UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 25, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from to
------------------------ ------------------------
Commission file number 0-19326
ADVANCED PROMOTION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0017135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3001 South West 10th Street
Pompano Beach, Florida 33069-4814
(Address of principal executive offices, including zip code)
(305) 969-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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
------ ------
SHARES OF COMMON STOCK OUTSTANDING
18,691,095 AS OF JUNE 30, 1996
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
INDEX
PART I
FINANCIAL INFORMATION
FACING PAGE 1
INDEX 2
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS 3
STATEMENTS OF OPERATIONS 5
STATEMENTS OF CASH FLOWS 6
NOTES TO FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. NOT APPLICABLE 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 17
ITEM 5. NOT APPLICABLE 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE PAGE 19
2
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
<TABLE>
<CAPTION>
BALANCE SHEETS
(In thousands, except share data)
November 25, May 25,
1995 1996
-------- --------
<S> <C> <C>
ASSETS
- - ------
CURRENT ASSETS:
Cash and cash equivalents $ 5,600 $ 387
Restricted investment 85
Accounts receivable, net of allowance of $500
at November 25, 1995 and $460 at
May 25, 1996 926 522
Due from stockholders (Note 4) 116 51
Prepaid expenses and other current assets 390 301
-------- --------
Total current assets 7,117 1,261
PROPERTY AND EQUIPMENT
Store equipment - installed 19,580 15,548
Computers and equipment 6,599 6,688
-------- --------
26,179 22,236
Less accumulated depreciation (9,549) (12,017)
-------- --------
16,630 10,219
Equipment held for future store installation 7,995 10,543
-------- --------
Total property and equipment 24,625 20,762
-------- --------
Deferred financing costs and other assets 471 419
-------- --------
$ 32,213 $ 22,442
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
(DEFICIENCY)
- - ---------------
CURRENT LIABILITIES
Accounts payable $ 2,531 $ 2,184
Accrued expenses 1,317 1,107
Accrued interest 104 108
Preferred dividends 1,064 1,853
Due to stockholders (Note 4) 360 98
Consumer redemption liability 10,106 7,436
Current portion of capital lease obligations 1,962 1,960
Current portion of long-term debt 27
-------- --------
Total current liabilities 17,471 14,746
</TABLE>
3
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
<TABLE>
<CAPTION>
BALANCE SHEETS (Continued)
(In thousands, except share data)
November 25, May 25,
1995 1996
-------- --------
<S> <C> <C>
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 4,909 4,509
6% SUBORDINATED CONVERTIBLE DEBENTURES (Note 5) 9,937 10,300
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock, $.01 par value, 3,000,000 shares
authorized at November 25, 1995 and May 25, 1996
Convertible senior preferred stock, $6 cumulative
annual dividend (liquidation preference of $11,783
at November 25, 1995 and $12,119 at May 25, 1996)
issued and outstanding 112,399 shares at
November 25, 1995 and May 25, 1996 1 1
Convertible series A preferred stock, $.01 par value,
$6 cumulative annual dividend (liquidation preference
of $4,590 at November 25, 1995 and $4,713 at May 25,
1996)issued and outstanding 41,250 shares shares
at November 25, 1995 and May 25, 1996
Convertible series B preferred stock, $.01 par value,
$6 cumulative annual dividend (liquidation preference
of $4,378 at November 25, 1995 and $4,708 at May 25,
1996) issued and outstanding 110,191 shares shares
at November 25, 1995 and May 25, 1996 1 1
Convertible series C preferred stock, $.01 par value,
$6 cumulative annual dividend (liquidation preference
of $125 at May 25, 1996) issued and outstanding 1,250
shares at May 25, 1996
Common stock, $.01 par value: authorized 48,000,000 shares
at November 25, 1995 and 200,000,000 at May 25, 1996;
issued 18,442,400 at November 25, 1995 and May 25, 1996 184 184
Less 1,305 shares of common stock in treasury stock (at cost) (7) (7)
Additional paid-in-capital 119,368 119,493
Deficit accumulated during the development stage (119,651) (126,785)
--------- ---------
Total stockholders' deficiency (104) (7,113)
------- -------
$32,213 $22,442
======= =======
</TABLE>
See notes to financial statements.
4
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
For the period
December 4,1987
Three Months Ended Six Months Ended (Date
---------------------- ---------------------- of inception)
May 27, May 25, May 27, May 25, to May 25,
1995 1996 1995 1996 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES $ 1,422 $ 986 $ 2,297 $ 1,894 $ 18,229
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Direct operating expenses 3,218 1,800 6,629 4,454 49,254
Selling, general and administrative 3,437 1,957 6,642 3,876 59,549
Research and product development 247 120 443 287 10,196
Depreciation and amortization 1,356 1,532 2,655 2,795 20,043
--------- --------- --------- --------- ---------
Total costs and expenses 8,258 5,409 16,369 11,412 139,042
--------- --------- --------- --------- ---------
LOSS FROM OPERATIONS (6,836) (4,423) (14,072) (9,518) (120,813)
OTHER INCOME (EXPENSE):
Other income 53 28 103 49 1,211
Interest expense (405) (352) (952) (639) (4,009)
Debt conversion expense (3,500) (3,500) (5,000)
Extinguishment of consumer redemption
liability 1,062 3,763 3,763
--------- --------- --------- --------- ---------
NET LOSS ($ 10,688) ($ 3,685) ($ 18,421) ($ 6,345) ($124,848)
========= ========= ========= ========= =========
PREFERRED STOCK DIVIDEND REQUIREMENTS (61) (395) (123) (789) (1,937)
--------- --------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS ($ 10,749) ($ 4,080) ($ 18,544) ($7,134) ($126,785)
========= ========= ========= ========= =========
NET LOSS PER COMMON SHARE ($ 0.73) ($ 0.22) ($ 1.35) ($ 0.39)
========= ========= ========= =========
See notes to financial statements.
</TABLE>
5
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the period
December 4,1987
Six Months Ended (Date
-------------------- of inception)
May 27, May 25, to May 25,
1995 1996 1996
--------- --------- ---------
<C> <C> <C>
OPERATING ACTIVITIES:
Net Loss (18,421) ($ 6,345) ($124,848)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,655 2,795 20,043
Provision for uncollectible accounts 35 36 917
Debt conversion expense 3,500 5,000
Extinguishment of consumer redemption liability (3,763) (3,763)
Reserve for loss on equipment 687 700 3,248
Equipment write-off 129
Loss on disposition of assets 326 3,540
Contributed occupancy costs 150
Amortization of bond discount 64 36 207
Issuance of convertible subordinated debentures in lieu
of interest 602 327 1,711
Deferred compensation 68 405
Compensatory value of stock options 485 3,207
Gain on extinguishment of lease obligation (40)
(Increase) decrease in accounts receivable (404) 368 (1,438)
(Increase) decrease in due from stockholders 206 65 (52)
(Increase) decrease in prepaid and other current
assets (262) 28 (282)
(Increase) decrease in deferred financing costs
and other assets 18 52 (73)
Increase (decrease) in accounts payable and
accrued expenses (2,319) (553) 3,631
Increase (decrease) in due to stockholders (42) (262) 67
Increase in consumer redemption liability 2,233 1,093 11,199
--------- --------- ---------
Net cash used in operating activities (10,895) (5,097) (77,042)
INVESTING ACTIVITIES:
Purchase of computers and equipment (266) (49) (5,233)
Purchase of store equipment - installed and equipment
held for future store installation (331) (31,505)
Proceeds from the disposition of store equipment -
installed and equipment held for future store installation 152 152
Restricted investment 458 85 41
Proceeds from disposition of computers and equipment 28
--------- --------- ---------
Net cash (used in) provided by investing activities (139) 188 (36,517)
</TABLE>
6
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
STATEMENT OF CASH FLOWS (Continued)
(in thousands)
<TABLE>
<CAPTION>
For the period
December 4,1987
Six Months Ended (Date
-------------------- of inception)
May 27, May 25, to May 25,
1995 1996 1996
--------- --------- ---------
<C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and preferred
stock (net of issuance costs) 10,722 125 94,784
Proceeds from issuance of non-voting common stock 431
Proceeds from additional equity contribution 853
Proceeds from short-term note payable 570
Proceeds from long-term note payable 1,562
Decrease in due to stockholders for repayment of
purchased equipment 31
Purchase of treasury stock (7)
Payments made under bank loan (15) (27) (151)
Payments made under capital leases (875) (402) (4,340)
Proceeds from lease financing 568
Payments made under note payable to stockholder (1,137)
Payments made under short-term note payable (470)
Payments under capital lease obligation to related
parties (169)
Proceeds from subordinated debt issuance 22,850
Payment of debt issue costs (1,350)
Payment of dividends on preferred stock (79)
--------- --------- ---------
Net cash (used in) provided by financing activities 9,832 (304) 113,946
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,202) (5,213) 387
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,630 5,600
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 428 $ 387 $ 387
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
AND NONCASH TRANSACTIONS:
Cash paid during the period for interest $ 209 $ 158 $ 1,675
Issuance of common stock for reduction of notes payable 375
Issuance of restricted common stock under deferred
compensation agreement 405
Capital lease obligations 1,235 10,452
Issuance of convertible subordinated debentures in lieu
of interest 602 327 1,711
Dividends accrued on preferred stock 123 789 1,937
Issuance of preferred stock in exchange for 6% subordinated
convertible debentures (net) 11,187 11,187
See notes to financial statements
</TABLE>
7
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
For the six months ended May 25, 1996 and May 27, 1995
1. GENERAL
Advanced Promotion Technologies, Inc. (the "Company") provides
in-store promotion and marketing services to consumer product manufacturers and
to supermarkets through its Vision Value Network (the "Network"), a proprietary
satellite-linked, electronic marketing network developed and owned by the
Company.
The accompanying financial statements should be read in conjunction
with the Company's financial statements and notes thereto for the fiscal year
ended November 25, 1995.
The financial statements have been prepared on a going concern basis
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. Through May 25, 1996, the Company had incurred
net losses since inception aggregating $124,848,000. As of May 25, 1996, current
liabilities exceeded current assets by $13,485,000, and the Company had a
stockholders' capital deficiency of $7,113,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon obtaining
equity capital, lease financing or other financing to adequately finance its
business and, ultimately, attaining profitable operations. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets or the amounts and classification of
liabilities should the Company be unable to continue as a going concern.
The financial statements were prepared from the books and records of
the Company without audit. In the opinion of management, these financial
statements include all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of the Company in accordance with generally accepted accounting
principles.
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. The Company uses estimates in its valuation of the carrying
amount of the store equipment-installed and equipment held for future store
installation and for the monthly charge to operations under the Company's
consumer redemption program. Actual results could differ from these estimates.
The results of operations for the three month and six month periods
ended May 27, 1995 and May 25, 1996 are not necessarily indicative of the
operating results for the full fiscal year.
