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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1999.
REGISTRATION NO. 333-75913
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
URBAN JUICE & SODA COMPANY LTD.
(Exact name of registrant as specified in its charter)
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WYOMING 5149 APPLIED FOR
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
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1356 FRANCES STREET CT CORPORATIONS
VANCOUVER, B.C. V5L 1Y9 SYSTEM
CANADA 1720 CAREY
(800) 656-6050 AVENUE
(Address and Telephone Number CHEYENNE,
of WYOMING 82001
Registrant's Principal (800) 362-1228
Executive (Name, Address
Offices) and Telephone
Number of Agent
for Service)
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COPIES TO:
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WILLIAM E. VAN VALKENBERG, JENNIFER CUE, CHIEF FINANCIAL DAVID TOYODA, ESQ.
ESQ. OFFICER CATALYST CORPORATE FINANCE
DAREN H. NITZ, ESQ. URBAN JUICE & SODA COMPANY LAWYERS
VAN VALKENBERG FURBER LAW LTD. 1100 - 1055 WEST HASTINGS
GROUP P.L.L.C. 1356 FRANCES STREET STREET
1325 FOURTH AVENUE, SUITE 1200 VANCOUVER, B.C. V5L 1Y9 VANCOUVER, B.C. V6E 2E9
SEATTLE, WA 98101-2509 U.S.A. CANADA CANADA
TELEPHONE: (206) 464-0460 TELEPHONE: (800) 656-6050 TELEPHONE: (604) 443-7016
FACSIMILE: (206) 464-2857 FACSIMILE: (604) 253-4501 FACSIMILE: (604) 443-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement which
relates to the continuation of Urban Juice & Soda Company Ltd. from the Province
of British Columbia into Urban Juice & Soda Co., a Wyoming corporation pursuant
to the articles of continuance described in this registration statement.
--------------------------
If any of these securities being registered in this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. /X/
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(1), MAY
DETERMINE.
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URBAN JUICE & SODA COMPANY LTD.
PROXY STATEMENT
------------------
URBAN JUICE & SODA COMPANY LTD.
(A TO-BE-FORMED WYOMING CORPORATION)
PROSPECTUS
We are furnishing this proxy statement/prospectus to shareholders of Urban
Juice & Soda Company Ltd., a British Columbia corporation, in connection with
our Board of Directors' solicitation of proxies for use at an extraordinary
general meeting of the shareholders of Urban Canada. The meeting will be held at
1356 Frances Street, Vancouver, British Columbia, Canada, on December 17, 1999,
at 10:00 a.m., local time for the specific purpose of obtaining shareholder
approval of our plan to reincorporate the legal existence of Urban Canada to the
State of Wyoming. The process necessary to accomplish this continuation of
business from Canada to Wyoming is described more fully in this proxy
statement/prospectus and in the accompanying Notice of Extraordinary General
Meeting of Shareholders of Urban Canada. The specific items to be voted on to
effect this continuation are detailed in the form of proxy attached to this
proxy statement/prospectus.
This proxy statement/prospectus is also a prospectus of Urban Juice & Soda
Company Ltd., a to-be-formed Wyoming corporation, relating to common shares of
Urban Canada that will become common shares of Urban Wyoming upon effectiveness
of the continuation of Urban Canada into the State of Wyoming. When we effect
the continuation, we will continue our legal existence in Wyoming as if we had
been originally incorporated under the Wyoming Business Corporation Act and each
of our outstanding common shares will be converted from a common share of Urban
Canada into a common share of Urban Wyoming.
The common shares of Urban Canada are currently traded on the Vancouver
Stock Exchange under the symbol "UJS" and quoted on the OTC Bulletin Board under
the symbol "UJSAF". Following the continuation, the common shares of Urban
Wyoming are expected to be listed on the Vancouver Stock Exchange under the
symbol "UJS" and quoted on the OTC Bulletin Board under the symbol "UJSA". Urban
Canada's common shares will no longer be listed or traded on any exchange.
In order to become effective, at least 75 percent of the votes cast by our
shareholders in person or by proxy at the meeting must approve the proposed
continuation. We will accomplish the proposed continuation as soon as we can
following approval by our shareholders and once we and others satisfy or waive
the other conditions to the continuation.
SEE "RISK FACTORS," BEGINNING ON PAGE 9 FOR A DISCUSSION OF RISKS, INCLUDING
TAX EFFECTS, RELATING TO THE CONTINUATION AND THE OWNERSHIP OF URBAN WYOMING
COMMON SHARES.
This proxy statement/prospectus and the accompanying form of proxy are first
being mailed to our shareholders on or about November 15, 1999.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
A registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This proxy statement/prospectus does not constitute an offer to sell
or the solicitation of an offer to buy nor will there be any sale of these
securities in any state in which that offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
that state.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 10, 1999.
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TABLE OF CONTENTS
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WHERE YOU CAN FIND MORE INFORMATION....................................................................... 6
WE USE CANADIAN G.A.A.P................................................................................... 6
SUMMARY................................................................................................... 7
Urban Canada............................................................................................ 7
Corporate Restructuring Prior to Continuation........................................................... 7
The Continuation........................................................................................ 7
Introduction.......................................................................................... 7
Continuation.......................................................................................... 7
Rights of Dissenting Shareholders..................................................................... 8
Conversion of Shares.................................................................................. 8
Conversion of Warrants................................................................................ 8
Continuing Disclosure Obligation...................................................................... 8
RISK FACTORS.............................................................................................. 9
Strong Opposition From Traditional Non-Alcoholic Beverage Manufacturers May Prevent Us From Expanding
Our Market............................................................................................ 9
Our Reliance on Non-Contract, Independent Distributors Could Make The Distribution and Marketing of Our
Product Unpredictable................................................................................. 9
Our Dependence On Third-Party Packers of Our Products Could Make Management of Our Marketing and
Distribution Efforts Inefficient or Unprofitable...................................................... 10
We Have Not Earned a Profit in Any Year................................................................. 10
Brand Name Recognition and Acceptance is Critical to Our Success or Failure............................. 11
Our Ability to Continue Developing New Products to Satisfy Our Consumers' Changing Preferences Will
Determine Our Long-Term Success or Failure............................................................ 11
The Loss of Key Personnel Would Directly Affect Our Efficiency and Profitability........................ 11
Our Limited Operating Experience Could Hinder Our Ability to Expand Our Market.......................... 11
We Could Be Exposed to Product Liability Claims for Personal Injury or Possibly Death................... 12
Our Inability to Protect Our Trademarks, Design Marks and Flavor Concentrate Trade Secrets May Prevent
Us From Successfully Marketing Our Products........................................................... 12
Our Business Is Subject to Many Regulations and Noncompliance is Costly................................. 12
Our Information Technology and Computer Controlled Systems May Not Be Year 2000 Compliant............... 12
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS.................................................... 12
MARKETS AND MARKET PRICES................................................................................. 13
Common Shares........................................................................................... 13
Common Share Purchase Warrants.......................................................................... 13
Beneficial Ownership.................................................................................... 14
THE EXTRAORDINARY GENERAL MEETING......................................................................... 14
Management Solicitation and Appointment of Proxies...................................................... 14
Revocation of Proxies................................................................................... 14
Record Date; Shareholders Entitled to Vote at the Meeting............................................... 15
Voting of Shares and Proxies and Exercise of Discretion by Proxyholders................................. 15
Solicitation of Proxies................................................................................. 15
TAX CONSEQUENCES OF THE CONTINUATION...................................................................... 15
United States Federal Income Tax Consequences........................................................... 15
U.S. Holders.......................................................................................... 16
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2
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Controlled Foreign Corporation Considerations....................................................... 17
Passive Foreign Investment Company Considerations................................................... 17
Foreign Personal Holding Company.................................................................... 18
Dissenting Shareholders............................................................................. 18
Urban Canada Warrants............................................................................... 18
United States Taxation of Income, Gains, and Losses................................................. 18
Canadian Holders...................................................................................... 19
Subsequent Sale of Urban Wyoming Shares............................................................. 19
Receipt of Dividends on Urban Wyoming Shares........................................................ 20
Federal Estate Tax Treatment........................................................................ 20
Canadian Income Tax Considerations...................................................................... 20
Nature of Shares and Warrants of Urban Canada Held by Canadian Holders................................ 21
Pre-Continuation Transaction.......................................................................... 21
Consequences of Continuation to Holders............................................................... 21
Foreign Reporting................................................................................... 22
Dissent Proceedings................................................................................. 22
Interest Expense.................................................................................... 22
Company Consequences.................................................................................. 22
Tax-exempt Holders.................................................................................... 23
Non-resident Holders.................................................................................. 23
INTEREST OF MANAGEMENT IN THE CONTINUATION................................................................ 24
RIGHTS OF DISSENTING SHAREHOLDERS......................................................................... 24
Right of Dissent........................................................................................ 24
Dissent Proceedings..................................................................................... 24
SELECTED FINANCIAL DATA................................................................................... 25
EXCHANGE RATE DATA........................................................................................ 26
URBAN CANADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 27
Overview................................................................................................ 27
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998........................... 27
Sales................................................................................................. 27
Cost of Sales......................................................................................... 27
Gross Profit.......................................................................................... 28
Expenses.............................................................................................. 28
Other Income (Expenses)............................................................................... 28
Net Income (Loss)..................................................................................... 28
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998........................... 28
Investor Relations...................................................................................... 29
Litigation.............................................................................................. 29
Impact of the Year 2000 Computer Problem................................................................ 29
Results of Operations................................................................................... 30
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997................................... 30
Sales................................................................................................. 30
Cost of Sales......................................................................................... 30
Gross Profit.......................................................................................... 31
Expenses.............................................................................................. 31
Other Income (Expenses)............................................................................... 31
Net Loss.............................................................................................. 32
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3
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Liquidity and Capital Resources....................................................................... 32
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997................................. 32
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996................................... 32
Sales................................................................................................. 33
Cost of Sales......................................................................................... 33
Gross Profit.......................................................................................... 33
Expenses.............................................................................................. 33
Other Income (Expenses)............................................................................... 34
Net Loss.............................................................................................. 34
Product Development Costs............................................................................. 34
Quarterly Operating Results; Seasonality................................................................ 34
U.S. GAAP Reconciliation................................................................................ 36
URBAN CANADA BUSINESS..................................................................................... 36
Urban Canada............................................................................................ 36
Corporate Structure................................................................................... 37
Company Background.................................................................................... 38
The Alternative or New Age Beverage Industry............................................................ 39
Business Strategy....................................................................................... 39
Brand Franchise....................................................................................... 40
Distributor Network and Key Accounts.................................................................. 40
Brand and Product Development........................................................................... 41
Market Evaluation..................................................................................... 41
Distributor Evaluation................................................................................ 41
Production Evaluation................................................................................. 41
Image and Design...................................................................................... 41
Products................................................................................................ 42
Proprietary Brands.................................................................................... 42
Licensed Products..................................................................................... 42
Marketing, Sales and Distribution....................................................................... 43
Seasonality............................................................................................. 44
Production.............................................................................................. 44
Contract Packing Arrangements......................................................................... 44
Raw Materials......................................................................................... 44
Quality Control....................................................................................... 44
Regulation............................................................................................ 45
Trademarks, Design Marks and Flavor Concentrate Trade Secrets........................................... 45
Competition............................................................................................. 46
Employees............................................................................................... 46
MANAGEMENT................................................................................................ 47
Directors, Executive Officers and Key Employees......................................................... 47
Executive Compensation.................................................................................. 48
Executive Officers.................................................................................... 48
Summary Compensation Table............................................................................ 49
Compensation of Directors............................................................................. 49
Remuneration of Directors and Executive Officers...................................................... 49
Options, Stock Appreciation Rights and Other Rights to Purchase Securities............................ 50
Directors' and Officers' Insurance.................................................................... 50
Long-Term Incentive Plans............................................................................. 50
Pension Benefits...................................................................................... 50
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4
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Other Benefits........................................................................................ 51
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS.......................................................... 51
MANAGEMENT CONTRACTS...................................................................................... 51
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS................................................ 51
DESCRIPTION OF URBAN CANADA CAPITAL STOCK................................................................. 51
Common Shares and Warrants.............................................................................. 51
Escrow Shares........................................................................................... 52
Pre-Continuation Sale of Assets......................................................................... 52
TRANSFER AGENT AND REGISTRAR.............................................................................. 52
SHAREHOLDER'S RIGHTS UNDER THE WYOMING BUSINESS CORPORATION ACT........................................... 52
The Organizational Documents............................................................................ 52
Amendments to Organizational Documents................................................................ 53
Share Capital........................................................................................... 53
Appointment of Directors................................................................................ 53
Management.............................................................................................. 54
Rights of Shareholders.................................................................................. 54
Dissent Rights Under the Wyoming Business Corporations Act.............................................. 54
LEGAL MATTERS............................................................................................. 55
EXPERTS................................................................................................... 55
FINANCIAL STATEMENTS...................................................................................... F-1
APPENDIX A................................................................................................ A-1
ARTICLES OF CONTINUANCE................................................................................... A-1
APPENDIX B................................................................................................ B-1
COMPANY ACT OF BRITISH COLUMBIA........................................................................... B-1
DIVISION 2--DISSENT PROCEEDINGS........................................................................... B-1
INFORMATION NOT REQUIRED IN PROSPECTUS.................................................................... II-1
Item 20. Indemnification Of Directors And Officers...................................................... II-1
Item 21. Exhibits And Financial Statement Schedules..................................................... II-1
Item 22. Undertakings................................................................................... II-2
SIGNATURES................................................................................................ II-4
POWER OF ATTORNEY......................................................................................... II-4
EXHIBIT INDEX.............................................................................................
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WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus constitutes a part of a registration
statement on Form S-4 that we filed with the Securities and Exchange Commission
under the Securities Act. This proxy statement/ prospectus does not contain all
of the information set forth in the registration statement and its exhibits. For
further information about our company and the common shares offered by this
proxy statement/prospectus, please refer to the registration statement. We urge
you to refer to the copy of the documents filed as exhibits to the registration
statement filed with the SEC.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 (United States), as applicable to foreign private issuers, and we
file reports and other information with the SEC. You can inspect and copy the
reports and other information filed with the SEC at the SEC's public reference
facilities located at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the SEC's regional offices at 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, CA 90036-3648. You may also obtain copies of
these materials from the SEC at prescribed rates by mailing a request to the
Public Reference Section of the SEC, at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549.
Some of our reports are filed electronically and maintained in the SEC's
EDGAR database. You can view these electronically filed documents through the
SEC's website at http://www.sec.gov.
------------------------
We have not authorized any dealer, salesperson or other individual to give
any information or to make any representations other than those contained in
this proxy statement/prospectus. You may not rely on any information or
representations other than those set forth in this proxy statement/prospectus.
This proxy statement/prospectus is not an offer to sell, or a solicitation of an
offer to buy, the securities offered by this proxy statement/prospectus to any
person in any state or other jurisdiction in which that offer or solicitation is
unlawful. The delivery of this proxy statement/prospectus at any time does not
imply that information contained in this document is correct as of any time
subsequent to its date.
WE USE CANADIAN G.A.A.P.
Except as otherwise noted, financial data in this proxy statement/prospectus
are presented in accordance with generally accepted accounting principles as
applied in Canada.
6
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SUMMARY
THE FOLLOWING IS A SUMMARY OF INFORMATION CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. THIS DOCUMENT PROVIDES A COMPLETE SUMMARY OF THE
SIGNIFICANT ASPECTS OF THE TRANSACTIONS DESCRIBED, BUT IT SHOULD BE REVIEWED
TOGETHER WITH ALL THE SUPPLEMENTAL MATERIALS ATTACHED. WE URGE YOU TO REVIEW
CAREFULLY ALL OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
THE ARTICLES OF CONTINUANCE ATTACHED AS APPENDIX A AND THE OTHER ATTACHED
APPENDICES.
URBAN CANADA
We develop, produce, market and distribute a broad selection of
"alternative" or "New Age" beverages. We created in 1994, and launched in 1995,
two brands unique to Urban Juice, JONES SODA CO. "a traditional 90's soda," and
WAZU, a natural spring water.
CORPORATE RESTRUCTURING PRIOR TO CONTINUATION
In order to better align the business operations of Urban Canada and our
wholly-owned subsidiaries, WAZU Products Ltd. will sell assets used in its U.S.
operations to Urban Juice & Soda (USA) Inc. The assets will be sold for proceeds
equal to their fair market value. Urban Juice & Soda (USA) Inc. will assume debt
of WAZU Products Ltd. equal to their fair market value of the U.S. assets. Under
Canadian and US GAAP, this transaction will be treated as a transfer of assets
under common control, and accordingly will be accounted for at historical cost
in a manner similar to a pooling of interests.
THE CONTINUATION
INTRODUCTION
Our management is proposing that our corporate existence be continued out of
British Columbia into the State of Wyoming. As a result of the continuation we
will cease to be a British Columbia company governed by the provisions of the
British Columbia Company Act and will become a Wyoming company governed by the
provisions of the Wyoming Business Corporations Act. Our wholly-owned
subsidiaries, WAZU Products Ltd. and Urban Juice & Soda (USA) Inc. will be
wholly-owned subsidiaries of the Wyoming company.
We believe that the continuation will provide us with a number of benefits
including:
- Integrating us more fully into the United States, our primary market
- Increasing our access to United States capital and debt sources, which
have been our primary source of both equity and debt financing
- Better positioning ourselves for the possible future listing of our shares
on a United States exchange
- Increasing our access to qualified personnel
To accomplish the continuation, we will adopt and file articles of
continuance with the Secretary of State of Wyoming that will replace our current
memorandum and articles. A copy of the proposed articles of continuance are
attached as Appendix A and may be reviewed at our solicitors' office, Catalyst
Corporate Finance Lawyers, 1100 - 1055 West Hastings Street, Vancouver, British
Columbia, V6E 2E9 at any time during normal business hours.
CONTINUATION
At the meeting of shareholders, our management will ask you to approve the
continuation by special resolution. We will also seek your consent to not
proceed with the continuation in the event
7
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that the special resolution is passed by the shareholders at the meeting and we
subsequently conclude that it would not be in our best interests to proceed.
The continuation will not result in any change in our business or assets,
liabilities, net worth or management, nor will the continuation impair any of
our creditors' rights. A particular shareholder's holding will not change. The
continuation is not, in itself, a corporate reorganization, amalgamation or
merger.
On the completion of the continuation, we will become Urban Wyoming subject
to the provisions of the Wyoming Business Corporations Act. As Urban Wyoming we
will establish a registered office in Wyoming and upon consummation of the
continuation, we will file a Current Report on Form 8-K with the SEC to reflect
the continuation for the purposes of Section 15(d) of the Exchange Act.
RIGHTS OF DISSENTING SHAREHOLDERS
The continuation gives rise to a shareholder's right of dissent. Section 207
of the British Columbia Company Act requires a dissenting shareholder to notify
us in writing at least two days before the meeting scheduled for shareholder
voting. The right to dissent will be lost if the shareholder fails to notify us
in writing two days in advance of the meeting or if the shareholder votes in
favor of the continuation. The written notice by the dissenting shareholder must
contain holder and share information and demand an appraisal of the common
shares identified. If the continuation is approved at the meeting, and we go
forward with the continuation, shareholders who comply with the provisions of
Section 207 of the British Columbia Company Act will be entitled to receive
payment for their shares. This could have an adverse effect on our cash flow.
The payment amount is determined by agreement between us and the shareholder on
the fair value of the common shares. However, if we cannot agree on the fair
value, the value may be determined by court. A copy of Section 207 is attached
as Appendix B to this proxy statement/prospectus.
CONVERSION OF SHARES
The current share certificates representing our common shares will represent
an equivalent number of common shares of Urban Wyoming without other action by
our shareholders. You will not have to exchange any share certificates. We will
issue new certificates representing common shares of Urban Wyoming upon
transfers of common shares or at your request.
CONVERSION OF WARRANTS
The current outstanding warrants to purchase common stock of Urban Canada
will represent warrants to purchase an equivalent number of common shares of
Urban Wyoming without other action by our warrant holders. Warrant holders will
not have to exchange any warrants. Warrant holders who are not shareholders will
not have a right to vote on the continuation proposal.
CONTINUING DISCLOSURE OBLIGATION
We will remain a "reporting issuer" in British Columbia, Alberta and Ontario
after the continuation, and will continue to be obligated to prepare and issue
news releases in British Columbia, Alberta and Ontario, file material change
reports with the British Columbia Securities Commission, Alberta Securities
Commission and the Ontario Securities Commission, prepare, file and provide to
shareholders unaudited quarterly and audited annual financial statements, and
otherwise comply with the British Columbia Securities Act, Alberta Securities
Act and Ontario Securities Act, where applicable. Our insiders will continue to
be subject to the insider trading and reporting requirements of the British
Columbia Securities Act, Alberta Securities Act and the Ontario Securities Act.
8
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RISK FACTORS
STRONG OPPOSITION FROM TRADITIONAL NON-ALCOHOLIC BEVERAGE MANUFACTURERS MAY
PREVENT US FROM EXPANDING OUR MARKET
The alternative beverage industry is highly competitive. We compete with
other beverage companies not only for consumer acceptance but also for shelf
space in retail outlets and for marketing focus by our distributors, all of
which also distribute other beverage brands. Our products compete with all
non-alcoholic beverages, most of which are marketed by companies with greater
financial resources than Urban Canada and some of which are placing severe
pressure on independent distributors not to carry competitive alternative or New
Age beverage brands such as JONES SODA CO. We also compete with regional
beverage producers and "private label" soft drink suppliers. If, due to such
pressure or other competitive threats, we are unable to sufficiently develop our
distribution channels, we may be unable to achieve our current revenue and
financial targets. As a means of maintaining and expanding our distribution
network, we intend to introduce product extensions and additional brands. There
can be no assurance that we will be able to do so or that other companies will
not be more successful in this regard over the long term. Competition,
particularly from companies with greater financial and marketing resources than
Urban Canada, could have a material adverse affect on our ability to expand the
market for our products.
OUR DEPENDENCE ON NON-CONTRACT, INDEPENDENT DISTRIBUTORS COULD AFFECT OUR
ABILITY TO EFFICIENTLY AND PROFITABLY DISTRIBUTE AND MARKET OF OUR PRODUCT
As is customary in the beverage industry, we have no contractual commitments
from our independent distributors. In order to reduce inventory costs,
independent distributors endeavor to order products from us on a "just in time"
basis in quantities, and at such times, based on the demand for the products in
a particular distribution area. Accordingly, there is no assurance as to the
timing or quantity of purchases by any of our independent distributors or that
any of our distributors will continue to purchase products from us in the same
frequencies and/or volumes as they may have done in the past.
For the year ended December 31, 1998, approximately 18.0% of the cases of
our beverage products sold were sold through three distributors. Our ability to
establish a market for our unique brands and products in new geographic
distribution areas, as well as maintain and expand our existing markets, is
dependent on our ability to establish and maintain successful relationships with
reliable independent distributors strategically positioned to serve those areas.
The ability to maintain our distribution system and to attract additional
distributors in new distribution areas will depend on a number of factors, many
of which are outside our control. These factors include, the level of demand for
our brands and products in a particular distribution area, our ability to price
our products at levels competitive with those offered by competing products, and
our ability to deliver products in the quantity and at the time ordered by
distributors. We cannot assume that we will be able to meet all or any of these
factors in any of our current or prospective geographic areas of distribution.
Our inability to achieve any of these factors in a geographic distribution area
will have a material adverse effect on our relationships with our distributors
in that particular geographic area, thus limiting our ability to expand our
market.
Our marketing and sales strategy presently, and in the future, will rely on
the availability and performance of our independent distributors. In addition,
we do not currently have, nor do we anticipate in the future that we will be
able to establish, long-term contractual commitments from many of our
distributors. Accordingly, there is no assurance that we will be able to
maintain our current distribution relationships or establish and maintain
successful relationships with distributors in new geographic distribution areas.
Moreover, there is the additional possibility that we may have to incur
9
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additional expenditures to attract and/or maintain key distributors in one or
more of our geographic distribution areas in order to profitably exploit our
geographic markets.
OUR DEPENDENCE ON THIRD-PARTY PACKERS OF OUR PRODUCTS COULD MAKE MANAGEMENT OF
OUR MARKETING AND DISTRIBUTION EFFORTS INEFFICIENT OR UNPROFITABLE
Even though we control and manage the entire manufacturing process of our
products, we do not own the plant and equipment required to manufacture and
package our beverage products and do not anticipate having such capabilities in
the future. As a consequence, we depend on third-party or contract packers to
produce our beverage products and to deliver them to distributors. Our ability
to attract and maintain effective relationships with contract packers for the
production and delivery of our beverage products in a particular geographic
distribution area is important to the achievement of successful operations
within each distribution area. Currently, the competition among contract packers
for business allows us to have the choice of two or more acceptable contract
packers in each of our geographic distribution areas. Under these circumstances,
we are currently able to establish and maintain competitive arrangements with
contract packers. However, there is no assurance that these conditions will
continue to exist in either our current geographic distribution areas or in new
areas we may enter. Accordingly, there is no assurance that we will be able to
maintain our economic relationships with current contract packers or establish
satisfactory relationships with contract packers in new geographic distribution
areas we may enter. The failure to establish and maintain effective
relationships with contract packers for a distribution area would likely prevent
us from successfully selling our products in that area or materially reduce
profits realized from the sale of our products in that area.
As is customary in the contract packing industry for comparably sized
companies, we are expected to arrange for our contract packing needs
sufficiently in advance of anticipated requirements. To the extent demand for
our products exceeds available inventory and the capacities produced by contract
packing arrangements, we will be unable to fulfill distributor orders on demand.
Conversely, we may produce more product than warranted by the actual demand for
it, resulting in higher storage costs, the potential unavailability of adequate
storage facilities to meet inventory levels, and the potential risk of inventory
spoilage. Our failure to accurately predict our contract packaging requirements
may impair relationships with our independent distributors and key accounts,
which, in turn, would likely have a material adverse affect on our ability to
maintain profitable relationships with those distributors and key accounts.
WE HAVE NOT EARNED A PROFIT IN ANY YEAR
Through December 31, 1998, Urban Canada had an accumulated deficit of
$10,616,388, most of which had resulted from our operations during the period in
which we transformed Urban Canada from being a regional distributor of licensed
and unlicensed beverage brands and products to a unique brand holder producing,
developing and marketing our own products. We believe that to operate at a
profit we must significantly increase the sales volume for our unique brands and
products, achieve and maintain efficiencies in operations, maintain fixed costs
at or near current levels and avoid significant increases in variable costs
relating to production, marketing and distribution. Our ability to significantly
increase sales from current sales levels will depend primarily on success in
introducing our current brands and products, and possibly new unique brands and
products, into new geographic distribution areas, particularly in the United
States. Our ability to successfully enter new distribution areas will, in turn,
depend on various factors, many of which are beyond our control including, but
not limited to, the continued demand for our brands and products in target
markets, the ability to price our products at levels competitive with competing
products, the ability to establish and maintain relationships with distributors
in each geographic area of distribution and the ability in the future to create,
develop and successfully introduce one or more new brands, products, and product
extensions. There is no
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<PAGE>
assurance that we will successfully achieve all or any of these goals, or that
we will achieve profitable operations.
WE COMPETE IN AN INDUSTRY THAT IS BRAND-CONSCIOUS, SO BRAND NAME RECOGNITION AND
ACCEPTANCE OF OUR PRODUCTS ARE CRITICAL TO OUR SUCCESS
Our business is substantially dependent upon acceptance by independent
distributors of the JONES SODA CO. brand as a beverage brand which may provide
incremental sales growth rather than reduce distributors' existing beverage
sales. It is still too early in the product life cycle of the JONES SODA CO.
brand to determine whether it will achieve this level of acceptance by
independent distributors or, ultimately, retail consumers. We believe that the
success of the WAZU brand will also be substantially dependent upon acceptance
of the JONES SODA CO. brand. Accordingly, any failure by the JONES SODA CO.
brand to achieve acceptance or market penetration would likely have a material
adverse affect on our profitability.
WE COMPETE IN AN INDUSTRY CHARACTERIZED BY RAPID CHANGES IN CONSUMER
PREFERENCES, SO OUR ABILITY TO CONTINUE DEVELOPING NEW PRODUCTS TO SATISFY OUR
CONSUMERS' CHANGING PREFERENCES WILL DETERMINE OUR LONG-TERM SUCCESS
The current JONES SODA CO. market distribution and penetration may be
limited with respect to the population as a whole to determine whether the brand
has achieved initial consumer acceptance, and there can be no assurance that
this acceptance will ultimately be achieved. Based on industry information and
our own experience, we believe that alternative or New Age beverage brands and
products may be successfully marketed for five to nine years after the product
is introduced in a geographic distribution area before consumers' taste
preferences change. In light of the limited life for alternative or New Age
beverage brands and products, a failure to introduce new brands, products or
product extensions into the marketplace as current ones mature would likely
prevent us from achieving long-term profitability.
THE LOSS OF KEY PERSONNEL WOULD DIRECTLY AFFECT OUR EFFICIENCY AND PROFITABILITY
We are dependent upon the creative skills and leadership of our founder,
Peter M. van Stolk, who serves Urban Canada as President and Chief Executive
Officer, as well as the management and operational skills of other members of
our senior management team. We have entered into an employment agreement with
Mr. van Stolk which expires in 2001. The loss of Mr. van Stolk could have a
material adverse affect on our ability to develop a long-term, profitable
business plan.
Our management team consists of several key production, distribution, sales
and financial personnel who have been recruited within the past two years. In
order to manage and operate Urban Canada successfully in the future, it may be
necessary to further strengthen our management team; specifically, we anticipate
we will need to recruit a senior executive to be the Chief Operating Officer of
Urban Canada. The competition for such key personnel is intense, and there can
be no assurance that we will be successful in attracting, retaining or
motivating such individuals. The failure to attract, retain or motivate such key
personnel would likely have a material adverse affect on our ability to operate
our business efficiently and profitably.
