[Gerson, Preston, Robinson & Company, P.A.
Certified Public Accountants
Letterhead]
Board of Directors and Shareholders
BEVsystems International, Ltd.
Miami, Florida
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of BEVsystems
International, Ltd. as of December 31, 2001 and the related statements
of operations, shareholders' equity and cash flows for the nine months
ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
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 financial position of BEVsystems
International, Ltd. as of December 31, 2001 and the results of its
operations and its cash flows for the nine months ended December 31,
2001, in conformity with accounting principles generally accepted in
the United States of America.
The financial statements referred to above have been prepared assuming
that BEVsystems International, Ltd. will continue as a going concern.
As more fully described in Note 3, the Company has incurred operating
losses, negative cash flows from operating activities and has a working
capital deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as
to these matters are also described in Note 3. The accompanying
financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might
result from the outcome of this uncertainty.
/s/Gerson, Preston, Robinson & Company, P.A.
April 22, 2002
Miami Beach, Florida CERTIFIED PUBLIC ACCOUNTANTS
BEVsystems International, Ltd.
BALANCE SHEET
At December 31, 2001
============================================================================
ASSETS
Current assets
Cash $ 84,961
Accounts receivable 23,791
Inventory 21,297
Other current assets 17,000
- ---------------------------------------------------------------------------
Total current assets 147,049
Furniture and equipment 232,068
Intangible assets 5,913,490
- ---------------------------------------------------------------------------
Total assets $ 6,292,607
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,158,817
Bank notes payable; interest payable monthly at
9%; collateralized by transportation equipment
with a net book value of $92,423 at December 31;
subsequent to December 31 the notes were extended
to July 17, 2002 73,938
Convertible notes payable, net of debt discount;
interest payable monthly at 10.5%; maturities range
from April 2002 to November 2002; $540,000 due to
shareholders and related parties 946,700
- ---------------------------------------------------------------------------
Total liabilities 2,179,455
Shareholders' equity
Common stock; $.01 par value; 100,000,000 shares
authorized; 14,817,647 shares issued and
outstanding and additional paid-in capital 6,535,671
Accumulated deficit (2,422,519)
- ---------------------------------------------------------------------------
Total shareholders' equity 4,113,152
- ---------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 6,292,607
===========================================================================
See accompanying notes.
1
BEVsystems International, Ltd.
STATEMENT OF OPERATIONS
Nine Months Ended December 31, 2001
===========================================================================
Revenues $ 1,499,645
- ---------------------------------------------------------------------------
Costs and expenses
Cost of revenues 1,353,135
Payroll, benefits and related expenses 711,357
Selling, general and administrative 1,857,672
- ---------------------------------------------------------------------------
Total costs and expenses 3,922,164
- ---------------------------------------------------------------------------
Net loss $ (2,422,519)
===========================================================================
See accompanying notes.
2
BEVsystems International, Ltd.
STATEMENT OF SHAREHOLDERS' EQUITY
Nine Months Ended December 31, 2001
=======================================================================================================================
Common Stock Additional
Number of Paid-In Accumulated
Shares Amount Capital Deficit Total
- -----------------------------------------------------------------------------------------------------------------------
Balance at April 1, 2001 - $ - $ - $ - $ -
Issuance of common stock 4,200,000 42,000 - - 42,000
Issuance of common stock and warrants in a
private placement net of issuance costs 3,700,000 37,000 1,483,000 1,520,000
Issuance of common stock and warrants for
the acquisition of Life International 6,917,647 69,176 4,830,695 - 4,899,871
Issuance of options in connection with
convertible notes payable - - 73,800 - 73,800
Net loss - - - (2,422,519) (2,422,519)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 14,817,647 $ 148,176 $ 6,387,495 $(2,422,519) $ 4,113,152
=======================================================================================================================
See accompanying notes.
3
BEVsystems International, Ltd.