8
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
For the six months ended May 25, 1996 and May 27, 1995
2. NET LOSS PER COMMON SHARE
Net loss per common share is based upon the weighted average number of
common shares outstanding in each period. All common stock equivalents have been
excluded because their effect would be anti-dilutive. Weighted average shares
outstanding were 14,641,091 and 18,441,095 for the three month periods ended May
27, 1995 and May 25, 1996 and 13,775,396 and 18,441,095 for the six month
periods ended May 27, 1995 and May 25, 1996, respectively.
3. NEW ACCOUNTING PRONOUNCEMENTS
The Company has not completed the process of evaluating the impact
that will result from adopting Statements of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of and No. 123, Accounting for Stock-Based Compensation,
which become effective during fiscal 1997. The Company is unable to disclose the
impact that adopting Statements of Financial Accounting Standards No. 121 and
No. 123 will have on its financial position and results of operations when such
statements are adopted during fiscal 1997. In addition, the Company has not yet
determined whether it will continue to recognize compensation under the
valuation method of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" or elect to follow the "fair value" method under
Statement No. 123.
4. RELATED PARTY TRANSACTIONS
Due to stockholders at May 25, 1996, represents amounts due to certain
ex-officers of the Company in accordance with consulting agreements, and
consulting services from a company of which the Vice Chairman of the Company's
Board of Directors is Chairman and President.
Due from stockholders at May 25, 1996, includes amounts due from
Procter and Gamble and The Vons Companies, Inc. ("Vons") for fees in connection
with their participation in the Network, as well as revenues from promotions run
on the system. These transactions have payment terms of net thirty days, and
balances due are non-interest bearing.
5. SUBORDINATED CONVERTIBLE DEBENTURES
The Company issued $17,050,000 of 6% Subordinated Convertible
Debentures in May, 1994. Interest is payable semiannually starting October,
1994, with principal due in May, 1999. The debentures are convertible into
common stock of the Company at the option of the holder exercisable at $7.14 per
share. Detachable warrants to purchase 1,790,250 shares of common stock
exercisable at $7.50 per share which expire in May, 1999 were issued with the
debentures.
9
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
For the six months ended May 25, 1996 and May 27, 1995
In October and November, 1994, the Company issued an additional
$5,800,000 of 6% Subordinated Convertible Debentures. Interest is payable
semi-annually starting February 15, 1995, with principal due August, 1999. The
debentures are convertible into common stock of the Company at the option of the
holder exercisable at $6.25 per share. Detachable warrants to purchase 464,000
shares of common stock exercisable at $7.25 per share which expire in August,
1999 were issued with the debentures.
During 1994, 1995 and the six months ended May 25, 1996, the interest
payments due of $458,000, $647,000, and $328,000 respectively, were satisfied by
the issuance of additional debentures with terms similar to those described
above. No warrants were issued in connection with these additional debentures.
In March, 1995, the Company and certain of the Subordinated
Convertible Debenture holders concluded an exchange of $11,187,000 of
outstanding debentures (net of related unamortized discount of $1,410,000 and
deferred financing costs of $631,000) for 132,263 shares of the Company's senior
preferred stock. The exchange offer also included the exchange of warrants to
purchase 1,275,100 shares of common stock originally issued as part of a unit
exercisable at $7.25 to $7.50 per share with the debentures for replacement
warrants to purchase 1,708,634 shares of the Company's common stock exercisable
at $4.25 to $5.00. Such warrants have subsequently been adjusted to 4,310,706
shares exercisable at $1.76 and expire in October, 2004. In connection with this
exchange, the Company recorded, in March 1995, a non-cash debt conversion
expense of $3,500,000 representing the fair value of all securities transferred
in the exchange, in excess of the fair value of all securities issuable pursuant
to the original terms. A final valuation was made in the fourth quarter of
fiscal 1995, and the debt conversion expense was increased from $3.5 million to
$5 million.
At May 25, 1996, $10,300,000 of Subordinated Debentures remained
outstanding net of an unamortized discount of $1,034,000. Such debentures are
convertible into 1,670,000 shares of common stock. Detachable warrants for
675,150 exercisable at $7.50 and 304,000 exercisable at $7.25 remain outstanding
and expire in May and August, 1999, respectively.
6. COMMITMENTS AND CONTINGENCIES
As of June 18, 1996, the Vision Value Network was installed and
operating in 215 supermarkets, including certain stores operated by SUPERVALU,
Inc., The Big Bear Company, and Von's, Inc. There can be no assurance that any
of these retailers will continue to support the program. Currently, the Company
has no agreements for installation of additional stores.
Procter & Gamble and the Company are parties to a priority use
agreement whereby Procter & Gamble has a right of first refusal with respect to
the promotion of its products in all of its product categories during all
promotion cycles for all participating stores in all market areas.
10
<PAGE>
ADVANCED PROMOTION TECHNOLOGIES, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
For the six months ended May 25, 1996 and May 27, 1995
Procter & Gamble's right of first refusal will continue for a period
of five years following achievement of specified levels of market penetration of
the Network in each particular market area and will not exceed nine years after
the Network is first introduced in any such market area.
On February 29, 1996, Vons and the Company agreed to terminate its
Installation and Development Agreement. The programs and existing equipment are
to remain in place and continue until terminated by either party upon ninety
(90) days written notice. Vons gave such notice effective June 1, 1996.
Following such notice, Vons has the right to lease the existing equipment in its
supermarkets from the Company without the Vision Value promotions for up to one
year. Furthermore, the Company agreed that in the future, as it develops various
software and marketing programs, it will make such programs available to Vons on
an exclusive basis in Vons' marketing areas.
7. SUBSEQUENT EVENTS
On June 11, 1996, the Company entered into an Asset Purchase Agreement
and Mutual Release with Sunrise Resources, Inc. and Dawia Bank, Limited, whereby
the Company gained title and interest to equipment under a lease agreement clear
and free of all liens, claims or encumbrances in exchange for $3,000,000 cash
and 7,500 shares of the Series C Preferred Stock to be offerred in the Comany's
proposed financing. The closing is to take place at such time the Company
completes the proposed financing currently in progress.
In June, 1996, the Company's sublessor, Modcomp / Cerplex, L.P.,
commenced an action in the County Court of Broward County, Florida, to evict the
Company from its office facility. The Company has deposited all accrued rent in
the registry of the Court and intends to vigorously defend the action, asserting
claims against the sublessor based on the condition of the building.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company was founded in December 1987 as a joint venture that
included Procter & Gamble and an affiliate of AC Nielsen Company ("Nielsen").
Prior to fiscal 1993, the Company was primarily engaged in designing, developing
and enhancing the Vision Value Network. In order to demonstrate the capabilities
of the Network, in May 1991 the Company and certain consumer product
manufacturers initiated a year-long controlled market test conducted by Nielsen
(the "Nielsen Test"). During the Nielsen Test, 12 consumer product manufacturers
with 367 brands participated on a trial basis in the Network, which was then
operating in approximately 30 stores. As the Company had anticipated in light of
the limited installed base of stores, most manufacturers' participation in the
Network ended upon completion of the Nielsen Test. While the Nielsen Test was
proceeding, the Company undertook development of the production version of the
Network, which was completed in fiscal 1993.
Recognizing that a larger base than thirty stores would be necessary
to secure ongoing manufacturer participation following the Nielsen Test, the
Company has concentrated on marketing the Network to targeted supermarket chains
to gain sufficient penetration in particular markets to make the Network
attractive to national consumer product manufacturers. As of June 18, 1996, the
Network was installed and operating in 215 supermarkets, including certain
stores of SUPERVALU, Inc., The Big Bear Company, and Von's, Inc. There can be no
assurance that any of these retailers will continue to support the program.
Due to capital constraints, the Company has not been able to reach the
critical mass necessary to attract and retain significant manufacturer
participation. As of June 18, 1996, the Company has an agreement with Dean Foods
for participation of 9 brands on the Network.
Liquidity and Capital Resources
The Company has funded its operations primarily through capital
contributed by its stockholders and, beginning in 1994 with convertible debt
and, to a lesser extent, equipment lease financing. From its inception through
May 25, 1996, the Company's stockholders had contributed $119,679,000 of equity
to the capital of the Company (net of issuance costs). In addition, $20,201,000
was raised through the issuance of 6% subordinated debentures (net of
unamortized discount) in 1994, prior to the March 1995 debt conversion. As of
May 25, 1996, the Company had cash and cash equivalents of $387,000, and a
working capital deficit of $13,485,000. The Company had entered into a master
lease agreement to obtain lease financing for a portion of the terminals and
other Network components that are installed in supermarkets. As of May 25, 1996,
the Company has entered into leases under this agreement for equipment with an
original cost of approximately $10,116,000 at annual effective interest rates
between 9% and 16%. The Company is currently in arrears on its lease payments by
approximately $1,090,000 and has negotiated for a termination of the agreement
at a discount to face value. (See Note 7)
The Company is exploring alternative designs which would lower the
average equipment cost in the retail store. These designs may deliver less
functionality, but would be more economical. The Company's present strategy is
to revise its pricing and reduce its costs and expenses with a view to operating
on a smaller retailer base.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consequently, the Company requires additional financing in the near
term to continue operations. The Company is currently engaged in efforts to
obtain additional financing and expects such financing would be provided in
private offerings of additional equity securities. If adequate funds are not
available in a timely manner, the Company's business will be materially and
adversly affected and it will be forced to cease operations. If additional funds
are raised by issuing equity securities, significant dilution to existing
stockholders may result. There can be no assurance that additional financing
will be available or, if available, that it will be available on acceptable
terms.
Overview of Revenues and Expenses
The Company anticipated that its primary sources of revenues would be
the transaction fees it charged to participating retailers and consumer product
manufacturers. Historically, each delivery of a promotion or advertisement to a
consumer through the Network generated a transaction fee payable to the Company
either by the manufacturer or retailer sponsoring the product. In addition, a
transaction fee was generated by each Vision Value Point awarded to a consumer
purchasing a product sponsored by a manufacturer or retailer. Retailers' fees
were subject to a minimum monthly charge per store. In addition, each store paid
a one-time connection charge for the installation of the Network, although the
Company bore most of the cost of equipment and installation. The Company also
charged manufacturers and retailers on a cost-plus basis for producing
promotional media for use in the Network.
As part of the strategy to move to a software and services provider,
the Company is currently introducing a new pricing plan to retailers. The new
plan focuses on APT's ability to deliver targeted promotions and services to the
retailer's customer. It allows the retailer to pay for various services at a
rate that is competitive to other media; yet, provides APT with a higher revenue
per store. The retailer will take a larger role by paying for marketing
materials, communication costs and coupon paper. The stores will also provide
on-site support for maintenance of the equipment. It is not known how many
retailers will accept the new pricing structure. The Company has been notified
by several retailers and expects additional retailers to terminate their
participation in the Network.
Selling, general and administrative expenses consist primarily of (i)
costs associated with the Company's consumer product manufacturer and retail
sales force, (ii) costs associated with marketing, field and home office
employees and (iii) travel, consulting, professional, business communications
and other expenses. Research and product development expenses are comprised
mainly of the Network's hardware and software development costs. The Company
expects that research and product development expenses will relate more to
exploring alternative designs which would lower the average equipment cost in
the retailer store.