OUR LIMITED OPERATING EXPERIENCE COULD HINDER OUR ABILITY TO EXPAND OUR MARKET
We launched our first unique brand, WAZU, in March 1995, and our second
unique brand, JONES SODA CO., in November 1995. In view of this limited
operating experience as a brand holder, we are vulnerable to a variety of
business risks usually associated with young companies or mature companies
entering a new line of business including the lack of management's experience in
expanding our market internationally. We believe that we must expand our market
internationally, but we cannot assure that
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<PAGE>
we will be able to operate successfully as an international producer, marketer
and distributor of our beverage brands, and any failure to do so would likely
have a material adverse affect on our profitability.
WE COULD BE EXPOSED TO PRODUCT LIABILITY CLAIMS FOR PERSONAL INJURY OR POSSIBLY
DEATH
Although we have product liability insurance in the aggregate amount of $5
million, with an each occurrence limit of $5 million, we cannot assure that the
coverage will be sufficient to cover any or all product liability claims. To the
extent our product liability coverage is insufficient, a product liability claim
would likely have a material adverse affect upon our financial condition. In
addition, any product liability claim successfully brought against us may
materially damage the reputation of our products, thus adversely affecting our
ability to continue to market that product.
OUR INABILITY TO PROTECT OUR TRADEMARKS, DESIGN MARKS AND FLAVOR CONCENTRATE
TRADE SECRETS MAY PREVENT US FROM SUCCESSFULLY MARKETING OUR PRODUCTS
We consider our trademarks, design marks and flavor concentrates to be of
considerable value and importance to our business. We are pursuing the
registration of our trademarks in the United States, Canada and internationally.
There can be no assurance that the steps taken by us to protect these
proprietary rights will be adequate or that third parties will not infringe or
misappropriate our trademarks, design marks, flavor concentrates, trade dress
and/or similar proprietary rights. In addition, there can be no assurance that
other parties will not assert infringement claims against us. Any event that
would jeopardize our proprietary rights or any claims of infringement by third
parties could have a material adverse affect on our ability to profitably
exploit our unique products or recoup our associated research and development
costs.
OUR BUSINESS IS SUBJECT TO MANY REGULATIONS AND NONCOMPLIANCE IS COSTLY
The production and marketing of our unique beverages, including contents,
labels, caps and containers, are subject to the rules and regulations of various
federal, provincial, state and local health agencies. If a regulatory authority
finds that a current or future product or production run is not in compliance
with any of these regulations, we may be fined, or production may be stopped,
thus adversely affecting our financial conditions and operations. Similarly, any
adverse publicity associated with any noncompliance may damage our reputation
and our ability to successfully market our products.
OUR INFORMATION TECHNOLOGY AND COMPUTER CONTROLLED SYSTEMS MAY NOT BE YEAR 2000
COMPLIANT
We may not accurately identify all potential Year 2000 problems within our
business, and the corrective measures that we implement may be ineffective or
incomplete. Any unexpected problems could interrupt our ability to develop and
produce our products, process orders, accurately report operating and financial
data or service our customers. Similar problems and consequences could result if
any of our key suppliers or customers experience Year 2000 problems. Our failure
or the failure of our significant suppliers and customers to adequately address
the "Year 2000" issue could adversely affect our business, operating results and
financial condition. For more information about our Year 2000 compliance
efforts, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of the Year 2000 Computer Problem."
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Some statements contained in this proxy statement/prospectus are
forward-looking. Forward-looking statements can be identified by the use of
words like "believe," "expect," "may," "will," "should," or "anticipate," or by
discussions of strategy. We caution you that our business and operations are
subject to a variety of risks and uncertainties and, consequently, our actual
results may materially differ from the results projected by the forward-looking
statements contained in this proxy statement/prospectus. Some of these risks and
uncertainties are discussed under "Risk Factors," beginning on page 9 of this
proxy statement/prospectus.
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MARKETS AND MARKET PRICES
COMMON SHARES
Our common shares are currently traded on the Vancouver Stock Exchange under
the symbol "UJS". Our common shares are also quoted on the OTC Bulletin Board.
We have not made any application to list the common shares on any other
exchange. The following table shows the high and low closing sale prices of the
common shares for the calendar quarters indicated, as reported by the Vancouver
Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
----------- ---------
<S> <C> <C>
1997:
First quarter............................................................. Can.$ 2.55 1.44
Second quarter............................................................ Can.$ 2.50 1.45
Third quarter............................................................. Can.$ 1.90 1.30
Fourth quarter............................................................ Can.$ 1.35 0.69
1998:
First quarter............................................................. Can.$ 1.10 0.73
Second quarter............................................................ Can.$ 1.34 0.83
Third quarter............................................................. Can.$ 1.15 0.42
Fourth quarter............................................................ Can.$ 0.56 0.40
1999:
First quarter............................................................. Can.$ 0.90 0.45
Second quarter............................................................ Can.$ 1.35 0.76
Third quarter............................................................. Can.$ 1.48 1.05
</TABLE>
As of November 1, 1999, there were 18,685,918 common shares issued and
outstanding of which 6,151,326 or approximately 32.9% were held by 183 record
holders in the United States.
COMMON SHARE PURCHASE WARRANTS
As of November 1, 1999, we had warrants outstanding to purchase an aggregate
of 2,610,567 of our common shares. We issued warrants to purchase 40,000 common
shares in connection with a bank loan that closed on June 18, 1998. These
warrants expire on June 18, 2000 and have an exercise price of Can.$1.15 per
share. We also issued warrants to purchase 914,000 common shares in connection
with a private placement of common shares that closed on December 9, 1998. The
exercise price of these warrants is Can.$0.60 per share and expire on December
9, 2000. Finally, in connection with a private placement of our common shares
that closed on May 4, 1999, we issued warrants to purchase 1,656,567 common
shares, with each two warrants exercisable for one of our common shares, at an
aggregate exercise price of Can.$0.75 per share until May 4, 2000, and $0.90 per
share until May 4, 2001. There is no trading market for the warrants and we do
not intend to request the listing of the warrants on any exchange.
We relied on Rule 506 of the Regulation D for the private placements closed
on December 9, 1998 and May 4, 1999, as in both cases, the only purchasers of
our common shares were "accredited investors" as such term is defined under Rule
501(a) of the Regulation D.
To the best of our knowledge, Urban Canada is not directly or indirectly
owned or controlled by another corporation or by any foreign government.
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BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding beneficial
ownership of our common shares, as of November 1, 1999, with respect to the
total amount of the outstanding common shares owned by our officers and
directors as a group. To the best of our knowledge, no shareholder is the
beneficial owner of more than five percent of the outstanding common shares.
<TABLE>
<CAPTION>
AMOUNT PERCENT OF
TITLE OF CLASS IDENTITY OF PERSONS OR GROUP OWNED CLASS
- ------------------ -------------------------------------------------- -------------- ---------------
<S> <C> <C> <C>
Common Shares Officers and directors as a group 1,598,021 10.5%
</TABLE>
Management knows of no arrangement which would result in a change in control
of the Company subsequent to the date of this registration statement.
THE EXTRAORDINARY GENERAL MEETING
This proxy statement/prospectus is being furnished to our shareholders in
connection with the solicitation by our Board of Directors of proxies for the
meeting. The meeting will be held at 1356 Frances Street, Vancouver, British
Columbia, Canada, at 10:00 a.m. local time on December 17, 1999, and at its
adjournment or postponement. The approximate date of mailing this proxy
statement/ prospectus and the accompanying proxy card to our shareholders is
November 15, 1999.
MANAGEMENT SOLICITATION AND APPOINTMENT OF PROXIES
THE PEOPLE NAMED IN THE ACCOMPANYING FORM OF PROXY ARE NOMINEES OF OUR
MANAGEMENT. A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND AND ACT FOR AND ON THE SHAREHOLDER'S BEHALF AT THE
MEETING OTHER THAN THE PEOPLE DESIGNATED AS PROXYHOLDERS IN THE ACCOMPANYING
FORM OF PROXY. TO EXERCISE THIS RIGHT, THE SHAREHOLDER MUST EITHER:
(A) ON THE ACCOMPANYING FORM OF PROXY, STRIKE OUT THE PRINTED NAMES OF THE
INDIVIDUALS SPECIFIED AS PROXYHOLDERS AND INSERT THE NAME OF THE
SHAREHOLDER'S NOMINEE IN THE BLANK SPACE PROVIDED; OR
(B) COMPLETE ANOTHER PROPER FORM OF PROXY.
TO BE VALID, A PROXY MUST BE DATED AND SIGNED BY THE SHAREHOLDER OR BY THE
SHAREHOLDER'S ATTORNEY AUTHORIZED IN WRITING. IN THE CASE OF A CORPORATION, THE
PROXY MUST BE SIGNED BY A DULY AUTHORIZED OFFICER OF OR ATTORNEY FOR THE
CORPORATION.
THE COMPLETED PROXY, TOGETHER WITH THE POWER OF ATTORNEY OR OTHER AUTHORITY,
IF ANY, UNDER WHICH THE PROXY WAS SIGNED OR A NOTARIALLY CERTIFIED COPY OF THE
POWER OF ATTORNEY OR OTHER AUTHORITY, MUST BE DELIVERED TO PACIFIC CORPORATE
TRUST COMPANY, OF SUITE 830 - 625 HOWE STREET, VANCOUVER, BRITISH COLUMBIA, V6C
3B8, AT LEAST 48 HOURS BEFORE THE MEETING, EXCLUDING SATURDAYS, SUNDAYS AND
HOLIDAYS.
REVOCATION OF PROXIES
At any time up to and including the last business day preceding the day of
the meeting or any adjournment of the meeting, a shareholder who has given a
proxy may revoke it at any time before the proxy is exercised. To revoke a
proxy, a letter of revocation must be delivered to Pacific Corporate Trust
Company of Suite 830 - 625 Howe Street, Vancouver, British Columbia V6C 3B8 or
to the registered office of Urban Canada at Suite 1100 - 1055 West Hastings
Street, Vancouver, British Columbia, Canada, V6E 2E9, or delivered to the
chairperson of the meeting on the day of the meeting or any adjournment of the
meeting before any vote has been taken on a matter for which the proxy is to be
used. To be effective, the letter must be signed by the shareholder, the
shareholder's attorney authorized in writing or, where the shareholder is a
corporation, a duly authorized officer or attorney of the corporation
In addition, a proxy may be revoked by operation of law if, for example, the
shareholder dies, becomes incompetent, or, if the shareholder is a corporation,
partnership or other entity, the shareholder is dissolved.
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<PAGE>
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE AT THE MEETING
Holders of our common shares of record on the close of business on November
12, 1999, the record date, will be entitled to vote at the meeting. As of the
record date, there were 18,685,918 of our common shares outstanding.
Shareholders should not forward any stock certificates with their proxy
cards. If the continuation is consummated, certificates representing our common
shares will represent shares of Urban Wyoming common stock.
Our directors and senior officers do not believe that any person
beneficially owns, directly or indirectly, or exercises control or direction
over, shares carrying more than 10% of the voting rights attached to all
outstanding shares of Urban Canada.
VOTING OF SHARES AND PROXIES AND EXERCISE OF DISCRETION BY PROXYHOLDERS
To approve the continuation, the special resolution must be approved by at
least 75% of the votes cast in person or by proxy.
A shareholder may indicate the manner in which the persons named in the
proxy are to vote regarding a matter to be acted upon at the meeting by marking
the appropriate space. If the instructions as to voting indicated in the proxy
are clear, the shares represented by the proxy will be voted or withheld from
voting in accordance with the instructions given in the proxy.
If no choice is specified in the proxy regarding a matter to be acted upon,
the proxy confers discretionary authority regarding that matter upon the named
in the proxy. It is intended that the proxyholder named by management in the
accompanying form of proxy will vote the shares represented by the proxy in
favor of each matter identified in the proxy.
The proxy also confers discretionary authority upon the named proxyholder
regarding amendments or variations to the matters identified in the attached
notice of meeting and regarding any other matters which may properly be raised
at the meeting. As of the date of this proxy statement/prospectus, we are not
aware of any amendments or variations, or any other matters, that will be
presented for action at the meeting other than those referred to in the
accompanying notice of meeting. If, however, other matters that are not now
known to us are properly raised at the meeting then the persons named in the
accompanying form of proxy intend to vote on them in accordance with their best
judgment.
SOLICITATION OF PROXIES
Solicitations of proxies will be made primarily by mail and possibly
supplemented by telephone or other personal contact by our directors, officers
and employees without special compensation. We may reimburse shareholders'
nominees or agents for the costs incurred in obtaining authorization to execute
forms of proxy from their principals. We will bear any costs of solicitation of
proxies.
TAX CONSEQUENCES OF THE CONTINUATION
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
As set forth in the opinion of KPMG LLP, attached to this registration
statement as exhibit 8.2, and the following commentary, we have been advised
that the continuation is a tax-free reorganization and will have no material
United States federal income tax consequences for our shareholders. This summary
of the principal United States federal income tax consequences of the
continuation applies to U.S. holders who own common shares of Urban Canada as
capital assets on the date of this proxy statement/prospectus. U.S. holders
include U.S citizens and resident aliens, corporations and partnerships
organized under the laws of the United States or any state thereof, estates
subject to the U.S. federal income tax on their income regardless of source and
trusts subject to the primary
15
<PAGE>
supervision of a court within the United States and control by a U.S. fiduciary.
U.S. holders who own interests in Urban Canada indirectly through one or more
non-U.S. entities or in carrying on business outside the United States through a
permanent establishment or fixed place of business or U.S. holders who hold an
interest in Urban Canada other than as a common shareholder should consult with
their tax advisors.
This summary also describes the U.S. federal income tax consequences of the
continuation to Canadian holders who are, specifically, those persons resident
in Canada who own common shares of Urban Canada as capital assets on the date of
this proxy statement/prospectus. The discussion is limited to the U.S. federal
income tax consequences to Canadian holders of their ownership and disposition
of the common shares of Urban Canada as a result of the continuation and assumes
the Canadian holders have no other U.S. assets or activities.
This summary is based upon the facts set out in this proxy
statement/prospectus and upon additional information possessed by our management
and upon representations of our management. This discussion is also based upon
the United States Internal Revenue Code of 1986, U.S. Treasury regulations, the
Canada-United States Income Tax Convention, 1980 and subsequent protocols, and
judicial and administrative interpretations as of the date of this proxy
statement/prospectus. This discussion does not consider the potential effects,
adverse or beneficial, of any recently proposed legislation, which if enacted,
possibly could be applied on a retroactive basis at any time. There can be no
assurance that new legislation with retroactive effect will not be introduced or
that judicial or administrative interpretations may not change in a way that
will materially change the U.S. federal income tax consequences described in
this summary. We have not requested an advance income tax ruling from the
Internal Revenue Service.
This summary is not intended to address all provisions of the Internal
Revenue Code that may be relevant to a particular shareholder. No attempt has
been made to address the United States income tax consequences of the
continuation to U.S. holders who have special status under the Internal Revenue
Code or the Canadian Income Tax Act such as financial institutions, insurance
companies, tax exempt organizations, broker-dealers or dual-residents of the
U.S. and Canada, to U.S. citizens or U.S. resident aliens resident in Canada or
to non-U.S. persons who are not resident in Canada. This summary does not
address the U.S. federal income tax consequences to a person of the ownership,
exercise or disposition of any compensatory options.
This summary does not comment on state and local income tax consequences of
the continuation because it is impractical to consider the state and local tax
rules of each jurisdiction in which a particular U.S. Holder may be resident.
THIS SUMMARY IS OF A GENERAL NATURE AND DOES NOT ADDRESS SPECIFIC TAX
CONSEQUENCES WHICH MAY RESULT FROM A PARTICULAR SHAREHOLDER'S INDIVIDUAL
CIRCUMSTANCES. U.S. HOLDERS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE SPECIFIC UNITED STATES FEDERAL AND STATE INCOME TAX CONSEQUENCES
OF THE CONTINUATION TO THEIR OWN CIRCUMSTANCES.
U.S. HOLDERS
The continuation of Urban Canada to the United States into the
post-continuation company, Urban Wyoming, will be treated for U.S. federal
income tax purposes as a tax-free reorganization. Generally, no gain or loss
will be recognized to a U.S. Holder upon the continuation. A U.S. holder's
adjusted basis in the shares of Urban Wyoming received in the exchange will be
equal to the U.S. holders adjusted basis in the shares of Urban Canada
surrendered in the exchange.
A U.S. holder who sells or exchanges shares of a foreign corporation, such
as the shares of Urban Canada, in transactions such as those undertaken in the
continuation that are otherwise tax-free for U.S. income tax purposes, may be
required to recognize gain, as provided in U.S. Treasury regulations. However,
those regulations that uphold non-recognition treatment to U.S. holders who own
less than
16
<PAGE>
10% of the total voting power of the shares of the foreign corporation will be
applied to the continuation. Management has represented that no U.S. holders of
Urban Canada own 10% or more of the total voting power of the shares of Urban
Canada, either directly, indirectly or constructively. Non-recognition treatment
is conditioned upon a U.S. holder filing a notice under Reg. 1.367(b)-1(c)(1)
containing prescribed information on or before the last day for filing a U.S.
income tax return for the year of the exchange, taking timely extensions into
account. This notice must be filed with the district director with whom the U.S.
holder is required to file a U.S. federal income tax return for the year of
exchange.
U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE APPROPRIATE
FILING REQUIREMENT WITH RESPECT TO THE SALE OR EXCHANGE OF URBAN CANADA'S
SHARES.
CONTROLLED FOREIGN CORPORATION CONSIDERATIONS
If more than 50% of the voting power of all classes of shares or of the
total value of the shares of Urban Canada is owned, directly, indirectly, or
constructively, by citizens or residents of the United States, U.S. domestic
partnerships and corporations or estates or trusts other than foreign estates or
trusts, each of whom owns 10% or more of the total combined voting power of all
classes of shares of Urban Canada ("U.S. Shareholders"), Urban Canada will be
treated as a controlled foreign corporation under Subpart F of the Internal
Revenue Code. This classification would have many complex results, including the
required inclusion in income of their pro rata shares of the "Subpart F income,"
of Urban Canada by U.S. Shareholders, as specifically defined by the Internal
Revenue Code. Further, if Urban Canada is deemed to be a controlled foreign
corporation, U.S. Shareholders may be subject to U.S. income tax on their pro
rata shares of any increase in the average amounts of U.S. property held by
Urban Canada.
In addition, under Section 1248 of the Internal Revenue Code, gain from the
sale or exchange of shares of Urban Canada by a holder who is or was a U.S.
Shareholder at any time during the five-year period ending with such sale or
exchange would be treated as dividend income and taxed at ordinary income rates
to the extent of earnings and profits of Urban Canada attributable to the stock
sold or exchanged.
If Urban Canada is both a passive foreign investment company (as defined
below) and a controlled foreign corporation, Urban Canada will not be treated as
a passive foreign investment company with respect to the U.S. Shareholders.
Management does not believe that Urban Canada is a controlled foreign
corporation.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
Urban Canada will be classified as a passive foreign investment company for
any taxable year during which either 75 percent or more of our gross income is
passive income or the average quarterly value of our assets which produce or are
held for the production of passive income for such taxable year equals or
exceeds 50 percent of the average quarterly value of our total assets for the
year. Classification of Urban Canada as a passive foreign investment company at
any time during a particular U.S. holder's holding period may result in a number
of unfavorable U.S. income tax consequences including recognition of gain on the
disposition of Urban Canada shares, recognition of gain on the continuation of
Urban Canada to the United States, taxation of that gain at rates applicable to
ordinary income and an imposition of an interest charge on taxes apportioned to
prior years in the U.S. holder's holding period for his Urban Canada shares.
Management does not believe that Urban Canada satisfies either of the tests
for passive foreign investment company status in this year or that it has
satisfied either test in any previous year.
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<PAGE>
FOREIGN PERSONAL HOLDING COMPANY
Urban Canada will be classified as a foreign personal holding company for
U.S. federal income tax purposes if both of the following tests are satisfied:
(i) at any time during Urban Canada's taxable year, five or fewer individuals
who are U.S. citizens or residents own or are deemed to own (under certain
attribution rules) more than 50% of all classes of Urban Canada's shares
measured by voting power or value and (ii) Urban Canada receives at least 60%
(50% in subsequent years) of its gross income (regardless of source), as
specifically adjusted, from passive sources.
If Urban Canada were to be classified as a foreign personal holding company,
a portion of our "undistributed foreign personal holding company income" (as
defined for U.S. federal income tax purposes) would be allocated to all of our
U.S. shareholders who are U.S. holders on the last day on which Urban Canada is
classified as a foreign personal holding company or the last day of Urban
Canada's taxable year if earlier. This income would be includable in a U.S.
holder's gross income as a dividend for U.S. federal income tax purposes. U.S.
holders who dispose of their common shares prior to that date would not be
subject to tax under these rules.
Management does not believe that Urban Canada satisfies either the foreign
personal holding company ownership test or the foreign personal holding company
income test.
DISSENTING SHAREHOLDERS
U.S. holders who exercise their right of dissent and who receive cash in
exchange for their common shares of Urban Canada will recognize gain or loss.
Gain or loss will be treated as U.S. source capital gain or capital loss and
will be measured as the difference between the money and the fair market value
of other property received in exchange for the shares and the adjusted basis of
the shares surrendered.
URBAN CANADA WARRANTS
A U.S. holder who holds warrants enabling the U.S. holder to acquire common
shares of Urban Canada will not recognize gain or loss as a result of the change
in entitlement to acquire common shares of Urban Wyoming as a result of the
continuation. In addition, a U.S. holder who purchases Urban Wyoming shares
pursuant to a warrant will not recognize any gain or loss on such a purchase and
will have an adjusted tax basis in Urban Wyoming shares equal to the aggregate
of the purchase price of the warrants and the purchase price of Urban Wyoming
shares acquired pursuant to the warrants.
UNITED STATES TAXATION OF INCOME, GAINS, AND LOSSES
Distributions made by Urban Wyoming to U.S. holders of Urban Wyoming shares
will be treated as dividends to the extent of Urban Wyoming's current and
accumulated earnings and profits. Dividend income is treated as ordinary income.
The maximum federal income tax rate on ordinary income of individuals is
currently 39.6 percent.
A corporate U.S. holder who receives a dividend from Urban Wyoming will be
allowed a dividends received deduction from its taxable income in an amount
equal to 70% of the dividend received if the corporate U.S. holder owns less
than 20% of the voting power and the value of the shares of Urban Wyoming. A
corporate U.S. holder who has an ownership percentage of at least 20% but less
than 80% of the voting power and value of shares of Urban Wyoming will receive a
dividends received deduction in the amount of 80% of the dividends received. A
corporate U.S. holder that owns 80% or more of the voting power and value of the
shares of Urban Wyoming will be allowed a dividends received deduction equal to
100% of the dividend received from Urban Wyoming.
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<PAGE>
Distributions in excess of Urban Wyoming's current and accumulated earnings
and profits will be tax-free to the extent of the U.S. holder's adjusted basis
in their Urban Wyoming shares but will reduce the adjusted basis by the same
amount.
U.S. holders who hold their Urban Wyoming shares as a capital asset and who
either dispose of their Urban Wyoming shares at a gain or who receive
distributions in excess of Urban Wyoming's earnings and profits and adjusted
basis will recognize a capital gain. Under current U.S. law, the net long term
capital gains (assets held in excess of 12 months) of individuals are subject to
a maximum federal income tax rate of 20 percent. Net short-term capital gains
are taxed at the marginal tax rates for ordinary income. (For individuals the
maximum marginal rate is 39.6% and for corporations the maximum marginal rate is
35%.)
In order to determine the appropriate capital gains tax rate, U.S. holders
who are individuals will need to determine the holding period of their Urban
Wyoming shares (i.e., the period of time that the U.S. holder has owned the
Urban Wyoming shares). In determining the holding period of the Urban Wyoming
shares, the U.S. holder will include the period during which the shares of Urban
Canada were held by the U.S. holder.
For corporations, capital gains and ordinary income are taxed at the maximum
federal income tax rate of 35 percent.
Capital losses are deductible only to the extent of capital gains. However,
in the case of taxpayers other than corporations, $3,000 ($1,500 in the case of
a married person filing a separate return) of capital losses are deductible
against ordinary income annually. In the case of individuals and other non-
corporate taxpayers, capital losses that are not currently deductible may be
carried forward to other years. In the case of corporations, capital losses that
are not currently deductible are carried back to each of the three years
preceding the loss year and forward to each of the five years succeeding the
loss year.
CANADIAN HOLDERS
A Canadian holder will not be subject to United States federal income tax or
reporting requirements on gain recognized as a result of the continuation.
U.S. non-recognition treatment is mandatory rather than elective and will
result in the Canadian holders receiving a U.S. federal income tax adjusted cost
basis in the Urban Wyoming shares acquired pursuant to the exchange that is the
same as the U.S. adjusted basis of their shares of Urban Canada surrendered.
Canadian holders will not be subject to U.S. income tax on account of cash
received on payments made pursuant to the dissent provisions of the
continuation.
SUBSEQUENT SALE OF URBAN WYOMING SHARES
A Canadian holder will not be subject to United States federal income tax on
gain recognized on the sale or other disposition of Urban Wyoming shares, unless
the Urban Wyoming shares constitutes a United States real property interest at
the time of disposition and the Canadian holder is a "5 percent shareholder." A
Canadian holder who beneficially owns or owned more than five percent of the
total fair market value of Urban Wyoming's regularly traded shares, either at
the time of disposition or at any time in the five-year period ending on the
disposition date, will be a 5 percent shareholder. Gain recognized by a 5
percent shareholder will be subject to United States tax unless the Canadian 5
percent shareholder establishes in a prescribed manner that Urban Wyoming is not
a United States real property interest. Specifically, the Canadian 5 percent
shareholder must establish that the fair market value of Urban Wyoming's United
States real property interests is and was less than 50 percent of the fair
market value of the sum of all of its trade or business assets, its real
properties located
19
<PAGE>
outside the United States and its United States real property interests, both at
the time of disposition and at any time in the five year period ending on the
disposition date.
Management believes that Urban Wyoming will not be a U.S. real property
interest.
RECEIPT OF DIVIDENDS ON URBAN WYOMING SHARES
Distributions made by Urban Wyoming to Canadian holders of Urban Wyoming
shares will be treated as U.S. source dividends to the extent of Urban Wyoming's
current and accumulated earnings and profits. Canadian holders will generally be
subject to 15 percent U.S. non-resident withholding tax, with no allowance for
deductions, except in the case of a Canadian corporation that owns at least 10
percent of the Urban Wyoming voting shares, in which case the U.S. non-resident
withholding tax rate is reduced to 5 percent pursuant to the Canadian-United
States Income Tax Convention.
Distributions in excess of Urban Wyoming's current and accumulated earnings
and profits will be tax-free to the extent of the Canadian holder's adjusted
basis in their Urban Wyoming shares but will reduce the adjusted basis by the
same amount. Distributions in excess of Urban Wyoming's earnings and profits and
adjusted basis will give rise to a capital gain, treated in the manner described
in, "Subsequent Sale of Urban Wyoming Shares," above.
FEDERAL ESTATE TAX TREATMENT
Shares and warrants of Urban Wyoming held by an individual Canadian holder
at the time of death are U.S. situs assets and are potentially subject to United
States federal estate tax. A non-resident of the United States is eligible for
an effective $60,000 exemption amount on U.S. situs assets. Estates with U.S.
situs assets in excess of $60,000 are subject to estate tax rates ranging from
26% to 55%. A number of relieving provisions are available under the
Canadian-United States Income Tax Convention, including a potentially enhanced
effective exemption amount, a limited marital credit and, depending upon the
circumstances, a Canadian foreign tax credit for all or a portion of any U.S.
estate taxes paid. As well, individual Canadian holders whose world-wide gross
estates, as computed under U.S. tax rules, are limited to $1.2 million or less
are subject to U.S. estate tax only on properties the disposition of which would
be subject to U.S. income tax under the Canadian-United States Income Tax
Convention.
CANADIAN INCOME TAX CONSIDERATIONS
Thorsteinssons, our Canadian tax counsel, has advised that the following
general summary fairly describes the principal Canadian federal income tax
consequences of the proposed continuation of Urban Canada to Wyoming to our
Canadian holders who are, specifically, those shareholders and warrantholders
who are resident in Canada, who own, either alone or together with related
persons, less than 10% of the shares of Urban Canada, and to whom shares and
warrants of Urban Canada constitute capital property for the purposes of the
Canadian Income Tax Act. This summary also describes the principal Canadian
federal income tax consequences of the proposed continuation of Urban Canada to
Wyoming to non-resident holders who are, specifically, those shareholders and
warrantholders who are non-residents of Canada, do not carry on business in
Canada, and who own, either alone or together with related persons, less than
10% of the shares of Urban Canada. Other shareholders and warrantholders of the
Company should consult their own tax advisors as the tax consequences to them of
the proposed continuation are beyond the scope of this summary.
20
<PAGE>
This summary is based upon the current provisions of the Canadian Income Tax
Act, the regulations therein, any proposed amendments to the Canadian Income Tax
Act or regulations previously announced by the Federal Minister of Finance and
counsel's understanding of the current administrative and assessing policies of
Revenue Canada, Customs, Excise and Taxation. This description is not exhaustive
of all possible Canadian federal income tax consequences and does not take into
account or anticipate any changes in law, whether by legislative, governmental
or judicial action other than the proposed amendments, nor does it take into
account provincial or foreign tax considerations which may differ significantly
from those discussed herein.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IT IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER.
ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH
RESPECT TO THE CANADIAN INCOME TAX CONSEQUENCES TO THEM OF THE PROPOSED
CONTINUATION.
NATURE OF SHARES AND WARRANTS OF URBAN CANADA HELD BY CANADIAN HOLDERS
The shares and warrants of Urban Canada will generally constitute "capital
property" to a Canadian holder, unless the Canadian holder is a trader or dealer
in securities or is engaged in an adventure in the nature of trade with respect
to the shares and warrants. Certain individual Canadian holders whose shares of
Urban Canada might not otherwise qualify as "capital property" may be entitled
to obtain such qualification by disposing of their shares before the time of the
continuation and making an irrevocable election under subsection 39(4) of the
Canadian Income Tax Act. After the continuation, the shares of Urban Canada will
no longer constitute Canadian securities for purposes of the subsection 39(4)
election. ANY INDIVIDUALS CONTEMPLATING MAKING AN ELECTION UNDER SUBSECTION
39(4) OF THE CANADIAN INCOME TAX ACT SHOULD CONSULT THEIR TAX ADVISORS AS THE
ELECTION WILL AFFECT THE CANADIAN INCOME TAX TREATMENT OF THE DISPOSITION OF THE
SHAREHOLDER'S OTHER CANADIAN SECURITIES.
