BUSINESS
OUR COMPANY
Our company is a Delaware corporation, which was formed on April 27, 1996. Our
company formerly owned the majority interest in two Sino-American joint ventures
in China, known as Green Food Peregrine Children's Food Co. Ltd. and Hangzhou
Meilijian Dairy Products Co., Ltd. These two joint ventures processed milk
products for local consumption in the areas of Shanghai and Hangzhou, China,
respectively. We closed Green Food Peregrine in December 1999 and sold its
interest in Hangzhou Meilijian Dairy in December 2000.
In December 1999, we obtained Chinese government approval for the
registration of a new wholly owned subsidiary in the Wai Gao Qiao "free trade
zone" in Shanghai, China. We formed this import-export company to import, export
and distribute food products on a wholesale level in China. In addition, China
Premium (Shanghai) is our legal presence in China with respect to contractual
arrangements for the development, marketing and distribution of branded food
products. We have ceased all business activities of this Chinese subsidiary in
the first quarter of 2003, owing to low sales volume and insufficient financial
or logistic resources to market our products profitably in mainland China.
In December of 1999, we formed Bravo! Foods, Inc., a wholly owned Delaware
subsidiary, which we utilized to advance the promotion and distribution of
branded Looney Tunes(TM) products in the United States, through production
agreements with local dairy processors. At the end of 2001, we assumed this
business, and our U.S. subsidiary ceased functioning as an operating company at
that time.
On February 1, 2000, we changed our name from China Peregrine Food
Corporation to China Premium Food Corporation, and on March 16, 2001 we changed
our name to Bravo! Foods International Corp.
THE BUSINESS
Our business involves the development and marketing of our owned
Slammers(R) trademarked brand, the obtaining of license rights from third party
holders of intellectual property rights to other trademarked brands, logos and
characters and the granting of production and marketing rights to processor
dairies to produce branded flavored milk utilizing our intellectual property. We
generate revenue primarily through the sale of "kits" to these processors. In
the United States, we also generates revenue from the unit sales of finished
branded flavored milks to retail consumer outlets.
"Kits" sold to processors consist of flavor ingredients that are developed
and refined by us and the grant of production rights to processors to produce
the flavored milks. The consideration paid to us under these production
contracts consists of fees charged for our grant of production rights for the
branded flavored milks plus a charge for flavor ingredients. The fees charged by
us for the production rights have been formulated to match our royalty costs for
our intellectual property licenses.
WARNER BROS. LICENSES
In January 1999, we commenced a licensing agreement with Warner Bros.
Consumer Products, permitting us to produce and distribute a line of high
quality, flavored milks branded with the Warner Bros. Looney TunesJ logos,
characters and names in the Shanghai and Hangzhou greater metropolitan areas. To
obtain this license, we agreed to pay 3% royalty fees of net invoiced price of
each licensed product with a minimum guaranteed royalty of $300,000. In the
summer of 2000, we agreed to pay an additional $100,000 for an expanded license
for all of mainland China and an extension of the expiration date to June 2003.
Thereafter, the parties agreed to extend the license to October 29, 2003, at
which time the license expired.
On July 27, 2000, we executed a licensing agreement with Warner Bros. to
use Looney TunesJ characters and names on milk products in the United States.
This licensing agreement obligated us to pay a guaranteed royalty of $500,000,
and granted us the right to use the cartoon characters of Bugs Bunny, Tweety,
Tasmanian Devil, Road Runner, Wile E Coyote, Lola Bunny, Marvin the Martian,
Sylvester and Daffy Duck on milk products for sale in specified retail outlets
in the fifty United States, Puerto Rico and the United States Virgin Islands.
The initial term of the agreement was for 3 years, from January 1, 2000 through
December 31, 2002. In early 2002, the parties agreed to extend the term of this
license for an additional year to December 31, 2003. This extension was part of
a promotional license for the Warner Bros. "Taz Atti-Tour" for the period March
13, 2002 to December 31, 2002, for which we paid an additional $250,000
guaranteed royalty.
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On November 7, 2001, we executed a licensing agreement with Warner Bros.
to use Looney TunesJ characters and names on milk products in Mexico. This
licensing agreement grants us the right to use the Warner Bros. cartoon
characters on milk products for sale in specified retail outlets throughout
Mexico. The initial term of the agreement is for 3 years, from June 1, 2001
through May 31, 2004.
