BLUE SKY NATURAL BEVERAGE CO.
Financial Statements
As of December 31, 1999 and 1998
Together with Report of Independent Public Accountants
TABLE OF CONTENTS
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Page
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Deficit 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 10
SUPPLEMENTAL SCHEDULES:
Cost of Sales 11
Selling Expenses 12
General and Administrative Expenses 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Blue Sky Natural Beverage Co.:
We have audited the accompanying balance sheets of BLUE SKY NATURAL BEVERAGE
CO., as of December 31, 1999 and 1998 and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. These financial
statements and the accompanying supplemental schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and the accompanying supplemental schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Blue Sky Natural Beverage Co.,
as of December 31, 1999 and 1998 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules are presented
for purposes of additional analysis and are not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Albuquerque, New Mexico
May 24, 2000
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BLUE SKY NATURAL BEVERAGE CO.
Balance Sheets - December 31, 1999 and 1998
1999 1998
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Assets
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Current Assets:
Cash $ 5,049 $ 37,066
Trade accounts receivable, net of allowance for doubtful
accounts of $65,886 and $82,417 for 1999 and 1998 458,163 221,234
Inventories 22,070 16,176
Note receivable from stockholder, current portion 5,213 4,190
Prepaid expenses and other 7,935 4,321
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Total current assets 498,430 282,987
Note receivable from stockholder, net of current portion 6,932 6,932
Furniture, fixtures and equipment, net 40,594 52,419
Intangible assets net of amortization 61,577 22,500
------------------ ------------------
Total assets $ 607,533 $ 364,838
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Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities
Accounts payable $ 712,658 $ 449,102
Accrued expenses 58,175 52,024
Current portion of long-term debt 419,070 264,630
------------------ ------------------
Total current liabilities 1,189,903 765,756
Long-term debt, net of current portion 1,109,015 1,333,541
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Total liabilities 2,298,918 2,099,297
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Stockholders' Deficit
Common stock - $.0001 par value; 3,000,000 shares
authorized; 600,000 issued and outstanding 600 600
Accumulated deficit (1,691,985) (1,735,059)
------------------ ------------------
Total stockholders' deficit (1,691,385) (1,734,459)
------------------ ------------------
Total liabilities and stockholders' deficit $ 607,533 $ 364,838
================== ==================
The accompanying notes to financial statements are an integral part of these
balance sheets.
2
BLUE SKY NATURAL BEVERAGE CO.
Statements of Operations
For the Years Ended December 31, 1999 and 1998
1999 1998
---- ----
Net Sales $ 6,417,295 $ 6,691,294
Cost of Sales 4,570,070 5,202,577
-------------------- --------------------
Gross profit 1,847,225 1,488,717
Selling Expenses 966,337 1,136,152
General and Administrative Expenses 695,592 956,068
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Operating income (loss) 185,296 (603,503)
Interest and other Non-Operating Income 6,749 17,875
Interest Expense (148,971) (146,644)
-------------------- --------------------
Income (loss) before income taxes 43,074 (732,272)
Income Taxes:
Effect of change to Subchapter S Corporation - 22,704
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Net income (loss) $ 43,074 $ (754,976)
==================== ====================
The accompanying notes to financial statements are an integral part of these statements.
3
BLUE SKY NATURAL BEVERAGE CO.
Statements of Stockholders' Deficit
For the Years Ended December 31,1999 and 1998
Common Stock
-------------------------------- Accumulated
Shares Amount Deficit Total
------ ------ ------------ -----
Balance at December 31, 1997 600,000 $ 600 $ (980,083) $ (979,483)
Net loss - - (754,976) (754,976)
-------------- -------------- ---------------- --------------
Balance at December 31, 1998 600,000 600 (1,735,059) (1,734,459)
Net income - - 43,074 43,074
Balance at December 31, 1999 600,000 $ 600 $ (1,691,985) $ (1,691,385)
============== ============== ================ ==============
The accompanying notes to financial statements are an integral part of these
statements.
4
BLUE SKY NATURAL BEVERAGE CO.
Statements of Cash Flow
For the Years Ended December 31,1999 and 1998
1999 1998
---- ----
Cash Flows from Operating Activities:
Net income (loss) $ 43,074 $ (754,976)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 42,334 23,347
Bad debt expense 21,579 92,563
Changes in operating assets and liabilities:
Trade accounts receivable (258,508) (3,555)
Inventories (5,894) 68,672
Notes receivable from stockholder (1,023) 2,533
Income taxes receivable 47,091
Deferred income taxes 22,704
Prepaid expenses and other (3,614) 9,550
Accounts payable 263,556 229,811
Accrued expenses 6,151 (103,830)
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Net cash provided by (used for) operating activities 107,655 (366,090)
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Cash Flows from Investing Activities:
Purchase of intangible assets (60,066)
Purchase of furniture, fixtures and equipment (9,520) (13,775)
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Net cash used in investing activities (69,586) (13,775)
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Cash Flows from Financing Activities:
Principal payments on long-term debt (446,589) (183,723)
Borrowings on long-term debt 376,503 406,256
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Net cash (used for) provided by financing activities (70,086) 222,533
---------------- ----------------
Net Decrease in cash (32,017) (157,332)
Cash, beginning of year 37,066 194,398
---------------- ----------------
Cash, end of year $ 5,049 $ 37,066
================ ================
Supplemental Cash Flow Information:
Cash paid during the year for interest $ 102,781 $ 146,644
================ ================
The accompanying notes to financial statements are an integral part of these
statements.
