SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 2, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________TO ______________________
Commission file number 1-23020
THE APPLETREE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0205933
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5732 Curlew Drive
Norfolk, Virginia 23502
(Address of principal executive offices) (Zip Code)
(757) 466-9200
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the Common Stock of the issuer outstanding as of March
2, 1997 was 111,556,357.
THE APPLETREE COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 2, 1997 and September 1, 1996
(rounded to thousands except share data)
March 2, September 1,
1997 1996
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 139,000 $ 248,000
Accounts receivable (net of allowance for
doubtful accounts and spoilage of $568,000
in 1997 and $693,000 in 1996) 888,000 1,431,000
Inventories 491,000 1,067,000
Prepaid expenses and other current assets 84,000 41,000
----------- -----------
Total current assets 1,602,000 2,787,000
Property and equipment, net 3,954,000 4,351,000
Deposits and other assets 361,000 324,000
----------- -----------
Total assets $ 5,917,000 $ 7,462,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Notes payable $ 24,000 $ 56,000
Convertible debentures due on demand 3,957,000 1,050,000
Current portion of capitalized lease obligations 213,000 176,000
Current portion of long-term debt 237,000 201,000
Accounts payable 2,933,000 3,029,000
Accrued expenses 1,287,000 2,131,000
Reclassification of long-term debt 3,170,000 3,061,000
----------- -----------
Total current liabilities 11,821,000 9,704,000
Capitalized lease obligations, net of
current portion 870,000 964,000
Long-term debt, net of current portion 105,000 215,000
Convertible debentures 400,000 500,000
----------- -----------
Total liabilities 13,196,000 11,383,000
----------- -----------
Stockholders' equity deficiency:
Preferred stock- par value $.001 per share,
10,000,000 shares authorized, 85,494 shares
issued and outstanding as of March 2, 1997
(liquidation preference of $3,856,140); 85,389
shares issued and outstanding as of September
1, 1996 (liquidation preference of $3,740,640) - -
Common Stock - par value $.001 per share,
120,000,000 shares authorized, 111,565,122
shares issued and 111,556,357 shares
outstanding as of March 2, 1997; 115,089,087
shares issued and 115,080,322 shares
outstanding as of September 1, 1996 112,000 115,000
Additional paid-in capital 35,953,000 35,933,000
Accumulated deficit (43,185,000) (39,810,000)
Less treasury stock, at cost (159,000) (159,000)
----------- -----------
Total stockholders' equity deficiency (7,279,000) (3,921,000)
----------- -----------
Total liabilities and stockholders'
equity deficiency $ 5,917,000 $ 7,462,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
THE APPLETREE COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three-month and six-month periods ended
March 2, 1997 and March 3, 1996
(rounded to thousands except per share data)
(Unaudited)
Three-month period ended Six-month period ended
March 2, March 3, March 2, March 3,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales $3,419,000 $7,230,000 $8,757,000 $15,260,000
Costs of goods sold 2,090,000 4,632,000 5,497,000 9,756,000
----------- ----------- ----------- -----------
Gross profit 1,329,000 2,598,000 3,260,000 5,504,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative 2,548,000 4,407,000 5,959,000 8,727,000
Professional fees 118,000 18,000 193,000 189,000
----------- ----------- ----------- -----------
Total operating
expenses 2,666,000 4,425,000 6,152,000 8,916,000
----------- ----------- ----------- -----------
Loss from operations (1,337,000) (1,827,000) (2,892,000) (3,412,000)
----------- ----------- ----------- -----------
Other expense:
Interest expense 242,000 278,000 402,000 535,000
Other expense (37,000) 29,000 (35,000) 44,000
----------- ----------- ----------- -----------
Total other expense 205,000 307,000 367,000 579,000
----------- ----------- ----------- -----------
Net loss $(1,542,000) $(2,134,000) $(3,259,000) $(3,991,000)
=========== =========== =========== ===========
Net loss per common share:
Net loss applicable
to common
stockholders $(1,623,000) $(2,150,000) $(3,421,000) $(4,153,000)
=========== =========== =========== ===========
Weighted average
number of common
shares outstanding 110,946,000 38,184,000 110,549,000 31,042,000
=========== ========== =========== ==========
Net loss per common
share $ (0.01) $ (0.06) $ (0.03) $ (0.13)
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
THE APPLETREE COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six-month periods ended March 3, 1997 and March 2, 1996
(rounded to thousands)
1997 1996
------------ -------------
Cash flows from operating activities: $(3,259,000) $(3,991,000)
Net loss
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 427,000 439,000
Amortization expense - 21,000
Bad debt expense 48,000 (32,000)
Loss on sale of property and equipment 3,000 9,000
Common stock issued as payment of finance
costs 22,000 -