PRE-CONTINUATION TRANSACTION
Before the continuation, WAZU Products Ltd., a subsidiary of Urban Canada,
will sell the assets used in its U.S. operations to Urban Juice and Soda (USA)
Inc., another subsidiary of Urban Canada, for proceeds of disposition equal to
the fair market value of its assets. WAZU will realize a gain on the sale equal
to the amount by which the proceeds exceed the tax cost of its assets, three
quarters of which must be included in its income for the year of disposition.
WAZU may deduct any non-capital losses available for carry-forward from the gain
in computing its taxable income for the year in which the sale takes place.
As of the date of this proxy statement/prospectus, in view of the fair
market value and the tax cost of the assets to be sold by WAZU and the
non-capital losses available to be carried forward by WAZU, we do not believe
that Canadian income tax will be payable as a result of the sale.
CONSEQUENCES OF CONTINUATION TO HOLDERS
The continuation of Urban Canada into Wyoming will not constitute a taxable
event for our Canadian holders. Canadian holders will continue to hold their
shares and warrants at the same adjusted cost base as before the continuation.
Any dividends paid by us to our Canadian shareholders after Urban Canada's
continuation into Wyoming and reconstitution as Urban Wyoming will no longer be
eligible for the dividend tax credit provided under the Canadian Income Tax Act.
Under the Canada-US Income Tax Convention the U.S. tax that may be withheld from
dividends paid by us to our Canadian shareholders will be limited to a maximum
rate of 15%. Canadian shareholders may claim a foreign tax credit or a deduction
in computing their taxable income for US tax withheld on dividends paid by Urban
Canada.
21
<PAGE>
FOREIGN REPORTING
A Canadian resident is required under the Canadian Income Tax Act to report
his or her foreign property holdings if the aggregate cost amount of such
holdings exceeds $100,000. Following the continuation, the shares and warrants
of Urban Wyoming will constitute foreign property for the purposes of this rule
and their "cost amount" will count towards the calculation of the $100,000
threshold.
DISSENT PROCEEDINGS
If a shareholder initiates formal dissent proceedings in respect of the
proposed continuation, Urban Canada will be required to purchase the dissenting
shareholder's shares for a cash payment equal to the fair value of the shares.
The redemption proceeds will be treated as a dividend to the extent that the
proceeds exceed the paid-up capital of the purchased shares. The balance of the
redemption proceeds (i.e., the amount equal to the paid-up capital of the
purchased shares) will be treated as proceeds of disposition of the shares for
the purpose of computing the shareholder's capital gain or loss. Consequently,
the dissenting shareholder will realize a capital gain or loss to the extent
that the paid-up capital of the shares exceeds or is exceeded by the
shareholder's adjusted cost base of the shares.
A dissenting shareholder that is a private corporation or a subject
corporation, as those expressions are defined in the Canadian Income Tax Act,
will be liable to pay a 33 1/3% refundable tax under Part IV of the Canadian
Income Tax Act on the redemption proceeds to the extent that they are treated as
a dividend. A private corporation is one that is not public and is not
controlled by one or more public companies and a subject corporation is one that
is not private and is controlled by or for the benefit of one individual or a
related group of individuals.
If the dissenting shareholder is a corporation resident in Canada, the full
amount of the redemption proceeds may be treated as proceeds of disposition with
the result that no dividend will be deemed to have been paid to the shareholder
and any gain or loss realized by the dissenting shareholder will be determined
by reference to the full amount of the redemption proceeds.
Any capital loss arising on the exercise of dissent rights by a corporate
shareholder of Urban Canada will be reduced by the amount of dividends received
or deemed to have been received, including any deemed dividend arising from the
exercise of dissent rights, on the purchased shares where the period of
ownership of the shares was less than 365 days or where the corporate holder
(together with individuals or entities with whom it did not deal at arm's
length) held more than 5% of the issued shares of any class of Urban Canada at
the time the dividends were received or deemed to have been received.
INTEREST EXPENSE
Urban Canada's continuation to Wyoming will not affect the deductibility of
interest incurred on money borrowed to purchase shares of Urban Canada. Interest
that is deductible now will continue to be deductible by the shareholder after
the continuation to Wyoming when paid or payable, depending on the method
regularly followed by the shareholder. Interest will remain deductible only as
long as the shareholder continues to own the shares of Urban Wyoming or uses the
borrowed funds to earn income from a business or property. Compound interest is
deductible only when paid.
COMPANY CONSEQUENCES
Once we have been granted a Certificate of Continuation or similar
constitutional documents from Wyoming, Urban Canada will be deemed to have been
incorporated in Wyoming at that time for purposes of the Canadian Income Tax Act
and will cease to be a resident of Canada.
The "corporate emigration" rules under the Canadian Income Tax Act will
apply upon the continuation of Urban Canada to Wyoming. Accordingly, we will be
deemed to have had a taxation
22
<PAGE>
year ended immediately before being granted a Certificate of Continuation in
Wyoming. Each property owned by us immediately before the deemed year end will
be deemed to have been disposed of for proceeds of disposition equal to that
property's fair market value. Any gains or losses derived from this deemed
disposition of property will be taken into account when determining the amount
of our taxable income for the fiscal period which ends immediately before Urban
Canada's continuation into Wyoming. The amount of any taxable income so
determined will be subject to tax in accordance with the provisions of the
Canadian Income Tax Act.
As of the date of this proxy statement/prospectus, in view of the fair
market value and tax cost of each property owned by us, we do not believe that
Canadian income tax will be payable solely as a result of the deemed disposition
of each of our properties.
We will also be required to pay a special branch tax equal to 5% of the
amount by which the fair market value of our assets exceed the aggregate of our
liabilities, including any liabilities under the Canadian Income Tax Act, and
the paid-up capital of issued and outstanding shares at the time of Urban
Canada's continuation into Wyoming.
As of the date of this proxy statement/prospectus, in view of the fair
market value of our assets, liabilities and the paid-up capital of our issued
and outstanding shares, we do not believe that we will be liable to pay the
special branch tax.
After our continuation into Wyoming, Urban Wyoming will cease to be liable
for Canadian tax on our worldwide income. However, if we carry on business
through a permanent establishment located in Canada, as that expression is
defined in the Canadian-United States Income Tax Convention, we will continue to
be subject to Canadian tax on business profits attributable to the permanent
establishment.
TAX-EXEMPT HOLDERS
After the continuation takes effect, the shares of Urban Wyoming will remain
listed on the Vancouver Stock Exchange which is a prescribed stock exchange for
purposes of the Canadian Income Tax Act. In this way, the shares and warrants
will be qualified investments for a trust governed by a registered retirement
savings plan, deferred profit sharing plan, registered retirement income fund or
registered pension plan, and certain other entities. However, the shares and
warrants would constitute "foreign property" to these trusts and entities for
the purposes of the Canadian Income Tax Act.
Excepting foreign property that constitutes a qualified investment and
property that was not foreign property when acquired but became foreign property
within the preceding two years, trusts and other entities must pay a monthly tax
under the Canadian Income Tax Act equal to 1% of the amount by which the cost
amount of all the trust's foreign property as determined at the end of each
month exceeds the aggregate of:
(a) 20% of the cost amount of all the trust's property; and,
(b) in certain circumstances, an additional amount in respect of the
trust's "small business investment amount."
The result of this rule is that the cost of the shares and warrants of Urban
Wyoming will not be included in the excess foreign property subject to the
monthly tax until two years after the date of the continuation.
HOLDERS THAT ARE ONE OF THE TYPES OF ENTITIES DESCRIBED ABOVE SHOULD CONSULT
THEIR OWN TAX ADVISORS REGARDING THE CONSEQUENCES OF HOLDING SHARES AND WARRANTS
OF URBAN WYOMING.
NON-RESIDENT HOLDERS
The continuation of Urban Canada into Wyoming will not constitute a taxable
event for federal Canadian income tax purposes for holders who are not resident
in Canada for Canadian income tax purposes.
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<PAGE>
Dividends paid by Urban Wyoming to these non-resident holders after our
continuation into Wyoming will no longer be subject to Canadian withholding tax.
INTEREST OF MANAGEMENT IN THE CONTINUATION
No director or senior officer of Urban Canada at any time since the
beginning of our most recently completed financial year, no proposed nominee for
election as a director of Urban Canada and no associate or affiliate of any
person has any material interest, direct or indirect, by way of beneficial
ownership of securities or otherwise, in the continuation, except for any
interest arising from the ownership of shares of Urban Canada where the
shareholder will receive no extra or special benefit or advantage not shared on
a pro-rata basis by all holders of shares in the capital of Urban Canada.
RIGHTS OF DISSENTING SHAREHOLDERS
RIGHT OF DISSENT
The British Columbia Company Act provides that our shareholders are entitled
to exercise dissenter's rights in connection with the continuation. A
shareholder validly exercising its right of dissent is entitled to be paid the
fair value of its shares as determined by agreement between the dissenter and
us. If we cannot agree on the fair value of the shares, the value will be
determined by a court order. In determining the fair value of the dissenter's
shares, the court will consider the value of the shares as of the day before the
date the continuation resolution is passed, including any appreciation or
depreciation in anticipation of the vote. The court may set the price and terms
of the payment and sale or order that they be set by arbitration. The court is
not bound by any single set of evidentiary standards, although the quoted stock
market price is used as an indication of the fair value of the shares.
DISSENT PROCEEDINGS
A dissenting shareholder must follow the appropriate procedures under the
British Columbia Company Act or suffer the termination or waiver of its
dissenter's rights.
A shareholder electing to exercise dissenter's rights must, at least two
days prior to the meeting, perfect its dissenter's rights by demanding in
writing from Urban Canada the appraisal of its common shares of Urban Canada, as
provided in Section 37 of the British Columbia Company Act. A holder who elects
to exercise dissenter's rights should mail or deliver its written demand to
Urban Canada at 1356 Frances Street, Vancouver, British Columbia, Canada V6L
1Y9, Attn: Corporate Secretary. The demand should specify the holder's name and
mailing address, the number of common shares of Urban Canada owned and that the
holder is demanding appraisal of its shares. Only a holder of record of common
shares of Urban Canada, or its representative, is entitled to assert dissenter's
rights for the shares registered in its name.
Section 207 of the British Columbia Company Act applies after a holder of
Urban Canada common shares has given its notice of dissent. If a holder
exercises and perfects dissenter's rights in connection with the continuation
under Section 207, any common shares of Urban Canada affected by those rights
will not be converted into common shares of Urban Wyoming but instead will be
converted into the right to receive the consideration as may be determined in
accordance with Section 207.
If any dissenting shareholder withdraws or loses its right to appraisal, its
shares will be converted into common shares of Urban Wyoming in the continuance.
A shareholder will lose its right to appraisal if it votes in favor of the
continuation.
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<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of December 31, 1994, 1995, 1996, 1997, 1998,
and as of June 30, 1999, for the nine months ended December 31, 1994 and the
years ended December 31, 1995, 1996, 1997 and 1998, are derived from the audited
consolidated financial statements of Urban Canada (the "Consolidated Financial
Statements"), and should be read in conjunction with the Consolidated Financial
Statements and the notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations. The unaudited selected financial
data as of June 30, 1999 and comparative figures as of June 30, 1998 and for the
six months ended June 30, 1999 and June 30, 1998, respectively, have been
prepared by management of Urban Canada. The Consolidated Financial Statements
are expressed in Canadian dollars and were prepared in accordance with Canadian
generally accepted accounting principles, which do not materially differ from
United States generally accepted accounting principles except as explained in
"Consolidated Financial Statements--Note 14." We changed our fiscal year end to
December 31, effective 1994. As a result, amounts reported for fiscal 1994 are
for nine months ended December 31, 1994. Previously, Urban Canada had a fiscal
year ending on March 31.
<TABLE>
<CAPTION>
NINE SIX SIX
MONTHS YEAR YEAR YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
STATEMENT OF OPERATIONS DATA 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 6/30/99 6/30/98
- -------------------------------------- ------------- --------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CANADIAN GAAP
Sales................................. Can.$5,278,230 $4,412,338 $3,458,701 $3,265,317 $7,011,046 $8,263,627 $3,339,969
Cost of sales......................... 4,422,241 3,750,758 3,006,924 3,043,694 5,123,016 5,684,292 2,387,889
------------- --------- --------- --------- ---------- ---------- ---------
Gross margin.......................... 855,989 661,580 451,777 221,623 1,888,030 2,579,335 952,080
Operating expenses.................... 1,031,338 2,218,028 2,874,977 4,263,456 4,154,106 2,869,796 1,905,365
------------- --------- --------- --------- ---------- ---------- ---------
Total operating loss................ Can.$ 175,349 $1,556,448 $2,423,200 $4,041,833 $2,266,046 $ 290,461 $ 953,285
------------- --------- --------- --------- ---------- ---------- ---------
OTHER INCOME/EXPENSES:
Interest expense on debentures........ Can.$ 27,649 $ 21,703 $ -- $ -- $ -- $ -- $ --
Other interest expense................ 10,436 31,578 26,527 10,002 16,347 $ 13,522 $ 8,736
Interest income....................... 3,314 401 29,055 57,146 27,725 15,518 23,910
Miscellaneous income (expense)........ 4,264 113,875 1,341 5,167 3,028 (32,234) 1,696
Foreign exchange gain................. 6,361 72,224 22,604 26,787
Gain (loss) on disposal of capital
assets.............................. -- 18,823 (6,921) 12,584 17,813 4,307 (5,792)
------------- --------- --------- --------- ---------- ---------- ---------
Net loss(1)......................... Can.$ 205,856 $1,476,630 $2,426,252 $3,970,577 $2,341,707 $ 293,788 $ 915,420
------------- --------- --------- --------- ---------- ---------- ---------
------------- --------- --------- --------- ---------- ---------- ---------
Net loss per common share(2).......... Can.$ 0.04 $ 0.23 $ 0.28 $ 0.33 $ 0.17 $ 0.02 $ 0.08
Weighted average number of common
shares outstanding(3)(4)............ 5,544,200 6,345,285 8,779,905 11,868,160 14,037,202 17,228,815 13,850,643
DIFFERENCES TO US GAAP
Loss determined under Canadian GAAP... Can.$ 205,856 $1,476,630 $2,426,252 $3,970,577 $2,341,707 $ 293,788 $ 915,420
Stock compensation expense............ -- -- -- -- 18,607 -- 18,607
Expense (income) relating to product
development costs................... -- 94,604 273,439 39,911 (84,000) 42,000 (42,000)
------------- --------- --------- --------- ---------- ---------- ---------
Loss determined under US GAAP......... Can.$ 205,856 $1,571,234 $2,699,731 $4,010,488 $2,276,314 $ 335,788 $ 892,027
------------- --------- --------- --------- ---------- ---------- ---------
------------- --------- --------- --------- ---------- ---------- ---------
Weighted average number of common
shares outstanding under Canadian
GAAP................................ 5,544,200 6,345,285 8,779,905 11,868,160 14,037,202 17,228,815 13,850,643
Less common shares held in escrow..... 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
------------- --------- --------- --------- ---------- ---------- ---------
Weighted average number of common
shares outstanding under U.S.
GAAP................................ 4,044,200 4,845,285 7,279,905 10,368,160 12,537,202 15,728,815 12,350,643
Net loss per common share under U.S.
GAAP................................ Can.$ 0.05 $ 0.32 $ 0.37 $ 0.39 $ 0.18 $ 0.02 $ 0.07
Shareholders deficit under Canadian
GAAP................................ Can.$ 401,222 $1,877,852 $4,304,104 $8,274,681 $10,616,388 $10,910,176 $9,190,101
Development costs expensed under U.S.
GAAP................................ -- 94,604 368,083 407,994 323,994 365,994 365,994
Employee share purchase loans......... -- -- -- 21,400 -- -- --
Stock compensation.................... -- -- -- -- 18,607 18,607 18,607
------------- --------- --------- --------- ---------- ---------- ---------
Shareholder deficit under U.S. GAAP... Can.$ 401,222 $1,972,456 $4,672,187 $8,704,075 $10,958,989 $11,204,777 $9,574,702
------------- --------- --------- --------- ---------- ---------- ---------
------------- --------- --------- --------- ---------- ---------- ---------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF AS OF
BALANCE SHEET DATA 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 6/30/99 6/30/98
- ------------------------------ ------------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets................ Can.$1,356,012 $1,740,613 $4,046,920 $3,677,130 $ 2,766,317 $ 6,122,289 $3,169,642
Capital assets................ 378,790 321,149 229,552 667,764 834,975 778,896 891,856
Intangible assets............. 150,943 192,155 450,048 634,451 454,099 425,918 623,528
------------- ---------- ---------- ---------- ----------- ----------- ----------
Total assets.............. Can.$1,885,745 $2,253,917 $4,726,520 $4,979,345 $ 4,055,391 $ 7,327,103 $4,685,026
------------- ---------- ---------- ---------- ----------- ----------- ----------
------------- ---------- ---------- ---------- ----------- ----------- ----------
Current liabilities........... 431,636 869,394 681,237 1,204,941 1,696,929 2,845,910 1,633,193
Capital leases and long term
debt........................ 126,233 121,803 54,641 -- 31,915 15,919 --
Debentures.................... 520,000 248,302 -- -- -- -- --
Share capital................. 1,209,098 2,892,270 8,294,746 12,049,085 12,942,935 15,375,450 12,241,934
Accumulated deficit........... (401,222) (1,877,852) (4,304,104) (8,274,681) (10,616,388) (10,910,176) (9,190,101)
------------- ---------- ---------- ---------- ----------- ----------- ----------
Shareholders' equity.......... Can.$ 807,876 1,014,418 3,990,642 3,774,404 2,326,547 4,465,274 3,051,833
Common shares
outstanding(3)(4)........... 5,824,379 7,354,701 10,742,612 13,651,164 15,150,164 18,660,918 13,936,164
</TABLE>
- ------------------------------
(1) The amounts of the net losses are computed in accordance with Canadian GAAP.
The net loss in accordance with U.S. GAAP differs from the amount in the
Consolidated Financial Statements due to the expensing of product
development costs as incurred and the recording of stock compensation on
options and warrants granted to non-employees. Under U.S. GAAP, the net loss
for the years ended December 31, 1995, 1996, 1997 and 1998 were
Can.$1,571,234, Can.$2,699,731, Can.$4,010,488 and Can.$2,498,140,
respectively.
(2) The amounts of net losses per share are computed in accordance with Canadian
GAAP. The net loss per share for Canadian GAAP is calculated including the
1,500,000 common shares held in escrow. Under U.S. GAAP, such common shares
would not be included in the loss per share calculation. Under U.S. GAAP,
the net loss per share for the years ended December 31, 1995, 1996, 1997 and
1998 were Can.$0.32, Can.$0.37, Can.$0.39 and Can.$0.18, respectively.
(3) Does not include 2,412,000 common shares reserved for issuance upon exercise
of outstanding stock options at exercise prices ranging from $0.75 to $1.75
per share as at August 11, 1999, 40,000 common shares reserved for issuance
upon exercise of outstanding warrants at an exercise of Can.$1.15, 914,000
common shares reserved for issuance upon exercise of outstanding warrants at
an exercise price of Can.$0.60 and 1,656,567 common shares reserved for
issuance upon exercise of outstanding warrants at an exercise of Can.$0.75
per share if exercised by May 4, 2000, and then at $0.90 per share until May
4, 2001.
(4) 1,500,000 escrow shares are eligible for release at a rate of one escrow
share released pro rata for each Can.$0.125 of cumulative cash flow from
operations of Urban Canada. Release of these shares from escrow is subject
to approval by the securities regulatory authorities. See "Description of
Urban Canada Capital Stock -- Escrow Shares."
EXCHANGE RATE DATA
The following table sets forth certain exchange rates based on the daily
noon buying rate in New York City for the cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York. Such
rates are set forth as U.S. dollars per Can.$1.00. On August 27, 1999, the
inverse of the noon buying rate was Can.$1.00 per US$0.6702.
<TABLE>
<CAPTION>
FROM TO AVERAGE HIGH LOW
- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
4/1/94 12/31/94 0.7277 0.7457 0.7103
1/1/95 12/31/95 0.7286 0.7527 0.7023
1/1/96 12/31/96 0.7332 0.7513 0.7235
1/1/97 12/31/97 0.7220 0.7487 0.6945
1/1/98 12/31/98 0.6740 0.7105 0.6341
1/1/99 6/30/99 0.6702 0.6891 0.6535
</TABLE>
26
<PAGE>
URBAN CANADA MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We currently produce and market two New Age Beverages. In 1994, we created,
and in 1995 launched, two unique beverage brands, JONES SODA CO., a "premium"
soda, and WAZU, a natural spring water. Prior to the launch of these two Urban
Juice brands, we were solely a regional distributor of licensed and unlicensed
alternative or New Age beverage brands and products in various territories
located in Western Canada.
In connection with transforming our business focus from being solely a
regional distributor of licensed and unlicensed brands and products to being
solely a developer, producer, marketer and distributor of our own brands and
products, we believe our short-term sales growth will be substantially dependent
on our ability to build the JONES SODA CO. brand franchise and expand our
distributor network. We believe that our long-term sales growth will be largely
dependent on the ability to continue to build the quality of our distributor
network for our brands, and to successfully launch new unique beverage brands
and products through that network when the lifecycle of our existing brands and
products warrant doing so.
One of the main reasons for our change in strategic direction was the
potential to earn higher gross margins from the sale of our own unique beverage
brands. We anticipate that gross margins will improve as we increase the volume
of sales of our brands. This increase, we believe, will come from falling
marginal costs as we increases our sales volume.
In order to better align the business operations of Urban Canada and our
wholly-owned subsidiaries, WAZU Products Ltd. will sell assets used in its U.S.
operations to Urban Juice & Soda (USA) Inc. The assets will be sold for proceeds
equal to their fair market value. Urban Juice & Soda (USA) Inc. will assume debt
of WAZU Products Ltd. equal to their fair market value of the U.S. assets. Under
Canadian and US GAAP, this transaction will be treated as a transfer of assets
under common control, and accordingly will be accounted for at historical cost
in a manner similar to a pooling of interests.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
SALES
Total sales increased by Can.$4,923,658 or 147%, from Can.$3,339,969 for the
six months ended June 30, 1998 to Can.$8,263,627 for the six months ended June
30, 1999. The portion of total sales of JONES SODA for the six month period
ending June 30, 1999, was 96.1%, with the balance of 3.9% comprising a
combination of WAZU Natural Spring Water and wearable clothing of JONES SODA.
JONES SODA sales increased 153% from Can.$3,145,996 in 1998 to Can.$7,944,306 in
1999, while sales of WAZU Spring Water and wearables increased 65% from
Can.$193,973 in 1998 to Can.$319,321 in 1999.
Sales of JONES SODA increased year over year due to increased case sales by
existing distributors as well as new distributors that were added in late 1998
and early 1999. As of June 30, 1999, JONES SODA was sold in Western Canada,
Ontario, Nova Scotia, Newfoundland, California, the Pacific Northwest, New York,
New Jersey, Nevada, Arizona, Alaska, Yukon, select regions of New England,
Philadelphia, Ohio, Illinois, Indiana, Michigan, South Dakota, Nebraska,
Alabama, Iowa, Georgia, North Carolina, Florida and Hawaii.
COST OF SALES
Cost of sales, which consists of product and delivery and storage expenses,
increased by Can.$3,296,403, or 138%, from Can.$2,387,889 for the six months
ended June 30, 1998 to Can.$5,684,292 for the six months ended June 30, 1999.
The increase in cost of sales was attributable to the increase in sales year
over year. Cost of goods sold as a percent of sales was 68.8% for the six month
period ending June 30, 1999 compared to 71.5% for the six month period ending
June 30, 1998.
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Delivery and storage was up as a percent of sales due to a wider distribution of
customers to ship primarily from two bottling plants.
GROSS PROFIT
Gross profit increased by Can.$1,627,255, or 171%, from Can.$952,080 for the
six months ended June 30, 1998 to Can.$2,579,335 for the six months ended June
30, 1999. The increase in gross profit reflects the increase in the sales
compared to the same period last year. Gross margin increased from 28.5% for the
six months ended June 30, 1998 to 31.2% for the six months ended June 30, 1999.
The increase in gross margin reflects the lower cost of goods due to volume
efficiencies.
EXPENSES
Total expenses increased by Can.$964,431 or 50.6% from Can.$1,905,365 for
the six months ended June 30, 1998 to Can.$2,869,796 for the six months ended
June 30, 1999. The increase in total expenses for the six month period ended
June 30, 1999 compared to the same period last year is due primarily to an
increase in promotion and selling expenses.
Promotion and selling expenses increased by Can.$681,234, or 60% from
Can.$1,143,503 for the six months ended June 30, 1998 to Can.$1,824,737 for the
six months ended June 30, 1999. Promotion and selling increased year over year
due to the increased amount of distributor programs due to the increased number
of distributors of Jones Soda.
Wages increased Can.$35,662 or 16% from Can.$222,431 for the six months
ended June 30, 1998 to Can.$258,093 for the six months ended June 30, 1999 due
to increased costs to serve a much larger sales force and distributor base.
Professional fees increased Can.$98,311 or 236% from Can.$41,645 for the six
months ended June 30, 1998 to Can.$139,956 for the six months ended June 30,
1999 and consulting fees increased Can.$79,312, or 87.5% from Can.$90,606 for
the 1998 period to Can.$169,818 in the 1999. The increase in professional and
consulting fees is attributable to increased legal and accounting fees
associated with our lawsuit against Tastemaker as well as our re-incorporation
into the United States.
OTHER INCOME (EXPENSES)
Other income (expense) was Can.$(3,327) for the six months ended June 30,
1999 compared to other income of Can.$37,865 for the six months ended June 30,
1998. Other expense for the six months ended June 30, 1999 consisted mainly of
miscellaneous expense incurred to destroy old product and associated with the
Tastemaker lawsuit and interest expense on our Operating Line of Credit,
partially offset by foreign exchange gains and interest income earned on cash
deposits.
NET INCOME (LOSS)
Our net loss decreased by Can.$621,632 or 68% from Can.$(915,420) for the
six months ended June 30, 1998 to Can.$(293,788) for the six months ended June
30, 1999. As a percentage of total sales, the net loss decreased from 27.4% for
the period ended June 30, 1998 to 3.6% for the period ended June 30, 1999. The
improvement is due to a higher level of sales as well as improved gross margins.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998.
Net cashflow from operating activities for the six-month period ending June
30, 1999 was Can.$(1,287,687) compared to Can.$(1,380,668) for the same period
in 1998. The Company invested in sales, marketing and administrative expenses to
increase the Company's distributor network and promote the Company's lead brand,
Jones Soda. Net cashflow from financing activities in 1999 was Can.$2,106,919
compared to Can.$151,098 in 1998. During the period ending June 30, 1999, the
Company closed a Private Placement of Can.$2,432,515. Cash and cash equivalents
increased for the six-month period ending June 30, 1999 to Can.$1,110,502 from
Can.$136,902 in 1998.
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The current ratio of the Company's balance sheet as at June 30, 1999 was
2.15 compared to 1.94 as at June 30, 1998. Working capital as at June 30, 1999
was Can.$3,276,379 compared to Can.$1,536,449 for the same time last year.
Inventory was Can.$1,652,362 as at June 30, 1999 compared to Can.$1,524,953 for
the same time last year, and for 1999 included raw materials of Can.$643,249,
WAZU finished goods of Can.$5,749 and Jones Soda finished goods of approximately
Can.$934,759. Wearables and point of sale materials of Can.$68,605 made up the
remaining inventory balance.
We announced on May 4, 1999 that we had closed our Private Placement in the
amount of Can.$2,484,850. The purpose of this financing was to finance the
growth of the brand in 1999.
INVESTOR RELATIONS
During the period ending June 30, 1999, we completed all investor relations
activities in-house. We sent out copies of news or press releases, our corporate
brochure, and communicated to shareholders with a monthly newsletter. As
in-house activities, there are no material expenses associated with investor
relations.
LITIGATION
On February 19, 1997, we filed a Statement of Claim in the British Columbia
Supreme Court (URBAN JUICE & SODA COMPANY LTD. V. HERCULES INCORPORATED ET AL.)
The named defendants were Tastemaker, Tastemaker Canada Inc., Hercules
Incorporated and Mallinckrodt Inc. Givaudan Roure Flavors Corporation, by
agreement dated March 31, 1997, assumed the United States liabilities of
Tastemaker, and on August 6, 1997 was substituted as the defendant in place of
Mallinckrodt Inc., carrying under the name and style of Tastemaker, Hercules
Incorporated, and Tastemaker. Thus, the defendants in the action are now
Givaudan Roure Flavors Corporation and Tastemaker Canada, Inc. The trial date is
set for March 2000. Tastemaker and its affiliated companies, were the flavor
houses that created the concentrate for the original line of flavors for JONES
SODA CO. We are seeking damages in excess of Can.$1,000,000 against the
defendants for failing to design and produce concentrate in accordance with our
specifications.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
In November 1998, we upgraded new billing, accounting and administrative
systems which are now fully operational and which have been represented to be
fully Year 2000 compliant. Failures of our internal systems could temporarily
prevent us from processing orders, issuing invoices, manufacturing and
developing products and could require us to devote significant resources to
correcting resulting problems. We have tested all of our desktop computers for
Year 2000 compliance with Year 2000 compliance testing software. All of our
desktop units are Year 2000 compliant. We have received written assurances from
the manufacturers of the computers used in our co-packing facilities that all of
their computers are Year 2000 compliant. We are addressing our embedded systems
on a prioritized piece-by-piece basis.
