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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number ________________________________
URBAN JUICE & SODA COMPANY LTD.
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(Name of small business issuer in its charter)
WYOMING 91-1696175
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
234 9TH AVENUE NORTH
SEATTLE, WA 98109 (206) 624-3357
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(Address of Principal Executive Offices) (Issuer's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
- - -------------------------------- -------------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
COMMON SHARES, WITHOUT PAR VALUE
--------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. /X/ Yes / / No
Check if no disclosure of delinquent filers in response to ITEM 405 OF
REGULATION S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year: $11,086,450
The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the price at which the stock was sold, or the average bid and
asked price of such stock, as of a specified date within the past 60 days: As of
March 14, 2000, $14,353,937
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 14, 2000, there were
18,813,398 shares of the Company's common stock issued and outstanding.
Documents Incorporated By Reference: THE COMPANY'S DEFINITIVE PROXY STATEMENT
FOR ITS ANNUAL MEETING OF SHAREHOLDERS ON MAY 31, 2000, WHICH WILL BE FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER THE CLOSE OF THE
FISCAL YEAR 1999, IS INCORPORATED BY REFERENCE IN PART III HEREOF.
Transitional Small Business Disclosure Format (Check one): Yes __; No X
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URBAN JUICE & SODA COMPANY LTD.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1. Description of Business.......................................................................... 4
Item 2. Description of Property..........................................................................22
Item 3. Legal Proceedings................................................................................22
Item 4. Submission of Matters to a Vote of Security Holders..............................................23
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.........................................23
Item 6. Management's Discussion and Analysis or Plan of Operation........................................24
Item 7. Consolidated Financial Statements................................................................29
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............29
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...............................................30
Item 10. Executive Compensation...........................................................................30
Item 11. Security Ownership of Certain Beneficial Owners and Management...................................30
Item 12. Certain Relationships and Related Transactions...................................................30
PART IV
Item 13. Exhibits and Reports on Form 8-K..................................................................30
SIGNATURE.....................................................................................................31
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EXPLANATORY NOTE
Unless otherwise indicated or the context otherwise requires, all
references herein to "we," "us," "the Company" and "Urban Juice" are to Urban
Juice & Soda Company Ltd., a Wyoming corporation, and its wholly owed
subsidiaries WAZU Products Ltd., Zip City Distribution Co. Vancouver Ltd., Urban
Juice & Soda (USA) Inc. and Vancouver Island Beverage Company Ltd.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Statements in this report
that relate to future results and events are based on the Company's current
expectations. Actual results in future periods may differ materially from those
currently expected or desired because of a number of risks and uncertainties.
For a discussion of factors affecting the Company's business and prospects, see
"ITEM 1. - DESCRIPTION OF BUSINESS - Other Factors Affecting the Business of the
Company."
CURRENCY TRANSLATION
Unless otherwise stated, dollar figures stated in this Annual Report are in
United States dollars. The Company's financial statements are reported in United
States dollars. However, as the Company was headquartered in Canada in 1999,
many of its transactions are carried out in Canadian dollars.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
We develop, produce, market and distribute "alternative" or "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.
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:
o creating of a strong distributor relationships;
o stimulating strong consumer demand for our existing brands and
products throughout Canada and the United States; and
o developing 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 reorganized and strengthened our senior management team.
We use contract packers to prepare, bottle and package Urban Juice'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
Woodbridge, Ontario. 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.
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HISTORICAL DEVELOPMENT
We were incorporated on December 23, 1986 under the BRITISH COLUMBIA
COMPANY ACT as "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 "Urban Juice & Soda Company Ltd." on May 26, 1993.
On December 31, 1999, we continued out of British Columbia to the State of
Wyoming, as a result of which, we ceased to be a British Columbia company
governed by the provisions of the BRITISH COLUMBIA COMPANY ACT and became a
Wyoming company governed by the provisions of the WYOMING BUSINESS CORPORATIONS
ACT.
The genesis of our business dates back to March 6, 1987 when Peter M. van
Stolk founded Urban Hand Limited in Edmonton, Alberta pursuant to the laws of
Alberta. In September 1987, Urban Hand Limited began marketing and distributing
Just Pik't Juices, a patented line of fresh squeezed juices, for all of Western
Canada. In 1989, Urban Hand Limited 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. On July 2, 1991, Urban
Hand Limited continued pursuant to the laws of British Columbia under the name
"Urban Hand Enterprises Limited." By the end of 1991, Urban Hand Enterprises
Limited had become the leading distributor on a per capita basis for Just Pik't
Juices in North America. In 1992, Urban Hand Enterprises Limited 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 Enterprises Limited acquired the exclusive distribution
rights to Thomas Kemper Sodas, hand crafted brewed soda products, for all of
Canada. In May 1993, we (still under the name "International Republic Aircraft
Manufacturing Corporation") acquired Urban Hand Enterprises Limited, together
with the distribution companies and rights to additional alternative or New Age
beverages, and rights to create, manufacture and distribute one or more
internally developed beverage brands. On February 20, 1995, Urban Hand
Enterprises Limited changed its name to "WAZU Products Ltd."
In June 1993, we, through then wholly-owned subsidiary Urban Hands
Enterprises Limited, acquired Southpines Juice & Soda Company, Inc., a beverage
distribution company serving the greater Vancouver and Whistler areas of British
Columbia. Southpines Juice & Soda Company, Inc. was incorporated in British
Columbia on May 31, 1991 and in April 1995, changed its name to "Zip City
Distribution Co. Vancouver Ltd." Zip City Distribution Co. Vancouver Ltd. no
longer distributes beverage products and is currently inactive.
In September 1993, we acquired Vancouver Island Beverage Company Ltd., a
full-line beverage distribution company serving southern Vancouver Island.
Vancouver Island Beverage Company Ltd. was incorporated in British Columbia on
March 31, 1992 and, after September 1993, operated as a distribution arm for us
on Vancouver Island until it was reorganized in December 1994. Vancouver Island
Beverage Company Ltd. is currently inactive.
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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 September 1996, West End Soda Brews in October 1996, and Just
Pik't Juices in December 1996.
Form 1997 to1999, the Company has operated solely as a beverage
manufacturer and marketer of its own brands, JONES SODA CO. and WAZU. In June
1998, the Company introduced a product extension of JONES SODA CO., NATURAL
JONES Soda, a natural soda formulation. In January 1999, the Company introduced
another product extension of JONES SODA CO., SLIM JONES, a diet version of JONES
SODA CO. In August 1999, the Company created a third product extension of JONES
SODA CO., JONES SODA WHOOPASS, an energy drink. Also in November 1999, the
Company re-formulated its NATURAL JONES Soda line for re-launch in January 2000.
SUBSIDIARIES
o WAZU Products Ltd. - Our 100% owed subsidiary. Incorporated on March
6, 1987 pursuant to the laws of Alberta. Continued from Alberta to
British Columbia on July 2, 1991.
o Zip City Distribution Co. Vancouver Ltd. - 100% owed subsidiary
of WAZU Products Ltd. Incorporated in British Columbia on May 31,
1991. Currently inactive.
o Vancouver Island Beverage Company Ltd. - Our 100% owed subsidiary.
Incorporated in British Columbia on March 31, 1992. Currently
inactive.
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o Urban Juice & Soda (USA) Inc. - Our 100% owed subsidiary. Incorporated
in the State of Washington on August 3, 1995. Currently conducts
minimal business activities.