Gain on settlement of debt (17,000) -
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable 495,000 417,000
Inventories 576,000 (155,000)
Prepaid expenses and other current assets (43,000) (114,000)
Other assets (37,000) (65,000)
Accounts payable and accrued expenses (884,000) (1,165,000
----------- ----------
Net cash used in operating activities (2,669,000) (4,636,000)
----------- ----------
Cash flows from investing activities:
Payments for acquisition - (55,000)
Capital expenditures (25,000) (264,000)
Proceeds from sale of property and equipment 10,000 5,000
----------- ----------
Net cash used in investing activities (15,000) (314,000)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures 2,657,000 1,705,000
Proceeds from issuance of note payable - 603,000
Payments on note payable, long-term debt
and capitalized lease obligations (72,000) (243,000)
Deferred financing costs - (34,000)
Proceeds from issuance of preferred
and common stock (10,000) 3,158,000
----------- ----------
Net cash provided by financing activities 2,575,000 5,189,000
----------- ----------
Net increase (decrease) in cash
and cash equivalents (109,000) 239,000
Cash and cash equivalents at beginning of year 248,000 -
----------- ----------
Cash and cash equivalents at end of period $ 139,000 $ 239,000
=========== ==========
See accompanying notes to condensed consolidated financial statements.
THE APPLETREE COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three-Month and Six-Month Periods Ended March 2, 1997
and March 3, 1996
(Unaudited)
Note 1 PETITION IN BANKRUPTCY
On April 4, 1997, the Company's Board of Directors authorized the filing
of a voluntary petition for The AppleTree Companies, Inc. and its
subsidiary, Americas Foods, Inc., (collectively, the "Petitioner") in the
United States Bankruptcy Court for the Eastern District of Virginia
seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code.
On April 4, 1997, the Company filed its petition requesting to continue
in the management and control of its business and property as debtor-in-
possession under the Bankruptcy Code. The Company has not yet drafted a
Plan of Reorganization, but has entered into agreements with real estate
agents offering certain of its real estate for sale in an effort to
improve its financial position and cash flows.
The consolidated financial statements of The AppleTree Companies, Inc.
and subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles applicable to a going concern
which contemplate, among other things, realization of assets and payment
of liabilities in the normal course of business and do not purport to
reflect or provide for all consequences of the Petitioner's ongoing
Chapter 11 proceedings. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities
or the effects on existing stockholders' equity that may result from any
plans, arrangements or other actions arising from the aforementioned
proceedings, or the inability of the Company to continue as a going
concern, because the eventual outcome of the matter referred to in the
preceding paragraph is not presently determinable.
The continuation of operations of the Company is dependent upon its
ability to operate profitably and generate sufficient cash from
operations or other sources to effectuate a Plan of Reorganization that
will meet ongoing obligations over a sustained period, continue normal
credit terms with its suppliers, obtain adequate financing for future
needs and obtain the required approvals of creditors and the Bankruptcy
Court of a Plan of Reorganization.
The Bankruptcy Code allows the debtor-in-possession to either assume or
reject certain liabilities, leases or other executory contracts subject
to court approval. In addition, upon the formation of a Plan of
Reorganization, other potential adjustments to asset values or accruals
of liabilities could result from potential asset sales or liquidation of
liabilities at amounts different than amounts reflected in historical
financial statements. At the present time it is not possible to estimate
with any degree of certainty the ultimate adjustment to assets or
liabilities which may result from any such potential adjustments.
Note 2 BASIS OF PRESENTATION
In the opinion of management of the Company, the accompanying condensed
consolidated financial statements contain all adjustments, which consist
only of normal and recurring adjustments, necessary for a fair
presentation of results for the periods indicated. The results of any
interim period are not necessarily indicative of results for the full
year. The September 1, 1996 condensed consolidated balance sheet was
derived from audited financial statements. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and related notes thereto for the year ended September 1, 1996.
Note 3 - CESSATION OF WESTERN OPERATIONS
As part of its ongoing efforts to reduce operating expenses and achieve
profitability, effective at the close of business on February 14, 1997,
the Company ceased its manufacturing operations in Salt Lake City, Utah
and eliminated routes emanating from that location. The Company is seeking
a buyer for this manufacturing facility.