In seeking Year 2000 status reports from our suppliers and distributors, we
sent out an initial mailing of 200 questionnaires to all of our suppliers and 50
questionnaires to our distributors. To date, we have received 99 responses from
suppliers and 34 responses from distributors. All responses describe Year 2000
compliance by those suppliers and distributors. With the growth of the business
and increase in the number of distributors of our product, we sent out a
subsequent mailing to 100 additional distributors which either replaced former
distributors or which were new territory distributors.
Of our suppliers and distributors, we have identified 12 suppliers and 15
distributors which we consider material third-parties to our business based on
the volume of business and potential impact on our business these third-parties
could have. As of September 30, 1999, we have received satisfactory
questionnaire responses from 11 of the 12 material suppliers and 9 of the 15
material distributors. We expect to receive the remaining responses from
material third parties by mid-November 1999.
29
<PAGE>
Among all of our suppliers and distributors, only two suppliers have been
identified as being irreplaceable and these two suppliers have verbally assured
us of their Year 2000 compliance. For all of our other suppliers, we have
identified back-up suppliers that we can readily access in the event of Year
2000 problems by our current suppliers. We can also readily access replacement
distributors for any of our major distributors in the event of Year 2000
problems on their part.
If our customers are not Year 2000 compliant, they may experience material
costs to remedy problems, may face litigation costs and may delay purchases of
our products. As a result, our business, financial condition and results of
operations could be seriously harmed. If our suppliers, particularly our
contract packers, are not Year 2000 compliant, they may experience material
costs to remedy problems, may face litigation costs and may delay production of
our products. As a result, our business, financial condition and results of
operations could be seriously harmed. We have funded our Year 2000 plan from
cash balances. As of June 11, 1999, we have spent Can.$60,000 to address the
Year 2000 problem, primarily on new computer software. We will incur
approximately another Can.$10,000 in costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance
and software. In addition, we may experience material problems and costs with
Year 2000 compliance that could seriously harm our business, financial condition
and results of operations. We have begun to develop a contingency plan to
address situations that may result if we are unable to achieve Year 2000
readiness of our critical operations. The cost of developing and implementing
this plan may itself be significant. Finally, we are also subject to external
forces that might generally affect industry and commerce, such as utility or
transportation company interruptions caused by Year 2000 compliance failures.
RESULTS OF OPERATIONS
By March 1995, Urban Canada made a strategic decision to focus time and
resources on our own internally developed brands. This shift in business focus,
combined with changes in consumer trends, resulted in a decline in the sales of
other companies' beverage brands by us. By year-end 1998, we distributed only
our own internally-developed brands and did not distribute the licensed or
unlicensed brands of any third parties. The percentage of our total sales
derived from the distribution of licensed and unlicensed brands was .3% in 1997,
28% in 1996 and 86% in 1995. As we complete the shift from being a distributor
of licensed and unlicensed brands to a developer, producer, marketer and
distributor of our own brands, our gross margins will continue to increase. Our
gross margins increased from 13.1% in 1996 to 17.6% in 1997 and 26.9% in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
SALES
Total sales increased by Can.$3,745,729 or 115%, from Can.$3,265,317 for the
year ended December 31, 1997 to Can.$7,011,046 for the twelve months ended
December 31, 1998. Sales of Jones Soda increased year over year due to increased
case sales by our 30 existing distributors as well as 70 new distributors that
were added in 1998. Of the increase in sales, Can.$2,259,252 is attributable to
the new distributors added in 1998. As of December 31, 1998, Jones Soda was sold
in Western Canada, Ontario, Nova Scotia, Newfoundland, California, the Pacific
Northwest, New York, New Jersey, Nevada, Arizona, Alaska, Yukon, select regions
of New England, Philadelphia, Ohio, Illinois, Indiana, Michigan, South Dakota,
Nebraska, Georgia, North Carolina and Florida.
COST OF SALES
Cost of sales, which consists of product and delivery and storage expenses,
increased by Can.$2,079,322, or 68.3%, from Can.$3,043,694 for the twelve months
ended December 31, 1997 to Can.$5,123,016 for the twelve months ended December
31, 1998. The increase in cost of sales was attributable to the increase in
sales for Urban Canada year over year.
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<PAGE>
1997 cost of sales includes a Can.$353,797 write-down of inventory. The
write-down relates to goods acquired in 1996 which were determined to be
unsaleable due to improper concentrate levels and labels which did not meet
regulatory requirements.
GROSS PROFIT
Gross profit increased by Can.$1,666,407, or 752%, from Can.$221,623 for the
twelve months ended December 31, 1997 to Can.$1,888,030 for the twelve months
ended December 31, 1998. The increase in gross profit reflects the increase in
the sales compared to the same period last year. Gross margin increased from
6.8% for the twelve months ended December 31, 1997 to 26.9% for the twelve
months ended December 31, 1998. The increase in gross margin reflects the lower
cost of goods due to the volume increases and efficiencies incurred with the
production of the Jones Soda brand.
EXPENSES
Total expenses decreased by Can.$109,350 or 3% from Can.$4,263,456 for the
twelve months ended December 31, 1997 to Can.$4,154,106 for the twelve months
ended December 31, 1998. The decrease in total expenses for the twelve month
period ended December 31, 1998 compared to the same period last year is due
primarily to a reduction in office, administration and bad debt expenses,
partially offset by a slight increase in promotion, selling and wage expenses.
Total expenses include a Can.$102,871 write-down of intangible assets. The
write-down relates to advertising services which were paid for in advance, and
in June 1998 the marketing contract to which those services related was
cancelled and the services were not going to be provided to us. We appropriately
wrote-off the balance.
Office and administration expenses decreased by Can.$184,863, or 23.3% from
Can.$794,204 in 1997 to Can.$609,341 in 1998. The decrease is attributable to a
strict review of costs and consequent reduction in insurance costs, office
supplies, rent, and public company expenses.
Bad debt expense improved in 1998 by Can.$379,905 from 1997. Bad debt
expense as a percent of sales was 1.2% in 1998, compared to 14.2% in 1997. The
improvement in bad debt experience is due to an increasingly stronger
distributor network, combined with strict controls put into place to manage the
credit risk.
Promotion and selling expenses increased by Can.$110,421 or 5.2% from
Can.$2,111,116 for the twelve months ended December 31, 1997 to Can.$2,221,537
for the twelve months ended December 31, 1998. Promotion and selling was
relatively consistent year over year, however the allocation in 1998 was
directed more heavily on building our sales team and initiating various
marketing programs with our distributor network.
Wages and commissions increased Can.$82,671 or 22.5% from Can.$366,137 for
the twelve months ended December 31, 1997 to Can.$448,808 for the twelve months
ended December 31, due to increased costs to serve a much larger sales force and
distributor base.
The amortization increase from December 31, 1997, to December 31, 1998, was
due to increased purchase of capital assets, such as coolers and computer
equipment, and the consequent increase in depreciation expense of these assets.
OTHER INCOME (EXPENSES)
Other expense was Can.$75,631 for the twelve months ended December 31, 1998
compared to income of Can.$71,256 for the twelve months ended December 31, 1997.
Other expense for the twelve months ended December 31, 1998 consisted mainly of
losses caused by changes in foreign exchange rates.
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<PAGE>
NET LOSS
Our net loss decreased by Can.$1,628,870 or 41% from Can.$3,970,577 for the
twelve months ended December 31, 1997 to Can.$2,341,707 for the twelve months
ended December 31, 1998. As a percentage of total sales, the net loss decreased
from 121.5% for the year ended December 31, 1997 to 33.4% for the year ended
December 31, 1998. The improvement is due to a higher gross margin based on a
higher level of sales and a relatively consistent level of expenses.
LIQUIDITY AND CAPITAL RESOURCES
1998 expenses includes a Can.$102,871 write-down of intangible assets. The
write-down relates to advertising services which were paid for in advance, and
in June 1998, the marketing contract to which those services related was
cancelled and the services were not going to be provided to us. We appropriately
wrote-off the balance to operating expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net cashflow from operating activities in 1998 was Can.$(2,098,030) compared
to Can.$(3,060,716) for the year ended December 31, 1997. The Company invested
in sales, marketing and administrative expenses, to increase the Company's
distributor network and promote the Company's lead brand, Jones Soda. Net
cashflow from financing activities in 1998 was Can.$884,319 compared to
Can.$3,687,083 in 1997. During 1998 and 1997, the company raised capital through
the issuance of commons shares. Net cashflow from investing activities for the
year ended December 31, 1998 was Can.$424,992 compared to Can.$807,785 in 1997.
In each of these years the Company invested in dedicated Jones Soda cooler
equipment and also invested in trademarking of Jones Soda and its various
slogans and design work. Cash and cash equivalents decreased to Can.$336,983 in
1998 from Can.$1,666,086 in 1997.
The current ratio of our balance sheet as at December 31, 1998 was 1.63
compared to 3.05 as at December 31, 1997. Working capital as at December 31,
1998 was Can.$1,069,388 compared to Can.$2,472,189 as at December 31, 1997.
Inventory was Can.$823,514 as at December 31, 1998 compared to Can.$1,090,699 as
at December 31, 1997, and for 1998 included raw materials of approximately
Can.$383,280, WAZU finished goods of Can.$8,813 and JONES SODA finished goods of
approximately Can.$375,518. Wearables and point of sale materials of Can.$55,903
made up the remaining inventory balance. The level of inventory is lower in 1998
than in 1997 even with higher sales levels due to better management of the JONES
SODA inventory. We are currently planning approximately Can.$200,000 of capital
expenditures, specifically 100,000 for a 34 foot marketing recreational vehicle
and $100,000 for 100 coolers. The source of funds for these capital expenditures
will be from operating cashflow and/or capital lease arrangements.
We have an authorized operating line of credit in the amount of
US$1,000,000. Security for the operating line of credit includes accounts
receivable, inventory and other assets, including our brand trademarks. We have
covenants in place, including current ratio, a minimum tangible net worth and
maximum quarterly losses. As of today's date, we are in compliance with the
covenants. In addition as of today's date, the balances drawn on the operating
line of credit are nil.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net cashflow from operating activities in 1997 was Can.$(3,060,716) compared
to Can.$(2,871,216) for the year ended December 31, 1996. We invested in the
primary launch of JONES SODA in each of these years. Net cashflow from financing
activities in 1997 was Can.$3,687,083 compared to Can.$5,095,103 in 1996. During
1997 and 1996, we raised capital through the issuance of common shares and with
the purpose of financing the launch and growth of JONES SODA. Net cashflow from
investing activities for the year ended December 31, 1997 was Can.$807,785 in
1997 compared to Can.$372,663 in 1996. In each of these years, we invested in
dedicated JONES SODA cooler equipment and also invested in trademarking JONES
SODA and its various slogans and design work. Cash and cash equivalents
decreased to Can.$1,666,086 in 1998 from Can.$1,847,504 in 1997.
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<PAGE>
The current ratio of our balance sheet as at December 31, 1997 was 3.2
compared to 5.9 as at December 31, 1996. Working capital as at December 31, 1997
was Can.$2,472,189 compared to Can.$3,365,683 as at December 31, 1996. Inventory
as at December 31, 1997 was Can.$1,090,699 compared to Can.$899,102 as at
December 31,1996, and for 1997 included raw materials of approximately
Can.$375,380, WAZU finished goods of Can.$88,852 and JONES SODA finished goods
of approximately Can.$644,467.
SALES
Total sales decreased by Can.$193,384, or 5.6%, from Can.$3,458,701 for the
twelve months ended December 31, 1996 to Can.$3,265,317 for the twelve months
ended December 31, 1997. Sales of our own brands increased Can.$764,270, or
30.7% from Can.$2,492,557 for the twelve months ended December 31, 1996 to
Can.$3,256,827 for the twelve months ended December 31, 1997. Our sales of
licensed and unlicensed brands decreased 99% from 1996 to 1997. This is
consistent with our focus in 1997 on being a manufacturer, marketer and
distributor of our own brands and products, Jones Soda and WAZU Natural Spring
Water, in select markets in North America.
COST OF SALES
Cost of sales, which consists of product and delivery and storage expenses,
increased by Can.$36,770, or 1.2%, from Can.$3,006,924 for the twelve months
ended December 31, 1996 to Can.$3,043,694 for the twelve months ended December
31, 1997. The increase in cost of sales was primarily attributable to the
inventory write-down of Can.$353,797, offset by a lower average cost of product
for our brands in 1997 compared to the average cost of product for our licensed
and unlicensed brands and our own brands in 1996. Delivery and storage costs
were lower compared to the same period last year due primarily to better terms
from suppliers for shipping and warehousing.
We wrote down inventory of Can.$353,797 in 1997. We filed a Statement of
Claim in February 1997 against Tastemaker, the flavor house that designed the
original flavor concentrates in 1995-96 for Jones Soda. We are claiming damages
for product that failed to meet certain flavor stability and performance
standards. We are seeking damages for inventory and other costs in excess of
Can.$1,000,000 from Tastemaker.
GROSS PROFIT
Gross profit decreased by Can.$230,154, or 50.9%, from Can.$451,777 for the
twelve months ended December 31, 1996 to Can.$221,623 for the twelve months
ended December 31, 1997. The decrease in gross profit reflects the overall
increase in the cost of sales compared to the same period last year. Gross
margin decreased from 13.1% for the twelve months ended December 31, 1996, to
6.8% for the twelve months ended December 31, 1997. The decrease in gross margin
reflects the focus on our own brands in 1997 and the decreased emphasis on the
sale of unlicensed and licensed brands.
EXPENSES
Total expenses increased by Can.$1,388,479, or 48.3%, from Can.$2,874,977
for the twelve months ended December 31, 1996 to Can.$4,263,456 for the twelve
months ended December 31, 1997. Expenses for the twelve month period ended
December 31, 1997 included advertising credits, (non-cash marketing expenses) of
Can.$842,794 compared to nil for the twelve month period ending December 31,
1996.
The increase in total expenses for the twelve months ended December 31, 1997
compared to the twelve months ended December 31, 1996 was attributable to higher
advertising and promotion expenses incurred to launch, promote and sell our own
brands and products in two of our key markets in the United States, partially
offset by lower wages and commission expense. Advertising and promotion
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<PAGE>
expenses, including the advertising credits, increased by Can.$803,440 or 61.4%
from Can.$1,307,676 for the twelve months ended December 31, 1996 compared to
Can.$2,111,116 for the twelve months ended December 31, 1997.
Office and general administrative expenses increased by Can.$309,136, or
63.7%, from Can.$485,068 for the twelve months ended December 31, 1996 to
Can.$794,204 for the twelve months ended December 31, 1997, as a result of
higher insurance costs, public company expenses and additional offices.
Bad debt expense increased by Can.$324,170, or 232.7%, from Can.$139,301 for
the twelve months ended December 31, 1996 to Can.$463,471 for the twelve months
ended December 31, 1997, due primarily to a write-down of an account receivable
of Can.$275,000 owed by the Company's distributor in New York City.
Wages and commissions decreased by Can.$225,517, or 38.1%, from Can.$591,654
for the twelve months ended December 31, 1996 to Can.$366,137 for the twelve
months ended December 31, 1997.
Consulting fees increased by Can.$94,420, or 131.1%, from Can.$72,006 for
the twelve months ended December 31, 1996 to Can.$166,426 for the twelve months
ended December 31, 1997 as certain of our sales people acted in consulting
capacities. Professional fees increased by Can.$94,139, or 174.8%, from
Can.$53,869 for the twelve months ended December 31, 1996 to Can.$148,008 for
the twelve months ended December 31, 1997. Professional fees increased in 1997
due to our having to complete regulatory filings with the United States
Securities and Exchange Commission.
OTHER INCOME (EXPENSES)
Other income (expenses) was Can.$(3,052) for the twelve months ended
December 31, 1996 compared to Can.$71,256 of income, for the twelve months ended
December 31, 1997. Other income (expenses) for the twelve months ended December
31, 1997 consists mainly of interest income earned on the Company's short term
marketable securities.
NET LOSS
Our net loss increased by Can.$1,544,325, or 63.6% from Can.$2,426,252 for
the twelve months ended December 31, 1996 to Can.$3,970,577 for the twelve
months ended December 31, 1997. As a percentage of total sales, the net loss
increased from 70.1% to 121.6%.
PRODUCT DEVELOPMENT COSTS
Product development costs (before amortization) as of December 31, 1997
included Can.$63,817 (December 31, 1996--Can.$433,160 and December 31,
1995--Can.$80,558) expended on the JONES SODA CO. project and Can.$0.00
(December 31, 1996--Can.$23,408 and December 31, 1995--Can.$17,586) expended on
the WAZU project. Approximately $250,000 was paid to Orpheus Consulting Ltd. to
complete the flavor development for JONES SODA CO., establish production,
operation and quality control procedures, initiate a raw material inventory
handling and monitoring system, negotiate with raw material suppliers,
transportation companies and independent warehouses, and review our distribution
agreements with some of its major customers. The balance was expended on artwork
and design of JONES SODA CO. and WAZU labels and packaging, posters, point of
sale materials, and presentation boards.
QUARTERLY OPERATING RESULTS; SEASONALITY
The following table sets forth the case sales of our internally developed
brands and licensed and unlicensed brands for the most recent thirteen quarters.
The quarterly case sales reflect, in our opinion, all adjustments necessary to
present the results of operations for such periods which include only
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normal recurring adjustments. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING DATA (IN CASES SOLD):
JONES SODA CO. and WAZU brands........................ 20,061 64,519(1) 73,786 31,653
Licensed brands....................................... 13,006 20,730 5,055 2,247
Unlicensed brands..................................... 4,509 3,035 1,618 15
----------- ----------- ------ ------
Total............................................... 37,576 88,284 80,459 33,915
----------- ----------- ------ ------
----------- ----------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING DATA (IN CASES SOLD):
JONES SODA CO. and WAZU brands........................ 17,783(2) 102,635 61,364 27,668
Licensed brands....................................... 30 20 9 9
Unlicensed brands..................................... -- -- -- --
----------- ----------- ------ ------
Total............................................... 17,813 102,655 61,373 27,677
----------- ----------- ------ ------
----------- ----------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (IN CASES
SOLD):
JONES SODA CO. and WAZU
brands................... 86,218 125,358 128,762 97,129 170,143 335,124
Licensed brands............ -- -- -- -- -- --
Unlicensed brands.......... -- -- -- -- -- --
----------- ----------- ------------- ------ ----------- ------------
Total.................... 86,218 125,358 128,762 97,129 170,143 335,124
----------- ----------- ------------- ------ ----------- ------------
----------- ----------- ------------- ------ ----------- ------------
</TABLE>
- ------------------------
(1) Includes case sales of 15,229 which represent a recovery on account of
certain production deficiencies which we believe were in the normal course
of business. The supplier of bottle caps incorrectly produced the wrong
color of caps, which were utilized in a production run of 15,229 cases. From
an image/marketing perspective, the product was deemed unfit for sale in the
marketplace and these 15,299 cases were sold back to the supplier pursuant
to the terms of the supply contract.
(2) Case sales decreased during the first quarter of 1997 due to a production
delay in connection with the launch of five new JONES SODA CO. flavors. We
did not begin shipping these products until February when the new flavors
came off the production line. At this time, we also changed our concentrate
manufacturer from Tastemaker to Pro Liquitech due to Tastemaker's inability
to meet industry standards for flavor stability and performance.
We have experienced significant fluctuations in quarterly results that have
been the result of many factors, including the following: the addition or
deletion of certain licensed brands to our distribution portfolio; the shift in
our business focus from being solely a regional distributor of licensed and
35
<PAGE>
unlicensed brands and products to being solely a developer, producer, marketer
and distributor of our internally developed brands and products; the seasonal
demand for beverages; and competition and general economic conditions. Due to
these and other factors, our results of operations have fluctuated from period
to period. As a result, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as any indication of future performance.
Like many other companies in the beverage industry, we generate a
substantial percentage of our revenues during the warm weather months of April
through September. We believe that the demand for our products will reflect such
seasonal consumption patterns. While we expand our distribution network and
increase its market penetration, however, such seasonality may not be easily
discernible from our results of operations. Due to all of the foregoing factors,
our operating results in a particular quarter may fail to meet market
expectations. See Item 1. "Description of Business--Seasonality."
U.S. GAAP RECONCILIATION
Our Consolidated Financial Statements have been prepared by our management
in accordance with Canadian GAAP. Such Consolidated Financial Statements vary in
certain significant respects from accounting principles generally accepted in
the United States. Application of accounting principles generally accepted in
the United States would have affected net loss and net loss per share
calculations as disclosed in Note 14 to the Consolidated Financial Statements.
The amounts of net loss and net loss per share are computed in accordance with
Canadian GAAP. The net loss in accordance with U.S. GAAP differs from the amount
in the Consolidated Financial Statements due to the expensing of product
development costs as they are incurred. The net loss and net loss per share in
accordance with U.S. GAAP for the year ended December 31, 1998 were $2,276,314
and $0.18 per share, respectively.
URBAN CANADA BUSINESS
URBAN CANADA
Urban Canada develops, produces, markets and distributes "alternative" or
"New Age" beverages. In 1994 we created, and in 1995 launched, two unique
beverage brands, JONES SODA CO., "a traditional 90's soda," and WAZU, a natural
spring water.
Our business strategy is to increase sales by expanding distribution of our
internally developed brands in new and existing markets, stimulating consumer
trial of our products and increasing consumer awareness of, and brand loyalty
to, our unique brands and products. Key elements of our business strategy
include:
- the creation of strong distributor relationships;
- stimulating strong consumer demand for our existing brands and products
throughout Canada and the United States; and
- ongoing development of unique alternative beverage brands and products.
The premise underlying our business strategy is that the success of any
alternative or New Age beverage brand will, in large part, be determined by its
brand image. Moreover, due to the limited life cycle of beverages in the
alternative or New Age category of the beverage industry, we believe that the
ongoing process of creating new brands, products and product extensions will be
an important factor in our long-term success.
Beginning in March, 1995, our business has shifted from being solely a
regional distributor of licensed and unlicensed brands and products to being
solely a developer, producer, marketer and distributor of our internally
developed brands and products. During this period we have also
36
<PAGE>
reorganized and strengthened our senior management team. Sales of our unique
brands have increased from 1995 through 1998, as follows:
- from $634,625 for the year ended December 31, 1995 to $2,492,557 for the
year ended December 31, 1996, for an increase of $1,857,932 or 293%;
- from $2,492,557 for the year ended December 31, 1996 to $3,256,827 for the
year ended December 31, 1997, for an increase of $764,270, or 30.7%; and
- from $3,256,827 for the year ended December 31, 1997 to $7,011,046 for the
year ended December 31, 1998, for an increase of $3,754,219 or 115.3%.
We use contract packers to prepare, bottle and package Urban Canada's
internally developed products, continually reviewing our contract packing needs
in light of regulatory compliance and logistical requirements. Currently, our
primary contract packers are located in Burnaby, British Columbia and
Elizabethtown, Kentucky. Substantially all of the raw materials used in the
preparation, bottling and packaging of our products are purchased by us or by
our contract packers in accordance with our specifications.
We arrange with independent trucking companies to have product shipped from
various contract packers to independent warehouses. From such independent
warehouses, we deliver our products through independent trucking companies to
our distributors. Distributors sell and deliver our products either to
sub-distributors or directly to retail outlets, and such distributors or
sub-distributors stock the retailers' shelves with our products.
CORPORATE STRUCTURE
The following outlines our current organizational structure:
[LOGO]
WAZU Products Ltd. is the entity through which Urban Juice generates the
majority of our revenues. WAZU Products was incorporated on March 6, 1987
pursuant to the laws of Alberta under the name Urban Hand Limited. On July 2,
1991, WAZU Products continued pursuant to the laws of British Columbia under the
name Urban Hand Enterprises Limited. On February 20, 1995, WAZU Products changed
its name to its current name.
Zip City Distribution Co. Vancouver Ltd. previously distributed licensed and
unlicensed beverage products in the Vancouver, British Columbia market. Zip City
was incorporated in British Columbia on May 31, 1991 and was acquired by WAZU
Products Ltd. in June 1993. In April 1995, Zip City changed its name to its
current name from its previous name, Southpines Juice & Soda Company Inc. Zip
City no longer distributes beverage products and is currently inactive.
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<PAGE>
Vancouver Island Beverage Company Ltd. previously operated as distribution
arm for Urban Juice on Vancouver Island. By December 1994, the operations of
this company were reorganized in order to take advantage of efficiencies at both
Zip City and WAZU Products. This company was incorporated in British Columbia on
March 31, 1992 and is currently inactive.
Urban Juice & Soda (USA) Inc. was incorporated in the State of Washington on
August 3, 1995, and currently conducts minimal business activities.
COMPANY BACKGROUND
We were incorporated on December 23, 1986, under the British Columbia
Company Act under the name 2072 Investment Ltd. On September 25, 1987, we
changed our name to Republic Aircraft Manufacturing Corporation. On June 9,
1992, we changed our name to International Republic Aircraft Manufacturing
Corporation and finally to our present name on May 26, 1993.
The genesis of our business dates back to March 1987 when Peter M. van Stolk
founded Urban Hand Limited ("Urban Hand") in Edmonton, Alberta. In September
1987, Urban Hand began marketing and distributing Just Pik't Juices, a patented
line of fresh squeezed juices, for all of Western Canada. In 1989, Urban Hand
moved its principal place of business from Edmonton to Calgary, Alberta and in
1990, it moved its principal place of business from Calgary to Vancouver,
British Columbia. By the end of 1991, Urban Hand had become the leading
distributor on a per capita basis for Just Pik't Juices in North America. In
1992, Urban Hand began to implement an aggressive plan to acquire the
distribution rights to a full-line of complementary alternative or New Age
beverage brands.
In 1992, Urban Hand acquired the exclusive distribution rights to Thomas
Kemper Sodas, hand crafted brewed soda products, for all of Canada. In May 1993,
Urban Hand was acquired by International Republic Aircraft Manufacturing
Corporation, with a mandate to acquire distribution companies, acquire rights to
additional alternative or New Age beverages, and to create, manufacture and
distribute one or more internally developed beverage brands. In June 1993, we
acquired Southpines Juice & Soda Company, Inc. (since renamed Zip City), a
beverage distribution company serving the greater Vancouver and Whistler areas
of British Columbia. In September 1993, we acquired Vancouver Island Beverage
Company Ltd., a full-line beverage distribution company serving southern
Vancouver Island. By acquiring our own distribution and our own trucks, we
gained more control over our distribution system and assured our access to
retailers for our line of licensed products. In September 1993, we acquired the
exclusive distribution rights to AriZona Iced Teas for Western Canada. By early
1994, we had also acquired the exclusive distribution rights to all of Canada
(except Quebec) for the West End Soda Brew line of products.
By the end of 1994, we had established our business as a full-line beverage
distribution company focusing on the distribution of alternative beverage
products in Western Canada. During 1994, we simultaneously completed the
creation of two internally developed products and began work on the creation of
a third internally developed product. In March 1995, coinciding with the
accelerating demand for bottled water, we launched our first unique brand, WAZU,
a natural spring water. In November 1995, we launched our second trademarked
brand, JONES SODA CO.
During this period, we had also been selling AriZona Iced Teas in the
Western Canadian market. By March 1995, however, we had made a strategic
decision to focus our time and resources on our own brands. Because the AriZona
Iced Tea relationship required a high degree of managerial time and resources,
and because of certain other factors, we sold our rights to distribute AriZona
Iced Teas to another independent Vancouver, British Columbia based distributor.
In April 1995, we acquired the rights to Lahaina Iced Teas and Lemonades,
ready-to-drink teas. In May 1995, we acquired the rights to distribute Odwalla,
all natural fresh fruit and vegetable-based beverages. In order to increase our
business focus on our own brands, however, we discontinued the distribution of
Odwalla in February 1996, Lahaina Iced Teas and Lemonades in May 1996, Thomas
Kemper Sodas in
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<PAGE>
September 1996, West End Soda Brews in October 1996, and Just Pik't Juices in
December 1996. We no longer sell licensed or unlicensed brands nor operate as a
beverage distributor.
THE ALTERNATIVE OR NEW AGE BEVERAGE INDUSTRY
JONES SODA CO. and WAZU, which are classified as New Age or alternative
beverages, as well as other unique brands and products that we may develop in
the future, compete with beverage products of all types, including soft drinks,
beer, fruit juices and drinks, bottled water, wine and spirits.
In its annual beverage market survey for calendar year 1998, Beverage World
magazine estimated that the New Age or alternative beverage markets grew 12.6%
over 1997, to approximately $7.73 billion in total sales.
New Age or alternative beverages are distinguishable from mainstream
carbonated soft drinks in that they tend to contain less sugar, less
carbonation, and natural ingredients. As a general rule, three criteria have
been established for such a classification: (1) relatively new introduction to
the market-place; (2) a perception by consumers that consumption is healthful
compared to mainstream carbonated soft drinks; and (3) the products use natural
ingredients and flavors. According to Beverage Aisle magazine (January 1998
issue), the New Age or alternative beverage category consists of the following
segments:
- Retail polyethylene terephthalate (PET) bottled waters
- Ready-to-drink (RTD) teas
- Single-serve fruit beverages
- Sports drinks
- Sparkling water
- Premium Sodas
- RTD Coffees
- All Others
BUSINESS STRATEGY
After witnessing the proliferation of hundreds of new ready-to-drink tea
brands during the first half of 1995, we anticipated what we believed to be a
peak in the product life cycle for this segment of the New Age beverage category
and decided to launch our trademarked brand, JONES SODA CO., which we believed
was creating a new category and offering distributors something new to sell. In
its January 1998 issue, Beverage Aisle magazine renamed the all-natural soda
segment as the premium soda segment and cited JONES SODA CO. as an example of a
beverage in this category. Thus, we believe that the JONES SODA CO. brand and
product line have helped to create a new segment in the New Age or alternative
beverage industry.
