Xstream Beverage Net (XSBV) - Description of business


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Company Description
OVERVIEW AND BUSINESS STRATEGY

We develop, market, sell and distribute new age beverage category natural sodas, fruit juices and energy drinks. Following our acquisition in April 2003 of Total Beverage Network, our focus has been to build a network of small to medium sized beverage distribution businesses, with an emphasis on the East Coast of the United States. Our goal is to become a leading distributor of beverage products through multiple distribution channels. Since our acquisition of Total Beverage Network, we have acquired additional beverage distribution companies together with a natural juice company and certain intellectual property rights related to other beverage names.

Our business strategy is to complete our network of small to medium sized beverage distributors in major markets throughout the United States, as well as expanding our base of proprietary value-added brands currently competing in various aspects of the new age beverage industry. Our success is dependent on our ability to make these additional acquisitions and then to effectively integrate their operations into our company. We believe that we will generate stronger than industry average margins by selling both our own proprietary brands as well as third party brands that are dependent upon our multi-market distribution network. Our belief, which is based upon the experience of our management, is that as our distribution network grows, this expanded distribution network may give us some leverage to obtain better pricing and promotional deals from third party brand owners who may be willing to offer reduced pricing in exchange for increased distribution capabilities.

For fiscal 2005 and 2004 approximately 95 % and 96%, respectively, of our revenues were derived from distribution of third-party brands with the remaining approximately 5% and 4% attributable to sales of our propriety products.

OUR MARKET SEGMENT

Our activities are focused in the new age and alternative beverage segments of the beverage market. New Age or alternative beverages are distinguishable from mainstream carbonated soft drinks in that they tend to have less carbonation and are made from natural ingredients. As a general rule, three criteria have been established for such a classification:

* relatively new introduction to the market-place; * a perception by consumers that consumption is healthful when compared to mainstream carbonated soft drinks; and * the use of natural ingredients and flavors in the products.

The new age beverage category includes non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, single serve juices, ready-to-drink iced coffees, energy drinks, sports drinks, soy drinks and single-serve still water (flavored and unflavored) with beverages, including sodas, that are considered natural, as well as sparkling juices. Brand name products which are part of this beverage category include natural juices and juice drinks such as Odwalla, Naked Juice and Snapple, sports and energy drinks such as Gatorade and Red Bull, bottled water and enhanced waters such as Evian and Vitamin Water, and ready-to- drink teas such as Arizona Iced Tea.

The new age beverage category is the fastest growing segment of the beverage marketplace according to Beverage Marketing Corporation (www.beveragemarketing.com), a company founded in 1972 which is a supplier of information, consulting and financial services specializing in meeting the needs of the global beverage industry. According to the 2004 State of the Industry report issued by the Beverage Marketing Corporation, sales in 2003 for the new age beverage category of the market are estimated at approximately $14.1 billion at wholesale, representing a growth rate of approximately 5.9% over the revised estimated wholesale sales in 2002 of approximately $13.3 billion. Growth in the category is attributed to consumer interest in more variety, healthier alternatives to carbonated soft drinks, and more new product activity by the major beverage manufacturers including Coca-Cola and Pepsi Cola.

OUR PROPRIETY PRODUCTS AND DISTRIBUTION ACTIVITIES

Our proprietary brand portfolio is directed to consumers who prefer new age beverage products to traditional carbonated soft drinks such as Coca-Cola, Pepsi and 7-Up. The new age beverage category is attractive to us because it is a growth segment of the beverage market and we believe that consumers will pay more for these products than carbonated soft drinks.

Currently, our proprietary products include:

YOHIMBE ENERGY DRINK Yohimbe Energy Drink is an energy drink similar in taste and appearance to the market leader, Red Bull, which is sold in 250ml cans. The principal point of difference is the addition of extract of "yohimbe", a botanical believed to be associated with improved blood supply to the muscles and a positive impact on human libido. Sales of Yohimbe Energy Drink represented less than 1% and approximately 2%, respectively, of our total revenues for the fiscal years ended December 31, 2005 and 2004.

CHINESE ROCKET FUEL Launched in the first quarter of 2005, Chinese Rocket Fuel is also an energy drink that is similar in taste and appearance to the market leader, Red Bull. The principal point of difference is the addition of extracts of Chinese herbs including Panax Ginseng and Schizandra. Unlike Red Bull and Yohimbe, Chinese Rocket Fuel is sold in 16 fl. oz. (476 mls) cans and competes in this segment with energy drink brands such as Hansen's Monster and Coca Cola's Rock Star. Sales of Chinese Rocket Fuel represented less than 1% of our total revenues for the fiscal years ended December 31, 2005.

MAUI JUICE COMPANY The products include a line of natural juices and juice blends that contain no artificial ingredients, preservatives or added color. The product range is currently only available in Hawaii and includes seven traditional Maui Juice flavor varieties, including Noni Lemonade, Ginger Blast and Spirulina Smoothie, all of which are sold in 16 ounce and 32 ounce plastic bottles, and three new products: Passion Fruit Guava and Orange Juice, Pineapple Orange and Guava Orange that were launched in June of 2005 Because these products have a limited shelf life, the product is sold exclusively through cold cabinet channels where natural juices are found. Sales of Maui Juice Company products represented approximately 3% of our total revenues for the fiscal year ended December 31, 2005.

