U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required] for the fiscal year ended September 1, 1996.
Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the transition period from ____________ to
________________
Commission file number 0-23020
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THE APPLETREE COMPANIES, INC.
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(Name of small business issuer in its charter)
Delaware 65-0205933
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5732 Curlew Drive, Norfolk, Virginia 23502
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (757) 466-9200
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Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. x
Issuer's revenues for its most recent fiscal year are $28,666,000
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average closing bid and asked prices of such stock as of
December 9, 1996, was $2,600,000.
The number of shares of the issuer's Common Stock, par value $.001 per share,
outstanding as of December 9, 1996 was 118,856,323.
PART I
Item 1. Description of Business
The AppleTree Companies, Inc., (together with its subsidiaries, the "Company")
(ATRE - OTC Bulletin Board) a Delaware corporation formed in 1991, is a holding
company with substantially all of its operations conducted by its wholly owned
subsidiaries named below. Unless otherwise stated herein, the term "Company"
includes its wholly owned operating subsidiaries. The business of the Company
is the manufacture of fresh and frozen sandwiches and the distribution of those
products and other resale products, purchased from unrelated third parties,
primarily to convenience stores and vending machine operations.
In December 1993, the Company acquired substantially all of the operating assets
of Stewart Foods, Inc., a debtor in possession under Chapter 11 of the
bankruptcy laws of the Unites States for a purchase price of $3,657,000
(including transaction costs) consisting of cash. In February 1994, the Company
acquired 100% of the outstanding voting common stock of Carriage Town Products,
Inc. for a purchase price of $525,000 consisting of cash. In November 1994, the
Company acquired 100% of the outstanding voting common stock of Royal American
Foods Corporation for a purchase price of $3,652,000, as adjusted, which
consisted of $2,352,000 in cash and a seller financed note of $1.3 million;
plus transaction related costs of $295,000. In October 1995, the Company
acquired the assets (including the name "Sandwich Makers" and a covenant not to
compete from the owner) and assumed certain liabilities of Sandwich Makers of
Arizona, Inc. and Sandwich Makers of California, Inc. (collectively, the
"Sandwich Makers") for $350,000. During fiscal 1994, the Company also acquired
90% of the outstanding voting common stock of J. R. Bassett Optical,
Incorporated for $1,077,000, whose operations were discontinued in fiscal 1995.
The Company accounted for the above acquisitions using purchase accounting.
The Company formed Americas Foods, Inc., a wholly owned subsidiary ("AFI")
as a Delaware corporation in September 1994. During 1996, the Company merged
the other subsidiaries, namely, Stewart Products, Inc. ("Stewart"), Royal
American Foods Corporation ("Royal") and the net assets of the Sandwich Makers
into AFI; Carriage Town Products, Inc.'s ("CTP") operations were combined with
Stewart's operations in 1995. Through AFI, the Company distributes products
nationally to chain and independent convenience stores and to the vending and
food service markets. AFI now manufactures fresh and frozen sandwiches in three
plants located in Norfolk, Salt Lake City, and Phoenix.
AFI distributes these products, along with resale products made by others,
such as frozen burritos, pizzas, meat and salted snacks, pastries, and coffee
service, through its own distribution network which serves approximately 8,000
retail accounts in eleven states in the Western United States and in Virginia,
North and South Carolina, and Georgia in the Eastern United States.
The Company's primary market is those consumers who place a premium on quality
Take Away To Eat food purchases obtained at convenience stores and vending
machines located in offices, schools, and factories. The Company's goal is to
consolidate its position and become a dominant force in this Take Away To Eat
food industry by acquisition, the development of its existing operations, and
its relationships with major convenience store chains and vending machine
operators.
Distribution
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The Company distributes its manufactured products (fresh/frozen sandwiches)
and resale items through its own direct store delivery network utilizing both
Company employees and independent distributors. Using leased tractor/trailers,
it ships from its plants to route salesmen or sales centers. Route salesmen,
using both leased and owned trucks, deliver products to the Company's customers.
In its vending machine operations, the Company delivers directly to independent
central distributors who deliver the Company's products to local vending machine
operators. The Company identified and eliminated several unprofitable routes
during fiscal 1996 to reduce its distribution costs.
Raw Materials
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The Company has numerous suppliers of raw materials for its products, including
Kotarides Baking Company, Metz Baking Company, Higrade Meats, Inc.,U.S. Food
Service, Inc., Goodman Foods and Fernando Foods. The Company obtains its raw
materials at market prices. The loss of any one or any group of such suppliers
would not have a material adverse effect on the Company because there are
numerous other available sources.
Customers
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The Company's principal customers are companies operating convenience stores in
the Eastern and Western United States. No one customer accounts for more than
10% of the Company's sales.
Trade and Brand Names
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Through its subsidiaries, the Company owns a number of federally registered
and unregistered brand names, trade names, and trademarks. The Company
believes that these names have significant consumer value. Currently, the
Company utilizes the "Deli Dan" brand for its direct store delivery products,
"Audrey's Deli" for certain vending products, "Sandwich Makers" for certain
fresh sandwiches, and "Squire Foods" for institutional sales. The Company has
applied for, or intends to seek, the registration of some trademarks that are
not currently registered and any subsequent marks or trade names as the
Company's management deems advisable. However, there can be no assurance that
the Company will be able to obtain valid trademark registrations for any such
trademarks.
Research and Development
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The Company does not separately itemize research and development costs. None
of these costs are borne directly by customers. A nominal portion of the
Company's selling, general, and administrative expenses included research and
development expenses.
Competition
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The food business is highly competitive. There are other companies with
financial, marketing and other resources greater than those of the Company
which are engaged in the production, marketing and distribution of products
which compete with those of the Company. The Company competes by offering a
quality product at a reasonable price. There can be no assurance that the
Company's products will compete successfully with the products of such other
companies.
Government Regulation
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Companies involved in the manufacture, packaging and distribution of food
items are subject to extensive regulation by various government agencies
which, pursuant to statutes, rules and regulations, prescribe quality,
purity, manufacturing and labeling requirements, among other things.
Food manufacturing facilities are also subject to inspections by various
regulatory authorities, including the Food and Drug Administration ("FDA") and
U.S. Department of Agriculture ("USDA"). A finding of a failure to comply
with one or more regulatory requirements can result in the imposition of
sanctions including closing all or a portion of a company's production
facilities.
A previous owner of the Company's Norfolk, Virginia, operations center is
subject to a Consent Decree of Permanent Injunction dated June 19, 1990 (the
"June 19, 1990 Decree") entered in a case in the United States District Court
for the Eastern District of Virginia, Norfolk Division, Civil No, 90-1344-N,
styled as United States of America v. Stewart Sandwiches, Inc. a corporation,
and Theodore J. Broecker and Donald R. Beard, individuals (the "Stewart
Defendants"). The June 19, 1990 Decree, among other things, permanently
enjoined the Stewart Defendants "from directly or through any subsidiary,
shipping or introducing into interstate commerce any finished product that is
adulterated within the meaning of 21 U.S.C. 342(a)(1) because it contains
Listeria Monocytogenes" and permanently enjoined the Stewart Defendants "from
failure to comply with a written plan which has been prepared by outside
independent consultants covering specific points described in the June 19, 1990
Decree and presented to and approved by the Food and Drug Administration on
June 13, 1990 as complying with good manufacturing practices, which plan is
designed to be a program for adequate preparing, packing, or holding any
articles of food at the Stewart Defendants' facilities, while such food is held
for sale afte shipment in interstate commerce. On November 27, 1996,
counsel for the U.S. Department of Justice (the "Justice Department") wrote
to the Company dba Americas Foods and advised of the Justice Department's
intent to apply the June 19, 1990 Decree to AFI and to seek a court order
requiring AFI to show cause why it should not be held in contempt of court
for violation of the June 19, 1990 Decree. The Justice Department offered to
settle based on terms of a proposed Consent Decree of Permanent Injunction which
accompanied the Justice Department's letter.
In a transaction which was the subject of an Order Approving Sale dated
December 12, 1993, a predecessor of the Company purchased certain assets from
Stewart Foods, Inc. a.k.a. Stewart Sandwiches, which was in bankruptcy at the
time of the sale. The Justice Department claims that AFI is simply the
successor of Stewart Sandwiches, Inc. The Company does not believe that the
June 19, 1990 Decree is applicable to AFI. The Company is negotiating with
the U.S. Department of Justice in an attempt to settle the matter as promptly as
possible on terms as favorable as possible.
Employees/Consultants
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At September 1, 1996, the Company and its subsidiaries had 397 full-time
employees, of which 187 were hourly, 95 were commissioned, and 115 were
salaried. As of December 9, 1996, the Company and its subsidiaries had 363
employees, all of which were full-time. The Company's employees are not
unionized. The Company has not experienced any work stoppages and considers its
employee relations to be excellent. The Company has entered, and may, from time
to time, enter into consulting agreements with outside consultants for purposes
of various business-related services.
Item 2. Description of Property
The Company currently leases approximately 10,000 square feet of office space
located at 2255 Glades Road, Boca Raton, Florida (the "Florida Property").
In August 1996, the Company relocated its home office from the Florida Property
to its Norfolk operations center. The Florida Property is currently vacant.
The lease for the Florida Property is for a period of five years and expires
on December 14, 1998. The lease provides for a base annual rental of
$183,230 payable in monthly installments, with annual increases of 5% each
year. The Company has ceased making rental payments and is currently
negotiating with its landlord to terminate this lease agreement.
AFI owns fee simple title to the following properties:
Approximate
Description Location Square Feet
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Patty/Sandwich Norfolk, VA 40,000
Plant
Executive Office and Norfolk, VA 10,000
Warehouse
Service Center Summerville, SC 5,000
Service Center Greenville, NC 5,000
Sandwich Plant Salt Lake City, UT 35,000
Strategica Capital Corporation, as part of the loan agreement described in
"Item 6. Management's Discussion and Analysis - Liquidity and Capital
Resources," below, and certain convertible debenture holders currently hold
liens on these properties.
AFI leases a sandwich plant located in Phoenix, Arizona. This plant has
square footage of approximately 7,700, with monthly rentals of $3,013 plus
operating expense allocated. This lease expires in 1998.
CTP leases a plant in Florence, South Carolina as a result of the assumption
of a lease purchase agreement. The lease agreement calls for monthly payments
of $15,000 through December 1, 2003 with an option to purchase on December 1,
2003 for an additional $200,000.
AFI also leases six other sales centers located in Virginia, South Carolina,
and Arizona. The average floor space of these offices is approximately 4,200
square feet. These offices are leased with expiration dates varying through
1997. Approximate monthly rentals for these offices total approximately
$4,000.
Management believes that the Company's facilities and the equipment used in
operations are in good working condition and are adequate for the Company's
present needs, but anticipates that capital expenditures will be necessary in
the near future. The Company does not currently have funds for any capital
expenditures.
Item 3. Legal Proceedings
(a) On March 30, l994, the Company filed an action in the Circuit Court of
Broward County, Florida, to seek recovery against Michael Salit, a former
director and the Company's former Chairman, Chief Executive Officer and
Secretary; Donna Salit, wife of Salit (collectively the "Salits"); David Lobel
("Lobel"), the Company's former Chief Financial Officer and a former Director;
and Lola Lobel, wife of Lobel (collectively the "Lobels"), for an alleged
diversion of the Company's assets and for any other damages resulting from
certain alleged improprieties and misstatements made by Messrs. Salit and
Lobel. Salit has filed a counterclaim against the Company and certain
individual officers. In addition, Salit and Lobel have filed certain
affirmative defenses against the Company's claim. All of these actions have
been consolidated in the Circuit Court of Broward County, Florida ("State
Actions"). The individual officers and directors have retained their own
independent counsel. The Company believes it will be successful on the
merits of its claims and will be successful in defending the counterclaim.
Pursuant to its By-Laws, the Company is indemnifying the fees and costs of
the officers named in the counterclaim.
(b) The Company and certain former executive officers and former executive
officers, including Mr. Lobel and Mr. Salit, have been named as defendants in
four actions filed in March 1994 in the United States District Court for the
Southern District of Florida by certain individuals ("Federal Actions"). The
complaints, which are similar, allege violations of various sections of the
state and federal securities laws including Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and the rules promulgated thereunder, as well
as common law claims of fraud, misrepresentation and breach of fiduciary duty.
The Federal Actions allege that the Company and certain executive officers
made untrue statements of material facts and omitted to state material facts
necessary to make statements made not misleading in its public disclosure
documents relating in particular to the matters complained of by the Company
against Mr. Salit and Mr. Lobel. The Federal Actions have been consolidated.
However, at this time, the attorneys for the Company and the attorneys for
the Company's directors (which include those who have been named in the
Federal Actions, which include Paul B. Kravitz, but which do not include
Messrs. Salit and Lobel (referred to herein as the "Company's Directors"))
have tentatively agreed with the attorneys for the plaintiffs in the Federal
Actions, on a settlement to resolve the claims against the Company and the
Company's Directors arising out of the Federal Actions. The terms and details
of the proposed settlement contemplate that the Company will issue warrants
("Settlement Warrants") to enable the plaintiffs ("Federal Action Plaintiffs")
and their attorneys to obtain 228,280 shares of the Company's common stock at an
exercise price of 75% of the market price of the Company's common stock as of
the date of the Settlement Order and, in addition to the Settlement Warrants,
228,280 shares of common stock ("Settlement Shares") and pay certain
administrative costs associated with the settlement.
(c) Based on information supplied to the Securities and Exchange Commission
by the Company, on April 26, 1994, the SEC issued an order for a private
investigation of the Company and certain of its former officers and directors to
determine whether violations of the securities laws may have occurred and so
as to enable the SEC to issue subpoenas and obtain documents. In November
1996, the Company consented to the entry of a final judgment of permanent
injunction and other relief in the United States District Court Southern
District of Florida relating to this matter, neither admitting nor denying the
allegations of the complaint. The consent has been submitted to the court for
final affirmation and approval by the judge.
(d) The Company is a party to certain other proceedings arising in the
normal course of business which it believes will not have a material adverse
impact on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
On June 20, 1996, the Company held a special meeting of its shareholders at
which time the shareholders voted to amend the Company's Certificate of
Incorporation to increase its number of authorized shares of Common Stock from
ninety million shares to one hundred twenty million shares. The number of
votes cast for and against the matter, as well as abstention are set forth
below. Broker non-votes are counted as votes against a matter.
In Favor Against Abstain
Amendment to Certificate of
Incorporation Regarding Capital
Stock 34,091,255 1,419,941 138,728
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock was traded in the over-the-counter market (NASDAQ-
ATRE) and transactions were reported on the NASDAQ SmallCap Market until
October 22, 1996. On that date, due to the Company's inability to meet
certain of NASDAQ's minimum listing requirements including the minimum capital
requirements, the Company's common stock was deleted from NASDAQ, and it now
trades on the OTC Bulletin Board (pink sheets).
The following table sets forth, for the periods indicated, high and low bid
prices of the Company's common stock, according to the NASD Monthly
Statistical Report provided to the Company. All of the information in the
following table has been revised to give effect to the Company's one-for-five
reverse stock split effected in October 1994.
QUARTER HIGH LOW
FISCAL YEAR 1995
First 09/01/94 to 11/30/94 2 5/32 13/16
Second 12/01/94 to 02/26/95 1 19/32 9/16
Third 02/27/95 to 05/28/95 1 1/4 1/2
Fourth 05/29/95 to 09/03/95 21/32 1/4
FISCAL YEAR 1996
First 09/04/95 to 12/03/95 13/16 1/4
Second 12/04/95 to 03/03/96 1/2 1/8
Third 03/04/96 to 06/02/96 7/16 1/8
Fourth 06/02/96 to 09/01/96 7/32 1/64
These price quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions. As of
December 9, 1996, there were approximately 740 holders of record of the
Company's common stock. The closing bid and ask prices for the Company's Common
Stock as of December 9, 1996 were $.026 and $.035, respectively.
The Company has not paid cash dividends since its inception. Provisions of the
Company's loan documents and preferred stock prohibit payment of dividends and
the present policy of the Company is to retain earnings, if any, for the
expansion of its business.
Set forth below is a table listing recent sales of the Company's securities
which were not registered under the Securities Act of 1933, as amended (the
"1933 Act"). Such sales were made pursuant to Section 4(2) and 4(6) of the 1933
Act and Regulation D promulgated thereunder.
Number of Purchase Aggregate
Date Type Shares Price Amount
06/24/96 10% Convertible Debenture n/a $250,000 $250,000
07/05/96 10% Convertible Debenture n/a $250,000 $250,000
07/26/96 8% Convertible Debenture (1) n/a $200,000 $200,000
08/09/96 8% Convertible Debenture (1) n/a $100,000 $100,000
08/12/96 Common Stock 2,000,000 $.0125 $ 25,000
08/12/96 Common Stock 2,000,000 $.0125 $ 25,000
08/12/96 Common Stock 24,000,000 $.0125 $300,000
08/14/96 8% Convertible Debenture (1) n/a $350,000 $350,000
08/16/96 Common Stock 3,840,000 $.0125 $ 48,000
08/16/96 Common Stock 3,840,000 $.0125 $ 48,000
08/16/96 Common Stock 160,000 $.0125 $ 2,000
08/16/96 Common Stock 160,000 $.0125 $ 2,000
08/30/96 8% Convertible Debenture (1) n/a $400,000 $400,000
09/20/96 8% Convertible Debenture (1) n/a $350,000 $350,000
09/27/96 8% Convertible Debenture (1) n/a $150,000 $150,000
10/10/96 8% Convertible Debenture (1) n/a $200,000 $200,000
10/10/96 8% Convertible Debenture (1) n/a $300,000 $300,000
10/14/96 8% Convertible Debenture (1) n/a $242,500 $242,500
10/14/96 8% Convertible Debenture (1) n/a $ 7,500 $ 7,500
10/18/96 8% Convertible Debenture (1) n/a $250,000 $250,000
10/25/96 8% Convertible Debenture (1) n/a $100,000 $100,000
10/31/96 8% Convertible Debenture (1) n/a $ 50,000 $ 50,000
12/04/96 8% Convertible Debenture (1) n/a $480,000 $480,000
(1) These debentures are noninterest bearing for the first year and bear
interest at the stated rate thereafter. As of September 1, 1996, the Company
did not have sufficient authorized shares to permit conversion of any
debentures.
Item 6. Management's Discussion and Analysis
Operating Results
Year Ended September 1, 1996 compared to Year Ended September 3, 1995
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Net sales for the fiscal year ended September 1, 1996 were approximately
$28,666,000 compared to approximately $26,578,000 for the fiscal year ended
September 3, 1995. The increase in net sales of approximately $2,088,000
(approximately 8%) is due principally to a full year of operations of Royal in
fiscal 1996 compared to nine months in fiscal 1995 and the acquisition of
Sandwich Makers in October 1995, which was offset by reduced sales resulting
from product shortages during the fiscal year and reduced institutional sales
resulting from the Company's closure of its patty plant operations in February
1996.
Costs of goods sold for the year ended September 1, 1996 was approximately
66.6% compared to approximately 65.3% for the year ended September 3, 1995.
The increase in this percentage was due principally to the Company's entry
into the fresh sandwich program in fiscal 1996.
