99.1 Audited Financial Statements of GFY, Inc.
Smith & Company
A Professional Corporation of Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
Officers and Directors
GFY, Inc.
Buffalo Grove, Illinois
We have audited the accompanying balance sheet of GFY, Inc. (an Illinois
corporation) as of December 31, 2003, and the related statement of operations,
changes in stockholders' (deficit), and cash flows for the period from April 1,
2003 (date of inception) to December 31, 2003. 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 consolidated
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 GFY, Inc. as of December 31,
2003, and the results of its operations, changes in stockholders' (deficit), and
its cash flows for the period from April 1, 2003 (date of inception) to December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has cash flow constraints, and an accumulated
deficit, and has suffered losses from operations. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Smith & Company
Certified Public Accountants
Salt Lake City, Utah
April 16, 2004
4764 South 900 East, Suite 1 o Salt Lake City, Utah 84117-4977
Telephone: (801) 281-4700 o Facsimile: (801) 281-4701
E-mail: smithcocpa@earthlink.net
Members: American Institute of Certified Public Accountants
o Utah Association of Certified Public Accountants
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GFY, Inc.
Balance Sheet
December 31, 2003
ASSETS
------
Cash $ 7,380
Inventory 1,900
---------
Total current assets 9,280
Property and equipment, net (Note 3) 31,424
Franchise fee, net of amortization of $2,477 (Note 2) 27,523
---------
Total Assets 68,227
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accrued Expenses 3,797
Note payable (Note 4) 60,672
Payable to shareholder (Note 4) 37,460
---------
Total current liabilities 101,929
Total liabilities 101,929
Common Stock, no par value
1,000 shares issued and outstanding 1,000
Additional paid-in capital --
Accumulated deficit (34,702)
---------
(33,702)
---------
Total liabilities and stockholders' deficit $ 68,227
=========
The accompanying notes are an integral part of these financial statements
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GFY, Inc.
Statement of Operations
For the period of April 1, 2003 (inception) to December 31, 2003
Net revenues $ 72,552
Cost of sales 34,728
---------
Gross profit 37,824
Goodwill Impairment (33,030)
General and administrative expenses 38,699
---------
Loss from operations (33,905)
Interest expense
(797)
---------
Loss before provision for income taxes (34,702)
---------
Provision for income taxes 0
---------
Net loss $(34,702)
=========
Net loss per weighted average outstanding share: $ (34.70) based on 1,000 shares
outstanding
The accompanying notes are an integral part of these financial statements
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GFY, Inc.
STATEMENT OF STOCKHOLDERS' DEFICIT
For the period of April 1, 2003 (inception) to December 31, 2003
COMMON STOCK ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
Stock issued to founder on 4/1/03 1,000 $ 1,000 $ -- $ -- $ --
Net loss for period from April 1, 2003
to December 31, 2003 -- -- -- (34,702) (34,702)
--------- --------- ---------- --------- ---------
Balance at December 31, 2003 1,000 $ 1,000 $ -- $(34,702) $(34,702)
========= ========= ========== ========= =========
The accompanying notes are an integral part of these financial statements
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GFY, INC.
STATEMENT OF CASH FLOWS
For the period of April 1, 2003 (inception) to December 31, 2003
Cash flows from Operating Activities:
Net loss $(34,702)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Goodwill impairment 30,030
Depreciation and amortization 8,023
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Increase in accrued expenses 3,797
---------
NET CASH USED IN OPERATING ACTIVITIES 7,148
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 1,000
Note repayment (9,328)
Loan from shareholder 8,560
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 232
---------
Net increase (decrease) in cash 7,380
Cash, at beginning of period 0
---------
Cash, at end of period $ 7,380
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 34
Cash paid for taxes $ 0
The Company also incurred a note payable of $70,000 to purchase property and
equipment of $36,970, a franchise fee of $30,000 and other assets of $3,030.
The accompanying notes are an integral part of these financial statements
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GFY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
ORGANIZATION AND NATURE OF OPERATIONS
GFY, Inc. was incorporated in the state of Illinois on January 13, 2003 (the
"Company") in order to acquire an operating Frulatti franchise in Buffalo Grove,
Illinois. The restaurant offers specialty fruit juice smoothie beverages and
healthy food options. The Company closed on the acquisition on April 1, 2003 and
took over the operations of the business as of that date. The financial
statements contain the operations of the restaurant from the effective date of
acquisition through December 31, 2003.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a loss as a
result of its operations in the current period. Further, the Company is in
default on a note that is secured by the restaurant and the assets owned by the
Company. Management is seeking financing through future collaborative
arrangements with third parties to meet its cash needs. There are no assurances
that funds will be available to execute the Company's operating plan or that
future collaborative arrangements will be consummated. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MANAGEMENT ESTIMATES
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 the disclosure of
contingent assets and liabilities and the reported amounts of income and
expenses. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with an original maturity of three
months or less to be cash equivalents. Balances in bank accounts may, from time
to time, exceed federally insured limits.
