<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 33-98282
APPLEWOODS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3859709
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
274 Riverside Avenue
Westport, Connecticut
(Address of principal executive offices)
06880
(Zip Code)
(203) 227-4912
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Class Outstanding at April 30, 1997
------------ --------------------------------
Common Stock 8,472,000
<PAGE>
APPLEWOODS, INC.
INDEX
PART 1: FINANCIAL INFORMATION Page:
Item 1. Financial Statements:
Balance Sheet as of March 31, 1997 and June 30, 1996 2
Statements of Operations for the three months and nine months
ended March 31, 1997 and 1996 3
Statement of Stockholders Equity for the nine months ended
March 31, 1997 4
Statements of Cash Flows for the nine months ended
March 31, 1997 and 1996 5
Notes to Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations 8 - 10
PART II: OTHER INFORMATION:
Item 6. Exhibits & Reports on Form 8-K 11
Signatures 12
<PAGE>
APPLEWOODS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Unaudited)
March 31 June 30
---------- -------
1997 1996
Assets: (Unaudited)
Current Assets:
Cash $ 1,541,142 $ 3,958,168
Trade Accounts Receivable,net of allowance 993,262 673,689
for doubtful accounts of $ 71,913 and
$97,538 respectively
Other Receivables 85,138 108,118
Inventory 2,816,496 1,742,066
Prepaid Consultancy Fees 513,000 993,000
Other Current Assets 128,173 65,177
------------ ------------
Total Current Assets 6,077,211 7,540,218
------------ ------------
Property, Plant and Equipment -Net 728,209 424,222
------------ ------------
Other Assets
Trademarks - Net 101,823 80,794
Prepaid Consultancy Fees 28,250 293,000
------------ ------------
Total Other Assets 130,073 373,794
------------ ------------
Total Assets $ 6,935,493 $ 8,338,234
============ ============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 983,179 $ 905,889
Accrued Expenses 362,888 100,384
Accrued Taxes 43,069 34,685
Other Current Liabilities 140,049 57,311
Other Current Liabilities - Related Parties 39,589 49,883
------------ ------------
Total Current Liabilities 1,568,774 1,148,152
------------ ------------
Commitments And Contingencies
Stockholders' Equity:
Series A Preferred Stock - $.0001 Par
Value, 500,000 Shares Authorized,
249,911 Shares Issued 25 25
Common Stock, $.0001 Par Value,
30,000,000 Shares Authorized,
8,472,000 Shares Issued 847 847
Additional Paid-In Capital 12,040,017 12,040,017
Accumulated Deficit (6,870,114) (4,919,790)
Cumulative Foreign Currency Translation
Adjustment 195,944 68,983
------------ ------------
Total Stockholders' Equity 5,366,719 7,190,082
------------ ------------
Total Liabilities and Stockholders' Equity $ 6,935,493 $ 8,338,234
============ ============
See accompanying notes to the consolidated financial statements
Page 2
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APPLEWOODS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1997 1996 1997 1996
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 1,277,706 $ 583,003 $ 3,768,406 $ 2,374,198
Storefitting and License Revenue 216,817 60,915 719,129 637,512
---------------- ------------- ------------- ---------------
Total Revenues 1,494,523 643,918 4,487,535 3,011,710
---------------- ------------- ------------- ---------------
Cost of Sales:
Product Sales 926,638 342,413 2,716,676 1,486,892
Storefitting and License Revenue 192,888 103,079 543,231 448,744
---------------- ------------- ------------- ---------------
Total Cost of Sales: 1,119,526 445,492 3,259,907 1,935,636
---------------- ------------- ------------- ---------------
Gross Profit 374,997 198,426 1,227,628 1,076,074
Selling, General and Admin.
