary for us to fully exploit the market window for our products requires effective planning and management processes. Our plans for significant growth are expected to continue to place a strain on our managerial, operational and financial resources. To manage our growth, we must continue to implement and improve operational financial systems and to expand, train and manage our employee base. The additional personnel required by our expected growth must be recruited in a tight labor market. There can be no assurance our systems, procedures or controls will be adequate to support our operations, or that management will be able to achieve the rapid execution necessary to fully exploit the perceived market window for our products. If we are unable to manage growth effectively, our business, operating results and financial condition will be adversely affected.

If we expand in the future, we will increasingly become vulnerable to a variety of business risks associated with growing companies. Our current growth plans require, among other things, acquiring suitable and product-compatible water and beverage companies. The failure to maintain or upgrade financial and management control systems or to recruit additional staff or to

respond effectively to difficulties encountered during growth could have a material adverse effect on our business, financial condition and operating results. Although we are taking steps to ensure that our systems and controls are adequate to address our current and anticipated needs, and are attempting to recruit additional staff, there can be no assurance that, if we continue to grow, we will be able to effectively manage our growth, anticipate and satisfy all of the changing demands and requirements that such growth will impose upon us or achieve greater operating income or profitability.

We are subject to government and regulatory issues.

We are subject to government rules and regulations, including federal, state and local laws, regulations and inspections, and trade association standards. These laws and regulations and their interpretation and enforcement are subject to change. There can be no assurance that additional or more stringent requirements will not be imposed on our operations in the future. Our failure to comply with any of these governing bodies could irreparably harm the business. Risks of incurring substantial compliance costs and liabilities and penalties for non-compliance, particularly with respect to certain FDA laws and regulations, are inherent in our business. Such compliance requires us to perform regular testing of our water supply, an integral part of our products. If we fail an inspection, we must take immediate action to correct any deficiencies and fully document said action(s). All deficiencies must be corrected within thirty (30) days of inspection. Additional testing is required to ascertain cleanliness of equipment used in the processing and bottling of our products. Management believes it complies with the rules and regulations with which it is required to comply.

If we, our management and or our employees fail to comply with a governing rule or regulation, we may be subject to fines, or other penalties, or its business license may be lost or suspended. If we were to lose our license and suspend operations, it would have a material adverse effect on our business, financial condition and operating results. Management cannot predict whether we will incur such costs or penalties in the future.

We also recognize the oversight of our operations by the Occupational Safety and Health Administration (“OSHA”). While management intends to conduct operations in a manner consistent with OSHA regulations and standards that limit accidents and bodily injury, there can be no assurance that an accident will not happen in the manufacturing facility or on any of our premises.

We face risks associated with liability claims.

The bottling and distribution of beverages can lead to product liability claims, including liability due to the presence of contaminants in its products. We will maintain insurance coverage against the risk of product liability. However, the amount of the insurance we may carry could be subject to certain exclusions and may, or may not, be adequate. In addition to direct losses resulting from product liability, we could suffer adverse publicity and damage to our reputation in the event of contamination which could have a material adverse effect on sales and profitability.

Our management owns significant amounts of our common stock and consequently exerts significant influence on the direction of our business.

Our directors and executive officers beneficially own approximately 39.9% of our outstanding common stock as March 2006. Accordingly, these persons, as a group, will be able to exert significant influence over the direction of our affairs and business, including any determination with respect to our acquisition or disposition of assets, future issuances of common stock or other securities, and the election or removal of directors. Notwithstanding the exercise of their fiduciary duties by the directors and executive officers and any duties that such other stockholder may have to us or our other stockholders in general, these persons may have interests different than yours.

We have operated and currently operate without independent directors.

We have not had independent directors throughout our history. Accordingly, none of the material agreements between related parties have been negotiated with the oversight of independent directors. Most agreements into which we have entered were at the absolute discretion of Mr. Martin and Mr. Fry.

Risks Relating to our Capital Stock and Common Stock

Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.

Our common stock currently trades on a limited basis on the OTC Bulletin Board. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

There are a large number of shares underlying our convertible preferred stock and warrants that may be available for future sale and the sale of these shares may depress the market price of our common stock.

As of March 27, 2006, we had 37,757,036 shares of common stock issued and outstanding, convertible preferred stock outstanding that may be converted into 40,408,000 shares of common stock at below market prices, and outstanding warrants to purchase 34,597,073 shares of common stock. The sale of these shares may adversely affect the market price of our common stock.

The issuance of shares upon conversion of the preferred stock and exercise of outstanding warrants may cause immediate and substantial dilution to our existing stockholders.

The issuance of shares upon conversion of the convertible preferred stock and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the convertible preferred stockholders may not convert their preferred stock and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting and/or exercising some of their holdings, selling these shares and then converting the rest of their holdings. In this way, the convertible preferred holders could sell more than this limit while never holding more than this limit.

