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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
|X| Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 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 No. 0-27850
APPLEWOODS(R), INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3859709
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
274 Riverside Avenue
Westport, Connecticut 06880
(Address of Principal (Zip Code)
Executive Officers)
Registrant's telephone number, including area code: (203) 227-4912
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. Yes _X_ No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-B is not 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 were $5,921,689.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing price of such stock as
of September 30, 1997, was approximately $2,647,500.
Number of shares outstanding of the issuers common stock, as of
September 30, 1997, was 8,472,000.
DOCUMENTS INCORPORATED BY REFERENCE:
A portion of the Registrant's definitive Proxy Statement relating to
the Registrant's 1997 Annual Meeting of Stockholders ("Proxy Statement") to be
filed pursuant to Regulation 14A is incorporated by reference in Part III of
this Report.
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PART I
Item 1. BUSINESS.
Applewoods(R), Inc., a Delaware corporation ("Applewoods(R) Delaware"),
through its wholly owned subsidiary Applewoods(R) International Limited, an
English corporation ("AIL"), manufactures and sells natural soaps, oils,
lotions, other toiletries and related gift products to both licensed
Applewoods(R)' retail stores and authorized distributors around the world.
Applewoods(R) Delaware and AIL are collectively referred to herein as the
"Company" or "Applewoods(R)". The Company's principal products include natural
hair and skincare products and related gift items. Applewoods(R) Delaware was
formed in September 1995 to acquire all of the outstanding shares of capital
stock of AIL and ALA Limited ("ALA"), a wholly-owned subsidiary of the Company
which was dissolved on July 15, 1996. All share and per share data included in
this annual report have been restated to reflect the Company's two-for-one stock
split effected in May 1996.
In April 1996, immediately prior to the Company's initial public
offering, Applewoods(R) Delaware acquired AIL and ALA by issuing an aggregate of
3,600,000 shares of Common Stock of Applewoods(R) Delaware for the all of the
issued and outstanding shares of capital stock of AIL and ALA. In connection
with its initial public offering, the Company raised approximately $6,900,000
from the sale of 2,760,000 shares of the Company's Common Stock. The proceeds
from the offering were used to repay certain indebtedness and have been and will
continue to be used to expand the Company's business. Following the Company's
initial public offering, holders of an aggregate of 576,000 of the Company's
Class A Warrants exercised such warrants for an aggregate exercise price of
$1,728,000.
The Company was formed in 1978 for the purpose of developing and
marketing natural toiletries. In July 1992, the Company's predecessor was placed
into receivership in England. (Receivership in England is similar to bankruptcy
in the United States). In August 1992, Messrs. Roger Buoy and Tony Swash, the
Company's Chief Executive Officer and Chief Operating Officer, respectively,
purchased the Company's assets from the receiver. Prior to entering into
receivership, AIL owned and operated six retail stores in the United Kingdom,
all of which were closed prior to the receiver being appointed. Messrs. Buoy and
Swash redirected the Company's business by concentrating on establishing
licensed retail stores to sell the Company's natural soaps, oils, lotions, and
gift items.
Since purchasing the assets of AIL, the Company has focused upon
establishing licensed retail stores and enhancing its product lines. The Company
concentrates its efforts upon creating, manufacturing and marketing natural
beauty products rather than operating Company owned retail stores. The Company's
credo is "Beauty Without Cruelty", and reflects the Company's efforts to develop
and market products which eventually will be free from animal by-products and
not tested on animals.
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The Company believes that Applewoods(R)' retail stores are most likely
to be successful if they are owner operated. Therefore, the Company's business
plan has been to license the Applewoods(R)' concept to entrepreneurs who, on
their own or through sublicensees, open their own Applewoods(R)' retail stores
and market Applewoods(R)' products. In selecting prospective store licensees,
the Company seeks individuals based upon their knowledge of the natural toiletry
business and their empathy with the Company's underlying belief in Beauty
without Cruelty.
As of September 30, 1997, there were 74 Applewoods(R)' retail stores
(including stores within other larger retail stores) located in Asia, the Middle
East, Europe, the Caribbean, North America, Central and South America, offering
15 product lines: Applewoods(R) Soaps, Extracts(TM), Naturals(TM), Orchid and
Camelia(TM), Discoveries(TM), Mother and Baby(TM), EVER(TM), Bristol Blue(TM),
Aromatherapy(TM), Out of Africa(TM), Marine(TM), Love Oils from the Planet
Venus(TM), Rich Shea Butter(TM), Pot Pourri(TM) and Florilegium(TM). In
addition, the Company is introducing three additional ranges in Autumn 1997 -
Lavender, Coconut and a group of Fragrances. These product lines include hand
and body lotions, skincare products, bath oils, fragranced candles, men's
grooming items, powders, creams, aromatherapy products, soaps, conditioners,
bubble baths, shower gels, massage oils, bath sponges, massagers and other
accessory products. Although most of the Company's products are designed to
appeal to women, there are two product lines directed at the male market,
Ever(TM) and Bristol Blue(TM), which tend to be purchased by women, as gifts for
men. The Company also offers a variety of sundry products, such as wooden and
plastic bath and body accessories and candles. Applewoods(R)' retailers are
restricted from purchasing or selling products from third parties without the
Company's prior written consent.
The Company does not charge its retail store licensees any franchise,
advertising or other licensing fees. However, the Company receives an initial
fee (approximately $70,000) for designing and fixturing the retail space, and
providing initial support services. In addition, in order to commence
operations, retail store licensees need to purchase the initial inventory from
the Company at the established wholesale price (approximately $40,000). After a
new licensee is approved, a Company representative visits the territory to
review potential sites selected by the licensee for retail stores. Once a
prospective location is found and a decision is made to proceed, all necessary
construction details are obtained. The Company designs the store front and
interior fixtures, normally including lighting. After finalizing the proposed
design and budget, the Company constructs the fixturing and store frontage at
its own facilities and ships these items to the new location, where they are
installed (in all cases, but for eleven stores which were installed directly by
the licensees) by a representative of the Company's construction department. All
Applewoods(R)' stores are similar in atmosphere and design although layout will
vary to meet the particular requirements of each building or structure.
Applewoods(R)' retail stores normally occupy between 500 to 1,000 square feet of
floor space.
In addition to licensed retail stores, the Company's products are
promoted in North America by QVC Inc., a direct response television
organization. The Company hopes to generate brand awareness in the United States
through mass market merchandising of its products on the
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QVC national cable channel. The Company has participated in several shows during
1996 and 1997.
The Company develops and manufactures almost all of its own products,
with the exception of soaps, candles, some alcohol-based products and various
accessories. The Company hopes that Applewoods(R)' products eventually will be
free from animal by-products, subject to the availability of a successful
vegetable or synthetic replacement. Applewoods(R) is against testing on animals
and encourages its suppliers to share the same philosophy. The packaging for the
Company's products is minimal and recycled or recyclable where possible.
Products
The Company develops its own formulations for the face, body and hair.
Most formulas are carried in two or three sizes of containers. The formulations
for the face, body and hair include natural ingredients such as herbs and
extracts from vegetables, flowers and fruits. These products are not tested on
animals and, whenever possible, the containers that they are packaged in are
recyclable. The Company believes it is in compliance with significant regulatory
requirements for safe ingredients, detailed ingredient listing and non-drug
claims as presently enacted. Unlike pharmaceutical products, cosmetics and
skincare products are not generally patented and do not currently require
approval by the Food and Drug Administration ("FDA").
The products marketed by the Company are often linked by common
characteristics, such as scent or skin-type, thereby creating a fully integrated
line of personal-care products which, in turn, encourages customers to purchase
all their personal-care needs from the Company.
The Company enhances the image of its products and its overall
corporate image by emphasizing natural, hypo-allergenic formulations. The
Company also emphasizes environmental sensitivity by strictly avoiding products
which are tested on animals, using minimal packaging which has been or can be
recycled, printing advertising and educational materials on recycled paper. The
Company is a member of the animal rights group, British Union for Abolition of
Vivisection.
The Company is conducting research in an effort to develop new product
lines as well as new products for existing product lines. The Company
anticipates periodically introducing new products to the marketplace based on
customer preferences.
The Company currently offers the following product lines:
Extracts(TM)
Using extracts from nature with unusual properties (such as aloe vera,
chamomile, henna, peppermint, shea butter and rosemary), "Extracts" represents a
complete collection of hair and skincare products for different skin types,
formulated for everyday use.
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Naturals(TM)
"Naturals" includes shampoos, conditioners, moisturizers and various
toiletries in five different fragrances packaged in recycled Spanish glassware.
Orchid & Camelia(TM)
Orchid & Camelia are classic "English" toiletries designed specifically
for the gift market which include soaps, lotions, fragranced candles and scented
drawer liners.
Ever(TM)
"EVER" is a line of products which have been specially developed by the
Company for men. EVER products include bath and shower gel, shampoo, soaps,
aftershave and other men's grooming products. EVER is primarily marketed to
women as gift items for men.
Bristol Blue(TM)
A line of men's toiletries designed to appeal to more active men.
Bristol Blue products include bath and shower gel, shampoo, soaps, aftershave
and other men's grooming products.
Applewoods(R) Aromatherapy(TM)
"Aromatherapy" products include essential oils, shampoos, lotions and
skin preparations for all skin and hair types derived from pure oils.
"Aromatherapy" products are designed to produce aromas which have a palliative,
soothing and relaxing effect.
Mother and Baby(TM)
The Company has created a natural range of soothing creams and oils
designed to pamper mothers-to-be and newborn babies by using ingredients with
limited fragrance and an absence of mineral oils and talcum powder. "Mother and
Baby" products include, powders, creams, shampoo, oils, lotions and gels.
Applewoods(R) Discoveries(TM)
This group of soaps, shampoos, conditioners, bubble baths, hand and
body lotions and shower gels is brightly packaged and are fragranced to resemble
twelve exotic fruits.
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Out of Africa(TM)
The "Out of Africa" collection consists of lotions, skin toners, bubble
baths, shampoos, conditioners and cologne, each packaged in an attractive
antique-looking bottle with an ornate stopper.
Applewoods(R) Marine(TM)
The Company has a "Marine" collection of soaps, bath oils and shower
gels which are packaged in ecru and turquoise packaging to capture the feeling
of the sea.
Rich Shea Butter(TM)
"Rich Shea Butter" uses a butter made from the Karite nut and is
characterized by its deep, smooth, moisturizing properties. The Company has
created a range of products from Rich Shea Butter for everyday use that includes
hand and body lotion, a deluxe hand cream, a liquid soap and conditioners.
Love Oils from the Planet Venus(TM)
The Company has created a group of bath and massage oils intended for
younger customers by using brightly colored liquids of differing viscosities
which management believes creates a psychedelic appearance.
The Applewoods(R) Vegetable Soaps(TM)
The Company sells translucent, vegetable-based glycerine soaps. These
soaps are sold in a variety of sizes and packaging including bath-sized tablets,
gift packages, collections of fruit shape soap and small novelty soaps.
The Applewoods(R) Pot Pourri Collection(TM)
The Company's potpourri is hand-blended from flowers and plants and
then fragranced with natural oils.
English Florilegium(TM)
A gift collection of English Florals, English Rose, Lavender and
Freesia. Combination gift boxes are complemented by pot pourri and dried
flowers.
The Company plans to introduce the following ranges in Autumn 1997:
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Lavender(TM)
This range has introduced another fragrant dimension to toiletries and
gifts; fragrance, room sprays, soaps and shower gels sit alongside white lace
accessories.
Coconut(TM)
Inspired by exotic island locations, coconut preparations bring a
holiday mood into the home with shampoo, shower gel, body lotion and soap.
Fragrance(TM)
Six new fragrances are introduced, one unisex and five for women. The
main offer being a group of four known as Applewoods(R) Flight of Fragrance: all
Eau de Parfum and named after butterflies: Sangaris, Esmeralda, Papilio and
Lacewing.
Earth Tones(TM)
The Company introduced in December 1995 a cosmetics line for women.