SQUEEZE Squeeze is a line of traditional carbonated soft drinks, sometimes referred to as "Gourmet Sodas" that are sweetened with cane sugar and have natural flavor systems. This line of seven flavor varieties is sold in "Old Fashioned" 12 ounce glass bottles. Sales of the Squeeze line of products represented less than 1% of our total revenues for the fiscal year ended December 31, 2005 following its launch in the fourth quarter of fiscal 2004.

The primary focus of our distribution effort is directed towards retail outlets such as convenience stores, delicatessens, gas stations, bars, restaurants and hotels. The effective display and promotion of beverage products in refrigerated display cabinets (cold cabinets) is key to a successful business in these outlets. We rely upon point of sale display and promotion to increase customer awareness of our products. As our brands generate increased consumer awareness and consumer demand, distribution to larger retailers, such as grocery stores and warehouse clubs, and wholesalers will become more critical to our continued market penetration.

Through our network, we also distribute a wide variety of beverages, alternative and new age beverages, energy drinks, juices and non-carbonated sodas, vitamin waters, specialty and nutrition drinks and non-alcoholic beer. We actively seek to acquire distribution rights for products we believe show strong growth potential. At December 31, 2005 we had approximately 20 beverage suppliers. Third-party brand name products currently distributed by us include:

AriZona ice teas Dannon FIJI mineral water Switch Glacier Lake water Vermont Pure Hansen's Natural beverages Skae Beverages Martinelli's juices SPA Mineral Water IZZE sparking juices Vernor's soda Apple & Eve Clearly Canadian water Welch's Crush Tazo teas Brick House Guinness non-alcoholic beer SoBe

We are a party to distribution agreements with a number of beverage manufacturers which set forth the terms and conditions of our distribution rights of those products. These agreements grant us either exclusive or non- exclusive distribution rights for certain territories and our ability to distribute that company's products are limited to sales made in those specific areas. In some instances we have the right to appoint sub-distributors within our prescribed territory. We do not presently have any sub-distributors and have no present plans to establish any sub-distributors. The terms of these agreements are generally for one year with automatic annual renewals providing we are meeting our minimum distribution levels of the brand in question. Historically we have met the various minimum order requirements and anticipate that we will continue to meet these terms in the future. We also distribute Glacier Lake water on a non-exclusive basis in the Maryland, District of Columbia and Northern Virginia areas under an oral agreement with the beverage manufacturer. This distribution relationship, which represented approximately 4.5% of our revenues for each of the fiscal years ended December 31, 2005 and 2004, can be terminated at any time.

SEASONALITY

Sales of ready-to-drink beverages are somewhat seasonal, with over 60% of our sales expected to occur in the second and third calendar quarters.

PRODUCT MANUFACTURING

We currently manufacture the Maui Juice Company products in our facility in Hawaii. The plant is located in Kahalui on the island of Maui and is equipped with essential blending and fruit processing equipment. In May of 2005, we moved our Hawaiian operations to a larger facility on Maui. The additional space and FDA/ USDA clean rooms in the new facility will enable us, in the future, to automate our current labor intensive manufacturing operations and provide added security for our production processes. The new facility will also permit us to increase our production capacity as demand for these products increase in future periods.

We rely on third party manufacturers to produce our Yohimbe, Chinese Rocket Fuel and Squeeze branded products. The third party manufacturers use our proprietary formulations and flavor ingredients in the production of these products. At the time of production, one of our chemists observes the product manufacture and production run, tests the finished beverage product and the package integrity.

In the case of unique flavor ingredients, we obtain the raw materials for the manufacture of our products from several sources and arrange for the direct delivery of these raw materials to the third-party manufacturer. For raw materials commonly used in the manufacture of beverages similar to our products, such as sugar and citric acid, we obtain these directly from the third party manufacturers to take advantage of cost savings available through bulk purchases by the third party manufacturer. We normally pre-pay for the manufacture and for the packaging materials. We own the finished inventory which is shipped to our warehouses upon completion.

We believe that there are several primary suppliers of raw materials within the U.S. In addition, we believe that there are many manufacturers in the U.S. that could manufacture any product we choose to produce. With the possible exception of PET bottles for future Maui Juice Company products, we do not anticipate having contracts with any entities or persons committing such suppliers to provide the materials required for the production of our products. We believe raw materials are plentiful worldwide.