On May 28, 2002, we executed a licensing agreement with Warner Bros. to
use Looney TunesJ characters and names on milk products in Canada. This
licensing agreement grants us the right to use the Warner Bros. cartoon
characters on milk products for sale in specified retail outlets throughout
Canada. The initial term of the agreement was for 25 months, from March 1, 2002
through March 31, 2004.
All of our licensing agreements recognize that we will use third party
production agreements for the processing of flavored milk products, and that the
milk products will be produced and may be sold directly by those processors. Our
responsibilities under its third party production agreements are to design and
provide Warner Bros. approved packaging artwork, to help determine the best
tasting flavors for the particular market and to assist in the administration,
promotion and expansion of the Looney TunesJ branded milk program. Ingredients
for the flavored milks are formulated to the Company's specifications and
supplied on an exclusive basis by Givaudan Roure. In the United States, the
Company assumes the responsibility for sales and marketing of the Looney TunesJ
flavored milks produced by Jasper Products and Shamrock Farms.
Under our United States license, we agreed to a royalty rate of 5% on the
amount invoiced to the producer dairies for "kits". In Mexico, we agreed to a
sliding scale royalty rate initially equal to 5% on the amount invoiced, with
rate increases to 5% and 7%, respectively for the second and third contract
years. We agreed to a 5% royalty rate on the amount invoiced to the producers in
Canada and a 3% royalty rate in China.
NON-RENEWAL OF WARNER BROS. LICENSES.
The history of our company with all of the Warner Bros. licenses, as a function
of sales of the flavored milks, has not supported the guaranteed royalty
structure required by Warner Bros. for its licenses. As a result, we developed
our own Slammers(R)brand in 2003 and executed licenses with Marvel Comics and
Moon Pie in 2004. For these reasons, in the fourth quarter 2003, we decided not
to seek the renewal for the China license and not accept the offer of Warner
Bros. to renew the U.S. license. In addition, we decided not to renew our
licenses with Warner Bros. for Canada and Mexico.
PRODUCTION CONTRACTS
Prior to 2000, our company's business primarily involved the production and
distribution of milk in China. In the third quarter of 2000, our company began
to refocus our company's business away from the production - distribution aspect
of the value chain by implementing a business model that involved the branding,
marketing, packaging design and promotion of flavored fresh milk in the United
States, branded with Looney Tunes(tm) characters. During the middle of 2001,
this refocused business was implemented in China, in December 2001 in Mexico,
and in the third quarter of 2002 in Canada.
United States
The initial dairy processors with which we had production contracts were members
of Quality Chekd Dairies, Inc., a national cooperative with over 40 member
dairies that process fresh milk on a regional basis. This business, while
viable, proved to have limited sales expansion capabilities in the US owing to
the inherent regional distribution limitations of a "fresh" milk product with a
short shelf life.
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The advent of extended shelf life (ESL) and aseptic long life milk presented us
with the opportunity to dramatically increase sales on a national basis. In the
third quarter of 2001 and the first quarter of 2002, we entered into production
contracts with Shamrock Farms, located in Phoenix, Arizona and Jasper Products,
of Joplin, Missouri, and began to market branded ESL and aseptic flavored milks
to large national chain accounts.
Significantly, with ESL and aseptic milks, we are no longer dependent upon
regional processor dairies to promote the sale of our branded flavored milks.
Since distribution issues do not limit ESL and aseptic milk sales to the
accounts of regional dairy processors, we have assumed responsibility for
promoting sales either directly or through food brokers who represent us with
both national and regional accounts. This business model, coupled with the
production capacity of these two ESL dairy processors, allowed us to seek
national accounts in an aggressive fashion, resulting in arrangements to supply
flavored milk products to over 11,000 stores nationally at the end of 2002.
Under our current U.S. business model, our revenue source is derived not
only from "kit" sales, but also from the differential between the cost to our
company of producing the ESL and long life aseptic products and the wholesale
price to our accounts for unit sales of the finished Looney Tunes(TM) flavored
milks.
