Exhibit 99.1
Audited Combined Financial Statements of Paciugo Management LLC
For the Year Ended December 31, 2002
Report of Independent Certified Public Accountants
To the Partners
Paciugo Management LLC
We have audited the accompanying combined balance sheet of
Paciugo Management LLC ("Paciugo") as of December 31, 2002, and
the related combined statements of operations, changes in
partners' capital and cash flows for the year then ended. These
financial statements are the responsibility of Paciugo's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit 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 audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial
position of Paciugo as of December 31, 2002, and the combined
results of their operations and their combined cash flows for the
year then ended, in conformity with accounting principles
generally accepted in the United States of America.
GRANT THORNTON LLP
Dallas, Texas
January 31, 2003
PACIUGO MANAGEMENT LLC
COMBINED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,910,282
Accounts receivable 29,449
Inventory 298,369
Prepaid expenses 82,343
-----------
2,320,443
-----------
LONG-TERM ASSETS
Property and equipment, net 1,805,924
Other assets 9,906
-----------
1,815,830
-----------
$ 4,136,273
===========
LIABILITIES & PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable $ 353,145
Accrued liabilities 54,988
Notes payable, short-term 370,388
-----------
778,521
-----------
NOTES PAYABLE, LONG-TERM 53,249
NOTE PAYABLE TO PARTNERS 450,000
COMMITMENTS AND CONTINGENCIES -
PARTNERS' CAPITAL
Partners' capital 3,792,962
Accumulated deficit (938,459)
-----------
2,854,503
-----------
$ 4,136,273
===========
The accompanying notes are an integral part of this statement.
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PACIUGO MANAGEMENT LLC
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Net sales $ 1,773,649
Operating expenses:
Cost of goods sold 318,246
Selling, general and administrative expenses 1,819,968
Depreciation and amortization 334,486
-----------
2,472,700
-----------
Operating loss (699,051)
Interest expense 102,582
-----------
Net loss $ (801,633)
===========
The accompanying notes are an integral part of this statement.
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PACIUGO MANAGEMENT LLC
COMBINED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Partners' Accumulated
Capital Deficit Total
----------- ----------- -----------
<s> <c> <c> <c>
Balance, January 1, 2002 $ 50,000 $ (136,826) $ (86,826)
Conversion of notes payable to partners to partners' capital 1,242,962 1,242,962
Capital contribution from Novo Networks, Inc. 2,500,000 2,500,000
Net loss (801,633) (801,633)
----------- ----------- -----------
Balance, December 31, 2002 $ 3,792,962 $ (938,459) $ 2,854,503
=========== =========== ===========
The accompanying notes are an integral part of this statement.
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PACIUGO MANAGEMENT LLC
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
<s> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (801,633)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 334,486
Change in operating assets and liabilities:
Accounts receivable (27,732)
Inventory (106,937)
Prepaid expenses (64,477)
Accounts payable 352,287
Accrued liabilities 43,421
Accrued interest payable (57,168)
-----------
Net cash used in operating activities (327,753)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,357,758)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 1,275,574
Payments on notes payable (196,843)
Capital contribution from Novo Networks, Inc. 2,500,000
-----------
Net cash provided by financing activities 3,578,731
-----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,893,220
CASH AND CASH EQUIVALENTS, beginning of year 17,062
-----------
CASH AND CASH EQUIVALENTS, end of year $ 1,910,282
===========
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SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 16,810
Cash paid for income taxes $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACITIVITIES:
Conversion of notes payable to partners to partners' capital $ 1,242,962
The accompanying notes are an integral part of this statement.
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PACIUGO MANAGEMENT LLC
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1.BUSINESS
(a) General
Paciugo Management LLC ("PMLLC"), a Texas limited liability
company formed in May of 2001, is the sole general partner of
Ad Astra Holdings LP ("Ad Astra"), a Texas limited partnership
(formerly Paciugo Holdings LLC) and Authentic Gelato LP,
Paciugo Supply Company LP, Paciugo Franchising LP and Paciugo
Properties LP (collectively the "Operating Partnerships").
PMLLC, through its partnership interest in Ad Astra and the
Operating Partnerships, manages a gelato manufacturing,
retailing and catering business operating under the brand name
"Paciugo." Throughout these financial statements, we refer
collectively to PMLLC, Ad Astra and the Operating Partnerships
as "Paciugo" or the "Company."
Prior to May 2001, the Company operated as Authentic Gelato
LLC, a Texas limited liability company that was formed on
April 5, 2000. In May of 2001 Authentic Gelato LLC reorganized
into Authentic Gelato LP.