REVENUE RECOGNITION
The Company records revenues at the time of sales. All revenues are from the
direct sale of products to customers at the point of sale.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
currently estimated at five years. Maintenance and repairs are charged to
expense as incurred. Significant renewals and betterments are capitalized. At
the time of retirement or other disposition of property and equipment, the cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations.
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The Company periodically reviews the value of its property and equipment for
impairment whenever events or changes in circumstances indicate that the book
value of an asset may not be recoverable. An impairment loss would be recognized
whenever the review demonstrates that the future undiscounted net cash flows
expected to be generated by an asset from its use and eventual deposition are
less than the carrying amount of the asset.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for stock-based compensation. However, SFAS No. 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB No. 25 must make pro forma disclosures of net income (loss) and
earnings (loss) per share, as if the fair value method of accounting defined in
SFAS No. 123 had been applied.
FISCAL YEAR-END
The Company has elected a March 31 year end for financial and income tax
reporting purposes.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivatives must be recognized in the balance sheet at their fair market value,
and the corresponding derivative gains or losses be either reported in the
statement of operations or as a component of other comprehensive income
depending on the type of hedge relationship that exists with respect to such
derivative. Currently, the Company has no derivatives.
INVENTORY
Inventory consists of food and beverage products available for sale. Inventory
is recorded at the lower of cost or market, on a first-in, first-out basis.
FRANCHISE FEE
The Company acquired a franchise fee at a value of $30,000. The cost is being
amortized over a period of 109 months, which is the remaining term of the
franchise agreement.
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NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 2003:
Food service equipment $36,970
Less accumulated depreciation (5,546)
--------
$31,424
========
NOTE 4 - NOTE PAYABLE/PAYABLE TO SHAREHOLDER
On April 3, 2003, in conjunction with the acquisition of the Frulatti franchise,
the Company entered into a Promissory Note in the amount of $70,000 with the
seller of the franchise. The note called for monthly payments of $1,166 and a
balloon payment of $28,000 on December 5, 2003. The Company failed to make the
balloon payment and as a result the complete note is now due and payable. As of
December 31, 2003, the principal balance due on this note was $60,672. As per
the terms of the Promissory Note, upon default, an interest rate of 18% is
applied to the balance of the note. Interest expense of $763 was accrued in
December 2003. Interest continues to accrue at the default rate of 18%. The
Company is continuing to make monthly payments on this note.
The Company is currently carrying a loan from its President and shareholder in
the amount of $37,460. This note is for the repayment of expenses and payments
made by the shareholder, primarily from the acquisition of the Frulatti
franchise. The note is due on demand and will bear interest at 6%.
NOTE 5 - LEASES AND COMMITMENTS:
The Company leases its facilities under a 3-year lease agreement that was
entered into on October 1, 2003. The monthly lease is $220 per month through
September 30, 2004 and increases to $231 per month from October 1, 2004 through
September 30, 2005 and increases to $242 from October 1, 2005 through September
30, 2006.
Future annual minimum lease payments for all non-cancelable operating leases as
of December 31, 2003, are as follows:
Operating
Lease
-----
Year ending December 31,
2004 $ 2,673
2005 2,805
2006 2,178
---------
Total lease payments under
Operating lease $ 7,656
=========
Rent expense for the period ended December 31, 2003 was $1,700.
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NOTE 6 - STOCKHOLDERS' DEFICIT
In January 2003, the founder received 1,000 shares of common stock upon
formation of the Company in exchange for payment of $1,000.
NOTE 7 - INCOME TAXES
The Company's income tax expense is not significant.
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to December 31, 2003, the Company effectuated an Agreement and Plan
of Reorganization ("Merger" or "Merger Agreement") by and among F10 Oil & Gas
Properties, Inc., a Nevada corporation, ("F10") and the Company, dated as of
January 7, 2004. F10 issued a total of 20,000,000 restricted shares of its
$0.001 par value common stock to the stockholders of the Company on January 12,
2004 (the "Closing"). As a result, immediately after the Merger, the former
stockholders of the Company owned approximately 60.7% of F10's common stock.
Subsequent to Closing, F10 changed its corporate name to GFY Foods, Inc.
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