In June 2002, we entered into a production contract with a division of
Parmalat USA Corp. to produce, market and sell the Looney Tunes(TM) brand
flavored milks. Under this agreement, Parmalat is the exclusive producer and
distributor of Bravo! Foods' new Looney Tunes(TM) brand fortified aseptic milk,
packaged in Tetra-Brik(TM) format under our Slammers Fortified Reduced Fat
Milk(TM) logo in the United States. Our agreement with Parmalat gives us an
expanded presence in supermarkets through the use of shelf stable aseptic milk
that is processed, sold and distributed by Parmalat. In addition, under this
agreement we retained responsibility for aseptic product sales in the food
service sector, either directly or through food brokers who represented us with
both national and regional accounts. Our agreement with Parmalat expired with
the non-renewal of the Warner Bros. license for the United States.
Mexico
In December 2001, we commenced our contractual relationship with Neolac
S.A, a national dairy processor located in central Mexico. We sell kits to
Neolac, including production rights for its branded flavored milk for all of
Mexico. Our responsibilities are to design and provide approved packaging
artwork, to help determine the best tasting flavors for the particular market
and to assist in the administration, promotion and expansion of the branded
flavored milk program. Ingredients for the flavored milks are formulated to our
specifications and supplied on an exclusive basis by Givaudan Roure. We do not
have any responsibility for or participation in sales or distribution in Mexico.
Canada
In April 2002, we commenced our contractual relationship with Farmers
Dairy, a dairy processor located in Halifax, Nova Scotia, Canada. We sell kits
to Farmers Dairy, including production rights for the branded flavored milk
products. Our responsibilities are to design and provide approved packaging
artwork, to help determine the best tasting flavors for the particular market
and to assist in the administration, promotion and expansion of the branded
flavored milk program. Ingredients for the flavored milks are formulated to the
Company's specifications and supplied on an exclusive basis by Givaudan Roure.
We do not have any responsibility for or participation in sales or distribution
in Canada.
China
Our withdrawal from milk production in China in 2000 resulted in the
signing of supply agreements with Hangzhou Meilijian and Huai Nan Dairy to
produce branded traditional white and flavored milks, which the Company sold in
Shanghai, Hangzhou, Ningbo, Nanjing, Fuzhou, Wuxi and Suzhou. The administration
of supply, distribution, marketing and sales of the branded flavored milk
products in China was the responsibility of China Premium Food Corp Shanghai)
Co, Ltd., our wholly owned Chinese registered subsidiary.
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In October 2001, China Premium Food Corp (Shanghai) Co, Ltd .began to
implement the Bravo! "kit sales" model with the execution of a production
contract with Kunming Xuelan Dairy, located in Kunming City in Southwest China.
From October 2001, through the third quarter 2002, Kunming Dairy produced the
Company's branded flavored milks in 250ml single serve gable top packaging. In
January 2002, Heilongjiang Wan Shan Dairy (Wonder Sun Dairy) began producing the
vanilla Looney Tunes(TM) flavored milk. This dairy is located in Harbin City in
Northeast China and has distribution rights to Heilongjiang, Jilin, Liaoning and
Hebei provinces as well as Beijing and Tianjin municipalities.
As of December 31, 2003, China Premium Food Corp (Shanghai) Co, Ltd.
ceased business activities in China. We closed all operations of this subsidiary
in the first quarter of 2004.
PRODUCTS
Commencing in September of 2000, we implemented the "kit" sales program
with third party dairy processors in the United States, for the production and
sale of fresh branded flavored milk in single serve plastic bottles. This
product, as with all of our U.S. products up to September 2000, had a limited
shelf life of, generally, 21 days.
In early 2002, we developed branded extended shelf life and aseptic long
life flavored milk products. The extended shelf life product was sold in 11.5oz
single serve plastic bottles and must be refrigerated. The shelf life of this
product is 90 days. Our aseptic product does not require refrigeration and has a
shelf life of 8 months. This product is packaged in an 11.2oz Tetra Pak
Prisma(TM) sterile paper container. Both of these products were introduced to
the public in the second and third quarters of 2002.
Commencing in May 2002, we developed a new branded fortified flavored milk
product under the "Slammers Fortified Reduced Fat Milk(R)" brand name. Our
Slammers brand is used in conjunction with our licensed third party trademarks.