If we are required for any reason to redeem our convertible preferred stock, we would be required to deplete our working capital, if available, or raise additional funds. Our failure to redeem our convertible preferred stock, if required, could result in legal action against us, which could require the sale of substantial assets.

In February 2006, we sold $20,204,000 of convertible preferred stock. Any event of default could require the early redemption of the convertible preferred stock and/or payment of dividends at a default dividend rate if the default is not cured with the specified grace period. In addition, the convertible preferred stock has a three year life at the end of which, the holders may put back to the Company all unconverted shares for cash at the face value of the preferred stock.

We anticipate that the full amount of the convertible preferred stock, together with required dividends will be converted into shares of our common stock, in accordance with the terms of the convertible preferred stock. If we are required to instead redeem the convertible

preferred stock, we would be required to use our working capital or raise additional funds. If we were unable to redeem the convertible preferred stock when required, the holders could commence legal action against us to recover the amounts due. Any such action may require us to obtain additional financing or curtail operations.

The terms of our preferred stock require us to meet certain revenue targets by March 31, 2007 or suffer substantial dilution.

The Preferred Stock Certificate of Designations provides among other things that if Universal does not achieve certain net sales targets in the four quarters ended March 31, 2007, the conversion price for the Series A Preferred Stock will be decreased to the product of (x) the then current conversion price and (y) .6666. Failure in meeting this revenue target could lead to substantial dilution and could result in current stockholders losing a substantial portion or all of the value of their investment.

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue our normal operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. In addition, we have a substantial amount of convertible preferred stock and a substantial and prolonged decline in the price of our common stock would make it unlikely that the convertible preferred stock would be converted and if we were required to redeem a significant portion of the convertible preferred stock it would be highly detrimental to our liquidity and our operations. We also have a substantial number of warrants outstanding and a decline in the price of our common stock would make it unlikely that those warrants would be exercised and that could be especially detrimental to our liquidity and our operations. Such reductions would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plan and operations, including our ability to expand our facilities and equipment, develop new products and continue our current operations. If our stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

Since our shares are thinly traded, and trading on the OTC Bulletin Board may be sporadic because it is not an exchange, stockholders may have difficulty reselling their shares.

Our common shares are currently listed for public trading on the NASDAQ Stock Market, Inc.’s OTC Bulletin Board. There can be no assurance that an active public market will continue for the common stock, or that the market price for the common stock will not decline below its current price.

Trading prices of our common shares may fluctuate in response to a number of factors, many of which will be beyond our control. There can be no assurance that trading prices and price earnings ratios previously experienced by our common shares will be matched or maintained. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted. Such litigation, if initiated, could result in substantial costs for us and a diversion of management’s attention and resources.

Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.

Our executive officers, directors, and principal stockholders who hold 5% or more of the outstanding common stock and their affiliates beneficially owned as of December 31, 2005, in the aggregate, approximately 56% of our outstanding common stock. These stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

Future sales of our common stock may cause our stock price to decline.

Our stock price may decline by future sales of our shares or the perception that such sales may occur. If we issue additional shares of common stock in private financings under an exemption from the registration laws, then those shares will constitute “restricted shares” as defined in Rule 144 under the Securities Act. The restricted shares may only be sold if they are registered under the Securities Act, or sold under Rule 144, or another exemption from registration under the Securities Act.

Some of our outstanding restricted shares of common stock are either eligible for sale pursuant to Rule 144 or required under existing registration rights agreements to be registered under the Securities Act for resale by the holders. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market may cause the stock’s market price to decline. See “Description of Securities.”

We do not expect to pay dividends on our common stock.

We have not paid dividends since inception on our common stock, and we do not contemplate paying dividends in the foreseeable future on our common stock in order to use all of our earnings, if any, to finance expansion of our business plans.

If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board, we could be investigated by the SEC or we could incur liability to our shareholders.

Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. Failure to remain current in our reporting obligations might also subject us to SEC investigation or private rights of action by our shareholders.

Our common stock is subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.

The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

  •   that a broker or dealer approve a person’s account for transactions in penny stocks; and

  •   the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

  •   obtain financial information and investment experience objectives of the person; and

  •   make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

  •   sets forth the basis on which the broker or dealer made the suitability determination; and

  •   that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Our articles of incorporation and bylaws and Nevada law contain provisions that could delay or prevent a change of control and could limit the market price of our common stock.

Our authorized capital stock consists of 100,000,000 shares of common stock and 25,000,000 shares of preferred stock. Our board of directors, without any action by stockholders, is authorized to designate and issue shares of preferred stock in any class or series as it deems appropriate and to establish the rights, preferences and privileges of these shares, including dividends, liquidation and voting rights. The rights of holders of shares of preferred stock that may be issued may be superior to the rights granted to the holders of existing shares of our common stock. Further, the ability of our board of directors to designate and issue such undesignated shares could impede or deter an unsolicited tender offer or takeover proposal and the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of our common stock.