ITEM 1. DESCRIPTION OF BUSINESS.

The Company

    We develop, produce, market and distribute "alternative" or "New Age" beverages. We currently produce, market and distribute two unique beverage brands, Jones Soda Co. ® , a "premium" soda, and Jones Soda WhoopAss™ , an energy drink.

    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:

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creating strong distributor relationships;



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stimulating strong consumer demand for our existing brands and products throughout the United States and Canada; and



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developing unique alternative beverage brands and products.

    The premise underlying our business strategy is that the commercial 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 Jones Soda'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, Woodbridge, Ontario, and Warrenton, Missouri. 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.

Historical Development

    We were incorporated on December 23, 1986, under the British Columbia Company Act as "2072 Investment Ltd." After several name changes, we became "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 and became a Wyoming corporation. On August 1, 2000, we merged Urban Juice & Soda Company Ltd. into Jones Soda Co., aWashington State corporation.

    We began as a marketer and distributor of juices, sodas and other New Age and alternative beverages. 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

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November 1995, we launched our second trademarked brand, Jones Soda Co .®. We continued to distribute other brands, but stopped doing so by the end of 1996, in order to increase our business focus on our own brands.

    From 1997 to 2000, the Company has operated solely as a beverage manufacturer and marketer of its own brands, Jones Soda Co . and Wazu . The Company's primary brand, Jones Soda Co . and its product extensions, comprise the majority of the Company's sales, with Wazu comprising less than 1% of the Company's total sales. In June 1998, the Company introduced a product extension of Jones Soda Co. , Natural Jones , 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 WhoopAss , an energy drink. In June 2000, the Company decided to stop producing Natural Jones in order to focus on its core brands, Jones Soda Co. and Jones WhoopAss . In November 2000, the Company created a product extension of Jones Soda Co., Jones Juice™ for launch in April 2001 .

Subsidiaries

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WAZU Products Ltd.—A wholly-owned subsidiary, incorporated in British Columbia, which focuses on our operations in Canada.



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Jones Soda Co. (USA) Inc.—A wholly-owned subsidiary, incorporated in the State of Washington, which focuses on our operations in the United States.



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Myjones.com Inc.—A wholly-owned subsidiary incorporated in the State of Washington, which operates our www.myjones.com website.

The New Age or Alternative Beverage Industry

     Jones Soda Co. , WAZU , and Jones WhoopAss , 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 1999, Beverage World magazine ( www.beverageworld.com ) estimated that the New Age or alternative beverage markets grew 13.3% over 1998, to approximately $8.6 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 Marketing Corporation ( www.beverageworld.com ), for 1999, the New Age or alternative beverage category consists of the following segments:

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Energy drinks



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Premium Soda



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Ready-to-drink (RTD) Coffee



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Ready-to-drink (RTD) teas



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Retail polyethylene terephthalate (PET) bottled waters



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Single-serve fruit beverages



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Sports beverages



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Sparkling water

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Vegetable/Fruit Blends



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Other New Age beverages

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 changed the name of the "all-natural soda" segment to 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. 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— 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," below.

    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 12 and 34. Accordingly, our strategy is to develop unique brand names, slogans and trade dress. In addition to unique 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.

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Distributor Network And Key Accounts

    We distribute our products through a network of independent distributors. We have also obtained listings for the Jones Soda Co. brand with certain key retail accounts. We have pursued this strategy both in an effort to increase sales and to encourage distributors to distribute our brands and products to our key accounts and other accounts of our distributors.

    We usually grant independent distributors the right to distribute finished cases of one or more of our brands in a particular region, province, state or local territory, subject to our overall management directives. We select distributors who we believe will have the ability to get our unique brands and products on the "street level" retail shelves in convenience stores, delicatessens, sandwich shops and selected supermarkets. Ultimately, we have chosen, and will continue to choose, our distributors based upon their perceived ability to build our brand franchise. We currently maintain a network of approximately 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.

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.

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We have used, and intend to continue to use, a different artist, or group of artists, whose portfolio of work best suits Jones Soda Co. 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 New Age or alternative 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.

    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 contemporary urban American 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.

    Our current Slim Jones beverage products are:

    In August 1999 we developed, and in October 1999 launched, Jones WhoopAss . Jones WhoopAss is a citrus drink in an 8.4 ounce (250ml) slim can containing riboflavin, niacin, vitamin B6 and thiamin. Jones WhoopAss is a new category extension for Jones Soda Co. which competes in the Energy Drink category of the New Age beverage industry.

    On February 22, 2001, the Company announced that it will be launching a non-carbonated beverage, Jones Juice™ . The Jones Juice product line, which was developed in late 2000 and early 2001, will initially be made up of two teas and four juices and will be sold in 20 ounce bottles. Jones Juice will have 100% natural flavors and will contain ingredients such as ginseng, royal jelly, kava kava, valerian root, lemongrass, zinc, taurine, creatine and various vitamins. The Company anticipates launching Jones Juice to its distributor network in early April 2001.

    For the year ended December 31, 2000, revenue from the sale of Jones Soda Co. and its product extensions, Slim Jones and Natural Jones , constituted 81.2% of the Company's total revenue. Revenue from the sale of Jones WhoopAss constituted 18.7% of the Company's 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. WAZU 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

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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.

    For the year ended December 31, 2000, revenue from the sale of WAZU products came solely from sales in Canada and constituted 0.1% of the Company's total sales revenue.

Marketing, Sales And Distribution

Marketing

    Our pricing policies for the Jones Soda Co., Jones WhoopAss 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 Jones WhoopAss is $1.99 in the United States and Can.$1.99 in Canada. The suggested retail price for a wee WAZU (500ml bottle) is Can.$0.89—Can.$0.99 in Canada.