Operating expenses increased approximately $1,694,000 (approximately 9%) from
$18,906,000 (approximately 71% of net sales) in fiscal 1995 to $20,600,000
(approximately 71.9% of net sales) in fiscal 1996. This is due to a full year
of Royal's operations in fiscal 1996, the Sandwich Maker acquisition in
October 1995, corporate relocation costs ($400,000), increased asset impairment
(DSD sales routes of $1,280,000 and patty plant equipment of $458,000 in fiscal
1996), and increased lease costs in fiscal 1996; this increase was
offset by management's cost reduction plans, including the reduction of
professional fees in fiscal 1996 of approximately $1,021,000 (approximately
58%) and consultants' stock option compensation from fiscal 1995.
Other expense, net, decreased from $1,224,000 in fiscal 1995 to $836,000 in
fiscal 1996. In fiscal 1995, the Company charged finance costs approximating
$668,000 to expense. This decrease was offset by increased interest charges
resulting from the Company's increased average debt balance in fiscal 1996.
The Company's net loss per common share decreased from $1.08 in fiscal 1995 to
$.22 in fiscal 1996. The principal cause for the decrease was the significant
number of shares issued during the year ended September 1, 1996 through
conversions of convertible debentures and other debt, and additional sales of
common stock.
Year Ended September 3, 1995 compared to Year Ended August 31, 1994
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During the fiscal year ended September 3, 1995, because its acquisition of
Royal, the Company expanded its operations to include a plant in Salt Lake
City, Utah with 52 direct store delivery routes. This acquisition, completed
in November 1994, brought with it additional annual revenues of approximately
$14.5 million. Previously, the Company acquired its Norfolk operations
(referred to herein as "Stewart"); and approximately nine months' results of
those operations are included in the fiscal year ended August 31, 1994, but a
full year of those operations are included in the year ended September 3,
1995. Also, during the fiscal year ended September 3, 1995, the Company
adopted a plan to discontinue J R Bassett Optical Incorporated's ("JRBO")
optical business operations. Comparisons which follow are based on fiscal
1994 amounts as reclassified for those discontinued operations. Pro forma
information is included in Note 2 of the consolidated financial statements.
Net sales for the fiscal year ended September 3, 1995 were approximately
$26,578,000 compared to approximately $10,760,000 for the fiscal year ended
August 31, 1994. The increase in net sales of approximately $15,818,000
(approximately 147%) is principally attributable to the acquisition of Royal,
and a complete year for the Company's Norfolk operations compared to nine
months in fiscal 1994. The increase in net sales associated with Royal was
approximately $11 million.
Costs of goods sold for the fiscal year ended September 3, 1995 was
approximately 65.3% compared to approximately 67.9% for the fiscal year ended
August 31, 1994. The decrease in this percentage was due to the Company's
effort to improve plant efficiency and reduce its costs.
Operating expenses totaled approximately $18,906,000 (approximately 71% of net
sales) for the year ended September 3, 1995 compared to approximately
$10,327,000 (approximately 96% of net sales) for the year ended August 31,
1994. As a percent of sales, operating expenses decreased approximately 25%
as a result of the increased sales base with a lesser increase in operating
expenses. The dollar increase of approximately $8,579,000 was a result of
increased operating expenses attributable to the Company's Royal acquisition,
a full year of the Company's Norfolk operations, impairment of intangible
assets, and consultants' stock option compensation. The increase in operating
expenses associated with Royal was approximately $3,948,000. The Company
evaluated the carrying value of its intangible assets in fiscal 1995 and
determined that the values recorded principally for routes and goodwill from
the Stewart operations were impaired. The Company has adjusted the values
accordingly and charged operations $1,235,000. Also, an accrual was made for
the tentative settlement of Federal Actions, described in "Legal Proceedings,"
in the amount of $300,000.
Other expenses increased from $278,000 in the fiscal year ended August 31,
1994 to $1,224,000 in the fiscal year ended September 3, 1995. The principal
factor in this increase was additional interest expense in 1995, caused by
additional debt and the expensing of financing costs, in the amount of
$668,000, associated with long term borrowings classified as current due to
covenant violations.
The Company has reflected the results of JRBO's operations for the fiscal
years ended September 3, 1995 and August 31, 1994 as discontinued operations
in the accompanying consolidated financial statements. Net sales of JRBO in
fiscal 1995 were $1,901,000 compared with $2,235,000 in fiscal 1994. The
decrease is attributable to declining sales and the disposal of several stores
at the beginning of the fourth quarter. Operating costs and expenses of JRBO
were $2,883,000 in fiscal 1995 compared to $4,444,000 in fiscal 1994. The
decline is principally due to the goodwill and other intangibles impairment
recorded in fiscal 1994 in the amount of $1,351,000.
The Company's net loss per common share decreased from $5.76 in fiscal 1994 to
$1.08 in fiscal 1995. The principal cause for the decrease was the
significant number of shares issued during the fiscal year ended September 3,
1995 through conversions of convertible debentures and preferred stock,
exercise of stock options, and additional sales of common stock.
Liquidity and Capital Resources
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The Company has experienced significant losses from operations since its
inception. The Company has had numerous demands on its capital through the
fiscal year ended September 1, 1996 and it has a working capital deficit of
$6,917,000 as of September 1, 1996. Net cash used in operating activities
was $7,444,000 in its fiscal year 1996 compared to $5,830,000 in the year
ended September 3, 1995. This increase in cash used was a result of stock
option compensation and a loss on diposal of discontinued operations in fiscal
1995. Management anticipates negative cash flows from operating activities will
continue until the Company has completed its cost reduction plan currently under
way. This plan includes relocating the Company's home office to its Norfolk
operations center in August 1996, dismissing several executive and
administrative employees, reducing administrative overhead, eliminating
unprofitable routes, reducing distribution costs, and further consolidation of
certain activities to reduce selling, general and administrative expenses. Upon
completion of the cost reduction effort, management's focus will be on
increasing the Company's revenue base.
In an effort to achieve profitability, the Company examined its gross profit by
product and eliminated the unprofitable items, and revised sales prices during
the first quarter of fiscal 1997. Management expects this will enhance the
Company's profitability and annual operating cash flows. In addition, management
continues to explore other opportunities to increase food service and vending
sales revenues. Further, the Company restructured its route system effective
in September 1996 to eliminate unprofitable sales centers which will result in
reduced payroll and overhead costs. The Company's viability as a going
concern is dependent upon the successful implementation of these plans and
obtaining a significant increase in working capital.
Net cash used in investing activities was $386,000 in the fiscal year ended
September 1, 1996 compared to $2,624,000 in fiscal 1995. Of the fiscal 1995
amount, approximately $2.3 million was used to acquire Royal and, in 1996,
$55,000 was used to fund an acquisition. Capital expenditures were $397,000
and $523,000 during fiscal 1996 and 1995, respectively. Management has
evaluated the Company's current facilities and equipment and anticipates that
additional capital expenditures may be necessary in the near future. No
material contractual commitments for capital expenditures existed at year-end.
There is no assurance that financing or equity capital will be available at
terms acceptable to the Company to fund any significant capital expenditures.
During fiscal 1996, the Company financed its investments and operating
deficits through funds obtained by the issuance of common stock and
convertible debentures, and an additional $604,000 loan from Strategica
Capital Corporation ("Strategica"). The Company received $4.7 million from
the issuance of common stock. The Company also received $3.3 million from the
issuance of convertible debentures. Most of the debentures are payable on
demand and are non interest bearing for the first year of the instrument.
The Strategica loan agreement, originated in May 1995, requires monthly interest
payments at 12.5% and contains substantial restrictions on the conduct of
business and other activities of the Company other than in the ordinary course
of business without the prior consent of the lender. The loan is collateralized
by substantially all of the Company's tangible and intangible assets. The loan
agreement also limits the Company's ability to encumber assets or borrow
additional funds without prior consent of the lender. Pursuant to the agreement
the Company may not declare or pay any dividends or make distributions of any
kind in cash or stock. The lender also has the right to nominate at least two
members of the Company's board of directors (or three members if the board is
expanded to seven members). In connection with this financing, the Company also
issued warrants to purchase common stock. On November 22, 1995, the Company
and its lender amended this loan agreement to provide for an additional future
advance of up to $1 million, of which $604,000 was advanced to the Company. The
balance of the advance is not expected to be disbursed by the lender. During
1996, the Company repaid $194,000 of this note from the proceeds of a sale of
property.
As of September 1, 1996, the Company was obligated under Convertible Debentures
aggregating $1,550,000. Of this balance, $500,000 is uncollateralized and due
in 1998 with interest at 10%, and $1,050,000 is due on demand with interest at
8% after the first year and collateralized by a security agreement junior to the
lien granted Strategica discussed above.
As a result of its severe liquidity problems, the Company frequently has been
unable to make timely payments to its trade and other creditors. As of
September 1, 1996, and December 1, 1996, the Company had past due accounts
payable (greater than 30 days) totaling approximately $2.1 million and $1.9
million, respectively. Certain vendors have suspended deliveries to the
Company and have agreed to make deliveries only on a cash basis. As a result,
the Company was not always able to make product shipments on a timely basis,
and although no significant orders have been canceled to date, lack of product
has had an adverse effect on sales. Should the Company experience a
significant volume of suspended vendor deliveries resulting in reduced sales
volume, the Company's ability to maintain its current level of operations
would be jeopardized.
Throughout the current fiscal year, and continuing subsequent to year end, the
Company has considered a number of alternatives to improve its liquidity and
cash positions. The Company is closely monitoring its liquidity position to
ensure that existing cash is employed in a way management believes will be
most effective. In order to conserve cash, management has postponed certain
capital expenditures for plant and facility improvements and instituted other
cost-saving measures, some of which may adversely impact the Company's future
operating results.
The Company recognizes that additional funds will be required to pay trade
payables, purchase products and make payments for materials. Accordingly,
management continues to seek additional capital to maintain the needed growth
in revenues. The Company acknowledges there can be no assurance that the
Company will be able to obtain additional capital or other financing when it
is needed, or that such financing will be available on acceptable terms. In
the event the Company is unable to generate the necessary revenues to support
ongoing operations, or raise additional capital, there could be a serious
adverse impact on the Company's future operations and further impact on the
Company's status as a "going concern."
Item 7. Financial Statements
Attached as pages F-1 to F-28.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The directors, executive officers, and significant employees, of the Company
as of December 9, 1996 were as follows:
NAME AGE POSITION HELD WITH THE COMPANY
- ----------- ----- -------------------------------
Allan C. Sorensen 58 Chairman of the Board
John Donlevy 70 Chief Executive Officer, President and
Director
Justin A. DiMacchia 54 Chief Financial Officer, Vice President
of Finance, Treasurer, and Director
George Kelly 61 Director
David G. Klarman, Esq. 31 Director
Harold Rashbaum 70 Director
Each officer holds office at the discretion of the Board of Directors. Each
director holds office until the next annual meeting of stockholders or until
such director's successor is elected and qualified. There are no family
relationships among members of the board of directors or any executive
officers.
Allan C. Sorensen became the Company's Chairman of the Board in August 1996
and has been a director since February 1996. He also serves as Chairman of
the Board of Interim Services, Inc. ("Interim") and has served on the Board of
that company since 1967. He was President of Interim from 1967 until 1989 and
became Chief Executive Officer in 1978, when H&R Block, Inc. acquired Interim,
until September 1991. He was elected Chairman of Interim in 1989. He served
as a director of H&R Block, Inc. from 1979 until September 1993. H&R Block
spun off Interim in an initial public offering in January 1994. Mr. Sorensen
holds a Bachelors of Science degree in Pharmacy from Drake University.
John Donlevy has been a Director since October 31, 1994, and was elected
President and Chief Executive Officer in June 1996. Mr. Donlevy also served
as a consultant to AppleTree. He has more than 30 years of experience in the
food and beverage industry. During the 1980's, Mr. Donlevy served as
President of several Florida corporations, including South East Beverage
Corp., an Anheuser-Busch distributor for Dade County; Zephyrhills Water
Company, which serviced all of Florida; and Country Hearth Bakeries. He was
Executive Vice President of KMC Holding Company, Miami from 1983 until 1988.
Justin A. DiMacchia has been a Director since July 1994, Chief Financial
Officer since March 1994 and Vice President of Finance since July 1993. Mr.
DiMacchia joined the Company in July 1993. From 1991 until joining the
Company, Mr. DiMacchia was Vice President of Finance and Chief Financial
Officer for ArtWorks. From 1989 to 1990, Mr. DiMacchia was Vice President of
Finance and Chief Financial Officer for Wentworth Galleries. He was Executive
Vice President and Chief Financial Officer for Country Hearth Bakeries from
1987 to 1988. In addition to retail experience, he practiced as a Certified
Public Accountant, specializing in mergers and acquisitions, and was also with
Arthur Andersen & Co. Mr. DiMacchia received a Bachelor of Business
Administration from Ohio University in 1969. He is a member of the American
Institute of Certified Public Accountants and the Florida Institute of
Certified Public Accountants.
George Kelly became a director in February 1996. Mr. Kelly is owner and
President of E.G.K. Corporation which owns and operates a restaurant. From
1988 to May 1996, Mr. Kelly served as President and Chief Executive Officer of
D.G.P., Inc., a restaurant company with operations in Texas and Florida. From
1985 to 1987, Mr. Kelly owned and operated Victory Management, a food service
company, which he sold in 1987. From 1968 to 1985, Mr. Kelly owned and
operated Top Services, Inc., a food service company providing food to
cafeterias, corporate private dining rooms, hospitals, schools and vending
service. Mr. Kelly sold this company to Stouffer Corporation in 1975 and
continued to run it until 1985.
David Klarman, Esq. became a director in August 1996. In August 1996, Mr.
Klarman formed Klarman & Associates, a law firm specializing in corporate and
securities law with offices located in New York and San Francisco. From August
1996 to present, Mr. Klarman was appointed General Counsel of U. S. Wireless
Corporation. From July 1994 to August 1996, Mr. Klarman was an associate of
Lampert & Lampert, a law firm specializing in corporate and securities law.
From February 1991 to July 1994, Mr. Klarman was an associate of Goldstein
Axelrod & DiGioia, a law firm. Mr. Klarman received his Juris Doctorate from
Benjamin N. Cardozo School of Law, Yeshiva University and is a member of the
New York State Bar. Mr. Klarman received a B.S. degree in Finance from the
University of Maryland in 1986. Pursuant to the terms of the Company's
Certificate of Designation, as amended, the holder of 2,575 shares of 11%
Convertible Preferred Stock is entitled to nominate two directors to the
Company's board of directors; Mr. Klarman is one of two representatives
nominated by the holder.
Harold Rashbaum became a director in August 1996. Mr. Rashbaum has been the
Secretary, Treasurer and a director of Hollywood Productions, Inc. since May
1996. He also has been the secretary, chief financial officer and a director
of D. L. Productions, Inc., since its inception in April 1996. Mr. Rashbaum
became the chairman of the board of Play Co. Toys & Entertainment Corp. in
August 1996. From January 1991 to March 1992, he was a consultant for National
Wholesale Liquidators, Inc., a retailer of household goods and housewares. From
February 1996 to present, Mr. Rashbaum has been the president and a director of
H. B. R. Consultant Sales Corp., of which his wife is the sole stockholder. From
March 1992 to June 1995, Mr. Rashbaum was a consultant to 47th Street Photo,
Inc., a retailer of electronics, which position was at the request of the
bankruptcy court, during the time it was in Chapter 11. Mr. Rashbaum has been a
consultant for Play Co. Toys & Entertainment Corp. since June 1995, which
company is a wholesaler and retailer of children's toys. Pursuant to the terms
of the Company's Certificate of Designation, as amended, the holder of 2,575
shares of 11% Convertible Preferred Stock is entitled to nominate two directors
to the Company's board of directors; Mr. Rashbaum is one of two representatives
nominated by the holder.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires a
company's officers, directors, and persons who beneficially own more than 10%
of a registered class of a company's equity securities to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10%
beneficial owners also are required by rules promulgated by the SEC to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the
Company, the Company believes that during the 1996 fiscal year, the Company's
officers and directors have filed all of their required reports. The Company
is aware of holders of greater than 10% of the Company's Common Stock. As
listed in Item 11(a), the Company believes that they have filed their required
reports.
Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets for the salaries of the most highly compensated
executive officers, with salary and bonus exceeding $100,000, for each of the
three years in the period ended September 1, 1996.
Annual Long-term
Compensation Compensation
(1)
Securities All
Name and Principal Underlying Other
Position Year Salary($) Bonus($) Options Compensation
(4)
Paul B. Kravitz 1996 $237,131 $22,408 -
Chairman of the 1995 172,989 50,000 2,296,160
Board, CEO and 1994 102,533 13,144 162,000
President (2)
John W. Donlevy 1996 $100,000 - - $25,000
President and CEO (2)
(3)
Justin A. 1996 $156,057 $16,587 -
DiMacchia CFO, V.P. 1995 104,327 35,000 1,038,080
of Finance, Treasurer 1994 69,242 12,650 97,000
and Director
(1) Non cash benefits for each named executive officer were less
than 10% of their aggregate annual compensation.
(2) Mr. Kravitz retired in August 1996.
(3) Mr. Donlevy became chief executive officer in June 1996, and became
president in August 1996. For the fiscal year ended September 1, 1996, Mr.
Donlevy received $25,000 as compensation; the amount contained in the schedule
above has been annualized.
(4) During 1996, options granted in 1994 and 1995 were repriced at market.
See Options Granted in Last Fiscal Year.
The Company provides compensation to outside directors for their services in
the amount of $1,000 for each meeting attended. The Company periodically has
also granted options pursuant to the 1995 Directors Stock Option Plan.
Mr. Kravitz's employment agreement, as renegotiated in March 1995, provided
for an annual salary of $260,000 for the next five years, in addition to use
of a car (or a car allowance), a bonus equal to five percent (5%) of the
Company's pre-tax profits and participation in the Company's benefit plans.
Mr. Kravitz retired in August 1996, and pursuant to the terms of his
retirement agreement, the Company agreed to pay Mr. Kravitz an annual salary
of $65,000 until December 31, 1997, in addition to the use of a car.
Mr. Donlevy was appointed Chief Executive Officer of the Company in June 1996,
and President in August 1996, for which his annual compensation is
$150,000. Prior to his appointment, since 1995, Mr. Donlevy served as a
director and a consultant to the Company and was paid $2,000 monthly.
In March, 1995 the Company entered into an employment agreement with Mr.
DiMacchia providing for an annual salary of $150,000 for the next five years,
in addition to the use of a car. In February 1996, Mr. DiMacchia agreed to a
salary reduction to $110,000 per year. Mr. DiMacchia's agreement also
entitles him to participation in an executive bonus pool, if any. Under the
employment agreement, if the Company terminates Mr. DiMacchia's employment
without cause, or if Mr. DiMacchia terminates his employment agreement after a
change in control, the Company is required to pay him the remaining salary and
benefits under the terms of his employment contract. In the event of the death
of Mr. DiMacchia during the agreement's term, the Company is required to pay his
estate an amount equal to two years salary.
The following table presents information concerning options granted or
repriced in fiscal 1996, all of which are vested, to named executive officers
under the Company's employee option plans.