Due to capital constraints, the Company has not been able to expand
the retailer base to a level sufficient to cover costs and expenses. At the
current time, the Company is reducing costs and expenses in order to operate on
a smaller retailer base. It is not clear whether the Company can achieve the
necessary cost level in the appropriate time frame.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Direct operating expenses consist primarily of (i) costs of installing Network
equipment, (ii) store support and consumer marketing expenses and (iii) an
accrual for anticipated costs of redeeming consumers' Vision Value Points
through the Company's gift catalog.
Depreciation and amortization are principally incurred in connection
with installed store equipment and, to a lesser extent, computers, development
and testing equipment, office equipment, furniture, fixtures and improvements.
Results of Operations
Three Months Ended May 25, 1996 and Three Months Ended May 27, 1995
REVENUES. Revenues were $986,000 in the three months ended May 25,
1996, as compared to $1,422,000 in the three months ended May 27, 1995.
Promotion revenues increased from 1995 to 1996 by approximately $74,000 due to
greater participation in the Vision Value Club by consumers , offset by a
decrease in revenue from manufacturers of $320,000, and a
decrease in installation revenues of $190,000.
DIRECT OPERATING EXPENSES. Direct operating expenses decreased to
$1,800,000 in the three months ended May 25, 1996, from $3,218,000 in the three
months ended May 27, 1995. The decrease is related principally from a decrease
of approximately $738,000 in the amount accrued for consumer redemption expense,
and also a decrease in other operating expenses due to a decrease in the
installed base of stores from 295 at May 27, 1995 to 219 at May 25, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In the three months
ended May 25, 1996, selling, general and administrative expenses were
$1,957,000, as compared to $3,437,000 in the three months ended May 27, 1995.
The decrease is primarily due to a decrease in salary and related expenses as a
result of the Company's effort to restructure the Company by eliminating several
management positions and consolidating functions where appropriate.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development
expenses were $120,000 in the three months ended May 25, 1996, and $247,000 in
the three months ended May 27, 1995. Current research and development expenses
relate to exploring alternative designs which would lower the average equipment
cost in the retail store.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was
$1,532,000 in the three months ended May 25, 1996 and $1,356,000 in the three
months ended May 27, 1995. Depreciation expense increased in 1996 as compared to
1995 as a result of the acceleration of depreciation of certain equipment being
phased out in fiscal 1996.
DEBT CONVERSION EXPENSE. In March, 1995, the Company and certain of
the subordinated convertible debt holders concluded an exchange of approximately
$11.2 million of outstanding subordinated debentures for 132,263 shares of the
Company's senior preferred stock. (See Note 5). In connection with this
exchange, the Company recorded in March, 1995 a non-cash debt conversion expense
of $3.5 million representing the fair value of all securities transferred in
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
the exchange in excess of the fair value of all securities issuable pursuant to
the original terms. A final valuation was made in the fourth quarter of fiscal
1995, and the debt conversion expense was increased from $3.5 million to $5
million.
EXTINGUISHMENT OF CONSUMER REDEMPTION LIABILITY. During the three
months ended May 25, 1996, the Company negotiated a settlement at a discount
with a continuing retailer to discontinue the point program at the end of June
1996. Through May 25, 1996, the gain to the Company is approximately $1 million.
OTHER INCOME (EXPENSE). Interest income was $28,000 in the three
months ended May 25, 1996, as compared to $53,000 in the three months ended May
27, 1995. Interest income varied based on the amount of cash available to invest
and fluctuating interest rates. Interest expense was $352,000 in the three
months ended May 25, 1996 as compared to $405,000 in the three months ended May
27, 1995. The decrease in 1996 was a result of the subordinated convertible
debenture conversion (see Footnote 5).
Six Months Ended May 25, 1996 and Six Months Ended May 27, 1995
REVENUES. Revenues were $1,894,000 in the six months ended May 25,
1996, as compared to $2,297,000 in the six months ended May 27, 1995. Promotion
revenues increased from 1995 to 1996 by approximately $286,000 due to greater
participation in the Vision Value Club by consumers, offset by a decrease in
revenue from manufacturers of $486,000, and a decrease in installation revenues
of $203,000.
DIRECT OPERATING EXPENSES. Direct operating expenses decreased to
$4,454,000 in the six months ended May 25, 1996, from $6,629,000 in the six
months ended May 27, 1995. The decrease is related principally from a decrease
of approximately $1,299,000 in the amount accrued for consumer redemption
expense and also a decrease in other operating costs due to a decrease in the
installed base of stores from 295 at May 27, 1995 to 219 at May 25, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In the six months ended
May 25, 1996, selling, general and administrative expenses were $3,876,000, as
compared to $6,642,000 in the six months ended May 27, 1995. The decrease is
primarily due to a decrease in salary and related expenses as a result of the
company's effort to restructure the Company by eliminating several management
positions and consolidating functions where appropriate.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development
expenses were $287,000 in the six months ended May 25, 1996, and $443,000 in the
six months ended May 27, 1995. Current research and development expenses relate
to exploring alternative designs which would lower the average equipment cost in
the retail store.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was
$2,795,000 in the six months ended May 25, 1996 and $2,655,000 in the six months
ended May 27, 1995. Depreciation expense increased in 1996 as compared to 1995
as a result of the acceleration of depreciation of certain equipment being
phased out in fiscal 1996.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DEBT CONVERSION EXPENSE. In March, 1995, the Company and certain of
the subordinated convertible debt holders concluded an exchange of approximately
$11.2 million of outstanding subordinated debentures for 132,263 shares of the
Company's senior preferred stock. (See Note 5). In connection with this
exchange, the Company recorded in March, 1995 a non-cash debt conversion expense
of $3.5 million representing the fair value of all securities transferred in the
exchange in excess of the fair value of all securities issuable pursuant to the
original terms. A final valuation was made in the fourth quarter 1995, and the
debt conversion expense was increased from $3.5 million to $5 million.
EXTINGUISHMENT OF CONSUMER REDEMPTION LIABILITY. During the first
three months of fiscal 1996, the Company de-installed approximately 79 stores,
resulting in the assumption of the consumer redemption liability by certain
retailers in the amount of approximately $2.7 million. Also, during the three
months ended May 25, 1996, the Company negotiated a settlement at a discount
with a continuing retailer to discontinue the point program at the end of June
1996. Through May 25, 1996, the gain to the company is approximately $1 million.
OTHER INCOME (EXPENSE). Interest income was $49,000 in the six months
ended May 25, 1996, as compared to $103,000 in the six months ended May 27,
1995. Interest income varied based on the amount of cash available to invest and
fluctuating interest rates. Interest expense was $639,000 in the six months
ended May 25, 1996 as compared to $952,000 in the six months ended May 27, 1995.
The decrease in 1996 was a result of the subordinated convertible debenture
conversion (see Footnote 5).
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June, 1996, the Company's sublessor, Modcomp / Cerplex, L.P., commenced an
action in the County Court of Broward County, Florida, to evict the Company from
its office facility. The Company has deposited all accrued rent in the registry
of the Court and intends to vigorously defend the action, asserting claims
against the sublessor based on the condition of the building.
ITEM 2. NOT APPLICABLE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company is in arrearage in the payment of dividends on the Series A
Preferred, Series B Preferred, and Senior Preferred Stock. As of May 25, 1996,
total dividends accrued but not paid to stockholders were approximately
$1,853,000.
The Company is in arrearage in lease payment to the lessor of equipment the
Company has installed in supermarkets. As of June 1, 1996, the Company was
deficient by approximately $1,090,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of Stockholders of Advanced Promotion Technologies, Inc. was
held on March 28, 1996.
The following proposal was submitted for adoption and was adopted by the votes
indicated (which constituted the affirmative vote of a majority of the
outstanding shares of voting stock).
Resolved, the amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of stock to 203,000,000 ( 200,000,000
authorized shares of Common Stock and 3,000,000 authorized shares of Preferred
Stock) is hereby approved and adopted.
For the proposal: 17,391,632 shares
Against the proposal: 2,011,027 shares
Abstaining: 407,801 shares
The number of shares of broker non-votes for the proposal was none.
The following proposal was submitted for adoption and was adopted by the votes
indicated ( which votes constitute a majority of the total votes cast on the
proposal by person or by proxy).
17
<PAGE>
PART II
OTHER INFORMATION
Resolved, the amendment to the Company's Stock Option Plan to increase the
number of shares available for awards under the plan from 2,250,000 to
22,500,000 and to change to the formula pursuant to which directors receive
awards by providing for the grant of options in lieu of cash compensation
currently paid to directors, to increase from three months to three years the
maximum period of time during which options awarded under the plan may be
exercised by directors who cease to be directors as a result of their failure to
be re-elected to or their resignation from the Board of Directors, and to
clarify that the term of each option granted to a director expires ten years
from the date of grant, unless it otherwise expires earlier in accordance with
the terms of the plan.
For the Proposal: 13,990,648
Against the Proposal: 5,361,611
Abstaining: 458,201
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
1. Asset Purchase Agreement and Mutual Release between the registrant
and Sunrise Leasing Corporation and Daiwa Bank, Limited.
2. Series C Certificate of Designation
3. Exhibit 27 - Financial Data Schedule (Electronic filing only)
b. Reports on form 8-K:
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Advanced Promotion Technologies, Inc.
(Registrant)
/s/ George R. Harrison 7/3/96
------------------------------------------ ------
George R. Harrison Date
President and Chief Operating Officer
/s/ Michael S. Luther 7/3/96
------------------------------------------- ------
Michael S. Luther, Director Date
Acting Principal Financial Officer
19
ASSET PURCHASE AGREEMENT AND MUTUAL RELEASE
This ASSET PURCHASE AGREEMENT AND MUTUAL RELEASE (the "Agreement") is
entered into as of the 11th day of June, 1996, between SUNRISE RESOURCES, INC.,
a Minnesota corporation, and Sunrise Leasing Corporation, a Minnesota
corporation (hereinafter collectively either "Sunrise" or "Seller"), whose
address is 5500 Wayzata Boulevard, Suite 725, Minneapolis, Minnesota 55415, The
Daiwa Bank, Limited, a banking association ("Daiwa") whose address is c/o The
Sumitomo Bank, Ltd., 4135 Multifoods Tower, 33 South Sixth Street, Minneapolis,
Minnesota 55402, and ADVANCED PROMOTION TECHNOLOGIES, INC., a Florida
corporation, (hereinafter either "APT" or "Buyer"), whose address is 3001 S.W.
10th St., Pompano Beach, Florida, 33069.