Utilizing creative but relatively low cost marketing and brand promotion
techniques, we are currently focused on building a strong distributor network
for our lead brand, JONES SODA CO., and its complementary brand, WAZU. We
believe that our experience as a distributor of licensed and non-licensed New
Age beverage brands has given, and will continue to give, our company
credibility in connection with its efforts to build a quality network of
independent distributors. Moreover, we believe that our first hand experience
watching other companies' fortunes rise and fall with a single New Age beverage
brand has been incorporated into our business strategy. Five New Age beverage
brands, including Sundance, New York Seltzer, Koala Springs, Clearly Canadian
and Snapple, have each achieved a minimum of $100,000,000 in revenues. Each of
these brands were the first brands in a new segment of the New Age beverage
category and each brand had a certain fashion or trend component. For instance,
Koala Springs increased sales at a time when Australia was popular as a travel
39
<PAGE>
destination. In developing the JONES SODA CO. brand, we believe we have created
a leading brand in the premium soda segment of the New Age beverage category and
have marketed the product with a distinct fashion component. The fashion
component includes black and white labels, which is representative of current
overall fashion trends. See "Products--Proprietary Brands--JONES SODA CO." We
believe we will be ready to launch new unique brands, products and/or product
extensions through our then-existing distributor network if and when the
consumer demand for JONES SODA CO. and/or WAZU brands or products begins to
decline.
Our business strategy is to attempt to increase sales by expanding product
distribution in new and existing markets, stimulating consumer trial of our
products and increasing consumer awareness of and brand loyalty to our unique
brands and products. We believe that products in the New Age beverage category,
much like certain fashion trends, tend to have a limited life cycle of
approximately five to nine years. As part of our business strategy, we intend to
launch new brands, products and/or product extensions at approximately eighteen
to thirty month intervals. See "--Brand and Product Development."
Key elements of our business strategy include the following:
BRAND FRANCHISE
We believe that the market for alternative beverages is dependent to a large
extent on image more than taste, and that this market is driven by trendy, young
consumers between the ages of 15 and 34. Accordingly, our strategy is to develop
eclectic brand names, slogans and trade dress. In addition to eclectic labeling,
we provide each of our distributors with point-of-sale promotional materials and
branded apparel items. We promote interaction with our customers through the use
of such point-of-sale items as posters, stickers, table cards, shelf danglers,
post cards, hats, pins, T-shirts, and our proprietary lighted display box. In
addition, through the labels on its bottles, we invite consumers to access our
website and to send in photographs to be featured on the JONES SODA CO. labels.
We believe that our labeling, marketing and promotional materials increase
distributor, retailer and consumer awareness of our brands and products.
DISTRIBUTOR NETWORK AND KEY ACCOUNTS
We distribute our products through a network of independent distributors. We
have also obtained listings for the JONES SODA CO. brand with certain key retail
accounts. We have pursued this strategy both in an effort to increase sales and
to encourage distributors to distribute our brands and products to our key
accounts and other accounts of our distributors.
We usually grant independent distributors the right to distribute finished
cases of one or more of our brands in a particular region, province, state or
local territory, subject to our overall management directives. We select
distributors who we believe will have the ability to get our unique brands and
products on the "street level" retail shelves in convenience stores,
delicatessens, sandwich shops and selected supermarkets. Ultimately, we have
chosen, and will continue to choose, our distributors based upon their perceived
ability to build our brand franchise.
We currently maintain a network of approximately 100 distributors in select
markets of the Western, Central and Eastern regions of North America. In the
Western region, distributors are located in Alaska, Yukon, Western Canada,
Pacific Northwest, California, Nevada, Arizona and New Mexico. In the Central
region, distributors are located in Illinois, Wisconsin, Ohio, Indiana,
Missouri, Minnesota, Michigan and Ontario. In the Eastern region, distributors
are located in New England, New York, New Jersey, Pennsylvania, Maryland,
Georgia, Nebraska, North Carolina and Florida.
40
<PAGE>
We have additionally pursued distribution to "alternative" or
"non-traditional" beverage retailers. We have entered into exclusive
distribution agreements with approximately 200 independent non-traditional
beverage retailers, including music stores, skateboard shops, comic book stores
and clothing stores in San Diego, Seattle and Vancouver, British Columbia. We
intend to selectively pursue distribution to these national and independent
non-traditional beverage accounts as part of our distribution and marketing
strategy.
BRAND AND PRODUCT DEVELOPMENT
We have developed and intend to continue to develop our brands and products
in-house. We used a similar process to create the WAZU and JONES SODA CO.
brands, and intend to continue utilizing this process in connection with the
creation of our future brands. This process primarily consists of the following
steps:
MARKET EVALUATION
First we perform a complete review of the beverage industry in general,
including a review of existing beverage categories and segments, and the product
life cycle stages of such categories and segments. In addition, we review the
fashion industry and the consumer products industry to determine the general
trends in such industries. Based on these findings, we also review and attempt
to determine the direction of future fashion and consumer product trends.
Finally, we evaluate the strengths and weaknesses of certain categories and
segments of the beverage industry with a view to pinpointing potential
opportunities.
DISTRIBUTOR EVALUATION
We prepare a thorough analysis of existing and potential distribution
channels. This analysis addresses, among other things, which companies will
distribute particular beverage brands and products, where such companies may
distribute such brands and products, and what will motivate these distributors
to distribute such brands and products.
PRODUCTION EVALUATION
We review all aspects of production in the beverage industry, including
current contract packing capacity, strategic production locations, and quality
control, and prepare a cost analysis of the various considerations that will be
critical to producing our unique brands and products.
IMAGE AND DESIGN
In light of our market, distribution and production evaluations, we then
create and develop the concept for a beverage brand or product extension.
Although we control all aspects of the creation of each brand or product
extension, we contract with outside creative artists to help design our brands.
We have used, and intend to continue to use, a different artist, or group of
artists, whose portfolio of work best suits Urban Juice with respect to the
creation of a particular new brand. Such artists work closely with us to
finalize the creation of a new brand image and design. Our technical services
department then works with various flavor concentrate houses to test, choose and
develop product flavors for the brand.
In addition to the WAZU and JONES SODA CO. brands and products, we have
developed the concept for a third unique brand in a different segment of the
alternative or New Age beverage category. However, we currently anticipate that
we will not launch this brand until the life cycle of our existing brands or
products warrant doing so. Due to the limited life cycle of beverages in the
alternative or New Age category, we believe that the ongoing process of creating
new brands, products and product extensions will be an important factor in our
long-term success.
41
<PAGE>
PRODUCTS
PROPRIETARY BRANDS
JONES SODA CO. We believe that our trademarked JONES SODA CO. brand and
product line is a leader in the new segment of the New Age beverage category
called premium sodas. The JONES SODA CO. product line currently consists of the
following twelve flavors:
<TABLE>
<S> <C> <C> <C>
- - Orange - Strawberry lime - Fufu berry - Crushed Melon
- - Grape - Vanilla cola - Blue bubble gum - Pink
- - Cherry - Root beer - Green apple - Club Soda
- - Lemon lime - Cream soda - Pineapple upside-down
</TABLE>
Each of the current JONES SODA CO. products is made from natural and artificial
flavors. Some flavors distributed in the U.S. market may contain caffeine. Each
flavor has a different color profile which we believe is readily distinguishable
on a retail shelf. Most JONES SODA CO. beverage products come in twelve ounce
(355 ml.) clear long-neck bottles with primarily black and white labels
displaying a variety of urban American 1990s images. We also encourage consumers
of JONES SODA CO., through the labels on our bottles, to send in photographs
that may potentially be used on one of the JONES SODA CO. labels.
In June of 1998, we launched three flavors of NATURAL JONES SODA:
- Passion
- Lemon ginger
- Peach ginseng
In January of 1999, we launched four flavors of SLIM JONES and added a fifth
flavor in June 1999. Our current SLIM JONES beverage products are:
- Orange
- Lime cola
- Fufu berry
- Cream Soda
- Black Cherry
WAZU. We also seek to distinguish our WAZU brand and product line from
other competitive brands and product lines in the now well-developed PET bottled
water segment of the alternative or New Age beverage category. Each of the WAZU
products contains water currently sourced from springwater in Burnaby, British
Columbia. We have positioned the WAZU brand and product line in the middle price
point of the PET bottled water category. In doing so, we offer WAZU to
distributors as a brand that will offer enhanced incremental sales without
damaging sales of their current brands.
The WAZU product line currently consists of the following stock keeping
units:
- wee WAZU: (16.9 fluid ounces or 500ml) (with or without sport-cap)
- TRUE WAZU: (33.8 fluid ounces or 1L) (with or without sport-cap)
- BIG WAZU: (50.7 fluid ounces or 1.5L) (with or without sport-cap)
LICENSED PRODUCTS
In order to increase our business focus on our internally developed brands,
we discontinued the distribution of Odwalla in February 1996, Lahaina Iced Teas
and Lemonades in May 1996, Thomas Kemper Sodas in September 1996, West End Soda
Brews in October 1996, and Just Pik't Juices in December 1996. We no longer hold
marketing and distribution rights to any licensed brands. See "The
Company--Company Background."
42
<PAGE>
MARKETING, SALES AND DISTRIBUTION
Our unique products are sold in six provinces and 25 states, primarily in
convenience stores, delicatessens, sandwich shops and selected supermarkets. Our
products are sold by approximately 100 independent distributors. Our policy is
to grant our distributors rights to sell particular brands within a defined
territory. The majority of our distributors carry other beverage products.
Agreements with our distributors vary, but are usually oral and terminable by
either party at will, as is common in the beverage industry.
During 1998 the three primary distributors of our products purchased
approximately 6.9%, 5.7% and 5.4%, respectively, of the total number of cases
sold by Urban Juice. We believe that, concurrent with the expected increase in
consumer awareness of our brands, we will upgrade and expand our distributor
network which may result in a decreased dependence on any one or more of our
independent distributors.
It is our business practice to require our independent distributors to place
their purchase orders for our products at least 10 days in advance of shipping.
To the extent we have additional product available in inventory, it will fulfill
other purchase orders when and as received. We contract with outside trucking
companies to deliver our products from our independent warehouses to our
independent distributors. After an independent distributor receives delivery of
our products it will most often, in turn, resell and deliver those products
directly to a retail outlet and stock the retailer's shelves with our products.
Our pricing policies for the JONES SODA CO. and WAZU brands take into
consideration competitors' prices and our perception of what a consumer is
willing to pay for the particular brand and product. The goal is to
competitively price our unique products with the other New Age beverages. Since
we can control our production costs, we work back through the distribution chain
so that our suggested retail prices are proportional with respect to the
anticipated profit margins of each chain in the distribution process. The
suggested retail price for JONES SODA CO. products is Can.$0.99 - Can.$1.29 in
Canada and $0.79 - $1.09 in the United States. The suggested retail price for a
wee WAZU (500ml bottle) is Can.$0.89 - Can.$0.99 in Canada and $0.59 - $0.79 in
the United States.
During 1997, our sales force was organized into four regional groups (U.S.
Northeast, California, Pacific Northwest and Ontario), as well as certain second
tier markets. In 1998, this expanded to include Central and Southeast U.S. and
with Peter Strahm, the Vice President of Sales and Distribution ultimately
responsible for each region. All of our sales personnel have had prior industry
experience. Senior sales personnel are responsible for large retail accounts
located in their regions, the management of existing independent distributor
relationships and the selection of new independent distributors as may be
required. Junior sales personnel work closely with the sales representatives of
our independent distributors to help them open street level retail accounts and
train them in our sales and marketing techniques.
We primarily use point-of-sale materials such as posters, stickers, table
cards, shelf danglers, post cards, hats, pins, T-shirts and jackets to increase
consumer awareness of our proprietary brands. In response to consumer demand, we
sell our wearables on our web site HTTP://WWW.JONESSODA.COM. Through cooperative
advertising, certain of our independent distributors fund a portion of our
marketing budget, based upon case sales. In selected cities, we have planned or
are planning to sponsor or participate on a "grass roots" level at certain
events in an attempt to increase brand awareness and loyalty. We have also
devised a number of other low cost techniques which involve all Urban Juice
personnel (and which we treat as trade secrets) to create distinct personalities
for each of our brands. We have also begun a program of signing up extreme sport
athletes to promote JONES SODA CO. Pursuant to the program, we have signed up
several athletes in the skateboard, snowboard and mountain bike industries. We
also use a leased recreational vehicle painted with the JONES SODA CO. colors
and logos to create consumer awareness and enthusiasm to assist distributors as
they open new
43
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markets. In addition to these marketing techniques, we also initiated a campaign
of cross-promotions with other companies. Such cross promotions in 1998 were
with BMG Entertainment, Armani A/X, Namco Limited and Diesel Stores.
SEASONALITY
Typically, the beverage industry as a whole generates a substantial
percentage of its revenues during the warm weather months of April through
September. We believe that the demand for our unique products will reflect such
seasonal consumption patterns. As we expand our distribution network and
increase our market penetration, such seasonality may not be easily discernible
from our results of operations. We use independent contract packers, truckers
and distributors to increase the amount of product available during peak
seasonal periods without incurring expenses for personnel or equipment during
our slower periods.
PRODUCTION
CONTRACT PACKING ARRANGEMENTS
We currently use two main independent contract packers known as "co-packers"
to prepare and bottle our products. As is customary in the contract packing
industry, we are expected to arrange for our contract packing needs sufficiently
in advance of anticipated requirements. Accordingly, it is our business practice
to require our independent distributors to place their purchase orders for our
products at least 10 days in advance of shipping. Other than minimum case volume
requirements per production run, we do not have any minimum production
requirements, except as detailed below.
During 1998, we used several contract packing facilities to produce all
requirements of both JONES SODA CO. and WAZU. We have made arrangements with
another contract packing facility to produce NATURAL JONES, our upscale
pasteurized version of JONES SODA CO.
RAW MATERIALS
The raw materials used in the preparation and packaging of our products
(consisting primarily of concentrate, glass, labels, caps and packaging) are
purchased from suppliers selected either directly by our contract packers or by
us which, in turn, supply those raw materials to our contract packers.
We believe that we have adequate sources of raw materials which are
available from multiple suppliers. Currently, we purchase all of our flavor
concentrate for JONES SODA CO. products from Pro-Liquitech, Inc., a flavor
concentrate company, on an exclusive basis. We intend to purchase flavor
concentrate from multiple flavor houses for future JONES SODA CO. flavors and/or
additional products, with the intention of developing secondary sources of
flavor concentrate for each of our products. The water used to produce JONES
SODA CO. is filtered and is also treated to reduce alkalinity.
QUALITY CONTROL
Our products are made from high quality ingredients and natural and
artificial flavors. We seek to ensure that all of our products satisfy our
quality standards. Contract packers are selected and monitored by our own
quality control representatives in an effort to assure adherence to our
production procedures and quality standards. We analyze samples of our products
from each production run undertaken by each of our contract packers.
For every run of product, extensive on-line testing of product quality and
packaging is completed. This includes testing levels of sweetness, carbonation,
taste, product integrity, packaging and various regulatory cross checks. For
each product, the contract packer must transmit all quality control test results
to us on a daily basis. These test results are reviewed by technical staff for
compliance with our standards. In addition, samples from every production run
are forwarded to our Quality Control
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Department. These samples are then re-tested by us to double check the
production facilities' quality control. Based on our experience, we believe this
cross check on product meets or exceeds standard procedures established in the
industry.
Testing at both the Urban Juice facility and the contract production
facilities includes microbiological checks and other tests to ensure the
production facilities meet the standards and specifications of our quality
assurance program. This information is then logged into a database for rapid
statistical analysis and followed up with each contract packer. We believe our
production facilities inspection program meets or exceeds industry standards.
Water quality is monitored during production and at scheduled testing times to
ensure compliance with applicable government regulatory requirements. Flavors
are pre-tested before shipment to contract packers from the flavor manufacturer.
We are committed to an on-going program of product improvement with a view
toward ensuring the high quality of our product.
We believe we source and select only those suppliers that use only quality
components. We also inspect packaging suppliers' production facilities and
monitor their product quality.
REGULATION
The production and marketing of our licensed and proprietary beverages are
subject to the rules and regulations of various federal, provincial, state and
local health agencies, including without limitation, Health Canada, Agriculture
and Agri-Food Canada and the United States Food and Drug Administration. The FDA
and Agriculture and Agri-Food Canada also regulate labeling of our products.
From time to time, we may receive notifications of various technical labeling
and/or ingredient infractions with respect to our licensed products. We believe
that we have a compliance program in place to ensure compliance with production,
marketing and labeling regulations on a going-forward basis, and that none of
the foregoing notifications or actions would have a material adverse affect on
our business, financial condition or results of operations. There are no
potential notifications or actions currently outstanding.
TRADEMARKS, DESIGN MARKS AND FLAVOR CONCENTRATE TRADE SECRETS
We own a number of different trademarks, including the following which are
registered in Canada and the United States: "JONES SODA CO.," "I'VE GOT A JONES
FOR A JONES," "URBAN JUICE & SODA CO.," Urban Juice & Soda & Design, Urban Juice
& Soda Co. & Design and Wazu & Design. In Canada the trademarks expire 15 years
from the registration date and in the United States 10 years from the
registration date, although in the U.S., they may be renewed for a nominal fee.
In addition, we have applied for trademark protection in Canada and the United
States for a number of other trademarks for slogans and product design,
including "WET YOURSELF," "I'VE GOT A JONES FOR SODA," "IT MAY NOT BE YOUR
THING" and "FUFU BERRY SODA." In addition, trademark protection for the marks
JONES SODA CO. and WAZU have also been applied for in the United Kingdom,
Germany, Japan, and other foreign jurisdictions.
To date, we have the exclusive rights to nineteen flavor concentrates
developed with Pro-Liquitech, Inc., which we protect as trade secrets. We will
continue to take appropriate measures, such as entering into confidentiality
agreements with our contract packers and exclusivity agreements with our flavor
houses, to maintain the secrecy and proprietary nature of our flavor
concentrates.
We consider our trademarks, design marks and flavor concentrates to be of
considerable value and importance to our business. No challenges to our
trademarks or design marks have arisen and we have no reason to believe that any
such challenges will arise in the future.
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COMPETITION
The beverage industry is highly competitive. The principal methods of
competition in the beverage industry include brand name, brand image, price,
labeling and packaging, product quality and taste, trade and consumer promotions
and the development of new brands, products and product extensions. We compete
with other beverage companies not only for consumer acceptance but also for
shelf space in retail outlets and for marketing focus by our distributors, all
of which also distribute other beverage brands. Our products compete with all
non-alcoholic beverages, most of which are marketed by companies with
substantially greater financial resources than Urban Juice. We also compete with
regional beverage producers and "private label" soft drink suppliers.
In order to compete effectively in the beverage industry, we believe that we
must first convince independent distributors that JONES SODA CO. is a leading
brand in the newly created premium soda segment of the alternative or New Age
beverage industry. As such, JONES SODA CO. provides distributors with the
opportunity for incremental beverage sales growth rather than replacing their
existing beverage sales. In connection with or as a follow-up to the
establishment of an independent distributor relationship for the JONES SODA CO.
brand, we sell WAZU as a complementary brand which may replace competitive PET
bottled water products carried by such distributors. As a means of maintaining
and expanding our distribution network, we intend to introduce new products and
product extensions, and when warranted, new brands. Although we believe that we
will be able to continue to create unique, exciting and fashionable brands,
there can be no assurance that we will be able to do so or that other companies
will not be more successful in this regard over the long term.
Pricing of the products is also important. The JONES SODA CO. products are
priced in the same price range as competitive New Age beverage brands and
products. WAZU products are priced in the middle of the pricing range for PET
bottled water products.
EMPLOYEES
As of December 31, 1998, we had 25 full-time employees, of whom 15 were
employed in sales and marketing capacities, five were employed in administrative
capacities, and five were employed in manufacturing and quality control
capacities. None of our employees are represented by labor unions. We believe
that our relationships with our employees are good.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding our directors,
executive officers and key employees, as of August 11, 1999.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
CONTRACTUAL
NAME AGE TITLE WITH URBAN CANADA SINCE ARRANGEMENT
- ----------------- --- ------------------------------------------ ------------------------ ------------------
<S> <C> <C> <C> <C>
Peter M. van 36 President, Chief Executive Officer and Officer and Director 5-year Employment
Stolk Director since May 1993 Agreement(1)
Jennifer L. Cue 36 Chief Financial Officer, Secretary and Director since March 3-year Employment
Director 1995 Officer since Agreement(1)
October 1995
Peter Strahm 37 Vice President of Sales--North America Officer since April 1998 N/A
Ron B. Anderson 46 Director Director since July 1994 N/A
Michael M. 50 Director Director since April N/A
Fleming 1997
Matthew Kellogg 35 Director Director since May 1999 N/A
Peter Cooper 46 Director Director since May 1999 N/A
</TABLE>
PETER M. VAN STOLK has served as our President, Chief Executive Officer and
a director since May 1993. Mr. van Stolk began his career in the beverage
industry in 1987 when he founded Urban Hand. He served in a similar capacity
with Urban Hand prior to it being acquired by Urban Canada in 1993. Mr. van
Stolk is also a member of the Social Venture Network. Since 1987, Mr. van Stolk
has worked in virtually all aspects of the beverage distributor business. He
attended Grant McKewan College in Edmonton, Alberta.
JENNIFER L. CUE has served as our Corporate Secretary since August 1997,
Chief Financial Officer since February 1997, Vice President, Corporate and
Financial Development, between October 1995 and January 1997, and a director
since March 1995. Prior to October 1995, Ms. Cue served as Vice President
Investment Research of D. Grant Macdonald Capital Corporation from February
1994, and prior to that served as Vice President, Investments at Penfund
Management in Toronto, Ontario from November 1990. From 1986 to 1988, Ms. Cue
worked in Commercial Banking for Lloyds Bank Canada. Ms. Cue holds an MBA from
McGill University in Montreal and a Bachelor of Commerce from the University of
British Columbia in Vancouver, British Columbia.
PETER STRAHM has served as our Vice President of Sales--North America since
April 1998. Prior to April 1998, Mr. Strahm served as Vice President, Eastern
Region for R.J. Groux Corporation, a beverage distribution company based in New
York. From 1989 to 1996 Mr. Strahm served in various positions at Snapple
Beverage Corporation. From 1989 to 1992, Mr. Strahm was the New York State Area
Manager for Snapple. From 1992 to 1993, Mr. Strahm served as Midwest Regional
Manager for Snapple where he oversaw the newly formed Midwest regional office.
From 1993 to 96, Mr. Strahm was President & CEO of Mr. Natural Inc., the
company-owned distributor for Snapple in the New York area. Prior to Snapple,
Mr. Strahm was with the Pepsi organization for five years. Mr. Strahm holds a
Bachelor of Science degree and an M.B.A.
RON B. ANDERSON has served as one of our directors since July 1994. Mr.
Anderson is currently the Vice President, Corporate Development of ParkSide
Developments L.P., a private partnership involved in real estate development.
From July 1995 to December 1995, Mr. Anderson was a full-time consultant
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to The Loewen Group Inc., a funeral service company. From August 1993 to June
1995, he was President of D. Grant Macdonald Capital Corporation, a private
merchant bank. From September 1987 to July 1993, he was Senior Manager, British
Columbia District for National Bank of Canada. Mr. Anderson is a Certified
General Accountant and holds a B. Comm. from the University of British Columbia
in Vancouver, British Columbia.
MICHAEL M. FLEMING has served as one of our directors since April 1997. Mr.
Fleming is currently a Partner with the law firm of Ryan, Swanson & Cleveland in
Seattle, Washington, and specializes in real estate, dispute resolution,
securities and environmental matters. He is also the President and owner of
Kidcentre, Inc., a company in the business of providing child care services in
Seattle, Washington. Since April 1985, he has also been the President and owner
of Fleming Investment Co., an investment company. Mr. Fleming is currently a
board member of several entities, including Caring Products International, Inc.,
the Washington Chapter of the Cystic Fibrosis Foundation and the Seattle
Children's Museum.
MATTHEW KELLOGG was appointed as one of our directors on May 28, 1999. Mr.
Kellogg is currently the Managing Member of Kingfisher Capital, LLC. From 1995
to 1999, Mr. Kellogg served as the Managing Member of MTC, LLC, a restaurant
management firm. From 1997 to 1998, Mr. Kellogg was the Business Development
Director for Playnetwork, Inc. following his position at Enviros Inc. as
Business Development Manager from 1993 through 1995.
PETER COOPER was appointed as one of our directors on May 28, 1999 and has
served as Chairman of the Board since October 24, 1999. Mr. Cooper is currently
the owner of Cooper & Company, a U.S. based investment company with interests in
real estate and private companies. Mr. Cooper is also a founding partner of
Cooper & LeVasseur, a "special situation" investment parnership. From 1986
through 1994, Mr. Cooper served as Chief Executive of L.D. Nathan & Co., Ltd., a
New Zealand based retail and consumer brand company and following the merger
with Lion Breweries as an Executive Director of Lion Nathan Limited. Mr. Cooper
received an Honors Degree in Law from Auckland University and was admitted as a
Barrister and Solicitor in New Zealand in 1977.
EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
For purposes of this proxy statement/prospectus, "executive officer" of
Urban Canada means an individual who at any time during the year was the Chair
or a Vice-Chair of Urban Canada where the person performed the functions of such
office on a full-time basis; the President of Urban Canada; any Vice-President
of Urban Canada in charge of a principal business unit such as sales, finance or
production; any officer of Urban Canada or of a subsidiary of Urban Canada; or
any other person who performed a policy-making function in respect of Urban
Canada.
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The summary compensation table below discloses compensation paid to the
following individuals:
(a) our chief executive officer ("CEO");
(b) each of our four most highly compensated executive officers, other than
the CEO, who were serving as executive officers as at the end of the most
recently completed financial year and whose total salary and bonus
exceeds $100,000 per year; and
(c) any additional individuals for whom disclosure would have been provided
under (b) but for the fact that the individual was not serving as an
executive officer of Urban Canada at the end of the most recently
completed financial year
We currently have two executive officers so qualified: Peter van Stolk
(Chief Executive Officer and President) and Peter Strahm (Vice President of
Sales).
SUMMARY COMPENSATION TABLE
The following table contains a summary of the compensation paid to the
Messrs. van Stolk and Strahm during the three most recently completed financial
years. In the column headings, "SAR" or "stock appreciation right" means a right
granted by Urban Canada, as compensation for services rendered, to receive a
payment of cash or an issue or transfer of securities based wholly or in part on
changes in the trading price of publicly traded securities of Urban Canada, and
"LTIP" or "long term incentive plan" means any plan that provides compensation
intended to serve as incentive for performance to occur over a period longer
than one financial year, but does not include option or stock appreciation right
plans or plans for compensation through restricted shares or restricted share
units.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------------------------
OTHER SECURITIES RESTRICTED PAYOUTS
ANNUAL UNDER SHARES OR -----------
COMPEN- OPTIONS/SARS RESTRICTED LTIP
NAME AND YEAR SALARY BONUS SATION GRANTED SHARE UNITS PAYOUTS
PRINCIPAL POSITION ENDED (CAN.$) (CAN.$) (CAN.$) (#) (CAN.$) (CAN.$)
- ----------------------------- ------------ ---------- ----------- --------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter van Stolk,............. Dec. 31/96 $ 50,000 Nil 61,760 70,000 Nil Nil
CHIEF EXECUTIVE Dec. 31/97 $ 54,885 Nil Nil 295,000 Nil Nil
OFFICER Dec. 31/98 $ 83,400 Nil $ 10,210 320,000 Nil Nil
Peter Strahm,................ Dec. 31/96 Nil Nil Nil Nil Nil Nil
VICE PRESIDENT, Dec. 31/97 Nil Nil Nil Nil Nil Nil
SALES Dec. 31/98 $ 114,742 Nil Nil 100,000 Nil Nil
<CAPTION>
ALL OTHER
COMPEN-
NAME AND SATION
PRINCIPAL POSITION (CAN.$)
- ----------------------------- -------------
<S> <C>
Peter van Stolk,............. Nil
CHIEF EXECUTIVE Nil
OFFICER Nil
Peter Strahm,................ Nil
VICE PRESIDENT, Nil
SALES Nil
</TABLE>
COMPENSATION OF DIRECTORS
None of our directors has received any remuneration for acting as director
of Urban Canada except for the incentive stock options as disclosed below. In
addition, directors are paid out of pocket expenses incurred in attending Board
of Directors and committee meetings of the Board.
REMUNERATION OF DIRECTORS AND EXECUTIVE OFFICERS
The aggregate remuneration paid or payable by Urban Canada and its
subsidiaries in 1998 to the directors and executive officers of Urban Canada was
Can.$288,142.
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<PAGE>
OPTIONS, STOCK APPRECIATION RIGHTS AND OTHER RIGHTS TO PURCHASE SECURITIES
The following table sets out the incentive stock options and stock
appreciation rights granted to Messrs. van Stolk and Strahm during our most
recently completed financial year.
<TABLE>
<CAPTION>
MARKET VALUE OF
% OF TOTAL SECURITIES
SECURITIES OPTIONS/SARS UNDERLYING
UNDER GRANTED TO EXERCISE OR OPTIONS/SARS ON
OPTIONS/SARS EMPLOYEES IN BASE PRICE THE DATE OF GRANT EXPIRATION
NAME GRANTED (#) FINANCIAL YEAR (CAN.$/SECURITY) (CAN.$/SECURITY) DATE
- --------------------------- --------------- --------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Peter van Stolk............ 100,000 4.15% $ 1.15 Nil May 22, 2003
100,000 4.15% $ 1.15 Nil June 1, 2003
20,000 0.008% $ 1.00 Nil July 24, 2003
100,000 4.15% $ 0.75 Nil Feb. 8, 2003
Peter Strahm............... 100,000 4.15% $ 1.00 Nil Mar. 24, 2003
</TABLE>
Since the beginning of our most recently completed financial year, the
following options and other rights to purchase securities of Urban Canada were
granted to the directors and executive officers of Urban Canada, as a group:
<TABLE>
<CAPTION>
EXERCISE
SECURITIES PRICE CONSIDERATION RECEIVED
UNDER OPTION PER SHARE DATE OF GRANT/EXPIRY DATE FOR THE GRANT
- ------------- ------------- ----------------------------- -------------------------
<S> <C> <C> <C>
180,000... Can.$ 0.75 Feb 8, 1999/Feb 8, 2004 Nil
115,000 Can.$ 0.80 Feb. 9, 1999/Feb. 2, 2004 Nil
150,000 Can.$ 0.85 Mar. 5, 1999/Mar. 5, 2004 Nil
</TABLE>
Since the beginning of our most recently completed financial year, no
options and other rights to purchase securities of Urban Canada were exercised
by the directors and executive officers of Urban Canada.