OPTIONS GRANTED IN LAST FISCAL YEAR
Number of % of Total Exercise Expiration
Securities Employees or Date
Underlying in Fiscal Base Price
SARs Granted Year ($/Sh)
Name (#)
Paul B. Kravitz,
1993 Stock Option Plan 208,160(1) 61% $0.09375 2004
1995 Executive Stock
Option Plan 1,625,000(2) 62% $0.09375 2000
1995 Key Employee
Stock Option Plan 775,000(3) 49% $0.09375 2005
John W. Donlevy
Directors Stock Option
Plan 52,500(4) 41% $0.19 to $0.97 2006
Justin A. DiMacchia,
1993 Stock Option Plan 135,080(5) 39% $0.0935 2004
1995 Executive Stock
Option Plan 1,000,000(2) 38% $0.0935 2000
1995 Key Employee
Stock Option Plan 400,000(3) 25% $0.0935 2005
(1) Of the options granted, 206,160 were granted in fiscal 1994 and 1995 at
$3.44 per share, were repriced in November 1994, March 1996 and September
1996 at market. In 1996, the Compensation Committee, in lieu of additional
options and in consideration of his early retirement, reduced the exercise price
of existing options.
(2) The options as granted became exercisable according to a schedule based
on the price of the Common Stock reaching various levels, ranging from $1.25 to
$4.25 per share. The options were granted in fiscal 1995 at $.56 per share, but
were repriced in March 1996 and September 1996 at market and eliminated the
pricing plateaus. In 1996, the Compensation committee, in lieu of additional
options, reduced the exercise price of existing options.
(3) These options are exercisable immediately. These options were granted in
August 1995, but were repriced in September 1996 at market. In 1996, the
Compensation Committee, in lieu of additional options, reduced the exercise
price of existing options.
(4) These options were granted while Mr. Donlevy was serving as an outside
director. In June 1996, Mr. Donlevy was appointed Chief Executive Officer of
the Company and became an employee. Mr. Donlevy became president in August 1996
upon Mr. Kravitz's retirement.
(5) Of the options granted, 133,080 were granted in fiscal 1994 and 1995 at
$3.44 per share, were repriced in November 1994, March 1996 and September 1996
at market. In 1996, the Compensation Committee, in lieu of additional options,
reduced the exercise price of existing options.
The following table presents, as to each named executive officer, the value of
their respective unexercised options as of September 1, 1996. No named
executive officer exercised any options during the fiscal year ended September
1, 1996.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Year-End Options at Year-End
Exercisable/ Exercisable/
Name Unexercisable Unexercisable(1)
- ------------------ ---------------------- --------------------
Paul B. Kravitz 2,608,160/0 $0/$0
John W. Donlevy 52,500/0 $0/$0
Justin A. DiMacchia 1,535,080/0 $3,838/$0
(1) Based on the closing bid price on September 1, 1996 ($.09375).
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners.
The following table sets forth information as of December 9, 1996, with
respect to any person who is known to the Company to be the beneficial owner
of more than 5% of the Company's Common Stock. The shares included below
which are issuable pursuant to convertible debentures, while currently
convertible, may not be issued until such time as the shareholders approve an
increase to the authorized number of shares of Common Stock of the Company.
Percent
Name and Address Number of Beneficially
of Beneficial Owner Shares(1)(2) Owned(1)(2)
AUER & CO. For the Benefit
of Washington University 50,400,000(3) 29.8%
10829 Olive Boulevard
St. Louis, Missouri 63141
BBC Foundation, Ltd. 80,000,000(4) 40.2%
c/o Todtman, Young, Tunick,
Nachamie, etal.
425 Park Avenue
New York, New York 10022
Benchmark Partners, L.P. 20,000,000(5) 14.4%
c/o Rich Whitman
750 Lexington Avenue, 24th
Floor
New York, New York 10022
Emanon Partners, L.P. 49,800,000(6) 29.5%
c/o Schaenen Fox Capital
Management
237 Park Avenue
New York, New York 10017
Europe American Capital
Corporation 15,736,111(7) 11.7%
Main Road
Tortola, British Virgin
Islands
Lancer Offshore, Inc. 26,000,000(8) 18.2%
c/o Citco Fund Services,
Curaco
Kaya Flamboyan 9-P.O.
Box 812
Curacao, Netherlands,
Antilles
Lancer Partners, L.P. 47,459,530(9) 35.2%
200 Park Avenue, Suite 3900
New York, New York 10166
Alfred Peeper 30,769,231(10) 20.6%
c/o Euram
C. Hamburgo 22
Ed. Las Algas 2-4
03500 Benidorm, Spain
Strategica Capital
Corporation 17,949,931(11) 13.1%
d/b/a Strategica Group
1221 Brickell Avenue
Miami, Florida 33133
(1) Ownership includes sole voting and investment power except as otherwise
noted. When applicable, the number of shares beneficially owned includes
the number of unissued shares which the listed person has a right to acquire
within 60 days after December 9, 1996. In determining the number of shares
outstanding for computing the percent of class owned by a listed person, the
number of shares outstanding of the Company has been increased by the number of
unissued shares which the listed person has a right to acquire from the Company
within 60 days after December 9, 1996.
(2) Applicable percentage ownership is based on 118,856,323 shares of Common
Stock outstanding on December 9, 1996.
(3) Represents Common Stock issuable related to convertible debentures in the
amount of $630,000. The Debentures are convertible into Common Stock at
$.0125 per share.
(4) Represents Common Stock issuable related to convertible debentures in the
amount of $1,000,000. The Debentures are convertible into Common Stock at
$.0125 per share.
(5) Represents Common Stock issuable related to convertible debentures in the
amount of $250,000. The Debentures are convertible into Common Stock at
$.0125 per share.
(6) Represents Common Stock issuable related to convertible debentures in the
amount of $622,500. The Debentures are convertible into Common Stock at
$.0125 per share.
(7) Includes shares of Common Stock issuable upon the conversion of 11%
Convertible Preferred Stock, issued on February 15, 1996, totaling
$2,832,500. The number of shares was calculated based on the terms of the
Convertible Preferred Stock, which provide that the holder may convert at
$.18 per share.
(8) Represents 2,000,000 shares of Common Stock and Common Stock issuable
related to convertible debentures in the amount of $300,000. The
Debentures are convertible into Common Stock at $.0125 per share. The Company
believes that Michael Lauer controls both Lancer Offshore, Inc. and Lancer
Partners, L.P.
(9) Represents (i) 31,459,530 shares of Common Stock; and (ii) Common Stock
issuable related to convertible debentures in the amount of $200,000. The
Debentures are convertible into Common Stock at $.0125 per share. The Company
believes that Michael Lauer controls both Lancer Partners, L.P. and Lancer
Offshore, Inc.
(10) Represents Common Stock issuable related to convertible debentures in the
amount of $400,000. The Debentures are convertible into Common Stock at
50% of the closing bid price on the day before conversion. As of December
9, 1996, the closing bid price was $0.026 per share. These convertible
debentures were issued to certain non-U.S. corporations which the Company
believes are controlled by Alfred Peeper.
(11) Represents shares of Common Stock which are issuable upon the exercise of
warrants issued on May 22, 1995, that expire on May 22, 2000. Pursuant to
loan documents dated May 22, 1995, and November 22, 1995, Strategica is
entitled to additional warrants, in order to bring the total number issuable
upon the exercise of warrants to 18.5% of the Company's outstanding Common
Stock. The exercise price is $.5625 per share.
(b) Security Ownership of Management.
The following table sets forth information as of December 9, 1996 regarding the
beneficial ownership of Common Stock of each director of the Company, each named
executive officer and all directors and executive officers of the Company as a
group. The shares included below which are issuable pursuant to the Company's
option plans, while currently exercisable, may not be issued until such time as
the shareholders approve an increase to the authorized number of shares of
common stock of the Company.
Percent
Number Beneficially
Name of Beneficial Owner of Shares(1) Owned(1)(2)
Paul B. Kravitz (3) 2,795,160(4) 2.3%
John Donlevy (3) 58,500(5) *
Justin A. DiMacchia 1,549,624(6) 1.3%
Allan C. Sorensen 175,000(7) *
George Kelly 25,000(7) *
David Klarman, Esq. 0 0
Harold Rashbaum 0 0
All Executive Officers 4,603,284(8) 3.7%
and Directors as a
Group (7 persons)
- -----------------------
* Less than one percent.
(1) Ownership includes sole voting and investment power except as otherwise
noted. When applicable, the number of shares beneficially owned includes the
number of unissued shares which the listed person (or group) has a right to
acquire within 60 days after December 9, 1996. In determining the number of
shares outstanding for computing the percent of class owned by a listed person
(or group), the number of shares outstanding of the Company has been increased
by the number of unissued shares which the listed person (or group) has a right
to acquire from the Company within 60 days after December 9, 1996.
(2) Applicable percentage ownership is based on 118,856,323 shares of Common
Stock outstanding on December 9, 1996.
(3) In June 1996, Mr. Donlevy was appointed Chief Executive Officer of the
Company, and, upon Mr. Kravitz's retirement in August 1996, Mr. Donlevy was
appointed president of the Company.
(4) Includes 187,000 shares owned directly and 2,608,160 shares subject to
options and warrants that are presently exercisable.
(5) Includes 6,000 shares owned directly and 52,500 shares subject to options
that are presently exercisable.
(6) Includes 14,544 shares owned directly and 1,535,080 shares subject to
options and warrants that are presently exercisable.
(7) Includes 25,000 shares subject to options that are presently exercisable.
(8) Includes 357,544 shares of Common Stock and 4,245,740 shares subject to
options and warrants that are presently exercisable.
Item 12. Certain Relationships and Related Transactions
During 1996, the Company issued to European American Capital Corporation
("EACC") a new series of its previously authorized preferred stock. This new
series is the subject of a Certificate of Designation, as amended (the
"Certificate"), and is the 11% Convertible Preferred Stock ("COPS"). Each share
of COPS is issued for $1,100; has a dividend or payment in lieu thereof,
payable quarterly starting June 30, 1996; and is convertible into common stock
at the option of EACC at the rate of $.18 per share or by the Company as
provided in the Certificate.
In November 1994, to finance the acquisition of Royal, the Company entered into
a convertible debenture agreement with EACC in the amount of $3.5 million
bearing interest at 10%. From January 1995 to February 1996, $1.3 million of
this debenture was converted into approximately 4.2 million shares of the
Company's Common Stock. In February 1996, the balance of $2.2 million, together
with a $500,000 note, accrued interest and a fee, were converted into 2,575
shares of the COPS. Pursuant to the terms of the Certificate, EACC is entitled
to nominate two directors to the Company's board of directors. Messrs. Klarman
and Rashbaum were nominated by EACC to the Company's board of directors.
See Item 11(a) "Security Ownership of Certain Beneficial Owners" for
disclosure concerning recently issued convertible debentures.
See Item 6 "Management's Discussion and Analysis - Liquidity and Capital
Resources" for disclosure concerning the Company's loan agreement with
Strategica Capital Corporation.
Item 13. Exhibits and Reports on Form 8-K
Exhibit No.
3.1 Certificate of Incorporation, as amended(1)
3.2 Bylaws of the Company, as amended(2)
3.3 Certificate of Amendment of Certificate of Incorporation
dated September 28, 1995(3)
3.4 Certificate of Correction of Certificate of Incorporation
dated January 25, 1996(3)
3.5 Certificate of Amendment of Certificate of Incorporation dated
February 23, 1996(3)
3.6 Certificate of Designation for 11% Convertible Preferred
Stock(3)
3.7 Amended Certificate of Designation for 11% Convertible
Preferred Stock(3)
4.1 Form of Common Stock Certificate(4)
4.2 Limited Secured Convertible Debenture, dated as of November
22, l994, issued by the Company to Europe American Capital Corp.(5)
4.3 Amendment, dated January 17, 1995, to the Limited Secured
Convertible Debenture, dated as of November 22, 1994 issued by the
Company to Europe American Capital Corp.(6)
4.4 Convertible Debenture, dated January 17, 1995 issued by the
Company to Abikon, Ltd.(6)
4.5 Promissory Note dated January 31, 1995 issued by the Company
to TransAtlantic Commerce Corp. (6)
4.6 Loan Agreement and Warrant Agreement dated May 22, 1995,
between the Company and Strategica Capital Corp. (7)
4.7 Promissory Note dated May 22, 1995, issued by the Company to
Strategica Capital Corp.(7)
4.8 Amendment to Loan Agreement and Warrant Agreement dated
November 22, 1995, between the Company and Strategica Capital Corp.
(8)
4.9 Promissory Note dated November 22, 1995, issued by the
Company to Strategica Capital Corp. (8)
4.10 Convertible Debenture dated August 23, 1995 issued by the
Company to Liba Developments, Inc. (8)
4.11 Convertible Debenture dated September 14, 1995 issued by the
Company to LaSalle Investments Ltd. (8)
4.12 Convertible Debenture dated October 2, 1995 issued by the
Company to International Future Holdings Corporation, Ltd. (8)
4.13 Convertible Debenture dated November 8, 1995 issued by the
Company to Amarante S.A. (8)
4.14 Convertible Debenture dated October 30, 1995 issued by the
Company to Flurina Developments Inc. (8)
4.15 Letter Agreement from Strategica Capital Corporation dated
December 1, 1995 modifying Loan Agreement (3)
4.16 Form of Convertible Debenture issued by the Company in 1996.
4.17 Form of Security Agreement issued by the Company in 1996.
4.18 Form of Warrant Agreement issued by the Company in 1996.
4.19 Form of Subscription Agreement issued by the Company in
1996.
10.1 Lease dated August 21, 1992 between Glades Road Associates
and the Company.(2)
10.2 Order Approving Sale of Assets to Modami Stewart Foods,
Inc., dated December 12, l993.(9)
10.3 Exercise of Conversion Rights Agreement, dated November 30,
l993, between Optical Express, Inc. and the Company. (10)
10.4 Stock Exchange Agreement, dated January 31, l994, between
the Company and certain officers of Optical Express, Inc. (11)
10.5 Stock Exchange Agreement, dated February 9, l994, between
Modami Stewart Foods Inc., the Company, and Robert W. Lackey(11)
10.6 Share Purchase Agreement, dated as of November 22, l994,
between Americas Foods, Inc. and Pepperidge Farm, Incorporated. (5)
10.7 Letter Agreement, dated as of November 22, l994, between the
Company and Europe American Capital Corp. re: issuance of Americas
Foods and The AppleTree Companies, Inc. warrants.(1)
10.8 1993 Stock Option Plan(1)
10.9 Consulting Agreement, dated as of July 31, 1994, between the
Company and Michael Lapp.(1)
10.10 1995 Key Employees Stock Option Plan(6)
10.11 1995 Executive Stock Option Plan(6)
10.12 1995 Directors Stock Option Plan(6)
10.13 Ruden, Barnett, McClosky, Smith, Schuster & Russell, P.A.
Legal Fee Agreement dated March 20, 1995(6)
10.14 Employment Agreement dated March 30, 1995 between the
Company and Paul Kravitz(6)
10.15 Employment Agreement dated March 30, 1995 between the
Company and Justin A. DiMacchia(6)
10.16 Consulting and Financial Advisory Services Agreement dated
May 22, 1995 between the Company and Strategica Capital Corp.(7)
10.17 Asset Purchase Agreement between the Company and Sandwich
Makers of Arizona, Inc. and Sandwich Makers of California, Inc. (8)
10.18 Consulting Agreement dated as of September 23, 1994 between
the Company and Alan Berkun.(13)
10.19 Amendment to Asset Purchase Agreement between the Company
and Sandwich Makers of California, Inc. dated January 23, 1996(3)
21.1 Subsidiaries of the Company(6)
23.1 Consent of Coopers & Lybrand, L.L.P.
Reports on Form 8-K
None
______________________
(1) Incorporated by reference to the Company's Form 10-KSB for the year ended
August 31, 1994
(2) Incorporated by reference to the Company's Form 10-K for the year ended
August 31, 1992
(3) Incorporated by reference to the Company's Form 10-QSB for the quarterly
period ended March 3, 1996
(4) Incorporated by reference to the Company's Registration Statement on Form
S-18, File No. 33-44902-A
(5) Incorporated by reference to the Company's Form 8-K, dated November 22, 1994
(6) Incorporated by reference to the Company's Form 10-QSB for the quarterly
period ended February 28, 1995
(7) Incorporated by reference to the Company's proxy statement dated July 7,
1995
(8) Incorporated by reference to the Company's Form 10-KSB for the year ended
September 3, 1995
(9) Incorporated by reference to the Company's Form 8-K, dated on December 30,
1993
(10) Incorporated by reference to the Company's Form 10-QSB for the quarterly
period ended November 30, 1993
(11) Incorporated by reference to the Company's Form 10-QSB for the quarterly
period ended February 28, 1994
(12) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 33-83076
(13) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 33-84668
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE APPLETREE COMPANIES, INC.
By: /s/ John W. Donlevy
--------------------------------
John W. Donlevy, CEO,
President and Director
(Principal Executive Officer)
Date: December 19, 1996
-------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: Allan C. Sorensen
--------------------------------
Allan C. Sorensen, Chairman
of the Board
Date: December 19, 1996
-------------------------------
By: /s/ John W. Donlevy
--------------------------------
John W. Donlevy, CEO,
President and Director
(Principal Executive Officer)
Date: December 19, 1996
-------------------------------
By: /s/ Justin A. DiMacchia
--------------------------------
Justin A. DiMacchia, CFO,
Vice President of Finance,
Treasurer, and Director
(Principal Finance and
Accounting Officer)
Date: December 19, 1996
-------------------------------
By: /s/ George Kelly
--------------------------------
George Kelly, Director
Date: December 19, 1996
------------------------------
By: /s/ David Klarman
--------------------------------
David Klarman, Esq., Director
Date: December 20, 1996
------------------------------
By: /s/ Harold Rashbaum
--------------------------------
Harold Rashbaum, Director
Date: December 20, 1996
------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The AppleTree Companies, Inc.
Norfolk, Virginia
We have audited the accompanying consolidated balance sheets of The AppleTree
Companies, Inc. as of September 1, 1996 and September 3, 1995, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the fifty-two week period ended September 1, 1996 and the fifty-
three week period ended September 3, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The AppleTree
Companies, Inc. as of September 1, 1996 and September 3, 1995, and the
consolidated results of their operations and their cash flows for the fifty-two
and fifty-three week periods then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
has experienced recurring losses and negative cash flows from operations, has a
capital deficiency and working capital deficiency, and is not in compliance with
existing loan covenants. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
these matters are also described in Note 3. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ COOPERS & LYBRAND, L.L.P.