WHEREAS, Seller represents and warrants that it is the owner and Lessor
of that certain computer equipment and grocery store purchase tracking equipment
currently leased by Buyer, as Lessee, under that certain Master Lease Agreement
dated May 22, 1992, by and between Seller, as Lessor, and Buyer, as amended by
various schedules, modifications and amendments thereto (collectively the "Lease
Agreement") such equipment leased under the Lease Agreement is included on
Exhibit "A", attached hereto and incorporated herein for all purposes (the
"Equipment");
WHEREAS, Buyer represents and warrants that it is not the owner, but
rather is the Lessee, of the Equipment;
WHEREAS, pursuant to that certain Loan and Security Agreement, dated as
of February 7, 1995, by and between Sunrise, as borrower, and Daiwa as lender,
Sunrise borrowed from Daiwa the sum of $7,200,000 and pledged to Daiwa, to
secure repayment of such loan, the Equipment covered by certain Schedules under
1
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the Lease Agreement and assigned to Daiwa Sunrise's rights under the Lease
Agreement with respect to such Schedules, all as described in the documents
evidencing that transaction (the "Daiwa Agreement").
WHEREAS, included in the Daiwa Agreement is that certain Notice and
Acknowledgment of Assignment executed as of January 7, 1995 (the "APT
Acknowledgment"), pursuant to which APT, Sunrise and Daiwa memorialized the
consent of the parties to the pledge of the Equipment and the assignment to
Daiwa of the right to enforce Sunrise's rights under the Lease Agreement, in
accordance with the terms and conditions therein.
WHEREAS, Buyer is currently in default under the Lease Agreement;
WHEREAS, Buyer and Seller entered into that certain Letter Agreement
dated April
15, 1996 (the "Letter Agreement"), whereby Buyer agreed to purchase from Seller
all the Equipment free and clear of all Seller's liens, claims and encumbrances
for a purchase price of three million dollars ($3,000,000.00) and seven thousand
five hundred (7,500) shares of Series C preferred stock of Buyer;
WHEREAS, Seller agreed to make its best efforts to obtain a release
from Daiwa of Daiwa security interest under the Loan and Security Agreement and
any and all liens, claims, and encumbrances Daiwa has against APT;
WHEREAS, contemporaneously with giving effect to the consummation of
the transaction contemplated hereby, Seller has been successful in its efforts
to obtain a release of Daiwa's security interest in the Equipment and to obtain
for APT a release of Daiwa's claims against APT from all sources relating to the
2
<PAGE>
Equipment, and the Lease Agreement, including those arising from the Lease
Agreement, the Daiwa Agreement and the APT Acknowledgement except as otherwise
provided herein;
WHEREAS, under the Letter Agreement, Buyer and Seller mutually agreed
to release each other for any and all obligations which have arisen or may arise
under the Lease Agreement; and
WHEREAS, Seller desires to sell and Buyer desires to purchase the
Equipment under the terms and conditions set out in this Agreement.
NOW THEREFORE, for and in consideration of the premises and the mutual
benefits to be derived from the transaction, the receipt and sufficiency of
which are hereby acknowledged, Buyer agrees to purchase and receive from Seller
and Seller agrees to sell and convey to Buyer the Equipment under the following
terms and conditions:
1. TRANSFER OF PROPERTIES
----------------------
Upon the terms and subject to the conditions provided for in this
Agreement, Seller shall sell, assign and convey to Buyer and Buyer shall acquire
by July 31, 1996 or such other date as the parties may hereinafter agree to in
writing (hereinafter the "Closing Date") all of Seller's right, title and
interest to the Equipment free and clear of all liens, claims or encumbrances.
The form of the Assignment and Bill of Sale shall be as set out on Exhibit "B"
attached hereto and incorporated herein for all purposes.
2. PURCHASE PRICE
--------------
Buyer shall pay three million dollars ($3,000,000) by wire transfer in
immediately available funds to Daiwa for Seller's account on the Closing Date.
In addition, Buyer shall issue to Seller seven thousand five hundred (7,500)
shares of Series C preferred stock (the
3
<PAGE>
"Stock") as described on Exhibit "C" attached hereto. The aforementioned cash
and Stock collectively shall be the "Purchase Price". Such Purchase Price shall
be payable subject to the conditions to Closing being completed by the
appropriate parties hereto.
3. REPRESENTATIONS AND WARRANTIES BY SELLER
----------------------------------------
Seller hereby represents and warrants that as of the Closing Date:
a. Seller (i) is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Minnesota with power and
authority to own all of its properties and assets and to carry on its business
as it is now being conducted, and (ii) Seller has taken all action required by
law, and, by the Closing Date, Seller will have taken all action required by its
certificate of incorporation and bylaws or otherwise to authorize the execution
and delivery of this Agreement.
b. There are no actions, suits or proceedings pending or, to the
knowledge of Seller, threatened against or affecting Seller, the Equipment, or
Seller's business involving the possibility of any judgment or liability which
may result in any material adverse change in the Equipment which would prevent
or hinder Seller in the consummation of the transactions contemplated hereby.
c. Seller is the owner and lessor of the Equipment and has not, prior
to the date hereof, sold, assigned or otherwise hypothecated any of the rights
or properties which comprise any part of the Equipment, nor has Seller created
or suffered to exist any liens, mortgages or other encumbrances which, as of the
Closing Date after giving effect to the consummation of the transaction
contemplated hereby, have not been satisfied or discharged.
4
<PAGE>
d. Seller understands that the shares of Stock have not been registered
under the Securities Act of 1933, as amended (the "Act") or the securities laws
of any state, based upon an exemption from such registration requirements for
non-public offerings pursuant to Regulation D under the Act or other exemptions
thereunder.
e. Seller understands that the shares of Stock are and will be
"restricted securities," as said term is defined in Rule 144 of the Rules and
Regulations promulgated under the Act.
f. Seller understands that the shares of Stock may not be sold or
otherwise transferred unless they have been first registered under the Act and
all applicable state securities laws, or unless exemptions from such
registration provisions are available with respect to said resale or transfer.
g. Seller is acquiring the Stock solely for its own account, for
investment purposes only, and not with a view towards the resale or distribution
thereof.
h. Seller will not sell or otherwise transfer any of the shares of
Stock or any interest therein, unless and until (A) said shares shall have the
first registered under the Act and all applicable state securities laws; or (B)
Seller shall have first delivered to Buyer a written opinion of counsel (which
counsel and opinion shall be reasonably satisfactory to Buyer) to the effect
that the proposed sale or transfer is exempt from the registration provisions of
the Act and all applicable state securities laws.
i. Seller is an "accredited investor," as such term is defined in
Regulation D of the Rules and Regulations promulgated under the Act.
j. Seller has received and carefully reviewed (A) Buyer's Annual
Report to shareholders and its report on Form 10-K, as amended, for the fiscal
5
<PAGE>
year ended November 26, 1994, its Form 8-K filed with the Securities and
Exchange Commission (the "SEC") on March 17, 1995, its quarterly report on Form
10-Q for the period ended February 24, 1996, and its proxy statement dated
February 9, 1996 filed with the SEC (collectively, the "SEC Reports"), (B) the
Risk Factors and Description of Capital Stock and other Securities relating to
Buyer dated as of May, 1996 (the "Risk Factors") previously delivered to Seller
and (C) the Certificate of Designation for the Series C Preferred Stock.
k. Seller has had a reasonable opportunity to ask questions of and
receive answers from Buyer concerning Buyer, and all such questions, if any,
have been answered to the full satisfaction of the Seller.
4. REPRESENTATIONS AND WARRANTIES OF DAIWA
---------------------------------------
Daiwa hereby represents and warrants:
a. Daiwa has taken all action required by law and, by the Closing Date,
Daiwa will have taken all action required by its charter and bylaws or otherwise
to authorize the execution, and delivery of this Agreement.
b. Except as set forth in the SEC Reports and the Risk Factors, there
are no actions, suits or proceedings pending or, to the knowledge of Daiwa,
threatened against or affecting Daiwa, its assets, or its business involving the
possibility of any judgment or liability which would prevent or hinder Daiwa in
the consummation of the transactions contemplated hereby.
c. To the best of Daiwa's knowledge, the attached Exhibit "D" is a full
and complete list of all U.C.C. 1's filed by Daiwa against the Equipment.
6
<PAGE>
5. REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants:
a. Buyer (i) is a corporation duly formed, validly existing and in good
standing under the laws of Florida with power and authority to own all of its
properties and assets and to carry on its business as it is now being conducted
and (ii) Buyer has taken all action required by law, and by the Closing Date,
Buyer will have taken all action required by its certificate of incorporation
and bylaws or otherwise to authorize the execution and delivery of this
Agreement.
b. There are no actions, suits or proceedings pending or, to the
knowledge of Buyer, threatened against or affecting Buyer, its assets, or its
business involving the possibility of any judgment or liability which may result
in any material adverse change in such business or which would prevent or hinder
Buyer in the consummation of the transactions contemplated hereby.
c. Buyer's execution, delivery and performance of this Agreement and
the issuance of the Stock hereunder are being given in exchange for fair and
equivalent consideration in an arm's length transaction between a willing seller
and a willing buyer, neither being under any compulsion.
d. The sole source of funds for the payment of the $3,000,000 portion
of the Purchase Price are the proceeds from the sale of Series C Preferred Stock
by Buyer.
e. Buyer's execution, delivery and performance of this Agreement and
the issuance by the Buyer of the Stock hereunder, will result in legally binding
obligations of the Company enforceable against the Buyer in accordance with the
terms and provisions hereof and of the Certificate of Designation, Rights and
Preferences relating to the Stock, a true
7
<PAGE>
and correct copy of which is attached hereto as Exhibit "C" and is incorporated
herein by reference (the "Series C Certificate of Designation") and the Stock is
entitled to the rights, privileges and preferences set forth in the Series C
Certificate of Designation.
f. Upon its issuance under the circumstances set forth in this
Agreement, the Stock will be duly authorized, validly issued, fully paid and non
- - -assessable.
g. In connection with the issuance of the Stock under the circumstances
set forth in this Agreement, and based upon Seller's representation in Section
3, it is not necessary to register the Stock under the Securities Act of 1933,
as amended, or any state blue sky law.
6. TERMS FOR CLOSING
-----------------
The closing ("Closing") shall occur on the Closing Date by 5:00 p.m
C.S.T. or at such other time as the parties may hereafter agree upon in writing.
Closing shall be accomplished by delivery of the following documents to the
designated party hereto.
a. Seller shall deliver to Buyer the following:
(i) Assignment and Bill of Sale from Seller to Buyer
transferring the Equipment free and clear of all
liens, claims and encumbrances.
(ii) U.C.C. 3's releasing any and all liens, claims or
encumbrances Seller has a against the Equipment
including, without limitation, the liens in favor of
Daiwa.
(iii) Any and all other documentation to adequately and
fully release all liens, claims and encumbrances
Seller has against the Equipment.
8
<PAGE>
b. Daiwa shall deliver to Buyer the following:
(i) U.C.C 3's releasing any and all liens, claims or
encumbrances Daiwa has against the Equipment.
(ii) Any and all other documentation to adequately and
fully release all liens, claims and encumbrances
Daiwa has against the Equipment.
c. Buyer shall deliver to Seller:
(i) $3,000,000 by wire transfer of immediately available
funds to Daiwa at:
The Sumitomo Bank, Ltd.
ABA Number 071001850
for credit account of The Daiwa Bank, Ltd.
Tokyo A/C Number 010021413
Reference: Sunrise Resources
(ii) the Stock along with blank stock powers representing
such shares of stock.