NEW PRODUCT DEVELOPMENT PROGRAM AND RESEARCH AND DEVELOPMENT

The new age beverage category growth is largely sustained by the constant addition of new products, brands and brand extensions. An integral part of our strategy is to develop and introduce innovative products and packages. The development time from the inception of the concept through product development and testing to the manufacture and sale of the finished product is several months. Not all new ideas make it through consumer research. To the extent that we have sufficient capital, we intend to more actively pursue the research, development manufacture and distribution of beverage products. During fiscal 2004 and fiscal 2005, we spent approximately $25,000 and $15,000 respectively on new product and package development.The acquisition of the Maui Juice Company brand has opened a research and development project to formulate new flavors for the existing cold cabinet range in Hawaii. Specifically in 2005, we introduced a not from concentrate, fresh squeezed orange juice and three new high juice content, juice blend products: Passion Fruit Guava and Orange Juice, Pineapple Orange and Guava Orange that were launched in June of 2005. We have also developed a new line of Maui Juice Company brand shelf stable products which we intend to introduce on the U.S. mainland later in 2006. We are unable at this time to predict our research and development expenses for fiscal 2006.

OUR GROWTH AND ACQUISITION STRATEGY

We believe that the evolution and growth of virtual soft drink brands or brands whose owners do not possess manufacturing or distribution assets, coupled with a nationwide consolidation of distribution by the three major soft drink companies, Coca Cola, Pepsi and Cadbury Schweppes, has created a unique business opportunity in the area of beverage sales and distribution. Until recently, most major metropolitan areas in the United States had at least one strong, independent distributor of beverage product. Typically these operators carried a national

brand of beer, cola and a juice line, had extensive coverage of their territory and controlled considerable brand assets such as vending machines and coolers.

The formation of Coca Cola Enterprises and then The Pepsi Bottling Group began the demise of the independents whose fate was sealed when Cadbury Schweppes began buying up strong, independent brands such as Snapple, Dr Pepper, Seven Up and Mistic and running them through a few strong regional distribution companies, such as S.E. Atlantic in the southeast U.S. The former strong independents have consolidated and acquired many smaller competitors. Most of the surviving small distributors are under-resourced, entrepreneurial operations with no core brand business and inadequate infrastructures.

It is within this group of companies, distributors with solid management but without the means to grow, that we hope to identify potential acquisition targets. Our business objective is to market a full range of proprietary new age brands. To achieve this goal, we are acquiring and developing brands and products that we believe are appropriate and desirable for target consumers, as well as acquiring a network of beverage distribution companies. Our strategy is to complete our network of small to medium sized beverage distributors in major markets throughout the United States. We believe that we will generate stronger than industry average margins by selling value-added proprietary brands and third party value-added brands that are dependent upon our multi-market distribution network. We also believe that the acquisition of beverage distribution companies will give us access to our target customers as well as enabling us to earn revenues by distributing a portfolio of third party brands.

We believe that our acquisition strategy is key to our ability to grow our company. We have identified over 1,000 beverage distribution companies nationwide that meet our acquisition profile of annual sales revenues between $2,500,000 and $5,000,000. These distributors are ideal for future growth programs in the smaller metropolitan markets. For the larger markets such as Washington D.C. and New York, we are seeking an acquisition target in the revenue range of $5,000,000 to $10,000,000. An added benefit of a network of operations is the added leverage that multiple market operations bring when negotiating with the third party brand owners.

Our ability to complete additional acquisitions, however, is limited to available capital. Because of our relatively small size and the limited trading in our common stock, we believe that the consideration to be paid in additional acquisitions will be a combination of cash, equity and debt. As of the date hereof, however, we are not a party to any agreement for any additional acquisitions. We will be competing with many other companies in executing our acquisition strategy and, as a result of our small size and present lack of capital for use in acquisitions, we are at a disadvantage and we cannot assure you that we will be effective in implementing this strategy.

OUR HISTORY

We were organized under the laws of the State of Nevada on February 1, 1989, under the name East End Investment, Inc. for the purpose of engaging in the business of investing and all other lawful businesses. We have undertaken a number of name changes during our history. In November 1989 our name was changed to The Theme Factory, Inc., in March 2001 our name was then changed to the Geyser Group, Ltd., in September 2001 we changed our name to Xstream Beverage Group, Inc. and in October 2004 we change our name to Xstream Beverage Network, Inc.

Effective March 9, 2001, we executed agreements to acquire 100% of AquaPure International, Inc., a Nevada corporation, and 100% of Water Star Bottling, Inc., a Wyoming corporation, both in exchange for shares of our common stock. AquaPure was organized in July, 1999 to acquire operating spring water companies through financing and business combinations. Water Star bottled and marketed spring water from a cold water geyser located in the Bridger/Teton National Forest, Wyoming and it marketed fruit flavored spring water nationally. On September 14,

2001 the parties mutually agreed to rescind these agreements and the shares of our common stock issued in these transactions were returned to us and cancelled.

In September 2001 we acquired 100% of the issued and outstanding capital stock of Power Beverage Corp. from its stockholders. Power Beverage was organized in Florida in September 2001 to acquire and operate specialty beverage companies and it had no revenues at the time of the transaction.

On April 30, 2002 we entered into an agreement to acquire 100% of Buzzy's Beverages, Inc. in exchange for shares of our common stock. Buzzy's was a ready to drink ice cold coffee manufacturer located in California. As a result of Buzzy's inability to provide us with audited financial statements, we rescinded the agreement prior to the issuance of any consideration.