STATEMENT OF CASH FLOWS
Nine Months Ended December 31, 2001
===========================================================================
Operating activities
Net loss $ (2,422,519)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 23,679
Amortization of debt discount 20,500
Changes in operating assets and liabilities,
net of acquisition:
(Increase) in accounts receivable (23,791)
(Increase) in inventory (21,297)
(Increase) in other current assets (17,000)
Increase in accounts payable and accrued expenses 1,068,817
- ---------------------------------------------------------------------------
Net cash (used) in operating activities (1,371,611)
- ---------------------------------------------------------------------------
Investing activities
Purchase of furniture and equipment (60,781)
Acquisition of Life International (1,020,000)
- ---------------------------------------------------------------------------
Net cash (used) in investing activities (1,080,781)
- ---------------------------------------------------------------------------
Financing activities
Issuance of common stock 1,562,000
Proceeds from convertible note payable 1,000,000
- ---------------------------------------------------------------------------
Total inflows 2,562,000
Cash outflows for principal payments of bank
notes payable 24,647
- ---------------------------------------------------------------------------
Net cash provided by financing activities 2,537,353
- ---------------------------------------------------------------------------
Net increase in cash 84,961
Cash, beginning of period -
- ---------------------------------------------------------------------------
Cash, end of period $ 84,961
===========================================================================
Supplemental disclosures of cash flow information:
Supplemental schedule of non-cash investing and
financing activities:
Stock and warrants issued in connection with the
acquisition of Life International $ 4,899,871
Transportation equipment acquired through bank
notes payable $ 98,585
Warrants issued in connection with convertible
notes payable $ 73,800
See accompanying notes.
4
BEVsystems International, Ltd.
NOTES TO FINANCIAL STATEMENTS
===========================================================================
1. NATURE OF OPERATIONS AND RISKS AND UNCERTAINTIES
BEVsystems International, Ltd. (the "Company") was formed in
Bermuda on March 20, 2001 and is a provider of oxygenated
beverages. The Company had no activity from March 20, 2001
through March 31, 2001.
July 12, 2001, the Company acquired the net assets of the beverage
division of Life International, a provider of oxygenated
beverages. The net assets included oxygenation equipment,
bottles, proprietary seals, marketing materials, office equipment,
trademarks, patent rights and other intangible assets (see Note
4).
The Company distributes the products primarily through an
international distribution network. Approximately 92% of the
Company sales were made to one distributor in Japan. Domestic
sales, which are approximately 5% of total revenues, are through
local distributors and home delivery.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. The Company's revenues are derived
principally from the delivery of oxygenated beverages. Revenues
are recognized upon delivery of the product to the customers.
Upon delivery, the Company has no further obligations.
Inventory. Inventories consist primarily of labels, bottles and
caps and are priced at cost.
Intangible Assets. Intangible assets consist primarily of process
technology, trademarks and goodwill. Goodwill is not amortized.
All other intangible assets are deemed to have indefinite useful
lives because they are expected to generate cash flows
indefinitely and are, therefore, not amortized.
The Company evaluates the recoverability of intangible assets for
impairment on an annual basis or whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Such evaluation involves the use of an
independent appraisal or is based on various analyses, including
cash flows and profitability projections. If the sum of the
expected future cash flows or the appraised value is less than the
carrying amount of the assets, an impairment loss is recognized.
Accordingly, impairment loss is the difference between the sum of
the estimated future cash flows or appraised value and the
carrying amount of the asset. Management believes that there is
no impairment as of December 31, 2001.
5
BEVsystems International, Ltd.
NOTES TO FINANCIAL STATEMENTS
===========================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Income Taxes. The Company will incur United States income taxes
for income generated in this country. The financial statements do
not provide for any income taxes, as there was no income generated
in the United States. There is no Bermuda tax on income or
capital gains.
Furniture and equipment. Furniture and equipment are stated at
cost. Depreciation is provided over estimated useful lives of the
assets using the straight-line method.
The costs of significant improvements are capitalized. Costs of
normal repairs are charged to expense as incurred. The cost and
accumulated depreciation of furniture and equipment retired or
otherwise disposed of are eliminated from the respective accounts
and any resulting gain or loss is included in income.
Concentration of credit risk. The Company maintains its cash in
bank accounts, which at times exceed federally insured limits.
The Company has not experienced any losses in such accounts.
Use of Estimates. The preparation of financial statements in
conformity accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and
expenses during the reported period. Estimates are used for, but
not limited to, allowance for doubtful accounts; accounts payable;
asset impairments; depreciable lives of assets; useful lives of
intangible assets; and valuation of intangibles. Future events
and their effects cannot be perceived with certainty. Accordingly
our accounting estimates require the exercise of judgment. The
accounting estimates used in the preparation of our financial
statements will change as new events occur, as more experience is
acquired, as additional information is obtained and as the
Company's operating environment changes. Actual results could
differ from those estimates.