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:
o Retail polyethylene terephthalate (PET) bottled waters
o Ready-to-drink (RTD) teas
o Single-serve fruit beverages
o Sports drinks
o Sparkling water
o Premium sodas
o RTD coffees
o 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.
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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 was the first brand 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
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. brand 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
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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 140 distributors in 41 states in the U.S. and eight provinces in
Canada.
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.
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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, distributor 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 or product extension. 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.
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.
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 fifteen flavors:
- - - Orange Soda - Strawberry Lime Soda - Fufu Berry Soda
- - - Grape Soda - Vanilla Cola - Blue Bubblegum Soda
- - - Cherry Soda - Root Beer - Green Apple Soda
- - - Lemon Lime Soda - Cream Soda - Pineapple Upside-Down Soda
- - - Crushed Melon - Pink - Club Soda
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 (355ml) 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. In
November 1999 we re-formulated, and in January 2000 re-launched, NATURAL JONES
Soda. In January 2000,
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we also introduced a fourth flavor of NATURAL JONES Soda. Our current NATURAL
JONES Soda products are:
- - - Passion - Lemon Ginger - Peach Ginseng
- - - Natural Root Beer
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:
- - - Diet Orange Soda - Diet Lime Cola - Diet Fufu Berry Soda
- - - Diet Cream Soda - Diet Black Cherry Soda
In August 1999 we developed, and in October 1999 launched, JONES SODA
WHOOPASS. JONES SODA WHOOPASS is a citrus drink in an 8.4 ounce (250ml) slim
can, which contains riboflavin, niacin, vitamin B6 and thiamin. JONES SODA
WHOOPASS is a new category extension for JONES SODA CO. which will compete in
the energy category of the New Age beverage industry.
For the year ended December 31, 1999, revenue from the sale of Jones
Soda Co. products and its product extensions constitutes 94.1% of the Company
total revenue.
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 spring water 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:
o wee WAZU: (16.9 fluid ounces or 500ml) (with or without
sport-cap)
o TRUE WAZU: (33.8 fluid ounces or 1L) (with or without sport-cap)
o BIG WAZU: (50.7 fluid ounces or 1.5L) (with or without sport-cap)
For the year ended December 31, 1999, revenue from the sale of WAZU
products constitutes 0.1% of the Company's total sales revenue.
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
"Historical Development."
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MARKETING, SALES AND DISTRIBUTION
MARKETING
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.
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 also have a program of sponsoring 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 two leased recreational vehicles painted with the JONES SODA CO. colors
and logos to create consumer awareness and enthusiasm to assist distributors as
they open new markets. In addition to these marketing techniques, we also
initiated a campaign of cross-promotions with other companies. Such cross
promotions in 1999 were with BMG Entertainment.
During 1999 we also developed a unique website, WWW.MYJONES.COM which
allows our JONES SODA CO. consumers to create their own personalized 12 pack of
JONES SODA CO. with their unique photo in the labels. The strategy of
WWW.MYJONES.COM is to provide a unique product offering to our consumers as well
as provide a unique marketing opportunity for our JONES SODA CO. brand.
Consumers can scan their unique photo through the web and crop and create their
own "MYJONES" labels. The unique labels are downloaded at our head office and we
send out 12 packs of the soda to the consumer. We believe that this strategy
will increase awareness for the JONES SODA CO. brand as well as provide for
increased interactivity with the JONES SODA CO. brand.
SALES
Our unique products are sold in eight provinces in Canada and 41
states in the U.S., primarily in convenience stores, delicatessens, sandwich
shops and selected supermarkets. During the year ended December 31, 1999, sales
to the U.S. represents 84% of the total with the balance of 16% representing
sales in Canada.
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During 1999, our sales force was reorganized into seven regional
groups, including the U.S. Pacific Northwest, California, the U.S. Mountain
Region, the U.S. Northeast, the U.S. Southeast, the U.S. Midwest and Canada. The
Senior Vice President of Sales and Marketing was ultimately responsible for all
regions. 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 relations 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.
DISTRIBUTION
Our products are sold by approximately 140 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 the year ended December 31, 1999, the three primary
distributors of our products purchased approximately 8.0%, 6.2% and 5.0%,
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.
We generally 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, we 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.
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.
During 1999 we used several contract-packing facilities to produce all
requirements of JONES SODA CO. We have made arrangements with another contract
packing
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facility to produce NATURAL JONES Soda, our upscale pasteurized version of JONES
SODA CO. and another contract packing facility to produce JONES SODA WHOOPASS.
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
concentrates 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 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.
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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, FLAVOR CONCENTRATE TRADE SECRETS AND PATENT PENDING
We own a number of trademarks, including the following which are registered
in Canada and the United States: "URBAN JUICE & SODA CO.," "JONES SODA CO.,"
"WAZU," and "SLIM JONES." 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. Also, we have
registered in Canada and the United States a number of other trademarks for
slogans and product designs, including "WET YOURSELF," "I'VE GOT A JONES FOR A
JONES," "URBAN JUICE & SODA CO. AND DESIGN," and "WAZU AND DESIGN."
Additionally, 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 twenty-five 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 also have applied for a patent for our "MYJONES.COM" project. The patent
application is directed to aspects of a business method including an Internet
web site operative to allow a user to create a visual representation of a soda
bottle label including an image provided by the user. The label will include the
Jones Soda brand identifier, which is similar to the labels placed on similar
bottles sold in retail stores.
We consider our trademarks and flavor concentrate trade secretes to be of
considerable value and importance to our business. No challenges to our
trademarks 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 and JONES SODA WHOOPASS as a
complementary brand which may replace other energy drinks. Our distribution
strategy for NATURAL JONES Soda is to offer this product extension to a
different distribution network, the heath food wholesalers and retailers. 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. JONES SODA WHOOPASS is priced in the middle to high of
the pricing range for energy drinks. NATURE JONES SODA is priced in the middle
to high of the pricing range for natural sodas.
EMPLOYEES
As of December 31, 1999, we had 31 full-time employees, 19 of whom were
employed in sales and marketing capacities, eight were employed in
administrative capacities, and four 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.
CONTINUATION FROM BRITISH COLUMBIA, CANADA TO WYOMING, U.S.
The corporate existence of the Company was continued out of British
Columbia into the State of Wyoming on December 31, 1999. As a result of the
continuation, the Company has ceased to be a British Columbia company governed
by the provisions of the BRITISH COLUMBIA
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COMPANY ACT and has become a Wyoming company governed by the provisions of the
WYOMING BUSINESS CORPORATION ACT. Pursuant to the continuation, our wholly-owned
subsidiaries, WAZU Products Ltd., Urban Juice & Soda (USA) Inc. and Vancouver
Island Beverage Company Ltd. became wholly-owned subsidiaries of the Wyoming
company.
We believe that the continuation will provide us with a number of benefits
including:
o Integrating us more fully into the United States, our primary market
o Increasing our access to Unites States capital and debt sources, which
have been our primary source of both equity and debt financing
o Better positioning ourselves for the possible future listing of our
shares on a United States exchange
o Increasing our access to qualified personnel
The continuation has not resulted 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 did not change. The
continuation is not, in itself, a corporate reorganization, amalgamation or
merger. See "ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS."
OTHER FACTORS AFFECTING THE BUSINESS OF THE COMPANY
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 Juice 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 Juice, 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
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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, 1999, approximately 19.2% 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
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
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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 products than warranted by the actual demand for
it, resulting in higher storage costs, the potential unavailability o 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, 1999, Urban Juice had an accumulated deficit of
$8,663,673, most of which had resulted from our operations during the period in
which we transformed Urban Juice 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,
products or product extensions, 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 assurance that
we will successfully achieve all or any of these goals, or that we will achieve
profitable operations.