DIRECTORS' AND OFFICERS' INSURANCE
We maintain directors' and officers' insurance for our directors and
officers as well as those of our subsidiaries as a group. The yearly coverage
limit of such insurance is $3,000,000 per occurrence and $3,000,000 in the
aggregate, subject to a corporate deductible of $50,000 per loss on
non-securities claims and $150,000 per loss on securities claims. We paid a
premium of $36,000 in the last completed fiscal year with respect to the period
October 9, 1999 to October 8, 2000.
LONG-TERM INCENTIVE PLANS
During the financial year ended December 31, 1998, there were no payments
made to directors or executive officers pursuant to the long-term incentive
plan.
PENSION BENEFITS
We currently have no pension benefits arrangement under which we have made
payments to the directors and executive officers of Urban Canada during our most
recently completed financial year or intend to make payments to our directors
and executive officers upon their retirement (other than the payments set out
above and those made, if any, pursuant to the Canada Pension Plan or any
government plan similar to it).
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OTHER BENEFITS
We did not pay any remuneration pursuant to any existing plan or arrangement
during our most recently completed financial year to the directors and executive
officers of Urban Canada, as a group, directly or indirectly, other than the
payments set out above and those made pursuant to the Canada Pension Plan or any
government plan similar to it and payments to be made for, or benefits to be
received from, group life or accident insurance, group hospitalization or
similar group benefits or payments. We do not propose to make any payments,
directly or indirectly, in the future to the directors and executive officers of
Urban Canada, as a group, pursuant to any existing plan or arrangement.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
Other than indebtedness incurred in the ordinary course of our business, not
exceeding Can.$5,000 per occurrence, no director or executive officer of Urban
Canada, or any proposed nominee for election as a director of the Company, or
any associate or affiliate of any director, executive officer or proposed
nominee, is or has been indebted to Urban Canada, or to any other entity that
was provided a guarantee or similar arrangement by Urban Canada in connection
with the indebtedness, at any time since the beginning of our most recently
completed financial year. For fiscal year 1998 there was no single transaction
in excess of $60,000.
MANAGEMENT CONTRACTS
Our directors and officers perform all of the material management functions
in Urban Canada.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Other than as set forth in this proxy statement/prospectus, no insider of
Urban Canada, no proposed nominee for election as a director and no associate or
affiliate of any such insider or proposed nominee has had any material interest,
direct or indirect, in any transaction since the beginning of our most recently
completed financial year or in any proposed transaction that, in either case,
has materially affected or will materially affect our operations.
DESCRIPTION OF URBAN CANADA CAPITAL STOCK
The authorized capital of Urban Canada consists of 100,000,000 common
shares. The following summary description of Urban Canada capital stock is
qualified in its entirety by reference to the memorandum and articles of Urban
Canada, copies of which are filed as exhibits to the registration statement on
Form 8-A, filed with the SEC on October 3, 1996, as amended, and Urban Canada's
Form 6-K Report of Foreign Private Issuer containing unaudited financial
statements for the six months ended June 30, 1999.
COMMON SHARES AND WARRANTS
Urban Canada is authorized to issue 100,000,000 common shares without par
value. The common shares are all of the same class and rank equally as to
dividends, voting powers and participation in assets. No common shares are
subject to call or assessment. There are no pre-emptive or conversion rights and
no provisions for redemption, retraction, purchase for cancellation, surrender
or sinking or purchase funds. Provisions as to the modification, amendment or
variation of such rights or provisions are contained in the British Columbia
Company Act. See "Markets and Market Prices" for a description of our
outstanding common shares and common share purchase warrants.
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ESCROW SHARES
Presently 1,500,000 of our common shares are held in trust by Pacific
Corporate Trust Company pursuant to a performance escrow share agreement dated
March 29, 1993, as required by the policies of the Vancouver Stock Exchange. The
purpose of the escrow is to provide performance incentives to the holders of the
escrow shares. The parties to the escrow agreement as amended, are Pacific
Corporate Trust Company, Urban Canada, Peter von Stolk, William Wong, Carl Mark,
Tony Peiffer and Brian G. Richards, who were all officers or directors of the
company on that date. The escrow shares are restricted and any dealings with
them are subject to the direction or determination of the Vancouver Stock
Exchange. The escrow restrictions prohibit all trading or dealing in any manner
with, or release of, the escrow shares without the consent of the Vancouver
Stock Exchange and further prohibit the recording of trading or any transfer of
the escrow shares prior to release from escrow without such consent. A holder of
escrow shares, rather than Pacific Corporate Trust Company, has the right to
vote the escrow shares, except on a resolution to cancel the escrow shares but
has waived the right to receive dividends and to participate in our assets and
property on our winding-up or dissolution.
The escrow shares may be released from escrow, on a pro rata basis, based
upon our cumulative cash flow. "Cumulative cash flow" is net income before tax
with depreciation, amortization and expensed research and development costs
added back. One escrow share will be released pro rata for each Can.$0.125 of
cumulative cash flow. Upon release from the escrow, the shares will be freely
tradable by the holder.
PRE-CONTINUATION SALE OF ASSETS
In order to better align the business operations of Urban Canada and our
wholly-owned subsidiaries, WAZU Products Ltd. will sell assets used in its U.S.
operations to Urban Juice & Soda (USA) Inc. The assets will be sold for proceeds
equal to their fair market value. Urban Juice & Soda (USA) Inc. will assume debt
of WAZU Products Ltd. equal to their fair market value of the U.S. assets. Under
Canadian and US GAAP, this transaction will be treated as a transfer of assets
under common control, and accordingly will be accounted for at historical cost
in a manner similar to a pooling of interests. For the tax consequences of this
transaction, see "Canadian Income Tax Considerations--Pre-Continuation
Transaction."
TRANSFER AGENT AND REGISTRAR
Our common share transfer agent and registrar is Pacific Corporate Trust
Company, whose address is 830 - 625 Howe Street, Vancouver, British Columbia,
V6C 3B8.
SHAREHOLDER'S RIGHTS UNDER THE WYOMING BUSINESS CORPORATION ACT
The following is a discussion of the material provisions of the Wyoming
Business Corporations Act. This discussion includes, where relevant, a summary
of certain differences between the Wyoming Business Corporations Act and the
British Columbia Company Act. However, the following summary is not intended to
be exhaustive and its focus is primarily upon shareholder rights and safeguards.
Nothing that follows should be construed as legal advice to any particular
shareholder of Urban Canada and shareholders should consult with their own legal
advisors respecting all of the implications of the continuation.
THE ORGANIZATIONAL DOCUMENTS
Under the British Columbia Company Act, a British Columbia company is
required to have organizational documents made up of a memorandum and articles.
Under the Wyoming Business Corporations Act, a Wyoming company which has
continued from another jurisdiction is required to
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<PAGE>
have organizational documents made up of articles of continuance. The articles
of continuance will set forth Urban Canada's name and authorized share capital
and take the place of Urban Canada's current memorandum.
AMENDMENTS TO ORGANIZATIONAL DOCUMENTS
Both the Wyoming Business Corporations Act and the British Columbia Company
Act require shareholders to approve substantive changes to the organizational
documents of a company. However, the requisite majority of votes necessary to
approve substantive changes to the organizational documents under the British
Columbia Company Act is 75% (3/4) of the votes cast whereas under the Wyoming
Business Corporations Act a simple majority of 50% of shareholders entitled to
vote on the proposed resolution is required. Both the Wyoming Business
Corporations Act and the British Columbia Company Act provide that in the case
of certain fundamental changes, such as the alteration of special rights and
restrictions attached to issued shares or a proposed amalgamation or
continuation to another jurisdiction, a resolution similarly approved by each
class of shares is also required.
SHARE CAPITAL
Upon the completion of the continuation and the adoption of the proposed new
articles of continuance, the authorized share capital of Urban Wyoming will
consist of 100,000,000 common shares without par value. Urban Wyoming will have
only one kind and class of shares and there will be no unusual rights or
restrictions attached to that class. All of the current issued common shares of
Urban Canada will be converted into shares of this class automatically without
any further action by the shareholders.
All of the common shares of Urban Canada in this new class will rank equally
as to voting rights, participation in a distribution of the assets of Urban
Wyoming on a liquidation, dissolution or winding-up of Urban Canada and the
entitlement to dividends. The holders of the common shares will be entitled to
receive notice of all meetings of shareholders and to attend and vote the shares
at the meetings. Each common share will carry with it the right to one vote.
In the event of the liquidation, dissolution or winding-up of Urban Wyoming
or other distribution of its assets, the holders of the common shares will be
entitled to receive, on a pro rata basis, all of the assets remaining after
Urban Wyoming has paid out its liabilities. Distribution in the form of
dividends, if any, will be set by the Board of Directors.
Provision as to the modification, amendment or variation of the rights
attached to the common shares of Urban Wyoming will be contained in Urban
Wyoming's articles of continuance and the Wyoming Business Corporations Act.
Generally speaking, substantive changes to the share capital require the
approval of the shareholders by majority resolution.
APPOINTMENT OF DIRECTORS
Under both the British Columbia Company Act and the Wyoming Business
Corporations Act, the company's directors are elected by the shareholders at
each annual general meeting and typically hold office until the next annual
general meeting at which time they may be re-elected or replaced. Individuals
appointed as directors to fill vacancies on the Board or added as additional
directors hold office like any other director until the next annual general
meeting at which time they may be re-elected or replaced. A director may be
removed between annual meetings by way of a shareholder resolution passed in
that regard at a meeting of the shareholders called for that purpose.
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MANAGEMENT
The Board of Directors will be responsible for the overall management of
Urban Wyoming. However, they are permitted to delegate much of their
responsibility to the officers and employees of Urban Wyoming and to committees
formed by the board. As a "reporting issuer" in British Columbia, Urban Wyoming
will continue to be required to have an audit committee.
The directors and senior officers are required, under the Wyoming Business
Corporations Act, to act honestly, in good faith and with a view to the best
interests of Urban Wyoming. The directors have a fiduciary responsibility to
Urban Wyoming and they are required to disclose conflicts of interests. The
fiduciary standards of directors under the Wyoming Business Corporations Act is
similar to the standards under the British Columbia Company Act. Both laws
require directors to act in good faith and in our best interest, with the same
care as would be exercised by a reasonable, prudent person.
RIGHTS OF SHAREHOLDERS
In addition to the voting, dividend and liquidation rights attached to the
common shares as described under "Share Capital" above, the Wyoming Business
Corporations Act affords shareholders certain rights such as the right to call a
shareholders' meeting or cause a derivative action to be brought on behalf of
Urban Wyoming, as well as certain rights to review the minute books of Urban
Wyoming.
The Wyoming Business Corporations Act provides that a shareholder or a
director may commence or defend a legal action on behalf of a company (a
derivative action) to enforce a right, duty or obligation owed to Urban Wyoming
by another party or to obtain damages for any breach of that right, duty or
obligation. A shareholder is entitled to commence a derivative action if:
- the shareholder was a shareholder of Urban Wyoming at the time of the act
or omission complained of, or became a shareholder through transfer by
operation of law from one who was a shareholder at the time; and
- the shareholder fairly and adequately represents the interests of Urban
Wyoming in enforcing the rights of Urban Wyoming.
Court approval is also required to discontinue, settle or dismiss any action
brought under any of these provisions.
Under the British Columbia Company Act, a shareholder of a company has the
right to apply to court on the grounds that Urban Canada is acting or proposes
to act in a way that is prejudicial to the shareholder (this is referred to as
an oppression action). On such an application, the court may make such order as
it sees fit, including an order to prohibit any act proposed by Urban Canada.
The Wyoming Business Corporations Act does not contain a comparable provision
and, accordingly, this remedy is not available to the shareholders of a Wyoming
company.
DISSENT RIGHTS UNDER THE WYOMING BUSINESS CORPORATIONS ACT
The rights of shareholders to dissent to actions proposed to be taken by a
Wyoming company are not significantly different from the right to dissent
provided the shareholders of a British Columbia company under the British
Columbia Company Act.
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LEGAL MATTERS
Legal matters relating to the legality of the issuance of the common shares
offered by this proxy statement/prospectus will be passed upon for Urban Canada
by Catalyst Corporate Finance Lawyers, Vancouver, British Columbia. Legal
matters will be passed upon for Urban Wyoming by Bagley Law Office, Cheyenne,
Wyoming, and Van Valkenberg Furber Law Group P.L.L.C., Seattle, Washington,
special United States counsel to Urban Canada. Van Valkenberg Furber Law Group
P.L.L.C. will rely on the opinions of Catalyst Corporate Finance Lawyers on
Canadian law and Bagley Law Office on Wyoming law.
EXPERTS
KPMG, LLP, independent chartered accountants, have audited our financial
statements as of December 31, 1997 and 1998, and for each of the years in the
three-year period ended December 31, 1998. We have included our financial
statements in this proxy statement/prospectus and elsewhere in the registration
statement in reliance on KPMG, LLP, reports, given on their authority as experts
in accounting and auditing.
55
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
URBAN JUICE & SODA COMPANY LTD.
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements Of Operations And Deficit.......................................................... F-4
Consolidated Statements Of Changes In Financial Position................................................... F-5
Notes to Consolidated Financial Statements................................................................. F-6
Schedule of Office and Administration Expenses............................................................. F-22
Schedule II--Valuation and Qualifying Accounts............................................................. F-23
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
To the Directors
Urban Juice & Soda Company Ltd.
We have audited the consolidated balance sheets of Urban Juice & Soda
Company Ltd. as at December 31, 1998 and 1997 and the consolidated statements of
operations and deficit and changes in financial position for each of the years
in the three year period ended December 31, 1998 and the attached financial
statement schedule for each of the years in the three year period ended December
31, 1998. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997, and the results of its operations and the changes in its
financial position for each of the years in the three year period ended December
31, 1998 in accordance with generally accepted accounting principles in Canada.
Also in our opinion, the related financial statement schedule, when considered
in relation to the consolidated financial statements taken as a whole presents
fairly, in all material respects, the information set forth therein.
Significant measurement differences between Canadian and United States
accounting principles as they affect these consolidated financial statements are
explained and quantified in note 14.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
February 12, 1999, except
as to note 2(a) which is as
of April 12, 1999
F-2
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- -----------------------------
1999 1998 1997
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and term deposits........................................ $ 1,110,502 $ 336,983 $ 1,666,086
Accounts receivable (note 3).................................. 3,056,049 1,271,470 809,418
Inventory (note 4)............................................ 1,652,362 823,514 1,090,699
Prepaid expenses.............................................. 303,376 334,350 110,927
-------------- -------------- -------------
6,122,289 2,766,317 3,677,130
Capital assets (note 5)........................................... 778,896 834,975 667,764
Intangible assets (note 6)........................................ 425,918 454,099 634,451
-------------- -------------- -------------
$ 7,327,103 $ 4,055,391 $ 4,979,345
-------------- -------------- -------------
-------------- -------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 7).................................... $ 309,600 $ --
Accounts payable and accrued liabilities...................... $ 2,822,265 1,363,684 1,139,850
Current portion of long-term debt (note 8).................... 23,645 23,645 65,091
-------------- -------------- -------------
2,845,910 1,696,929 1,204,941
Long-term debt (note 8)........................................... 15,919 31,915 --
Shareholders' equity:
Share capital (note 9)........................................ 15,375,450 12,942,935 12,049,085
Deficit....................................................... (10,910,176) (10,616,388) (8,274,681)
-------------- -------------- -------------
4,465,274 2,326,547 3,774,404
Operations (note 2(a))
Commitments and contingencies (note 10)
-------------- -------------- -------------
$ 7,327,103 $ 4,055,391 $ 4,979,345
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------- --------------------------------------------
1999 1998 1998 1997 1996
-------------- ------------- -------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales............................... $ 8,263,627 $ 3,339,969 $ 7,011,046 $ 3,265,317 $ 3,458,701
Cost of sales....................... 5,684,292 2,387,889 5,123,016 3,043,694 3,006,924
-------------- ------------- -------------- ------------- -------------
2,579,335 952,080 1,888,030 221,623 451,777
Expenses:
Amortization.................... 156,885 107,480 317,449 197,754 199,446
Bad debts....................... 7,215 1,034 83,566 463,471 139,301
Consulting fees................. 169,916 90,606 167,664 166,426 72,006
Filing fees and transfer
agent......................... 19,574 16,524 23,925 16,340 25,957
Office and administration
(schedule).................... 293,418 282,142 609,341 794,204 485,068
Professional fees............... 139,956 41,645 178,945 148,008 53,869
Promotion and selling........... 1,824,737 1,143,503 2,221,537 2,111,116 1,307,676
Wages........................... 258,093 222,431 448,808 366,137 591,654
Write-off of intangible
assets........................ -- -- 102,871 -- --
-------------- ------------- -------------- ------------- -------------
2,869,796 1,905,365 4,154,106 4,263,456 2,874,977
-------------- ------------- -------------- ------------- -------------
Loss from operations................ (290,461) (953,285) (2,266,076) (4,041,833) (2,423,200)
Other income (expense):
Foreign exchange gain (loss).... 22,604 26,787 (72,224) 6,361 --
Other interest expense.......... (13,522) (8,736) (16,347) (10,002) (26,527)
Interest income................. 15,518 23,910 27,725 57,146 29,055
Miscellaneous income............ (32,234) 1,696 3,028 5,167 1,341
Gain (loss) on disposal of
capital assets................ 4,307 (5,792) (17,813) 12,584 (6,921)
-------------- ------------- -------------- ------------- -------------
(3,327) 37,865 (75,631) 71,256 (3,052)
-------------- ------------- -------------- ------------- -------------
Loss for the year................... (293,788) (915,420) (2,341,707) (3,970,577) (2,426,252)
Deficit, beginning of year.......... (10,616,388) (8,274,681) (8,274,681) (4,304,104) (1,877,852)
-------------- ------------- -------------- ------------- -------------
Deficit, end of year................ $ (10,910,176) $ (9,190,101) $ (10,616,388) $ (8,274,681) $ (4,304,104)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Loss per share (note 2(g)).......... $ (0.02) $ (0.08) $ (0.17) $ (0.33) $ (0.28)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash provided by (used in):
Operations:
Loss for the year................. $ (293,788) $ (915,420) $ (2,341,707) $ (3,970,577) $ (2,426,252)
Items not involving cash:
Amortization.................. 156,885 107,480 317,449 197,754 199,446
Loss (gain) on disposal of
capital assets.............. (4,307) 5,792 17,813 (12,584) 6,921
Write-down of inventory
subject to legal claim...... -- -- -- 353,797 --
Write-down of intangible
assets...................... -- -- 102,871 -- --
Changes in non-cash operating
working capital:
Accounts receivable........... $ (1,784,579) $ (493,118) (462,052) (271,545) (34,884)
Inventory..................... (828,848) (434,254) 267,185 (545,394) 289,730
Prepaid expenses.............. 30,974 (94,324) (223,423) 651,514 (713,649)
Accounts payable and accrued
liabilities................. 1,458,581 470,004 223,834 536,319 (192,528)
------------- ------------- ------------- ------------- -------------
(1,265,082) (1,353,840) (2,098,030) (3,060,716) (2,871,216)
Financing:
Increase in long-term debt........ -- -- 46,982 -- --
Repayment of long-term debt....... (15,996) (41,752) (56,513) (67,256) (59,071)
Convertible debenture............. -- -- -- -- (248,302)
Issuance of share capital, net.... 2,432,515 192,849 893,850 3,754,339 5,402,476
------------- ------------- ------------- ------------- -------------
2,416,519 151,097 884,319 3,687,083 5,095,103
Investments:
Proceeds on disposal of capital
assets.......................... 4,307 2,800 11,200 18,084 52,062
Purchase of capital assets........ (44,645) (284,004) (401,352) (545,178) (73,581)
Purchase of intangible assets..... (27,980) (45,237) (34,840) (280,691) (351,144)
------------- ------------- ------------- ------------- -------------
(68,318) (326,441) (424,992) (807,785) (372,663)
------------- ------------- ------------- ------------- -------------
Increase (decrease) in cash (bank
indebtedness)....................... 1,083,119 (1,529,184) (1,638,703) (181,418) 1,851,224
Cash (bank indebtedness), beginning of
year................................ 27,383 1,666,086 1,666,086 1,847,504 (3,720)
------------- ------------- ------------- ------------- -------------
Cash, end of year..................... $ 1,110,502 $ 136,902 $ 27,383 $ 1,666,086 $ 1,847,504
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Cash is defined as cash and term deposits less bank indebtedness.
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
1. NATURE OF OPERATIONS:
The Company develops and distributes sodas and water which are bottled under
contract by third parties.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Operations:
These consolidated financial statements have been prepared on a basis
which assumes the realization of assets and settlement of liabilities in
the normal course of business. During the years ended December 31, 1998,
and 1997, the Company incurred losses of $2,341,707 and $3,970,577,
respectively. The Company's ability to continue with its planned course
of expansion and to recover its investment in capital and intangible
assets is dependent upon raising additional financing and generating
future profitable operations. Subsequent to year end, the Company entered
into private placements to raise $2,000,000 in equity financing.
(b) Basis of consolidation:
The consolidated financial statements include the assets, liabilities,
revenues and expenses of Urban Juice & Soda Company Ltd. (the parent) and
its wholly-owned subsidiaries, Wazu Products Ltd., Zip City Distribution
Co. (Vancouver) Ltd., Vancouver Island Beverage Company Ltd., and Urban
Juice and Soda (USA) Inc. All material intercompany transactions and
balances have been eliminated.
(c) Inventory:
Inventory has been valued at the lower of cost and net realizable value
with cost being determined on a First In - First Out basis. Cost includes
laid-down cost that is cost of material plus the cost of direct labour
applied to the product and applicable overhead chargeable to production
plus delivery and storage costs plus applicable overheads.
(d) Capital assets:
Capital assets are recorded at cost and are amortized on the declining
balance basis over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Equipment............................................. 20% to 50%
Automobile and computers.............................. 30%
Leasehold improvements................................ 20%
Equipment under capital lease......................... lease term
</TABLE>
(e) Intangible assets:
(i) The Company follows the policy of capitalizing development costs,
including artwork and design, marketing and production, and
consulting and licencing relating to new projects. Deferred
development costs are amortized on a straight-line basis over five
years from
F-6
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the date of commercial production. When a project is abandoned, the
related development costs are written off.
(ii) Trademarks and patents are amortized over their estimated useful
lives of five years.
(f) Revenue recognition:
Sales are recorded upon shipment of products, and represent amounts
realized net of sales returns, discounts and allowances.
Sales returns are recognized once the Company has picked up the returned
goods by issuing a credit note to the customer. Discounts are offered to
customers via promotional events. Discounts are recorded by issuing a
credit note for the discounted amount on shipment of the goods.
(g) Loss per share:
Basic loss per share is based upon the weighted average number of common
shares outstanding of 14,037,202 (1997--11,868,160; 1996--8,779,905).
Fully diluted loss per share has not been presented as all outstanding
options (1998--1,494,750; 1997--1,054,076; 1996-- 1,123,696)
(1998--914,000; 1997--2,631,700; 1996--3,397,700) and warrants are
anti-dilutive.
(h) Foreign currency:
The Company's foreign operations are considered to be integrated and
accordingly the Company uses the temporal method of translation. Monetary
items denominated in foreign currency are translated to Canadian dollars
at exchange rates in effect at the balance sheet date and non-monetary
items are translated at rates of exchange in effect when the assets were
acquired or obligations incurred. Revenues and expenses are translated at
rates in effect at the time of the transactions. Foreign exchange gains
and losses are included in income.
(i) Use of 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 at the date of
the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Items involving the significant
use of management estimates include the carrying value of intangible
assets, collectibility of accounts receivable, useful lives of capital
assets, and valuation of inventory. Actual results could differ from
those estimates.
(j) Advertising costs:
The Company expenses all advertising costs as incurred. Prepaid
advertising costs are amortized over a 12 month period which is the
average period the related advertising services are being provided.
During the years ended December 31, 1998, 1997, and 1996, the Company
incurred advertising costs of $1,133,599, $1,419,416 and $555,374,
respectively.
F-7
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
JUNE 30, ------------ ------------
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
Trade.............................................. $ 3,308,828 $1,543,110 $ 986,832
Other.............................................. 71,050 36,584 108,195
Allowance for doubtful accounts.................... (323,829) (308,224) (285,609)
------------ ------------ ------------
$ 3,056,049 $1,271,470 $ 809,418
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
4. INVENTORY:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
JUNE 30, ------------ ------------
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods..................................... $ 1,009,113 $ 440,234 $ 733,319
Raw materials...................................... 643,249 383,280 357,380
------------ ------------ ------------
$ 1,652,362 $ 823,514 $1,090,699
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
During 1997, $353,797 of inventory was written off to cost of sales as
the inventory was determined to be unsaleable due to improper concentrate
levels and labels which did not meet certain regulations. This inventory
was initially acquired during 1996, and it was determined to be
unsaleable in February 1997.
F-8
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
5. CAPITAL ASSETS:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
JUNE 30, 1999 (UNAUDITED) COST AMORTIZATION VALUE
- ------------------------------------------------------ ------------ ------------ ----------
<S> <C> <C> <C>
Equipment............................................. $ 1,232,761 $ 536,878 $ 695,883
Equipment under capital lease......................... 49,455 12,363 37,092
Automotive............................................ 87,629 42,519 45,110
Leasehold improvements................................ 1,306 495 811
------------ ------------ ----------
$ 1,371,151 $ 592,255 $ 778,896
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
DECEMBER 31, 1998 COST AMORTIZATION VALUE
- ------------------------------------------------------ ------------ ------------ ----------
<S> <C> <C> <C>
Equipment............................................. $ 1,249,669 $ 462,737 $ 786,932
Equipment under capital lease......................... 49,455 7,418 42,037
Automotive............................................ 40,408 35,343 5,065
Leasehold improvements................................ 1,306 365 941
------------ ------------ ----------
$ 1,340,838 $ 505,863 $ 834,975
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
DECEMBER 31, 1997 COST AMORTIZATION VALUE
- -------------------------------------------------------- ---------- ------------ ----------
<S> <C> <C> <C>
Equipment............................................... $ 927,545 $ 267,227 $ 660,318
Automotive.............................................. 40,048 33,328 6,720
Leasehold improvements.................................. 906 180 726
---------- ------------ ----------
$ 968,499 $ 300,735 $ 667,764
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
6. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
JUNE 30, ------------ ------------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C>
Artwork and design.................................. $ 164,867 $ 164,867 $ 164,867
Marketing and production, consulting and
licensing......................................... 418,318 418,318 418,318
Trademarks and patents.............................. 225,736 176,314 244,345
----------- ------------ ------------
808,921 759,499 827,530
Less amortization................................... (383,008) (305,400) (193,079)
----------- ------------ ------------
$ 425,918 $ 454,099 $ 634,451
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
In June 1998 it became apparent that advertising services previously paid
for in advance were not going to be provided once the marketing contract to
which these services were related was
F-9
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
6. INTANGIBLE ASSETS: (CONTINUED)
cancelled, and accordingly the Company wrote off the amount capitalized. The
amount written off was $102,871. The write-down relates to assets to be
disposed of after amortization expense of $102,870 in 1998 ($3,960--1997,
$89,177--1996).
7. BANK INDEBTEDNESS:
Operating line of credit up to an amount of $1,500,000 (U.S. $1,000,000)
bearing interest at prime plus 1.5% (9.25%), secured by assignment of all
assets.
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
JUNE 30, ------------ ------------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C>
Bank term loans, repayable in various monthly
instalments with interest at prime plus 1.75%
(8.5%), secured by chattel mortgages over
equipment of the Company.......................... $ -- $ 8,578 $ 65,091
Capital lease obligations payable in monthly
instalments of $1,605 including principal and
interest at 10.4%, maturing October 2001.......... 39,564 46,982 --
----------- ------------ ------------
39,564 55,560 65,091
Less current portion................................ (23,645) (23,645) (65,091)
----------- ------------ ------------
$ 15,919 $ 31,915 $ --
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
Principal portion of long-term debt due within each of the next three years
are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 23,645
2000............................................................... 16,712
2001............................................................... 15,203
---------
$ 55,560
---------
---------
</TABLE>
9. SHARE CAPITAL:
(a) Authorized:
100,000,000 common shares without par value.
F-10
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
9. SHARE CAPITAL: (CONTINUED)
(b) Issued:
<TABLE>
<CAPTION>
NUMBER
OF SHARES AMOUNT
------------ -------------
<S> <C> <C>
Balance, December 31, 1995....................................... 7,354,701 $ 2,892,270
Issued for cash:
Exercise of share purchase options............................. 429,872 547,252
Exercise of share purchase warrants............................ 300,000 303,000
Private placement.............................................. 186,000 427,320
Conversion of debentures....................................... 160,191 248,296
Public offering (net of issue costs of $1,324,014)............. 2,281,700 3,793,647
Issued for debt.................................................. 30,148 82,825
Underwriters' unit warrants...................................... -- 136
------------ -------------
3,387,911 5,402,476
------------ -------------
Balance, December 31, 1996....................................... 10,742,612 8,294,746
Issued for cash:
Exercise of share purchase options............................. 214,974 271,637
Exercise of share purchase warrants............................ 400,000 368,000
Private placement (net of issue costs of $271,505)............. 2,293,578 3,168,862
Share issue costs.............................................. -- (54,160)
------------ -------------
2,908,552 3,754,339
------------ -------------
Balance, December 31, 1997....................................... 13,651,164 12,049,085
Return of shares to treasury..................................... (20,000) (21,400)
Issued for cash:
Exercise of share purchase options............................. 605,000 490,250
Private placement (net of issue costs of $32,000).............. 914,000 425,000
------------ -------------
1,519,000 915,250
------------ -------------
Balance, December 31, 1998....................................... 15,150,164 12,942,935
------------ -------------
Issued for cash:
Private placement (net of issue costs of $200,550)............. 3,510,754 2,432,515
------------ -------------
Balance, June 30, 1999........................................... 18,660,918 $ 15,375,450
------------ -------------
------------ -------------
</TABLE>
(i) The shares returned to treasury in 1998 relate to a promissory note
signed by an employee of the Company to exercise their option to
purchase 20,000 shares at the exercise price of $1.07 which was
never paid, therefore, the shares were returned to treasury.