(iii) a copy of Buyer's articles of incorporation and a
certificate, dated not more than ten (10) days prior
to the Closing Date, of the Florida Secretary of
State as to Buyer's corporate good standing in such
state;
(iv) records of all corporate action taken by Buyer to
authorize the execution, delivery and performance of
this Agreement and the issuance of the Stock
certified by a duly authorized officer thereof to be
true and complete as of the Closing Date;
(v) an incumbency certificate, dated as of the Closing
Date, signed by a duly authorized officer of Buyer
and giving the name and bearing a specimen signature
of each individual who shall be authorized to sign,
in the name and on behalf of Buyer, this Agreement
and the Stock;
9
<PAGE>
(vi) a closing certificate executed by an authorized
officer of Buyer to the effect that the
representations and warranties contained herein are
true and correct on the Closing Date immediately
prior to the completion of the transactions
contemplated by this Agreement.
After the Closing, Seller, Daiwa and Buyer agree to execute and deliver
from time to time at the reasonable request of the other all such further
instruments of conveyance, assignment and further assurances and perform all
such other acts as may reasonably be required to satisfy the obligations of the
parties hereto but no party shall be obligated to perform if such further acts
impose any unreasonable cost or expense on the party being requested to perform.
Should APT file bankruptcy and the payment of the Purchase Price to
Sunrise be finally adjudicated as preferential, upon repayment of the Purchase
Price, all releases granted under Section 8 hereunder shall be null and void ab
initio.
7. CONDITIONS TO PAYMENT OBLIGATIONS OF BUYER FOR CLOSING
------------------------------------------------------
a. The obligations at Closing of Buyer is subject, at the option
of Buyer, to the satisfaction at or prior to the Closing Date of the following
conditions:
(i) All representations and warranties of Seller and
Daiwa contained in this Agreement shall be true at
and as of the Closing Date, as if such
representations and warranties were made at and as of
the Closing Date, and Seller and Daiwa shall have
performed and satisfied all covenants and agreements
required by this Agreement to be performed and
satisfied by Seller and Daiwa at or prior to the
Closing Date;
10
<PAGE>
(ii) No action, proceeding, inquiry or investigation by
any governmental body or agency shall have been
brought or threatened (and shall not have been fully
disposed of) which questions the validity or legality
of he transactions effectuated by this Agreement; and
(iii) Buyer has raised four million dollars ($4,000,000) by
means of a public offering as described within the
offering memorandum attached hereto and incorporated
herein as Exhibit "E".
b. The respective obligations at Closing of Seller and Daiwa are
subject, at option of Seller and Daiwa (each acting for itself), to the
satisfaction at or prior to the Closing Date of the following conditions:
(i) Daiwa and Seller have completed and documented their
restructuring of the Daiwa Agreement to the mutual
satisfaction of Daiwa and Seller.
8. MUTUAL RELEASE
--------------
a. Buyer, contemporaneously with the consummation of the Closing of the
transactions described in Section 6 hereof, does hereby release and discharge
Seller and Daiwa from any and all rights, claims, actions, amounts, demands,
contracts, debts, controversies, agreements, lawsuits, damages, land causes of
action of every nature and description, whether known or unknown, suspected or
unsuspected, actual or potential, contingent or otherwise, which Buyer has ever
11
<PAGE>
had or which it now has against Seller or Daiwa by reason of any matter,
controversy or thing arising from or in any way derived from the Lease
Agreement, together with any amendments, supplements and schedules thereto; the
Daiwa Agreement and any other agreements or obligations by and between the
parties hereto, save and except claims for breach of this Agreement.
b. Subject to the last sentence of Section 6 hereof, Seller,
contemporaneously with the consummation of the Closing of the transactions
described in Section 6 hereof, does hereby release and discharge Buyer from any
and all rights, claims, actions, amounts, demands, contracts, debts,
controversies, agreements, lawsuits, damages, liabilities and causes of action
of every nature and description, whether known or unknown, suspected or
unsuspected, actual or potential, contingent or otherwise, which Seller has ever
had or which it now has against Buyer by reason of any matter, controversy or
thing arising from or in any way derived from or relating to the Lease
Agreement, together with any amendments, supplements and schedules thereto; the
Daiwa Agreement and any other agreements or obligations by and between the
parties hereto, save and except claims for breach of this Agreement.
c. Subject to the last sentence of Section 6 hereof, Daiwa,
contemporaneously with the consummation of the Closing of the transactions
described in Section 6 hereof, does hereby release and discharge Buyer from any
and all rights, claims, actions, amounts, demands, contracts, debts,
controversies, agreements, lawsuits, damages, liabilities and causes of action
of every nature and description, whether known or unknown, suspected or
unsuspected, actual or potential, contingent or otherwise, which Daiwa has ever
had or which it now has against Buyer by reason of any matter, controversy or
thing arising from or in any way derived from or relating to the Lease
12
<PAGE>
Agreement, together with any amendments, supplements and schedules thereto; the
Daiwa Agreement, the APT Acknowledgement and any other agreements or obligations
by and between the parties hereto, save and except claims for breach of this
Agreement.
9. MISCELLANEOUS
-------------
a. Any notices required or permitted hereunder shall be sufficiently
given if in writing and hand delivered or sent by registered or certified mail,
postage prepaid, addressed to an officer of the party to be notified, at the
following addresses:
Seller: Sunrise Resources, Inc.
5500 Wayzata Boulevard, Suite 725
Minneapolis, Minnesota 55415
Buyer: Advanced Promotion Technologies, Inc.
3001 S.W. 10th St.
Pompano Beach, Florida 33069
Daiwa: The Daiwa Bank, Limited
c/o The Sumitomo Bank, Ltd.
4135 Multifoods Tower
33 South Sixth Street
Minneapolis, Minnesota 55402
or such other address as shall be specified in writing by either party in the
names provided hereunder, and any such notice shall be deemed given as of the
date so mailed or hand delivered.
b. This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns. No party may
assign its rights, title or interest hereunder, without the written consent of
the other party hereto except that Sunrise may grant a security interest in this
Agreement without obtaining Buyer's consent. No assignment provided for
hereunder shall in any way operate to enlarge, alter or change any obligation of
13
<PAGE>
the other party hereto nor shall the assignor be relieved of its obligations
hereunder without the express written consent of the non-assigning parties.
c. The section and other headings contained in this Agreement are for
reference only and shall not affect in any way the meaning or interpretation of
this Agreement.
d. The representations and warranties of the parties contained herein
and the covenants and obligations of the partes to be performed after the
Closing Date shall all survive the Closing Date and the delivery of all
documents in connection therewith.
e. Time is of the essence of this Agreement.
f. This Agreement supersedes and replaces that certain Letter Agreement
dated April 15, 1996 by and between the Buyer and Seller. Furthermore, this
Agreement constitutes the entire agreement between the parties concerning the
subject matter hereof and there are no agreements, modifications, conditions or
understandings, written or oral, express or implied, pertaining to the subject
matter hereof which are not contained herein. No amendment, modification or
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto.
g. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of Minnesota, excluding any law which would apply the
law of another jurisdiction.
h. This Agreement shall be subject to all valid and applicable laws,
orders, directives, rules and regulations of any duly constituted governmental
body, official, or agency having jurisdiction.
14
<PAGE>
i. In the event of any conflict or inconsistency between the terms of
this Agreement and the terms of the documents attached hereto as Exhibits, this
Agreement shall control.
j. AT THE OPTION OF SUNRISE OR DAIWA, THIS AGREEMENT MAY BE ENFORCED IN
ANY FEDERAL COURT OF MINNESOTA STATE COURT SITTING IN MINNEAPOLIS OR ST. PAUL,
MINNESOTA; AND BUYER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT
AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE
EVENT BUYER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT
OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED
BY THIS AGREEMENT, SUNRISE AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE
TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH
TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE
DISMISSED WITHOUT PREJUDICE.
k. EACH PARTY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (i) UNDER THIS AGREEMENT OR UNDER ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (ii) ARISING FROM ANY
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY
SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
15
<PAGE>
l. This Agreement may be executed in multiple counterparts and by
separate parties in separate counterparts, either via facsimile or in the
original, each of which shall be deemed an original and all of which taken
together shall be one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ATTEST: SUNRISE RESOURCES, INC.
/s/Signature By:/s/Errol Carlstrom
- - -------------------------------- -----------------------------------
Corporate Secretary
Title: President & Chief Operating
Officer
ATTEST: SUNRISE LEASING CORPORATION
/s/Signature By:/s/Errol Carlstrom
- - -------------------------------- -----------------------------------
Corporate Secretary
Title: President $ Chief Operating
Officer
ATTEST: ADVANCED PROMOTION TECHNOLOGIES
/s/Signature By:/s/Michael S. Luther
- - -------------------------------- -----------------------------------
Corporate Secretary
Title: Vice Chairman
16
<PAGE>
THE DAIWA BANK, LIMITED
By:/s/Signature
----------------------------------
Title: Attorney-In-Fact
17
<PAGE>
STATE OF MINNESOTA
COUNTY OF HENNOPIN.
Before me, the undersigned authority, a Notary Public in and for the
State of Minnesota, on this day personally appeared ERROL CARLSTROM of SUNRISE
RESOURCES, INC., a Minnesota corporation, known to me to be the person whose
name is subscribed to the foregoing instrument, and acknowledged to me that he
executed the same for the purposes and consideration therein expressed, in the
capacity therein stated, and as the act and deed of said corporation.
"SEAL"
/s/Signature
--------------------------
Notary Public in and for
the State of Minnesota
STATE OF MINNESOTA
COUNTY OF HENNOPIN
Before me, the undersigned authority, a Notary Public in and for the
State of Minnesota, on this day personally appeared ERROL CARLSTROM of SUNRISE
LEASING CORPORATION, a Minnesota corporation, known to me to be the person whose
name is subscribed to the foregoing instrument, and acknowledged to me that he
executed the same for the purposes and consideration therein expressed, in the
capacity therein stated, and as the act and deed of said corporation.
"SEAL"
/s/Signature
--------------------------
Notary Public in and for
the State of Minnesota
18
<PAGE>
STATE OF NEBRASKA
COUNTY OF DOUGLAS
Before me, the undersigned authority, a Notary Public in and for the
State of NEBRASKA, on this day personally appeared MICHAEL S. LUTHER of Advanced
Promotion Technologies, Inc., a Florida corporation, known to me to be the
person whose name is subscribed to the foregoing instrument, and acknowledged to
me that he executed the same for the purposes and consideration therein
expressed, in the capacity therein stated, and as the act and deed of said
partnership.
"SEAL"
/s/Signature
--------------------------
Notary Public in and for
the State of NEBRASKA
STATE OF NEW YORK
COUNTY OF NEW YORK
Before me, the undersigned authority, a Notary Public in and for the
State of NEW YORK, on this day personally appeared JUN OKUAA, the
Attorney-In-Fact of The Daiwa Bank, Limited, a _____________ , known to me to be
the person whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same for the purposes and consideration
therein expressed, in the capacity therein stated, and as the act and deed of
said partnership.
