Financial Statements and Report of
Independent Certified Public Accountants
ESSENTIA WATER, INC.
December 31, 1999 and 1998
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................... 3
FINANCIAL STATEMENTS
BALANCE SHEETS..................................................... 4
STATEMENTS OF OPERATIONS........................................... 5
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)........................ 6
STATEMENTS OF CASH FLOWS........................................... 7
NOTES TO FINANCIAL STATEMENTS...................................... 8
GRANT THORNTON
Accountants and Grant Thornton LLP
Management Consultants
The US Member Firm of
Grant Thornton International
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Essentia Water, Inc.
We have audited the accompanying balance Sheets of Essentia Water, Inc. (a
Washington corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholder's equity (deficit), and cash flows for
the year ended December 31, 1999 and for the period from June 30, 1998 (date of
inception) through December 31, 1998. 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 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 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 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 Essentia Water, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the year ended December 31, 1999 and for the period from June 30, 1998 (date
of inception) through December 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $688,150 during the year ended December 31,
1999, and, as of that date, the Company's current liabilities exceeded its
current assets by $412,893 and its total liabilities exceeded its total assets
by $132,883. These factors, among others, as discussed in note B to the
financial statements, 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 K. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Grant Thornton, LLP
- --------------------------------
Seattle, Washington
January 28, 2000
Suite 4150
700 Fifth Avenue
Seattle, WA 98104
Tel 206 623-1121
Fax: 206 623-9247
3
Essentia Water, Inc.
BALANCE SHEETS
December 31,
ASSETS
1999 1998
---------- ----------
CURRENT ASSETS
Cash $ 55,142 $ 48,016
Accounts receivable 95,665 25,205
Inventories 78,747 41,754
Prepaid expenses 34,410 3,375
---------- ----------
Total current assets 263,964 118,350
---------- ----------
PROPERTY AND EQUIPMENT - AT COST, net 280,010 312,763
---------- ----------
$ 543,974 $ 431,113
========== ==========
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable $ 105,880 $ 72,698
Accrued liabilities 20,977 3,148
Stockholder notes payable 400,000 300,000
Advances from NextPath Technologies, Inc. 150,000 -
---------- ----------
Total current liabilities 676,857 375,846
---------- ----------
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock - authorized 10,000,000 and
2,000,000 shares of no par value; 3,937,390,
and 279,424 shares issued and outstanding
in 1999 and i998, respectively 1,058,847 558,847
Accumulated deficit (1,191,730) (503,580)
--------- ---------
(132,883) 55,267
---------- ----------
$ 543,974 $ 431,113
========== ==========
The accompanying notes are an integral part of these statements.
4
Essentia Water, Inc.
STATEMENTS OF OPERATIONS
Year ended December 31, 1999 and period ended December 31, 1998
1999 1998
---------- ----------
REVENUES
Brand sales $ 553,792 $ 103,641
Private label sales 201,508 79,613
Discounts (78,079) (8,853)
---------- ----------
Net revenues 677,221 174,401
Cost of goods sold 499,755 199,468
---------- ----------
Gross profit (loss) 177,466 (25,067)
---------- ----------
OPERATING EXPENSES
Selling and marketing 528,664 237,710
General and administrative 293,239 237,855
---------- ----------
821,903 475,565
---------- ----------
Operating loss (644,437) (500,632)
INTEREST EXPENSE 43,713 2,948
---------- ----------
NET LOSS $(688,150) $(503,580)
========== ==========
The accompanying notes are an integral part of these statements.
5
Essentia Water, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Year ended December 31, 1999 and period ended December 31, 1998
Common Stock Accumulated
-----------------------
Shares Amount Deficit Total
----------- ---------- ------------ ----------
Balance at June 30, 1998
(date of inception) $ - $ - $ - $ -
Issuance of founders shares 169,424 338,847 338,847
Sale of common stock at $2.00
per share 110,000 220,000 220,000
Net loss for the year - - (503,580) (503,580)
---------- ---------- ---------- ---------
Balance at December 31, 1998 279,424 558,847 (503,580) 55,267
12: 1 stock dividend effective
October 15, 1999 3,353,088
Issuance of common stock for
related party notes payable 304,878 500,000 500,000
Net loss for the year - - (688,150) (688,150)
---------- ---------- ----------- ---------
Balance at December 31, 1999 3,937,390 $1,058,847 $(1,191,730) $(132,883)
========== ========== =========== =========
The accompanying notes are an integral part of this statement.