Earth Tones include lipsticks, blushes, foundations and concealers. Nail polish
and other nail treatments are not currently a part of the Earth Tones cosmetics
line.
The Company's formulations are developed by the Company. These
formulations for the Company's products are not patented or patentable and could
be duplicated, although the Company considers its product formulas to be trade
secrets. The Company does not believe, however, that the availability of
similarly formulated products would necessarily have a material adverse effect
on the Company's prospects. The Company's ability to select and have developed
appealing fragrances and other product formulas is a significant factor in
determining the success of a particular item. Success of a product is also
dependent, however, upon many variables including, marketing, advertising,
promotion, packaging, availability and consumer perception of value and price.
The Company, from time to time, contracts with outside consultants to assist in
developing new products.
Sales and Marketing
The Company's sales and marketing efforts are focused on expanding the
number of Applewoods(R)' retail stores and increasing the sales of its products
at each location. Accordingly, the Company intends to participate at a variety
of international trade exhibitions around the world which specifically focus on
licensing new businesses. The Company has developed a new series of marketing
and sales promotion media to promote its products and the retail stores. The
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Company also has upgraded its instore merchandising materials and information
literature, and has hired a public relations officer to aid with these marketing
campaigns.
The Company's objective is to license retail stores which provide adult
customers of all ages the convenience of one-stop shopping for skincare and
haircare products. The Company's marketing strategy is to require licensees to
provide customers with a leisurely atmosphere in which to shop while they select
and test different scents and colors at their own pace. The Company also sells
directly to independent retailers in England. The Company believes that its
products are affordable while, at the same time, maintaining a high-quality
standard. The Company prices its products below comparable designer
department-store brands (such as Lancome, Clarins and Shiseido), but above
comparable mass-market brands sold in drugstores or discount stores (such as
Naturistics, Freemans and Montange Jeunesse). The Company anticipates that its
marketing costs will proportionately decrease as sales volumes increase.
Distribution
Each retail licensee is required to purchase inventory prior to the
opening of an Applewoods(R)' retail store. As inventory is sold, or if a
retailer wishes to purchase a new product line, the retail store places orders
for goods by facsimile transmission to the Company's offices in Devon, England.
The Company endeavors to fulfill orders within three weeks from the date of
receipt. Most orders are fulfilled from the Company's inventory or, in the event
of a large order, the Company manufactures the goods (except for certain goods
purchased from outside sources) as ordered. The Company's order processing
system is part of the Pegasus Accounting System which allows the Company to
maintain optimum inventory balances for the maintenance of minimum balances and
to minimize the carrying cost of the Company's inventory. Most overseas orders
are shipped FOB Applewoods(R) and each retailer usually requests delivery by
container to his facility.
Suppliers
The Company acquires fragrances, packaging and labels from outside
suppliers for use in connection with its manufactured products. The Company
tests each product and their raw materials to determine ingredient
compatibility. These tests may be conducted by independent third parties in
those instances where the Company believes outside testing to be necessary and
appropriate.
The Company believes that its present manufacturing facilities enhanced
by certain capital improvements, will be sufficient to meet product demands for
the foreseeable future with the possible exception of high season peaks in
demand. The Company does not have any long-term contracts with the suppliers of
raw materials used in the manufacturing of the Company's products. As a result,
the Company will be required to identify new suppliers for such materials
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in the event its present sources are interrupted or discontinued. The Company
believes that alternative suppliers exist, and will be available if necessary.
There can be no assurance, however, that the Company will be able to obtain raw
materials and supplies from such alternative sources, or that it will be able to
do so without delay or increased costs.
Packaging
The Company purchases plastic bottles and caps for its products
directly from manufacturers. In order to avoid any supply disruptions, the
Company operates under a minimum balance ordering scheme for its inventory. The
Company normally keeps three to four months of finished inventory on hand.
Management believes that this provides adequate time to identify new suppliers
should a particular manufacturer experience any production or distribution
delays.
The Company designs the labels used on its products. Product labels are
designed to coordinate with the particular product and packaging and are
intended to project the Company's image. Product labels are manufactured by
outside suppliers.
Manufacturing
The Company manufactures all of its liquid toiletry products with the
exception of certain alcohol-based products, soaps, soap related products,
candles and accessories. The Company's manufacturing facilities are located at
International House, Heathfield Industrial Estate, Newton Abbot, Devon, England
where the Company leases approximately 34,500 square feet (plus further
short-term warehousing facilities of approximately 20,000 square feet). This
facility is also utilized by the Company for the construction of storefronts and
fixtures to be utilized in Applewoods(R) stores. The manufacturing facility
operates for one and a half shifts during busy periods.
Retail Store Licenses
Most Applewood's stores are operated by a licensee pursuant to the
terms of a license agreement typically entered into by the Company and the
licensee for a period of five years. The license agreement restricts (i) the
territory in which the licensee may operate, (ii) the goods which such licensee
may sell in an Applewoods(R)' store, and (iii) the licensee from competing with
the Company's business or from using the Company's trademarks (except as
expressly permitted). Further, the licensee is required to comply with the
Company's manual, to meet certain sales targets and to open further stores in
the territory as agreed upon. The agreement is typically renewable for a further
five year period upon the fulfillment by the licensee of certain conditions,
including achieving certain sales targets. The Company intends to enter into
such license agreement with all retailers operating an Applewoods(R)' retail
store.
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Retail Stores
Each Applewoods(R)' store is owned and operated under the direction of
a licensee or sublicensee. The Company's stores are designed to provide an
attractive, clean, natural, colorful and convenient atmosphere for customers.
The typical Applewoods(R) store devotes an average of 90% of its total square
footage to selling space. Store sizes typically range from 500 to 1,000 square
feet, with an average size store being 700 square feet and having selling space
of 650 square feet. There are wall to wall shelves to display products by
category, with related products displayed on adjacent areas. Point-of-sale signs
containing prices and descriptions of the products are prominently displayed and
brochures for most products are also available for customers.
Although the stores are self-service, store personnel are trained to
assist customers by guiding them to appropriate products or product groups and
providing product information.
Store Locations
As of September 30, 1997, there were 74 Applewoods(R)' retail stores in
the following locations:
United States 4
Canada 2
Asia 10
Europe 41
Middle East 9
Latin America 8
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TOTAL 74
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The Company encourages site selection by its licensees based on
customer demographics, traffic generated by shopping malls, residents, shoppers
or tourists. Given the number of geographic regions that management believes
have high market potential, the Company expects a sufficient number of suitable
locations to be available for new Applewoods(R)' stores.
An important aspect of the Company's growth strategy is to reach new
customers through the opening of new stores in new markets and, as conditions
warrant and appropriate locations become available, in existing markets. There
can be no assurance that the Company's expansion within its existing markets
will not adversely affect the individual financial performance of the Company's
existing stores or its overall results of operations. The Company's ability to
implement its expansion plans successfully will depend upon a number of factors,
including the ability to attract qualified licensees, hire and train qualified
employees, the availability of suitable store locations on acceptable terms,
availability of additional capital on acceptable terms, the ability to control
operating costs and the ability to maintain management information and
distribution systems to meet growth requirements.
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Direct Response Television Sales
On February 3, 1997, the Company, through its subsidiary, Applewoods(R)
International Limited, entered into an agreement with QVC Inc., the direct
response television organization 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 United States, (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 United States (other than in areas where existing franchisees
have rights prohibiting such promotion). The initial term of the Agreement is
for two years, renewable for successive two-year periods.
Competition
The Company competes in the retail cosmetics and personal-care products
industry. The industry is comprised of large discount chains, independent
discount outlets, department stores, supermarkets, drugstores, direct marketers
and specialty retailers. Although the Company competes with all of these sellers
of personal-care products, the Company believes that its success will be
determined upon how it competes with specialty retailers, such as The Body Shop,
Crabtree and Evelyn, and Bath and Body Works. Virtually all of the Company's
competitors and potential competitors (including The Body Shop, Crabtree and
Evelyn and Bath and Body Works) have substantially greater resources, including
capital, research and development personnel and manufacturing and marketing
capabilities, and also may offer well established, broad product lines. Some of
the Company's competitors have long-term or preferential supply arrangements
with established retailers. Such arrangements may act as a barrier to market
entry. There can be no assurance that the Company will be able to compete
successfully.
Operations
Other than one store in North America, all of the Company's operations
are in the United Kingdom. Information as to sales to unaffiliated customers by
geographic area is set forth in Note 9 of Notes to the Consolidated Financial
Statements of the Company and is incorporated herein by reference.
Trademarks and Service Marks
The Company has filed applications to register or has received certain
registered trademarks in each country in which the Company sells products and
believes such protection to be necessary. In certain countries, including but
not limited to, Singapore, Chile and the Philippines, the related Registrar has
raised objections to registration. Although the Company is endeavoring to
overcome these objections, there is no guarantee that the related trademarks
will be registered or that once registered, infringements will not occur.
Further, in certain countries including, but not limited to, Spain and Japan,
notwithstanding prohibitions in the related license
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agreement, the related licensee registered the Company's trademarks in the
related licensee's own name. The Company has prosecuted such infringements
vigorously and has been successful in several countries, including Spain and
Japan, but there is no guarantee that in the future the Company will be
successful at restricting unauthorized usage of its trademarks. Nevertheless,
the Company intends to defend vigorously claims that use by the Company of its
trademarks infringe upon the intellectual property rights of third parties.
Management and Employees
The Company employs four executive officers, approximately 14 people in
administration, approximately 78 in product development, manufacturing and
distribution, 3 in store operations and training, and approximately 23 people in
shopfitting and additional personnel on a part-time basis as required to
compensate for seasonal fluctuations. The Company's work force is not currently
unionized, nor is the Company aware of any efforts by its employees to unionize.
The Company considers its employee relations to be good.
Government Regulation
The Company is subject to the Consumer Product Safety Act, the Federal
Hazardous Substance Act and to the jurisdiction of the Consumer Product Safety
Commission as well as product safety laws in foreign jurisdictions. Such
regulations subject the Company to the possibility of requirements of repurchase
or recall of products found to be defective and the possibility of fines or
penalties. The FDA has promulgated certain regulations concerning product
labeling and product claims. In addition, the Federal Trade Commission ("FTC")
regulates product claims. Existing and future FDA and FTC regulations could
impact certain products of the Company.
The Company currently enters into license agreements with each
Applewoods(R)' retailer, pursuant to which the Company requires such licensees
to purchase the Company's products and to sell those products in accordance with
the Company's manual. Accordingly, although the Company has endeavored to create
relationships with its United States licensees which do not violate federal or
state franchise laws and regulations, such laws and regulations may apply to the
licenses awarded by the Company to one or more of the existing or future United
States retail stores. Such laws and regulations require certain disclosures to
be made by a franchisor to a potential franchisee and govern the offer and sale
of franchises. These laws have broad enforcement provisions, including civil and
criminal penalties, and, under certain state laws, potential and existing
franchisees may have a private cause of action for franchise violations. While
management does not currently believe that it has violated such franchise laws,
there can be no assurance that the Company will not be required to comply with
such laws and regulations, particularly as the Company enters into additional
relationships with retailers located in the United States. Consequently, the
Company has prepared the required disclosure documents and intends to commence
filings with the Federal Trade Commission and relevant state agencies in order
to comply with all applicable state and federal franchise laws with respect to
existing Applewoods(R)
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locations in the United States as well as the opening of new Applewoods(R)'
stores. There can be no assurance that the Company will be granted all necessary
approvals to conduct a franchise business, either by the FTC or state agencies,
or that such approval will be granted without delay.
Item 2. PROPERTIES.