Fair Value of Financial Instruments. The Company's financial
instruments, primarily consisting of cash, accounts receivable,
accounts payable and accrued expenses, approximate fair value due
to their short-term nature or interest rates that approximate
market.
New Accounting Pronouncements. On June 29, 2001, the Financial
Accounting Standards Board issued Statements of Financial
Accounting Standards No. 141, Business Combinations (Statement
141), and No. 142, Goodwill and Other Intangible Assets (Statement
142). Statement 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying
business combinations that were initiated prior to July 1, 2001.
Statement 141 changes the criteria to recognize intangible assets
apart from goodwill. The requirements of Statement 141 are
effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001.
6
BEVsystems International, Ltd.
NOTES TO FINANCIAL STATEMENTS
===========================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Under Statement 142, goodwill and indefinite lived intangible
assets are no longer amortized but will be reviewed annually, or
more frequently if impairment indicators arise. Identifiable
intangible assets will continue to be amortized over their
estimated useful lives.
3. GOING CONCERN - UNCERTAINTY
As shown in the accompanying financial statements, the Company has
incurred recurring losses and negative cash flows from operating
activities and has negative working capital and shareholders'
deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The Company has initiated several actions to generate working
capital and improve operating performances, including equity and
debt financing and cost reduction measures.
There can be no assurance that the Company will be able to
successfully implement its plans, or if such plans are
successfully implemented, that the Company will achieve its goals.
Furthermore, if the Company is unable to raise additional funds,
it may be required to reduce its workforce, reduce compensation
levels, reduce dependency on outside consultants, modify its
growth and operating plans, and even be forced to terminate
operations completely.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern and do not
include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome
of this uncertainty.
4. LIFE INTERNATIONAL ACQUISITION
Effective July 12, 2001, the Company consummated a merger with
Life International, an oxygenated beverage company.
Pursuant to the merger, the Company issued 6,917,647 shares of
common stock to Life International and 1,991,210 warrants for
additional shares. The warrants were exercised subsequent to
December 31, 2001 and provided Life International with a 49%
ownership interest in the Company. There was no cost to exercise
the warrants and they had no expiration date. The stocks and
warrants were assigned a value of $4,899,871 based on the sales
price of common stock sold by the Company in two separate private
placements which occurred before and after the acquisition.
7
BEVsystems International, Ltd.
NOTES TO FINANCIAL STATEMENTS
===========================================================================
4. LIFE INTERNATIONAL ACQUISITION (Cont'd)
The merger was accounted for using the purchase method of
accounting. The Company has determined the purchase price to be
allocated to be $5,913,490, which consists of a cash payment of
$1,020,000, the value of the shares and warrants of $4,899,871,
less the net assets of $6,381, which consists of $96,381 of fixed
assets less the liabilities assumed of $90,000. The purchase
price in excess of net assets has been allocated as follows:
Description Amount
------------------------------------------------
Process technology $ 3,887,000
Trademarks 830,000
Goodwill 796,490
Distribution network (customer
relationships 400,000
------------------------------------------------
$ 5,913,490
================================================
The Company obtained an independent valuation of the assets of
Life International in order to determine the fair value of assets
purchased.
The following unaudited pro forma financial information reflects
the results of operations for the nine months ended December 31,
2001 as if the acquisition has occurred at the beginning of the
period presented, and after giving effect to purchase accounting
adjustments. This unaudited pro forma information is presented
for illustrative purposes only and is not necessarily indicative
of the results of operations in future periods or results that
would have been achieved had the Company and Life International
been combined during the period.
Nine Months Ended December 31, 2001
------------------------------------------------------
Net revenues $ 2,639,482
======================================================
Net loss $(2,405,619)
======================================================
8
BEVsystems International, Ltd.
NOTES TO FINANCIAL STATEMENTS
===========================================================================
5. FURNITURE AND EQUIPMENT
Useful
At December 31, 2001 Lives
----------------------------------------------------------------------
Office furniture $ 24,578 3 years
Transporation equipment - Pledged 98,585 4 years
Other equipment 132,584 4 years
-------------------------------------------------
255,747
Less accumulated depreciation (23,679)
-------------------------------------------------
Furniture and equipment, net $ 232,068
=================================================
Depreciation expense was $23,679 for the nine months ended
December 31, 2001.