Expenses 976,182 445,737 2,558,428 1,252,276
Consultancy Fees 248,250 245,750 744,750 485,750
---------------- ------------- ------------- ---------------
(Loss) from Operations: (849,435) (493,061) (2,075,550) (661,952)
---------------- ------------- ------------- ---------------
Other Income (Expense):
Gain on Sale of Equipment - - - 5,088
Foreign Exchange (Loss) Gain (93,172) - 55,722 -
Interest Income 10,523 - 69,504 -
Interest Expense 0 (71,379) 0 (232,989)
---------------- ------------- ------------- ---------------
Total Other Income
(Expense) (82,649) (71,379) 125,226 (227,901)
---------------- ------------- ------------- ---------------
(Loss) before Income Taxes (932,084) (564,440) (1,950,324) (889,853)
Provision for Income Taxes - - - -
---------------- ------------- ------------- ---------------
Net (Loss) $ (932,084) $ (564,440) $ (1,950,324) $ (889,853)
================ ============= ============= ===============
Net (Loss) per share $ (0.11) $ (0.22) $ (0.23) $ (0.35)
================ ============= ============= ===============
Weighted average number of shares 8,524,364 2,568,000 8,524,364 2,568,000
================ ============= ============= ===============
</TABLE>
See accompanying notes to the consolidated financial statements
Page 3
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APPLEWOODS, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Series A Preferred Additional
------------------ ------------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1996 8,472,000 $847 249,911 $25 $12,040,017
Foreign Currency Translation Adjustment - - - - -
Net Loss - - - - -
--------- ---- ------- --- -----------
Balance - March 31, 1997 8,472,000 $847 249,911 $25 $12,040,017
========= ==== ======= === ===========
<CAPTION>
Foreign
Currency Total
Accumulated Translation Stockholders'
Deficit Adjustments Equity
------- ----------- -------
<S> <C> <C> <C>
Balance - June 30, 1996 $(4,919,790) $68,983 $7,190,082
Foreign Currency Translation Adjustment - 126,961 126,961
Net Loss (1,950,324) - (1,950,324)
----------- -------- ----------
Balance - March 31, 1997 $(6,870,114) $195,944 $5,366,719
=========== ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements
Page 4
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APPLEWOODS, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(Unaudited) Nine Months Ended
March 31
---------------------------------
1997 1996
---- ----
Cash Flows from Operating Activities:
Net Loss $(1,950,324) $(889,853)
Adjustment to Reconcile Net Loss to Net
Cash Used for Operating Activities
Depreciation 219,088 66,698
Amortization of Trademarks 25,062 16,041
(Gain) on Sale of Equipment - (5,088)
Imputed Interest - 52,786
Non-Cash Consulting Fees 720,000 480,000
Changes in Assets and Liabilities
Trade Accounts Receivable (319,573) (278,532)
Other Receivables 22,980 4,253
Inventory (1,074,430) (131,476)
Other Current Assets (62,996) (51,218)
Other Assets 24,750 -
Accounts Payable 77,290 (116,399)
Accrued Expenses 262,504 353,741
Accrued Taxes 8,384 30,820
Other Current Liabilities 82,738 27,798
Other Current Liabilities - Related
Parties (10,294) (64,628)
----------- ---------
Net Cash - Operating Activities (1,974,821) (505,057)
----------- ---------
Investing Activities
Proceeds from Sale of Equipment - 21,433
Purchase of Property and Equipment (494,902) (55,658)
Investment in Trademarks (39,298) (10,508)
----------- ---------
Net Cash - Investing Activities (534,200) (44,733)
----------- ---------
Financing Activities
Payment of Lease Obligations - (51,609)
(Repayment of)/Proceeds from Cash Overdraft - (1,047)
(Repayment of)/Proceeds from Short-Term Loans - 500,000
(Repayment of)/Proceeds from Related Party
Loans - 108,031
----------- ---------
Net Cash - Financing Activities - 555,375
----------- ---------
----------- ---------
Effect of Exchange Rate Changes On Cash 91,995 (5,585)
----------- ---------
Net Decrease In Cash (2,417,026) -
Cash - Beginning of Period 3,958,168 -
----------- ---------
Cash - End of Period $ 1,541,142 $ -
=========== =========
Supplemental Disclosures of Cash Flow
Information
Cash paid during the period for:
Interest $ - $ 175,915
Income Taxes $ - $ -
See accompanying notes to the consolidated financial statements
Page 5
<PAGE>
APPLEWOODS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- ---------------------------------------------------------------------
(1) Significant Accounting Policies
Significant Accounting Policies of Applewoods, Inc. (the "Company") are
set forth in the Company's Form 10-KSB as filed with the Securities and Exchange
Commission on October 15, 1996. Certain prior year amounts have been
reclassified to conform with the current year presentation.
(2) Basis of Reporting
The balance sheet as of March 31, 1997, the statements of operations
for the three months and nine months ended March 31, 1997 and 1996, the
statement of stockholders' equity for the nine months ended March 31, 1997, and
the statements of cash flows for the nine months ended March 31, 1997 and 1996
have been prepared by the Company without audit. The accompanying unaudited
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company such
statements shall include all adjustments (consisting only of normal recurring
items) which are considered necessary for a fair presentation of the financial
position of the Company at March 31, 1997, and the results of its operations and
cash flows for the nine months then ended. It is suggested that these financial
statements be read in conjunction with Form 10-KSB filed with the Securities and
Exchange Commission on October 15, 1996.