The Company's corporate offices are located in England at International
House, Heathfield Industrial Estate, Newton Abbot, Devon TQ12 6RY and in the
United States at 274 Riverside Avenue, Westport, Connecticut 06880. The Company
leases five units at its Heathfield Industrial Estate, Devon, England facility
for office and warehouse space. Three of these leases expires in August 1998 and
the other two before June 1998. The rent for the Company's Devon facilities is
103,500 pounds per annum (approximately $170,000) and council rates of
24,274 pounds (approximately $40,000) per annum. In addition, the Company leases
a small warehouse in Devon of 5,000 square feet at an annual rate of 44,600
pounds (approximately $73,340). The Company believes that these facilities are
adequate to meet its current needs and that suitable additional or alternative
space will be available as needed in the future on commercially reasonable
terms.
The Company's executive headquarters are in Westport, Connecticut. The
Company's lease is on a month to month basis at a rent of $544 per month.
Item 3. LEGAL PROCEEDINGS.
Except as set forth below, there is no material litigation pending or
threatened against the Company nor are there any such proceedings to which the
Company is a party. There are two continuing proceedings to which the Company is
a party which the Company does not believe is material for the reasons set forth
below.
In November 1993, Mr. Ian Mitchell, the former controlling stockholder
of AIL prior to its entering into receivership, commenced proceedings against
AIL in a litigation entitled Ian Robert Mitchell and Applewoods(R) International
Limited in The High Court of Justice, Queen's Bench Division, in England,
seeking damages for wrongful dismissal from his position as sales director of
AIL and for loss of his shareholdings. Should he succeed he places a value on
this claim of not less than $186,000, although he is also seeking an assessment
of unspecified damages. The Company intends to defend vigorously Mr. Mitchell's
claim and has asserted counterclaims in excess of plaintiff's demand against Mr.
Mitchell and his wife, Judith Ann Mitchell, alleging deception, breach of
warranty, and misrepresentation by them in connection with their sale to AIL of
the business and property of AIL and grave misconduct and material breaches of
Mr. Mitchell's service agreement, such that AIL was entitled to terminate his
employment and treat the service agreement as rescinded.
The Company has been named in an action Mott v. Sterling Foster & Co.,
Inc., et al., (United States District Court, District of South Carolina) along
with various other defendants. The complaint against the Company contains
allegations of violations of state and federal
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securities laws and common law fraud and negligence arising out of the April
1996 initial public offering of 2,760,000 shares of Company common stock.
According to the complaint, the underwriter of the offering, Sterling Foster &
Co., Inc. employed improper sales tactics and manipulated secondary market
trading in shares of the Company's common stock following the offering. The
complaint seeks unspecified damages. The Company and its officers and directors
deny the allegations in the complaint and are vigorously defending this action.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's shareholders for vote during
the last quarter of its fiscal year.
13
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of Common Stock commenced trading on The Nasdaq
SmallCap Market ("Nasdaq") on the effectiveness of the Company's initial public
offering on April 10, 1996 under the trading symbol "APWD". The Common Stock is
regularly quoted and traded on Nasdaq.
The following table indicates the high and low bid prices for the
Company's Common Stock for the period up to June 30, 1997 based upon information
supplied by Nasdaq. Prices represent quotations between dealers without
adjustments for retail markups, markdowns or commissions, and may not represent
actual transactions.
Quoted Bid Price(1)
-------------------
High($) Low($)
------- ------
1997 Calendar Year
------------------
First Quarter 3.13 0.56
January 1, 1997
- March 31, 1997
Second Quarter 0.72 0.22
April 1, 1997
- June 30, 1997
1996 Calendar Year
------------------
Second Quarter 9.125 6.75
April 10, 1996
- June 30, 1996
Third Quarter 6.75 5.25
July 1, 1996
- September 30, 1996
Fourth Quarter 5.50 0.50
October 1, 1996
- December 31, 1996
(1) The Company effected a two-for-one stock split with respect to its
shares of Common Stock outstanding on May 9, 1996.
14
<PAGE>
On September 30, 1997, the closing price of the Common Stock as
reported on The Nasdaq SmallCap Market was $0.3125. As of October 9, 1997 there
were 92 holders of record and 1,483 beneficial owners of Common Stock.
15
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Overview
Applewoods(R), Inc., a Delaware corporation, ("AI"), was formed in
September 1995 to acquire all of the outstanding stock of Applewoods(R)
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.
This Annual Report contains forward looking information that is subject
to certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected.
Results of Operations
Year ended June 30, 1997 compared with year ended June 30, 1996
The Company's revenues are generated from the sale of products to
licensees and an initial license fee charged for all necessary construction
items and services that include the design and fixturing of the retail space.
Total revenues increased by 55.5% over the previous year. Within this, product
sales increased 50.3% over the previous year, essentially due to the increased
number and quality of retail stores. At June 30, 1997, the Company had 65
licensed shops operating compared with 47 at June 30, 1996. Storefitting and
license revenue increased by 80.1%.
The gross profit percentage for the year ended June 30, 1997 declined
from 28% to 21%. Product margin decreased from 32% to 20% in 1997; this was a
result of providing against inventory associated with product lines which are
being replaced. The margin generated by the storefitting and licensed revenue
increased from 14% to 24% reflecting the increased activity level.
Selling, general and administrative expenses increased by 65.3% to
approximately $3,474,000 this year from approximately $2,101,000 in the previous
year. The major element
16
<PAGE>
Results of Operations (continued)
of this was 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 has expensed the balance of $1,200,000 of noncash
consulting expense related to two consulting agreements which commenced in
October 1995 as the full benefit of these marketing agreements have been taken
by the Company.
The Company has also expensed the balance of $86,000 of capitalized
investment banker fees originating in January 1996. This recognizes the decision
of the Company's investment banker to withdraw from supporting the Company's
stock.
The Company benefited from a foreign exchange gain of $94,805 compared
to a loss in 1996 of $3,441. This was a result of the pound sterling
strengthening against the US dollar through the year. Interest income of $87,383
has replaced interest expense of $462,025 because of the effect of the public
offering in April 1996 which replaced the bank borrowings and other loans with a
cash surplus.
Liquidity and Capital Resources
At June 30, 1997, the Company had working capital of $3,267,000
including cash of $787,000.
During the year, the Company used cash of approximately $2,719,000 to
fund operations. Contributing to this use of cash was a net loss for the year,
before consulting items of approximately $2,113,000, an increase in inventory of
approximately $979,000 and an increase in the Company's accounts receivable of
approximately $428,000. Accrued expenses increased by approximately $326,000.
Net cash used in investing activities increased to $576,000 due to the purchase
in the year of new machinery to improve the production process. The Company did
not have any significant capital commitments at June 30, 1997.
The Company's financial statements have been prepared on a going
concern basis because management believes, based on cash flow projections
through September 30, 1998, the Company may be able to continue to operate
through that date without the need for credit facilities.
The Company is presently investigating various sources of credit should
they be needed to meet cash flow requirements caused by the continuing growth of
the Company and seasoned fluctuations in sales revenue. It believes that
existing bank balances, cash flow from operations and borrowing facilities,
which are currently under negotiation, will be sufficient to meet its
requirements for the foreseeable future.
17
<PAGE>
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 34% of annual product sales were generated in the October
to December quarter. Quarterly results should therefore be viewed in this
context.
New Accounting Standards
In February 1997, FAS 128 "Earnings per Share" was issued. The
provisions of this statement must be adopted for accounting periods ending after
December 15, 1997. Earlier adoption is not permitted. FAS 128 simplifies the
provision relating to the computation of earnings per share ("EPS"). It replaces
the presentation of primary EPS with basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. The adoption of FAS 128 by the Company will not have
any material impact on the EPS amounts previously reported.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements following Item 13 of this Annual Report on
Form 10-KSB.
18
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Price Waterhouse, LLP ("PW") by a letter dated June 20, 1997 was
dismissed as the independent accountants for the Company. The reports of PW on
the financial statements of the Company for the year ended June 30, 1996 contain
no adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles. The Company's Board of
Directors approved the dismissal of PW. For the year ended June 30, 1996 and
through June 20, 1997, there have been no disagreements between the Company and
PW on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which would have caused PW to make a
reference thereto in its report on the Company's financial statements for such
period. During the most recent fiscal year and through June 20, 1997, there have
been no reportable events (as defined in Regulation S-K, Item 304(a)(1)(v)).
The Company was furnished with a letter from PW addressed to the
Securities and Exchange Commission stating that PW agrees with the above
statements.
The Company engaged Ernst & Young, as its new independent auditors as
of June 20, 1997. Prior to such date, the Company did not consult with Ernst &
Young regarding (i) the application of accounting principles, (ii) the type of
audit opinion that might be rendered by Ernst &Young, or (iii) any other matter
that was the subject of a disagreement between the Company and its auditor (as
defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as
described in Item 304(a) (1)(v) of Regulation S-K).
Moore Stephens, P.C. (formerly Mortenson & Associates, P.C.) ("Moore
Stephens") by the letter dated June 26, 1996 was dismissed as the independent
accountants for the Company. The reports of Moore Stephens on the financial
statements of the Company for the year ended June 30, 1995 contains no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The Company's Board of
Directors approved the dismissal of Moore Stephens. For the year ended June 30,
1995 and through June 26, 1996, there were no disagreements between the Company
and Moore Stephens on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which would have
caused Moore Stephens to make a references thereto in its report on the
Company's financial statements for such period. During the year ended June 30,
1995 and through June 26, 1996, there were no reportable events (as defined in
Regulation S-K, Item 304(a)(1)(v)).
The Company was furnished with a letter from Moore Stephens addressed
to the Securities and Exchange Commission stating that Moore Stephens agrees
with the above statements.
19
<PAGE>
The Company engaged Price Waterhouse LLP ("PW"), as its new independent
accountants as of June 26, 1996. Prior to such date, the Registrant did not
consult with PW regarding (i) the application of accounting principles, (ii) the
type of audit opinion that might be rendered by PW, or (iii) any other matter
that was the subject of a disagreement between the Company and its auditor (as
defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as
described in Item 304(a)(1)(v) of Regulation S-K).
20
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
Directors and Executive Officers
Name Age Position Held
- ------------------ --- -------------
Roger Buoy 51 Chairman of the Board of Directors, Chief
Executive Officer and Director
Tony E. Swash 46 Chief Operating Officer and Director
David H. Knight 43 Chief Financial Officer and Secretary
Graham Cluer 39 Vice President - Operations
Josh Gaspero 55 Director
Sherman A. Drusin 55 Director
Terence McAuley(1) 43 Chief Financial Officer and Secretary
- ----------
(1) Resigned as the Chief Financial Officer and Secretary in October 1996.
Background of Executive Officers and Directors
Roger M. Buoy has been the Chief Executive Officer and Chairman of the Board of
the Company since August 1992. From 1983 to 1992, Mr. Buoy was the President,
Chief Executive Officer and founder of Mindscape International, Inc.,
("Mindscape") a developer and publisher of educational and entertainment
software for personal computers and video game machines. In 1987, Mindscape
successfully completed its initial public offering in 1990. Mindscape was then
sold to Software Toolworks, and subsequently renamed Mindscape and acquired by
the Pierson Group of the United Kingdom. From 1981 to 1983, Mr. Buoy was the
Executive Vice President-Software Publishing and Operations of Scholastic, Inc.,
a New York based publisher of educational materials.
21
<PAGE>
Tony E. Swash has been Chief Operating Officer and a Director of the Company
since August 1992. From 1979 to 1992, Mr. Swash was Sales Director for Ray
Engineering Company Ltd. ("Ray Engineering"), a subsidiary of a British public
company. In 1985, Mr. Swash along with two other directors and two venture
capital companies, purchased Ray Engineering. In 1988, Mr. Swash was
instrumental in selling Ray Engineering to an English public limited company. He
remained as the Divisional Managing Director of Ray Engineering until he
resigned to take part in the purchase of the assets of AIL in 1992.
David H. Knight has served as Chief Financial Officer for the Company since
October 1996. Mr. Knight is a Fellow of the Institute of Chartered Accountants
who has worked in the manufacturing industry for fifteen years after completing
his post qualification experience with Price Waterhouse in 1980. Most recently,
he has worked for four years from 1992 as the Financial Director of a large
operating division of William Baird plc in the textile industry. He has also had
experience as Financial Controller in the plastics and agricultural industries.