Also, effective at the close of business on that date, Paul Mitchell, the
Company's vice president of sales resigned, and, through MICCIO
Enterprises, Inc., an entity he created, took over the Company's
Phoenix, Arizona manufacturing and distribution operations. The
Company acquired those operations, together with the Sandwich Maker
name, in October 1995 from entities owned by Mr. Mitchell. This
transaction is the subject of a letter of intent dated February 14, 1997
and the terms of this transaction have not been finalized and are subject
to the Bankruptcy Court, Board of Directors and a lender's approval. The
Company will continue production under the Sandwich Maker name and
expects to enter into a license agreement with MICCIO Enterprises, Inc.
relating to the Sandwich Maker name. No accounting recognition has been
given to this transaction due to its current pending status.
Pro forma results of operations for the year ended September 1, 1996 and
the three-month period ended December 1, 1996 reflect the results of
operations without those operations as though the transaction occurred on
September 4, 1995. The net book value of assets held for sale is
approximately $669,000; and net assets being sold to MICCIO Enterprises,
Inc. are approximately $59,000 (net of estimated liabilities of
approximately $155,000).
Note 4 - INVENTORIES
Inventories consist of the following:
March 2, 1997 September 1, 1996
------------- -----------------
(Unaudited)
Raw materials and supplies $ 229,000 $ 467,000
Finished goods 262,000 600,000
---------- -----------
$ 491,000 $1,067,000
========== ==========
Note 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 2, 1997 September 1, 1996
------------- -----------------
(Unaudited)
Land $ 472,000 $ 472,000
Buildings and improvements 1,225,000 1,215,000
Furniture, fixtures and equipment 1,162,000 1,154,000
Machinery and equipment 1,820,000 1,820,000
Transportation and delivery equipment 1,343,000 1,340,000
---------- ----------
6,022,000 6,001,000
Accumulated depreciation and
amortization (2,068,000) (1,650,000)
---------- ----------
$3,954,000 $4,351,000
========== ==========
Note 6 - CONVERTIBLE DEBENTURES
The Company issued $2,807,200 of 8% debentures in the first six months of
fiscal 1997, and $85,750 of 8% debentures in March 1997. The outstanding
principal balance of each debenture is payable on demand. Interest for
the first year is waived, and thereafter, interest is payable monthly.
New debentures may be converted into common stock at conversion prices
ranging from $.0075 to $.0125 per share. The Company, however, currently
does not have sufficient authorized and unissued shares of common stock
to issue upon the conversion of any debentures. The Company may redeem
the debentures at any time prior to maturity for the principal amount
outstanding including accrued interest.
The Company issued 3,776,000 shares of its common stock during the first
quarter of fiscal 1997 in partial satisfaction of a convertible
debenture ($100,000) and accrued interest of $18,000. The Company also
issued 2 million shares of its common stock in the second quarter as
payment of $22,000 of a $25,000 financing fee.
In January 1997, an investor rescinded a $100,000 common stock
transaction for 8 million shares in exchange for a convertible debenture
for the same amount effective at August 16, 1996, the date of the
original transaction.
Note 7 - PREFERRED STOCK TRANSACTIONS
The Company's 11% Convertible Preferred Stock ("COPS") has a dividend or
payment in lieu thereof, payable quarterly commencing June 30, 1996. In
September 1996, the Company issued 105 shares of COPS in payment of the
June 30, 1996 dividend. Through April 21, 1997, the Company had not
fulfilled the dividend requirements of the COPS for subsequent quarterly
dividends.
Note 8 - CASH FLOW DISCLOSURES
Non cash financing activities:
In connection with its acquisition of Sandwich Maker in October 1995,
the Company acquired assets and assumed liabilities as follows:
1995
----------
Fair value of assets acquired $931,000
Liabilities assumed (593,000)
Issuance of note to seller (263,000)
---------
Net consideration paid 75,000
Net other purchase price adjustments and
amounts paid after December 3, 1995 (20,000)
---------
Cash paid for acquisition $ 55,000
=========
During the six-month period ended March 2, 1997, $100,000 of convertible
debentures and accrued interest of $18,000 were converted into 3,776,000
shares of common stock. Further, in the second quarter, the Company
issued 2 million shares of common stock as payment of $22,000 of a
$25,000 financing fee.