6
Essentia Water, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31, 1999 and period ended December 31, 1998
1999 1998
----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (688,150) $ (503,580)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 49,728 2,767
Loss on intangible assets - 26,574
Changes in operating assets and liabilities
net of effect of initial purchase of assets:
Accounts receivable (70,460) 9,678
Inventories (36,993) 87,677
Prepaid expenses (31,035) 3,105
Accounts payable 33,182 (45,205)
Other current liabilities 17,829 3,148
--------- ---------
Net cash used in operating activities (725,899) (415,836)
--------- ---------
CASH FLOWS FROM INVESTING ACTMTIES
Purchase of furniture and equipment (16,975) (56,148)
--------- ---------
Net cash used in investing activities (16,975) (56,148)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party note payable 600,000 300,000
Proceeds received from issuance of common stock - 220,000
Proceeds from advance from NextPath
Technologies, Inc. 150,000 -
--------- ---------
Net cash provided by financing activities 750,000 520,000
--------- ---------
Net increase in cash 7,126 48,016
Cash at beginning of period 48,016 -
--------- ---------
Cash at end of period $ 55,142 $ 48,016
========= =========
See note J for non-cash activities.
The accompanying notes are an integral part of these statements.
7
Essentia Water, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Essentia Water, Inc.(the Company), a Washington S-corporation, manufactures
and distributes electrolyte and alkaline enhanced bottled water products.
The Company was formed on June 30, 1998 when certain assets and liabilities
owned by the Company's sole stockholder were acquired. The assets and
liabilities which netted to $338,847 were exchanged for 169,424 shares of
common stock and were recorded at founders cost.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. Accounts Receivable
-------------------
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is provided. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
2. Inventories
-----------
Inventories axe stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
3. Depreciation
------------
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives ranging
from three to seven years.
The straight-line method of depreciation is followed for substantially all
assets for financial reporting purposes, but accelerated methods are used
for tax purposes.
4. Income Taxes
------------
Effective July 1, 1998, the Company made an election under Subchapter S of
the Internal Revenue Code. Under this section, income taxes on net earnings
or tax benefits of net operating losses are accounted for personally by the
stockholders. Accordingly, no provision or benefit has been made for income
taxes for the year ended December 31, 1999 and period ended December 31,
1998, respectively.
5. Use of Estimates
----------------
In prepaxing the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the 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.
6. Related Parties
---------------
The Company currently leases space from and provides certain accounting and
administrative support for a company in which the Company's president and
sole stockholder has a controlling interest.
8
Essentia Water, Inc.
NOTES TO FINANCIAL STATEN[ENTS
December 31, 1999 and 1998
NOTE B - GOING CONCERN
As shown in the financial statements, the Company incurred a net loss of
$688,150 in 1999 and $503,580 in 1998. In addition, the Company's
current liabilities exceeded its current assets by $412,893 and its
total liabilities exceeded its total assets by $132,883 as of December
31, 1999. These factors, raise substantial doubt about the Company's
ability to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to obtain
additional capital and operate at a profit. The Company's plans with
respect to these matters axe described in note K.
NOTE C - ACCOUNTS RECEIVABLE
Accounts and notes receivable consist of the following at December 31:
1999 1998
--------- ---------
Trade $ 72,293 $ 24,487
Related party receivable 19,754 -
Other 3,618 718
--------- ---------
$ 95,665 $ 25,205
========= =========
NOTE D - INVENTORIES
Inventories consist of the following at December 31:
1999 1998
--------- ---------
Purchased parts and raw materials $ 58,015 $ 13,227
Finished goods 20,732 28,527
--------- ---------
$ 78,747 $ 41,754
========= =========
9
Essenfia Water, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1999 1998
---------- ----------
Production equipment $ 309,644 $ 309,644
Office furniture and equipment 22,861 5,886
---------- ----------
332,505 315,530
Less accumulated depreciation 52,495 2,767
---------- ----------
$ 280,010 $ 312,763
========== ==========
NOTE F - STOCKHOLDER NOTES PAYABLE
On December 31, 1998, the Company had unsecured demand notes of $300,000
due to the sole stockholder of the Company. The notes accrue interest at 8%
and are due January 1999. In January 1999 these demand notes were
consolidated into a new note for $300,000 due to the sole stockholder of
the Company, accruing interest at 8% and due January 2000. During fiscal
year 1999, the company incurred another $600,000 in unsecured demand notes
due to the sole stockholder of the Company. On October 31, 1999, $500,000
of these notes were converted to 304,878 shares of common stock. The due
date of the remaining notes of $400,000 were extended upon the acquisition
of the Company by NextPath Technologies, Inc. (note lC) as of December 31,
1999, the notes accrue interest at 10.5% and are due July 2000.