Graham R. Cluer has served as Vice President-Operations for the Company since
October 1996. Mr. Cluer graduated from University of Bangor, Wales in 1979 with
a B.S. (Honors) in Biochemistry. Mr. Cluer was employed by Unigate Dairies
Limited and after various supervisory roles was promoted to Operations Manager
(Production) at Chadwell Heath, UDL's largest production facility. Mr. Cluer
then joined Associated Dairies (taken over by MD Foods in 1990) in 1988 as
Factory Manager (North East) and promoted to Operations Director in 1993
responsible for manufacturing plants at Settle and Kendal. Following the sale of
the Kendal plant in 1995, Mr. Cluer managed the Company's technical function
together with the Settle plant and periods at the Bamber Bridge, London and
Newcastle factories.
Josh Gaspero has been a Director of the Company since August 1996. He is
presently Chairman of Joshua Tree Holdings, LLC which has controlling interests
in Adventure Weekend Magazine, Best of Times Productions and Joshua Lockhard
Direct Response Group. Previously he was Co-Chairman of Readers Digest Young
Families from October 1993 until March, 1996. From March 1982 until October,
1993, he was Co-Chairman and Founder of Joshua Morris Publishing, a company
subsequently purchased by The Readers Digest Association. Prior to 1982, Mr.
Gaspero was President and CEO of Harlequin Books North America. Mr. Gaspero is a
1964 graduate of St. Joseph's University with a B.A. in Marketing.
Sherman A. Drusin has been a Director of the Company since August, 1996. Mr.
Drusin is currently a consultant providing corporate finance counseling to
several companies. Previously, he was the Director of Corporate Finance for
Sterling Foster & Co., Inc., an investment banking firm in New York from March,
1995 until February, 1997. In addition, he is President and Director of
Preferred Benefit Plans, Inc. located in Armonk, New York. Previously, he was
Vice President for Corporate Finance for J. Gregory & Company, an investment
banking firm. For 25 years prior to his work in the investment banking field,
Mr. Drusin was CEO, President and
22
<PAGE>
Director of several computer software companies. He currently serves on the
Board of Directors of several organizations which include InTime Systems
International, the Sterling Foster Foundation and the Make-A-Wish Foundation of
Metro New York. Furthermore, he is an advisor to the Board of Directors of
several publicly traded corporations. Mr. Drusin is a 1964 graduate of Fairleigh
Dickinson University with a B.S. in Economics.
Terence McAuley served as a part-time Chief Financial Officer for Applewoods
from December 1994 to October 1996, devoting 20 hours per week to the Company.
Since 1988 he has served as an independent consultant to various companies and
from 1984 to 1988 he served as Chief Financial Officer for ISIS Construction, a
building construction company. From 1980 to 1984, he was with the National Trust
of Great Britain as an accountant. Mr. McAuley qualified and worked as a
chartered accountant with Price Waterhouse from 1975 to 1980.
There are no family relationships between the officers and directors of
the Company, except that Roger Buoy and Tony Swash are second cousins.
Each director of the Company is entitled to receive reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
of the Company. The Directors receive no other compensation for serving on the
Board of Directors. The members of the Board of Directors intend to meet at
least quarterly during the Company's fiscal year, and at such other times duly
called.
Compliance with Section 16(a) of
The Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Except as provided below, to the Company's knowledge, based solely on
its review of the copies of such reports furnished to the Company during the
year ended June 30, 1997, all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten percent beneficial owners were
satisfied.
23
<PAGE>
Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows all the cash compensation paid or to be paid by the
Company to the Chief Executive Officer, one of the Company's executive officers
and all officers who received in excess of $100,000 in annual salary and bonus,
for the fiscal years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
---------------------------------------- -------- ---------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted All
Other Stock LTIP Other
Annual Awards Options/ Payouts Compensation
Name and Principal Position Year Salary($) Bonus($) Compensation($) ($) SARs(#) ($) ($)
- ---------------------------- ---- --------- -------- --------------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger Buoy, CEO 1997 $150,000 $35,000 $ -0- -0- 50,000(2) -0- (1)
1996 $150,000 $ -0- $ -0- -0- -0- -0- (1)
Tony Swash, COO 1997 $157,447 $ -0- $ -0- -0- -0- -0- (1)
1996 $102,774 $ -0- $ -0- -0- -0- -0- (1)
</TABLE>
- ----------
(1) Does not include certain automobile expenses and other prerequisites which
in the aggregate do not exceed the lesser of $50,000 or 10% of the named
executive officer's compensation.
(2) Represents options issued in May 1997 which were canceled and reissued in
July 1997.
The following table sets forth certain information with respect to options
granted during the last fiscal year to the Company's Executive Officers named in
the above Summary Compensation Table.
24
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e)
% of Total Options
Number of Securities Options/SARs Granted Exercise or
Underlying Option/ to Employees in Base Price Expiration
Name SARs Granted (#) Fiscal Year (# Share) Date
- ---- -------------------- -------------------- ---------- ----------
<S> <C> <C> <C> <C>
Roger M. Buoy 50,000 12% $0.34(3) 11/6/01
Josh Gaspero 25,000 6% $1.87(3) 5/4/01
Sherman A. Drusin 25,000 6% $1.87(3) 5/4/01
David H. Knight(1) 100,000 23% $1.87(3) 5/4/01
25,000 6% $0.34(3) 11/6/01
Graham R. Cluer(2) 100,000 23% $1.87(3) 5/4/01
25,000 6% $0.34(3) 11/6/01
</TABLE>
(1) Appointed Chief Financial Officer in October 1996.
(2) Appointed Vice President Operations in October 1996.
(3) All of the above options were canceled and reissued in July 1997 at an
exercise price of $0.22, the market price of the Company's stock on the
reissue date.
Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to
options exercised during the fiscal year ended June 30, 1997, by the Company's
Executive Officers named in the Summary Compensation Table, and with respect to
unexercised options held by such person at the end of the fiscal year ended June
30, 1997.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Value of
Securities Underlying Unexercised
Unexercised Options/ In-the-Money
SARs at FY-End (#) Options/SARs at
Shares Acquired Value Exercisable/ FY-End Exercisable
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ----------------------- ------------------
<S> <C> <C> <C> <C>
Roger M Buoy 0 $0 0/50,000(3) $0/$0
Josh Gaspero 0 $0 0/25,000(3) $0/$0
Sherman A. Drusin 0 $0 0/25,000(3) $0/$0
David H. Knight(1) 0 $0 0/125,000(3) $0/$0
Graham R. Cluer(2) 0 $0 0/125,000(3) $0/$0
</TABLE>
(1) Appointed Chief Financial Officer in October 1996.
(2) Appointed Vice President Operations in October 1996.
(3) All of the above options were canceled and reissued in July 1997 at an
exercise price of $0.22, the market price of the Company's stock on the
reissue date.
25
<PAGE>
Employment Agreements
As of July 1, 1995, the Company entered into a three (3) year
employment agreement with Roger Buoy, pursuant to which Mr. Buoy serves as the
Company's Chief Executive Officer. The agreement provides for Mr. Buoy to
receive a salary of $150,000 per annum during the first year and an increase of
10% per annum or such greater amount as determined in the discretion of the
Board of Directors based upon the Company's performance. The agreement also
provides for the payment of a bonus in cash and/or securities to Mr. Buoy to be
determined in the discretion of the Board of Directors. In addition, Mr. Buoy
has been granted the right to purchase four percent (4%) of the outstanding
Common Stock of the Company if the Company has earnings (excluding expenses
incurred in connection with the issuance of securities to certain shareholders
in connection with the Company's initial public offering (the "Offering") of
$1,000,000, $1,750,000 and $2,650,000, respectively, during any fiscal year
falling within the six (6) year period immediately following the effective date
of the Offering. If the Company has earnings of $4,000,000 in any such fiscal
year, Mr. Buoy will be entitled to acquire the entire twelve percent (12%) of
the shares of Common Stock. The exercise price for such options shall be $3.00
per share.
As of July 1, 1995, the Company entered into a three (3) year
employment agreement with Tony Swash, pursuant to which Mr. Swash serves as the
Company's Chief Operating Officer. The agreement provides for Mr. Swash to
receive a salary of $150,000 per annum during the first year and an increase of
10% per annum or such greater amount as determined in the discretion of the
Board of Directors based upon the Company's performance. The agreement also
provides for the payment of a bonus in cash and/or securities to Mr. Swash to be
determined in the discretion of the Board of Directors. In addition, Mr. Swash
has been granted the right to purchase four percent (4%) of the outstanding
Common Stock of the Company if the Company has earnings (excluding expenses
incurred in connection with the issuance of securities to certain shareholders
in connection with the Company's initial public offering (the "Offering") of
$1,000,000, $1,750,000 and $2,650,000, respectively, during any fiscal year
falling within the six (6) year period immediately following the effective date
of the Offering. If the Company has earnings of $4,000,000 in any such fiscal
year, Mr. Swash will be entitled to acquire the entire twelve percent (12%) of
the shares of Common Stock. The exercise price for such options shall be $3.00
per share.
The granting of rights to purchase Common Stock based on the attainment
of specified earnings (as discussed above) will result in compensation expense
to the Company equal to the excess of the fair market value per share of the
Common Stock over the exercise price of $3 per share multiplied by the number of
options granted.
26
<PAGE>
Stock Option Plans and Agreements
In October 1995, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1995 Stock Plan
(hereinafter called the "1995 Plan"). The purpose of the 1995 Plan is to provide
an incentive and reward for those executive officers and other key employees in
a position to contribute substantially to the progress and success of the
Company, to closely align the interests of such employees with the interests of
stockholders of the Company by linking benefits to stock performance and to
retain the services of such employees, as well as to attract new key employees.
In furtherance of that purpose, the 1995 Plan authorizes the grant to executives
and other key employees of the Company and its subsidiaries of stock options,
restricted stock, deferred stock, bonus shares, performance awards, dividend
equivalent rights, limited stock appreciation rights and other stock-based
awards, or any combination thereof. The 1995 Plan is expected to provide
flexibility to the Company's compensation methods, after giving due
consideration to competitive conditions and the impact of federal tax laws.
The maximum number of shares of Common Stock with respect to which
awards may be granted pursuant to the 1995 Plan is initially 1,000,000 shares.
Shares issuable under the 1995 Plan may be either treasury shares or authorized
but unissued shares. The number of shares available for issuance will be subject
to adjustment to prevent dilution in the event of stock splits, stock dividends
or other changes in the capitalization of the Company.
The 1995 Plan will be administered by a committee consisting of not
less than two (2) members of the Board of Directors who are "disinterested"
within the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Code (including persons
who may be deemed outside directors by virtue of any transitional rule which may
be adopted by the Internal Revenue Service implementing such Section). The Board
will determine the persons to whom awards will be granted, the type of award
and, if applicable, the number of shares to be covered by the award. During any
calendar year, no person may be granted under the 1995 Plan awards aggregating
more than 100,000 shares (which number shall be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or other changes in
capitalization of the Company).
In January 1996, the Company issued to certain employees of the Company
options exercisable for an aggregate of 100,000 shares of Common Stock at an
exercise price of $2.50 per share. The options vest over a period of three (3)
years commencing one (1) year from the date of grant and are exercisable for a
period of eighteen (18) months following the date of vesting.
In November 1996, the Company issued to certain Directors and employees
of the Company options exercisable for an aggregate of 294,000 shares of common
stock at an
27
<PAGE>
exercise price of $1.87 per share. The options vest over a period of three (3)
years commencing one (1) year from the date of grant and are exercisable for a
period of eighteen (18) months following the date of vesting.
In May 1997, the Company issued to certain Directors and employees of
the Company options exercisable for an aggregate of 135,000 shares of common
stock at an exercise price of $0.34 per share. The options vest over a period of
three (3) years commencing one (1) year from the date of grant and are
exercisable for a period of eighteen (18) months following the date of vesting.