Virginia Beach, Virginia
December 16, 1996
F-1
THE APPLETREE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
September 1, 1996 and September 3, 1995
(rounded to thousands except share data)
ASSETS 1996 1995
------------ -------------
Current assets:
Cash and cash equivalents $ 248,000 $ -
Accounts receivable (net of allowance for
doubtful accounts and spoilage of $693,000
in 1996 and $654,000 in 1995) 1,431,000 2,490,000
Inventories 1,067,000 1,868,000
Prepaid expenses and other current assets 41,000 119,000
------------ ------------
Total current assets 2,787,000 4,477,000
Property and equipment, net 4,351,000 4,857,000
Intangible assets, net - 795,000
Deposits and other assets 324,000 657,000
------------ -------------
Total assets $ 7,462,000 $ 10,786,000
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Notes payable $ 56,000 $ -
Convertible debentures due on demand 1,050,000 -
Current portion of capitalized lease obligations 176,000 170,000
Current portion of long-term debt 201,000 166,000
Accounts payable 3,029,000 3,456,000
Accounts expenses 2,131,000 1,777,000
Reclassification of long-term debt 3,061,000 3,150,000
----------- ------------
Total current liabilities 9,704,000 8,719,000
Capitalized lease obligations, net of
current portion 964,000 1,140,000
Long-term debt, net of current portion 215,000 348,000
Convertible debentures 500,000 2,925,000
----------- ------------
Total liabilities 11,383,000 13,132,000
----------- ------------
Commitments and contingencies (Notes 16, 17 & 18)
Stockholders' equity deficiency:
Preferred stock- par value $.001 per share,
10,000,000 shares authorized, 85,389 shares
issued and outstanding in fiscal 1996
(liquidation preference of $3,740,640);
109,114 shares issued and outstanding in
fiscal 1995 (liquidation preference of
$1,091,140)
Common Stock - par value $.001 per share,
120,000,000 shares authorized, 115,089,087
shares issued and 115,080,322 shares
outstanding in 1996; 50,000,000 shares
authorized, 19,867,122 shares issued and
19,858,357 outstanding in 1995 115,000 20,000
Additional paid-in capital 35,933,000 27,241,000
Accumulated deficit (39,810,000) (27,958,000)
Less: Subscription receivable - (1,490,000)
Treasury stock, at cost (159,000) (159,000)
------------ ------------
Total stockholders' equity deficiency (3,921,000) (2,346,000)
------------- ------------
Total liabilities and stockholders'
equity deficiency $ 7,462,000 $10,786,000
============= ============
See accompanying notes to consolidated financial statements.
F-2
THE APPLETREE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the fifty-two week period ended September 1, 1996 and
the fifty-three week period ended September 3, 1995
(rounded to thousands except per share data)
1996 1995
------------ -------------
Net Sales $ 28,666,000 $ 26,578,000
Costs of goods sold 19,082,000 17,362,000
------------ -------------
Gross profit 9,584,000 9,216,000
------------ -------------
Operating expenses:
Selling, general and administrative 18,120,000 14,926,000
Impairment of intangible assets 1,738,000 1,235,000
Professional fees 742,000 1,763,000
Consultants' stock option compensation - 982,000
------------ ------------
Total operating expenses 20,600,000 18,906,000
------------ ------------
Loss from operations (11,016,000) (9,690,000)
------------ ------------
Other expense:
Interest expense 843,000 1,204,000
Other, net (7,000) 20,000
------------ -----------
Total other expense 836,000 1,224,000
------------ -----------
Loss from continuing operations (11,852,000) (10,914,000)
------------ ------------
Loss from discontinued operations:
Loss from discontinued operations - (785,000)
Loss on disposal - (680,000)
------------- -------------
Loss from discontinued operations - (1,465,000)
------------ ------------
Net loss $(11,852,000) $(12,379,000)
============= =============
Net loss per common share:
Net loss applicable to common stockholders $(12,030,000) $(12,388,000)
============= =============
Weighted average number of common shares
outstanding 54,193,000 11,468,000
============= =============
Loss from continuing operations $ (0.22) $ (0.95)
Loss from discontinued operations 0.00 (0.13)
------------- -------------
Net loss per common share $ (0.22) $ (1.08)
============= =============
See accompanying notes to consolidated financial statements.
F-3
<TABLE>
THE APPLETREE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DEFICIENCY
for the fifty-two week period ended September 1, 1996 and
the fifty-three week period ended September 3, 1995
<CAPTION> <C>Preferred Stock <C> Common Stock <C>Additional <C> <C> <C> <C>
----------------- ---------------------- Paid-In Accumulated Subscription Treasury
Shares Amount Shares Amount Capital Deficit Receivable Stock Total
-------- ------- ------------ -------- ------------ ------------- ------------- ---------- ------------
Balance, August
31, 1994 351,350 $ - 2,728,746 $ 3,000 18,083,000 $(15,360,000) $(1,490,000) $(159,000) $ 1,077,000
Redemption of
preferred stock (16,000) (120,000) (120,000)
Conversion of
preferred stock
and dividends in
arrears relating
thereto into
common stock (226,236) 359,637 219,000 (219,000) -
Proceeds from
issuance of
common stock 7,936,854 8,000 3,520,000 3,528,000
Exercise of
consultants'
stock options 1,101,600 1,000 1,789,000 1,790,000
Conversion of
debentures into
common stock 6,295,618 6,000 2,668,000 2,674,000
Issuance of
common stock
for legal fees 1,477,667 2,000 1,082,000 1,084,000
Net loss (12,379,000) (12,379,000)
-------- ------- ------------ -------- ----------- ------------ ------------ ---------- ------------
Balance, September
3, 1995 109,114 - 19,867,122 20,000 27,241,000 (27,958,000) (1,490,000) (159,000) ( 2,346,000)
Conversion of
convertible
debentures, notes
payable, accrued
interest and fees
into preferred
stock 2,575 - 2,832,500 2,832,500
Conversion of
preferred stock
into common
stock (26,000) - 15,780 - - -
Proceeds from
issuance of
common stock 72,465,515 72,000 4,585,000 4,657,000
Conversion of
debentures and
note payable
into common
stock 22,740,670 23,000 2,710,000 2,733,000
Amount received
from subscription
receivable 55,000 55,000
Reversal of
subscription
receivable to
paid-in capital (1,435,000) 1,435,000 -
Net loss (11,852,000) (11,852,000)
-------- ------- ------------ -------- ----------- ------------ ---------- --------- -----------
Balance,
September 1,
1996 85,389 $ - 115,089,087 $115,000 $35,933,000 $(39,810,000) - $(159,000) $(3,921,000)
======== ======= ============ ======== =========== ============ ========== ========= ===========
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
THE APPLETREE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the fifty-two week period ended September 1, 1996 and
the fifty-three week period ended September 3, 1995
(rounded to thousands)
1996 1995
------------ -------------
Cash flows from operating activities $(11,852,000) $(12,379,000)
Net loss
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 913,000 932,000
Amortization expense 153,000 778,000
Bad debt expense 377,000 688,000
Impairment of intangible assets 1,738,000 1,235,000
Minority interest - (197,000)
Stock option compensation - 982,000
(Gain) loss on sale of fixed assets (191,000) 61,000
Loss on disposal of discontinued operations - 680,000
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable 743,000 (622,000)
Inventories 863,000 (191,000)
Prepaid expenses and other current assets 79,000 14,000
Other assets (49,000) (220,000)
Accounts payable and accrued expenses (218,000) 2,409,000
----------- -----------
Net cash used in operating activities (7,444,000) (5,830,000)
----------- -----------
Cash flows from investing activities:
Payments for acquisitions, net of cash
acquired of $171,000 in 1995 (55,000) (2,276,000)
Capital expenditures (397,000) (523,000)
Proceeds from sale of property and equipment 66,000 175,000
------------ -----------
Net cash used in investing activities (386,000) (2,624,000)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures 3,204,000 3,465,000
Proceeds from issuance of note payable
and long-term debt 604,000 3,150,000
Payments on note payable, long-term debt
and capitalized lease obligations (427,000) (1,801,000)
Deferred financing costs (34,000) (668,000)
Proceeds from exercise of stock options - 808,000
Proceeds from issuance of preferred
and common stock 4,731,000 3,528,000
Retirement of preferred stock - (120,000)
----------- -----------
Net cash provided by financing activities 8,078,000 8,362,000
----------- -----------
Net increase (decrease) in cash
and cash equivalents 248,000 (92,000)
Cash and cash equivalents at beginning of year - 92,000
---------- -----------
Cash and cash equivalents at end of year $ 248,000 $ -
========== ===========
See accompanying notes to consolidated financial statements.
F-5
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Basis of Presentation
--------------------------------------------
The AppleTree Companies, Inc.'s (together with its subsidiaries, the
"Company") primary business consists of manufacturing and distributing food
products to convenience stores, institutions and vending companies.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. Conditions exist which create
substantial doubt about the Company's ability to continue as a going concern.
See Note 3 for further information with respect to going concern and
management's plans. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries, Americas Foods, Inc. ("AFI") and
J. R. Bassett Optical, Incorporated ("JRBO"). All significant intercompany
accounts and transactions have been eliminated in consolidation. During
1995, the Company discontinued its optical operations and has presented those
operating results as discontinued operations (see Note 17).
Fiscal Year
-----------
The Company's fiscal year is a fifty-two, fifty-three week fiscal year ending
on the Sunday nearest August 31. The fiscal year ended September 1, 1996
contains fifty-two weeks and the fiscal year ended September 3, 1995 contains
fifty-three weeks.
Cash Equivalents
----------------
All highly liquid investments with an original maturity of three months or
less when acquired are classified as cash equivalents.
Inventories
-----------
Inventories are valued at the lower of cost, determined using the first-in,
first-out method, or market determined on a net realizable basis.
F-6
Property and Equipment
---------------------
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation and amortization are computed on a straight-line basis over the
estimated useful lives of the assets or, for property under capital leases,
over the lesser of the asset's useful life or the lease term. Upon disposition,
the cost and related accumulated depreciation are removed and the resulting
gain or loss is reflected in income for the period.
Intangible Assets
-----------------
Intangible assets consist primarily of direct delivery sales routes which are
being amortized using the straight-line method over 20 years. The Company
periodically evaluates the carrying value of intangible assets to measure and
recognize the possible impairment of these assets by reviewing future cash
flows in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for Impairment of Long-Lived Assets," which became
effective for years beginning after December 15, 1995. This pronouncement
requires an evaluation of estimated future cash flows and relating such cash
flows to the values recorded for long-lived assets, including intangible
assets and property and equipment. The adoption of SFAS No. 121 in 1996 had
no significant effect on the Company's financial statements.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, revenues and
expenses during the periods presented, and the disclosure of contingent
assets and liabilities at the date of the financial statements. Actual
results could differ from those estimates.
Income Taxes
------------
The Company recognizes deferred tax benefits and liabilities for the future
tax consequences, measured by enacted tax rates, attributable to deductible
temporary differences between financial statement and income tax basis of
assets and liabilities. In addition, the Company recognizes the future tax
benefit of net operating loss carryforwards to the extent that realization of
such benefits is more likely than not. A valuation allowance is provided
against deferred tax assets if, based on the weight of available evidence, it
is more likely than not that some or all of the deferred tax assets will not
be realized.
F-7
Net Loss Per Common Share
-------------------------
Net loss per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average number of common shares
outstanding during the year. Net loss applicable to common stockholders
consists of net loss plus preferred stock dividends. Convertible debentures,
convertible preferred stock, and warrants and options to purchase common
stock are not included in the computation of net loss per common share
because their conversion into common stock or exercise would have an
antidilutive effect.
Revenue Recognition
-------------------
The Company predominantly recognizes revenue upon delivery of products to
customers. The Company's products generally have a shelf life of seven to
fourteen days. The Company provides credit or refunds for certain of its
products where the shelf life has expired. The Company estimates returns
based on management's evaluation of historical experience and charges such
estimates against gross revenues.
Reverse Stock Split
-------------------
The Company approved a 1 for 5 reverse stock split in October 1994. All
share and per share data have been adjusted to give effect to the reverse
stock split.
Reclassification
----------------
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation. The reclassification had no effect on
net loss or stockholders' equity (deficiency).
2. ACQUISITIONS
------------
In November 1994, the Company acquired 100% of the outstanding voting common
stock of Royal American Foods Corporation ("Royal") for a purchase price of
$3,652,000, as adjusted, which consisted of $2,352,000 in cash and a seller
financed note in the amount of $1,300,000 which was due and paid in May 1995.
In addition, transaction related costs were approximately $295,000. The
Company accounted for this transaction using the purchase method of
accounting. The excess of the fair value of net assets acquired over
purchase price was approximately $1,127,000. This amount has been allocated
to reduce the fair market values assigned to noncurrent assets.
F-8
The unaudited pro forma consolidated results of operations listed below
reflect purchase accounting adjustments, including depreciation and
amortization of the assets acquired based on their fair values assuming the
Royal acquisition had occurred at the beginning of 1995.
1995
-----------
Net sales $30,528,000
Loss from operations (9,490,000)
Net loss (12,270,000)
Net loss per share ($1.07)
Weighted average shares of common
stock outstanding 11,468,000
The pro forma results presented above are for comparative purposes only.
They are not necessarily indicative of the operating results that would have
occurred if the transactions had been in effect for the entire period
presented, or of results which may be obtained in the future.
In October 1995, the Company acquired the assets and assumed certain
liabilities of Sandwich Maker of Arizona, Inc. and Sandwich Makers of
California, Inc. In addition, a covenant not to compete was entered into
with the former owner. The purchase price aggregated approximately $350,000,
which consisted of $55,000 cash and noninterest-bearing seller financed notes
of $295,000. The Company accounted for this transaction using the purchase
method of accounting. Historical sales approximated $3 million annually and
pro forma information is not considered significant.
F-9
3. GOING CONCERN AND MANAGEMENT'S PLANS
------------------------------------
The Company has experienced significant losses from operations during the
last four fiscal years and has a capital deficiency of $3,921,000 and a
working capital deficit of $6,917,000, including long-term debt of $3,061,000
classified as current due to covenant violations (see Note 8), as of
September 1, 1996. The Company anticipates numerous demands for capital
throughout fiscal 1997 including funds necessary to meet the cash that is
expected to be used in operating activities and funds necessary for capital
expenditures or debt obligations. The Company frequently has been unable to
make timely payments to its trade and other creditors. Certain vendors have
suspended deliveries to the Company or have agreed to make deliveries only on
a cash basis. As a result, the Company has not always been able to make
product shipments on a timely basis, which has had an adverse effect on
sales. There can be no assurances that the Company will be able to obtain
the required funds to take advantage of sales opportunities, sustain
operations or to satisfy debt obligations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, and do not include any adjustments
that might result from the outcome of this uncertainty.
Management anticipates negative cash flows from operating activities will
continue until the Company has completed its cost reduction plan currently
under way. This plan includes relocating the Company's home office to its
Norfolk operations center in August 1996 and dismissing several executive and
administrative employees and reducing administrative overhead, eliminating
unprofitable routes, reducing distribution costs, and further consolidation
of certain activities to reduce selling, general and administrative expenses.
Upon completion of the cost reduction effort, management's focus will be on
increasing the Company's revenue base.
In an effort to achieve profitability, the Company examined its gross
profit by product and eliminated the unprofitable items, and revised sales
prices during the first quarter of 1997. Management expects this will
enhance the Company's profitability and annual operating cash flows. In
addition, management continues to explore other opportunities to increase
food service and vending sales revenues.
Management has evaluated the Company's current facilities and equipment and
anticipates that capital expenditures are necessary to enhance operating
efficiency and improve profitability, but are contingent upon the
availability of funds.
F-10
Further, as it has in the past, the Company intends to raise capital to fund
its financial needs in addition to or to supplement the anticipated growth in
operating revenues. The Company, immediately prior to and continuing
subsequent to year end, completed a private placement of $3 million of its
common stock and convertible debentures. The Company used the proceeds to
reduce its current liabilities and fund operating losses. There is no
certainty that such financing will be sufficient to sustain its operations
for the short term while its cost reduction and revenue enhancement plans are
implemented. Accordingly, management is continuing to pursue other sources
of additional funding.
The Company's viability as a going concern is dependent upon raising short-
term funding and the successful implementation of its cost reduction plans.
4. CREDIT RISK
-----------
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and accounts receivable. The
Company maintains its cash and cash equivalents balances in bank accounts
with major financial institutions, which balances may, at times, exceed
federally insured limits. Concentrations of credit risk with respect to
accounts receivable are generally limited due to the large number of
customers comprising the Company's customer base and their dispersion across
the United States; however, the Company has one customer which comprises
approximately 27% and 13% of accounts receivable as of September 1, 1996 and
1995, respectively. This same customer accounted for 7.1% and 6.8% of net
sales in 1996 and 1995, respectively. The Company's customers are primarily
in the convenience store and food service industries. Generally, the Company
does not require collateral or other security to support customer
receivables.
5. INVENTORIES
-----------
Inventories at September 1, 1996 and September 3, 1995 consist of the
following:
1996 1995
---------- ----------
Raw materials $ 467,000 $ 659,000
Finished goods 600,000 1,209,000
---------- ----------
$1,067,000 $1,868,000
========== ==========
F-11
6. PROPERTY AND EQUIPMENT
----------------------
Property and equipment at September 1, 1996 and September 3, 1995 consists of
the following:
1996 1995
---------- -----------
Land $ 472,000 $ 462,000
Buildings and improvements 1,215,000 1,467,000
Furniture, fixtures and equipment 1,154,000 565,000
Machinery and equipment 1,820,000 2,297,000
Transportation and delivery equipment 1,340,000 1,172,000
---------- ----------
6,001,000 5,963,000
Accumulated depreciation and
amortization 1,650 000 1,106,000
---------- ----------
$4,351,000 $4,857,000
========== ==========
Included in the above amounts are capitalized leases principally for
machinery and equipment recorded at fair market value at the inception of the
leases in the amount of $1,575,000 as of September 1, 1996 and $1,628,000 as
of September 3, 1995. Accumulated amortization at September 1, 1996 and
September 3, 1995 amounted to $338,000 and $169,000, respectively.
7. INTANGIBLE ASSETS
-----------------
Intangible assets as of September 1, 1996 and September 3, 1995 consist of
the following:
1996 1995
--------- ---------
Direct delivery sales routes $ - $827,000
Accumulated amortization - (32,000)
--------- --------
$ - $795,000
========= ========
The Company, through its acquisition of Sandwich Maker in 1996, Royal in
1995, and Stewart and Carriage Town in 1994, increased its intangible assets
by $579,000, $830,000, $399,000 and $828,000, respectively. The Company
evaluated the carrying value of intangible assets as of September 1, 1996 and
September 3, 1995 and determined that certain assets were impaired and,
accordingly, charged $1,280,000 and $1,235,000 to operations in the fourth
quarters of fiscal 1996 and 1995. During the fourth quarter of 1995, the
Company also charged $668,000 to operations which is included in interest
expense for financing costs previously deferred.
F-12
8. NOTES PAYABLE AND LONG-TERM DEBT
--------------------------------
Long-term debt consists of the following at September 1, 1996 and September
3, 1995:
1996 1995
--------- ----------
AFI note payable with interest at 8.5%
payable at maturity, collateralized by
the proceeds of an AFI public offering.