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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 JONES SODA WHOOPASS, NATURAL JONES Soda and WAZU brands 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 Juice 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 several
years. In order to manage and operate Urban Juice 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 Juice. 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.
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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. We have since launched
three JONES SODA CO. brand extensions, NATURAL JONES Soda in June 1998, SLIM
JONES IN JANUARY 1999, AND JONES SODA WHOOPASS in October 1999. 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 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 AND FLAVOR CONCENTRATE TRADE
SECRETS MAY PREVENT US FROM SUCCESSFULLY MARKETING OUR PRODUCTS
We consider our trademarks and flavor concentrate trade secretes 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, flavor concentrate trade secrets 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.
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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 "ITEM 6. --MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION -- Impact of the Year 2000 Computer Problem."
ITEM 2. DESCRIPTION OF PROPERTY.
We own no real property. Pursuant to a lease which expires in January 2004,
we lease 8,372 square feet of warehouse and office space in Vancouver, British
Columbia for $3,042 per month, which we used as our principal executive offices
in 1999. We believe that our leased facilities are suitable and adequate for our
current needs.
We have also leased 7,989 square feet of office space in Seattle,
Washington for $10,985 per month which will be used as our principal executive
offices in 2000 and beyond. We intend to sublease our Vancouver office space and
lease a smaller office of 1,100 square feet at $900 per month.
ITEM 3. LEGAL PROCEEDINGS.
URBAN JUICE & SODA COMPANY LTD. V. HERCULES INCORPORATED ET AL. On February
19, 1997, we filed a Statement of Claim in the British Columbia Supreme Court.
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 October 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 $1,000,000 against the defendants
for failing to design and produce concentrate in accordance with our
specifications. When we initially sought proposals from various flavor houses,
the majority of them, including Tastemaker, identified that the concentrate
manufactured for the JONES SODA CO. line would meet certain flavor stability and
performance standards. However, we believe that the concentrate produced by
Tastemaker continually failed to meet these standards. In 1997, we retained a
new flavor house, Pro-Liquitech, Inc., to produce the concentrate for the JONES
SODA CO.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the extraordinary general meeting of shareholders held on December 17,
1999, the security holders authorized the Board of Directors to change our
domicile from the Province of British Columbia to the State of Wyoming (the
"Continuation").
For further information about the Continuation, please refer to (i) our
Registration Statement of Form S-4 (File No. 333-75913) which was filed with the
Securities and Exchange Commission on April 8, 1999 and declared effective on
November 12, 1999 and (ii) our Current Report on Form 8-K dated February 17,
2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON SHARES
Our common shares are currently traded on the Canadian Venture Exchange
(previously the "Vancouver Stock Exchange") under the symbol "UJS". Our common
shares are also quoted on the OTC Bulletin Board under the symbol "UJSA". We
have not made any application to list the common shares on any other exchange.
The following table shows the high and low closing sale prices of the common
shares for the calendar quarters indicated, as reported by the Canadian Venture
Exchange.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1999:
Fourth quarter......................................................Can.$ 1.25............Can.$ 0.86
Third quarter.......................................................Can.$ 1.48............Can.$ 1.05
Second quarter......................................................Can.$ 1.35............Can.$ 0.76
First quarter.......................................................Can.$ 0.90............Can.$ 0.45
1998:
Fourth quarter......................................................Can.$ 0.56............Can.$ 0.40
Third quarter.......................................................Can.$ 1.15............Can.$ 0.42
Second quarter......................................................Can.$ 1.34............Can.$ 0.83
First quarter.......................................................Can.$ 1.10............Can.$ 0.73
</TABLE>
As of March 14, 2000, there were 18,813,398 common shares issued and
outstanding. Those common shares were held by 233 holders of record. To the best
of our knowledge, we are not directly or indirectly owned or controlled by
another corporation or by any foreign government.
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COMMON SHARE PURCHASE WARRANTS
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 issued warrants to purchase 850,000 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 the warrants expire on
December 9, 2000. We relied on Rule 903 of the Regulation S for the private
placement as the warrants were only offered in Canada and the Company was a
foreign private issuer at the time.
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, at an
exercise price of Can.$0.75 per share until May 4, 2000, and Can.$0.90 per share
until May 4, 2001. These warrants expire on May 4, 2001. We relied on Rule 506
of the Regulation D for the private placement as the only purchasers of our
common shares were "accredited investors" as such term is defined under Rule
501(a) of the Regulation D.
In addition, in connection with the issuance of common shares in the
private placement in December 1998, the Company issued to the brokers warrants
to purchase 64,000 common shares at an exercise price of Can.$0.60 per share.
These warrants expire on December 9, 2000.
Finally, in connection with the issuance of common shares in the private
placement in May 1999, the Company issued to the brokers warrants to purchase
98,810 common shares, at an exercise price of Can.$0.75 per share until May 4,
2000, and Can.$0.90 per share until May 4, 2001. These warrants expire on May 4,
2001.
As of December 31, 1999, all of the above warrants were issued and
outstanding. There is no trading market for the warrants and we do not intend to
request the listing of the warrants on any exchange.
DIVIDENDS
We have not paid any cash dividends with respect to our Common Shares and
it is unlikely that we will pay any dividends on our Common Shares in the
foreseeable future. Earnings we realize, if any, will be retained in the
business for further development and expansion.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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
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natural spring water. In June 1998 we launched NATURAL JONES Soda, a product
extension of JONES SODA CO. In November 1999 we re-formulated, and in January
2000 re-launched NATURAL JONES Soda. We also introduced a new flavor of NATURAL
JONES Soda in January 2000. In January 1999, we launched SLIM JONES, another
product extension of JONES SODA CO. and added a new flavor in June 1999. In
August 1999 we created, and in October 1999 launched, JONES SODA WHOOPASS, the
third product extension of JONES SODA CO. 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 Juice & Soda
Company Ltd. and our wholly-owned subsidiaries, WAZU Products Ltd. will sell
assets used in its U.S. operations to Urban Juice & Soda (USA) Inc. Instead of
paying cashing proceeds to WAZU Product Ltd., Urban Juice & Soda (USA) Inc. will
assume debt of WAZU Products Ltd. equal to the fair market value of their U.S.
assets. Under Canadian and U.S. 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.
RESULTS OF OPERATIONS
NET SALES
For the year ended December 31, 1999, net sales were $11,086,450, an
increase of $6,359,159, or 134.5% over the net sales of $4,727,291 for the year
ended December 31, 1998. The increase in net sales was attributable to increased
sales of JONES SODA CO. through existing distributors, and to a lesser extent,
to the creation in August 1999 and launch in October 1999 of a JONES SODA CO.
product extension, JONES SODA WHOOPASS, which is a functional energy drink in an
8.4 ounce (250ml) slim can. As of December 31, 1999, JONES SODA CO. products
were sold in 41 states of the United States and eight provinces of Canada.
25
<PAGE>
GROSS PROFIT
Gross profit was $3,731,886 for the year ended December 31, 1999, an
increase of $2,458,857, or 193.2% over the gross profit of $1,273,029 for the
year ended December 31, 1998. The increase in gross profit was primarily
attributable to increased net sales as well as cost reductions achieved in
certain raw materials and packaging. Gross profit as a percentage of net sales
increased to 33.7% for the year ended December 31, 1999 from 26.9% for the year
ended December 31, 1998. The increase in gross profit as a percentage of net
sales was primarily attributable to the lower costs achieved.