In July 1997 all of the share options issued to date under the 1995
Plan were canceled and reissued at an exercise price of $0.22, the market price
of the Company's Common Stock on the reissue date.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of September
30, 1997, with respect to the beneficial ownership of the outstanding Common
Stock by (i) any holder of more than five (5%) percent; (ii) each of the
Company's officers and directors; and (iii) the directors and officers
of the Company as a group:
Percentage
Shares of (%) of
Name and Address Common Common
of Beneficial Owner Stock Owned Stock
- ------------------- ----------- ----------
Roger Buoy(1) 1,575,432(2) 18.0
Tony Swash(1) 1,415,258(3) 16.4
David H. Knight(1) 33,333(4) 0.4
Graham Cluer(1) 33,333(5) 0.4
Josh Gaspero(1) 53,723(6) 0.6
Sherman A. Drusin(1) 18,333(7) 0.2
Tanisi International, Ltd.(8) 540,000 6.4
Carmen Villalon(9) 540,000 6.4
All directors and officers 3,129,412 34.7
as a group (6 persons)
(2)(3)(4)(5)(6)(7)
28
<PAGE>
(1) The address of each stockholder shown above is c/o Applewoods, Inc.,
274 Riverside Avenue, Westport, CT 06880.
(2) Includes 285,432 shares of Common Stock issuable upon conversion of
142,716 shares of Series A Preferred Stock held by Mr. Buoy.
(3) Includes 155,258 shares of Common Stock issuable upon conversion of
77,629 shares of Series A Preferred Stock held by Mr. Swash.
(4) Includes an option to purchase 33,333 shares of Common Stock
which becomes exercisable in November 1997.
(5) Includes an option to purchase 33,333 shares of Common Stock
which becomes exercisable in November 1997.
(6) Includes 31,390 shares of Common Stock issuable upon conversion of
15,695 shares of Series A Preferred Stock held by Mr. Gaspero. Includes
an option to purchase 8,333 shares of Common Stock which becomes
exercisable in November 1997. Includes 4,000 shares of Common
Stock owned by Mr. Gaspero's daughter over which Mr. Gaspero
disclaims beneficial ownership.
(7) Includes an option to purchase 8,333 shares of Common Stock which
becomes exercisable in November 1997.
(8) The address of Tanisi International Ltd. is c/o Charles A. Schuette,
Esq., Ackerman, Senterfitt & Eidson P.A., One Southeast Third Avenue,
28th Floor, Miami, Florida 33131-1704.
(9) The address of Carmen Villalon is 32 Starline Drive, Blueridge, B
Subdivision Libif, Quezon City, Phillipines.
There are no agreements or other arrangements or understandings known
to the Company concerning the voting of the Common Stock of the Company or
otherwise concerning control of the Company which are not disclosed herein.
There are no preemptive rights applicable to the Company's securities.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On August 5, 1992, each of Roger Buoy and Tony Swash acquired at par
value one (1) ordinary share for 1 pound each in the share capital of Filbuk
290 Limited ("Filbuk"), the predecessor of AIL. On August 6, 1992 (i) each of
Roger Buoy and Tony Swash acquired at par value thirty-nine (39) ordinary shares
of 1 pound each in the share capital of Filbuk and (ii) Ian Mitchell acquired,
at par, value forty (40) ordinary shares for 1 pound each in the share capital
of Filbuk. On August 6, 1992, AIL issued certain Fixed Rate Unsecured Loan Notes
due 2002, at an interest rate of one percent (1%) per annum above LIBOR to (i)
Roger Buoy in exchange for an aggregate loan of approximately $400,000 and (ii)
Tony Swash in exchange for a loan of approximately $400,000. On August 6, 1992,
Filbuk acquired the assets of AIL from the receiver for aggregate purchase price
of approximately $926,000 and on August 10, 1992, Filbuk changed its name to
Applewoods International Limited.
29
<PAGE>
On June 28, 1993, each of Roger Buoy and Tony Swash acquired at par
value twenty (20) ordinary shares for 1 pound each in the share capital of AIL
from Ian Mitchell, the founder of AIL.
On April 21, 1994, Carmen Villalon, a previous director of the Company
who resigned in August 1996, made an advance payment of $100,000 to AIL in
respect of future sums due for future shipments of Applewoods' products, none of
which remains outstanding.
On April 29, 1994, (i) each of Roger Buoy and Tony Swash acquired at
par value ten (10) ordinary shares for 1 pound each in the share capital of AIL
and (ii) ISC International Ltd. ("ISC") acquired at par value thirty (30)
ordinary shares for 1 pound each in the share capital of AIL.
On April 29, 1994, ISC made an interest-free, unsecured loan of
approximately $107,000, to AIL. Armando Araujo, a previous director of the
Company who resigned in August 1996, is the President of ISC.
On April 29, 1994, AIL, ALA, Mr. Buoy and Mr. Swash entered into an
Assignment of Trade Marks, Name and Intellectual Property pursuant to which ALA
acquired all of AIL's right, title and interest in, to and under certain of
AIL's trade marks and know-how in Latin America (the "Latin American Trade
Marks").
On April 29, 1994, AIL, ALA, ISC Mr. Buoy and Mr. Swash entered into an
Exclusive License Agreement (the "License Agreement") pursuant to which ALA
licensed use of the Latin American Trade Marks to ISC for $50,000 and (ii) AIL
licensed ISC to exclusively sell AIL's products in Latin America. Accordingly,
ISC was the exclusive licensee of the Company's products in Latin America but
has now assigned its interest to Tanisi (see below).
On April 29, 1994, AIL and ISC entered into a Machinery and Supply
Agreement pursuant to which AIL agreed to sell certain machinery to ISC at fair
market value and ISC agreed to supply soaps to AIL for a ten (10) year period
(renewable for a further ten (10) years) at the lowest price at which ISC
supplies soaps to its customer. The sale of the machinery was substantially
completed during the year ended June 30, 1995 and was concluded in August, 1995.
On April 29, 1994, ISC made an advance payment of $100,000 to AIL in
respect of future sums due pursuant to the License Agreement, of which
approximately $40,214 remains outstanding.
30
<PAGE>
On June 13, 1994, Carmen Villalon acquired at par value thirty (30)
ordinary shares for 1 pound each in the share capital of AIL and made an
interest free, unsecured loan of approximately $158,000 to AIL.
As of July 1, 1995, the Company entered into a three (3) year
employment agreement with Roger Buoy, pursuant to which Mr. Buoy serves as the
Company's Chief Executive Officer. The agreement provides for Mr. Buoy to
receive a salary of $150,000 per annum during the first year and an increase of
10% per annum or such greater amount as determined in the discretion of the
Board of Directors based upon the Company's performance. The agreement also
provides for the payment of a bonus in cash and/or securities to Mr. Buoy to be
determined in the discretion of the Board of Directors. In addition, Mr. Buoy
has been granted the right to purchase four percent (4%) of the outstanding
Common Stock of the Company if the Company has earnings (excluding expenses
incurred in connection with the issuance of securities to certain shareholders
of the Company in connection with the Company's initial public offering (the
"Offering") of $1,000,000, $1,750,000 and $2,650,000, respectively, during any
fiscal year falling within the six (6) year period immediately following the
effective date of the Offering. If the Company has earnings of $4,000,000 in any
such fiscal year, Mr. Buoy will be entitled to acquire the entire twelve percent
(12%) of the shares of Common Stock. The exercise price for such options shall
be $3.00 per share.
As of July 1, 1995, the Company entered into a three (3) year
employment agreement with Tony Swash, pursuant to which Mr. Swash serves as the
Company's Chief Operating Officer. The agreement provides for Mr. Swash to
receive a salary of $150,000 per annum during the first year and an increase of
10% per annum or such greater amount as determined in the discretion of the
Board of Directors based upon the Company's performance. The agreement also
provides for the payment of a bonus in cash and/or securities to Mr. Swash to be
determined the discretion of the Board of Directors. In addition, Mr. Swash has
been granted the right purchase four percent (4%) of the outstanding Common
Stock of the Company if the Company has earnings (excluding expenses incurred in
connection with the issuance of securities to certain shareholders of the
Company in connection with the Company's initial public offering (the
"Offering") of $1,000,000, $1,750,000 and $2,650,000, respectively, during any
fiscal year falling within the six (6) year period immediately following the
effective date of the Offering. If the Company has earnings of $4,000,000 in any
such fiscal year, Mr. Swash will be entitled to acquire the entire twelve
percent (12%) of the shares of Common Stock. The exercise price for such options
shall be $3.00 per share.
In June 1995, ISC assigned to Tanisi, all of its right, title and
interest in, to and under all of its shares in AIL and ALA and all agreements
between ISC and AIL (other than the Machinery and Supply Agreement described
above).
31
<PAGE>
In September, 1995, the Company borrowed an aggregate of $500,000 from
eleven (11) unaffiliated lenders (the "Bridge Lenders"). In exchange for making
loans to the Company, each Bridge Lender received (i) a promissory note (each a
"Bridge Note") and (ii) the right, commencing on the effective date of the
Offering, to receive Bridge Units. Each of the Bridge Units is comprised of one
(1) share of Common Stock, one (1) Class A Warrant and one (1) Class B Warrant.
Each of the Bridge Notes was repaid at the closing of the Offering. The
promissory notes were paid with interest at the rate of eight percent (8%) per
annum.
In October 1995, Applewoods Delaware, AIL and ALA entered into a Share
Exchange Agreement, pursuant to which Applewoods Delaware acquired immediately
prior to the effective date of the Offering all of the outstanding capital stock
of AIL and ALA in exchange for 1,800,000 shares of Common Stock (the
"Acquisition Shares") of the Company. Both Roger Buoy, the Company's Chief
Executive Officer and Tony Swash, the Company's Chief Operating Officer,
exchanged their respective thirty five percent (35%) interests in AIL and ALA
and Carmen Villalon, a previous director of the Company, and Tanisi
International Ltd., a company under the common control of Armando Araujo, a
previous director of the Company, exchanged their respective fifteen percent
(15%) interests in AIL and ALA, in each case in exchange for a pro rated number
of the Acquisition Shares. In addition, as capital contributions to the Company
both Roger Buoy and Tony Swash canceled indebtedness owed to them by AIL in the
amount of approximately $411,000 and $413,000, respectively and Carmen Villalon
and Tanisi International Ltd. canceled indebtedness owed to them by AIL in the
amount of approximately $154,000 and $104,000, respectively.
In October 1995, the Company entered into certain subscription
agreements, pursuant to which, immediately prior to the effective date of the
Offering, the Company issued (i) 142,716 shares of Series A Preferred Stock to
Roger Buoy, in exchange for the cancellation of loans made by Mr. Buoy to AIL in
the aggregate principal amount of approximately $714,000 (or $5.00 per share),
(ii) 77,629 shares of Series A Preferred Stock to Tony Swash in exchange for the
cancellation of loans made by Mr. Swash to AIL in the aggregate principal amount
of approximately $388,000 (or $5.00 per share), (iii) 15,695 shares of Series A
Preferred Stock to Josh Gaspero, a director of the Company, in exchange for the
cancellation of loans made by Mr. Gaspero to AIL in the aggregate principal
amount of approximately $78,000 (or $5.00 per share) and (iv) 13,871 shares of
Series A Preferred Stock to Tim Kelly in exchange for the cancellation of loans
made by Mr. Kelly to AIL in the aggregate principal amount of approximately
$69,000 (or $5.00 per share). The number of shares of Series A Preferred Stock
issued for the cancellation of indebtedness was based on the terms of the Series
A Preferred Stock and the offering price of the Common Stock into which the
Series A Preferred Stock is convertible.
In October, 1995, the Company entered into a Consulting Agreement with
SK Fulfillment Consulting, Inc. ("SK Fulfillment") pursuant to which the Company
issued to SK
32
<PAGE>
Fulfillment 400,000 shares of Common Stock in exchange for marketing and
distribution consulting services. The number of shares issued to SK Fulfillment
were determined by negotiation between the Company and SK Fulfillment. SK
Fulfillment has agreed that for a period of two year(s) it will consult with the
Company regarding the marketing and distribution of the Company's products in
the United States. Stanley Krasnoff is the founder and sole stockholder of SK
Fulfillment.