F-11
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
9. SHARE CAPITAL: (CONTINUED)
(ii) The 7% per annum convertible debentures had a conversion feature,
allowing the holder to convert the debentures to common shares
based on a conversion price of $1.30 per share for the first year
(1995), $1.55 for the second year (1996), and $1.80 for the third
year (1997). The conversion price for the first year was based on
market price at the date when the debentures were issued, with
$0.25 per share incremental increases for each of the next two
years that the debentures were not converted, up to a maximum of
three years. During 1996, debentures aggregating $248,296 were
converted to 160,191 common shares.
(c) Share purchase options:
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1995 ISSUED EXERCISED EXPIRED 1996
- ----------------------------------------- --------- ------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
May 1, 1997.............................. $ 0.95 37,500 -- 22,500 -- 15,000
July 21, 1997............................ 0.84 15,000 -- 10,000 -- 5,000
August 14, 1997.......................... 0.86 249,568 -- 237,068 -- 12,500
August 26, 1997.......................... 1.07 125,000 -- 5,000 -- 100,000
August 29, 1997.......................... 1.13 25,000 -- 25,000 -- --
October 3, 1997.......................... 1.64 10,000 -- 304 -- 9,696
November 29, 1997........................ 2.15 200,000 -- 130,000 -- 70,000
February 14, 1998........................ 2.50 -- 90,000 -- -- 90,000
February 22, 1998........................ 3.05 -- 60,000 -- -- 60,000
April 22, 1998........................... 3.25 -- 41,500 -- -- 41,500
November 5, 1998......................... 2.00 -- 165,000 -- -- 165,000
December 13, 1998........................ 1.50 -- 210,000 -- -- 210,000
December 13, 1999........................ 1.50 -- 25,000 -- -- 25,000
December 19, 1998........................ 1.60 -- 320,000 -- -- 320,000
------------ ---------- ----------- --------- ------------
662,068 911,500 429,872 1,123,696
------------ ---------- ----------- --------- ------------
------------ ---------- ----------- --------- ------------
</TABLE>
F-12
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
9. SHARE CAPITAL: (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1996 ISSUED EXERCISED EXPIRED 1997
- ----------------------------------------- --------- ------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
May 1, 1997.............................. $ 0.95 15,000 -- 4,000 11,000 --
July 21, 1997............................ 0.84 5,000 -- 5,000 -- --
August 14, 1997.......................... 0.86 12,500 -- 12,500 -- --
August 26, 1997.......................... 1.07 100,000 -- 86,800 13,200 --
August 29, 1997.......................... 1.64 9,696 -- -- 9,696 --
October 3, 1997.......................... 2.15 70,000 -- -- 70,000 --
November 29, 1997........................ 2.50 90,000 -- -- 90,000 --
February 14, 1998........................ 3.05 60,000 -- -- 55,000 5,000
February 22, 1998........................ 3.25 41,500 -- -- 11,500 30,000
April 22, 1998........................... 3.25 -- 6,500 -- -- 6,500
November 5, 1998......................... 2.00 165,000 30,000 -- -- 195,000
December 13, 1998........................ 1.50 210,000 -- 106,674 103,326 --
December 13, 1999........................ 1.50 25,000 -- -- -- 25,000
December 19, 1998........................ 1.60 320,000 -- -- 26,174 293,826
February 7, 1999......................... 1.50 -- 122,000 -- 56,750 65,250
November 10, 1999........................ 1.60 -- 87,500 -- -- 87,500
April 29, 1999........................... 1.75 -- 191,000 -- -- 191,000
September 17, 1999....................... 1.50 -- 155,000 -- -- 155,000
------------ ---------- ----------- --------- ------------
1,123,696 592,000 214,974 446,646 1,054,076
------------ ---------- ----------- --------- ------------
------------ ---------- ----------- --------- ------------
</TABLE>
F-13
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
9. SHARE CAPITAL: (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1997 ISSUED EXERCISED EXPIRED 1998
- ----------------------------------------- --------- ------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
February 14, 1998........................ $ 2.00 5,000 -- -- 5,000 --
February 22, 1998........................ 3.05 30,000 -- -- 30,000 --
April 22, 1998........................... 3.25 6,500 -- -- 6,500 --
November 5, 1998......................... 2.00 195,000 -- -- 195,000 --
December 13, 1999........................ 1.50 25,000 -- -- -- 25,000
February 7, 1999......................... 1.50 65,250 -- -- -- 65,250
December 19, 1998........................ 1.60 293,826 -- -- 293,826 --
March 10, 2002........................... 1.60 87,500 -- -- -- 87,500
April 29, 1999........................... 1.75 191,000 -- -- 99,000 92,000
September 17, 1999....................... 1.50 155,000 -- -- 75,000 80,000
January 19, 2003......................... 0.85 -- 350,000 285,000 6,000 59,000
February 13, 2003........................ 1.00 -- 350,000 320,000 -- 30,000
February 23, 2003........................ 1.00 -- 295,000 -- -- 295,000
March 24, 2003........................... 1.00 -- 100,000 -- -- 100,000
May 22, 2003............................. 1.15 -- 125,000 -- -- 125,000
September 17, 1999....................... 1.15 -- 5,000 -- -- 5,000
May 22, 2000............................. 1.15 -- 11,000 -- -- 11,000
June 1, 2003............................. 1.15 -- 232,000 -- -- 232,000
July 24, 2003............................ 1.00 -- 270,000 -- -- 270,000
October 9, 2003.......................... 1.00 -- 10,000 -- -- 10,000
June 1, 2000............................. 1.15 -- 8,000 -- -- 8,000
------------ ---------- ----------- --------- ------------
1,054,076 1,756,000 605,000 710,326 1,494,750
------------ ---------- ----------- --------- ------------
------------ ---------- ----------- --------- ------------
</TABLE>
F-14
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
9. SHARE CAPITAL: (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING
OUTSTANDING JUNE 30,
DECEMBER 31, 1999
EXPIRY DATES PRICE 1998 ISSUED EXERCISED EXPIRED ------------
- ----------------------------------------- --------- ------------ ---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
February 14, 1998........................ 2.00 -- -- -- -- --
February 22, 1998........................ 3.05 -- -- -- -- --
April 22, 1998........................... 3.25 -- -- -- -- --
November 5, 1998......................... 2.00 -- -- -- -- --
December 13, 1998........................ 1.50 25,000 -- -- -- 25,000
February 7, 1999......................... 1.50 65,250 -- -- 50,250 15,000
December 19, 1998........................ 1.60 -- -- -- -- --
March 10, 2002........................... 1.60 87,500 -- -- 22,500 65,000
April 29, 1999........................... 1.75 92,000 -- -- 57,000 35,000
September 17, 1999....................... 1.50 80,000 -- -- 20,000 60,000
January 19, 2003......................... 0.85 59,000 -- -- -- 59,000
February 13, 2003........................ 1.00 30,000 -- -- -- 30,000
February 23, 2003........................ 1.00 295,000 -- -- 10,000 285,000
March 24, 2003........................... 1.00 100,000 -- -- -- 100,000
May 22, 2003............................. 1.15 125,000 -- -- -- 125,000
September 17, 1999....................... 1.15 5,000 -- -- -- 5,000
May 22, 2000............................. 1.15 11,000 -- -- -- 11,000
June 1, 2003............................. 1.15 232,000 -- -- -- 232,000
July 24, 2003............................ 1.00 270,000 -- -- -- 270,000
October 9, 2003.......................... 1.00 10,000 -- -- -- 10,000
June 1, 2000............................. 1.15 8,000 -- -- -- 8,000
February 23, 2000........................ 1.00 -- 10,000 -- -- 10,000
February 9, 2001......................... .80 -- 25,000 -- -- 25,000
March 5, 2001............................ 1.00 -- 60,000 -- -- 60,000
November 5, 2001......................... 2.00 -- 30,000 -- -- 30,000
September 17, 2002....................... 1.50 -- 20,000 -- -- 20,000
February 28, 2004........................ .75 -- 350,000 -- -- 350,000
February 9, 2004......................... .80 -- 280,000 -- -- 280,000
March 5, 2004............................ .85 -- 160,000 -- -- 160,000
May 7, 2004.............................. 1.15 -- 67,000 -- -- 67,000
May 31, 2004............................. .90 -- 100,000 -- -- 100,000
------------ ---------- ----------- --------- ------------
1,494,750 1,102,000 -- 159,750 2,437,000
------------ ---------- ----------- --------- ------------
------------ ---------- ----------- --------- ------------
</TABLE>
F-15
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
9. SHARE CAPITAL: (CONTINUED)
(d) Share purchase warrants:
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1995 ISSUED EXERCISED 1996
- ---------------------------------------------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
On or before June 9, 1996..................... $ 1.01 300,000 -- 300,000 --
On or before August 14, 1997.................. 0.92 400,000 -- -- 400,000
On or before November 14, 1997................ 1.96 300,000 -- -- 300,000
On or before February 26, 1997/98............. 2.50/2.88 -- 350,000 -- 350,000
On or before January 17, 1997/98.............. 1.52/1.75 -- 66,000 -- 66,000
On or before September 17, 1997/98............ 2.70/3.375 -- 2,281,700 -- 2,281,700
------------ ---------- ----------- ------------
1,000,000 2,697,700 300,000 3,397,700
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1996 EXERCISED EXPIRED 1997
- ---------------------------------------------- ------------ ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
August 14, 1997............................... $ 0.92 400,000 400,000 -- --
November 14, 1997............................. $ 1.96 300,000 -- 300,000 --
February 26, 1997/98.......................... $ 2.50/2.88 350,000 -- -- 350,000
January 17, 1997/98........................... $ 1.52/$1.75 66,000 -- 66,000 --
September 17, 1997/98......................... $ 2.70/$3.75 2,281,700 -- -- 2,281,700
------------ ---------- --------- ------------
3,397,700 400,000 366,000 2,631,700
------------ ---------- --------- ------------
------------ ---------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1997 ISSUED EXPIRED 1998
- ---------------------------------------------- ------------ ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
February 26, 1997/98.......................... $ 2.50/$2.88 350,000 -- 350,000 --
September 17, 1997/98......................... $ 2.57/$3.75 2,281,700 -- 2,281,700 --
December 9, 2000/2001......................... $ 0.60 -- 850,000 -- 850,000
------------ --------- ---------- ------------
2,631,700 850,000 2,631,700 850,000
------------ --------- ---------- ------------
------------ --------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING
OUTSTANDING JUNE 30,
DECEMBER 31, 1999
EXPIRY DATES PRICE 1998 ISSUED EXPIRED ------------
- ----------------------------------------------- ------------ ------------ ---------- ----------- (UNAUDITED)
<S> <C> <C> <C> <C> <C>
December 9, 2000/2001.......................... $ 0.60 850,000 -- -- 850,000
May 4, 2000/2001............................... $ 0.75/$0.90 -- 1,458,947 -- 1,458,947
------------ ---------- --- ------------
850,000 1,458,947 -- 2,308,947
------------ ---------- --- ------------
------------ ---------- --- ------------
</TABLE>
F-16
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
9. SHARE CAPITAL: (CONTINUED)
(e) Brokers' unit warrants and other share purchase warrants:
In addition to the share purchase warrants summarized above, the Company
issued two-year warrants to purchase 40,000 common shares on June 18,
1998 at an exercise price of $1.00 per share for the first year, and
$1.15 per share for the second year in connection with the closing of a
bank loan. Two-year brokers' unit warrants were also issued to purchase
64,000 common shares at an exercise price of $0.60 per share in
connection with a private placement that closed on December 9, 1998.
Subsequent to year end, additional two-year brokers' unit warrants to
purchase 197,620 common shares at an exercise price of $0.75 per share
for the first year and $0.90 per share for the second year were issued in
connection with the closing of a private placement on May 4, 1999.
In 1996, in conjunction with a public offering, the Company issued
two-year underwriters' warrants to purchase 212,103 common shares at an
exercise price of $2.70 for the first year and $3.38 for the second year.
The exercise prices associated with warrants issued are determined by
the market price at the warrant is granted based on the price per share
at end of day market close. The Company uses the intrinsic value method
to account for these warrants and accordingly no stock based compensation
has been recorded.
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1996 ISSUED EXERCISED EXPIRED 1997
- ---------------------------------- ------------ ------------ --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
September 27, 1997/1998........... $ 2.70/$3.38 212,103 -- -- -- 212,103
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
DECEMBER 31, DECEMBER 31,
EXPIRY DATES PRICE 1997 ISSUED EXERCISED EXPIRED 1998
- ---------------------------------- ------------ ------------ --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
December 9, 2000/2001............. $ 0.60 -- 64,000 -- -- 64,000
September 27, 1997/1998........... $ 2.70/$3.38 212,103 -- -- 212,103 --
------------ --------- ----------- ----------- ------------
212,103 64,000 -- 212,103 64,000
------------ --------- ----------- ----------- ------------
------------ --------- ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING EXPIRED OUTSTANDING
DECEMBER 31, ----------- JUNE 30,
EXPIRY DATES PRICE 1998 ISSUED EXERCISED 1999
- ---------------------------------- ------------ ------------ --------- ----------- (UNAUDITED) ------------
<S> <C> <C> <C> <C> <C> <C>
December 9, 2000/2001............. $ 0.60 64,000 -- -- -- 64,000
May 4, 2000/2001.................. $ 0.75/$0.90 -- 197,620 -- -- 197,620
------------ --------- ----------- ----------- ------------
64,000 197,620 -- -- 261,620
------------ --------- ----------- ----------- ------------
------------ --------- ----------- ----------- ------------
</TABLE>
F-17
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
10. COMMITMENTS AND CONTINGENCIES:
(a) Lease commitments:
The Company has lease commitments for office and warehouse premises
expiring at various dates. All rental payments are fixed rental payments,
as the Company does not have any contingent rental payments. The
agreements require base rental payments over the next five years as
follows:
<TABLE>
<S> <C>
1999.............................................................. $ 52,534
2000.............................................................. 52,744
2001.............................................................. 53,623
2002.............................................................. 55,380
2003.............................................................. 55,380
---------
$ 269,661
---------
---------
</TABLE>
(b) Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect an
entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting
the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
11. INCOME TAXES:
The Company, through its subsidiaries, has tax losses carried forward of
approximately $10,000,000 which may be applied against future earnings.
These losses expire between 1999 and 2005. The future income tax benefits
which may result from these losses have not been recognized in the financial
statements, as there is no sufficient assurance that these tax benefits will
be realized.
12. SEGMENTED INFORMATION AND EXPORT SALES:
The Company operates in one industry segment and substantially all of its
operations are based in Canada. During the year ended December 31, 1998,
export sales to the United States were approximately $5,460,000
(1997--$2,143,000).
F-18
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
13. FINANCIAL INSTRUMENTS:
(a) Fair values:
As at December 31, 1998, the carrying amounts reported in the balance
sheets for cash and term deposits, accounts receivable, accounts payable
and accrued liabilities approximate fair values, due to short term to
maturity of these instruments. Fair value of long term debt is based on
the present value of contractual payments using current market interest
rates as a discount factor. The carrying value of long term debt reported
on the balance sheet approximates fair value either because the debt
bears interest at floating rates, or because it bears interest at fixed
rates which approximate current market rates.
(b) Concentration of credit risk:
The Company mainly sells its products to customers in the United States
and Canada. Customers in the United States represent 78% or $1,203,626
(1997--76% or $749,992), while customers in Canada represent 22% or
$339,484 (1997--24% or $236,840) of year end accounts receivable trade
balances. The Company has credit policy controls in place to mitigate
this risk.
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP):
(a) The following table sets forth a reconciliation of loss determined under
Canadian GAAP with that determined under United States GAAP adjusted to
expense product development costs as period costs and to record stock
compensation expense,
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
JUNE 30, ------------- ------------- -------------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Loss determined under Canadian GAAP..................... $ (293,788) $ (2,341,707) $ (3,970,577) $ (2,426,252)
Stock compensation expense (note 14(g))................. -- (18,607) -- --
Income (expense) relating to product development
costs................................................. (42,000) 84,000 (39,911) (273,479)
----------- ------------- ------------- -------------
Loss determined under United States GAAP................ $ (335,788) $ (2,276,314) $ (4,010,488) $ (2,699,731)
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
</TABLE>
(b) Loss per share:
The Company has adopted Statement of Financial Accounting Standard No.
128 ("SFAS 128") "Loss Per Share".
The loss per share computed in accordance with Canadian GAAP includes
1,500,000 common shares held in escrow. The Vancouver Stock Exchange
requires that these shares be held in escrow, and any dealings in these
shares are subject to the direction or determination of the Vancouver
Stock Exchange. The escrow restrictions prohibit all trading or dealing
in any manner with or release of, the escrow shares without the consent
of the Vancouver Stock Exchange and further prohibit the recording of
trading or any transfer of the escrow shares prior to release from escrow
without such consent. The holder of escrow shares has the right
F-19
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP): (CONTINUED)
to vote the escrow shares, except on a resolution to cancel the escrow
shares, but has waived the right to receive dividends and to participate
in our assets and property on our winding-up or dissolution. These escrow
shares are held by Peter van Stolk (573,500), William Wong (301,250),
Brian G. Richards (250,000), Carl Mark (225,000) and Tony Peiffer
(150,000), all of whom were either directors or officers of the Company
at the time of the escrow agreement. The holders of the escrow shares
will be entitled to the pro-rata release of a number of shares equal to
the amount of cumulative cash flow produced by the Company not previously
applied toward a release, divided by the earned price of $0.125. Under
U.S. GAAP, such common shares would not be included in loss per share
calculations, and, upon eligibility for release from escrow, the fair
value of these shares would be charged against income as compensation
expense. Loss per share calculated in accordance with U.S. GAAP would be
as follows:
Under US GAAP, any release of these escrow shares would be recorded as
compensation expense at the time of release in accordance with APB 25
(note 14(g)).
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
JUNE 30, ------------ ------------ ------------
1999
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average number of common shares................ 17,228,815 14,037,202 11,868,160 8,779,905
Less common shares held in escrow....................... 1,500,000 1,500,000 1,500,000 1,500,000
------------ ------------ ------------ ------------
Weighted average number of shares for purposes of loss
per share calculation................................. 15,728,815 12,537,202 10,368,160 7,279,905
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per share.......................................... $ (0.02) $ (0.18) $ (0.39) $ (0.37)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-20
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP): (CONTINUED)
(c) The following sets forth the effect of adjusting for expenditures
relating to product development costs, which are expensed as period costs
under U.S. GAAP, on the assets and shareholders' equity of the Company:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
JUNE 30, ------------- -------------
1999
-------------
(UNAUDITED)
<S> <C> <C> <C>
Artwork and design expenditure...................................... $ 164,867 $ 164,867 $ 164,867
Marketing, production consulting and licensing expenditures......... 418,318 418,318 418,318
Amortization........................................................ (217,191) (259,191) (175,191)
Decrease in intangible asset........................................ $ 365,994 $ 323,994 $ 407,994
------------- ------------- -------------
------------- ------------- -------------
Share capital under Canadian GAAP................................... $ 15,375,450 $ 12,942,935 $ 12,049,085
Share issue costs under US GAAP (Note 14(g))........................ (307,131) (247,179) (231,646)
------------- ------------- -------------
Share capital under US GAAP......................................... $ 15,068,319 $ 12,695,756 $ 11,817,439
------------- ------------- -------------
------------- ------------- -------------
Share purchase warrants under Canadian GAAP......................... $ -- $ -- $ --
Share purchase warrants under US GAAP:
Issued in connection with bank loan............................... 18,607 18,607 --
Issued to brokers and underwriters................................ 307,131 247,179 231,646
------------- ------------- -------------
Share purchase warrants under US GAAP............................... $ 325,738 $ 265,786 $ 231,646
------------- ------------- -------------
------------- ------------- -------------
Shareholders deficit under Canadian GAAP............................ $ 10,910,176 $ 10,616,388 $ 8,274,681
Artwork and design expenditures..................................... 164,867 164,867 164,867
Marketing, production consulting and licensing expenditures......... 418,318 418,318 418,318
Amortization........................................................ (217,191) (259,191) (175,191)
Stock compensation.................................................. 18,607 18,607 --
Employee share purchase loans....................................... -- -- 21,400
------------- ------------- -------------
Shareholders deficit under US GAAP.................................. $ 11,204,777 $ 10,958,989 $ 8,704,075
</TABLE>
Employee share purchase loans:
Under U.S. GAAP, employee share purchase loans are to be recorded as a
reduction to shareholders' equity, which differs from Canadian GAAP
whereby they are recorded as an account receivable. This adjustment for
U.S. GAAP purposes would result in a decrease in accounts receivable by
$21,400 and a decrease in shareholders' equity by $21,400 in 1997. There
would be no adjustment in 1998 relating to employee share purchase loans.
F-21
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP): (CONTINUED)
(d) Statements of cash flows:
Cash flows from operating, financing and investing activities would be
presented as follows under United States accounting principles:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
JUNE 30, ------------- ------------- -------------
1999
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Loss for the year...................................... $ (335,788) $ (2,276,314) $ (4,010,483) $ (2,699,731)
Items not involving cash:
Amortization......................................... 198,885 233,452 119,354 106,195
Loss (gain) on disposal of capital assets............ (4,307) 17,813 (12,584) 6,921
Write down of inventory.............................. -- -- 353,797 --
Write down of intangible assets...................... -- 102,871 -- --
Shares issued for services........................... -- -- -- 204,000
Stock compensation..................................... -- 18,607 -- --
Changes in non-cash operating working capital:
Accounts receivable.................................. (1,784,579) (462,052) (271,545) (34,884)
Inventory............................................ (828,848) 267,185 (545,394) 289,730
Prepaid expenses..................................... 30,974 (223,423) 651,514 (713,649)
Accounts payable and accrued liabilities............. 1,458,581 223,834 536,319 (109,701)
------------- ------------- ------------- -------------
Cash used in operating activities........................ (1,265,082) (2,098,027) (3,179,027) (2,951,119)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in bank indebtedness............... (309,600) 309,600 -- --
Proceeds on issuance of share capital, net............. 2,432,515 915,250 3,754,339 4,867,347
Payments of bank loans................................. (15,996) (56,513) (67,256) (33,784)
------------- ------------- ------------- -------------
Cash flows provided by financing activities.............. 2,106,919 1,168,377 3,687,083 4,833,562
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of capital assets............................. (44,645) (354,370) (545,178) (98,868)
Proceeds on disposal of capital assets................. 4,307 11,200 18,084 52,062
Purchase of intangible assets.......................... (27,980) (56,513) (162,380) 15,586
------------- ------------- ------------- -------------
(68,318) (399,453) (689,474) (31,220)
Increase (decrease) in cash.............................. 773,519 (1,329,103) (181,418) 1,851,224
Cash (bank indebtedness), beginning of year.............. 336,983 1,666,086 1,847,504 (3,720)
------------- ------------- ------------- -------------
Cash, end of year........................................ $ 1,110,502 $ 336,983 $ 1,666,086 $ 1,847,504
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-22
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP): (CONTINUED)
The following non-cash transactions have not been reflected in the above
statement:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
JUNE 30, ------------ --------------- ------------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Shares issued for services (60,000 common shares at
$3.40/share)........................................... -- -- -- (204,000)
Conversion of accounts payable to shares (30,148 common
shares at $2.75/share)................................. $ -- $ -- $ -- $ (82,825)
Conversion of debentures................................. -- -- -- (248,302)
Capital lease obligations................................ -- 46,982 -- --
Return of shares to treasury............................. -- (21,400)
</TABLE>
Shares issued for services and accounts payable during 1996 were valued
by their market price at the date the settlement transaction occurred,
based on the price per share at end of day market close.
(e) Accounting for income taxes:
Under the asset and liability method of Statement of Financial Accounting
Standard No. 109 ("FAS 109"), deferred income tax assets and liabilities
are measured using enacted tax rates to reflect the future income tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective
tax losses. There is no effect of adopting the provisions of FAS 109 on
the Company's financial statements, since the Company's deferred tax
assets under U.S. GAAP as at December 31, 1998 and 1997 were fully offset
by a valuation allowance, on the basis that it is not more likely than
not that the deferred tax assets will be realized due to the ongoing
losses incurred by the Company.
The Company's deferred tax asset consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Net operating loss carry forwards............................... $ 4,500,616 $ 2,856,051
Capital assets.................................................. 234,869 112,965
Intangible assets............................................... (204,345) (285,503)
------------- -------------
Total gross deferred tax assets................................. 4,531,140 2,683,513
Less valuation allowance........................................ (4,531,140) (2,683,513)
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
(f) Comprehensive income:
Net income for the Company is the same as comprehensive income.
F-23
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP): (CONTINUED)
(g) Stock based compensation:
Options granted under the Company's stock option plan have a maximum term
of five years. Under the terms of the plan an employee can exercise 25%
of the options received on the date they are received, 25% in six months,
25% in 12 months and the balance after 12 months. An employee has 30 days
to exercise their options from the date of termination of employment with
the Company, otherwise they expire. The Company has 3,400,000 shares
authorized for options. Warrants have a maximum term of two years, with
no specified limit of shares authorized for warrants. Options and
warrants are issued as incentives to employees, officers, directors and
consultants, and are valued based on their intrinsic value using the fair
value of the shares, less applicable nominal discounts reflecting
marketability of the shares, at the time of issuance. To date,
substantially all of these options and warrants have been priced at the
market value of the shares at the time of issuance.
For United States GAAP purposes the Company has adopted the disclosure
provisions of Statement of Financial Accounting Standard No. 123 ("FAS
123"), Accounting for Stock-Based Compensation. The Company continues to
record compensation expense following the intrinsic value principles of
APB 25 for Accounting for Stock Issued to Employees, under which no
compensation expense has been recognized in 1998, 1997 or 1996.
Had compensation cost been determined based on fair value at grant dates
for awards under those plans consistent with the measurement provisions
of FAS 123, unaudited pro forma information with respect to the impact of
the fair value of stock options at the date of grant on reported income
for the years presented is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss in accordance with US GAAP.................................. $ (2,276,314) $ (4,010,488) $ (2,699,731)
Compensatory fair value of options granted........................... (784,311) (275,388) (498,177)
------------- ------------- -------------
Pro forma net loss in accordance with US GAAP........................ $ (3,060,765) $ (4,285,876) $ (3,197,908)
------------- ------------- -------------
------------- ------------- -------------
Pro forma--Basic loss per share under US GAAP........................ $ (0.24) $ (0.32) $ (0.44)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
For these purposes, the fair value of each option is estimated on the
date of the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions; dividend yield 0% (1997--0%;
1996--0%), Canadian risk-free interest rates 4.84% (1997--5.22%;
1996--4.24%) and expected option term of between one to five years. The
weighted average fair value of the options granted was $0.45
(1997--$0.51; 1996--$0.55) per option.
Under United States GAAP, the Company is required to record stock-based
compensation relating to stock options and warrants issued to
non-employees, using the fair value provisions of FAS 123. For these
purposes, the fair value of each option and warrant is estimated on the
F-24
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP): (CONTINUED)
date of the grant using the Black-Scholes Option-Pricing model based on
the parameters described above.
Under US GAAP, the warrants issued in connection with the closing of a
bank loan as described in Note 9(e) would give rise to stock compensation
of $18,607 in the year ended December 31, 1998, such amount to be
recognized as interest expense over the term of the loan. As the loan is
due on demand, the entire amount has been recorded as interest in 1998.
Under US GAAP, the brokers' unit warrants and underwriters' warrants
issued in connection with the issue of common shares as described in Note
9(e) would give rise to stock based compensation, such amounts to be
recognized as share issue costs and reflected as a reduction of share
capital:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
JUNE 30, ------------ --------------- ------------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Share issue costs........................................ $ 59,952 $ 15,533 -- $ 231,646
----------- ------------ ----- ------------
----------- ------------ ----- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
JUNE 30, ------------ ------------ ------------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NUMBER OF OPTIONS:
Outstanding at beginning of period....................... 1,494,750 1,054,076 1,123,696 662,068
Granted during period.................................... 1,102,000 1,756,000 592,000 911,500
Exercised during period.................................. -- 605,000 214,974 429,872
Expired during period.................................... 159,750 710,326 446,646 --
Outstanding at end of period............................. 2,437,000 1,494,750 1,054,076 1,123,696
Exercisable at end of period............................. 494,500 1,051,750 1,024,196 1,033,568
WEIGHTED AVERAGE OPTION PRICES:
Options outstanding at beginning of period............... $1.17 $1.74 $1.82 $1.32
Options granted during period............................ $0.88 $1.00 $1.64 $1.91
Options exercised during period.......................... -- $0.93 $1.26 $1.27
Options expired during period............................ $1.57 $1.79 $2.02 --
Options outstanding at end of period..................... $1.01 $1.17 $1.74 $1.82
Options exerciseable at end of period.................... $1.21 $1.43 $1.73 $1.66
</TABLE>
(h) Sales return policy:
The Company's policy to record sales returns at the time the goods have
been picked up by the Company and issue a credit note to the customer
differs from SFAS 48. Under US GAAP, a reasonable estimate of costs or
losses that may be expected in connection with returns is accrued at the
time of sale and sales would be reduced and a contra-receivable
established for
F-25
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
14. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP): (CONTINUED)
the amount of the estimated returns. The impact of this difference is not
material for any of the periods presented.
(i) Prepaid advertising costs.
The Company's policy of amortizing prepaid advertising costs over a
twelve month period, which is the average period for which the related
advertising services are being provided, differs from US GAAP, which
would require those costs be amortized to expenses in the actual period
or periods in which the related advertising services are being provided.
The impact of this difference is not material for any periods provided.
15. COMPARATIVE FIGURES:
Certain of the 1996 and 1997 comparative figures have been reclassified to
conform with the financial presentation adopted in 1998.