Slammers(R) is made from 2 percent fat milk and is fortified with 11 essential
vitamins. The introduction of this new product and the phase out of our
"regular" branded milks occurred in the fourth quarter of 2002. Our Slammers(R)
flavored milks are sold in the United States in single serve extended shelf life
11.5 oz plastic bottles, as well as the long life 11.2oz aseptic Tetra Pak
Prisma(TM) package. Our Slammers(R) flavored milks are sold in Mexico and Canada
in single serve extended shelf life 11.5 oz plastic bottles.
In October 2002, Parmalat introduced Looney Tunes(TM) brand fortified
aseptic milk, packaged in an 8oz Tetra-Brik(TM) format under our Slammers
Fortified Reduced Fat Milk(R) logo pursuant to a production agreement with us
executed in June 2002. The 8oz Tetra Brik Slammers(R) does not require
refrigeration and has a shelf life of 6 months. Currently, this product is no
longer available.
In November 2002, we introduced Slim Slammers Fortified Milk(R), a low
calorie version of our Slammers Fortified Reduced Fat Milk(R). Slim Slammers
Fortified Milk(R) has no sugar added and is sweetened with sucralose, a natural
sweetener made from sugar. Slim Slammers Fortified Milk(R) is made from 1
percent fat milk, is fortified with 11 essential vitamins and is available in
the same flavors as our Slammers(R) brand. We will reintroduce this product in
the United States with a new package and formulation in 2004.
NEW PRODUCTS
In the third quarter 2003, we commenced an analysis of the Looney
Tunes(TM) brand performance within the context of the possible renewal of its
Warner Bros. licenses for United States, Mexico, China and Canada. In the fourth
quarter 2003, we concluded that, as a function of the sales of flavored milks,
the Looney Tunes(TM) brand has not supported the guaranteed royalty structure
required by Warner Bros. for its licenses. In the fourth quarter 2004, we
decided not to renew our license agreements with Warner Bros. and began to
develop new products in anticipation of the consummation of other license
relationships for co-branded flavored milk with Marvel Comics and MoonPie, as
well as a new single Slammers(R) brand. We plan to launch these products in the
second quarter 2004 on a co-branded basis with Marvel Comics and a separate
co-branded line with MoonPie.
INDUSTRY TRENDS
The dairy industry in the western world is a very mature industry with
slow growth and, to a large extent, commodity like margins. The "got milk"
campaign has helped heighten awareness of the nutritional benefits of dairy
products but, even with this promotion, the US consumption of milk was basically
flat two years ago.
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Flavored milk was the only area of growth in the past two years and, when
promoted aggressively, the sales of flavored milk actually increased the sales
of traditional white milk. The International Dairy Foods Association reported
that flavored milks represent the only category for price and margin gains. As a
result, Nestles, Dean's, Hershey and Borden all promote their brand of
refreshment drinks. Sales of flavored milks for the last two years continued to
have a 7% gain in product volume and a 12% increase in sales measured in
dollars. Growth of this nature is welcome to this industry and validates the
interest by the trade in products like the Company's Slammers brand Looney
Tunes(TM) milk. The Beverage Marketing Corp. projects that growth in white milk
will be flat to .5%, with growth in flavored milks from 4% to 8% per year over
the next five years. Growth in the distribution of single serve milk products is
projected by this research group at from 10% to 20%.
MARKET ANALYSIS
The flavored milk business is a relatively new category in the dairy
field. The flavored "refreshment" segment is both the fastest growing and most
profitable category in the industry and is receiving the most attention in the
industry today. Pioneered by Nestle with the NesQuik line and Dean Foods with
the Chug brand, this "good for you" segment is in demand both in the U.S. and
internationally.
The International Dairy Foods Association reports that, although flavored
milk currently amounts to only 5 to 6 percent of milk sales, it represents over
59% of the growth in milk sales. With the total milk category exceeding $9.3
billion in 2002, the flavored segment was approximately $496 million.
Statistically, as the flavored segment grows, the entire category grows as well.
Selling more flavored milks has resulted in more sales of white milk as well.