Nature of Operations
--------------------
Paciugo is in the business of owning and operating a series of
retail locations that sell authentic Italian gelato to the
general public. Paciugo opened its first store in September
of 2000. As of December 31, 2002, it has seven retail
locations in and around Dallas, Texas, which are either
dedicated Paciugo stores or kiosks that operate in larger
retail venues as a small "store within a store." In addition
to the retail gelato business, a portion of its revenues are
derived from catering activities conducted primarily out of
its corporate headquarters. These activities typically
involve the serving of Paciugo gelato at a variety of special
events, including, private celebrations, philanthropic
gatherings and third-party retail promotions.
Seasonality
-----------
In general, the market for frozen desserts experiences a
certain degree of seasonal fluctuation, which is less marked
in regions that experience consistently colder year-round
climates. Paciugo enjoys higher sales volume during the period
between May and August.
(b) Recent Developments
On December 19, 2002, PMLLC and Ad Astra executed a purchase
agreement (the "Purchase Agreement") with Novo Networks, Inc.
("Novo Networks"). Pursuant to the Purchase Agreement, Novo
Networks purchased a 33% membership interest in PMLLC and a
32.67% interest in Ad Astra, which results in Novo Networks
holding an aggregate interest, including the PMLLC general
partnership interest, in Ad Astra equal to 33% (the "Initial
Interest"), for a purchase price of $2.5 million.
In addition, Novo Networks holds an option, exercisable for a
period of two years from December 19, 2002, to purchase an
additional 17.3% membership interest in PMLLC and a 17.127%
interest in Ad Astra (the "Subsequent Interest") for $1.5
million. Together, the Initial Interest and the Subsequent
Interest would result in Novo Networks holding a 50.3%
membership interest in PMLLC and a 49.797% limited partnership
interest in Ad Astra, for a total aggregate interest in Ad
Astra, including the PMLLC general partner interest, of 50.3%.
Under the terms of the Purchase Agreement, Novo Networks
provides services to support the business operations of
Paciugo, including administrative, accounting, financial,
human resources, information technology, legal, and marketing
services (the "Support Services"). The Support Services
expressly exclude providing certain capital expenditures as
well as services that are customarily performed by third party
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PACIUGO MANAGEMENT LLC
NOTES TO THE COMBINED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2002
professionals. In exchange for Novo Networks providing the
Support Services, Paciugo pays Novo Networks an annual
amount equal to the greater of $0.25 million or 2% of the
combined gross revenues of Paciugo (excluding any gross
revenues shared with third parties under existing contractual
arrangements). Paciugo makes monthly payments to Novo
Networks in the amount of $20,833, with the positive cumulative
difference, if any, between 2% of such gross revenues and
$20,833 per month to be paid within ten days of the end of
such month. Paciugo may not cancel or alter the scope of the
Support Services without Novo Networks' prior approval or consent.
Under the terms of the Purchase Agreement, Novo Networks is
entitled to and currently maintains representation on the governing
board of PMLLC (the "Board of Managers") as is proportionate to its
ownership interests therein. PMLLC, as the sole general
partner of Ad Astra, is empowered to make all decisions
associated with Ad Astra, except for those requiring the
approval of the limited partners, as set forth in the limited
partnership agreement of Ad Astra or under applicable law.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
-------------------------
The combined financial statements of Paciugo include the
accounts of PMLLC, Ad Astra and the Operating Partnerships.
Control of each entity is vested in the same group of owners,
their operations are interrelated and they are under common
management. All material intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
-------------------------
Paciugo considers all highly liquid instruments purchased with
an original maturity of three months or less to be cash
equivalents. At December 31, 2002, cash equivalents totaled
approximately $1.9 million and consisted of a money market
account. The Company maintains its cash and cash equivalents
with two financial institutions. The cash balance is in excess
of the FDIC insurance limit.
Inventory
---------
Inventory is comprised of gelato ingredients, goods used in
producing gelato and other items needed for the retail sale of
gelato, which are valued at the lower of cost or market.
Prepaid Expenses
----------------
Prepaid expenses are recorded as assets and expensed in the
period in which the related services are received.
Long-lived Assets
-----------------
The Company's long-lived assets consist of property and
equipment, in accordance with the Financial Accounting
Standards Board Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-
lived Assets" ("SFAS 144"). SFAS 144 established a single
accounting model for the impairment or disposal of long-lived
assets, including discontinued operations. The amount of
impairment, if any, is measured based on fair value and is
charged to operations in the period in which impairment is
determined by management. No impairment losses were recorded
in fiscal 2002.