5
BLUE SKY NATURAL BEVERAGE CO.
Notes to Financial Statements
December 31, 1998 and 1999
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1. Nature of Operations and Organization
Blue Sky Natural Beverage Co. (the "Company") was formed in 1980. Its
principal business activities consist of marketing, development and
distribution of natural beverages. The Company is located in
Santa Fe, New Mexico, and distributes flavored beverages throughout
the U.S. and in select international markets. The Company creates
flavors to its specifications, and contracts for the manufacturing
and distribution of its beverages.
As reflected in the accompanying financial statements at December 31,
1999 and 1998, the Company has a significant accumulated deficit in
stockholders' equity and current liabilities exceed current assets,
which raises concern about the Company's ability to satisfy its
obligations. The losses in 1998 were primarily from a production
process failure for one new product and the related product recall
and discontinuation. The Company absorbed all the costs of this
product recall and discontinuation during 1998. The Company is
continuing to pursue legal action against the outsourced providers
they believe to be at fault. At this time, the outcome of these
proceedings is undeterminable.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. Management's plans
in regard to these matters include the sale of substantially all of
the Company's assets, as discussed below.
On May 23, 2000 the Company received a Letter of Intent from a party
summarizing a proposed purchase transaction in which the party would
purchase substantially all of the assets of the Company for a
purchase price of $7.6 million. The target date of the closing of the
transaction is August 15, 2000. The financial statements do not
include any adjustments that might result from the outcome of this
proposed transaction.
2. Significant Accounting Policies
a. Basis of Accounting
The accounting and reporting policies of the Company conform with
generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
b. Inventories
Inventories are carried at the lower of cost or market value on a
first-in, first-out basis.
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c. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The Company
depreciates these assets over their estimated useful lives on a
straight-line basis as follows:
Furniture, fixtures and equipment 5 to 7 Years
Automobiles 5 Years
Expenditures for maintenance and repairs are charged to operations as
incurred.
d. Intangible Assets
Intangible assets, which are recorded at cost, include the Company's
trademark and other product development costs. The trademark is being
amortized over 5 years and the other product development costs are
being amortized over one year.
e. Revenue Recognition
The Company recognizes revenue net of sales and volume discounts when
products are shipped. Returned products and discounts are recorded as
a reduction of sales in the accompanying statements of operations.
f. Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred as part of
selling expenses.
g. Income Taxes
Effective January 1, 1998, the Company changed its taxable status
under the Internal Revenue Code (IRC) from a C corporation to a
Subchapter S corporation. As a result all income taxes are passed
through to the stockholders. Any deferred tax assets existing at the
election date not expected to be realized within certain time limits
specified by the IRC were removed from the books in 1998.
Accordingly, subsequent to December 31, 1997, the only current income
tax expense recorded is attributable to the removal of certain
deferred tax assets. The Company recognized a net expense of $22,704
as an effect of change to Subchapter S Corporation in 1998.
h. Stock Split
On August 12, 1999 the Board of Directors of the Company approved a
common stock split in the amount of 1,000 common shares to 1 common
share. The effects of the stock split have been shown retroactively
for comparative purposes.
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3. Inventories
Inventories consist of the following at December 31:
1999 1998
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Sodas (12 oz., 12 pack, 1 liter and 2 liter) $ 13,547 $ 4,010
Concentrate flavoring 10,440 10,371
Bag in box 2,777 2,651
20 oz. Water 2,730
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26,764 19,762
Less: Allowance for spoilage 4,694 3,586
----------------------- -----------------------
$ 22,070 $ 16,176
======================= =======================
4. Note Receivable from Stockholder
The note receivable from stockholder bears interest at the rate of
5.88% with principal being amortized through November 2000.
5. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following at
December 31:
1999 1998
----------------------- -----------------------
Furniture, fixtures and equipment $ 204,073 $ 194,553
Automobile 16,033 16,033
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220,106 210,586
Less: Accumulated depreciation 179,512 158,617
----------------------- -----------------------
$ 40,594 $ 52,419
======================= =======================
6. Defined Benefit Pension Plan
The Company had a defined benefit pension plan (the "Plan") which
covered all employees meeting minimum age and length of service
requirements. The Plan provided retirement benefits, which were based
on a fixed percentage of the average three highest annual salaries
earned during eligible years of employment. The Company was required
to fund contributions in a range established actuarially in
compliance with statutory Employee Retirement Income Security Act of
1974 ("ERISA") requirements. Miring 1998, the Plan was terminated and
Plan assets were distributed to participants prior to December
31,1998.