During the six-month period ended March 2, 1997, the Company issued 105
shares of its convertible preferred stock valued at approximately
$116,000 as payment for dividends accrued through June 30, 1996 on 2,575
shares of its convertible preferred stock. The Company has not yet
declared dividends for the three-month periods ended September 30, 1996,
December 31, 1996 or March 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six-Month Period Ended March 2, 1997 compared to March 3, 1996
Net sales decreased $6,503,000 (approximately 43%) from $15,260,000 for
the six-month period ended March 3, 1996 to $8,757,000 for the six-month
period ended March 2, 1997. The principal reason for the decrease was
the Company's cash flow problems resulting in a general lack of product.
Further, another factor in the decrease in net sales was the elimination
of unprofitable routes which accounted for approximately $1,749,000 of
the decrease. Food service sales reductions resulting principally from
the discontinuation of the institutional beef business accounted for
approximately $790,000 and approximately $994,000 was due to reduced
vending sales.
Cost of goods sold as a percentage of net sales for the six-month period
ended March 2, 1997 was approximately 63% compared with approximately 64%
for the six-month period ended March 3, 1996.
Operating expenses decreased $2,764,000 (approximately 31%) to $6,152,000
(approximately 70% of net sales) for the six-month period ended March 2,
1997 from $8,916,000 (approximately 58% of net sales) for the six-month
period ended March 3, 1996. This decrease was attained by management's
elimination of duplicative expenses, consolidation of departments,
elimination of unprofitable routes during the latter part of fiscal 1996,
relocation of home office from Florida to Virginia, reduction of
executive and other salaries and professional fees. Payroll and related
expenses declined by approximately $1.7 million from 1996 to 1997;
travel and entertainment and utilities declined approximately $345,000
and $200,000, respectively, due to fewer employees traveling and the
closure of the patty plant. Lease expense decreased approximately
$303,000 due to the closure of the Company's corporate offices in Florida
and reduced vehicle leases resulting from closure of unprofitable routes.
Other expenses decreased to $367,000 for the six-month period ended March
2, 1997 compared with $579,000 for the six-month period ended March 3,
1996. The principal factor in this decrease was reduced interest expense
in 1997, caused by the issuance of convertible debt which is noninterest
bearing in its first year and conversion of amounts outstanding during
the six-month period ended March 3, 1996 into common stock during fiscal
1996. This reduction was offset by default interest charged by the
Company's lender commencing in January 1997.
The Company's net loss per common share decreased from $.13 in fiscal
1996 to $.03 in fiscal 1997. The principal cause for the decrease was
the significant number of shares issued during the year ended September
1, 1996 and subsequent thereto through conversions of convertible
debentures and additional sales of common stock.
Three-Month Period Ended March 2, 1997 compared to March 3, 1996
Net sales decreased $3,811,000 (approximately 53%) from $7,230,000 for
the three-month period ended March 3, 1996 to $3,419,000 for the three-
month period ended March 2, 1997. The principal reason for the
decrease was the Company's cash flow problems resulting in a general lack
of product. Further, another factor in the decrease in net sales was the
elimination of unprofitable routes which accounted for approximately
$676,000 of the decrease. Food service sales reductions resulting
principally from the discontinuation of the institutional beef business
accounted for approximately $435,000 and approximately $670,000 was due
to reduced vending sales.
Cost of goods sold as a percentage of net sales for the three-month
period ended March 2, 1997 was approximately 61% compared with
approximately 64% for the three-month period ended March 3, 1996. The
decrease in cost for the 1997 period was attributable to reduced vending
sales and reduced availability of resale products for DSD routes, both of
which have a higher cost percentage.
Operating expenses decreased $1,759,000 (approximately 40%) to $2,666,000
(approximately 78% of net sales) for the three-month period ended March
2, 1997 from $4,425,000 (approximately 61% of net sales) for the three-
month period ended March 3, 1996. This decrease was attained by
management's elimination of duplicative expenses, consolidation of
departments, elimination of unprofitable routes during the latter part of
fiscal 1996, relocation of home office from Florida to Virginia,
reduction of executive and other salaries, and a reduction of
professional fees and electricity. Payroll and related expenses declined
by approximately $1.18 million from 1996 to 1997; travel and
entertainment and utilities declined approximately $188,000 and $136,000,
respectively, due to fewer employees traveling and the closure of the
patty plant. Lease expense decreased approximately $281,000 due to the
closure of the Company's corporate offices in Florida and reduced vehicle
leases resulting from closure of the Company's western and other
unprofitable routes. The increase of operating expenses as a percentage
of net sales was due to lower sales levels for 1997 compared with 1996.