Repaid in 1996 through the issuance of
11% Convertible Preferred Stock.(a) $ - $ 500,000
Installment note payable with interest
at 8.5%, due in monthly installments
of $13,140, including interest, through
August 1998, collateralized by delivery
vehicles. 267,000 397,000
Installment notes payable with interest
at 8.75% to 10%, due in monthly
installments of $3,700, including
interest, through November 1999,
collateralized by delivery vehicles. 116,000 -
Installment note payable with interest
at 17.7%, due in monthly installments
of $1,625 including interest, through
June 1998, collateralized by computer
equipment. 17,000 -
Installment note payable with interest
at 8.9%, due in monthly installments of
$753 including interest, through August
1998, collateralized by delivery vehicles. 16,000 23,000
F-13
Installment note payable, noninterest
bearing and uncollateralized, interest
imputed at 12%, repaid in 1996. - 94,000
Note payable with interest at 12.5% payable
monthly, collateralized by substantially
all of the Company's tangible and intangible
assets, due November 1997. (b) 3,061,000 2,650,000
---------- -----------
3,477,000 3,664,000
Current portion (including $3,061,000 and
$3,150,000 classified as current due to
noncompliance with loan covenants in 1996
and 1995, respectively) (3,262,000) (3,316,000)
---------- -----------
$ 215,000 $ 348,000
========== ===========
(a) The note was due to an affiliate of a former AFI director. In accordance
with the terms of the agreement, the Company agreed to sell to the lender
100,000 restricted units consisting of one share of AFI common stock and one
common stock purchase warrant. The Company tendered its payment to repay the
note, but, at the Company's request, the lender returned the payment and
provided an extension of the due date. In February 1996, the note payable,
together with accrued interest of $44,000 and a $50,000 fee for rescission of
the stock issuance agreement discussed above, was converted into 539 shares
of the Company's 11% Convertible Preferred Stock. (See Note 12.)
(b) This loan agreement, originated in May 1995, contains substantial
restrictions on the conduct of business and other activities of the Company
other than in the ordinary course of business without the prior consent of
the lender. The loan agreement also limits the Company's ability to encumber
assets or borrow additional funds without prior consent of the lender. The
Company may not declare or pay any dividends or make distributions of any
kind in cash or stock. In connection with the loan agreement, the Company
entered into a four year consulting agreement with an affiliate of the lender
requiring payments of $54,000 per year. The lender also has the right to
nominate at least two members of the Company's board of directors (or three
members if the board is expanded to seven members). In connection with this
financing, the Company also issued warrants to purchase common stock (see
Note 11). On November 22, 1995, the Company and its lender amended this loan
agreement to provide for an additional future advance of up to $1 million, of
which $603,000 was advanced to the Company. The balance of the advance is
not expected to be disbursed by the lender. In May 1996, in connection with
a sale of property, the Company repaid approximately $194,000 of the loan
balance. In addition, the Company entered into warrant agreements between
the lender, the Company and AFI as further discussed in Note 11.
F-14
During the period from May 22, 1995 to November 30, 1995, the Company
violated certain covenants contained in the loan agreement including late
interest payments, failure to provide financial information within the time
allotted in the agreement, failure to obtain written approval for certain
transactions, material adverse changes in financial condition and trade
accounts payable that are past due. The lender waived these defaults through
December 1, 1995 and the agreement was amended to ease certain covenant
requirements through September 30, 1996. While the lender has not expressed
an intent to declare the loan in default by reason of any violations of these
covenants, the provisions of the loan documents are so ambiguous and onerous
as to preclude classification of the loan as long-term. Accordingly, the
Company has classified the loan as a current liability.
Principal maturities of long-term debt by year are as follows:
Year ending:
1997 (including $3,061,000
classified as current due to
noncompliance with loan
covenants) $3,262,000
1998 173,000
1999 40,000
2000 2,000
----------
$3,477,000
==========
The carrrying value of the Company's notes payable, logn-term debt and
convertible debentures approximates fair value as of September 1, 1996.
F-15
9. CONVERTIBLE DEBENTURES
----------------------
Convertible debentures consist of the following as of September 1, 1996 and
September 3, 1995:
1996 1995
---------- -----------
8% collateralized convertible debentures,
due on demand, no interest is due for the
first year, interest payable monthly
thereafter. $1,050,000 $ -
10% uncollateralized convertible debentures,
due two years from the date of issuance in
1998, interest is payable monthly. 500,000 -
10% convertible debenture issued to an
entity controlled by a subsidiary's
director, converted to 11% Convertible
Preferred Stock in February 1996. (See
Note 12) - 2,300,000
10% convertible debenture issued in
January 1995 for $500,000. Approximately
$125,000 and $375,000 converted to
common stock in fiscal 1996 and 1995,
respectively. - 125,000
Prime rate plus 1% convertible debenture
issued in August 1995 for $500,000. Converted
to common stock in fiscal 1996. - 500,000
---------- -----------
1,550,000 2,925,000
Less current portion (1,050,000) -
---------- -----------
$ 500,000 $2,925,000
========== ==========
All 1996 debentures may be converted into common stock, subject to the
Company having sufficient authorized shares, at a conversion price of $.0125
per share, subject to adjustment as defined in the agreements. As of
December 16, 1996, the Company did not have sufficient authorized shares to
permit conversion of any debentures. Management intends to request that
shareholders approve an increase in the number of authorized shares of common
stock. The 1996 convertible debentures are collateralized by certain assets
subject to security agreements. All 1995 debentures were convertible into
common stock at a conversion price of fifty percent of the closing bid price of
the common stock at the date of conversion. In addition, the Company may redeem
the debentures prior to maturity for the principal amount outstanding plus
accrued interest.
F-16
During the year ended September 1, 1996, convertible debentures totaling
$2,475,000 plus accrued interest of $113,000 were converted into 21,962,099
shares of common stock. If such conversions occurred at the beginning of the
year, net loss per share would have been $.19 per share based upon adjusted
weighted average number of shares outstanding of 62,264,000 shares. During
the year ended September 3, 1995, convertible debentures totaling $2,440,000
plus accrued interest of $234,000 were converted into 6,295,618 shares of
common stock. If such conversions occurred at the beginning of the year, net
loss per share would have been $.89 per share based upon adjusted weighted
average number of shares outstanding of 13,902,000 shares. (See also Note
12.)
Principal maturities of convertible debentures by year are as follows:
Year ending:
1997 $1,050,000
1998 500,000
----------
$1,550,000
==========
10. CAPITALIZED LEASE OBLIGATIONS
-----------------------------
Capital leases consist primarily of an obligation with imputed interest at
7%, due in monthly installments, including interest, through December 2003.
At September 1, 1996, approximate future minimum lease payments under capital
leases are as follows:
Year ending:
1997 $ 252,000
1998 225,000
1999 180,000
2000 180,000
2001 180,000
Thereafter 420,000
----------
1,437,000
Less amount representing interest (297,000)
----------
Net present value of future minimum
lease payments 1,140,000
Less current portion (176,000)
---------
$ 964,000
=========
F-17
11. STOCK OPTIONS AND WARRANTS
--------------------------
Employee Stock Options
----------------------
In January 1994, the Company adopted a Stock Option Plan (the "1993 Plan")
which provides for the granting of incentive and non-qualified stock options
to key employees of the Company and certain independent contractors. The
maximum number of common shares for which options may be granted under the
plan is 500,000. Options may be exercised within a ten-year period.
Incentive stock options may be granted at an exercise price not less than the
fair market value of common stock at the date of grant. Non-qualified options
may be granted at an exercise price not less than the par value of the common
stock at the date of grant. The following table summarizes the 1993 Plan
activity for the years ended September 1, 1996 and September 3, 1995:
Number of
Shares Exercise Price
----------- ---------------
Balance, August 31, 1994 369,600 $.001 to $3.44
Grants 490,400 $ .88
Cancellations (360,000) $3.44
--------
Balance, September 3, 1996 500,000 $.1875 to $.88
Grants 343,240 $.0935 to $.09375
Cancellations (500,000) $.1875 to $.88
--------
Balance, September 1, 1996 343,240 $.001 to $.09375
========
Exercisable as of September 1, 1996 343,240 $.001 to $.09375
========
In January 1995, the Company adopted the following Stock Option Plans:
F-18
1) Key Employee Stock Option Plan -. The Plan provides for the granting of
incentive and non-qualified stock options to key employees of the Company and
certain independent contractors. Under the Plan, the maximum number of common
shares for which options may be granted is 2,500,000. Of the options granted
during 1995, options to purchase 1,578,333 shares of common stock are vested
and exercisable at $.0935 to$.09375 per share.
2) Executive Stock Option Plan - The Plan provides for the granting of
incentive and non-qualified stock options to the Company's executive officers.
As of the adoption of this plan, the Company had four officers who were
eligible to participate. Under the Plan, the maximum number of common shares
for which options may be granted is 2,700,000. The options have a term of 5
years from the date of grant. Options to purchase 2,633,333 shares are fully
vested and exercisable at $.0935 to $.09375 per share.
3) Directors Stock Option Plan - The Plan provides for the granting of non-
qualified stock options to the Company's non-employee directors. As of the
adoption of this plan, the Company had two directors who were eligible to
participate, and as of September 1, 1996 three directors were eligible. Under
the Plan, the maximum number of common shares for which options may be granted
is 350,000. The options have a term of ten years from the date of grant and
vest immediately.
The following table summarizes the activity for the 1995 stock option plans
for the years ended September 1, 1996 and September 3, 1995:
Key Employee Stock Executive Stock Directors Stock
Option Plan Option Plan Option Plan
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- ---------- ---------- ---------
Grants 2,252,500 $.25 5,400,000 $.56 to 50,000 $.97
$.97
Cancellation - (2,700,000) $.97 -
--------- ---------- ------
Balance,
September 3,
1995 2,252,500 $.25 2,700,000 $.56 50,000 $.97
Grants 1,202,500 $.0935 to 250,000 $.0935 to 77,500 $.19 to
$.09375 $.09375 $.3125
Cancellations (1,876,667) $.25 ( 316,667) $.19 to -
$.56
---------- ---------- -------
Balance,
September 1, $.0935 to $.0935 to $.19 to
1996 1,578,333 $.09375 2,633,333 $.09375 127,500 $.97
========= ========= =======
Exercisable
at September $.0935 to $.0935 to $.19 to
1, 1996 1,578,333 $.09375 2,354,217 $.1875 127,500 $.97
========= ========= =======
F-19
During the year ended September 1, 1996, the remaining options under the Key
Employee Stock Option Plan and the Executive Stock Option Plan were repriced
to $.09375 and $.0935 (the market price at the repricing date). Certain
previously granted stock options which were not fully vested at September 1,
1996 were cancelled as part of the Company's relocation of its home office to
Virginia. (See Note 3 regarding management's plans.)
As of September 1, 1996, no stock options have been exercised.
SFAS No. 123, "Accounting for Stock-Based Compensation," becomes effective for
years beginning after December 15, 1995. This pronouncement encourages, but
does not require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments to employees based on the
new fair value accounting rules. Additional disclosures are required under
the new pronouncement regardless of which method is used to measure
compensation. Management of the Company has not yet determined which method
will be followed when the new pronouncement is implemented.
Consultants' Stock Transactions
-------------------------------
From 1993 to 1995, the Company granted options to consultants for providing
certain management advisory services. Total cash proceeds from the exercise
of consultants' stock options amounted to $808,000 for fiscal 1995. During
the fourth quarter of fiscal 1995, the Company reflected the difference
between the fair market value of the common stock and the option exercise
price at the date of grant of approximately $982,000 as consultants' stock
option compensation expense in the statement of operations for the year ended
September 3, 1995.
Warrants
--------
In August 1992, the Company issued warrants to the underwriters of the
Company's initial public offering to purchase 25,000 shares of common stock
at $24.00 per share. The warrants are currently exercisable and expire in
August 1997. No warrants have been exercised as of September 1, 1996.
In September 1994, the Company issued warrants to purchase 120,000 shares of
common stock at an exercise price of $2.50 per share for legal services
rendered. The warrants expire in September 1997.
F-20
As part of the loan agreement entered into on May 22, 1995, the Company issued
3,126,389 warrants to the lender at $.5625 per share (the market value at that
date), expiring May 2000 and agreed to issue additional warrants, as
necessary, in order for the lender to maintain a 15% interest in the Company.
In connection with an amendment on November 22, 1995, the Company agreed to
issue additional warrants to purchase approximately 2 million shares of the
Company's common stock at $.5625 per share, expiring November 21, 2000. In
addition, the amendment adjusted the ownership maintenance percentage from 15%
to 18.5% of the Company's common stock on a fully-diluted basis. As of
September 1, 1996, the lender was entitled to warrants to purchase 17,949,931
shares, of which warrants totaling 3,126,389 shares were issued at the time of
the loan agreement.
Similar warrant agreements have been entered into between the lender and AFI
(only upon an initial public offering of the common stock of AFI), Royal and
Stewart to which the lender would be issued warrants to purchase 15%
(18.5%, as amended) of the issued and outstanding stock of the subsidiaries
at $.5625 per share. Further, in the event the Company does not attain
certain financial goals or market price before May 1997 and for each twelve
month period ending thereafter until May 2000, the Registered Holder will be
entitled to receive additional warrants.
The Company also issued warrants to purchase 75,000 shares of common stock at
an exercise price of $.5625 as a finder's fee for arranging the financing
described in the preceding paragraph.
In connection with the conversion of convertible debentures and a note payable
in February 1996, the Company issued 421,911 shares of its common stock and
warrants to purchase 216,250 shares of its common stock at an exercise price
of $.125 through September 2001.
In August 1996, in connection with the Company's issuance of its convertible
debentures, the Company, as a commission, issued warrants to purchase 432,500
shares of its common stock at an exercise price of $.125 through September 2001.
In addition, the Company issued warrants to purchase 16,000,000 shares of its
common stock at an exercise price of $.0125 through September 2001.
F-21
12. PREFERRED STOCK AND WARRANTS
----------------------------
In July 1993, the Company issued 352,667 shares of 8% cumulative convertible
preferred stock ("Preferred Stock") for net proceeds of $2,267,800.
Preferred stockholders are entitled to a cumulative dividend of $.60 per
share, payable semi-annually, on June 30 and December 31 of each year only
when declared by the Board of Directors. Each share of Preferred Stock is
convertible, for up to three years after issuance, into one unit consisting
of .6 shares of common stock and a unit warrant to purchase .6 shares of
common stock at $40.00 per share. The unit warrants may be exercised within a
5 year period from the date of issuance. The Company, at its option, may
redeem preferred stock at $15.00 per share provided the trading value of the
common stock has averaged more than $45.00 per share for a specified period.
The Company may redeem the unit warrants for $.25 per unit, provided that the
Company's common stock meets certain trading requirements.
The Company redeemed 1,317 shares of preferred stock during the year ended
August 31, 1994 for approximately $9,900. The Company also redeemed 16,000
shares of preferred stock during the year ended September 3, 1995 for
$132,500 including accrued dividends of $12,500.
During the year ended September 3, 1995, approximately 95% of the preferred
shareholders agreed to exchange their preferred stock holdings and related
dividends in arrears totaling approximately $308,000 into 1.3 shares of the
Company's common stock, two shares of common stock of JRBO and a five year
warrant to purchase .6 shares of the Company's common stock at $3.00 per share
for each share of preferred stock. In connection with the above, during
fiscal 1995, the Company issued 359,637 shares of the Company's common stock
and 639,700 shares of JRBO common stock in exchange for 226,236 shares of
preferred stock and related dividends. During fiscal 1996, the Company
issued 15,780 shares of the Company's common stock and 52,600 shares of JRBO
common stock in exchange for 26,300 shares of preferred stock and related
dividends.
Dividends in arrears as of September 1, 1996 and September 3, 1995 were
$28,000 and $19,000, respectively, and remain an obligation of the Company if
not paid at the time of conversion. Of the 82,814 shares of Preferred Stock
outstanding as of September 1, 1996, shareholders of all but 15,500 shares
agreed to the exchange discussed in the preceding paragraph.
F-22
The Company sold, in conjunction with the issuance of preferred stock,
certain warrants to purchase an aggregate of 10,580 shares of preferred stock
at $62.50 per share for a period of three years from the date of issuance to
the underwriters of the offering. Each share of Preferred Stock issued upon
the exercise of the warrants is convertible into a unit, each unit comprising
.6 shares of common stock and a warrant exercisable into .6 shares of common
stock at $40.00 per share. The warrants issued are subject to redemption by
the Company at $.25 per warrant provided that the Company's common stock
meets certain trading requirements.
During 1996, the Company issued a new series of its previously authorized
preferred stock. This new series is the subject of a Certificate of
Designation, as amended (the "Certificate") and is the 11% Convertible
Preferred Stock (referred to as "COPS"). Each share of COPS is issued for
$1,100; has a dividend or payment in lieu thereof, payable quarterly
starting June 30, 1996; and is convertible into common stock at the option
of the holder at the rate of $.18 per share or by the Company as provided in
the Certificate. The Company issued 2,575 shares of the COPS in exchange for
the conversion of a $2.2 million debenture plus accrued interest (see Note 9)
and in exchange for cancellation of a $500,000 note plus accrued interest and
a $50,000 fee (see Note 8). Dividends in arrears total $169,000 at September
1, 1996.
13. SUBSCRIPTION RECEIVABLE
-----------------------
The Company has a subscription receivable in the amount of $1,490,000 which
was reflected as a reduction of stockholders' equity as of August 31, 1994.
Collection of the subscription receivable had been delayed due to an improper
distribution of the Company's stock. In October 1995, the Company collected
approximately $55,000 in a negotiated settlement with its former transfer
agent and is still pursuing the individual former stockholders and other
service providers for nonpayment of the subscribed amount or the return of
the improperly issued stock. Due to the uncertainty surrounding the
collection of this subscription, in 1996, the Company offset the subscription
receivable against additional paid-in capital.
14. INCOME TAXES
------------
The Company recognized a net deferred asset, consisting principally of the
tax benefit of a net operating loss carryforward, of $14.9 million and $10.4
million as of September 1, 1996 and September 3, 1995, respectively. The
Company has provided a full valuation allowance against such net deferred
asset. Accordingly, the Company has not recorded an income tax benefit for
the fiscal years ended September 1, 1996 and September 3, 1995.
As of September 1, 1996, for income tax purposes, the Company has net
operating loss carryforwards of approximately $32 million which are available
to offset future taxable income, if any. The net operating loss
carryforwards expire in various years ending in 2011.
F-23
15. SUPPLEMENTAL CASH FLOWS INFORMATION
-----------------------------------
Supplemental disclosure of cash flow information:
Interest paid during 1996 and 1995 was $533,000 and $280,000, respectively.
Non cash financing and investing activities:
During the years ended September 1, 1996 and September 3, 1995, non-cash
investing activities included the acquisition of Sandwich Makers and Royal
for $350,000 and $3,947,000, respectively. Assets acquired, liabilities
assumed and consideration paid relating to those acquisitions are as follows:
1996 1995
---------- -----------
Fair value of assets acquired $966,000 $4,660,000
Cash acquired - (171,000)
Liabilities assumed (610,000) (713,000)
Issuance of note to seller (295,000) (1,300,000)
-------- ----------
61,000 2,476,000
Amount paid in 1995 for Sandwich
Maker acquisition and in 1994 for
Royal acquisition (6,000) (200,000)
-------- ----------
Consideration paid $ 55,000 $2,276,000
======== ==========
During 1996, the Company repaid approximately $194,000 of a note payable from
the proceeds of a sale of property and equipment. In addition, the Company
sold its Roanoke sales district and trucks in exchange for reducing
approximately $65,000 of notes payable.
F-24
During 1996, the Company issued 22,640,670 shares of its common stock upon
conversions of convertible debentures and to repay a note payable, totalling
$2,665,000 plus accrued interest of $113,000. In addition, the Company
issued 2,575 shares of its 11% Convertible Preferred Stock totalling
$2,832,000 upon conversions of convertible debentures, a note payable,
related accrued interest and a fee.
In April 1995, the Company issued 1,444,667 shares of its common stock to pay
invoices totaling $1,084,000 for legal services.
During 1995, the Company entered into a capitalized lease agreement for
telephone equipment valued at $122,000.