6. INTANGIBLE ASSETS
Description Amount
------------------------------------------------
Process technology $ 3,887,000
Trademarks 830,000
Goodwill 796,490
Distribution network (customer
relationships 400,000
------------------------------------------------
$ 5,913,490
================================================
There was no amortization expense for intangible assets for the
nine months ended December 31, 2001.
7. STOCK OPTION PLAN
In April 2001, the Company adopted a Stock Option Plan intended to
provide officers, directors, key employees and consultants of the
Company an opportunity to acquire stock in the Company. As of
December 31, 2001, 1,045,000 options to purchase shares at $0.55
per share had been issued. 475,000 of the options are vested at
December 31, 2001, with the remainder of 570,000 options to be
vested over the next two years. No options have been exercised at
December 31, 2001. The fair value of the options on the grant
date was $94,050 calculated using the Black-Scholes Option Pricing
Model.
9
BEVsystems International, Ltd.
NOTES TO FINANCIAL STATEMENTS
===========================================================================
7. STOCK OPTION PLAN (Cont'd)
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for
stock based employee compensation arrangements whereby no
compensation cost related to stock options is deducted in
determining net loss. Had the compensation cost for stock option
grants to the Company's employees been determined by SFAS No. 123,
"Accounting for Stock Based Compensation", the Company's net loss
would have increased for the nine months ended December 31, 2001
as presented in the table below. Using the Black-Scholes Option
Pricing Model, the Company's pro forma net loss is as follows:
Pro Forma Net Loss $ 2,484,506
Risk Free Interest Rate 5.71%
Expected Lives 2 Years
Expected Volatility None
For purposes of these pro forma disclosures, the estimated fair
value of the options granted is amortized to expense over the
options' vesting period.
8. COMMON STOCK TRANSACTIONS
In July 2001, the Company completed a private placement of
$1,787,500, consisting of 3,250,000 shares of the Company's common
stock at $0.55 per share and 3,250,000 warrants, exercisable at
$1.10 and expiring on May 1, 2003. The options had no value using
the Black-Scholes Option Pricing Model.
In December 2001, the Company raised an additional $247,500
through a private placement of 450,000 shares of common stock at
$0.55 per share.
The issuance costs associated with these two private placements
were $515,000 and is reflected in the net proceeds.
The holders of the convertible notes payable have 820,000 options
to acquire shares of the Company's stock at $0.55 per share. The
options expire in three to five years. The proceeds from the
issuance of the notes payable with the warrants, were allocated
between the warrants and the notes payable based on their relative
fair values at the time of issuance. The fair value of the
options on the grant date was $73,800 calculated using the Black-
Scholes Option Pricing Model and was accounted for as additional
paid-in capital and as a debt discount which is amortized to
interest expense over the term of the notes. $20,500 was charged
to interest expense during the nine months ended December 31,
2001.
10
BEVsystems International, Ltd.
NOTES TO FINANCIAL STATEMENTS
===========================================================================
9. RELATED PARTY TRANSACTIONS
Financial Partners Network Corporation ("FPN"), a corporation
owned by the Company's chairman and Chief Executive Officer,
advanced funds and provided services to the Company. A fee of
$250,000 was paid for services rendered in connection with the
private placement stock offering. FPN also advanced $262,584 for
operating expenses incurred by the Company. The operating
expenses are reflected on the statement of operations in selling,
general and administrative expenses. The Company entered into a
convertible note payable with FPN for repayment of the advances.
The Company has engaged The Better Image Company, a marketing
consulting firm, to execute certain product development and
marketing plans for the Company. The Company's Senior Vice
President of Marketing owns The Better Image Company. As of
December 31, 2001, the Company had incurred $309,800 in marketing
materials and product development costs for current marketing
programs. $180,894 is included in accounts payable and accrued
expenses and $77,416 is included in convertible notes payable at
December 31, 2001.
As of December 31, 2001, the Company owed certain employees
$221,099 for payment of accrued salaries and reimbursement of
expenses.
10. SUBSEQUENT EVENTS
On January 15, 2002, the Company entered into an agreement for the
purchase and sale of stock with Aqua Clara Bottling &
Distribution, Inc. The merger was consummated on February 25,
2002.
11