/s/Signature
--------------------------
Notary Public in and for
the State of NEW YORK
"SEAL"
19
CERTIFICATE OF DESIGNATIONS
OF SERIES C PREFERRED STOCK
OF
ADVANCED PROMOTION TECHNOLOGIES, INC.
Advanced Promotion Technologies, Inc. (the "Corporation"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify:
That, pursuant to authority conferred upon by the Board of Directors by
the Corporation's Certificate of Incorporation, as amended, and pursuant to the
provisions of Section 151 of the Delaware Corporation Law, said Board of
Directors, acting by a meeting of the Directors held on April 16, 1996, hereby
adopted the terms of the Series C Preferred Stock, which resolutions are set
forth on the attached page.
/s/George Harrison
-----------------------------
George Harrison,
President
<PAGE>
RESOLUTION FIXING AND DETERMINING THE TERMS
OF THE
SERIES C PREFERRED STOCK
OF
ADVANCED PROMOTION TECHNOLOGIES, INC.
WHEREAS, it is in the best interests of ADVANCED PROMOTION TECHNOLOGIES,
INC., a Delaware corporation (the "Corporation"), to issue and sell up to
300,000 shares of its preferred stock (the "Preferred Stock"), $0.01 par value,
set forth herein upon terms and conditions approved by the Board of Directors of
the Corporation (the "Board"); and
WHEREAS, Article Fourth of the Corporation's Restated Certificate of
Incorporation (the "Certificate of Incorporation") authorizes the Board to cause
the issuance of preferred stock in one or more series, with the number of
shares, the stated value and the dividend rate, if any, and the preferences and
relative, participating and special rights and the qualifications, limitations
or restrictions to be fixed in the case of each such series by resolution of the
Board;
NOW, THEREFORE, BE IT RESOLVED, that the Corporation issue and sell up to
300,000 shares of a series of Preferred Stock which shall be designated Series C
Preferred Stock ("Series C Preferred"), at a price of $100.00 per share to have
the preferences and rights and the qualifications, limitations or restrictions
hereinafter set forth in this resolution:
1. PREFERENCES. Except as otherwise provided herein and except with
respect to the Corporation's currently outstanding Senior Preferred Stock,
Series A Preferred Stock and Series B Preferred Stock, the preferences of each
share of Series C Preferred with respect to dividend payments and to
distributions of the Corporation's Property upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation shall be equal to the
preferences of every other share of Preferred Stock from time to time
outstanding in every respect and prior in right to such preferences of all other
equity securities of the Corporation, whether now or hereafter authorized.
2. VOTING RIGHTS. Except as otherwise provided herein, in the Certificate
of Incorporation or By-laws of the Corporation or by law, the holders of Series
C Preferred, by virtue of their ownership thereof, shall be entitled to cast the
number of votes per share thereof on each matter submitted to the Corporation's
stockholders for voting which equals the number of votes which could be cast by
the holders of the number of shares of Common Stock into which such shares of
Series C Preferred could be converted pursuant to Section 5 hereof immediately
prior to the taking of such vote. Such vote shall be cast together with those
cast by the holders of Common Stock and other series of Preferred Stock and not
as a separate class except as otherwise provided herein, in the Certificate of
Incorporation or By-laws of the Corporation or by law. The Series C Preferred
shall not have cumulative voting rights.
3. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time any Series C
Preferred shall be outstanding and the account of the Corporation pursuant to a
registration statement under the Securities Act filed with and declared
<PAGE>
effective by the Securities and Exchange Commission, the holders of the then
outstanding Series C Preferred shall have a preference against the Property of
the Corporation available for distribution to the holders of the Corporation's
equity securities equal to the amount of $100.00 per share, together with an
amount equal to all unpaid dividends accrued thereon to the date of payment of
such preference (the "Preferential Amount"), whether or not funds of the
Corporation are legally available therefor and whether or not declared by the
Board after payment to the holders of the then outstanding Senior Preferred
Stock, Series A Preferred Stock and Series B Preferred Stock. In addition, the
holders of the Series C Preferred shall be entitled to receive a participating
share of any further assets available for distribution to holders of Common
Stock, whether by reason of declared and unpaid dividends or otherwise, which
participating share shall be the same as that which such holders would have been
entitled to receive if, on the record date for determining the recipients of
such distributions, such holders were the holders of record of the numbers of
shares of Common Stock into which the outstanding shares of Series C Preferred
were then convertible. For purposes of this Section 3, the merger or
consolidation of the Corporation or the sale of all or substantially all of the
Corporation's assets shall, in and of themselves, be deemed to be a liquidation,
dissolution or winding up of the Corporation. Notwithstanding the foregoing, the
holders of Series C Preferred shall not be entitled to the Preferential Amount
in the event a dissolution, liquidation or winding up of the Corporation or a
merger or consolidation of the Corporation or the sale of all or substantially
all of the Corporation's assets would result in the holders of Series C
Preferred receiving not less than $100.00 per share, without taking into
consideration the Preferential Amount.
Subject to Section 6 hereof, all of the preferential amounts to be paid to
the holders of Series C Preferred as provided in this Section 3 shall be paid or
set apart for payment simultaneously with preferential amounts to be paid or set
apart for payment with respect to all other shares of Preferred Stock
outstanding, and before the payment or setting apart for payment of any amount
for, or the distribution of any Property of the Corporation to, the holders of
any other equity securities of the Corporation, whether now or hereafter
authorized, in connection with such liquidation, dissolution or winding up.
4. DIVIDENDS. Holders of record of shares of Series C Preferred, out of
funds legally available therefor, shall be entitled to receive dividends on
their shares, which dividends shall accrue at the rate per share of 6% per annum
of the stated amount of $100.00 ($6.00 per share per year for each full year)
commencing on the date of issuance, in cash or, at the option of the
Corporation, by the issuance of that number of whole shares of Series C
Preferred computed by dividing the amount of the dividend by the stated amount
of $100.00, dated the date such dividend is payable. Dividends on shares of
Series C Preferred shall be cumulative, and no dividends or other distributions
shall be paid or declared and set aside for payment on the Common Stock or any
other capital stock of the Corporation ranking junior to the Series C Preferred
until full cumulative dividends on all outstanding shares of Series C Preferred
shall have been paid or declared and set aside for payment. Dividends shall be
payable in arrears, at the rate of $1.50 per share for each full calendar
quarter on each February 28, May 31, August 31 and November 30 of each calendar
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<PAGE>
year, to the holders of record of the Series C Preferred as they appear on the
stock record books of the Corporation on such record dates not more than sixty
(60) nor less than ten (10) days preceding the payment dates thereof, as shall
be fixed by the Board of Directors of the Corporation or a duly authorized
committee thereof; provided, however, that the initial dividend for the Series C
Preferred shall accrue for the period commencing the date of issuance through
August 31, 1996. If, in any quarter, insufficient funds are available to pay
such dividends as are then due and payable with respect to the Series C
Preferred and all other classes and series of capital stock ranking in parity
therewith (or such payment is otherwise prohibited by provisions of the General
Corporation Law of Delaware as then in effect), such funds (or shares of Series
C Preferred) as are legally available to pay such dividends shall be paid to the
holders of the Series C Preferred and to the holders of such other classes and
series of capital stock, on a PRO RATA basis as provided in Section 6, in
accordance with the rights of each such holder, and the balance of accrued but
undeclared and/or unpaid dividends shall be declared and paid on the next
succeeding dividend date to the extent that funds (or shares of Series C
Preferred) are then legally available for such purpose. Each reference herein to
the Common Stock includes each other class or series of capital stock, if any,
ranking junior to the Series C Preferred that may be authorized from time to
time.
5. CONVERSION.
(A) GENERAL. For the purposes of conversion, the Series C Preferred
shall be valued at $100.00 per share ("Value"), and, if converted, the Series C
Preferred shall be converted into shares of Common Stock (the "Conversion
Stock") at the price per share of $0.25 per share of Conversion Stock
("Conversion Price"), subject to adjustment pursuant to the provisions of this
Section 5.
(B) RIGHT TO CONVERSION. At any time from and after December 1,
1996, any holder of Series C Preferred shall have the right, at such holder's
option, to convert such shares into Conversion Stock.
(C) METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW SERIES C PREFERRED;
TRANSFER AND EXCHANGE. The conversion right granted by Section 5(B) hereof may
be exercised, in whole or in part, by the surrender of the stock certificate or
stock certificates representing Series C Preferred to be converted at the
principal office of the Corporation (or at such other place as the Corporation
may designate in a written notice sent to the holder by first-class mail,
postage prepaid, at its address shown on the books of the Corporation)
accompanied by written notice of election to convert against delivery of that
number of whole shares of Common Stock as shall be computed by dividing (1) the
aggregate Value of the Series C Preferred so surrendered by (2) the Conversion
Price in effect at the time of such surrender. At the time of conversion of a
share of Series C Preferred, the Corporation shall pay in cash to the holder
thereof an amount equal to all unpaid dividends accrued thereon to the date of
conversion, or at the Corporation's option additional shares of Common Stock
calculated based on the assumption that the unpaid dividends were satisfied by
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<PAGE>
the issuance of additional shares of Series C Preferred which were surrendered
for conversion, whether or not funds of the Corporation are legally available
therefor and whether or not declared by the Board. Each Series C Preferred stock
certificate surrendered for conversion shall be endorsed by its holder. In the
event of any exercise of the conversion right of the Series C Preferred granted
herein, (i) stock certificates for the shares of Common Stock purchased by
virtue of such exercise shall be delivered to such holder forthwith, and (ii)
unless the Series C Preferred has been fully converted, a new Series C Preferred
stock certificate, representing the Series C Preferred not so converted, if any,
shall also be delivered to such holder forthwith. The stock certificates for the
shares of Common Stock so purchased shall be dated the date of such surrender
and the holder making such surrender shall be deemed for all purposes to be the
holder of the shares of Common Stock so purchased as of the date of such
surrender.
(D) MANDATORY CONVERSION. Upon the consummation of any sale of Common
Stock by the Corporation to underwriters for the account of the Corporation
pursuant to a registration statement under the Securities Act filed with and
declared effective by the Securities and Exchange Commission, provided the
offering results in the receipt by the Corporation of proceeds of not less than
$12,500,000 at a per share price of not less than $3.00 per share (the
"Qualified Public Offering"), all of the shares of Series C Preferred
outstanding shall be converted without any further action on the part of the
Corporation or the holders of such Series C Preferred ("Mandatory Conversion")
into a number of shares of Common Stock as shall be computed by dividing (1) the
aggregate Value of the Series C Preferred so surrendered by (2) the Conversion
Price in effect at the time of such surrender. At the time of Mandatory
Conversion, the Corporation shall pay in cash to each holder thereof an amount
equal to all unpaid dividends accrued thereon to the date of Mandatory
Conversion, or at the Corporation's option additional shares of Common Stock
calculated based on the assumption that the unpaid dividends were satisfied by
the issuance of additional shares of Series C Preferred which were surrendered
for conversion, whether or not funds of the Corporation are legally available
therefor and whether or not declared by the Board. Notice shall be mailed within
ten (10) business days following the first sale of Common Stock by the
Corporation pursuant to the Qualified Public Offering to each holder of Series C
Preferred Stock by first-class mail, postage prepaid, to such holder's most
current address shown on the books of the Corporation. Such notice shall specify
the date on which Mandatory Conversion occurred and call upon such holder to
surrender to the Corporation, in the manner and at the place designated in such
notice, the certificate or certificates representing the shares of Series C
Preferred so converted. In the event of Mandatory Conversion, the Corporation
shall forthwith transmit to each holder of Series C Preferred upon surrender of
the certificate(s) representing such shares, stock certificates for the shares
of Common Stock issued as a result thereof, dated the date of Mandatory
Conversion, and such holder shall be deemed for all purposes to be the holder of
such Common Stock as of the date of Mandatory Conversion.