TOTAL OPERATING EXPENSES
Total operating expenses were $4,560,227 for the year ended December
31, 1999, an increase of $1,742,649, or 61.8% over the total operating expenses
of $2,817,578 for the year ended December 31, 1998. The increase in total
operating expenses was primarily attributable to increase selling, general and
administration expenses incurred as a result of the Company's increased sales
volume. Total operating expenses as a percentage of sales decreased to 41.1% for
the year ended December 31, 1999 from 59.6% for the year ended December 31,
1998.
PROMOTION AND SELLING EXPENSES
Promotion and selling expenses were $3,036,094 for the year ended
December 31, 1999, an increase of $1,538,193, or 102.7% over the promotion and
selling expenses of $1,497,901 for the year ended December 31, 1998. The
increase in promotion and selling expenses was primarily attributable to
increased costs of promotional allowances and material associated with the
ongoing development of JONES SODA CO. and increased advertising such as event
sponsorships associated with building the JONES SODA CO. brand awareness.
Promotion and selling expenses as a percentage of net sales decreased to 27.4%
for the year ended December 31, 1999 from 31.7% for the year ended December 31,
1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1,524,133 for the year ended
December 31, 1999, an increase of $204,456, or 15.5% over the general and
administrative expenses of $1,319,677 for the year ended December 31, 1998. The
increase in general and administrative expenses was primarily attributable to
expenses associated with the Company's continuation into the United States as
well as legal fees associated with the Company's litigation against Tastemaker.
General and administrative expenses as a percentage of net sales decreased to
13.7% for the year ended December 31, 1999 from 27.9% for the year ended
December 31, 1998.
OTHER EXPENSES
Other income was $19,165 for the year ended December 31, 1999, an
increase of $9,451, or 97.3% over the other income of $9,714 for the year ended
December 31, 1998. This
26
<PAGE>
increase was primarily attributable to the increase in interest income
associated with cash balances during the 1999 year.
NET LOSS
Net loss was $809,176 for the year ended December 31, 1999, compared
to net loss of $1,534,835 for the year ended December 31, 1998. The $725,659
decrease in the net loss was attributable to increased sales and improved gross
profit margins, partially offset by increased total operating expenses. Net loss
as a percentage of sales decreased to 7.3% from 32.5% primarily due to
increasing sales volume.
LIQUIDITY AND CAPITAL RESOURCES
The operations of the Company historically have primarily been funded
through the issuance of common stock and external borrowings.
As at December 31, 1999, the Company had working capital of $1,663,211
compared to working capital of $697,578 as at December 31, 1998. The increase in
working capital was primarily attributable to the decrease in the net loss and
the issuance of common stock in May 1999.
On March 17, 2000, a credit facility was granted to the Company by Bank of
America Commercial Finance, consisting of a three-year revolving line of credit
of up to $3,000,000. The utilization of the revolving line of credit by the
Company is dependent upon certain levels of eligible accounts receivable and
inventory from time to time. Such revolving line of credit is secured by all of
the Company's assets, including accounts receivable, inventory, trademark
license and trademarks, and certain equipment. Borrowings under the credit
facility bear interest at a rate of Prime + 1.5%. The credit facility does not
impose any financial covenants.
Cash and cash equivalents increased by $124,732 for the year ended December
31, 1999. Net cash used in operating activities was $1,678,369. The Company's
investing activities used $178,470 cash for the year ended December 31, 1999,
primarily for the purchase of cooler and computer equipment. Cash flow provided
by financing activities was $1,969,144 for the year ended December 31, 1999 and
consisted primarily of $1,651,460 in proceeds from a private placement of common
shares which closed in May 1999. The difference of $12,427 relates to the effect
of foreign exchange rate changes in cash.
INVESTOR RELATIONS
During the period ending December 31, 1999, the Company completed all
Investor Relations activities in-house. The Company sent out copies of news or
press releases, the Company's corporate brochure, and communicated to
shareholders with a monthly newsletter and a quarterly Investor Conference Call.
27
<PAGE>
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
A number of computer programs are written using two digits rather than four
to define the applicable year. As a result, computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
In 1998, the Company upgraded billing, accounting and administrative
systems which are now fully operational and have been represented to be filly
Year 2000 compliant. All of the Company's desktop computers are Year 2000
compliant and the Company has received written assurances from the manufacturers
of the computers used in our co-packing facilities that all of their computers
are Year 2000 compliant.
During the year ended December 31, 1999, the Company assessed its customer
and suppliers' Year 2000 compliance status. Of the Company's suppliers and
distributors, 12 suppliers and 15 distributors have been identified as material
third parties to the Company based on volume of business and potential impact on
the Company's business. As of December 31, 1999, the Company has received
satisfactory response to its Year 2000 questionnaire from 11 of the 12 material
suppliers and 10 of 15 of the material distributors.
During the year ended December 31, 1999, the Company developed a
contingency plan which included a non-computerized back-up of all accounting and
non-accounting information. As at the date of this Annual Report, we have not
encountered any material Year 2000 problems.
SEASONALITY
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
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.
28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements are listed in the Index to Financial Statements and
filed and included elsewhere herein as a part of this Annual Report on Form
10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
29
<PAGE>
PART III
Part III is incorporated herein by reference from the Company's definitive
proxy statement issued in connection with the Company's 2000 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year ended December 31,
1999. Certain information regarding the executive officers of the Company is set
forth in Part I of this Form 10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following list describes the exhibits filed as part of this Annual
Report on Form 10-KSB.
3.1* Memorandum of Urban Juice & Soda Company Ltd.
3.2* Articles of Urban Juice & Soda Company Ltd.
3.3** Articles of Continuance of Urban Juice & Soda Company Ltd.
10.1** Bottling Agreement between Urban Juice & Soda Company Ltd.
and World Choice Bottling Corp.
10.2** Bottle Supply Agreement between Urban Juice & Soda Company
Ltd. and Zuckerman-Honickman, Inc.
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule pursuant to Rule 12b-32 under the
Securities Exchange Act of 1934, as amended
----------
* Previously filed as an exhibit to the Registration Statement
on Form SB-2 (No. 333-5156-LA), as amended through the date
hereof and incorporated herein by reference.
** Previously filed as an exhibit to the Registration Statement
on Form S-4 (No. 333-75913), as amended through the date
hereof and incorporated herein by reference.
(b) Reports on Form 8-K
None.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Registrant did not send an Annual Report covering the fiscal year ending
December 31, 1999 nor did it send proxy materials to security holders. If such
report and proxy materials are mailed to security holders, the Registrant shall
furnish to the Commission, for its information, four (4) copies of the Annual
Report to security holders and four (4) copies of the proxy materials.
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 29, 2000.
URBAN JUICE & SODA COMPANY LTD.