On August 26, 2002 we entered into a stock exchange agreement to acquire 100% of Dark Dog Sale & Retail Vertriebe Gmbh, an Austrian company which marketed an energy drink in Europe. The transaction was terminated prior to closing.

In 2002 we also signed a letter of intent to acquire 90% of Florida Brewery, Inc. In anticipation of closing this transaction, we deposited shares of our common stock which were to be issued as consideration with a third party escrow agent pending closing of this transaction. Prior to closing, the seller terminated the letter of intent and the shares previously deposited in escrow were returned to our company and cancelled.

On April 9, 2003, we closed on the acquisition of two companies. We acquired all of the issued and outstanding shares of common stock of Total Beverage Network, Inc., a Florida corporation, in exchange for 50,000 shares of our common stock. Following the closing of this acquisition, its two shareholders, Jerry Pearring and Barry Willson, become officers and directors of Xstream. Also on April 9, 2003, Total Beverage Network, now our wholly owned subsidiary, acquired substantially all of the assets of Universal Florida Beverage Distributors, Inc., a Florida corporation, in exchange for the issuance to Universal of 27,500 shares of our common stock. Universal is a distributor with distribution routes in the South Florida area. This distribution operation served to launch the Yohimbe brand and enabled our operations and marketing management to gain first hand knowledge of the brands' introduction. We will use our South Florida operation as a similar test market vehicle for future new brand introductions.

On May 1, 2003, our wholly owned subsidiary, Beverage Network of Connecticut, Inc., acquired substantially all of the assets of Finish-Line Distributors, LLC, a beverage distributor located in Bristol, Connecticut, in exchange for $152,593 and 800,000 shares of our common stock. In addition, we have paid Finish-Line Distributors an additional $50,000 in cash plus 5,000 shares of our common stock for meeting performance criteria set forth in the acquisition agreement.

In August 2003, we acquired the customer lists of American Natural Water Distributors in exchange for 550 shares of our common stock and a note in the principal amount of $12,000.

On January 14, 2004, our wholly owned subsidiary, Xstream Brands, entered into an Assignment of Trademark with Squeeze Beverage, Inc. for the assignment of all of its rights and interests in the trademark "SQUEEZE" for carbonated flavored soft drinks and seltzer water, including all variations thereof such as any spelling, formatives, phonetic variations and stylized designs of the same and all goodwill associated therewith. As consideration we issued 20,000 shares of our common stock to Squeeze Beverages, Inc. We valued the transaction at $48,000.

On March 1, 2004 our wholly owned subsidiary, Beverage Network of Hawaii, Inc., acquired substantially all of the assets and assumed certain liabilities of Pacific Rim Natural Juice Company, Inc. Through this acquisition, we acquired all of the production assets and personnel used in the manufacture of Maui Juice Company products. We were also able to transfer the lease

of the factory used in the manufacture. As consideration we issued the seller 12,500 shares of our common stock and advanced them $15,500. We valued the transactions at $45,500.

Also on March 1, 2004 our wholly owned subsidiary, Xstream Brands, entered into an Assignment of Trademark with The Maui Juice Company, Inc. for the assignment of all of its rights and interests in the trademark "Maui Juice Company", including all variations thereof such as any spelling, formatives, phonetic variations and stylized designs of the same and all goodwill associated therewith. Maui Juice Company's products contain interesting blends of unusual natural ingredients such as noni, spirulina and aloe. They also bring with them a Hawaiian heritage which we believe is a valuable marketing asset for our future business in the U.S. mainland with this brand. As consideration we agreed to pay The Maui Juice Company, Inc. $300,000 to be paid under the terms of the assignment agreement.

On March 16, 2004 our wholly owned subsidiary, Beverage Network of Massachusetts, acquired substantially all of the assets and assumed certain liabilities of Ayer Beverages, Inc. The general manager of Ayer Beverages has signed a three year agreement with us to act as vice president of our New England operations. We believe that Ayer Beverages' business also provides us with an important foothold in Massachusetts from which we have been able to open a new warehouse and business in the Boston-metropolitan area. Under the terms of the purchase agreement, as consideration we issued 20,000 shares of our common stock valued at $48,000 and $200,000 in cash.

Effective July 1, 2004, we purchased the assets of Master Distributors, Inc., d/b/a Atlantic Beverage Co., which included inventory, accounts receivable, office furniture, the rights to the products marketed by Atlantic Beverage and all rights to the operational business of Atlantic Beverage. The Atlantic Beverage business services the Washington DC, Northern Virginia and Baltimore, Maryland areas with a wide range of beverage products including Welch's and Hanson's products, products which we also distribute in our New England operations. Mr. Morris Stoddard, the former General Manager of Master Beverages, Inc., has signed a five year contract with us to oversee the management and growth of our Mid-Atlantic states' business and to act as an Advisory Director to the our Board of Directors.