In October, 1995, the Company entered into a Consulting Agreement with
Valjean Systems, Inc. pursuant to which the Company issued to Valjean Systems,
Inc. 80,000 shares of Common Stock in exchange for marketing and merchandising
consulting services. The number of shares issued to Valjean Systems, Inc. were
determined by negotiation between the Company and Valjean Systems, Inc. Valjean
Systems, Inc. has agreed that for a period of two year(s) it will consult with
the Company regarding the marketing and merchandising of the Company's products
in the Western United States. Diane Waldman is the founder and sole stockholder
of Valjean Systems, Inc.
In April, 1996, the Company completed a public offering of 2,400,000
shares of Common Stock at $5.00 per share for an aggregate of $6,000,000. An
additional 360,000 shares were sold for gross proceeds of $900,000 to the
underwriter to cover over-allotments. In addition, the underwriter received an
option, for a nominal fee, to acquire 240,000 shares of Common Stock at an
exercise price of $4.00 per share. The option expires in April 2001.
Effective with the closing of the offering, the Company entered into a
three-year consulting agreement with the underwriter. The consulting fee of
$100,000 was being charged to operations ratably over the term of the
agreement, however, the Company has expensed the balance of the fee
following the decision of the Company's investment banker to withdraw
from supporting the Company's stock.
On July 15, 1996 ALA assigned all its right, title and interest in, to
and under the Latin American Trade Marks to the Company and ALA was then
dissolved.
During the year to June 30, 1997, the Company has rented its offices in
Westport, Connecticut from a Director at a fair market rent. The total rent paid
and office expenses reimbursed are approximately $3,000.
With respect to each of the foregoing transactions, the Company
believes that the terms of such transactions were as fair to the Company as
could be obtained from an unrelated third party. Future transactions with
affiliates will be on terms not less favorable than could be obtained from
unaffiliated parties and will be approved by a majority of the independent
and/or disinterested members of the board of directors.
33
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements.
The following financial statements are included in Part II, Item 8:
Page
----
Index to Consolidated Financial Statements
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Consolidated Balance sheets as of June 30, 1997 and June 30, 1996 F-3
Consolidated Statements of operations for the years ended F-4
June 30, 1997 and 1996
Consolidated Statements of stockholders' equity for the years F-5
ended June 30, 1997 and 1996
Consolidated Statements of cash flows for the years ended F-6
June 30, 1997 and 1996
Notes to consolidated financial statements F-7 - F-16
34
<PAGE>
(a)(3) Exhibits.
1.01* Form of Underwriting Agreement.
3.01* Certificate of Incorporation of the Company dated September 5, 1995.
3.02* By-Laws of the Company.
3.03* Form of Certificate of Designation of Series A Preferred Stock.
4.01* Specimen Certificate for shares of Common Stock.
4.02* Specimen Certificate for shares of Series A Preferred Stock.
4.03* Form of Warrant Agreement
4.04* Form of Underwriter's Warrant.
4.05* Form of Lockup Letter with Officers and Directors.
5.01* Opinion of Bernstein & Wasserman, LLP, counsel to the Company.
10.01* Form of Retail Store License Agreement.
10.02* Employment Agreement between the Company and Roger Buoy dated as of
July 1, 1995.
10.03* Employment Agreement between the Company and Tony Swash dated as of
July 1, 1995.
10.04* Form of September 1995 Bridge Loan Agreements.
10.05* Consulting Agreement between the Company and SK Fullfillment
Consulting, Inc.
10.06* Consulting Agreement between the Company and Valjean Systems, Inc.
10.07* Form of Stock Exchange Agreement between the Company, Roger Buoy, Tony
Swash, Carmen Villalon, Tanisi International Ltd., Mewbec Limited and
Breams Trustees Limited.
35
<PAGE>
10.08* Form of Series A Preferred Stock Subscription Agreement between the
Company and Roger Buoy.
10.09* Form of Series A Preferred Stock Subscription Agreement between the
Company and Tony Swash.
10.10* Form of Series A Preferred Stock Subscription Agreement between the
Company and Josh Gaspero.
10.11* Form of Series A Preferred Stock Subscription Agreement between the
Company and Tim Kelly.
10.12* Form of Financial Advisory and Investment Banking Agreement.
10.13* 1995 Stock Plan.
21.01* List of Subsidiaries of the Registrant as of the Effective Date.
23.01* Consent of Bernstein & Wasserman, LLP (to be included in Exhibit
5.01).
- ----------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 No. 33-98282.
(B) Reports on Form 8-K.
A report on Form 8-K was filed on behalf of the Company on June 20,
1997 with respect to the change in the Company's independent auditors.
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
to the Shareholders and Board of Directors of Applewoods Inc.
We have audited the consolidated balance sheet of Applewoods Inc. as at June 30,
1997 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Applewoods Inc. at June 30, 1997 and the consolidated results of its operations
and its consolidated cash flows for the year then ended in conformity with
United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 of Notes to the
Financial Statements, the Company has suffered recurring losses and negative
cash flows 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 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Exeter, England Ernst & Young
October 13, 1997 Chartered Accountants
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Applewoods, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Applewoods,
Inc. at June 30, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Morristown, New Jersey
October 11, 1996
F-2
<PAGE>
APPLEWOODS, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 June 30
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Current Assets:
Cash $ 787,367 $ 3,958,168
Trade Accounts Receivable,net of allowance 1,101,706 673,689
for doubtful accounts of $ 39,519 and $97,538, respectively
Other Receivables 96,301 108,118
Inventory 2,721,295 1,742,066
Prepaid Consultancy Fees -- 993,000
Other Current Assets 56,110 65,177
------------ ------------
Total Current Assets 4,762,779 7,540,218
------------ ------------
------------ ------------
Property, Plant and Equipment - Net 671,865 424,222
------------ ------------
Other Assets
Trademarks - Net 104,560 80,794
Prepaid Consultancy Fees 293,000
------------ ------------
Total Other Assets 104,560 373,794
------------ ------------
------------ ------------
Total Assets $ 5,539,204 $ 8,338,234
============ ============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 941,747 $ 905,889
Accrued Expenses 426,384 100,384
Accrued Taxes 62,911 34,685
Other Current Liabilities 24,928 57,311
Other Current Liabilities - Related Parties 40,214 49,883
------------ ------------
Total Current Liabilities 1,496,184 1,148,152
------------ ------------
Commitments And Contingencies (Notes 4 and 14)
Stockholders' Equity:
Series A Preferred Stock - $.0001 Par Value,
500,000 Shares Authorized, 249,911 Shares issued and outstanding 25 25
Common Stock, $.0001 Par Value,
30,000,000 Shares Authorized, 8,472,000 Shares issued and outstanding 847 847
Additional Paid-In Capital 12,040,017 12,040,017
Accumulated Deficit (8,232,366) (4,919,790)
Cumulative Foreign Currency Translation Adjustment 234,497 68,983
------------ ------------
Total Stockholders' Equity 4,043,020 7,190,082
------------ ------------
Total Liabilities and Stockholders' Equity $ 5,539,204 $ 8,338,234
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
F3
<PAGE>
APPLEWOODS, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
June 30
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Product Sales $ 4,729,650 $ 3,146,258
Storefitting and License Revenue 1,192,039 661,538
----------- -----------
Total Revenues 5,921,689 3,807,796
----------- -----------
Cost of Sales:
Product Sales 3,752,914 2,156,754
Storefitting and License Revenue 903,963 568,246
----------- -----------
Total Cost of Sales: 4,656,877 2,725,000
----------- -----------
Gross Profit 1,264,812 1,082,796
Selling, General and Administrative Expenses 3,473,576 2,101,066
Consultancy Fees 1,286,000 734,000
----------- -----------
Loss from Operations: (3,494,764) (1,752,270)
----------- -----------
Other Income (Expense):
Gain on Sale of Equipment -- 8,993
Foreign Exchange Gain (Loss) 94,805 (3,441)
Interest Income 87,383 943
Interest Expense -- (462,025)
----------- -----------
Total Other Income (Expense) 182,188 (455,530)
----------- -----------
Loss before Income Taxes (3,312,576) (2,207,800)
Provision for Income Taxes -- --
----------- -----------
Loss before Extraordinary Item (3,312,576) (2,207,800)
Extraordinary Item -- (107,274)
----------- -----------
=========== ===========
Net Loss $(3,312,576) $(2,315,074)
=========== ===========
Loss before Extraordinary Item per share $ (0.39) $ (0.37)
Extraordinary Item per share -- (0.02)
----------- -----------
Net Loss per share $ (0.39) $ (0.39)
=========== ===========
Weighted average number of shares 8,472,000 5,927,342
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
F4
<PAGE>
APPLEWOODS, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Series A Preferred Stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance - July 1, 1995 3,600,000 $ 180 -- --
Capital Contributions of
Imputed Interest -- -- -- --
Conversion of Debt to Equity -- -- 249,911 25
Issuance of Stock - Consultancy 960,000 48 -- --
Issuance of Stock - Bridge Loan 576,000 29 -- --
Issuance of Stock - Public Offering 2,760,000 138 -- --
[Net of Offering Costs of $ 1,490,365]
Issuance of Stock - Class "A" Warrant Conversion 576,000 29 -- --
Stock Split -- 423 -- --
Foreign Currency Translation Adjustment -- -- -- --
Net [Loss] -- -- -- --
------------ ------------ ------------ ------------
Balance - June 30, 1996 8,472,000 847 249,911 25
Foreign Currency Translation Adjustment -- -- -- --
Net Loss -- -- -- --
------------ ------------ ------------ ------------
Balance - June 30, 1997 8,472,000 $ 847 249,911 $ 25
============ ============ ============ ============
<CAPTION>
Foreign
Additional Currency Total
Paid-In Accumulated Translation Stockholders'
Capital Deficit Adjustments Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance - July 1, 1995 $ 211,153 ($ 2,604,716) ($ 28,106) ($ 2,421,489)
Capital Contributions of
Imputed Interest 55,119 -- -- 55,119
Conversion of Debt to Equity 2,330,591 -- -- 2,330,616
Issuance of Stock - Consultancy 1,919,952 -- -- 1,920,000
Issuance of Stock - Bridge Loan 386,157 -- -- 386,186
Issuance of Stock - Public Offering 5,409,497 -- -- 5,409,635
[Net of Offering Costs of $ 1,490,365]
Issuance of Stock - Class "A" Warrant Conversion 1,727,971 -- -- 1,728,000
Stock Split (423) -- --
Foreign Currency Translation Adjustment -- -- 97,089 97,089
Net [Loss] -- (2,315,074) -- (2,315,074)
------------ ------------ ------------ ------------
Balance - June 30, 1996 12,040,017 (4,919,790) 68,983 7,190,082
Foreign Currency Translation Adjustment -- -- 165,514 165,514
Net Loss -- (3,312,576) -- (3,312,576)
------------ ------------ ------------ ------------
Balance - June 30, 1997 $ 12,040,017 ($ 8,232,366) $ 234,497 $ 4,043,020
============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
F5
<PAGE>
APPLEWOODS, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
June 30
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(3,312,576) $(2,315,074)
Adjustment to Reconcile Net Loss to Net
Cash Used for Operating Activities
Depreciation 307,939 101,882
Amortization of Trademarks 38,275 30,383
Gain on Sale of Equipment -- (8,993)
Loss on Extinguishment of Debt -- 107,274
Imputed Interest -- 55,119
Non-Cash Consulting Fees 1,200,000 720,000
Accretion of Interest on Bridge Loans -- 278,912
Changes in Assets and Liabilities
Trade Accounts Receivable (428,017) (230,232)
Other Receivables 11,817 (81,847)
Inventory (979,229) (402,758)
Other Current Assets 9,067 32,666
Other Assets 86,000 (53,000)
Accounts Payable 35,858 (11,445)
Accrued Expenses 325,999 (53,047)
Accrued Taxes 28,226 (3,124)
Other Current Liabilities (32,383) 17,613
Other Current Liabilities - Related Parties (9,669) (73,005)
----------- -----------
Net Cash - Operating Activities (2,718,693) (1,888,676)
----------- -----------
Investing Activities
Proceeds from Sale of Equipment -- 37,290
Purchase of Property and Equipment (522,812) (324,522)
Investment in Trademarks (53,328) (47,264)
----------- -----------
Net Cash - Investing Activities (576,140) (334,496)
----------- -----------
Financing Activities
Proceeds of Stock Issue, net -- 7,137,635
Payment of Lease Obligations -- (77,936)
Repayment of Cash Overdraft -- (427,072)
Repayment of Short-Term Loans -- (239,175)
Repayment of)/Proceeds from Related Party Loans -- (320,725)
----------- -----------
Net Cash - Financing Activities -- 6,072,727
----------- -----------
Effect of Exchange Rate Changes On Cash 124,032 108,613
----------- -----------
Net (Decrease)/Increase In Cash (3,170,801) 3,958,168
Cash - Beginning of Year 3,958,168 --
----------- -----------
Cash - End of Year $ 787,367 $ 3,958,168
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ -- $ 212,196
Income Taxes $ -- $ --
</TABLE>
See accompanying notes to the consolidated financial statements
F6
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) Organization and Business
Applewoods, Inc., a Delaware corporation ("AI") was formed in September
1995 to acquire all of the outstanding stock of Applewoods International
Limited ("AIL"). AIL, an English corporation, established in 1978,
sells natural soaps, oils, fragrances, lotions, other toiletries and
related gift products to licensed Applewoods stores; it also
manufactures the shop units and fits out the stores. AI and AIL are
collectively referred to as the "Company".