By: /s/ Peter van Stolk
---------------------------------------------
Peter van Stolk
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Peter M. van Stolk President, Chief Executive Officer March 29, 2000
- - ------------------------------------ (Principal Executive Officer) and Director
Peter M. van Stolk
/s/ Jennifer L. Cue Chief Financial Officer, (Principal Financial March 29, 2000
- - ------------------------------------ Officer and Principal Accounting Officer),
Jennifer L. Cue Secretary and Director
/s/ Ron B. Anderson
- - ------------------------------------ Director March 29, 2000
Ron B. Anderson
/s/ Michael M. Fleming
- - ------------------------------------ Director March 29, 2000
Michael M. Fleming
/s/ Matthew Kellogg
- - ------------------------------------ Director March 29, 2000
Matthew Kellogg
/s/ Peter Cooper
- - ------------------------------------ Chairman of the Board and Director March 29, 2000
Peter Cooper
</TABLE>
31
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
FORM 10-KSB ANNUAL REPORT
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's
Report..................................................................................F-1
Consolidated Financial Statements:
Consolidated balance sheets as of December 31, 1999 and 1998.....................F-2
Consolidated statements of operations for the years ended
December 31, 1999, 1998, and 1997............................................F-3
Consolidated statements of changes in shareholders' equity for the years ended
December 31, 1999, 1998, and 1997............................................F-4
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998, and 1997............................................F-5
Notes to consolidated financial statements.......................................F-6
</TABLE>
<PAGE>
AUDITORS' REPORT
To the Directors and Stockholders
Urban Juice & Soda Company Ltd. and Subsidiaries
We have audited the consolidated balance sheets of Urban Juice & Soda Company
Ltd. and subsidiaries as at December 31, 1999 and 1998 and the consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three year period ended December 3l, 1999, and the related
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Urban Juice &
Soda Company Ltd. and subsidiaries as at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 1999 in accordance with United States generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in note 1 to the consolidated financial statements, the
Company has suffered recurring losses from operations that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 1. The consolidated financial
statements and financial statement schedule do not include any adjustments that
might result from the outcome of this uncertainty.
Chartered Accountants
Vancouver, Canada
February 4, 2000
F-1
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
1999 1998
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 344,551 $ 219,819
Accounts receivable (note 3) 1,267,102 829,400
Inventory (note 4) 1,347,375 537,191
Prepaid expenses 169,493 218,102
- - --------------------------------------------------------------------------------------------------------
3,128,521 1,804,512
Fixed assets (note 5) 560,396 583,686
Intangible assets (note 6) 114,646 101,344
- - --------------------------------------------------------------------------------------------------------
$ 3,803,563 $ 2,489,542
- - --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit (note 7) $ 401,122 $ 201,957
Accounts payable and accrued liabilities 1,031,179 889,553
Current portion of capital lease obligations 33,009 15,424
- - --------------------------------------------------------------------------------------------------------
1,465,310 1,106,934
Capital lease obligations, less current portion (note 8) 70,558 20,819
Stockholders' equity (note 9):
Common stock:
Authorized: 100,000,000 common stock, no par value
Issued and outstanding: 18,754,398 common stock
(1998 - 15,150,164) 10,461,318 8,947,585
Additional paid-in capital 362,298 173,376
Accumulated other comprehensive income 107,752 95,325
Deficit (8,663,673) (7,854,497)
- - --------------------------------------------------------------------------------------------------------
2,267,695 1,361,789
Nature and continuance of operations (note 1)
Commitments and contingencies (note 10)
Subsequent event (note 1)
- - --------------------------------------------------------------------------------------------------------
$ 3,803,563 $ 2,489,542
- - --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
1999 1998 1997
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 11,086,450 $ 4,727,291 $ 2,359,333
Cost of goods sold 7,354,564 3,454,262 2,199,201
- - -----------------------------------------------------------------------------------------------------
Gross margin 3,731,886 1,273,029 160,132
Operating expenses:
Promotion and selling 3,036,094 1,497,901 1,629,048
General and administrative 1,524,133 1,319,677 1,534,011
- - -----------------------------------------------------------------------------------------------------
4,560,227 2,817,578 3,163,059
- - -----------------------------------------------------------------------------------------------------
Loss from operations (828,341) (1,544,549) (3,002,927)
Other income (expense):
Interest income, net (1,330) 7,672 34,064
Other income 20,495 2,042 3,733
- - -----------------------------------------------------------------------------------------------------
19,165 9,714 37,797
- - -----------------------------------------------------------------------------------------------------
Loss for the year $ (809,176) $ (1,534,835) $ (2,965,130)
- - -----------------------------------------------------------------------------------------------------
Loss per share,
basic and diluted $ (0.05) $ (0.12) $ (0.29)
- - -----------------------------------------------------------------------------------------------------
Weighted average common stock,
basic and diluted 17,829,970 12,537,202 10,368,160
- - -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional other
Common paid-in comprehensive Accumulated Comprehensive
stock Amount capital income (loss) deficit income (loss)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 10,742,612 $ 6,076,737 $ - $ - $ (3,354,532) $ -
Options exercised 214,974 183,155 - - - -
Warrants exercised 400,000 265,896 - - - -
Common stock issued for cash net of share
issue costs of $493,876 2,293,578 1,834,897 151,106 - - -
Comprehensive loss:
Net loss - - - - (2,965,130) (2,965,130)
Foreign currency translation adjustment - - - 160,516 - 160,516
--------
Total comprehensive loss $ (2,804,614)
------------
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 13,651,164 8,360,685 151,106 160,516 (6,319,662) -
Common shares repurchased (20,000) (13,960) - - - -
Options exercised 605,000 319,780 - - - -
Common shares issued for cash 914,000 281,080 10,133 - - -
Options issued in connection with debt
financing - - 12,137 - - -
Comprehensive loss:
Net loss - - - - (1,534,835) (1,534,835)
Foreign currency translation adjustments - - - (65,191) - (65,191)
-------------
Total comprehensive loss $ (1,600,026)
-------------
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 15,150,164 8,947,585 173,376 95,325 (7,854,497)
Options exercised 25,000 15,610 - - - -
Warrants exercised 68,480 35,585 - - - -
Common stock issued for cash 3,510,754 1,462,538 188,922 - - -
Comprehensive loss:
Net loss - - - - (809,176) (809,176)
Foreign currency translation adjustments - - - 12,427 - 12,427
-----------
Total comprehensive loss $ (769,749)
-----------
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 18,754,398 $ 10,461,318 $ 362,298 $ 107,752 $ (8,663,673)
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------
Total
Stockholders'
equity
- - ----------------------------------------------------------
<S> <C>
Balance, December 31, 1996 $ 2,722,205
Options exercised 183,155
Warrants exercised 265,896
Common stock issued for cash net of share
issue costs of $493,876 1,986,003
Comprehensive loss:
Net loss (2,965,130)
Foreign currency translation adjustment 160,516
Total comprehensive loss
- - ----------------------------------------------------------=
Balance, December 31, 1997 2,352,645
Common shares repurchased (13,960)
Options exercised 319,780
Common shares issued for cash 291,213
Options issued in connection with debt 12,137
financing
Comprehensive loss:
Net loss (1,534,835)
Foreign currency translation adjustments (65,191)
Total comprehensive loss
- - -----------------------------------------------------------
Balance, December 31, 1998 1,361,789
Options exercised 15,610
Warrants exercised 35,585
Common stock issued for cash 1,651,460
Comprehensive loss:
Net loss (809,176)
Foreign currency translation adjustments 12,427
Total comprehensive loss
- - ----------------------------------------------------------
Balance, December 31, 1999 $ 2,267,695
- - ----------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
1999 1998 1997
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss for the year $ (809,176) $ (1,534,835) $ (2,965,130)
Items not involving cash:
Depreciation and amortization 191,357 158,972 87,241
Loss (gain) on disposal of capital assets (2,899) 11,617 (9,092)
Write-down of intangible assets - 67,091 -
Stock-based compensation expense - 12,135 151,106
Changes in assets and liabilities:
Accounts receivable (437,702) (278,338) (157,016)
Inventory (810,184) 225,536 (104,044)
Prepaid expenses 48,609 (140,531) 480,994
Accounts payable and accrued liabilities 141,626 92,453 354,952
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,678,369) (1,385,900) (2,160,989)
Cash flows from investing activities:
Proceeds on disposal of fixed assets - 7,305 12,646
Purchase of fixed assets (156,489) (254,350) (381,243)
Purchase of intangible assets (21,981) (36,857) (51,827)
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (178,470) (283,902) (420,424)
Cash flows from financing activities:
Net borrowing under line of credit 199,165 201,957 -
Proceeds from capital lease obligations 82,748 36,243 -
Repayment of capital lease obligations (15,424) (45,518) (51,439)
Proceeds from exercise of options 15,610 331,917 183,155
Proceeds from exercise of warrants 35,585 - 265,896
Issuance of common stock, net of issuance costs 1,651,460 265,118 1,834,897
- - -------------------------------------------------------------------------------------------------------------------
Cash flows provided by financing activities 1,969,144 789,717 2,232,509
Effect of foreign exchange rate changes on cash 12,427 (65,191) 160,516
- - -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 124,732 (945,276) (188,388)
Cash and cash equivalents, beginning of year 219,819 1,165,095 1,353,483
- - -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 344,551 $ 219,819 $ 1,165,095
- - -------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing
and investing activities:
Stock-based compensation expense $ - $ 12,135 $ 151,106
Return of shares to treasury $ - $ (21,400) $ -
Capital lease obligations $ - $ 46,982 $ -
- - -------------------------------------------------------------------------------------------------------------------
Cash paid during year to:
Interest payments $ 21,400 $ 9,890 $ -
Income taxes $ - $ - $ -
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - -------------------------------------------------------------------------------
1. NATURE AND CONTINUANCE OF OPERATIONS:
Urban Juice & Soda Company Ltd. (the "Company" or "Urban Juice") develops,
produces, markets, and distributes "alternative" or "new age" beverages.