As consideration for the purchase of the assets of Atlantic Beverage we issued 96,154 shares of our common stock and $570,000 in cash which was delivered at closing, with an additional $554,648 in cash due by September 9, 2004, together with a secured convertible promissory note for $2,000,000 payable in 60 equal monthly payments and bearing 6% interest per annum and a separate $250,000 payment to be made in 12 equal weekly installments pursuant to the terms of the purchase agreement. The note is collateralized by the assets acquired, subject to the first position interest of Laurus Master Fund, L.P. The holder of the secured convertible promissory note may, at his option, elected to receive shares of our common stock valued at $5.20 per share in lieu of cash payments, with the minimum conversion amount being $25,000. As of March 15, 2005 we still owed Master Distributors, Inc. a portion of the cash payment which was due on September 9, 2004, as well as certain amounts under the secured convertible promissory note. In January 2005 Master Distributors, Inc. agreed to defer those amounts, and Mr. Stoddard agreed to defer amounts due him under his employment agreement, until April 14, 2005. As consideration for these deferments, we issued or agreed to issue to Mr. Stoddard and his assigns an aggregate of 390,000 shares of common stock valued at $660,000. September 2005 we received a notice form default from the principal shareholder of Master Distributors, Inc. At December 31, 2005 the balance due the seller in this transaction is $2,063,317.

COMPETITION

We compete with a growing number of new age and traditional beverages from the three global beverage companies and with brands owned by virtual brand owners like Hansen's (makers of "Monster" Energy Drink). Carbonated soft drinks remains the largest single category. However, consumers are increasingly turning away from carbonated beverages and focusing on New Age drinks. This category of beverage includes single-serve fruit beverages, sports beverages such as

Gatorade and Power Aide, energy drinks such as Red Bull, bottled water, premium soda, nutrient enhanced drinks, ready to drink coffees and teas, packaged juices, smoothies, and vegetable/fruit blends. In its New Age Beverage Market Overview, Beverage Marketing Corporation shows the New Age category consumption increasing from 7.6 gallons per capita in 1994 to 19.6 gallons per capita in 2003. In its report on the carbonated soft drink market for the same period, Beverage Marketing Corporation shows an increase from 49.9 gallons per capita in 1999 to 53.8 gallons per capita in 2003. Effectively, carbonated soft drinks grew 7.8% over the period when compared to 157.9% growth for New Age beverages. We face significant competition from other companies, especially from Red Bull, the leader in the energy drink field. Most of these companies are better capitalized than us and can obtain financing on more favorable terms.

GOVERNMENTAL REGULATION

The Food and Drug Administration ("FDA") issues rules and regulations for the beverage industry including, but not limited to, the labeling and formulary ingredients of beverage products. We are also subject to various state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, and labeling. Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse effect upon our capital expenditures, net income or competitive position. Regulatory guidelines, however, are constantly changing and there can be no assurance that either our product or our third party manufacturers will be able to comply with ongoing government regulations.

INTELLECTUAL PROPERTY

We rely on common law rights to our trademarks "Maui Juice Company" and "Squeeze." The common law rights protect the use of these marks used to identify our products. Our earlier application for a trademark of the name "Yohimbe Energy Drink" was cancelled. It is possible that our competitors will adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Our inability to protect our trade names will have a material adverse effect on our business, results of operations and financial condition. We also rely on trade secrets and proprietary know how, and employ various methods, to protect our concepts. However, such methods may not afford complete protection, and there can be no assurance that others will not independently develop similar know how or obtain access to our know how and concepts. There can be no assurance that we will be able to adequately protect our trade secrets. Third parties may assert infringement claims against us or against third parties upon whom we rely and, in the event of an unfavorable ruling on any claim, we may be unable to obtain a license or similar agreement to use technology that we rely upon to conduct our business.

EMPLOYEES

We currently have approximately 45 employees. None of our employees are covered by a collective bargaining agreement nor are they represented by a labor union. We consider our employee relations to be good.

RISK FACTORS

Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose all of your investment in our company.

WE WILL REQUIRE ADDITIONAL CAPITAL TO FUND OUR ONGOING OPERATIONS. IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL, THEN WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.

While we have increased our sales from year to year, our revenue growth has not been significant enough to generate sufficient gross profits to fund our daily operations. While we believe in the viability of our strategy to improve sales volume, we cannot accurately predict when or if our sales and gross profits will increase to the level necessary to sustain our operations and we will require additional capital to continue our acquisition strategy. Therefore, we will need to raise additional capital to fully implement our business, operating and development plans, sustain our ongoing operations and satisfy our obligations. All of our assets serve as collateral under currently outstanding obligations and we do not presently have any firm commitments for additional sources of working capital. There are no assurances that we will be successful in raising additional capital. If we are unable to obtain additional working capital in the near future, our ability to continue as a going concern will be in doubt and we may be required to curtail all or a portion of our operations.

WE HAVE A HISTORY OF LOSSES AND A SUBSTANTIAL ACCUMULATED DEFICIT, AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO CONTINUE AS A GOING CONCERN. AS A RESULT, YOU COULD LOSE YOUR ENTIRE INVESTMENT IN OUR COMPANY.