The acquisition is recorded as a recapitalization of AIL, with AI as the
acquiror. AI is considered a public shell and accordingly, the
transaction is not considered a business combination. The transaction is
accounted for as a reverse acquisition whereby AI is considered to be
the acquiree even though legally it is the acquiror, since it issued its
shares of stock to effect the acquisition. Since this is a reverse
acquisition, the legal acquiror, AI, continues in existence as the legal
entity whose shares represent the outstanding common stock of the
combined entities. The recapitalization was given retroactive effect.
The stock acquisition described above occurred immediately preceding the
effective date of the Company's initial public offering on April 10,
1996.
(2) Basis of Preparing Consolidated Financial Statements
The Company has incurred net losses of $3,312,576 and $2,315,074 and net
cash outflows from operations of $2,718,693 and $1,888,676 in the years
ended June 30, 1997 and 1996, respectively. Management has prepared
projected cash flow information for the period ending September 30,
1998. On the basis of these projections, management considers that the
Company may be able to continue to operate through that date without
the need for credit facilities. However, these projections are
estimates of future performance over which no assurances can be given
by the Company. While no credit facilities are currently in place, the
Company has investigated the availability of additional funds and
believes that it will be able to obtain sufficient financing should
the need arise. Accordingly, the financial statements have been
prepared on a going concern basis and do not include any adjustments
that might result from the outcome of this uncertainty.
(3) Summary of Significant Accounting Policies
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiary, after elimination of all significant intercompany
transactions.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. The Company did not have any cash equivalents at June 30,
1997 or June 30, 1996.
F7
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(3) Summary of Significant Accounting Policies (continued)
Accounts Receivable - Substantially all accounts receivable are due from
the Company's licensed shops and distributors. Product is purchased by
licensed shops on a per shipment basis. Credit is extended based on an
evaluation of the customers' financial condition. Management limits its
credit risk by insuring the great majority of its non-U.K. receivables
up to their full value.
Inventory - Inventory is stated at the lower of cost or market. At the
balance sheet date, cost is determined using the first-in, first-out
method.
Prepaid Consulting Fees - The Company has entered into consultancy
contracts related to developing business in the U.S. The Company is
currently evaluating certain business opportunities in the U.S. These
contracts have been amortized using the straight-line method over the
period of benefit. It is ,however the Company's policy to periodically
review and evaluate whether the benefits associated with these contracts
are expected to be realized.
Property, Plant and Equipment and Depreciation - Property, plant and
equipment are carried at cost less accumulated depreciation.
Depreciation is recorded on the straight-line method over the estimated
useful lives of the assets, which range from three to five years.
Trademarks - Trademarks, which are stated at cost less amortization,
consist primarily of legal costs incurred in registering the trademarks.
Amortization is provided on a straight-line basis over the life of the
trademarks, which is estimated to be five years.
Recoverability of Long-Lived Assets - The Company reviews the
recoverability of its long-lived assets when indications of impairment
are present. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its
long-lived assets from expected future cash flows from its operations on
an undiscounted basis.
Revenue Recognition - The Company's revenues are generated from the sale
of products to its retail store licensees and from an initial license
fee charged for all necessary construction items and services that
include the design and fixturing of the retail space ("storefitting and
license revenue"). Revenues from product sales are recognized at time of
shipment. Storefitting and license revenues are recognized upon receipt
of a deposit and the installation of a store; profit is only recognized
upon the installation of the store. Immediately upon delivery of the
fixtures, the Company provides installation, set-up and product
services. The fees for these services, which are immaterial, are
included in storefitting and license revenue.
Income Taxes - Deferred income taxes reflect the expected future tax
consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end. If
it is more likely than not that some portion or all of a deferred tax
asset will not be realized, a valuation allowance is recognized.
F8
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(3) Summary of Significant Accounting Policies (continued)
Foreign Currency Translation - Balance sheet amounts denominated in
currencies other than US dollars have been translated into US dollars
using the balance sheet date rate of exchange. Operating results
denominated in currencies other than US dollars have been translated
into US dollars using the average period rate of exchange for the year.
Equity transactions denominated in British pounds sterling have been
translated into US dollars using the effective rate of exchange at date
of issuance. Foreign exchange gains and losses have been included in
income.
Loss Per Share - Loss per share of common stock is based on the weighted
average number of common shares outstanding for the periods presented.
Generally, common stock equivalents are included in the computation only
when their effect is considered dilutive. However, stock and warrants
issued within a one-year period prior to the initial filing of the
Company's public offering have been included in the computation for
periods prior to that date, as outstanding for all periods presented
even when their effect is anti-dilutive.
Research and Development - Research and development costs are expensed
as incurred.
Non Cash Investing and Financing Activities - In October 1995, the
Company entered into two two-year consulting agreements with two
unaffiliated individuals and issued a total of 960,000 shares of the
Company's Common Stock with a fair value of $1,920,000 of which $720,000
was expensed through June 1996; the balance of $1,200,000 has been
expensed through June 1997.
Non Cash Investing and Financing Activities(continued)
In April 1996, immediately prior to the effective date of the Company's
initial public offering, the related party debt was either cancelled and
contributed to capital or converted to Series A Preferred Stock. The
existing stockholders of AIL exchanged their interests in AIL for a pro
rata number of the 3,600,000 shares of the Company. In addition, as
capital contributions, they cancelled indebtedness owed to them in the
aggregate principal amount of $1,081,072. The Company issued 249,911
shares of Series A Preferred Stock to two Directors and others in
exchange for the cancellation of indebtedness of the Company in the
aggregate principal amount of $1,249,544.
(4) Related Party Transactions
In April 1994, the Company received from a former director of the
Company a $100,000 deposit to be applied against future product
shipments. The Company applied 50% of product shipments against this
deposit and the remaining 50% of the product shipment was paid in cash.
As of June 30, 1996, the balance of a deposit of $12,339 was included on
the balance sheet as "Other Current Liabilities - Related Parties"; this
has been applied during the year to June 30, 1997 against product
shipped to a former director. Total revenue recognized in the year to
June 30, 1997 on sales to this former director (until August 1996) is
approximately $395,000.
In April 1994, the Company entered into a ten-year agreement with ISC
International, Ltd ("ISC"), a former stockholder of the Company, and a
company under the common control of Armando Araujo, a director of the
Company, until August 1996, for the manufacture of soap and soap related
products.
F9
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(4) Related Party Transactions (continued)
In April 1994, the Company entered into a license agreement with ISC to
sell exclusively the Company's products in Latin America; ISC assigned
in June 1995 all rights, titles and interest in this agreement to Tanisi
International Ltd., a company controlled by Armando Araujo, a director
of the Company until August 1996. In connection with this agreement, the
Company received from ISC an advance to be applied against future
product shipments; as of June 30, 1997, $40,214 remains deferred and is
included on the balance sheet as "Other Current Liabilities - Related
Parties". Total revenue recognized to June 30, 1997 on sales to ISC is
approximately $75,000.
On April 10, 1996, the Company's registration statement to offer for
sale 2,400,000 shares of Common Stock at $2.50 per share was declared
effective. In April 1996, the Company received net proceeds of
$5,409,635 from the sale of 2,400,000 shares and 360,000 over-allotment
shares. In May and June 1996, an additional $1,728,000 was received from
the conversion of 576,000 Class A Warrants issued to the bridge lenders.
Part of the proceeds have been used to repay the bridge lenders the
principal sum of $500,000 and a loan made by one of the directors in the
sum of approximately $325,000.
During the year to June 30,1997 the Company has rented its offices in
Westport, Connecticut from a Director at a market rental. The total of
rent paid and office expenses reimbursed approximates $3,000.
During the year to June 30, 1997 and 1996, the Company paid fees
amounting to approximately $28,624 and $8,014 respectively to Ms.
S.G.Buoy, the wife of a Director. The transactions were made on usual
commercial terms on an arms length basis.
(5) Commitments
(A) Employment Agreements - In July 1995, the Company entered into
three-year employment agreements with its Chief Executive Officer and
Chief Operating Officer. The agreements provide for an aggregate annual
salary of $300,000 with future increases and bonuses at the discretion
of the Board of Directors. In addition, the agreements provide for the
grant of options upon the Company's attainment of specified earnings
levels. If the specified earnings levels are attained, each officer will
receive options to purchase 12% of the outstanding stock of the Company
at an exercise price of $1.50 per share. This granting of options to
purchase common stock will result in compensation expense to the Company
equal to the excess of the fair market value per share of the common
stock over the exercise price multiplied by the number of options
granted.
(B) Consulting Agreements - In October 1995, the Company entered into
two two-year consultancy agreements. The Company issued an aggregate
960,000 shares of its common stock as compensation for these agreements.
During the year ended June 30, 1996, the Company expensed $720,000
prepaid consulting expense related to these agreements, and the balance
of $1,200,000 during the year ended June 30, 1997.
F10
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(5) Commitments (continued)
(C) Leases - The Company leases building and office space under
operating leases terminable in various years through 1998. Rental
expense for the years ended June 30, 1997 and 1996 was $212,800 and
$162,925, respectively.
Minimum annual lease commitments at June 30, 1997, under noncancelable
leases, to June 30 each year, are as follows:
1998 $ 215,707
1999 17,933
---------
$ 244,415
=========
(6) Employee Stock Options
In October 1995, the Company adopted the 1995 Stock Plan (the "1995
Plan") to provide an incentive for officers and other key employees. The
1995 Plan authorizes the grant to officers and other key employees of
the Company of stock options, restricted stock, deferred stock, bonus
shares, performance awards, dividend equivalent rights, limited stock
appreciation rights and other stock-based awards, or any combination
thereof. The maximum number of shares of common stock with respect to
which awards may be granted pursuant to the 1995 Plan is initially
1,000,000 shares. The options, except for the January 1996 grant, vest
equally on each one year anniversary during the three-year period
following the date of issuance, and are exercisable for an
eighteen-month period commencing on the vesting date. The options
granted in January 1996 vested equally on April 10, 1997 ( the "initial
exercise date" ) and each of the two subsequent anniversaries during the
three-year period following the initial exercise date, and are
exercisable for an eighteen-month period commencing on the vesting date.