The Company's main product lines include the brands: JONES SODA CO., a
carbonated soft drink; WHOOPASS, a high energy drink; and WAZU, a natural
spring water. The Company was incorporated in 1986 under the Company Act of
British Columbia. On December 31, 1999, the Urban Juice continued its
incorporation into Wyoming.
The Company's future operations are dependent upon the market's acceptance
of its products. There can be no assurance the Company's products will be
able to secure market acceptance. Operations to date have primarily been
financed through the issuance of common stock and long-term debt. 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, 1999 and
1998, the Company incurred losses of $809,176 and $1,534,835, respectively,
and generated negative cash flows from operating activities. The Company's
ability to continue as a going concern is dependent upon raising additional
financing and generating future profitable operations. Management has a
marketing plan in place to increase distribution of their product by
penetrating new markets and regions. Subsequent to year end, the Company
entered into an agreement with a financial institution for an operating
line of credit in the amount of $3,000,000 to finance future expansion.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements have been prepared using
United States generally accepted accounting principles and are
expressed in United States dollars because, on December 31, 1999 the
Company completed a corporate emigration from Canada and became a U.S.
domestic corporation. In prior years, the Company's consolidated
financial statements were prepared using Canadian generally accepted
accounting principles and were expressed in Canadian dollars. Prior
years financial statements have been restated to conform with United
States generally accepted accounting principles.
Material differences between United States and Canadian generally
accepted accounting principles are discussed and quantified in note
14.
The financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
F-6
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 2
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Use of estimates:
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Accordingly, actual results may differ
from these estimates.
(c) Foreign currency translation:
To December 31, 1999, the functional currency of the Company is the
Canadian dollar. These financial statements have been prepared using the
United States (U.S.) dollar as the reporting currency. Assets and
liabilities are translated into U.S. dollars at the exchange rate in effect
at the balance sheet date. Revenue and expenses are translated at the
average rates of exchange prevailing during the year. The translation
adjustment resulting from the process is presented separately as a
component of accumulated other comprehensive income (loss) in stockholders'
equity. Exchange gains or losses arising on translation or settlement of a
foreign currency denominated monetary items are included in the
consolidated statement of operations.
(e) Cash and cash equivalents:
The Company considers all short-term investments with a maturity date at
purchase of three months or less to be cash equivalents.
(f) Inventory:
Inventory has been stated at the lower of cost or estimated net realizable
value and include adjustments for estimated obsolescence. Cost includes
laid down cost plus applicable overheads and is determined principally
using periodically adjusted standards, which approximate actual cost on a
first-in first-out basis.
(g) Fixed assets:
Fixed assets are recorded at cost and are depreciated 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%
Equipment under capital lease Lease term
</TABLE>
(h) Intangible assets:
The Company's intangible assets include costs associated with attaining
trademarks and patents for the company's products and are amortized
straight-line over 5 years.
F-7
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 3
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) Impairment of long-lived assets and long-lived assets to be disposed
of:
Long-lived assets, which include fixed assets and intangible assets,
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
(j) Revenue recognition:
Sales are recorded upon shipment of products, and represent amounts
realized net of provisions for sales returns, discounts and
allowances.
Sales returns are recognized by issuing a credit note to the customer
once the Company has obtained the returned goods. Discounts are
offered to customers via promotional events. Discounts are recorded at
the time of sales recognition once the goods have been shipped by
issuing a credit note for the discounted amounts of the shipment.
(k) Research and development:
Research and development costs, which consist primarily of product
development costs, are expensed in the period incurred and are
included in general and administrative expenses. During the years
ended December 31, 1999, 1998 and 1997, the Company incurred research
and development costs of $52,836; $nil and $118,311, respectively.
(l) Stock-based compensation:
The Company accounts for its stock-based compensation arrangements
with employees in accordance with provision of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation expense
under fixed plans would be recorded on the date of grant only if the
market value of the underlying stock at the measurement date of the
grant exceeded the exercise price.
SFAS No. 123, "Accounting for Stock Based Compensation", requires
entities that continue to apply the provision of APB Opinion No. 25
for transactions with employees to provide pro forma net income and
pro forma earnings per share disclosures for employee stock option
grants as if the fair-value-based method in SFAS No. 123 had been
applied to these transactions. This information is provided in note
9(a).
The Company recognizes compensation expense for stock options, common
stock and other equity instruments issued to non-employees for
services received based upon the fair value of the equity instruments
issued.
F-8
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 4
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Advertising:
The Company expenses all advertising costs as incurred. Prepaid
advertising costs are amortized over a twelve month period, which is
the average period the related advertising services are being
provided. During the years ended December 31, 1999, 1998 and 1997, the
Company incurred advertising costs of $1,919,220; $764,035 and
$1,024,850 respectively.
(n) Income taxes:
The Company follows the asset and liability method of accounting for
income taxes. Under this method, current taxes are recognized for the
estimated income taxes payable for the current period. Deferred income
taxes are provided based on the estimated future tax effects of
temporary differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases as well as the
benefits of losses available to be carried forward to the future year
for tax purposes.
Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in operations in the period that includes
the enactment date. A valuation allowance is recorded for deferred tax
assets when it is not more likely than not that such deferred tax
assets will be realized.