16. COMMITMENTS AND CONTINGENCY
---------------------------
At September 1, 1996, approximate future minimum rental payments applicable
to noncancellable operating leases for office and retail space are as
follows:
Year ending:
1997 $ 617,000
1998 504,000
1999 470,000
2000 423,000
2001 246,000
Thereafter 92,000
----------
$2,352,000
==========
The above amounts exclude the future minimum rental payments associated with
leases assigned or sublet in connection with the discontinued operations of
JRBO for which the Company is contingently liable (see Note 17).
Rent expense was $1,802,000 and $1,296,000 for the years ended September 1,
1996 and September 3, 1995, respectively.
In connection with the Royal acquisition, the Company became the guarantor of
certain loans to distributors. As of September 1, 1996, the balance of the
loans was approximately $100,000. During fiscal 1996, pursuant to this
guarantee, the Company was required to repay loans totaling approximately
$35,000.
F-25
17. DISCONTINUED OPERATIONS
-----------------------
On June 16, 1995, the Company's board adopted a formal plan to dispose of its
JRBO stores by ratifying sales of certain stores and authorizing the sale of
JRBO's remaining stores to directors, officers, employees and other parties.
Accordingly, the Company has classified the optical business as discontinued
operations as of September 3, 1995. Through August 1995, the net assets of
seven of the stores were sold for $456,000. On September 11, 1995, the four
remaining stores were closed and the inventory and property and equipment
were sold to a JRBO director and an unrelated party for an aggregate price of
$68,000. The operating results for this period were minimal. In connection
with the transactions, JRBO assigned its existing store leases and certain
capitalized equipment lease obligations to certain buyers. The Company is
contingently liable for leases assigned or sublet in the aggregate amount of
approximately $276,000. The leases expire in various years through 2000.
There were no income tax consequences of the above disposition.
There were no material operations in fiscal 1996. The following are the
results of discontinued operations for 1995:
1995
-----------
Net sales $1,901,000
Costs and expenses 2,883,000
----------
Operating loss (982,000)
Minority interest 197,000
----------
Loss from discontinued operations $ (785,000)
==========
In connection with the discontinuation of the optical business, the Company
recorded a charge in 1995 of $680,000 to write down JRBO's net assets to
estimated realizable values and accrue for estimated operating losses of
$124,000 through the anticipated phase out period.
F-26
The assets and liabilities of the discontinued operation, which have not been
reclassified on the consolidated balance sheets, are as follows (in
thousands):
1996 1995
--------- ----------
Current assets, principally accounts
receivable and inventories $ - $ 70,000
Plant and equipment - 8,000
Other assets 72,000 101,000
-------- ---------
Total assets $ 72,000 $ 179,000
======== =========
Accounts payable and accrued liabilities $325,000 $ 378,000
Notes payable and long-term debt - 22,000
-------- ---------
Total liabilities $325,000 $ 400,000
======== =========
18. LITIGATION AND SEC INVESTIGATION
--------------------------------
In addition to certain individuals, the Company has been named as a defendant
in several lawsuits alleging violations of various federal and state
securities laws. The suits were consolidated but were not certified as class
actions. The Company and the individuals have tentatively agreed with the
plaintiffs' attorneys on a settlement to resolve the claims against the
Company and its directors arising out of these lawsuits. The proposed
settlement contemplates issuance of warrants to purchase 228,280 shares of
common stock at 75% of the market price at the date of settlement and 228,280
shares of common stock. The Company will either issue new shares or use the
shares held in escrow on behalf of the Company's former chief executive and
financial officers. The Company also has filed an action to seek recovery of
alleged damages with respect to the diversion of the Company assets by those
officers. Included in accrued expenses as of September 1, 1996 and September
3, 1995 is approximately $200,000 and $300,000, respectively, for the
settlement of this suit and related costs.
Based on information supplied to the Securities and Exchange Commission
("SEC"), by the Company, on April 26, 1994, the Securities and Exchange
Commission issued an order for a private investigation of the Company and
certain of its officers and directors to determine whether violations of the
securities laws may have occurred and so as to enable the SEC to issue
subpoenas and obtain documents. In November 1996, the Company consented to
the entry of a final judgment of permanent injunction and other relief in the
United States District Court Southern District of Florida relating to this
matter, neither admitting nor denying the allegations of the complaint. The
consent has ben submitted to the court for final affirmation and approval by the
judge.
The Company is a party to certain other proceedings arising in the normal
course of business which it believes will not have a material adverse impact
on its financial condition or results of operations.
F-27
19. SUBSEQUENT EVENTS
-----------------
Debenture Transactions
----------------------
Through December 13, 1996, the Company issued $2 million of 8% secured
convertible debentures. The outstanding principal balance of each debenture
matures and is due on demand. No interest is due during the first year of
the debentures. Thereafter, interest is payable monthly. The debentures may
be converted into common stock at a conversion price of $.0125 per share,
subject to adjustment as defined in the agreements. The Company may redeem
the debentures at any time prior to maturity for the principal amount
outstanding including accrued interest.
During the first quarter of fiscal 1997, a portion of a debenture outstanding
as of September 1, 1996 totaling $100,000 plus accrued interest of $18,000
was converted into 3.776 million shares of common stock.
Preferred Stock Transactions
----------------------------
In September 1996, the Company issued 105 shares of 11% Convertible Preferred
Stock in payment of dividends for the quarter ended June 30, 1996 on 2,575
shares of 11% Convertible Preferred Stock.
F-28
EXHIBIT 4.16
NEITHER THIS DEBENTURE NOR THE UNDERLYING COMMON SHARES HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE CORPORATION WILL NOT TRANSFER THIS
DEBENTURE, OR ANY COMMON SHARES ISSUED PURSUANT TO ITS CONVERSION PROVISION,
UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE OR SHARES
UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS, (ii) IT
FIRST RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS
OR ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED
TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND
UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE
PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933.
SECURED CONVERTIBLE DEBENTURE
U.S. $ Date of Issuance:
-------------------- -------------------
For value received, The AppleTree Companies, Inc., a Delaware
corporation (the "Issuer" or "Corporation") and its wholly owned subsidiaries,
jointly and severally, promise to pay to Name, Address, Amount ($000.00), (the
"Principal"), plus interest ("Interest") at the annual rate of eight percent
(8%) (the "Interest Rate"), which interest shall commence as of (Date - One
year from today), on the amount of Principal from time-to-time remaining
unpaid. This Debenture is not negotiable, and is transferable only on the
books of the Corporation by the registered holder or its duly authorized agent
or attorney. This Debenture is secured by a security interest in certain
assets of the Issuer and Subsidiaries (the "Secured Assets") pursuant to and
as further described in a Security Agreement, dated as of (Date of Debenture)
(the "Security Agreement"), between the Issuer, Lender and Subsidiaries.
1. Payments.
(a) The entire unpaid Principal and any accumulated unpaid
Interest thereon shall be due and payable on demand (the "Maturity Date").
(b) Interest shall be calculated on the basis of the actual number of days
elapsed divided by three hundred sixty-five (365) and shall be payable
quarter-annually on the last day of such quarter. Notwithstanding anything
herein to the contrary, payments of Interest may be made subsequent hereto in
shares of the Issuer's Common Stock registered in the name of the Lender (the
"Interest Shares"). The Interest Shares with respect to any such quarter
shall be payable to the Lender within fifteen (15) days after the end of such
quarter. For purposes of determining the number of Interest Shares to be
issued to the Lender with respect to any such quarter, the value of each of
the Interest Shares shall be deemed to be $.0125 per share.
(c) Notwithstanding the foregoing, the Interest Rate shall not
at any time exceed the maximum rate of interest permitted by applicable law in
effect from time-to-time. In the event that the Interest Rate exceeds the
maximum percentage permissible by applicable law in effect from time-to-time
in any interest period during the initial term or any extension of this
Debenture, only the maximum percentage permissible shall then be charged but
thereafter in any interest period or periods during which the rate is less
than the maximum percentage permitted by applicable law in effect from time-
to-time, the Interest Rate shall be increased so that Lender, its successors
or assigns, may collect interest in such amount as may have been charged
pursuant to the terms of this Debenture, but which was not charged because of
the limitation imposed by law.
(d) If the calculation of interest or the imposition of an
increase in the rate of interest upon default or the payment of any fees or
other charges which are construed to be interest under applicable law in
effect from time-to-time result in an effective rate of interest higher than
that permitted to be paid under applicable law in effect from time-to-time,
then such charges shall be reduced by a sum sufficient to result in an
effective rate of interest no greater than the maximum effective rate of
interest permitted to be paid under applicable law in effect from time-to-
time.
(e) Upon maturity of this Debenture, whether by acceleration or
in due course, Interest shall be recalculated as of November 22, 1997 over the
actual term of this Debenture based upon the amounts outstanding from time to
time, and if the total amount of Interest theretofore paid exceeds the amount
permitted to be paid under applicable law in effect from time-to-time, the
excess shall be credited to Principal, or if such excess exceeds the Principal
amount due hereunder, refunded to the Issuer.
(f) All payments hereunder shall be made in lawful money of the
United States of America without set-off, deduction or counterclaim.
2. Application of Payments. All payments hereunder shall first be
applied to accrued and unpaid Interest and the balance of such payments to
reduction of the unpaid Principal.
3. Prepayment. This Debenture may be prepaid in whole or in part at
any time and from time-to-time without penalty, provided Issuer gives Lender
at least five (5) days prior written notice thereof. Any prepayment shall be
accompanied by an amount equal to the Interest accrued thereon to the date of
receipt of such prepayment in collected funds.
4. Events of Default.
(a) The following shall constitute events of default:
(1) The nonpayment by the Issuer within ten (10) days
subsequent to notice thereof given to Issuer by Lender
of any payment of Principal, Interest or other sum due
Lender hereunder.
(2) The termination of the Issuer's existence.
(3) The Issuer or any of the Subsidiaries shall
become the subject of an order or decree for relief, or a liquidator,
assignee, custodian, sequestrator, trustee, or receiver shall be appointed for
all or a substantial portion of its property in any insolvency proceeding
under any applicable bankruptcy, insolvency, or other similar law now or
hereafter in affect, for its reorganization, dissolution, liquidation, or
winding up, and such order, decree or appointment shall not be discharged or
such jurisdiction relinquished or vacated or stayed within thirty (30) days.
(4) The Issuer or any of the Subsidiaries
voluntarily commences a bankruptcy or insolvency proceeding or consents to the
entry of an order for relief in connection therewith or the appointment of a
liquidator, assignee, custodian, sequestrator, trustee, or receiver of all or
a substantial part of its property.
(5) Any default set forth in the Security Agreement.
(b) Upon the occurrence of an event of default, the Lender, at
its option, by written notice to the Issuer, may declare the entire unpaid
Principal balance of this Debenture, together with accrued Interest, to be
immediately due and payable.
(c) In addition to payment of Interest and Principal, if upon an
event of default the Lender declares the entire unpaid Principal balance of
this Debenture, together with accrued Interest, to be immediately due and
payable, the Lender shall be entitled to recover from the Issuer all the
Lender's costs of collection, including the Lender's reasonable attorneys'
fees, paralegals' fees and legal assistants' fees (whether incurred in
connection with any judicial, bankruptcy, reorganization, administrative,
appeals, or other proceedings and whether such fees or expenses arise before
proceedings are commenced or after entry of any judgment), and all other
incurred in connection therewith.
5. Waivers. The Issuer, any Subsidiary and any endorsers, sureties,
guarantors, and all others who are or may become liable for the payment hereof
severally: (a) waive presentment for payment, demand, notice of demand, notice
of non-payment or dishonor, protest and notice of protest of this Debenture,
and all other notices in connection with the delivery, acceptance,
performance, default, or enforcement of the payment of this Debenture, (b)
consent to all extensions of time, renewals, postponements of time of payment
of this Debenture or other modifications hereof from time-to-time prior to or
after the maturity date hereof, whether by acceleration or in due course,
without notice, consent or consideration to any of the foregoing, (c) agree to
any substitution, exchange, addition, or release of any of the security for
the indebtedness evidenced by this Debenture or the addition or release of any
party or person
primarily or secondarily liable hereon, (d) agree that the Lender shall not be
required first to institute any suit or to exhaust its remedies against any
person or party liable hereunder or against the security in order to enforce
the payment of this Debenture and (e) agree that, notwithstanding the
occurrence of any of the foregoing (except by the express written release by
Lender), the undersigned shall be and remain, jointly and severally directly
and primarily liable for all sums due under this Debenture.
6. Jurisdiction. Any litigation with respect to or in connection
with this Debenture may be conducted in the courts of the State of New York
located in New York County, New York or the United States District Court in
and for the Southern District of New York with respect to any matter relating
to this Debenture. Any action, suit or proceeding brought by or on behalf of
either of the Lender or the Issuer or any assignee thereof or successor
thereto relating to such matters shall be commenced, pursued, defended, and
resolved in such courts and any appropriate appellate court having
jurisdiction to hear an appeal from any judgment entered in such courts.
Service of process may be made in any manner permitted by the rules of such
courts and the laws of the State of New York.
7. Miscellaneous Provisions.
(a) The term Lender as used herein shall mean any holder of this
Debenture.
(b) Time is of the essence in this Debenture
(c) The captions of sections of this Debenture are for
convenience of reference only, and shall not affect the construction or
interpretation of any of the terms and provisions set forth in this Debenture.
(d) If more than one person signs this Debenture, each is and
shall be jointly and severally liable hereunder.
(e) This Debenture shall be construed, interpreted, enforced,
and governed by and in accordance with the laws of the State of New York
(excluding the principles thereof governing conflicts of law), and Federal
law, in the event Federal law permits a higher rate of interest than New York
law.
(f) If any provision or portion of this Debenture is declared or
found by a court of competent jurisdiction to be unenforceable or null and
void, such provision or portions thereof shall be deemed stricken and severed
from this Debenture, and the remaining provisions and portions thereof shall
continue in full force and effect.
(g) This Debenture may not be amended, extended, renewed, or modified
nor shall any waiver of any provision hereof be effective, except by an
instrument in writing executed by an authorized officer of Lender. Any waiver
of any provision hereof shall be effective only in the specific instance and
for the specific purpose for which given
8. Conversion Rights of Lender. So long as this Debenture shall be
outstanding, the
Lender shall have conversion rights as follows:
(a) This Debenture shall be convertible in whole or in part at
the option of the Lender at any time into shares of Common Stock (the
"Conversion Shares") at an initial conversion price, subject to adjustment, of
$.0125 per share (the "Conversion Price"). The Lender's right of conversion
may be exercised on only one occasion during each Exercise Period (as
hereinafter defined). For purposes of this Agreement, each Exercise Period
shall be defined as the period which shall commence on the Conversion Date (as
defined in paragraph 8b. of the Debenture) and shall terminate ninety (90)
days after the disposition by the Lender of all of the Conversion Shares
acquired by Lender during the preceding Exercise Period.
(b) The conversion of this Debenture shall be effected on the
day that this Debenture is surrendered at the principal executive office of
the Issuer during its usual business hours, accompanied by written notice to
the effect that the Lender desires to convert this Debenture and which
specifies that portion of the outstanding Principal and accrued Interest (if
any) which the Lender desires to convert, the address to which the certificate
representing the Conversion Shares shall be delivered and shall include
reasonable instructions for delivery thereof (the "Conversion Date"). No
later than ten (10) business days following the Conversion Date, the Issuer
shall deliver such certificate in accordance with such instructions (the
"Delivery Date").
(c) If at any time the Issuer is required to issue shares of
Common Stock in excess of the number of shares then authorized and available
for issuance, both the Issuer and the Lender shall cooperate in taking any and
all steps necessary to increase the number of authorized shares of Common
Stock to effectuate the purposes of this Section 8.
(d) The Issuer shall at all times reserve and keep available out
of its authorized un-issued Common Stock the full number of shares of Common
Stock issuable upon conversion of this Debenture.
(e) No fractional shares or scrip representing fractional shares
shall be issued upon the conversion hereof. If any such conversion would
otherwise require the issuance of a fractional share, the number of Conversion
Shares to be issued shall be rounded to the nearest full share.
(f) All shares issued pursuant to this section shall be
issued as fully paid and non assessable.
(g) The number and kind of securities purchasable upon the
conversion of this Debenture 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 securities of the class of
securities which are issuable upon conversion of this Debenture (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 an increase in
the number of such securities outstanding) or in case of any consolidation or
merger of the Issuer with or into another corporation (other than a merger
with another corporation in which the Issuer 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
securities issuable upon the conversion of this Convertible Debenture or an
increase or decrease in the number of such securities outstanding), or in case
of any sale or transfer to another corporation of the property of the Issuer
as an entirety or substantially as an entirety, the holder of this Debenture
shall have the right to convert this Debenture (upon terms not less favorable
to the holder than those theretofore applicable to this Debenture) and to
receive upon such conversion, in lieu of the Conversion Shares theretofore
issuable upon conversion of this Debenture, the kind and amount of shares of
stock, and other securities, money or property receivable upon such
reclassification, change, consolidation, merger or sale or transfer by the
holder of the Conversion Shares had the Debenture been converted immediately
prior to such reclassification, change, consolidation, merger, sale or
transfer. The adjustment provisions hereof shall similarly apply to
successive reclassifications, changes, consolidations, mergers, sales, and
transfers.
(2) Subdivision or Combination. If the Issuer shall
subdivide or combine its outstanding securities of the class of securities
which are issuable upon conversion of this Debenture, the amount of securities
to be received upon such conversion shall be proportionately increased in the
case of a subdivision of such securities, or shall be proportionately reduced,
in the case of a combination of such securities, as of the effective date of
such transaction.
(3) Stock Dividends. If the Issuer at any time while this
Debenture is outstanding shall pay a dividend or make any other distribution
on its Common Stock payable in shares of its Common Stock, in either case,
other than from current or accumulated earnings, then the Conversion Price
shall be adjusted, as of the date the Issuer shall take a record of the
holders of its Common Stock for the purpose of receiving such dividend or
other distribution (or if no record is taken, as at the date of such payment
or other distribution) to that price determined by multiplying the number of
shares of Common Stock purchasable hereunder immediately prior to such payment
or other distribution by a fraction (a) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (b) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such dividend
or distribution.
9. Restrictions on Transfer. Neither this Debenture nor the shares
of Common Stock into which it is convertible have been registered under the
Securities Act of 1933. This Debenture, or any right hereunder, may not be
enforced against the Issuer by any Holder, except the original Holder herein,
(i) unless there is an effective registration covering this Debenture or
underlying right under the Securities Act of 1933 and applicable state
securities laws, (ii) unless the Corporation receives an opinion of an
attorney, licensed to practice within the United States, that the transfer of
the Debenture, or any underlying right, to such Holder is exempt from the
registration requirements of the Securities Act of 1933 and any relevant state
securities law, or
(iii) unless the transfer is made pursuant to Rule 144 under the Securities
Act of 1933.
THE APPLETREE COMPANIES, INC.
(CORPORATE SEAL) By:
------------------------------
Its: President
EXHIBIT 4.17
SECURITY AGREEMENT
THIS SECURITY AGREEMENT dated as of the day of August 1996,
between , a corporation, ("Secured Party") and The
AppleTree Companies, Inc., Americas Foods, Inc., Stewart Products, Inc., Royal
American Foods Corporation, Carriage Town Products, Inc. and J.R. Basset
Optical, Inc. (collectively, the "Debtors").