(E) OPTIONAL CONVERSION. At any time, if the market price for the
Common Stock shall be $3.00 or more, the Corporation may, at its sole option,
but shall not be obligated to, convert all or any number of shares held by any
holder of Series C Preferred into a number of fully paid and non-assessable
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<PAGE>
shares of the Corporation's Common Stock as shall be computed by dividing (1)
the aggregate Value of the Series C Preferred so surrendered by (2) the
Conversion Price in effect at the time of such surrender. At the time of
Optional Conversion, the Corporation shall pay in cash to each holder thereof an
amount equal to all unpaid dividends accrued thereon to the date of Optional
Conversion, or at the Corporation's option additional shares of Common Stock
calculated based on the assumption that the unpaid dividends were satisfied by
the issuance of additional shares of Series C Preferred which were surrendered
for conversion, whether or not funds of the Corporation are legally available
therefor and whether or not declared by the Board. Notice of the exercise by the
Corporation of the Optional Conversion shall be mailed to each holder of Series
C Preferred Stock by first-class mail, postage prepaid, to such holder's most
current address shown on the books of the Corporation. Such notice shall specify
the call upon such holder to surrender to the Corporation, in the manner and at
the place designated in such notice, the certificate or certificates
representing the shares of Series C Preferred so converted. In the event of
Optional Conversion, the Corporation shall forthwith transmit to such holder of
Series C Preferred upon surrender of the certificate(s) representing such shares
endorsed by such holder, stock certificates for the shares of Common Stock
issued as a result thereof, dated the date of Mandatory Conversion, and such
holder shall be deemed for all purposes to be the holder of such Common Stock as
of the date of Mandatory Conversion. For the purpose of this Section 5, "market
price" means the average of the daily closing prices of Common Stock for a
period of 15 out of 20 consecutive trading days preceding the date of the notice
of Optional Conversion. The closing price for each trading day shall be (i) for
any period during which the Common Stock shall be listed for trading on a
national securities exchange, the last reported sale price per share of Common
Stock as reported by the primary stock exchange if the Common Stock is traded on
a national stock exchange, or the Nasdaq Stock Market, if the Common Stock is
quoted on the Nasdaq Stock Market or (ii) if last sales price information is not
available, the average closing bid price of Common Stock as reported by the
Nasdaq Stock Market, or if not so listed or reported, then as reported by
National Quotation Bureau, Incorporated, or (iii) in the event neither clause
(i) nor (ii) is applicable, the average of the closing bid and asked prices as
furnished by any member of the National Association of Securities Dealers, Inc.
selected from time to time by the Corporation for that purpose.
(F) STOCK FULLY PAID; RESERVATION OF Shares. All shares of Common
Stock which may be issued upon conversion of Series C Preferred will, upon
issuance, be duly issued, fully paid and nonassessable and free from all taxes,
liens, and charges with respect to the issue thereof. At all times that any
Series C Preferred is outstanding, the Corporation shall have authorized, and
shall have reserved for the purpose of issuance upon such conversion, a
sufficient number of shares of Common Stock to provide for the conversion into
Common Stock of all Series C Preferred then outstanding at the then effective
Conversion Price. Without limiting the generality of the foregoing, if, at any
time, the Conversion Price is decreased, the number of shares of Common Stock
authorized and reserved for issuance upon the conversion of the Series C
Preferred shall be proportionately increased.
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<PAGE>
(G) ADJUSTMENT OF CONVERSION PRICE AND NUMBER OF SHARES. The number
of shares of Common Stock issuable upon conversion of Series C Preferred and the
Conversion Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(1) RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of any
reclassification or change of outstanding Common Stock issuable upon conversion
of Series C Preferred (other than a change in par value, or from par value to no
par value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any consolidation or merger of the Corporation with
or into another corporation (other than a merger with another corporation in
which the Corporation is the surviving corporation and which does not result in
any reclassification or change -- other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination -- of outstanding Common Stock issuable upon such
conversion) the rights of the holders of the outstanding Series C Preferred
shall be adjusted in the manner described below:
(a) In the event that the Corporation is the surviving
corporation, the Series C Preferred shall, without payment of additional
consideration therefor, be deemed modified so as to provide that upon conversion
thereof the holder of the Series C Preferred being converted shall procure, in
lieu of each share of Common Stock theretofore issuable upon such conversion,
the kind and amount of shares of stock, other securities, money and Property
receivable upon such reclassification, change, consolidation or merger by the
holder of one share of Common Stock issuable upon such conversion had conversion
occurred immediately prior to such reclassification, change, consolidation or
merger. The Series C Preferred shall be deemed thereafter to provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 5. The provisions of this clause (a)
shall apply in the same manner to successive reclassifications, changes,
consolidations and mergers.
(b) In the event that the Corporation is not the surviving
corporation, the surviving corporation shall, without payment of any additional
consideration therefor, issue new Series C Preferred, providing that upon
conversion thereof, the holder thereof shall procure in lieu of each share of
Common Stock theretofore issuable upon conversion of the Series C Preferred, the
kind and amount of shares of stock, other securities, money and Property
receivable upon such reclassification, change, consolidation or merger by the
holder of one share of Common Stock issuable upon conversion of the Series C
Preferred had such conversion occurred immediately prior to such
reclassification, change, consolidation or merger. Such new Series C Preferred
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 5. The provisions of
this clause (b) shall apply in the same manner to successive reclassifications,
changes, consolidations and mergers.
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<PAGE>
(2) SUBDIVISION OR COMBINATION OF SHARES. If the Corporation,
at any time while any of the Series C Preferred is outstanding, shall subdivide
or combine its Common Stock, the Conversion Price shall be proportionately
reduced, in case of subdivision of shares, as of the effective date of such
subdivision, or if the Corporation shall take a record of holders of its Common
Stock for the purpose of a subdividing, as of such record date, whichever is
earlier, or shall be proportionately increased, in the case of combination of
shares, as of the effective date of such combination or, if the Corporation
shall take a record of holders of its Common Stock for the purpose of so
combining, as of such record date, whichever is earlier.
(3) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Corporation,
at any time while any of the Series C Preferred is outstanding, shall:
(a) STOCK DIVIDENDS. Pay a dividend payable in Common
Stock, effect a stock split or make any other distribution of Common Stock in
respect of its Common Stock, the Conversion Price shall be adjusted, as of the
date the Corporation shall take a record of the holders of its Common Stock for
the purpose of receiving such dividend, stock split or other distribution (or if
no such record is taken, as of the date of such payment or other distribution),
to that price determined by multiplying the Conversion Price theretofore in
effect by a fraction (1) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior to such dividend, stock
split or distribution and (2) the denominator of which shall be the total number
of shares of Common Stock outstanding immediately after such dividend, stock
split or distribution (plus in the event that the Corporation paid cash for
fractional shares, the number of additional shares which would have been
outstanding had the Corporation issued fractional shares in connection with said
dividend, stock split or distribution); or
(b) LIQUIDATING DIVIDENDS, ETC. Make a distribution of
its Property to the holders of its Common Stock as a dividend in liquidation or
partial liquidation or by way of return of capital or other than as a dividend
payable out of funds legally available for dividends under the Certificate of
Incorporation and the laws of the State of Delaware, the holders of the Series C
Preferred shall, upon conversion thereof, be entitled to receive, in addition to
the number of shares of Common Stock receivable thereupon, and without payment
of any consideration therefor, a sum equal to the amount of such Property as
would have been payable to them as owners of that number of shares of Common
Stock of the Corporation receivable upon such conversion, had they been the
holders of record of such Common Stock on the record date for such distribution;
and an appropriate provision therefor shall be made a part of any such
distribution.
(H) ISSUANCE OF COMMON STOCK OR SERIES C PREFERRED FOR LESS THAN
CONVERSION PRICE. In the event of the issuance on or after May 31, 1996 but
before May 31, 2000 of any shares of Common Stock or Series C Preferred other
than shares of Excluded Shares (as defined in subsection 5(H)(7)) without
consideration or for a consideration per share less than the prevailing
Conversion Price, then the Conversion Price in effect immediately prior to each
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<PAGE>
such issuance shall forthwith be reduced to the lowest net price per share at
which any share of Common Stock has been issued or sold or is deemed to have
been issued or sold during such period; provided, however, that additional
shares of Common Stock issued or sold (or deemed issued or sold) without
consideration shall be deemed to have been issued or sold for $.01 per share.
Upon each adjustment of the Conversion Price pursuant to the provisions of this
Section 5(H), the number of shares of Common Stock issuable upon the conversion
of the Series C Preferred shall be adjusted to the nearest full share by
multiplying a number equal to the Conversion Price immediately prior to such
adjustment by the number of shares of Common Stock issuable upon conversion of
the Series C Preferred immediately prior to such adjustment and dividing the
product so obtained by the adjusted Conversion Price.
(I) For the purposes of any adjustment of the Conversion Price under
subsection 5(H), the following provisions shall be applicable:
(1) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash received by the
Corporation therefor.
(2) In the case of the issuance of Common Stock for
a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the "fair value" of such consideration as
determined in the good faith judgment of the Board of Directors of the
Corporation.
(3) In the case of the issuance of (x) options to
purchase or rights to subscribe for Common Stock, (y) securities by their terms
convertible into or exchangeable for Common Stock or (z) options to purchase or
rights to subscribe for such convertible or exchangeable securities:
(a) the aggregate maximum number of shares of
Common Stock deliverable upon conversion of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in subdivisions (1) and (2)
above), if any, received by the Corporation upon the issuance of such options or
rights plus the minimum purchase price provided in such options or rights for
the Common Stock covered thereby;
(b) the aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the conversion of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration received by the
Corporation for any such securities and related options or rights (excluding any
-8-
<PAGE>
cash received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the conversion of any related
options or rights (the consideration in each case to be determined in the manner
provided in subdivisions (1) and (2) above);
(c) on any change in the conversion price of
Common Stock deliverable upon conversion of any such options or rights or
conversions of or exchange for such convertible or exchangeable securities,
other than a change resulting from the antidilution provisions thereof, the
Conversion Price shall forthwith be readjusted to such Conversion Price as would
have obtained had the adjustment made upon the issuance of such options, rights
or securities not converted prior to such change been made upon the basis of
such change; and
(d) on the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price shall forthwith be readjusted to such
Conversion Price as would have obtained had such options, rights, securities or
options or rights related to such securities not been issued.