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7. Debt
Debt consists of the following at December 31:
1999 1998
----------------------- -----------------------
Note payable to a bank, prime plus 1%, (9.5% and 8.75% at December 31.
1999 and 1998, respectively) self amortizing through June 2003,
collateralized by all furniture, fixtures, equipment, inventory,
accounts receivable, tangibles and intangibles, and outstanding
Company stock
$ 865,785 $ 1,071,915
Revolving $200,000 credit line note payable to a bank, prime plus 1%,
(9.5% and 8.75% at December 31, 1999 and 1998, respectively), due June
2000, collateralized by the same assets as those collateralized for
the note payable above
200,000 56,256
Revolving $600,000 credit line note payable to a stockholder,
10% fixed, due February 2001, unsecured 462,300 470,000
----------------------- -----------------------
1,528,085 1,598,171
Less: current maturities 419,070 264,630
----------------------- -----------------------
$1,109,015 $ 1,333,541
======================= =======================
At December 31, 1999 the long-term debt matures as follows:
2000 $ 419,070
2001 703,748
2002 266,070
2003 139,197
----------------
$ 1,528,085
================
The note payable and revolving line-of-credit to a bank requires the
Company to comply with certain debt covenants including, but not
limited to restrictions on certain indebtedness, and restrictions on
the Company's ability to dispose of all or substantially all assets
or assign certain assets. The agreements also contain subjective
acceleration provisions that permit the bank to declare the debt
immediately due and payable if the Company's legal status, financial
condition or actions are such that the bank believes the Company's
ongoing existence is questionable. Management believes that the
Company is in compliance with all debt requirements at December 31,
1999. Management also believes that the Company will be able to
comply with all covenants in future periods.
8. Incentive Stock Option Plan
On August 12, 1999 the Board of Directors of the Company approved an
Incentive Stock Option Plan under which options to purchase the
Company's common stock may be granted to employees through August 12,
2009. Stock options vest ratably based on gross sales goals
determined by the Board of Directors. Unexercised options expire ten
years from the date of grant. All options are granted at the
estimated fair value of the stock at the date of grant. A total of
200,000 shares of common stock were initially reserved for options.
Terminated option shares are available for future grant under the
Plan. As of December 31, 1999 the Company had granted all 200,000
options at an exercise price of $ 2.96 per share, and no options have
been vested or exercised. The effect on income of these options
calculated in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", was immaterial in fiscal year 1999.
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9. Commitments
The Company has non-cancelable operating leases relating to two
equipment leases. The future minimum monthly payments under these
operating leases at December 31, 1999 are as follows:
2000 $ 4,324
2001 4,324
2002 4,324
2003 4,343
---------------
$ 15,315
===============
10. Significant Customers
For the years ended December 31, 1999 and 1998, sales to two
customers approximated 27% of total net sales. Trade accounts
receivable due from these two customers totaled approximately $54,992
and $29,700, at December 31, 1999 and 1998, respectively.
10
BLUE SKY NATURAL BEVERAGE CO.
Supplemental Schedule of Cost of Sales
For the Years Ended December 31,1999 and 1998
1999 1998
---------------------------- ----------------------------
Direct Materials $ 4,042,347 $ 4,588,538
Freight 411,259 450,254
Storage and access 6,366 54,545
Production costs - 894
Other direct costs 110,098 108,346
---------------------------- ----------------------------
$ 4,570,070 $ 5,202,577
============================ ============================
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BLUE SKY NATURAL BEVERAGE CO.
Supplemerital Schedule of Selling Expenses
For the Years Ended December 31, 1999 and 1998
1999 1998
---------------------------- ----------------------------
Advertising and promotion $ 221,247 $ 345,889
Sales salaries 327,134 306,766
Sales commissions 267,134 225,538
Travel 98,287 126,016
Bad debt 21,579 92,563
Shipping 16,467 22,083
Other 14,489 17,297
---------------------------- ----------------------------
$ 966,337 $ 1,136,152
============================ ============================
12
BLUE SKY NATURAL BEVERAGE CO.
Supplemental Schedule of General
and Administrative Expenses
For the Years Ended December 31, 1999 and 1998
1999 1998
---------------------------- ----------------------------
Salaries:
General office employees $ 190,020 $ 172,352
Officers and executives 165,906 298,444
Contributions 28,293 95,773
Professional fees 60,728 63,749
Travel, entertainment and meals 46,149 52,368
Rent 37,239 38,578
Telephone 40,726 36,452
Product development - 26,197
Insurance 13,933 25,463
Depreciation and amortization 42,334 23,347
Repairs and maintenance 24,010 18,703
Other 46,254 104,642
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$ 695,592 $ 956,068
============================ ============================
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