F11
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(6) Employee Stock Options (continued)
In January 1996, the Company issued 100,000 options to purchase shares
of the Company's common stock at an exercise price of $2.50 per share; a
further 294,000 options were issued in November 1996 at an exercise
price of $1.875, and 135,000 options were granted in May 1997 at an
exercise price of $0.344.
<TABLE>
<CAPTION>
Weighted Average
-------------------- Initial
Number of Exercise Fair value of exercise
Options Price options granted date
--------- -------- --------------- --------
<S> <C> <C> <C> <C>
Outstanding July 1,1995 --
Granted January 1996 100,000 $ 2.50 $ 2.25 4/10/97
-------
Outstanding June 30,1996 100,000
Granted November 1996 294,000 $ 1.87 $ 1.69 11/4/97
Granted May 1997 135,000 $ 0.34 $ 0.31 5/6/98
-------
Outstanding June 30, 1997 179,000 $ 1.60 $ 1.44
======= ======== ========
Exercisable June 30,1997 33,333 $ 2.50
======= ========
</TABLE>
The weighted average price of the options outstanding at June 30, 1997
was $1.60 and the weighted average remaining contractual life was 30
months. The weighted average fair value of these options at the date of
grant was $1.44. The fair value was estimated using the Black-Scholes
option-pricing model with the following average assumptions: dividend
yield of zero%, expected volatility 2.29, risk free interest rate 6%,
and expected life of 2 years.
Had the Company accounted for its employee stock options using fair
values, the net loss and net loss per share for the year ended June 30,
1997 would have been $3,478,254 and $0.41 per share respectively (1996
$2,341,544 and $0.40 per share respectively).
At June 30, 1997 33,333 options at an exercise price of $2.50 were
exercisable. No options have been exercised or cancelled, except as
detailed below.
All of the options issued under the plan were cancelled and the options
were reissued in July 1997 at an exercise price of $0.22, the market
price of the Company's common stock on the reissue date.
F12
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(7) Property, Plant & Equipment
Property, Plant & Equipment is comprised of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Plant & Machinery $ 695,058 441,798
Office Equipment & Fittings 457,786 140,496
Motor Vehicles 39,524 36,900
----------- -----------
1,192,368 619,194
Less: Accumulated depreciation 520,503 194,972
----------- -----------
$ 671,865 $ 424,222
=========== ===========
</TABLE>
(8) Trademarks
Trademarks is comprised of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Cost $ 214,587 $ 149,949
Less: Accumulated amortization 110,027 69,155
----------- -----------
$ 104,560 $ 80,794
=========== ===========
</TABLE>
(9) Inventory
The following is a summary of inventory:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Raw Materials $ 1,046,084 $ 856,893
Work in Progress 134,878 24,886
Finished Goods 1,540,333 860,287
----------- -----------
$ 2,721,295 $ 1,742,066
=========== ===========
</TABLE>
F13
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(10) Sales
Other than one store in North America, all of the Company's operations
are in, and all of its revenue arises in the United Kingdom. An analysis
of the Company's sales to unaffiliated customers by geographical area
are as follows:
Year ended Year ended
June 30, June 30,
1997 1996
----------- -----------
North America $ 856,162 $ 681,044
Europe 2,301,997 1,298,730
Southeast Asia 1,734,206 1,268,389
Rest of World 1,029,324 559,633
----------- -----------
$ 5,921,689 $ 3,807,796
=========== ===========
(11) Bridge Lenders
In September and October 1995, the Company borrowed an aggregate of
$500,000 to provide working capital for the Company, and in connection
with such loans executed promissory notes in the principal amount of
$500,000 bearing interest at 8% per annum. The notes were payable on the
earlier of the closing of the initial public offering or June 30, 1996.
As additional consideration, the bridge lenders received 576,000 bridge
units, each consisting of one share of Common Stock, one Class A
Warrant, exercisable at $3.00 per share, and one Class B Warrant,
exercisable at $5.00 per share. The bridge loans together with accrued
interest were repaid in April 1996. The proceeds received were allocated
to the notes ($114,000) and to the bridge units ($386,000) based on the
relative fair values of the notes and bridge units. Interest on the
notes was accreted to the date of repayment and amounted to
approximately $278,000 which was included in interest expense in the
year to June 30, 1996. The unamortized debt discount remaining of
$107,000 was expensed as an extraordinary item in the year to June 30,
1996.
(12) Public Offering
On April 10, 1996, the Company's registration statement to offer for
sale 2,400,000 shares of Common Stock at $2.50 per share was declared
effective. In April 1996, the Company received net proceeds of
$5,409,635 from the sale of 2,400,000 shares and 360,000 over-allotment
shares. In May and June 1996, an additional $1,728,000 was received from
the conversion of 576,000 Class A Warrants issued to the bridge lenders.
Part of the proceeds have been used to repay the bridge lenders the
principal sum of $500,000 and a loan made by one of the directors in the
sum of approximately $325,000.
In May 1996, the Company effected a 2-for-1 stock split. Per share data
for all periods presented have been adjusted to reflect this.
F14
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(13) Conversion of Debt
Pursuant to a Stock Exchange Agreement, Roger Buoy, the Company's Chief
Executive Officer and Tony Swash, the Company's Chief Operating Officer
exchanged their respective 35% interests in AIL, and Carmen Villalon, a
director of AIL, and ISC exchanged their respective 15% interests in
AIL, for a pro rata number of the 3,600,000 shares of the Company. In
addition, as capital contributions to the Company, Roger Buoy and Tony
Swash each cancelled indebtedness owed to them by the Company in the
amount of $411,025 and $412,592, respectively, and Carmen Villalon and
Tanisi (the successor in interest to ISC) each cancelled indebtedness
owed to them by the Company in the amount of $153,837 and $103,799,
respectively.
In addition, pursuant to the terms of a Series A Preferred Stock
Subscription Agreement, immediately prior to the effective date of the
initial public offering, the Company issued (i) 142,716 shares of Series
A Preferred Stock to Roger Buoy, in exchange for the cancellation by Mr
Buoy of certain indebtedness of the Company in the aggregate principal
amount of $713,577, (ii) 77,629 shares of Series A Preferred Stock to
Tony Swash in exchange for the cancellation by Mr Swash of certain
indebtedness on the Company in the aggregate principal amounts of
$388,141, (iii) 15,695 shares of Series A Preferred Stock to Josh
Gaspero in exchange for the cancellation by Mr Gaspero for certain
indebtedness of the Company in the aggregate principal amount of $78,473
and (iv) 13,871 shares of Series A Preferred Stock to Tim Kelly in
exchange for the cancellation by Mr Kelly of certain indebtedness of the
Company in the aggregate principal amount of $69,352.
(14) Provision for Income Taxes
Pursuant to United States tax laws, if a subsidiary of a United States
company which is organized under the laws of the United Kingdom is not
engaged in business in the United States, profits of such subsidiary
will not be subject to United States taxation, until distributed as
dividends. However, the United States company would receive a credit
against federal income tax liability that would otherwise result from
any distributions from the subsidiary for any United Kingdom corporate
taxes paid by its subsidiary on these distributions, as well as for any
United Kingdom dividend and royalty withholding taxes imposed directly
on the United States company.
As of June 30, 1997 the Company had approximately $3,800,000 of net
operating losses arising in AIL, which can be used to offset future
United Kingdom taxable income arising in the same trade. Under United
Kingdom tax law, there is no time limit for tax utilization of net
operating losses. The deferred tax asset arising on such operating
losses of approximately $1,178,000, however, has been offset by an
equivalent valuation allowance because the Company has no profitable
operating history and it is more likely than not that this deferred tax
asset will not be realized.
(15) Stockholders' Equity
(A) Common Stock - The Company is authorized to issue 30,000,000
common shares with a par value of $.0001. As of June 30, 1997,
8,472,000 shares have been issued and were outstanding.
F15
<PAGE>
APPLEWOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(15) Stockholders' Equity (continued)
(B) Preferred Stock - The Company is authorized to issue 1,000,000
shares of convertible preferred stock. The Board of Directors
has the authority to issue shares in one or more classes and to
designate the number of shares and the terms within the class.
As of June 30, 1997, 500,000 shares of Series A Preferred Stock
with a par value of $.0001 have been authorized and 249,911 have
been issued and were outstanding. Each share is convertible into
two shares of common stock, at the option of the holder, for
$2.50 per share, has a liquidating preference of $5.00 per share
and may be redeemed by the Company with five days notice, for
$5.00 per share. This stock ranks senior to any other preferred
stock which may be issued and to the common stock. Each holder
is entitled to one vote.
(C) Options and Warrants - At June 30, 1997, 576,000 Class B
Warrants issued to the bridge lenders remained outstanding. Each
Class B Warrant is exercisable into one share of common stock
commencing on April 10, 1997, at an exercise price of $5.00.
Each Class B Warrant may be redeemed by the Company if the bid
price of the Company's shares of common stock exceeds $6.00 per
share.
(16) Litigation
(A) A former shareholder / employee of AIL has commenced litigation
against the Company in England seeking damages for wrongful
dismissal and loss of his shareholdings. The Company intends to
defend vigorously its position and has asserted counterclaims
against the plaintiff. The Company believes that the disposition
of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
(B) The Company has been named in an action, Mott v. Sterling Foster
& Co., Inc., et al., (United States District Court, District of
South Carolina) along with various other defendants. The
complaint against the Company contains allegations of violations
of state and federal securities laws and common law fraud and
negligence, arising out of the April 1996 initial public
offering of 2,760,000 shares of the Company common stock.
According to the complaint, the underwriter of the offering,
Sterling Foster & Co., Inc. employed improper sales tactics and
manipulated secondary market trading in shares of the Company's
common stock following the offering. The complaint seeks
unspecified damages. The Company and its officers and directors
deny the allegations in the complaint and are vigorously
defending this action.
(17) New Accounting Standards
In February 1997, FAS 128 "Earnings per Share" was issued. The
provisions of this statement must be adopted for accounting periods
ending after December 15, 1997. Earlier adoption is not permitted. FAS
128 simplifies the provision relating to the computation of earnings per
share ("EPS"). It replaces the presentation of primary EPS with basic
EPS and requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital
structures. The adoption of FAS 128 by the Company will not have any
material impact on the EPS amounts previously reported.
F16
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 authorized.
Dated: New York, New York
October 13, 1997
APPLEWOODS(R), INC.
By:/s/ Roger Buoy
--------------------------
Roger Buoy
Chief Executive Officer
By:/s/ David H. Knight
---------------------------
David H. Knight
Chief Financial Officer, Principal
Accounting Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Roger Buoy Chief Executive Officer October 13, 1997
- ------------------------- and Director
Roger Buoy
/s/Tony Swash Chief Operating Officer October 13, 1997
- ------------------------- and Director
Tony Swash
/s/ David H. Knight Chief Financial Officer, October 13, 1997
- ------------------------- Principal Accounting
David H. Knight Officer and Secretary
/s/ Josh Gaspero Director October 13, 1997
- -------------------------
Josh Gaspero
/s/ Sherman A. Drusin Director October 13, 1997
- -------------------------
Sherman A. Drusin
37
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR TO JUNE 30, 1997
AS PRESENTED IN THE COMPANY'S FORM 10-K FOR SUCH PERIOD AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 787,367
<SECURITIES> 0
<RECEIVABLES> 1,141,225
<ALLOWANCES> 39,519
<INVENTORY> 2,721,295
<CURRENT-ASSETS> 4,762,779
<PP&E> 1,192,368
<DEPRECIATION> 520,503
<TOTAL-ASSETS> 5,539,204
<CURRENT-LIABILITIES> 1,496,184
<BONDS> 0
0
25
<COMMON> 847
<OTHER-SE> 4,042,148
<TOTAL-LIABILITY-AND-EQUITY> 5,539,204
<SALES> 5,921,689
<TOTAL-REVENUES> 5,921,689
<CGS> 4,656,877
<TOTAL-COSTS> 9,416,453
<OTHER-EXPENSES> (182,188)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,312,576)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,312,576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,312,576)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> 0
</TABLE>