16. CONTINUATION TRANSACTION:
Subsequent to December 31, 1998, WAZU Products Ltd. intends to sell the
assets used in its United States operations to Urban Juice and Soda USA Inc.,
which will be accounted for at historical cost under both Canadian and United
States GAAP since the parties to the transaction are under common control.
F-26
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
SCHEDULE OF OFFICE AND ADMINISTRATION EXPENSES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
JUNE 30,
1999
DECEMBER 31, DECEMBER 31, DECEMBER 31, -----------
1998 1997 1996
------------ ------------ ------------ (UNAUDITED)
<S> <C> <C> <C> <C>
Automobile............................................... $ 62,326 $ 54,955 $ 16,072 $ 29,859
Bank charges............................................. 18,532 12,054 26,502 10,188
Insurance, taxes and licences............................ 96,144 176,100 52,646 41,901
Office supplies, printing and postage.................... 201,190 225,599 125,367 91,359
Public company expense................................... 19,656 101,025 26,013 10,296
Rent..................................................... 91,869 105,816 114,358 47,371
Repairs and maintenance.................................. 5,842 10,513 18,428 3,394
Telephone................................................ 113,782 108,142 105,682 59,050
------------ ------------ ------------ -----------
$ 609,341 $ 794,204 $ 485,068 $ 293,418
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
F-27
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO OTHER END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- --------------------------------------- ----------- ----------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts........
Year ended December 31, 1998........... 285,609 83,567 0 (60,952) 308,224
Year ended December 31, 1997........... 0 463,470 0 (177,861) 285,609
Year ended December 31, 1996........... 0 139,301 0 (139,301) 0
</TABLE>
(1) Uncollected receivables written off, net of recoveries
F-28
<PAGE>
APPENDIX A
ARTICLES OF CONTINUANCE
OF
URBAN JUICE & SODA COMPANY LTD.
(i) A certified copy of the Memorandum and Articles of Urban Juice & Soda
Company Ltd. ("Urban Canada"), including all amendments thereto, are
attached hereto as EXHIBIT A.
(ii) The name of the corporation is "Urban Juice & Soda Company Ltd."
(iii) Urban Canada was incorporated on December 23, 1986 under the British
Columbia Company Act under the name 2072 Investment Ltd. On September 25,
1987, Urban Canada changed its name to Republic Aircraft Manufacturing
Corporation. On June 9, 1992, Urban Canada changed its name to
International Republic Aircraft Manufacturing Corporation and finally to
its present name on May 26, 1993. It has perpetual existence.
(iv) The address of Urban Canada's principle place of business is 1356 Frances
Street, Vancouver, B.C. V5L 1Y9, Canada.
(v) The address of the proposed registered office of Urban Juice & Soda
Company, Ltd. in Wyoming is 1720 Carey Avenue, Cheyenne, Wyoming 82001 and
the name of the registered agent at that address is CT Corporations System.
(vi) The purpose of Urban Juice & Soda Company, Ltd. is to conduct any lawful
business.
(vii) The names and respective business addresses of the directors and officers
of Urban Canada that will become officers and directors of Urban Juice &
Soda Company, Ltd., a Wyoming corporation, upon effectiveness of the
continuation are Peter M. van Stolk, President, Chief Executive Officer
and Director, Jennifer L. Cue, Chief Financial Officer, Secretary and
Director, Peter Strahm, Vice President of Sales--North America, Ron B.
Anderson, Director, Michael M. Fleming, Director, Matthew Kellogg,
Director and Peter Cooper, Director. Their business addresses are all
1356 Frances Street, Vancouver, B.C. V5L 1Y9, Canada.
(viii) The aggregate number of shares that Urban Canada is authorized to issue
is 100,000,000 common shares without par value. The common shares are all
of the same class and rank equally as to dividends, voting powers and
participation in assets. No common shares are subject to call or
assessment. There are no pre-emptive or conversion rights and no
provisions for redemption, retraction, purchase for cancellation,
surrender or sinking or purchase funds.
(ix) As of November 1, 1999, Urban Canada has 18,685,918 common shares issued
and outstanding.
(x) Urban Canada accepts the constitution of the State of Wyoming in compliance
with the requirements of Article 10, Section 5 of the Wyoming constitution.
Executed as of the day of , 1999.
Peter van Stolk,
PRESIDENT
A-1
<PAGE>
APPENDIX B
COMPANY ACT OF BRITISH COLUMBIA
DIVISION 2--DISSENT PROCEEDINGS
SECTION 207 DISSENT PROCEDURE
(1) If,
(a) being entitled to give notice of dissent to a resolution as provided in
section 37, 103, 126, 222, 244, 249 or 289, a member of a company (a
"dissenting member") gives notice of dissent,
(b) the resolution referred to in paragraph (a) is passed, and
(c) The company or its liquidator proposes to act on the authority of the
resolution referred to in paragraph (a),
The company or the liquidator must first give to the dissenting member
notice of the intention to act and advise the dissenting member of the
rights of dissenting members under this section.
(2) On receiving a notice of intention to act in accordance with subsection
(1), a dissenting member is entitled to require the company to purchase all
of the dissenting member's shares in respect of which the notice of dissent
was given.
(3) The dissenting member must exercise the right given by subsection (2) by
delivering to the registered office of the Company, within 14 days after
the company, or the liquidator, gives the notice of intention to act,
(a) a notice that the dissenting shareholder requires the company to
purchase all of the dissenting member's shares referred to in subsection
(2), and
(b) the share certificates representing all of those shares, and, on
delivery of that notice and those share certificates, the dissenting
member is bound to sell those shares to the company and the company is
bound to purchase them.
(4) A dissenting member who has complied with subsection (3), the company, or,
if there has been an amalgamation, the amalgamated company, may apply to
the court, and the court may
(a) require the dissenting member to sell, and the company or the
amalgamated company to purchase, the shares in respect of which the
notice of dissent has been given,
(b) set the price and terms of the purchase and sale, or order that the
price and terms be established by arbitration, in either case having due
regard for the rights of creditors,
(c) join in the application any other dissenting member who has complied
with subsection (3), and
(d) make consequential orders and give directions it considers appropriate.
(5) The price that must be paid to a dissenting shareholder for the shares
referred to in subsection (2) is their fair value as of the day before the
date on which the resolution referred to in subsection (1) was passed,
including any appreciation or depreciation in anticipation of the vote on
the resolution, and every dissenting member who has complied with
subsection (3) must be paid the same price.
(6) The amalgamation or winding up of the company, or any change in its
capital, assets or liabilities resulting from the company acting on the
authority of the resolution referred to in subsection (1),
B-1
<PAGE>
does not affect the right of the dissenting member and the company under
this section or the price to be paid for the shares.
(7) Every dissenting member who has complied with subsection (3)
(a) may not vote, or exercise or assert any rights of a member, in respect
of the shares for which notice of dissent has been given, other than
under this section,
(b) may not withdraw the requirement to purchase the shares, unless the
company consents, and
(c) until the dissenting member is paid in full, may exercise and assert all
the rights of a creditor of the company.
(8) If the court determines that a person is not a dissenting member, or is not
otherwise entitled to the right provided by subsection (2), the court,
without prejudice to any acts or proceedings that the company, its members,
or any class of members may have taken during the intervening period, may
make the order it considers appropriate to remove the limitations imposed
on the person by subsection (7).
(9) The relief provided by this section is not available if, subsequent to
giving notice of dissent, the dissenting member acts inconsistently with
the dissent, but a request to withdraw the requirement to purchase the
dissenting member's shares is not an act inconsistent with the dissent.
(10) A notice of dissent ceases to be effective if the dissenting member
consents to or votes in favor of the resolution of the company to which the
dissent relates, unless the consent or vote is given solely as a proxy
holder for a person whose proxy required an affirmative vote.
B-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subject to the provisions of the Wyoming Business Corporations Act, the
directors shall cause Urban Wyoming to indemnify a director or former director
of Urban Wyoming and the directors may cause Urban Wyoming to indemnify a
director or former director of a corporation of which Urban Wyoming is or was a
shareholder and the heirs and personal representatives of any former director
against all costs, charges and expenses, including an amount to settle an action
or satisfy a judgment, actually and reasonably incurred by him or them including
an amount paid to settle an action or satisfy a judgment in a civil, criminal or
administrative action or proceeding to which he is or they are made a party by
reason of his being or having been a director including any action brought by
Urban Wyoming. Each director of Urban Wyoming on being elected or appointed
shall be deemed to have contracted with Urban Wyoming on the terms of this
indemnity.
Subject to the provisions of the Wyoming Business Corporations Act, the
directors may cause Urban Wyoming to indemnify any officer, employee or agent of
Urban Wyoming or of a corporation of which Urban Wyoming is or was a shareholder
(notwithstanding that he is also a director) and his heirs and personal
representatives against all costs, charges and expenses whatsoever incurred by
him or them and resulting from his acting as an officer, employee or agent of
Urban Wyoming or the corporation.
The failure of a director or officer of Urban Wyoming to comply with the
provisions of the Wyoming Business Corporations Act or of the articles of
continuance shall invalidate any indemnity to which he is entitled under this
Part.
The directors may cause Urban Wyoming to purchase and maintain insurance for
the benefit of any person who is or was serving as a director, officer, employee
or agent of Urban Wyoming or as a director, officer, employee or agent of any
corporation of which Urban Wyoming is or was a shareholder and his heirs or
personal representatives against any liability incurred by him as a director,
officer, employee or agent.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
3.1* Articles of Continuance of Urban Juice & Soda Company Ltd.
3.2** Memorandum of Urban Juice & Soda Company Ltd.
3.3** Articles of Urban Juice & Soda Company Ltd.
5.1*** Opinion of Bagley Law Office
8.1 Opinion of Thorsteinssons
8.2 Opinion of KPMG LLP
10.1**** Bottling Agreement between Urban Juice & Soda and World Choice Bottling Corp.
10.2**** Bottle Supply Agreement between Urban Juice & Soda and Zuckerman-Honickman, Inc.
23.1*** Consent of Bagley Law Office (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3 Consent of Thorsteinssons (included in Exhibit 8.1)
24.1 Power of Attorney (included in the signature page to this registration statement)
99.1*** Letter to Shareholders
99.2*** Notice of Extraordinary General Meeting of Shareholders
99.3*** Form of Proxy
</TABLE>
- ------------------------
(*) Included as Appendix A to the proxy statement/prospectus.
(**) Filed as an exhibit to the SB-2 registration statement (No. 333-5156-LA),
as amended through the date hereof and incorporated herein by reference.
(***) Previously filed.
(****) Previously filed. Confidential treatment requested.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the proxy statement/prospectus pursuant to Items 4, 10(b), 11
or 13 of this Form, within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and Urban Canada being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such
II-2
<PAGE>
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Vancouver, British
Columbia, on November 10, 1999.
<TABLE>
<S> <C> <C>
URBAN JUICE & SODA CO.
By: /s/ PETER VAN STOLK
-----------------------------------------
Peter van Stolk
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ PETER M. VAN STOLK Officer and Director
- ------------------------------ (Principal Executive November 10, 1999
Peter M. van Stolk Officer)
Chief Financial Officer,
/s/ JENNIFER L. CUE Secretary and Director
- ------------------------------ (Principal Financial and November 10, 1999
Jennifer L. Cue Accounting Officer)
*
- ------------------------------ Director November 10, 1999
Ron B. Anderson
*
- ------------------------------ Director November 10, 1999
Michael M. Fleming
*
- ------------------------------ Director November 10, 1999
Matthew Kellogg
*
- ------------------------------ Director November 10, 1999
Peter Cooper
*/s/ JENNIFER CUE
- ------------------------------ Attorney-in-Fact November 10, 1999
Jennifer Cue
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1* Articles of Continuance of Urban Juice & Soda Company Ltd.
3.2** Memorandum of Urban Juice & Soda Company Ltd.
3.3** Articles of Urban Juice & Soda Company Ltd.
5.1*** Opinion of Bagley Law Office.
8.1 Opinion of Thorsteinssons
8.2 Opinion of KPMG LLP
10.1**** Bottling Agreement between Urban Juice & Soda and World Choice Bottling Corp.
10.2**** Bottle Supply Agreement between Urban Juice & Soda and Zuckerman-Honickman, Inc.
23.1*** Consent of Bagley Law Office
(included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3 Consent of Thorsteinssons (included in Exhibit 8.1)
24.1 Power of Attorney (included in the signature page to this registration statement)
99.1*** Letter to Shareholders
99.2*** Notice of extraordinary general meeting of Shareholders
99.3*** Form of Proxy
</TABLE>
- ------------------------
(*) Included as Appendix A to proxy statement/prospectus.
(**) Filed as an exhibit to the SB-2 registration statement (No. 333-5156-LA),
as amended through the date hereof and incorporated herein by reference.
(***) Previously filed.
(****) Previously filed. Confidential treatment requested.
<PAGE>
November 10, 1999
BY COURIER
Ms. Jennifer Cue
Chief Financial Officer
Urban Juice and Soda Company Ltd.
1356 Frances Street
Vancouver, British Columbia
V5L 1Y9
Dear Ms. Cue:
RE: URBAN JUICE & SODA COMPANY LTD. ("URBAN CANADA")
URBAN JUICE AND SODA COMPANY LTD.
(A TO-BE-FORMED WYOMING CORPORATION) ("URBAN WYOMING")
FORM S-4 REGISTRATION STATEMENT AMENDED EFFECTIVE NOVEMBER 10, 1999
INCLUDING A PROXY STATEMENT AND PROSPECTUS DATED
NOVEMBER 10, 1999 ("REGISTRATION STATEMENT")
OFFICER'S CERTIFICATE DATED NOVEMBER 10, 1999, TOGETHER
WITH SCHEDULES ("OFFICER'S CERTIFICATE")
We have reviewed the Registration Statement described above, and have assumed
that the facts stated therein are true. We have not reviewed any of the legal
documents referred to in the Registration Statement, but have assumed that
the legal obligations of Urban Canada and Urban Wyoming are accurately
described in the Registration Statement.
We have also reviewed the Officer's Certificate and have assumed that the
facts stated therein are true. Based on and subject to the foregoing, it is
our opinion that the material Canadian federal income tax consequences of the
proposed continuation of Urban Canada to Wyoming to shareholders and
warrantholders who are resident in Canada, who own, either alone or together
with related persons, less than 10% of the shares of Urban Canada, and to
whom shares and warrants of Urban Canada constitute capital property for the
purposes of the INCOME TAX ACT
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THORSTEINSSONS Tax Lawyers -2-
(Canada) (the "Act") ("Canadian Holders") are as follows. It is also our
opinion that the material Canadian federal income tax consequences of the
proposed continuation of Urban Canada to Wyoming to shareholders and
warrantholders who are non-residents of Canada, do not carry on business in
Canada, and who own, either alone or together with related persons, less than
10% of the shares of Urban Canada ("Non-resident Holders") are as described
below. Other shareholders and warrantholders of the Company should consult
their own tax advisors as the tax consequences to them of the proposed
continuation are beyond the scope of this opinion.
This opinion is based upon the current provisions of the Act, the regulations
therein, any proposed amendments to the Act or regulations previously
announced by the Federal Minister of Finance and counsel's understanding of
the current administrative and assessing policies of Revenue Canada, Customs,
Excise and Taxation. This opinion is not exhaustive of all possible Canadian
federal income tax consequences and does not take into account or anticipate
any changes in law, whether by legislative, governmental or judicial action
other than the Proposed Amendments, nor does it take into account provincial
or foreign tax considerations which may differ significantly from those
discussed herein.
THIS OPINION IS OF A GENERAL NATURE ONLY AND IT IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER.
ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH
RESPECT TO THE CANADIAN INCOME TAX CONSEQUENCES TO THEM OF THE PROPOSED
CONTINUATION.
NATURE OF SHARES AND WARRANTS OF URBAN CANADA HELD BY CANADIAN HOLDERS
The shares and warrants of Urban Canada will generally constitute "capital
property" to a Canadian Holder, unless the Canadian Holder is a trader or
dealer in securities or is engaged in an adventure in the nature of trade
with respect to the shares and warrants. Certain individual Canadian Holders
whose shares of Urban Canada might not otherwise qualify as "capital
property" may be entitled to obtain such qualification by disposing of their
shares before the time of the continuation and making an irrevocable election
under subsection 39(4) of the Act. After the continuation, the shares of
Urban Canada will no longer constitute Canadian securities for purposes of
the subsection 39(4) election. ANY INDIVIDUALS CONTEMPLATING MAKING AN
ELECTION UNDER SUBSECTION 39(4) OF THE ACT SHOULD CONSULT THEIR TAX ADVISORS
AS THE ELECTION WILL AFFECT THE CANADIAN INCOME TAX TREATMENT OF THE
DISPOSITION OF THE SHAREHOLDER'S OTHER CANADIAN SECURITIES.
PRE-CONTINUATION TRANSACTION
Before the continuation, WAZU Products Ltd. ("WAZU"), a subsidiary of Urban
Canada, will sell the assets used in its U.S. operations to Urban Juice and
Soda (USA) Inc., another subsidiary of Urban Canada, for proceeds of
disposition equal to the fair market value of its assets. WAZU
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THORSTEINSSONS Tax Lawyers -3-
will realize a gain on the sale equal to the amount by which the proceeds
exceed the tax cost of its assets. WAZU may then deduct any non-capital
losses available for carry-forward in computing its taxable income for the
year in which the sale takes place.
Based upon representations made by management in the Officer's Certificate
with respect to the fair market value and the tax cost of the assets to be
sold by WAZU, the non-capital losses available to be carried forward by WAZU,
and the projected taxable income of WAZU for the year in which the
disposition will take place, in our view as of this date no Canadian income
tax would be payable by WAZU as a result of the sale.
SHAREHOLDER CONSEQUENCES OF CONTINUATION
The continuation of Urban Canada into Wyoming will not constitute a taxable
event for Canadian Holders. Canadian Holders will continue to hold their
shares and warrants at the same adjusted cost base as before the continuation.
Any dividends paid to Canadian shareholders after Urban Canada's continuation
into Wyoming and reconstitution as Urban Wyoming will no longer be eligible
for the dividend tax credit provided under the Act. Under the CONVENTION
BETWEEN CANADA AND THE UNITED STATES OF AMERICA WITH RESPECT TO TAXES ON
INCOME AND ON CAPITAL (the "Canada-US Income Tax Convention") the US tax that
may be withheld from dividends paid to Canadian shareholders by Urban Wyoming
will be limited to a maximum rate of 15%. Canadian shareholders may claim a
foreign tax credit or a deduction in computing their taxable income for US
tax withheld on dividends paid by Urban Wyoming.
FOREIGN REPORTING
A Canadian resident is required under the Act to report his or her foreign
property holdings if the aggregate cost amount of such holdings exceeds
$100,000. Following the continuation, the shares and warrants of Urban
Wyoming will constitute foreign property for the purposes of this rule and
their "cost amount" will count towards the calculation of the $100,000
threshold.
DISSENT PROCEEDINGS
If a shareholder initiates formal dissent proceedings in respect of the
proposed continuation, Urban Canada will be required to purchase the
dissenting shareholder's shares for a cash payment equal to the fair value of
the shares. The redemption proceeds will generally be treated as a dividend
to the extent that such proceeds exceed the paid-up capital of the purchased
shares. The balance of the redemption proceeds (i.e., the amount equal to the
paid-up capital of the purchased shares) will be treated as proceeds of
disposition of the shares for the purpose of computing the shareholder's
capital gain or loss. Consequently, the dissenting shareholder will
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THORSTEINSSONS Tax Lawyers -4-
realize a capital gain or loss to the extent that the paid-up capital of the
shares exceeds or is exceeded by the shareholder's adjusted cost base of the
shares.
A Canadian Holder dissenting shareholder that is a private corporation or a
subject corporation, as those expressions are defined in the Act, will be
liable to pay a 33 1/3% refundable tax under Part IV of the Act on the
redemption proceeds to the extent that they are treated as a dividend. A
private corporation is one that is not public and is not controlled by one or
more public companies and a subject corporation is one that is not private
and is controlled by or for the benefit of one individual or a related group
of individuals.
If the dissenting shareholder is a corporation resident in Canada, the full
amount of the redemption proceeds may be treated as proceeds of disposition
with the result that no dividend will be deemed to have been paid to the
shareholder and any gain or loss realized by the dissenting shareholder will
be determined by reference to the full amount of the redemption proceeds.
Any capital loss arising on the exercise of dissent rights by a corporate
shareholder of Urban Canada will be reduced by the amount of dividends
received or deemed to have been received, including any deemed dividend
arising from the exercise of dissent rights, on the purchased shares where
the period of ownership of the shares was less than 365 days or where the
corporate holder (together with individuals or entities with whom it did not
deal at arm's length) held more than 5% of the issued shares of any class of
Urban Canada at the time the dividends were received or deemed to have been
received.
INTEREST EXPENSE
Urban Canada's continuation to Wyoming will not affect the deductibility of
interest incurred on money borrowed to purchase shares of Urban Canada.
Interest that is currently deductible will continue to be deductible by the
shareholder after the continuation to Wyoming when paid or payable, depending
on the method regularly followed by the shareholder. Interest will remain
deductible only as long as the shareholder continues to own the shares of
Urban Wyoming or uses the borrowed funds to earn income from a business or
property. Compound interest is deductible only when paid.
COMPANY CONSEQUENCES
Once Urban Canada has been granted a Certificate of Continuation or similar
constitutional documents from Wyoming, Urban Canada will be deemed to have
been incorporated in Wyoming at that time for purposes of the Act and will
cease to be a resident of Canada.
The "corporate emigration" rules under the Act will apply upon the
continuation of Urban Canada to Wyoming. Accordingly, it will be deemed to
have had a taxation year ended
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THORSTEINSSONS Tax Lawyers -5-
immediately before being granted a Certificate of Continuation in Wyoming.
Each property owned by it immediately before the deemed year end will be
deemed to have been disposed of for proceeds of disposition equal to that
property's fair market value. Any gains or losses derived from this deemed
disposition of property will be taken into account when determining the
amount of taxable income for the fiscal period which ends immediately before
Urban Canada's continuation into Wyoming. The amount of any taxable income so
determined will be subject to tax in accordance with the provisions of the
Act.
Based upon representations made by management in the Officer's Certificate
with respect to the fair market value and tax cost of each property owned by
Urban Canada, in our view as of this date no income tax would be payable
solely as a result of the deemed disposition of each of its properties.
Urban Canada will also be required to pay a special branch tax equal to 5% of
the amount by which the fair market value of its assets exceed the aggregate
of its liabilities, including any liabilities under the Act, and the paid-up
capital of its issued and outstanding shares at the time of Urban Canada's
continuation into Wyoming.
Based upon representations made by management in the Officer's Certificate
with respect to the fair market value of Urban Canada's assets and
liabilities and the paid-up capital of its issued and outstanding shares, it
is our view that as of this date Urban Canada would not be liable to pay the
special branch tax.
After its continuation into Wyoming, Urban Wyoming will cease to be liable
for Canadian tax on its worldwide income. However, if it carries on business
through a permanent establishment located in Canada, as that expression is
defined in the Canada-US Income Tax Convention, it will continue to be
subject to Canadian tax on business profits attributable to the permanent
establishment.
TAX-EXEMPT HOLDERS
After the continuation takes effect, the shares of Urban Wyoming will remain
listed on the Vancouver Stock Exchange which is a prescribed stock exchange
for purposes of the Act. In this way, the shares and warrants will be
qualified investments for a trust governed by a registered retirement savings
plan, a deferred profit sharing plan, a registered retirement income fund or
a registered pension plan, and certain other entities. However, such shares
and warrants would constitute "foreign property" to these trusts and entities
for the purposes of the Act.
Excepting foreign property that constitutes a qualified investment, and
property that was not foreign property when acquired but became foreign
property within the preceding two years, trusts and other entities described
above must pay a monthly tax under the Act equal to 1% of the amount, if any,
by which the cost amount of all the trust's foreign property as determined at
the
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THORSTEINSSONS Tax Lawyers -6-
end of each month exceeds the aggregate of:
(a) 20% of the cost amount of all the trust's property; and
(b) in certain circumstances, an additional amount in respect of the
trust's "small business investment amount" as that expression is
defined under the Act.
The result of this rule is that the cost of the shares and warrants of Urban
Wyoming will not be included in the excess foreign property subject to the
monthly tax until two years after the date of the continuation.
CANADIAN HOLDERS THAT ARE ONE OF THE TYPES OF ENTITIES DESCRIBED ABOVE SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE CONSEQUENCES OF HOLDING SHARES
OR WARRANTS OF URBAN WYOMING.
NON-RESIDENT HOLDERS
The continuation of Urban Canada into Wyoming will not constitute a taxable
event for federal Canadian income tax purposes for Non-resident Holders.
After Urban Canada's continuation into Wyoming dividends paid by Urban
Wyoming to Non-resident Holders will no longer be subject to Canadian
withholding tax.
CONSENT
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Prospectus of
the Registration Statement. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under
section 7 of the SECURITIES ACT OF 1933 (U.S.A.).
Yours truly,
KERRI L. MOONEY
c. Achaessa James, Van Valkenberg Furber Law Group P.L.L.C.
<PAGE>
KPMG LLP Telephone (604) 691-3000
Chartered Accountants Telefax (604) 691-3031
Box 10426 777 Dunsmuir Street www.kpmg.ca
Vancouver BC V7Y1K3
Canada
PRIVATE AND CONFIDENTIAL
Urban Juice & Soda Co. Ltd.
1156 Francis Street
Vancouver, B.C. V5L 1Y9
November 10, 1999
We have acted as accountants and U.S. tax advisers to Urban Juice & Soda Co.
Ltd. in connection with its continuance from British Columbia to Wyoming. As
accountants and U.S. tax advisers to Urban Juice & Soda Co. Ltd., we have
prepared the description of the U.S. federal income tax consequences of the
continuation set forth in the Form S-4 Registration Statement under the heading
"United States Federal Income Tax Consequences".
We hereby consent to the use of our name under the caption "United States
Federal Income Tax Consequences" in the Registration Statement and to the filing
of this opinion as an exhibit to the Registration Statement.
In rendering this opinion, we have relied upon statements, descriptions and
representations set forth in the Registration Statement and have assumed that
no actions have been (or will be taken) which are inconsistent with such
statements, descriptions and representations.
In rendering this opinion, we are relying on the relevant provisions of the
Internal Revenue Code of 1986, as amended, the regulations thereunder, and
judicial and administrative interpretations thereof, which are subject to
change or modification by subsequent legislation, regulatory, administrative or
judicial decisions. Any such changes could have an effect on our opinion. We
have also considered any proposed legislation that has been approved by either
the U.S. House of Representatives or the U.S. Senate as of the date this
opinion was issued but not yet enacted into law.
The opinion contained herein is not binding on the Internal Revenue Service,
any other tax authority or any court.
Based on the foregoing, it is our opinion that the following U.S. federal
income tax consequences will result from the continuation:
1. The continuation will qualify as a reorganization under section 368(a)
of the Internal Revenue Code.
2. No gain or loss will be recognized by Urban Juice & Soda Co. Ltd. as a
result of the continuation.
<PAGE>
Page 2
3. No gain or loss will be recognized by a non-dissenting shareholder of
Urban Juice & Soda Co. Ltd. as a result of the continuation.
4. The adjusted tax basis of a non-dissenting shareholder's shares in
Urban Juice & Soda Co. Ltd. after the continuation will be the same
as the tax basis in that shareholder's shares before the continuation.
5. The holding period of a non-dissenting shareholder's shares in Urban
Juice & Soda Co. Ltd. after the continuation will include the holding
period in that shareholder's shares before the continuation, provided
that the shares are held as capital assets on the date of the continuation.
6. The provisions of sections 367, 1248, and 1291 of the Internal Revenue
Code, which tax U.S. shareholders on certain reorganizations of non-U.S.
corporations that are otherwise tax-free, will not apply to the
continuation.
7. Gain or loss will be recognized by a dissenting shareholder who is a
U.S. holder and who receives cash in exchange for shares of Urban Juice &
Soda Co. Ltd. The gain or loss will be U.S. source capital gain or loss
for a U.S. holder who holds the shares as capital assets and will be
measured as the difference between the money received for the shares and
the adjusted tax basis of the shares surrendered. The capital gain or
loss will be long-term capital gain or loss on shares held for over one
year and will be short term capital gain or loss for shares held for one
year or less. U.S. holders include U.S. citizens and resident aliens,
corporations or partnerships organized under the laws of the United
States or any state thereof, estates subject to U.S. federal income tax
on their income regardless of source and trusts subject to the primary
supervision of a court within the United States and controlled by a U.S.
fiduciary.
8. Gain or loss will be recognized by a dissenting shareholder who is not a
U.S. holder and who receives cash in exchange for shares of Urban Juice &
Soda Co. Ltd. However, such gain or loss will not be taxable to a
dissenting shareholder who is not a U.S. holder and who holds the shares
as capital assets and not as part of a U.S. trade or business.
This opinion is expressed as of the date hereof and we are under no obligation
to supplement or revise our opinion to reflect any changes in applicable law or
in any information, document, representation, assumption or other matter as set
forth in the Registration Statement that becomes untrue or incorrect.
Yours very truly
/s/ KPMG LLP
<PAGE>
EXHIBIT 23.2
<TABLE>
<S> <C>
KPMG LLP TELEPHONE (604) 691-3000
CHARTERED ACCOUNTANTS TELEFAX (604) 691-3031
BOX 10426 777 DUNSMUIR STREET WWW.KPMG.CA
VANCOUVER BC V7Y1K3
CANADA
</TABLE>
ACCOUNTANTS' CONSENT
To the Directors of
Urban Juice & Soda Company Ltd.
We consent to the inclusion in the registration statement on Amendment 6 of Form
S-4 dated November 10, 1999 of Urban Juice & Soda Company Ltd. of our report
dated February 12, 1999, except as to note 2(a) which is as of April 12, 1999,
relating to the consolidated balance sheets of Urban Juice & Soda Company Ltd.
as of December 31, 1998 and 1997, the related consolidated statements of
operations and deficit and changes in financial position for each of the years
in the three year period ended December 31, 1998 and the related financial
statement schedule, and to the use of our name, and the reference to our firm
appearing under the heading "Experts" in the registration statement.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
November 10, 1999