For the fiscal years ended December 31, 2005 and 2004 we reported loss from operations of $8,363,981 and $6,959,446, respectively, and our cash used in operating activities was $2,929,367 and $3,534,338, respectively. At December 31, 2005 we had cash on hand of approximately $94,000 and a working capital deficit of $15,353,740. While our sales for fiscal 2005 increased $1,642,613, or approximately 19% from fiscal 2004, our operating expenses increased $1,404,535 in fiscal 2005 from fiscal 2004. Our revenue has not been sufficient to sustain our operations and, accordingly, we are in default under a number of obligations. The independent auditor's report for the fiscal year ended December 31, 2005 on our financial statements includes an explanatory paragraph to their audit opinion stating that our net losses, accumulated deficit and working capital deficit raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. As described above, we will need to raise additional working capital in order to continue our operations and satisfy our current and future obligations. If we are not successful in securing additional working capital, we may be required to cease operations.

WE ARE SUBJECT TO A NUMBER OF PAST DUE OBLIGATIONS AND JUDGMENTS, AS WELL AS UNPAID PAYROLL TAXES. OUR CONTINUING INABILITY TO SATISFY THESE OBLIGATIONS COULD RESULT IN SIGNIFICANT ADDITIONAL DAMAGES AND LEGAL FEES AND MAY PREVENT US FROM CONTINUING AS A GOING CONCERN.

At December 31, 2005 our current liabilities totaled $16,809,008, which includes certain non-cash expenses related to our financings or liabilities which have been restructured subsequent to December 31, 2005. Included in the current liabilities at December 31, 2005, however, is approximately $7,597,400 of liabilities which are past due at December 31, 2005 including amounts representing litigation judgments against our company, approximately $344,000 due for payroll taxes and amounts related to notes we have issued for acquisitions or financing transactions. We do not presently have sufficient capital to satisfy these obligations, including obligations to the IRS for payroll taxes we paid but which were not remitted by the payroll service provider. We are continuing to pursue litigation against the payroll service provider and its principals and are in negotiations with the I.R.S. regarding the payment of these taxes. If we are unable to make satisfactory arrangements with the I.R.S. related to these taxes, we could be subject to liens on our assets as well as significant penalties. While the other portions of these obligations are unsecured, other than a pledge of certain shares of our common stock, we may be required to use working capital to litigate these matters which will reduce the amount of capital we have available to fund our ongoing operations.

OUR ASSETS SERVE AS COLLATERAL UNDER THREE OUTSTANDING SECURED TERM NOTES. IF WE WERE TO DEFAULT ON OUR OBLIGATIONS UNDER THESE NOTES LAURUS MASTER FUND, L.P. COULD FORECLOSE ON OUR ASSETS WHICH WOULD PREVENT US FROM CONDUCTING OUR BUSINESS IN THE FUTURE AND WOULD CAUSE US TO CEASE OPERATIONS.

In April 2006 we also entered into a financing agreement with Laurus Master Fund, Ltd. pursuant to the terms of a secured convertible term note in the principal amount of $2,000,000, and two, non convertible three year term notes each in the principal amount of $4,000,000. The notes are collateralized by a blanket security interest in our assets and a pledge of the stock of our subsidiaries. While as a condition of the restructure of our obligations to Laurus Master Fund, L.P. in April 2006 the existing past due obligations will not constitute future events of default, if we should default under the repayment provisions of the secured convertible term note, or otherwise permit an event of default to occur under the note agreement, the note holder could seek to foreclose on our primary assets in an effort to seek repayment under the note. If the note holder was successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected

CERTAIN OF THE FINANCING TRANSACTIONS WE HAVE ENTERED INTO PROVIDE FOR THE PAYMENT OF LIQUIDATED DAMAGES IF WE DO NOT REGISTER THE UNDERLYING SHARES OF COMMON STOCK ON A TIMELY BASIS.

At December 31, 2005 we have recorded liabilities in the amount of $1,080,977 related to penalties for failure to timely register shares of our common stock which are underlying various financing transactions we entered into in fiscal 2004 and fiscal 2005. These liquidated damages will continue to accrue until such time as we satisfy the registration obligation. We do not currently have a registration statement pending covering any of these securities and we are unable to predict at this time when, or if, we will satisfy these registration obligations. As a result, we are unable estimate the amount of additional liquidation damages for which we will be obligated, which such amount may be significant.

WE MAY RECEIVE NO ECONOMIC BENEFIT FROM THE SWAP TRANSACTION WITH COGENT CAPITAL CORP. AND THE INSTITUTIONAL INVESTORS WHICH INCREASED OUR ISSUED AND OUTSTANDING COMMON STOCK BY APPROXIMATELY 75%.