AGREEMENT
In consideration of the foregoing and the mutual promises,
covenants, terms and conditions contained herein, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is agreed as follows:
1. Grant of security interest. As security for the full
payment and performance of any and all debts, obligations and liabilities of
each Debtor to Secured Party, no matter how or when arising, liquidated or
unliquidated, fixed or contingent, matured or unmatured, whether under this
agreement or any other agreement between the parties (the "Obligation") , each
Debtor hereby grants to Secured Party a lien upon and a continuing security
interest, subject to Permitted Senior Liens (as hereafter defined) , in all of
the Collateral described on Schedule A attached hereto.
The property described in Schedule A is hereinafter referred to
as the "Collateral Security".
2. Representations. Each Debtor hereby represents and warrants
to Secured Party as follows:
(a) There are no liens, pledges, security interests or other
encumbrances on any of the Collateral Security which are prior to the security
interests granted hereunder, except as set forth on Exhibit I annexed hereto
(the "Permitted Senior Liens").
(b) As to the Collateral Security: (i) the Collateral Security is presently
located at each location of Debtors set forth on Schedule B, and each Debtor
will notify Secured Party in writing thirty (30) days prior to the movement of
the Collateral Security to any new location not set forth on Schedule B; !ii)
each Debtor will at its own cost and expense keep the Collateral Security in
good repair (reasonable wear and tear excepted) ; (iii) each Debtor will not
sell, exchange, lease, or otherwise dispose of the Collateral Security, except
Inventory and cash used or sold by Debtor in the ordinary course of business;
(iv) each Debtor will insure the Collateral Security naming Secured Party as a
loss payee and if any Debtor fails to do so, Secured Party may procure such
insurance and charge the cost to Debtor; and
(v) each Debtor shall comply in all material respects with the terms and
conditions of any leases covering the premises where the Collateral Security
is located and any orders, ordinances, laws or statutes of any state or
municipal or governmental department having jurisdiction with respect to such
premises or the conduct of business thereon; the failure to comply with which
would have an Adverse Effect.
(c) Each of the Debtor's chief place of business is presently
located at 5732 Curlew Drive, Norfolk, VA 23502 and each Debtor will notify
Secured Party promptly of any change in the location of such Debtor's chief
place of business.
3. Covenants.
3.1 Each Debtor agrees to take such further action and to
execute such additional agreements, documents and instruments as Secured Party
shall reasonably request to effectuate or confirm the security interests
granted hereunder. Each Debtor will at its own expense from time to time
execute, file and record such financing statements and documents and take such
action, including without limitation segregation of records, as Secured Party
shall reasonably request to create and maintain the priority and status of the
security interests created hereunder. Each Debtor will defend the Collateral
Security against dilution and all claims and demands of all persons and will
keep the Collateral Security free and clear of all attachments, levies, taxes,
liens, security interests and encumbrances of any kind and nature except for
Permitted Senior Liens. Debtor will furnish Secured Party from time to time
upon request with written statements and schedules identifying and describing
the Collateral Security in such detail as Secured Party may reasonably
require. Each Debtor hereby appoints and reaffirms Barton Nachamie, as its
attorney-in-fact, to execute and file all financing statements and
continuation statements, and to do, at Secured Party's option and at Debtors,
expense, all acts and things which Secured Party may deem necessary to perfect
and continue perfected the security interest created by this Agreement
including where permitted by statute to file financing statements without the
Debtors' signature.
3.2 During the term of this agreement and until the obligations
have been paid in full in cash and this Agreement, the Loan Agreement and the
Related Documents have been irrevocably terminated, the Debtors shall not
grant any security interest in any Collateral Security to anyone other than
Secured Party nor permit any liens to be outstanding except Permitted Senior
Liens. The Debtors will not change its name, identity or structure without
giving secured Party thirty (30) days prior written notice thereof, and shall,
in connection with any such change, execute and deliver to Secured Party all
such additional agreements, financing statements and other documents as
Secured Party shall reasonably
require. This provision shall not be deemed to constitute consent to any
change of identity or structure.
3.3 The Debtors further warrant, covenant and agree that:
(a) Except for sales of inventory occurring in the ordinary
course of Debtors' business, Debtors will not sell, offer to sell, or
otherwise transfer the Collateral or any of Debtors' rights therein or without
Secured Party's prior written consent permit any lien, encumbrance, or
security interest to attach to the Collateral except that created by this
Agreement, security interests granted prior to the execution of this Agreement
and security interests that may attach as a matter of law. Debtors will
perform their obligations under its existing security agreements and under any
other security agreement that is entered into by Debtors with Secured Party's
consent.
(b) Debtors will pay as they become due all taxes
or other claims arising which may become a charge against the
Collateral.
(c) Debtors will insure the Collateral with companies and in amounts
acceptable to Secured Party, such amounts
being the full replacement value of the Collateral or the maximum amount the
insurer will permit, against risks of theft, vandalism, fire and such other
risks as are normally insured against, including standard extended coverage.
All insurance policies shall be written for the benefit of Debtors and Secured
Party as their interests may appear, and policies or certificates evidencing
the same shall be furnished to Secured Party. All insurance policies shall
provide for at least ten (10) days' prior written notice of cancellation to
Secured Party.
(d) Debtors will maintain the Collateral in good condition and
repair and will permit Secured Party to examine and inspect the Collateral at
any reasonable time and wherever located.
(e) Debtors will not permit any of the Collateral to be removed
from Debtors' place(s) of business without the prior written consent of
Secured Party except for sales in the ordinary course of Debtors' business.
Debtors will give immediate notice to Secured Party of any change of name of
Debtors, whether resulting from merger, consolidation, filing of trade name
affidavit or otherwise.
(f) Debtors will indemnify and save Secured Party harmless from
and against any and all loss, damage, liability, injury or other casualty to
persons or property caused or occasioned by the maintenance, operation and use
of the Collateral by Debtors, its agents or employees
(g) At the reasonable request of Secured Party, Debtors will
supply Secured Party with a current inventory of the Collateral.
(h) With respect to collateral to be purchased with monies
advanced by Secured Party to Debtors, this Security Agreement constitutes a
purchase money security interest.
4. Remedies. If the Obligations have become due and payable in
full under this Agreement or Related Documents or notes, and all notice
periods have expired, the Secured Party itself or by its attorney may
exercise with respect to the Collateral Security all of the rights and
remedies set forth in clauses (a) through (f) below or elsewhere herein or
otherwise available to a secured party under the applicable provisions of
the Uniform Commercial Code or any other applicable law (including, without
limitation, the right to appoint a receiver to take possession of the
Collateral Security and, without notice to or demand upon any Debtor, to
make such payments and do such acts as Secured Party considers necessary or
reasonable to protect its security interest in the Collateral Security) and
(in conjunction with or in addition to such rights and remedies) may, to the
extent permitted by applicable law, with or without process of law and
without liability for loss or damage, sell or dispose of all or any part of
the Collateral Security, free and clear of all claims, as hereinafter
provided. The following provisions shall govern the right of Secured Party
to so realize upon the Collateral Security, in addition to any rights and
remedies available at law or in equity or otherwise provided under this
agreement:
(a) Marshaling, etc. Secured Party shall not be required
to make any demand upon or pursue any of its rights or remedies against any
Debtor or others with respect to the payment or performance of the Obligations
secured hereby, or to pursue or exhaust any of its rights or remedies with
respect to any of the Collateral Security. Secured Party shall not be
required to marshal the Collateral security or secured obligations or to
resort to the Collateral Security in any particular order and all of its
rights hereunder shall be cumulative. To the extent not prohibited by
applicable law, each Debtor hereby agrees to waive and relinquish the benefit
and advantage of, and hereby covenants not to assert against Secured Party,
any present or future valuation, stay, appraisement, extension or redemption
laws which, but for this provision, might be applicable to any sale or
assignment made under any judgment, order or decree of any court, or privately
under the power of sale and assignment conferred by this agreement or in
respect of any of the Collateral Security. Without limiting the generality of
the foregoing, each Debtor hereby agrees that it will not invoke or utilize
and hereby waives any law which may delay or impede the enforcement of Secured
Party's rights underthis agreement. In addition, to the extent not prohibited
by applicable law, each Debtor hereby waives any right to prior notice 49268-1
4 (except to the extent expressly provided in this agreement) or judicial
hearing in connection with the taking possession or the disposition of any of
the Collateral Security.
(b) Sales and Assignments of the Collateral Security. Any item
of Collateral Security may be sold or assigned for cash or other value in any
number of lots at public or private sale without demand, advertisement or
notice (excepting only that Secured Party shall give Debtor ten (10) days'
prior written notice of the time and place of any public sale or of the time
after which a private sale may be made, which notice each Debtor hereby agrees
is reasonable). At any sale or sales of the Collateral Security (except at
private sale) Secured Party may bid for and purchase the whole or any part of
the property and rights so sold and upon compliance with the terms of such
sale may hold, exploit and dispose of such property and rights without further
accountability to any Debtor except for the proceeds of such sale or sales.
Each Debtor will execute and deliver, or cause to be executed and delivered,
such instruments, documents, assignments, waivers, certificates and affidavits
and supply or cause to be supplied such further information and take such
further action as Secured Party shall require in connection with such sale or
assignment.
M Application of Proceeds. The proceeds of all sales and
collections, and any other monies the application of which is not otherwise
herein provided for, shall be applied, at the election of the Secured Party,
as follows:
(i) First, to the payment of the costs and expenses
of such sale or sales and collections and the reasonable
expenses of Secured Party and of its counsel;
ii) Second, any surplus then remaining to the
payment of interest then due and payable and then to principal
then due and payable;
iii) Third, to the payment of any other amounts
required by applicable law, including without limitation,
Section 9.504 (1) (c) of the New York Uniform Commercial Code;
and
iv) Fourth, any surplus then remaining shall be paid
over (subject to the rights of third parties) to the Debtors or
for their account.
(d) Accounts. Secured Party shall have the right to notify account debtors
directly of its interest in accounts and collect same directly and to have
access to inspect, audit and make extracts from Debtors' records, files and
books of account. Each Debtor hereby appoints any officer of Secured Party or
any other person designated by it with power: to endorse such Debtor's name on
any checks, notes, acceptances, money orders, drafts or other forms of payment
which may come into Secured Party's possession; to sign such Debtor's name on
any invoices or bills of lading relating to any accounts on financing
statements under the Uniform Commercial Code or other public records on
verification of accounts and on notices to customers; to notify the post
office authorities to such change Debtor's address for delivery of mail to an
address designated by Secured Party; to receive, open and dispose of all mail
addressed to such Debtor and to do all other things Secured Party deems
necessary to carry out its rights under this Agreement. This power being
coupled with an interest is irrevocable so long as any obligations remain
outstanding and the Facility has not been irrevocably terminated.
(e) Possession and Assembly secured Party shall have the right to take
possession of the Collateral Security (and of the indicate of the Collateral
Security, in the case of intangibles) and maintain such possession on Debtors'
premises, or to remove the Collateral Security or any part thereof to such
other premises as Secured Party may desire. Upon Secured Party's request,
each Debtor shall assemble the Collateral Security and make it available to
Secured Party at a place reasonably designated by it. All costs and expenses
incurred by Secured Party in connection with the foregoing shall be charged to
Debtors' account, shall be added to the Obligations and shall be secured by
the Collateral Security.
(f) Secured Party's rights and remedies under this agreement and all other
agreements shall be cumulative. Secured Party shall have all other rights and
remedies not inconsistent here with as provided under the Uniform Commercial
Code, by law, or in equity. No exercise by Secured Party of one right or
remedy shall be deemed an election, and no waiver by Secured Party of any
default on Debtors part shall be deemed a continuing waiver. No delay by
Secured Party shall constitute a waiver, election or acquiescence by it.
Each of the following shall constitute an "Event of Default" hereunder (if the
same is continuing when the event of default declaration notice specified
below is given and when the two-business-day notice period, if any, specified
below expires): if (a) any Debtor shall fail to pay when due or punctually
perform any of the Obligations; or (b) any warranty, representation, or
material statement made or furnished to Secured Party by any Debtor or on
Debtor's behalf was false in any material respect when made or furnished or
deemed made; or (c) any event shall occur which results in the acceleration of
the maturity of any debt of any Debtor to others, and such event shall have an
Adverse Effect other than termination of the Subsidiaries, leases; or (d) any
of the Collateral Security shall be lost, stolen or damaged and such
occurrence shall have an Adverse Effect; or (e) there shall be a levy upon,
seizure or attachment of any of the Collateral Security; or (f) Debtor shall
cease operations, be dissolved or terminate its existence; or (g) the entry of
any judgment in excess of $50,000 against any of the Debtors, which judgment
is not satisfied (if a money judgment) or appealed from (with execution or
similar process stayed) within fifteen (15) days of its entry; or (h) any act
by, against, or relating to any of the Debtors, or its property or assets,
which act constitutes the application for, consent to, or sufferance of the
appointment of a receiver, trustee, or other similar fiduciary, pursuant to
Court action or otherwise, over all, or any part of the Debtor's property; the
granting of any trust mortgage or execution of an assignment for the benefit
of the creditors of any of the Debtors, or the occurrence of any other
voluntary or involuntary liquidation or extension of debt agreement for the
Debtor; or the offering by or entering into by the Debtor of any composition,
extension, or any other arrangement seeking relief from or extension of the
debts of the Debtor, or the initiation of any other judicial or non-judicial
proceeding or agreement by, against, or including the Debtor which seeks or
intends to accomplish a reorganization or arrangement generally with
creditors; or (i) the failure by any of the Debtors to generally pay the debts
of the Debtor as they mature; the entry of an order for relief or similar
order with respect to the Debtor in any proceeding pursuant to the Bankruptcy
Code or any other federal bankruptcy law; the filing of any complaint,
application or petition by or against the Debtor initiating any matter in
which the Debtor is or may be granted any relief from the debts of the Debtor
pursuant to the Bankruptcy Code or any other insolvency statute or procedure,
which complaint, application, or petition is not timely contested by the
Debtor or, if so timely contested, is not dismissed within thirty (30) days of
when filed; or (j) failure to perform under and/or committing any breach of
this agreement, the Loan Agreement or any Related Document; or (k) any Related
Document shall at any time fail to be in full force and effect and enforceable
in accordance with its terms, or (1) change of board of directors of
AppleTree; or "(m) sale of all or substantially all of the assets of the
Debtors; or (n) the occurrence of any other event because of which, in its
sole and subjective discretion, the secured party may deem itself in jeopardy;
or (o) the occurrence of any event which secured party may, in its sole and
subjective opinion, deem an adverse change in any of the Debtors' financial
conditions.
No Event of Default shall be deemed to have occurred for items described in
clause (b) above unless and until Secured Party delivers (during the
continuance of such default) a written notice declaring an Event of Default to
Debtor. No Event of Default shall be deemed to have occurred for any other
items described above unless and until Secured Party delivers (during the
continuance of such default) a written notice declaring an Event of Default to
any Debtor and such default is not remedied within two (2) business days
thereafter. Secured Party shall have no obligation to make any further
advance to the Debtors during said two (2) business day period or any other
period when a default is in existence unless and until the default has been
remedied to the Secured Party's satisfaction.
5. Miscellaneous.
5.1 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed effective only if
delivered by hand, or mailed by overnight delivery, return receipt requested,
to the addresses set forth below:
To the Secured Party:
To the Debtor:
The AppleTree Companies, Inc.
5732 Curlew Drive
Norfolk, VA 23502
5.2 Performance. If any Debtor is in default in the performance
or fulfillment of any of the terms, conditions, covenants or provisions on its
part to be performed or fulfilled hereunder, Secured Party may, at its option,
without waiving its right to enforce this agreement according to its terms
immediately or at any time thereafter and without notice to any Debtor,
perform or fulfill the same or cause the performance or fulfillment of same
for such Debtor's account, and the cost and expense thereof (including
reasonable attorneys fees) shall be added to the obligations secured hereby
and shall be payable on demand with interest thereon at the Regular Rate.
5.3 Costs and Expenses. Each Debtor shall pay all costs and
expenses and reasonable attorneys' fees of Secured Party and its counsel in
connection with the preparation, execution, delivery, amendment and
enforcement of this agreement, the Loan Agreement and all Related Documents.
5.4 Assignment. The terms and provisions of this agreement
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns.
5.5 Resort to Other Security. The taking of this Security Agreement shall
not waive or impair any other security Secured Party may have or hereafter
acquire for the payment and performance of the Obligations secured hereby, nor
shall the taking of any such additional security waive or impair this Security
Agreement; but Secured Party may resort to any security it may have in the
order it may deem proper.
5.6 Liability for Deficiency. Debtors shall be liable for any
deficiency remaining after collection of Accounts, sale of Collateral and/or
the exercise of any other remedy by Secured Party hereunder, provided that
nothing contained herein shall require Secured Party to pursue any of its
remedies against the Collateral before enforcing or obtaining a judgment under
the obligations.
5.7 Governing Law. This agreement and all rights and
obligations hereunder shall be governed by and construed in accordance with
the laws of the State of New York.
5.8 Waiver. No delay or f failure on the part of Secured Party
in exercising any right, privilege or option hereunder shall operate as a
waiver of such or of any other right, privilege, remedy or option, and no
waiver whatever shall be valid unless in writing, signed by Secured Party and
then only to the extent therein set forth. No waiver by Secured Party of any
Event of Default shall operate as a waiver of any other Event Of Default or of
the same Event of Default on a future occasion. THE UNDERSIGNED HEREBY WAIVE
ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
HEREON.
5.9 Termination. At such time as each Debtor shall completely
and finally satisfy all obligations in cash and the Facility has been
irrevocably terminated, this Security Agreement shall terminate and Secured
Party shall execute and deliver to Debtors all assignments, UCC termination
statements and other instruments as may be required to reflect the termination
of Secured Party's interest in the Collateral Security.
5.10 Modification. This agreement cannot be changed or
terminated orally.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed by their respective officers thereunto duly
authorized as of the day and year first above written.
DEBTORS: The AppleTree Companies, Inc.
By: Americas Foods, Inc.
By: Stewart Products, Inc.
By: Royal American Foods Corporation
By:Carriage Town Products, Inc.
By: J.R. Basset Optical, Inc.
By: SECURED PARTY:
EXHIBIT-I
Permitted Senior Liens
1. The lien of Strategica capital Corporation also known as Strategica Group
to the extent such lien is properly perfected on various assets of the
Debtors.