Other expenses decreased to $205,000 for the three-month period ended
March 2, 1997 compared with $307,000 for the three-month period ended
March 3, 1996. The principal factor in this decrease was reduced
interest expense in 1996, caused by the issuance of convertible debt
which is noninterest bearing in its first year and conversion of amounts
outstanding into common stock during fiscal 1996. This reduction was
offset by default interest charged by the Company's lender commencing in
January 1997.
The Company's net loss per common share decreased from $.06 in fiscal
1996 to $.01 in fiscal 1997. The principal cause for the decrease was
the significant number of shares issued during the year ended September
1, 1996 and subsequent thereto through conversions of convertible
debentures and additional sales of common stock.
FINANCIAL CONDITION
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 the six-month period ended
March 2, 1997 and it has a working capital deficit of $10,219,000 as of
March 2, 1997. Net cash used in operating activities was $2,669,000 for
the six-month period ended March 2, 1997 compared with $4,636,000 in the
six-month period ended March 3, 1996. These matters precipitated the
filing of the Company's bankruptcy petitions on April 4, 1997.
The Pendency of the Bankruptcy proceedings makes any discussion of
financial condition speculative. The Company's financial condition will
be entirely dependent on the provisions of, and its ability to have
approved, a Plan of Reorganization. It is anticipated, however, that the
Company will continue to seek to raise additional capital. As
substantially all of the Company's assets are pledged to secure the
Company's indebtedness to Strategica and secured convertible debenture
holders, the Company believes the consent of Strategica and the secured
convertible debenture holders will be required to consummate the Plan of
Reorganization or any sale of assets or of its securities.
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 and increased prices
commencing in the third quarter of fiscal 1997. In February 1997, the
Company closed its Salt Lake City and Phoenix manufacturing facilities
and routes emanating from those locations to reduce its losses. Further,
the Company relocated the Company's home office to its Norfolk operations
center in August 1996, dismissed several executive and administrative
employees, reduced administrative overhead, eliminated unprofitable
routes, reduced distribution costs, and further consolidated certain
departments to reduce selling, general and administrative expenses.
Management expects these changes will reduce the Company's losses and
help achieve 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 $15,000 for the six-month
period ended March 2, 1997 compared with $314,000 in comparable period of
fiscal 1996. Of the fiscal 1996 amount, $55,000 was used to fund an
acquisition. Capital expenditures were $25,000 and $264,000 during
fiscal 1997 and 1996, respectively. Management has evaluated the
Company's current facilities and equipment and anticipates that
additional capital expenditures may be necessary in the near future.
Further, in the event that the Company is unable to comply with the
provisions of the United States Food & Drug Administration Modified
Consent Decree of Permanent Injunction pertaining to its Norfolk,
Virginia manufacturing facility, dated February 28, 1997 (See Item 1 -
Legal Proceedings), the Company may be forced to locate an alternative
manufacturing location. No material contractual commitments for capital
expenditures existed at April 18, 1997. 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 during fiscal 1996. The Company also
received $3.3 million from the issuance of convertible debentures during
fiscal 1996. Most of the debentures are payable on demand and are
noninterest bearing for the first year of the instrument. During the
six-month period ended March 2, 1997, the Company issued $2.807,200 of
convertible debentures.
The Strategica loan agreement, originated in May 1995, has been declared
to be in default by Strategica. It requires monthly default interest
payments at 25% (12.5% pursuant to the agreement) 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 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. Since
September 3, 1995, the Company has classified the loan as a current
liability due to the agreement's burdensome and ambiguous terms.
As of April 18, 1997, the Company is obligated under Convertible
Debentures aggregating $4,442,950. Of this balance, $400,000 is
uncollateralized and due in 1998 with interest at 10%, and $4,042,950 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 April 16, 1997, the Company had past due accounts payable (greater
than 30 days) totaling approximately $2.85 million. 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.
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
its current reduced scale of operations and achieve 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."
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
(a) On April 4, 1997, the Company's Board of Directors authorized the
filing of a voluntary petition for The AppleTree Companies, Inc. and its
subsidiary, Americas Foods, Inc., (collectively, the "Petitioner") in the
United States Bankruptcy Court for the Eastern District of Virginia
seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code.
On April 4, 1997, the Company filed its petition requesting to continue
in the management and control of its business and property as debtor-in-
possession under the Bankruptcy Code. The Company has not yet drafted a
Plan of Reorganization, but has entered into agreements with real estate
agents offering certain of its real estate for sale in an effort to
improve its financial position and cash flows.