(3) Property, Plant & Equipment
Property, Plant & Equipment is comprised of the following:
March 31, June 30,
1997 1996
--------- -----------
Plant & Machinery $677,649 $ 441,798
Office Equipment & Fittings 440,358 140,496
Motor Vehicles 38,909 36,900
--------- -----------
1,156,916 619,194
Less: Accumulated depreciation 428,707 194,972
------- --------
$728,209 $424,222
======== ========
(4) Trademarks
Trademarks is comprised of the following:
March 31, June 30,
1997 1996
--------- ----------
Cost $ 198,135 $ 149,949
Less: Accumulated amortization 96,312 69,155
------ ------
$101,823 $80,794
======== =======
Page 6
<PAGE>
APPLEWOODS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- ---------------------------------------------------------------------
(5) Inventory
Inventory is comprised of the following:
March 31, June 30,
1997 1996
---------- ----------
Raw Materials $1,422,329 $ 856,893
Work in Progress 117,160 24,886
Finished Goods 1,277,007 860,287
---------- ----------
$2,816,496 $1,742,066
========== ==========
Page 7
<PAGE>
APPLEWOODS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Applewoods, Inc., a Delaware corporation, ("AI"), was formed in September
1995 to acquire all of the outstanding stock of Applewoods International Limited
("AIL"), a company registered in Great Britain. The acquisition was recorded as
a recapitalization of AIL, with AI as the acquiror. AI and AIL are collectively
referred to as the "Company".
The business of the Company is the establishment of licensed retail
stores to sell "natural" soaps, toiletries and related gift products. The
Company manufactures both the products and the associated storefittings at its
premises in Devon, England. During the past three years, the Company has pursued
an active policy of developing original product lines in-house and sourcing
accessory products from around the world. This is essential to provide a
sufficient range and variety of products to make the stores successful. It is
anticipated that this range development will continue for the foreseeable
future.
The Company has recently exhibited at major trade shows in the USA,
Canada, Europe and South America where management met with its existing and
potential licensees in order to secure new Applewoods retail stores.
The year ended June 1996 was dominated by the activity surrounding the
public offering. This was declared effective on April 10, 1996. The funds raised
give the Company the ability to develop its products and bring them to market as
rapidly as it is able. Historically the performance of the Company has been
greatly hampered by the lack of financial resources. The Company believes that
it now has the products and resources to become successful in the retail
cosmetics market.
This Form 10Q contains forward looking information that is subject to
certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected.
Three months ended March 31, 1997 compared to three months ended March 31, 1996
The Company's revenues are generated from an initial license fee charged
for all necessary construction items and services that include the design and
fixturing of the retail space, and from the sale of products to these licensees.
For the three months ended March 31, 1997, total revenues increased by 132.1%.
Within this, product sales increased by 119.2% over the previous year,
essentially due to the increased number of stores and sales into QVC, the direct
response television organization based in the United States. At March 1997, the
Company had 58 stores operating compared with 48 at March 1996. Storefitting and
license revenue increased by 255.9%.
The gross profit percentage for the three months ended March 31, 1997,
declined year on year from 31% to 25%. This was a result of balancing the
inventory profile and recognizing potential product obsolescence, the impact of
which was offset by an improvement in the storefitting and license gross margin;
in 1996, this quarter reported a standstill in the storefitting activity as
potential licencees waited for the outcome of the public offering. Selling,
general and administrative expenses increased to approximately $976,000 this
year from approximately $445,000 in the previous year. The major element within
this was again the increase in sales promotion, travel and product development,
which all relate to the increased efforts by the Company to develop the
worldwide market for its products.
The Company also recognized $240,000 of noncash consulting expense
related to two new consulting agreements which commenced in October 1995.
Interest income at approximately $11,000 this year replaced interest expense of
$71,000 last year. This was due to the effect of the public offering in April
1996 which replaced the bank borrowings and other loans with a cash surplus. A
foreign exchange loss has been recognized as a result of the weakening of the
Pound Sterling through the quarter; at March 31, 1997, the Pound Sterling
exchanged for 1.638 U.S. Dollars, while at December 31, 1996, the rate was
1.711.
It should be noted that there remains a further $480,000 of noncash
consulting fee expense to be expensed as at March 31, 1997.
Page 8
<PAGE>
APPLEWOODS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended March 31, 1997 compared to nine months ended March 31, 1996
For the nine months ended March 31, 1997, total revenues increased by
49.0%. Within this, product sales increased by 58.7% over the previous year,
essentially due to the increased number of stores. At March 1997, the Company
had 58 stores operating compared with 48 at March 1996. Storefitting and license
revenue increased by 12.8% compared to the previous year.