    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 Jones Soda Co. 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 three 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 2000 were with BMG Entertainment and Fox Interactive.

    During 2000 we maintained our 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 office in Canada and we send out 12 packs of the soda to the consumer. We believe this strategy has increased awareness for the Jones Soda Co. brand as well as provided for increased consumer interactivity with the Jones Soda Co. brand, and we anticipate that it will continue to achieve these objectives.

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, 2000, sales to the U.S. represented 82.5% of total sales, while sales to Canada represent 17.0% and sales to the U.K. represent .5% of total sales, respectively.

    During 2000, our sales force was organized into nine regional groups, including the U.S. Pacific Northwest, the U.S. Southwest, the U.S. South, the U.S. Northeast, the U.S. Southeast, the U.S. Midwest, Canada and International. Various Regional Managers were ultimately responsible for the separate regions. All of our sales personnel have had prior industry experience. Senior sales personnel

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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 most are oral and terminable by either party at will, as is common in the beverage industry.

    During the year ended December 31, 2000, the three primary distributors of our products purchased approximately 10.6%, 7.9% and 4.3%, respectively, of the total number of cases sold by Jones Soda Co. We anticipate that, concurrent with the expected increase in consumer awareness of our brands, we will continue to 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 three main independent contract packers known as "co-packers" to prepare and bottle our products. As is customary in the contract packing industry, we are expected to arrange for our contract packing needs sufficiently in advance of anticipated requirements. Accordingly, it is our business practice to require our independent distributors to place their purchase orders for our products at least 10 days in advance of shipping. Other than minimum case volume requirements per production run, we do not have any minimum production requirements, except as detailed below.

Raw Materials

    The raw materials used in the preparation and packaging of our products (consisting primarily of concentrate, glass, labels, caps and packaging) are purchased from suppliers selected either directly by our contract packers or by us which, in turn, supply those raw materials to our contract packers.

    We believe that we have adequate sources of raw materials which are available from multiple suppliers. Currently, we purchase all of our flavor concentrate for Jones Soda Co. products from Pro-Liquitech,  Inc., a flavor concentrate company, on an exclusive basis. We intend to purchase flavor concentrate from multiple flavor houses for future Jones Soda Co. flavors and/or additional products, with the intention of developing secondary sources of flavor concentrate for each of our products. The water used to produce Jones Soda Co. is filtered and is also treated to reduce alkalinity.

Quality Control

    Our products are made from high quality ingredients and natural and artificial flavors. We seek to ensure that all of our products satisfy our quality standards. Contract packers are selected and monitored by our own quality control representatives in an effort to assure adherence to our production procedures and quality standards. We analyze samples of our products from each production run undertaken by each of our contract packers.

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    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 Jones Soda Co. facility and the contract production facilities includes microbiological checks and other tests to ensure the production facilities meet the standards and specifications of our quality assurance program. This information is then logged into a database for rapid statistical analysis and followed up with each contract packer. We believe our production facilities inspection program meets or exceeds industry standards. Water quality is monitored during production and at scheduled testing times to ensure compliance with applicable government regulatory requirements. Flavors are pre-tested before shipment to contract packers from the flavor manufacturer. We are committed to an on-going program of product improvement with a view toward ensuring the high quality of our product.

    We believe we source and select only those suppliers that use only quality components. We also inspect packaging suppliers' production facilities and monitor their product quality.

Regulation

    The production and marketing of our licensed and proprietary beverages are subject to the rules and regulations of various federal, provincial, state and local health agencies, including without limitation, Health Canada, Agriculture and Agri-Food Canada and the United States Food and Drug Administration. The FDA and Agriculture and Agri-Food Canada also regulate labeling of our products. From time to time, we may receive notifications of various technical labeling and/or ingredient infractions with respect to our licensed products. We believe that we have a compliance program in place to ensure compliance with production, marketing and labeling regulations on a going-forward basis. There are no potential notifications or actions currently outstanding. See "Risk Factors Affecting the Business of the Company," below.

Trademarks, Flavor Concentrate Trade Secrets And Patent Pending

    We own a number of trademarks, including the following in Canada and the United States: " Jones Soda Co.® ," " WAZU®, " " Jones WhoopAss™ " 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 both Canada and the United States, they may be renewed for a nominal fee. In addition, we have trademark protection in Canada and the United States for a number of other trademarks for slogans and product designs, including " Wet Yourself™ ," " I've Got A Jones For A Jones® ," " Jones Soda Co. and Design™ ," " WAZU and Design® " and " My Jones™ ". In addition, trademark protection for the marks " Jones Soda Co." and " WAZU" have also been applied for in the United Kingdom, Germany, Japan, and other foreign jurisdictions.

    To date, we have the exclusive rights to 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.

    We consider our trademarks and flavor concentrate trade secretes to be of considerable value and importance to our business. No successful challenges to our registered trademarks have arisen and we

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have no reason to believe that any such challenges will arise in the future. See "Risk Factors Affecting The Business of The Company," below.

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 Jones Soda Co. 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 Jones WhoopAss as a complementary brand which may replace other energy drinks. Jones Juice, which was developed in 2000, will be offered in 2001 as a complementary brand to our existing distributor network which may replace other single-serve fruit beverages or ready-to-drink (RTD) teas. 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. See "Risk Factors Affecting The Business of The Company," below.

    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 WhoopAss is priced in the middle to high of the pricing range for energy drinks.

Employees

    As of December 31, 2000, we had 46 full-time employees, 32 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.