In addition, the International Dairy Foods Association and Dairy
Management Inc. have reported on studies suggesting that dairy products may help
in weight loss efforts when coupled with a reduced calorie diet, based on data
associating adequate calcium intake with lower body weight and reduced body fat.
We continue to develop a niche in the single serve flavored milk business
by utilizing strong, national branding as part of the promotion of our
Slammers(R) and Slim Slammers(R) products. This niche has as its focus the
increased demand for single serve, healthy and refreshing drinks.
Market segment strategy
The Bravo! model addresses a very clear and concise target market. We know
from experience that the largest retailers of milk products are demanding new
and more diverse refreshment drinks, specifically in the dairy area in response
to consumer interest and demand. To that end, we have and will continue to
differentiate our products from those of our competitors through innovative
product formulations and packaging designs, such as those implemented in our
Slammers fortified milk product line and our Slim Slammers(R) low calorie, no
sugar added products.
Our Slammers(R) milk products have had promising results penetrating this
arena as consumers continue to look for healthy alternatives to carbonated
beverages. The positioning of our products as a healthy, fun and great tasting
alternative refreshment drink at competitive prices to more traditional
beverages creates value for the producer and the retailer alike. This "profit
orientation" for the trade puts old-fashioned milk products in a whole new
light. The consumer is happy, the retailer is happy and the producer is able to
take advantage of the value added by the brand and the resulting overall
increase in milk sales.
We have been and continue to pursue a strategic goal of placing our
Slammers(R) milks in elementary, middle and high schools through ala carte lunch
programs and vending facilities in school cafeterias and are promoting our Slim
Slammers milks as low calorie, non-sugar added alternatives to traditional soft
drinks Penetration of this market segment has been limited by logistic and
economic concerns of school administrators in the push to remove traditional
carbonated soft drinks from schools in favor of milk and milk based products.
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COMPETITION
There are definite differences in the various competitors approach to this
new segment. The differences address packaging, processing, marketing and
distribution. Bravo! has taken the course of least resistance while producing a
product that is positioned to reward all involved economically.
Dean Foods based their market entrance five years ago on a new package
called the Chug. This was an innovative new way to market milk in a format that
made it convenient to drink milk "on the fly". The "chug" bottle was introduced
in 8 oz and 16 oz plastic milk bottles. These bottles have a wide mouth opening
and a very attractive screw top for convenience of sealing. The graphic label on
the bottle was a full wrap and was introduced in both white and chocolate
flavors. Currently, Dean is producing a flavored milk line under a license from
Hershey's.
Nestle launched their new line of flavored milks approximately four years
ago with a shaped bottle, the Nestle "bunny" and a broad line of flavors.
Nestle, branding Nesquick as a new name distinct from Nestle Quick, produces a
sterile aseptic product, which has long-life characteristics enabling fast
national penetration. This long shelf life configuration offers considerable
economic advantages in terms of shipping, storage, returns and production
economies but significantly impacts product quality and taste.
We have settled on the effort to develop and promote a taste tested ultra
quality fresh product, while enjoying the instant recognition of international
brands. We have sought and utilized what are believed to be well recognized
families of intellectual properties in the form of cartoon/comic book
characters. We have been able to enter into production contracts with several
national and international dairies and has moved from fresh milk to ESL and
aseptic long shelf life products to expand the market for our branded products.
Our resources for promotions have been limited, and we run significantly
less promotional activities in comparison to our competitors. Where we are in
direct competition with Nestles and Hershey's, however, we have been able to
maintain competitive sales levels.
Employees
We have seven full time employees located at our North Palm Beach
corporate offices. China Premium Food Corp (Shanghai) Co. Ltd., ceased
operations and does not maintain any employees in China.
DESCRIPTION OF PROPERTY
Neither our company nor our subsidiaries currently own any real property. As of
February 1, 1999, we moved our corporate offices from West Palm Beach to 11300
US Highway 1, Suite 202, North, Palm Beach, Florida, pursuant to a lease with
HCF Realty, Inc., having an initial term of five years. The term of this lease
has been extended for five years to May 31, 2009, at a 25% reduction in base
rent. The current monthly rent amounts to approximately $6,393.
We do not have a policy to acquire property for possible capital gains or
income generation. In addition, we do not invest in securities of real estate
entities or developed or underdeveloped properties.
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