The gross profit percentage for the nine months ended March 31, 1997,
declined from 36% to 27%. This was largely a result of the promotion cost of new
products into the market in the second quarter and provisioning against
potentially obsolescent inventory in the third quarter. Selling, general and
administrative expenses increased to approximately $2,558,000 this year from
approximately $1,252,000 in the previous year. The major element within this was
again the increase in sales promotion, travel and product development, which all
relate to the increased efforts by the Company to develop the worldwide market
for its products.
The Company also recognized $720,000 of noncash consulting expense
related to two new consulting agreements which commenced in October 1995.
Interest income at approximately $70,000 this year replaced interest expense of
$234,000 last year. This was due to the effect of the public offering in April
1996 which replaced the bank borrowings and other loans with a cash surplus. A
foreign exchange gain has been recognized as a result of the relative strength
of the Pound Sterling at the quarter end; at March 31, 1997, the Pound Sterling
exchanged for 1.638 U.S. Dollars, while at June 30, 1996, the rate was 1.554.
It should be noted that there remains a further $480,000 of noncash
consulting fee to be expensed as at March 31, 1997.
Liquidity and Capital Resources
At March 31, 1997, the Company had working capital of $4,508,000
including cash and cash equivalents of $1,541,000. The 5% variation in the Pound
Sterling/ U.S. Dollar exchange rate is relevant in comparing Net Asset values,
which mainly originate in Pounds Sterling, at the Balance Sheet dates.
During the nine months to March 31, 1997, the Company used cash of
approximately $1,975,000 to fund operations. Contributing to this use of cash
was a net loss for the period, before noncash items of some $987,000, and an
increase in inventory of $1,074,000. Net cash used in investing activities was
$534,000; this was mainly spent in the first fiscal quarter on new machinery to
automate the production process.
On Febuary 3 1997, the Company, through its subsidiary, Applewoods
International Limited, entered into an agreement with QVC Inc., the direct
response television organisation based in the United States pursuant to which
the Company granted QVC (i) the exclusive right to promote the Company's
products by direct response television in the USA, (ii) the non-exclusive right
to promote the Company's products by direct mail and retail distribution in the
retail stores of QVC or its affiliates, and (iii) the right of first refusal to
promote the Company's products by direct response television outside of the USA
(other than in areas where existing franchisees have rights prohibiting such
promotion) (each, an "Additional Territory"). The initial term of the Agreement
is for two (2) years, renewable for successive two (2) year periods (each, a
"Term").
Currently, the Company does not expect to spend significant further sums
on capital expenditure in 1996/97. The Company believes that existing bank
balances and cash flow from operations will be sufficient to meet its funding
requirements for the foreseeable future.
Page 9
<PAGE>
APPLEWOODS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impact of Inflation
Inflation has not been a major factor in the Company's business since
inception. There can be no assurances that this will continue.
Seasonality
The Company experiences considerable seasonal fluctuation in its
quarterly results due to the pre-Christmas retail sales period. In the last two
years, an average of 39% of annual product sales were generated in the October
to December quarter. Quarterly results should therefore be viewed in the context
of the above.
Page 10
<PAGE>
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits as required by Item 601 of Regulation S-K:
None Required.
(b) Reports on Form 8-K :
None filed during the quarter for which this form is submitted.
Page 11
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorised.
APPLEWOODS, INC.
Date: May 6, 1997
By: /s/ Roger M. Buoy,
------------------------------------
Roger M. Buoy,
Chairman and Chief Executive Officer
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE
FISCAL QUARTER TO MARCH 31, 1997 AS PRESENTED IN THE COMPANY'S FORM 10-Q
FOR SUCH PERIOD AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,541,142
<SECURITIES> 0
<RECEIVABLES> 1,065,175
<ALLOWANCES> 71,913
<INVENTORY> 2,816,496
<CURRENT-ASSETS> 6,077,211
<PP&E> 1,156,916
<DEPRECIATION> 428,707
<TOTAL-ASSETS> 6,935,493
<CURRENT-LIABILITIES> 1,568,774
<BONDS> 0
0
25
<COMMON> 847
<OTHER-SE> 5,366,719
<TOTAL-LIABILITY-AND-EQUITY> 6,935,493
<SALES> 4,487,535
<TOTAL-REVENUES> 4,487,535
<CGS> 3,259,907
<TOTAL-COSTS> 6,563,085
<OTHER-EXPENSES> 125,226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,950,324)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,950,324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,950,324)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> 0
</TABLE>