Under the terms of the swap transaction we entered into in June 2005 which is described later in this prospectus under "Management's Discussion and Analysis or Results of Operations - Recent Financing Transactions," we issued 19,736,848 shares of our common stock in exchange for $15 million of U.S. government bonds which represented a 20% discount to the fair market value of our common stock at the time we issued the shares. These share represent approximately 75% of our presently issued and outstanding common stock. The bonds and a portion of the shares were placed in escrow pending the satisfaction of certain conditions. While we did not receive any immediate economic benefit from the transaction, the amount of funds we may ultimately receive from this swap transaction is, unknown and it is possible that we will not receive any proceeds from these bonds. In addition, there is no provision for the return of any of the shares of our common stock we issued at the time of the transaction if we do not receive the $15 million represented by the face amount of the bonds or reacquire the shares through exercise of an option. Finally, while the bonds remain in escrow we are required to pay interest on the $15,000,000 which adversely affects our cash flow.

CERTAIN OF OUR OUTSTANDING SECURITIES ARE CONSIDERED DERIVATE LIABLITLIES. WE HAVE RECOGNIZED NON-CASH INCOME AND LOSSES IN FISCAL 2005 AND FISCAL 2004 WHICH HAVE HAD A MATERIAL EFFECT ON OUR FINANCIAL STATEMENTS.

The terms of various financings we have entered into in fiscal 2004 and 2005 contains terms which are considered embedded conversion features pursuant to EITF Issue No. 00-19. Additionally, because there is no explicit number of shares that are to be delivered under the terms of certain of these financings, at December 31, 2005 we were unable to assert that we had sufficient authorized and unissued shares to settle such features. Accordingly, all of our previously issued and outstanding instruments, such as warrants and options issued to non-employees pursuant to rendered services as well as those issued in the future, would be classified as liabilities, effective with the granting of the subsequent financing conversion reset feature. As described in Note 18 to the financial statements for the years ended December 31, 2005 and 2004 which are included elsewhere in this annual report, the application of EITF Issue No. 00-19 on our financial statements for fiscal 2005 resulted in other income to us of $14,160,487, while it resulted in other expense of $4,260,337 for fiscal 2004. While these income and expense items are non-cash transactions, in each of the years the application of the accounting standard had a significant impact on our net loss for the period through a reduction in our net loss of $14,160,487 for fiscal 2005 and an increase in our net loss of $4,260,337 for fiscal 2004. In addition, at December 31, 2005 our balance sheet reflects a current liability of $5,615,541 related to the derivate liability. This derivate liability has materially adversely impacted our working capital. While we cannot predict the impact of this accounting standard on our financial statement in future periods as the income/expense calculation is based upon a current market value of our common stock, it is likely that it will have similar impacts on our financial statement in future periods.

OUR MANAGEMENT MAY BE UNABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITIONS AND TO MANAGE OUR GROWTH AND WE MAY BE UNABLE TO FULLY REALIZE ANY ANTICIPATED BENEFITS OF THESE ACQUISITIONS.

Our business strategy includes growth through acquisition and internal development. We are subject to various risks associated with our growth strategy, including the risk that we will be unable to identify and recruit suitable acquisition candidates in the future or to integrate and manage the acquired companies.

Since our acquisition of Total Beverage Network, between April 2003 and July 2004 we have acquired four additional beverage distribution companies together with a natural juice company and certain intellectual property rights related to other new age beverages. Acquired companies' histories, geographical locations, business models and business cultures can be different from ours in many respects. Our directors and senior management face a significant challenge in their efforts to integrate our businesses and the business of the acquired companies or assets, and to effectively manage our continued growth. There can be no assurance that our efforts to integrate the operations of any acquired assets or companies acquired in the future will be successful, that we can manage our growth or that the anticipated benefits of these proposed acquisitions will be fully realized. The dedication of management resources to these efforts may detract attention from our day-to-day business. There can be no assurance that there will not be substantial costs associated with these activities or of the success of our integration efforts, either of which could have a material adverse effect on our operating results.

A MAJORITY OF OUR REVENUES ARE DERIVED FROM DISTRIBUTION OF THIRD PARTY BRANDS. WE ARE DEPENDENT ON DISTRIBUTION AGREEMENT WITH THESE MANUFACTURERS, THE MAJORITY OF WHICH ARE SHORT-TERM. IF WE SHOULD LOSE THE ABILITY TO DISTRIBUTE THESE THIRD-PARTY BRANDS OUR FUTURE REVENUES WILL BE ADVERSELY AFFECTED.

We are a party to distribution agreements with approximately 20 third party beverage manufacturers, including brands such as Spa Mineral Water imported from Belgium, Welch's juices, Glacier Lake water, Hansen's Natural beverages and Fiji Mineral water among others. Because approximately 96% of our revenues are derived from distribution of third party brands, our business depends heavily on distribution of brands which are manufactured by these third parties. In most instances, our right to distribute these products are subject to the terms of distribution agreements, although in one instance we are not a party to a written agreement but distribute the products based upon an oral agreement. As described elsewhere in this annual report under "Our Business - Our proprietary products and distribution activities", this oral agreement can be terminated at any time without notice to us. Revenues from distribution of third party brands under this oral agreement represented approximately 3.0% of our total revenues for the year ended December 31, 2005. The terms of the written agreements vary, but generally provide that they are either exclusive as long as we meet certain minimum order requirements or are non-exclusive. Historically we have met the various minimum order requirements and anticipate that we will continue to meet these terms in the future. The terms of these written agreements are generally one year, with renewal options. Because of the significant nature of the revenues from distribution of third party brands to our results of operations, the termination of any of these distribution agreements could have a material adverse effect on our business operations and prospects.