(o) Net loss per share:
Basic earnings per share is computed using the weighted average number
of common stock outstanding during the periods excluding common stock
held in escrow that is subject to cancellation of certain criteria on
net achieved. Diluted loss per share is computed by adjusting the
weighted average number of outstanding by the effect of the exercise
or conversion of all dilutive securities. As the Company has a net
loss in each of the periods presented, basic and diluted net loss per
share are the same.
Excluded from the computation of diluted earnings per share for the
year ended December 31, 1999 are warrants and options to purchase
5,957,874 shares of common stock because their effects would be
anti-dilutive.
(p) Comprehensive loss:
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. The
Company discloses the comprehensive loss in the Consolidated Statement
of Stockholders' Equity. Comprehensive loss includes net loss and
foreign currency translation adjustments.
F-9
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 5
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
3. ACCOUNTS RECEIVABLE:
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Trade $ 1,435,425 $ 978,872
Other 20,028 23,864
Receivable from related party 49,227 27,723
Allowance for doubtful accounts (237,578) (201,059)
--------------------------------------------------------------------------------
$ 1,267,102 $ 829,400
--------------------------------------------------------------------------------
4. INVENTORY:
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
Finished goods $ 877,855 $ 287,115
Raw materials 469,520 250,076
--------------------------------------------------------------------------------
$ 1,347,375 $ 537,191
--------------------------------------------------------------------------------
5. FIXED ASSETS:
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
Automotive $ 73,158 $ 63,618
Equipment 654,931 596,861
Office and computer equipment 354,933 265,019
--------------------------------------------------------------------------------
1,083,022 925,498
Accumulated depreciation (522,626) (341,812)
--------------------------------------------------------------------------------
$ 560,396 $ 583,686
--------------------------------------------------------------------------------
Included in fixed assets are assets under capital leases with a net book
value of $81,830 (1998 - $27,421)
6. INTANGIBLE ASSETS:
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
Trademarks and patents $ 123,325 $ 133,962
Less amortization (8,679) (32,618)
--------------------------------------------------------------------------------
$ 114,646 $ 101,344
--------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 6
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
7. LINE OF CREDIT:
The Company has a $1,000,000 bank line expiring in August 2000. Borrowings
under the line bear interest at the prime rate plus 1.5% (8.00% at December
31, 1999).
8. CAPITAL LEASE OBLIGATIONS:
The Company has a bank note payable in various monthly installments. The
notes bears interest at the prime rate plus 1.75% (8.25% at December 31,
1999). Scheduled principal payments on this note at December 31, 1999 are a
follows:
<TABLE>
<S> <C>
2000 $ 33,009
2001 28,874
2002 16,818
2003 8,544
2004 16,322
----------------------------
$ 103,567
----------------------------
</TABLE>
9. STOCKHOLDERS' EQUITY:
(a) Stock options:
In 1996, the Company adopted a stock option plan (the Plan) that
provides for the issuance of incentive and non-qualified stock options
to officers, directors, employees, and consultants to acquire up to
15% of the Company's issued and outstanding common stock.
The Board of Directors determines the terms and condition of the
options granted under the Plan, including the exercise price and
vesting schedule. The exercise price for qualified incentive stock
options shall not be less than the fair market value of the underlying
stock at the date of grant, and have terms no longer than five years
from the date of grant. Options granted generally vest over a period
of 18 months.
Under APB 25, compensation expense is measured as the excess, if any,
of the market price of the underlying stock over the exercise price on
the measurement date of the grant. Had stock compensation expense for
grants to employees under the Company's stock option plan been
determined based on the fair value methodology under SFAS 123, the
Company's 1999 and 1998 net loss would have increased to the following
pro forma amounts:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ 809,176 $ 1,534,835 $ 2,965,130
Pro forma 1,023,088 2,319,146 3,096,731
Basic and diluted net loss per share
As reported $ (0.05) $ (0.12) $ (0.23)
Pro forma (0.05) (0.18) (0.23)
---------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 7
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
9. STOCKHOLDERS' EQUITY (CONTINUED):
(a) Stock options (continued):
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model, which takes into account (1) the
market price of the underlying stock at the grant date, (2) the exercise
price, (3) an expected life ranging from one to five years, (4) 0% dividend
yield, (5) a risk-free interest rate ranging from 6.2% to 6.5%, and (6) an
estimated volatility of 90%.
The weighted average fair value of options granted in 1999, 1998 and 1997
was $0.35, $0.32 and $1.15, respectively.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
OUTSTANDING OPTIONS
-----------------------------------
Number Average
of shares exercise price
-----------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1996 1,123,696 $1.33
Options granted 592,000 1.18
Options exercised (214,974) (0.91)
Options canceled (446,646) (1.46)
-----------------------------------------------------------------------
Balance, December 31, 1997 1,054,076 1.22
Options granted 1,756,000 0.67
Options exercised (605,000) (0.63)
Options canceled (710,326) (1.21)
-----------------------------------------------------------------------
Balances at December 31, 1998 1,494,750 0.76
Options granted 1,207,000 0.63
Options exercised (25,000) (0.61)
Options canceled (491,250) (0.94)
-----------------------------------------------------------------------
Balances at December 31, 1999 2,185,500 $0.66
-----------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Weighted-average
Range of Number remaining Weighted-average Number Weighted-average
exercise outstanding contractual life exercise price exercisable exercise prices
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.52 to $0.59 784,000 4.0 $0.55 414,000 $0.55
0.69 to 0.80 1,236,500 3.1 0.73 1,123,000 1.73
1.04 to 1.39 165,000 2.2 1.14 82,500 1.16
-----------------------------------------------------------------------------------------------------------
2,185,500 1,619,500
-----------------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 8
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
9. SHAREHOLDERS' EQUITY (CONTINUED):
(b) Brokers' warrants:
In connection with the issuances of common stock in 1997, 1998 and
1999, the Company issued to the brokers warrants to purchase shares
of the Company's common stock, with exercise prices ranging from
$0.42 to $0.62 per share, expiring June 18, 2000 to May 4, 2001. As
of December 31, 1999, warrants to purchase 162,810 shares of common
stock remain outstanding. The warrants were recorded on issuance at
their estimated fair market value (FMV) as a share issuance cost.
The Company estimated the FMV of the warrants to be $52,000 using
the Black-Scholes option pricing model and using the following
assumptions: expected volatility of 90%, risk-free interest rate of
6.4%, expected life of two to three years, and a 0% dividend yield.
(c) Warrants:
In May, 1999, the Company issued 3,510,754 shares of common stock
in exchange for net proceeds of $1,651,460, being net of $259,108
of issuance costs. Attached to these shares were warrants to
purchase 1,656,567 shares of common stock. The warrants have an
exercise price of $0.52 per share for the first year and $0.62 per
share thereafter. The warrants expire May 4, 2001.
In December, 1998, the Company issued 914,000 shares of common
stock in exchange for net proceeds of $277,234, being net of
$20,874 of issuance costs. Attached to these shares were warrants
to purchase 850,000 shares of common stock. The warrants have an
exercise price of $0.42 per share. The warrants expire December 9,
2000.
10. COMMITMENTS AND CONTINGENCIES:
(a) Lease commitments:
The Company has lease commitments for office and warehouse premises
expiring at various dates. The agreements require base rental
payments over the next five years as follows:
<TABLE>
<S> <C>
2000 $ 36,500
2001 37,200
2002 38,400
2003 38,400
2004 3,200
----------------------------------
$ 153,700
----------------------------------
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, the Company
incurred rental expenses of $58,000, $62,000 and $76,500 respectively.
F-13
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 9
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
(b) 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.