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PACIUGO MANAGEMENT LLC
NOTES TO THE COMBINED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2002
Income Taxes
------------
Paciugo consists of partnerships and limited liability
companies in which the partners individually report their
share of taxable income or loss.
Revenue Recognition
-------------------
Paciugo sells authentic Italian gelato to the general public.
Revenue is recognized at the time of sale. Gross revenues
include concession fees resulting from revenue sharing
agreements with a retail grocery store chain.
Fair Value of Financial Instruments
-----------------------------------
The carrying value of financial instruments consisting of cash
and notes payable approximate fair value as of December 31,
2002, due to their short maturity.
Accounting Estimates
--------------------
In preparing financial statements in conformity with
accounting principles generally accepted in the United States
of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and
revenues during the reporting period. Actual results could
differ from those estimates.
3.PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Useful
Life December 31, 2002
-------- -----------------
Leasehold improvements 2-10 Yrs. $ 802,151
Furniture and fixtures 5-7 Yrs. 78,517
Vehicles 5 Yrs. 224,880
Equipment 3-5 Yrs. 1,113,932
-----------------
2,219,480
Accumulated depreciation
and amortization (413,556)
-----------------
$ 1,805,924
=================
During the year ended December 31, 2002, depreciation expense
totaled approximately $334,000.
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PACIUGO MANAGEMENT LLC
NOTES TO THE COMBINED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2002
4.Notes Payable
Notes payable at December 31, 2002, consists of the following:
Notes payable to a bank, bearing
interest at the higher of (i) the
daily Prime Rate or (ii) the daily
Federal Funds Rate plus 50 basis
points (5.3% at December 31, 2002).
Interest and principal are due in
monthly installments of approximately
$26,000, with the term of the note
expiring on December 31, 2003. The
note payable is collateralized by
the assets of the Company and a personal
guarantee from a founding partner. $ 311,697
Notes payable to four lenders for
financing business vehicles and
equipment, bearing interest at fixed
rates ranging from 4.75% to 9.00%.
Interest and principal are due in
monthly installments ranging from $334
to $1,700. These notes mature from May of
2003 to October of 2007. These notes are
collateralized by the vehicles and
equipment. 79,094
Notes payable to a bank for computers,
bearing interest at a fixed rate of 5.75%.
Interest and principal are due in monthly
installments of $2,000, with the final payment
due June of 2004. These notes are
collateralized by the computers. 32,846
--------------
423,637
less the current portion 370,388
--------------
$ 53,249
==============
The following are scheduled maturities of debt at December 31,
2002:
For the Year Ended December 31,
2003 $ 370,388
2004 32,216
2005 12,023
2006 5,486
2007 3,524
------------
$ 423,637
============
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PACIUGO MANAGEMENT LLC
NOTES TO THE COMBINED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2002
5.Commitments and Contingencies
Operating Leases
----------------
Paciugo is a lessee under certain non-cancelable operating
leases. Terms of the leases call for monthly payments ranging
from $2,860 to $10,290. For the year ended December 31, 2002,
the Company incurred rental expense of approximately $217,000.
Future minimum lease payments under these non-cancelable
operating leases are as follows:
For the Year Ended December 31,
2003 $ 483,706
2004 520,694
2005 504,341
2006 425,010
2007 255,758
Thereafter 97,946
------------
$ 2,287,455
============
Employment Agreements
---------------------
As of December 31, 2002, the Company had entered into
multi-year employment agreements with three of its
executives. These agreements mature during December of
2005 and provide for annual salaries ranging between
$80,000 and $150,000.
6.RELATED PARTY TRANSACTIONS
Conversion of Note Payable to Partners to Partners' Capital
-----------------------------------------------------------
In December of 2002, Novo Networks acquired an Initial
Interest in Paciugo by contributing $2.5 million. Under the
Purchase Agreement, certain partners received a $450,000
payment on an outstanding note payable to partners. The
Purchase Agreement required all remaining partners' debt,
including outstanding interest to be converted to partners'
capital except for a balance of $450,000. Under the terms of
the Purchase Agreement, in the event that Novo Networks
purchases the Subsequent Interest in Paciugo, the remaining
note payable to partners of $450,000 will be paid. If Novo
Networks does not purchase the Subsequent Interest, any
remaining note payable to partners will be converted to
partners' capital. For the year ended December 31, 2002,
$1,242,962 of the note payable to partners balance was
converted from debt to partners' capital.
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