THERE ARE NO ASSURANCES WE WILL EVER BE SUCCESSFUL IN ESTABLISHING A MARKET FOR OUR PROPRIETARY BRANDS. THE LACK OF ANY SIGNIFICANT MARKET IN FUTURE PERIODS WILL ADVERSELY EFFECT OUR ABILITY TO INCREASE OUR REVENUES AND OUR MARGINS.

A key element to our business model is the expansion of the distribution of our propriety brands which presently account for approximately 5% of our revenues for the year ended

December 31, 2005. Our margins are greater on the sales of our propriety products than margins from the sales of third party brands. We face significant competition from other new age beverage companies, the majority of which have greater brand recognition, a longer operating history and greater financial resources than we do. We cannot assure you that we will ever be successful in developing a meaningful market for our propriety brands. Our inability to create demand in the marketplace for our propriety products will prevent us, in future periods, from both increasing our revenues from sales attributable to those propriety products as well as increasing our margins on our sales.

WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE ABSENCE OF WHICH, SHAREHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.

Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and Nasdaq are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. While our board of directors has adopted a Code of Ethics and Business Conduct, we have not yet adopted any of these corporate governance measures and, since our securities are not yet listed on a national securities exchange or Nasdaq, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.

THE CONVERSION OF THE SECURED CONVERTIBLE TERM NOTE, EXERCISE OF WARRANTS AND THE CONVERSION OF SHARES OF OUR SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.

At March 31, 2006 we had:

* 35,802,211 shares of common stock issued and outstanding,

* warrants to purchase a total of 9,957,548 shares of our common stock with exercise prices ranging from $1.50 to $10.00 per share,

* 200,000 shares of Series A Cumulative Convertible Voting Preferred Stock issued and outstanding which is convertible into 200,000 shares of our common stock,

* 49.33 shares of our Series B Convertible Preferred Stock issued and outstanding which is presently convertible into 3,245,395 shares of our common stock, based upon a conversion price equal to the liquidation preference ($50,000 per share) divided by the conversion price of $0.76 per share, and

* 4,444,444 shares of our common stock issuable upon the conversion of the outstanding principal balance due on a secured convertible term note in the principal amount of $2,000,000 which was issued to Laurus Master Fund, Ltd. in April 2006 based upon a conversion price of $0.45 share.

Both the conversion prices of the Series B Convertible Preferred Stock and the secured convertible term note as well as the common stock purchase warrants to purchase an aggregate of 2,160,000 shares of our common stock issued or sold in connection with those transactions are all subject to adjustment in the event of stock splits and combinations, dividends or distributions, reclassifications or reorganizations, or in the event we issue or sell any additional shares of common stock or other securities which are convertible into common stock or common stock equivalents at a price less than the then current conversion price. In addition, remaining common stock purchase warrants currently outstanding to purchase an aggregate of 1,064,625 shares of our common stock are also subject to adjustment in the event of stock splits and combinations, dividends or distributions, reclassifications or reorganizations. As a result, the number of shares of our common stock into which the Series B Convertible Preferred Stock, the secured convertible term note, or the outstanding warrants are convertible may substantially increase based upon future events. We cannot predict with any certainty at this time, however, if any of these anti-dilution provisions will ever apply in the future to any of these securities and therefore we are unable to estimate the ultimate number of shares of our common stock which may be issuable upon the conversion of either the Series B Convertible Preferred Stock or the secured convertible term note or the warrants.

The conversion of the secured convertible term note or the Series A or Series B Convertible Preferred Stock and the exercise of outstanding warrants may materially adversely affect the market price of our common stock and will have a dilutive effect on our existing stockholders.

PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.

Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested stockholders.

In addition, our articles of incorporation authorize the issuance of up to 10,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our board of directors, of which 200,000 shares of Series A Cumulative Convertible Voting Preferred Stock and 49.33 shares of Series B Convertible Preferred Stock are issued and outstanding as of

March 31, 2006. Our board of directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.

OUR COMMON STOCK IS CURRENTLY QUOTED ON THE OTCBB, BUT TRADING IN OUR STOCK IS LIMITED. BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY EFFECT ITS LIQUIDITY.

The market for our common stock is extremely limited and there are no assurances an active market for our common stock will ever develop. Accordingly, purchasers of our common stock cannot be assured any liquidity in their investment. In addition, the trading price of our common stock is currently below $5.00 per share and we do not anticipate that it will be above $5.00 per share in the foreseeable future. Because the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of our securities in the secondary market because few broker or dealers are likely to undertake these compliance activities.

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