NOTE G - COMMITMENTS AND CONTINGENCIES
Operating Lease Obli~tion~
The Company conducts its administrative functions in leased facilities
under a month-to-month operating lease from a related party. Rent expense
for the leased facilities for the year ended December 31, 1999 and the
period ended December 31, 1998, was approximately $9,200 and $5,200,
respectively.
NOTE H - RETIREMENT PLAN
The Company has adopted a salary deferral retirement plan, or 401(k) plan.
The plan covers all employees who meet the plan's eligibility requirements.
The Company does not provide matching funds for contributions made by
employees.
10
Essentia Water, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE I - STOCK OPTIONS
The Company implemented a stock option plan during the year ended December
31, 1999 which is accounted for under APB Opinion No. 25 and related
Interpretations. The plan allows the Company to grant options to employees
for up to 50,000 shares of common stock per employee. Options currently
outstanding vest over a five-year period. The options are exercisable at
not less than the market value of the Company's common stock on the date of
grant. Accordingly, no compensation cost has been recognized for the plan.
Had compensation cost for the plan been determined based on the fair value
of the options at the grant dates consistent with the method required by
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the Company's net loss would have been increased
to the pro forma amounts indicated below for the year ended December 31,
1999. The fair value of option grants is estimated using the Black-Scholes
option pricing model with the following weighted average assumptions used
for grants in fiscal year 1999: expected volatility of 0%, risk free
interest rate of 6.50'%; expected lives of 10 years; and a zero percent
dividend yield.
1999
------------
Net loss:
As reported $ (688,150)
Pro forma $ (692,098)
Net loss per common share:
As reported $ (0.20)
Pro forma $ (0.20)
A summary of the Company's stock option plan's activity is as follows:
1999
--------------------------
Weighted
average
Stock options Shares exercise price
------------------------------------- ---------- --------------
Outstanding at beginning of year - $ -
Granted 607,200 .08
------- ------
Outstanding at end of year 607,200 $ .08
======= ======
Options exercisable at end of year 165,072 $ .08
======= ======
Weighted-average fair value of options
granted during the year $ .04
======
11
Essentia Water, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE I - STOCK OPTIONS - Continued
The following is a summary of stock options outstanding at December 31,
1999:
Options Outstanding
-------------------------------------------------------
Weighted-average Number of
Number remaining options
Exercise price outstanding contractual life exercisable
-------------- ----------- ------------------- -----------
$.08 607,200 9.58 years 165,072
NOTE J - NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental disclosure of cash flow information and non-cash investing and
financing activities is as follows for December 31:
1999 1998
-------- ---------
Non-cash operating activities
Accounts receivable received in exchange for stock $ - $ 34,883
Inventories received in exchange for stock $ - $ 129,431
Prepaid expenses received in exchange for stock $ - $ 6,480
Intangible assets received for stock $ - $ 26,574
Accounts payable received in exchange for stock $ - $(117,903)
Non-cash investing and financing activities
Equipment received in exchange for stock $ - $ 259,382
Related party debt converted to common stock $500,000 $ -
NOTE K - SUBSEQUENT EVENTS
On January 21, 2000, the Company was acquired by NextPath Technologies,
Inc. (NextPath). Under the terms of the agreement, the sole stockholder of
the Company will receive $8 million worth of NextPath common stock for all
the outstanding common stock of the Company. Outstanding stock options will
also be converted into NextPath options. The actual number of the NextPath
shares to be received by the Company's sole stockholder was based upon the
average market price for thirty trading days ending January 14, 2000, less
a discount of thirty percent to reflect the restricted nature of the stock.
This will result in the Company's tax status changing from its current
Subchapter S election. NextPath had advanced $150,000 as of December 31,
1999 and is committed to further advances to fund working capital
requirements. Management believes the Company will receive sufficient
future funds to finance operations. However, there can be no assurance that
such additional funding will be available on acceptable terms, if at all.
12