Although the change in date has occurred, it is not possible to
conclude that all aspects of the Year 2000 Issue that may affect the
entity, including those related to customers, suppliers, or other
third parties, have been fully resolved.
11. INCOME TAXES:
The Company's net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carry forwards $ - $ 2,935,822
Capital assets 170,015 153,209
Intangible assets (129,546) (133,297
---------------------------------------------------------------------------
Total gross deferred tax assets 40,469 2,955,734
Less valuation allowance (40,469) (2,955,734
---------------------------------------------------------------------------
Net deferred tax assets $ - $ -
---------------------------------------------------------------------------
</TABLE>
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, 1999,
export sales to the United States were approximately $9,304,000 (1998 -
$5,460,000).
13. FINANCIAL INSTRUMENTS:
(a) Fair values:
As at December 31, 1999, the carrying amounts reported in the
balance sheets for cash and cash equivalents, accounts receivable,
line of credit, accounts payable and accrued liabilities and the
capital lease obligation, approximate their fair values due to the
short-term to maturity of these instruments.
F-14
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 10
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
13. FINANCIAL INSTRUMENTS (CONTINUED):
(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 83%
(1998 - 78%; 1997 - 76%), while customers in Canada represent 17%
(1998 - 22%; 1997 - 24%) of year end accounts receivable balances.
No single customer represents in excess of 10% of revenues for the
year ended December 31, 1999.
14. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP):
(a) The following table sets forth a reconciliation of loss determined
under United States GAAP with that determined under Canadian GAAP
adjusted for product development costs which are deferred and
amortized, and stock compensation expense which is not recorded,
under Canadian GAAP:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss determined under United States GAAP $ (809,176) $ (1,534,835) $ (2,965,130)
Stock compensation expense 79,502 12,546 -
Income (expense) relating to product
development costs 95,416 (56,638) 28,837
----------------------------------------------------------------------------------------------------------
Loss determined under Canadian GAAP $ (634,258) $ (1,578,927) $ (2,936,293)
----------------------------------------------------------------------------------------------------------
</TABLE>
(b) 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 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 $0.087.
F-15
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 11
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
14. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED):
(b) Loss per share (continued):
Loss per share calculated in accordance with Canadian GAAP would be as
follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of common stock 17,829,970 12,537202 10,368,160
Common stock held in escrow 1,500,000 1,500,000 1,500,000
- - -------------------------------------------------------------------------------------------------------------------
Weighted average number of shares for
purposes of loss per share calculation 19,329,970 14,037,202 11,868,160
- - -------------------------------------------------------------------------------------------------------------------
Loss per share determined under Canadian GAAP $ (0.03) $ (0.11) $ (0.25)
- - -------------------------------------------------------------------------------------------------------------------
(c) The following sets forth the effect of adjusting for expenditures
relating to product development costs, which are deferred and amortized
under Canadian GAAP, and for the fair value of warrants issued as stock
compensation which is not recorded under Canadian GAAP, on the assets
and shareholders' equity of the Company:
- - -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
Artwork and design expenditures $ 115,292 $ 115,292 $ 115,292
Marketing, production consulting and
licencing expenditures 331,411 292,530 292,530
Amortization (122,614) (179,149) (122,511)
- - -------------------------------------------------------------------------------------------------------------------
Increase in intangible asset $ 324,089 $ 228,673 $ 285,311
- - -------------------------------------------------------------------------------------------------------------------
Common stock under United States GAAP $ 10,461,318 $ 8,947,585 $ 8,360,685
Share issue costs under United States GAAP 350,161 161,239 151,106
Stock compensation (79,502) (12,546) -
- - -------------------------------------------------------------------------------------------------------------------
Common stock under Canadian GAAP $ 10,731,977 $ 9,096,278 $ 8,511,791
- - -------------------------------------------------------------------------------------------------------------------
Additional paid-in capital under
United States GAAP $ 362,298 $ 173,376 $ 151,106
Fair value of warrants issued under
United States GAAP:
Issued in connection with bank loan (12,137) (12,137) -
Issued to brokers and underwriters (350,161) (161,239) (151,106)
- - -------------------------------------------------------------------------------------------------------------------
Additional paid-in capital Canadian GAAP $ - $ - $ -
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, page 12
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
- - --------------------------------------------------------------------------------
14. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) (CONTINUED):
(c) (continued):
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' deficit under United States GAAP $ 8,663,673 $ 7,854,497 $ 6,319,662
Artwork and design expenditures (115,292) (115,292) (115,292)
Marketing, production consulting and
licencing expenditures (331,411) (292,530) (292,530)
Amortization 122,614 179,149 122,511
Stock compensation (79,502) (12,546) -
Employee share purchase loans - - (14,965)
- - -------------------------------------------------------------------------------------------------------------------
Stockholders' deficit under Canadian GAAP $ 8,260,082 $ 7,613,278 $ 6,019,386
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
(d) Employee share purchase loans:
Under United States GAAP, employee share purchase loans are to be
recorded as a reduction to stockholders' equity, which differs from
Canadian GAAP whereby they can be recorded as an accounts receivable.
This adjustment for United States GAAP purposes would result in a
decrease in accounts receivable. This adjustment for United Stated
GAAP purposes would result in a decrease in accounts receivable by
$14,965 and a decrease in shareholders' equity by $14,965 in 1997.
There would be no adjustment in 1998 and 1999 relating to employee
share purchase loans.
F-17
<PAGE>
URBAN JUICE & SODA COMPANY LTD.
AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
(Expressed in U.S. Dollars)
December 31, 1999
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
- - -----------------------------------------------------------------------------------------------------------------------
Balance at Charged Balance at
beginning to costs Charged to end
Description of year and expenses other accounts Deductions * of year
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1999 $ 201,059 $ 44,827 - $ (8,308) $ 237,578
December 31, 1998 199,727 56,346 - (55,014) 201,059
December 31, 1997 - 334,877 - (135,150) 199,727
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Uncollected receivables written off, net of recoveries.
F-18
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Urban Juice & Soda Company Ltd. and Subsidiaries
We consent to the use of our audit report dated February 4, 2000 on the
consolidated balance sheets of Urban Juice & Soda Company Ltd. and Subsidiaries
as at December 31, 1999 and 1998 and the consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999 included herein, and the related financial
statement schedule.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from audited
consolidated financial statements of Urban Juice & Soda Company Ltd.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 344,551
<SECURITIES> 0
<RECEIVABLES> 1,504,680
<ALLOWANCES> 237,578
<INVENTORY> 1,347,375
<CURRENT-ASSETS> 3,128,521
<PP&E> 1,083,022
<DEPRECIATION> 522,626
<TOTAL-ASSETS> 3,803,563
<CURRENT-LIABILITIES> 1,465,310
<BONDS> 70,558
0
0
<COMMON> 10,461,318
<OTHER-SE> 470,050
<TOTAL-LIABILITY-AND-EQUITY> 3,803,563
<SALES> 11,086,450
<TOTAL-REVENUES> 11,086,450
<CGS> 7,354,564
<TOTAL-COSTS> 11,914,791
<OTHER-EXPENSES> (19,165)<F1>
<LOSS-PROVISION> 44,827
<INTEREST-EXPENSE> 24,100
<INCOME-PRETAX> (809,176)
<INCOME-TAX> 0
<INCOME-CONTINUING> (809,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (809,176)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
<FN>
<F1>Other expenses include 20,495 of other income/interest
income,net.
</FN>
</TABLE>