(4) All calculations under this subsection 5(H)
shall be made to the nearest cent ($.01), as the case may be.
(5) In any case in which the provisions of this
subsection 5(H) shall require that an adjustment of the Conversion Price shall
become effective immediately after a record date for an event, the Corporation
may, until the occurrence of such event, defer issuing to the holder of any
share of Series C Preferred converted after such record date and before any
occurrence of such event, the additional shares of capital stock issuable upon
such conversion by reason of the adjustment required by such event over and
above the shares of capital stock issuable upon conversion before giving effect
to such adjustment; PROVIDED, HOWEVER, that the Corporation shall deliver to
such holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(6) Whenever the Conversion Price shall be adjusted
as provided in subsection 5(H), the Corporation shall forthwith file, at its
principal office or at such other place as may be designated by the Corporation,
a statement, signed by its president or chief financial officer and by its
treasurer, showing in detail the facts requiring such adjustment and the Series
Conversion Price and/or the number of shares of Common Stock issuable upon
conversion of the shares of Series C Preferred, as the case may be, that shall
be in effect after such adjustment. The Corporation shall cause a copy of such
statement to be sent by first-class, certified mail, return receipt requested,
postage prepaid, to each holder of the shares of Series C Preferred at such
holder's address appearing in the Corporation's records.
-9-
<PAGE>
(7) For purposes of subsection 5(H), "Excluded
Shares" shall mean (A) shares of Common Stock issued upon conversion of shares
of Senior Preferred Stock, Series A Preferred Stock, Series B Preferred or
Series C Preferred or (B) shares of Common Stock issued upon the exercise of
options or warrants outstanding as of the date of issuance of the Series C
Preferred or options to purchase such shares which may, in the future, be issued
to officers and employees of the Corporation and its subsidiaries pursuant to
any equity incentive plan, option plan, agreements or other arrangement.
(J) NOTICE OF ADJUSTMENTS. Whenever the Conversion Price shall be
adjusted pursuant to Subsection 5(H) hereof (which shall include distributions
to which subsection 5(H)(3)(b) is applicable), the Corporation shall make a
certificate signed by its President or a Vice President and by its Treasurer,
Assistant Treasurer, Secretary or Assistant Secretary, setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Board of Directors made any determination
hereunder), and the Conversion Price after giving effect to such adjustment, and
shall cause copies of such certificate to be mailed (by first-class mail,
postage prepaid) to each holder of Series C Preferred at its address shown on
the books of the Corporation. The Corporation shall make such certificate and
mail it to each such holder promptly after each adjustment.
(K) FRACTIONAL SHARES. No fractional shares of Common Stock shall
be issued in connection with any conversion of Series C Preferred, but in lieu
of such fractional shares, the Corporation shall make a cash payment therefor
equal in amount to the product of the applicable fraction multiplied by the
Conversion Price then in effect.
(L) NO REISSUANCE OF SERIES C PREFERRED. No shares of Series C
Preferred which have been converted into Common Stock shall be reissued by the
Corporation; PROVIDED, HOWEVER, that each such share, after being retired and
canceled, shall be restored to the status of an authorized but unissued share of
Preferred Stock without designation as to series and may thereafter be issued as
a share of Preferred Stock not designated Series C Preferred.
6. PARITY WITH OTHER SERIES OF PREFERRED. If at anytime any payment
is required to be made on or with respect to Series C Preferred and any other
series of Preferred Stock (other than currently outstanding Senior Preferred
Stock, Series A Preferred Stock and Series B Preferred) and the Corporation does
not have funds sufficient to make in full all payments required to be made on or
with respect to the Series C Preferred and such other series of Preferred Stock
(other than currently outstanding Senior Preferred Stock, Series A Preferred
Stock and Series B Preferred) then the Corporation shall make payments on or
with respect to the Series A Preferred and such other series of Preferred Stock
(other than currently outstanding Senior Preferred Stock, Series A Preferred
Stock and Series B Preferred) such that the payment made with respect to each
series of Preferred Stock is in a substantially identical proportion of the full
payment due with respect to each such series.
-10-
<PAGE>
7. PREEMPTIVE RIGHTS. At any time prior to May 31, 1998 the Board of
Directors of the Corporation shall authorize the issuance of shares of any stock
of any class of the Corporation, or any rights, options or warrants to purchase
any such stock, or securities of any type whatsoever that are, or may become,
convertible into or exchangeable for such stock, options, warrants or securities
(hereinafter collectively called "Securities"), the Securities shall first be
offered ratably to the existing holders of shares of the Series C Preferred,
such rate being the percentage of the aggregate number of then issued and
outstanding shares of the Common Stock held by such holder of shares of Series C
Preferred that were issued upon conversion of the shares of the Series C
Preferred (a "Preemptive Rightholder") on the date of the authorization by the
Board of Directors of such issuance (the "Equity Percentage"); provided,
however, that each Preemptive Rightholder shall be entitled to exercise such
preemptive right only with respect to the whole of such proportionate share and
not with respect to only a part thereof.
(A) The preemptive rights provided for in this Section 7 shall
entitle each Preemptive Rightholder to subscribe for, purchase, or otherwise
acquire any Securities to be offered for sale, at a price or prices not less
favorable than the favorable price or prices at which such Securities are
proposed to be offered for sale to others, without deduction of any expenses of
or compensation for, underwriting or purchase of such Securities by underwriters
or dealers. In the event that the Corporation proposes to offer for sale to
others any Securities for a consideration other than cash, such preemptive
rights shall be exercisable by the Preemptive Rightholders for cash, in an
amount which, in, the determination of the Board of Directors, shall equal the
Fair Market Value (hereinafter defined) of any consideration other than cash.
(B) The Corporation shall, on the tenth day after the date of
authorization of the issuance of any Securities give notice to each Preemptive
Rightholder (the "Issuance Notice") of such authorization, which Issuance Notice
shall specify the number of shares of Securities to be issued, a full
description of such class of Securities and the offering price thereof.
(C) The preemptive rights granted pursuant to this Section 7 with
respect to any Securities to be issued by the Corporation shall be exercised by
a Preemptive Rightholder by the giving of notice of such exercise within ten
days after receipt by such Preemptive Rightholder of the Issuance Notice (the
"Preemptive Rights Period"). If any Preemptive Rightholder fails or declines to
purchase his proportionate share of the Securities so offered (a "Declining
Shareholder"), the Securities not purchased by the Declining Shareholders may be
sold by the Corporation.
-11-
<PAGE>
8. CERTAIN RIGHTS, RESTRICTIONS AND LIMITATIONS.
The Corporation shall not, and shall not permit any corporation of
which the Corporation owns, directly or indirectly, more than fifty (50%)
percent of the outstanding capital stock (a "subsidiary") to, without the
affirmative vote or written consent by the holders of more than sixty (60%)
percent of the shares of Series C Preferred then outstanding:
(A) change the designations, preferences, qualifications,
limitations, restrictions, or special or relative rights of the shares of the
Series C Preferred; or
(B) authorize or issue shares of any class of stock having any
preference or priority as to dividend payments, redemption or distributions of
the Corporation's property superior to or in parity with the Series C Preferred.
9. AMENDMENT. Except as otherwise provided in Section 8 hereof, the
terms of the Series C Preferred may be amended only if the Corporation has
obtained the affirmative vote or written consent by the holders of a majority of
the shares of Series C Preferred then outstanding.
10. DEFINITIONS. As used in this Article Fourth, the following terms
have the following meanings:
"Board" shall mean the Board of Directors of the Corporation.
"Common Stock" shall mean the Corporation's Common Stock, $.01 par value,
and any Stock into which such Common Stock may hereafter be changed.
"Conversion Price" shall have the meaning specified in Section 5(A)
hereof, as adjusted pursuant to the terms of this resolution.
"Conversion Stock" shall mean Common Stock issued upon conversion of
Series C Preferred.
"Fair Market Value" shall mean the fair market value, regardless of any
prior accounting treatment, of such assets, property, or the Series C Preferred
as determined by the Board of Directors of the Corporation which determination
shall be final, conclusively and binding.
"holders" shall mean the Persons who shall, from time to time, own of
record any Security. The term "holder" shall mean one of the holders.
"Person" shall mean an individual, a corporation, a limited liability
company, a partnership, a trust, an unincorporated organization or a government
organization or an agency or political subdivision thereof or any other legal
entity which is permitted or authorized by law to own or hold securities.
-12
<PAGE>
"Preferred Stock" means the Corporation's Preferred Stock, $0.01 par value
per share, of any series or all series.
"Property" shall mean money or an interest in any kind of property or
assets, whether real, personal or mixed, or tangible or intangible.
"securities" shall mean any debt or equity securities of the Corporation,
whether now or hereafter authorized, and any instrument convertible into or
exchangeable for securities or a security. The term "security" shall mean one of
the securities.
"Securities Act" shall mean the Securities Act of 1933, as amended prior
to or after the date hereof, or any federal statute or statutes which shall be
enacted to take the place of such Act, together with all rules and regulations
promulgated thereunder.
"Securities Exchange Commission" shall mean the United States Securities
and Exchange Commission or any successor to the functions of such agency.
"Series C Preferred" shall mean the Corporation's Series C Preferred
Stock, $0.01 par value per share, and any stock into which such stock may
hereafter be changed, other than by exercise of the conversion right of such
stock.
"stock" shall include any and all shares, interests or other equivalents
(however designated) of, or participations in, capital stock of the Corporation,
whether now or hereafter authorized.
"Value" shall have the meaning set forth in section 5 hereof.
- - -----------------------------
BE IT FURTHER RESOLVED, that the President or a Vice President and
Secretary or an Assistant Secretary of the Corporation execute a Certificate of
Designations setting forth this resolution under the seal of the Corporation and
that the Corporation file such Certificate with the Secretary of State of
Delaware in accordance with the provisions of Section 103 of the General
Corporation Law of Delaware, as amended.
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ADVANCED PROMOTION TECHNOLOGIES, INC. FOR THE SIX MONTHS
ENDED MAY 25, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-23-1996
<PERIOD-START> NOV-26-1995
<PERIOD-END> MAY-25-1996
<CASH> 387
<SECURITIES> 0
<RECEIVABLES> 982
<ALLOWANCES> 460
<INVENTORY> 0
<CURRENT-ASSETS> 1,261
<PP&E> 32,779
<DEPRECIATION> 12,017
<TOTAL-ASSETS> 22,442
<CURRENT-LIABILITIES> 14,746
<BONDS> 10,300
<COMMON> 184
0
2
<OTHER-SE> (6,927)
<TOTAL-LIABILITY-AND-EQUITY> 22,442
<SALES> 1,894
<TOTAL-REVENUES> 1,894
<CGS> 0
<TOTAL-COSTS> 11,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 639
<INCOME-PRETAX> (7,134)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,134)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