SCHEDULE OF COLLATERAL - SCHEDULE A
(a) All inventory now owned or hereafter acquired by Debtors;
(bb) All accounts, including accounts receivable, contract
rights and other rights to the payment of money, including Certificate of
Deposit and the like, tax refunds, now or hereafter existing, now owned or
hereafter acquired by Debtors ("Accounts");
(c) All furniture, fixtures, equipment and other tangible
personal property in all of its forms, wherever located, now or hereafter
existing, now owned or hereafter acquired by Debtors;
(d) All right, title and interest of Debtors as licensee under
any license agreements now existing or hereafter acquired;
(e) Deposit accounts, now existing or hereafter acquired;
(f) To the extent not otherwise included in the Collateral,
all books,
correspondence, credit files, customer lists, computer software, data bases,
records and other documents related to the above-described types of property,
including, without limitation, all tapes, cards, runs and other papers,
documents and computer storage media in the possession or control of any of
the undersigned, or any affiliate or subsidiary of the undersigned, or any
computer service bureau, wherever any of the foregoing may be located and
whether the same are owned by the undersigned on the date hereof or are
hereafter acquired or created by the undersigned;
(g) To the extent not otherwise included in the Collateral, all
rights in, to and under policies of insurance of every kind and nature
covering any Collateral, including, without limitation, claims or rights to
payment and proceeds heretofore or hereafter arising therefrom with respect to
the above-described types of property, whether the same are owned by the
undersigned on the date hereof or are hereafter acquired or created;
(h) To the extent not otherwise included in the Collateral,
including general intangibles (as defined in the Uniform Commercial Code)
including trademarks, tradenames, tax refunds, contract rights, trade secrets,
licensing agreements, royalty payments, copyrights, service marks, logos,
goodwill, rights of indemnification, and all other personal property, or any
kind or nature or any of the undersigned, now or hereafter existing, now owned
or hereafter acquired or created;
(i) To the extent not otherwise included in the Collateral, all
real property fixtures and rental income, wherever located, now or hereafter
existing, now owned or hereafter acquired;
All substitutions, proceeds and products of any and all of the
foregoing Collateral (including leases, subleases and license agreements),
proceeds from the sale thereof, cash and non-cash, and all cash collateral now
owned or hereafter acquired by Debtors and, to the extent not otherwise
included, all payments under insurance (whether or not Secured Party is the
payee thereof), all payment paid pursuant to settlements, judgments, or
compromises entered or entered into as a result of disputes or causes of
action to which Debtors are a party, or any indemnity, warranty of guaranty,
payable by reason of loss or damage to or otherwise with respect to any of the
foregoing Collateral.
EXHIBIT 4.18
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE SECURITIES LAWS BY REASON OF
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
LAWS, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT
OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
STOCK PURCHASE WARRANT
Date of Issuance:
Certificate No
------------------ ---------
For value received, The AppleTree Companies, Inc., a Delaware corporation (the
"Company"), hereby grants to Company or its registered assigns (the
"Registered Holder") the right to purchase from the Company shares
of the Company's Common Stock, par value $ per share (the Common Stock"),
at a price per share of $.0125 (as adjusted and in effect from time-to-time
pursuant to Section 2 below, the "Exercise Price"). Certain capitalized terms
used herein are defined in Section 5 hereof. The amount and kind of
securities purchasable pursuant to the rights granted hereunder and the
purchase price for such securities are subject to adjustment pursuant to the
provisions contained in this Warrant.
This Warrant is subject to the following provisions:
Section 1.
Exercise of Warrant.
1A.
Exercise Period. The Registered Holder may exercise, in whole or in part (but
not as to a fractional share of Common Stock), the purchase rights represented
by this Warrant at any time and from time-to-time after the Date of Issuance
to and including September 25, 2001 (the "Exercise Period").
1B.
Exercise Procedure.
(i)
This Warrant shall be deemed to have been exercised when the Company has
received all of the following items (the "Exercise Time"):
(a)
a completed Exercise Agreement, as described in
paragraph 1C below, executed by the Registered Holder;
(b)
this Warrant;
(c)
either (x) a check payable to the Company in an
amount equal to the product of the Exercise Price multiplied by the number of
shares of Common Stock being purchased upon such exercise (the "Aggregate
Exercise Price") or
(y) the surrender to the Company of securities of the Company having a
Market Price equal to the Aggregate Exercise Price of the Common Stock being
purchased upon such exercise.
(ii)
Certificates for shares of Common Stock purchased upon exercise of this
Warrant shall be delivered by the Company to the Registered Holder within
fifteen business days after the date of the Exercise Time. Unless this
Warrant has expired or all of the purchase rights represented hereby have been
exercised, the Company shall prepare a new Warrant, substantially identical
hereto, representing the rights formerly represented by this Warrant which
have not expired or been exercised and shall, within such fifteen-day period,
deliver such new Warrant to the Registered Holder.
(iii)
The Common Stock issuable upon the exercise of this Warrant shall be deemed to
have been issued to the Registered Holder at the Exercise Time, and the
Registered Holder shall be deemed for all purposes to have become the record
holder of such Common Stock at the Exercise Time.
(iv)
The issuance of certificates for shares of Common Stock upon the exercise of
this Warrant shall be made without charge to the Registered Holder for any
issuance tax in respect thereof or other cost incurred by the Company in
connection with such exercise and the related issuance of shares of Common
Stock. Each share of Common Stock issuable upon exercise of this Warrant
shall, upon payment of the Exercise Price therefor, be fully paid and
nonassessable and free from all liens and charges with respect to the issuance
thereof.
(v)
The Company shall not close its books against the transfer of this Warrant or
of any share of Common Stock issued or issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this
Warrant. The Company shall from time-to-time take all such action as may be
necessary to assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.
(vi)
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
issuance upon the exercise of this Warrant, such number of shares of Common
Stock issuable upon the exercise of this Warrant. The Company shall take all
such actions as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or governmental
regulation or any requirements of any domestic securities exchange upon which
shares of Common Stock may be listed (except for official notice of issuance
which shall be promptly delivered by the Company upon each such issuance).
1C.
Exercise Agreement.
Upon any exercise of this Warrant, the Exercise Agreement shall be
substantially in the form set forth in Exhibit I attached hereto. Such
Exercise Agreement shall be dated the actual date of execution thereof.
1D.
Fractional Shares.
If a fractional share of Common Stock would, but for the provisions of
paragraph 1A, be issuable upon exercise of the rights represented by this
Warrant, the Company shall, within five business days after the date of the
Exercise Time, deliver to the Registered Holder a check payable to the
Registered Holder in lieu of such fractional share in an amount equal to the
difference between the Market Price of such fractional share as of the date of
the Exercise Time and the Exercise Price of such fractional share.
Section 2.
Adjustment to Number of Shares.
The number of shares of Common Stock purchasable upon exercise of this Warrant
and the Exercise Price shall be subject to adjustment as follows:
2A.
In case the Company shall (I) pay a dividend in shares of Common Stock or make
a distribution in shares of Common Stock; (ii) subdivide its outstanding
shares of Common Stock; (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock; or (iv) issue by
reclassification of its shares of stock other securities of the Company, the
number of shares of Common Stock purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the holder of this Warrant
shall be entitled to receive the kind and number of shares of Common Stock or
other securities of the Company which he would have owned or have been
entitled to receive after the happening of any of the events described above,
had this Warrant been converted immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this paragraph 2A shall become effective immediately after the effective date
of such event retroactive to the record date, if any, for such event.
2B.
In case the Company shall issue rights, options or warrants to all holders of
its outstanding shares of Common Stock, without any charge to such holders,
entitling them (for a period expiring within forty five (45) days after the
record date mentioned below) to subscribe for or purchase shares of Common
Stock at a price per share which is lower at the record date mentioned below
than the then current Market Price per share of Common Stock, the number of
shares of Common Stock thereafter purchasable upon the exercise of this
Warrant shall be determined by multiplying the number of shares of Common
Stock theretofore purchasable upon exercise of this Warrant by a fraction, of
which the numerator shall be the number of shares of Common Stock outstanding
on the date of issuance of such rights, options or warrants plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options or warrants plus
the number of shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so offered would purchase at the then
current Market Price per share of Common Stock. Such adjustments shall be
made whenever such rights, options or warrants are issued, and shall become
effective retroactively immediately after the record date for the
determination of shareholders entitled to receive such rights, options or
warrants.
2C.
In case the Company shall distribute to all holders of its shares of Common
Stock evidence of its indebtedness or assets (excluding cash dividends or
distributions out of earnings and dividends or distributions referred to in
paragraph 2A above) or rights, options or warrants or convertible securities
containing the right to subscribe for or purchase shares of Common Stock
(excluding those referred to in paragraph 2B above), then in each case the
number of shares of Common Stock thereafter purchasable upon the exercise of
this Warrant shall be determined by multiplying the number of shares of Common
Stock theretofore purchasable upon the exercise of this Warrant by a fraction,
of which the numerator shall be the then current Market Price per share of
Common Stock on the date of such distribution, and of which the denominator
shall be the then current Market Price per share of Common Stock, less the
then fair value (as determined by the Board of Directors of the Company, whose
determination shall be conclusive) of the portion of the evidence of
indebtedness or assets so distributed or of such subscription rights, options
or warrants or of such convertible securities applicable to one share of
Common Stock. Such adjustment shall be made whenever any such distribution
is made, and shall become effective on the date of distribution retroactive to
the record date for the determination of shareholders entitled to receive such
distribution.
2D.
Upon each such adjustment of the number of shares of Common Stock issuable
upon exercise hereof, the Exercise Price of this Warrant shall be adjusted to
the Exercise Price determined by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the number of shares of Common Stock
acquirable upon exercise of this Warrant immediately after such adjustment.
Section 3.
Company Consolidation, Merger, Etc.
In case of any consolidation of the company with or merger of the Company into
another corporation or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as
an entirety, the Company or such successor or purchasing corporation, as the
case may be, shall execute an agreement that any holder of this Warrant shall
have the right thereafter upon payment of the Exercise Price in effect
immediately prior to such action to purchase upon exercise of this Warrant the
kind and amount of shares and other securities and property which he would
have owned or have been entitled to receive after the happening of such
consolidation, merger, sale or conveyance had this Warrant been exercised
immediately prior to such action. The Company shall mail by first class mail,
postage prepaid, to each holder of this Warrant, notice of the execution of
any such agreement. Such agreement shall provide for adjustments, which shall
be as nearly equivalent as may be practicable to the adjustments provided for
herein. The provisions of this paragraph shall similarly apply to successive
consolidations, mergers, sales or conveyances.
Section 4.
Certificate Evidencing Adjustments.
Whenever the Exercise Price shall be adjusted as required by the provisions
hereof, the Company shall forthwith file in the custody of its Secretary or an
Assistant Secretary at its principal office an officer's certificate showing
the adjusted Exercise Price determined as herein provided and setting forth in
reasonable detail the facts requiring such adjustment. Each such officer's
certificate shall be made available at all reasonable times for inspection by
the holder of this Warrant and the Company shall forthwith, after each such
adjustment, deliver a copy of such certificate to each holder of this Warrant.
Such certificates shall be conclusive as to the correctness of such
adjustments.
Section 5.
Definitions.
The following terms have meanings set forth below:
"Common Stock" means the Company's Common Stock, par value $.001 per share.
"Market Price" means, with respect to the shares of Common Stock, the mean
between the closing bid and asked prices as reported in the regular way for
such day on the principal national securities exchange in the United States on
which the shares are listed or admitted to trading, or, if they are not listed
or admitted to trading on any national securities exchange in the United
States, the mean between the closing bid and asked prices of the Common Stock
on NASDAQ or any comparable system, or, if the Common Stock is not listed on
NASDAQ or any comparable system, then the mean between the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time-to-time by the Company for that
purpose.
"Person" means an individual, a partnership, a joint venture, a corporation,
a trust, an unincorporated organization and a government or any department or
agency thereof.
Section 6.
No Voting Rights; Limitations of Liability.
This Warrant shall not entitle the holder hereof to any voting rights or
other rights as a stockholder of the Company. No provision hereof, in the
absence of affirmative action by the Registered Holder to purchase Common
Stock, and no enumeration herein of the rights or privileges of the Registered
Holder shall give rise to any liability of such holder for the Exercise Price
of Common Stock acquirable by exercise hereof or as a stockholder of the
Company.
Section 7.
Warrant Transferable.
This Warrant and all rights hereunder are non-transferable, in whole or in
part, without the prior written consent of the Company, which consent may be
withheld in the Company's sole discretion.
Section 8.
Replacement.
Upon receipt of evidence reasonably satisfactory to the Company (an affidavit
of the Registered Holder shall be satisfactory) of the ownership and the loss,
theft, destruction or mutilation of any certificate evidencing this Warrant,
and in the case of any such loss, theft or destruction, upon receipt of
indemnity reasonably satisfactory to the Company (provided that if the holder
is a financial institution or other institutional investor its own agreement
shall be satisfactory), or, in the case of any such mutilation upon surrender
of such certificate, the Company shall (at its expense) execute and deliver in
lieu of such certificate a new certificate of like kind representing the same
rights represented by such lost, stolen, destroyed or mutilated certificate
and dated the date of such lost, stolen, destroyed or mutilated certificate.
Section 9.
Notices.
Except as otherwise expressly provided herein, all notices referred to in this
Warrant shall be in writing and shall be delivered personally, sent by
reputable express courier service (charges prepaid) or sent by registered or
certified mail, return receipt
requested, postage prepaid and shall be deemed to have been given when so
delivered, sent or deposited in the U.S. Mail (I) to the Company, at its
principal executive offices and (ii) to the
Registered Holder of this Warrant, at such holder's address as it appears in
the records of the Company (unless otherwise indicated by any such holder).
Section 10.
Amendment and Waiver.
Except as otherwise provided herein, the provisions of this Warrant may be
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company has
obtained the written consent of the Registered Holder of this Warrant.
Section 11.
Descriptive Headings; Governing Law.
The descriptive headings of the several Sections and paragraphs of this
Warrant are inserted for convenience only and do not constitute a part of this
Warrant. The construction, validity and interpretation of this Warrant shall
be governed by the internal law, and not the conflicts law, of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
attested by its duly authorized officers under its corporate seal and to be
dated the Date of Issuance hereof.
THE APPLETREE COMPANIES, INC.
By:
-------------------------------
Its:
--------------------------------
[Corporate Seal]
Attest:
- ---------------------------------
Secretary
EXHIBIT I
EXERCISE AGREEMENT
To:
Dated:
The undersigned, pursuant to the provisions set forth in the attached Warrant
(Certificate No. W- ), hereby agrees to subscribe for the purchase of
shares of the Common Stock covered by such Warrant and makes payment herewith
in full therefor at the price per share provided by such Warrant.
Signature
--------------------------
Address
---------------------------
- -----------------------------
- -----------------------------
EXHIBIT 4.19
November 22, 1996
RE: Subscription Letter Agreement (the "Agreement") for The purchase
of Convertible Secured Debenture Issued Pursuant to an Exemption
from Registration
Gentlemen:
The AppleTree Companies, Inc., a Delaware corporation (the "Company"), has
been advised that you have indicated a desire to purchase a Convetible Secured
Debenture from the Company. Accordingly, the Company hereby offers to sell to
you as the "Purchaser" (described below), and Purchaser does hereby accept
such offer as to $ ("Price"), on the terms conditions, representations
and covenants as set forth herein.
PART I
Inasmuch as this constitutes a sale of securities which is governed and
regulated by various federal and state regulations, the Purchaser is making
certain representations upon which the Company will rely in selling you the
Debenture. As Purchaser, you acknowledge that you are a stockholder in the
Company and that no offering circular, private placement memorandum or other
disclosure document containing matters relating to the Debenture has been
previously furnished or will be furnished to you. However, you acknowledge
and understand the following: all material risks involving the sale of the
Debenture; the business of the Company; the description of the Purchaser set
forth below is true and correct, a description of the assets and liabilities
of the Company set forth on its financial statements which are a part of its
most recent 10-QSB, etc.; and, that the Company has given you the opportunity
to review all of the books and records of the Company, including the Company's
most recent Form 10-KSB, Form 10-QSB, and all other SEC filings; and such
other information and documents as the Purchaser may request. The Purchaser
makes the following representations to the Company as to the sale of the
Debenture:
1.
All of the foregoing is correct;
2.
The Debenture is suitable only for sophisticated investors and are being
offered and sold under the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder;
3.
If the Purchaser is a corporation or other entity described below, it is in
good standing, under the laws of the state of its incorporation and all board
resolutions and authorizations necessary to undertake this transaction, have
been authorized to execute this document;
4.
That Purchaser has been represented or have had the opportunity to consult
with legal counsel, tax counsel, tax advisors, accountants and others, to the
extent necessary concerning this transaction, and such representation has
included an examination or an opportunity to examine all applicable documents,
including tax, financial, accounting and securities aspects as to the
Debenture.
5.
Purchaser has further represented that the Debenture has not been registered
under the Securities Act of 1933 (the "Act") nor pursuant to the provisions of
the securities or other laws of any other applicable jurisdiction, but are
sold in reliance upon the exemptions for private offerings contained in
Section 4(2) of the Act and Regulation D promulgated thereunder and such other
jurisdictions. You are fully aware of the restrictions on sale,
transferability and assignment of the debentures and that you must bear the
economic risks of the investment in the Debentures for an indefinite period of
time because the Debentures or underlying Shares have not been registered
under the Act. Thus, the Debentures cannot be offered or sold unless they are
subsequently registered under the Act or an exemption from registration is
available. The Company does hereby grant to you a right to "piggyback" the
underlying Shares in any registration of stock by the Company or on behalf of
selling stockholders.
6.
Purchaser further agrees that the certificates representing the shares will be
inscribed with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR THE SECURITIES
LAWS OF ANY OTHER JURISDICTION AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN ANY MANNER UNLESS THEY
ARE REGISTERED UNDER SUCH ACT AND THE SECURITIES LAWS OF ANY APPLICABLE
JURISDICTION OR UNLESS PURSUANT TO AN EXEMPTION THEREFROM.
7.
The Purchaser acknowledges that no person is authorized to make any
representation which is not in conformity with the information contained
herein, and any such representation shall not and should not be relied upon by
you.
PART II
The Company warrants and represents that the Debentures are duly authorized
and validly issued and are non-assessable, and that the board has approved the
issuance of the Debentures.
Please review this document carefully and after you have done so as well as
all material matters in the manner set forth above, please execute this
agreement in the space set forth below.
Very truly yours,
THE APPLETREE COMPANIES, INC.
------------------------------------
John W. Donlevy
President
The undersigned hereby acknowledges the terms, conditions, representations,
and covenants as set forth above and agrees to accept the offer and subscribe
for $ of Convertible Secured Debenture.
-----------------------------------
NAME OF PURCHASER
-----------------------------------
Signature
If Purchaser is not an individual, the
following information is furnished:
1. The Purchaser is a
(describe entity)
2. The Purchaser is governed by the laws
of , and is
in good standing under such law.
3.
---------------------------------------
Print name of person signing on behalf
of Purchaser
4.
---------------------------------------
Print title of person signing on behalf
of Purchaser
5.
--------------------------------------
Provide Social Security No. or
Taxpayer Identification No.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The AppleTree Companies, Inc.
Norfolk, Virginia
We consent to the incorporation by reference in the registration statements of
The AppleTree Companies, Inc. (the "Company") on Form S-8 (File No. 33-91040 and
33-91490), of our report which includes an explanatory paragraph relating to the
Company's ability to continue as a going concern, dated December 16, 1996 on our
audits of the consolidated financial statements of the Company as of September
1, 1996 and September 3, 1995 and for the fifty-two weeks ended September 1,
1996 and for the fifty-three weeks ended September 3, 1995, which report is
included in this Annual Report on Form 10-KSB.
/s/ COOPERS & LYBRAND, L.L.P.
Virginia Beach, Virginia
December 16, 1996
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<PERIOD-END> SEP-01-1996
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<PP&E> 4,351
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0
0
<COMMON> 115
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<TOTAL-LIABILITY-AND-EQUITY> 7,462
<SALES> 28,666
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<CGS> 19,082
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