Under the Bankruptcy Code, the Bankruptcy Court has certain
supervisory powers over the operations of a debtor during its
reorganization and over transactions considered to be outside of the
ordinary course of business. The Bankruptcy Court may exercise
supervisory review over certain business operations or transactions in
connection with various phases of the Bankruptcy Proceedings. The
Bankruptcy court also exercises supervisory powers in connection with the
employment of attorneys, accountants and other professionals.
In the Bankruptcy Proceedings, an official unsecured creditor's
committee is formed and approved by the Bankruptcy Court to represent the
interest of all of the Company's unsecured creditors. The Company
expects to consult with such committee concerning the development of a
plan of reorganization and expects to regularly inform such committee
concerning the operation of its business. the Company is required to pay
certain expenses of this committee, including attorneys fees and certain
other professional fees, to the extent allowed by the Bankruptcy Court.
The Bankruptcy Code allows the debtor-in-possession to either
assume or reject certain liabilities, unexpired leases or other executory
contracts subject to court approval. If it assumes an executory contract
or lease, it must continue to perform its obligations under that contract
or lease and cure any existing defaults. In contrast, if it rejects a
contract or lease, it will cease performing under that contract or lease.
However, the Company may be subject to a claim for damages by the other
party to a contract or lease that is rejected.
Generally, a debtor seeking reorganization under Chapter 11 has
until confirmation of a plan of reorganization to decide whether to
assume or reject its executory contracts and unexpired leases with the
exception of leases on real property. Leases on real property must be
assumed or rejected within 60 days after the date of the debtor's
bankruptcy petition is filed.
Generally, claims against a debtor seeking reorganization under
Chapter 11 fall into two categories: secured and unsecured ( including
certain creditor's collateral, with the balance of such creditor's claim
being treated as unsecured. Unsecured and partially secured claims do
not accrue interest after the date of debtor's bankruptcy petition is
filed. A fully secured claim, however, does accrue interest after such
date up to the value of the collateral securing such claim or as
authorized by the Bankruptcy Court. The amount and validity of pre-
petition contingent or unliquidated claims against the Company ultimately
may be established by the Bankruptcy Court or by agreement of the
Parties.
The Company expects to conduct asset valuations and cash flow
studies precedent to the development and analysis of proposed plans of
reorganization and expects to pursue a number of options as part of its
efforts to achieve a consensual plan that maximizes the value of the
Company's assets for the benefits of its stockholders and its creditors
in accordance with the priority and other requirements of the Bankruptcy
Code. The Company also expects to file a disclosure statement. A
hearing to consider the adequacy of the information contained in the
disclosure statement will be scheduled. If the disclosure statement is
approved, the Bankruptcy Court will thereafter set hearings on plan
confirmation.
After a plan of reorganization has been filed and the Bankruptcy
Court has approved a disclosure statement in connection with that plan,
the plan and disclosure statement will be provided to all creditors and
those parties entitled to vote will be asked to vote to accept or reject
the plan. Under the Bankruptcy Code, acceptance of a plan occurs when it
is approved by the holders of a majority in number and two-thirds in
dollar amount of the claims in such class who vote on the plan. Classes
of claims which are not impaired are conclusively deemed to have accepted
the plan and do not vote. In addition, acceptance of a plan of
reorganization by a class of "interests" (i.e., in this case the common
stockholders) occurs when the holders of two-thirds in dollar amount of
the interests voted (i.e., two-thirds of the shares voted) approve it.
In addition, approval of the plan will require approval by any regulatory
bodies to the extent that their jurisdiction is not pre-empted by the
Bankruptcy Code. Following the vote on the plan, the Bankruptcy Court
will hold a hearing to consider whether to confirm the plan.
In order to confirm the plan, the Bankruptcy Court, among other
things, is required to find that (i) the plan and the proponent of the
plan have complied with all applicable provisions of the Bankruptcy Code;
(ii) the plan has been proposed in good faith and not by means forbidden
by law; (iii) with respect to each impaired class of claims or interest,
each holder of a claim or interest in such class has accepted the plan or
will receive at least the amount that such holder would receive in a
liquidation under Chapter 7 of the Bankruptcy Code; (iv) all impaired
classes of claims have voted to accept the plan; and (v) confirmation of
the plan is not likely to be followed by a liquidation or the need for
further financial reorganization of the debtor. Furthermore, in certain
instances specified in the Bankruptcy Code, the Bankruptcy Court may
confirm the plan over the rejection of impaired classes of claims or
interests, provided that at least one impaired class of claims has
accepted the plan. In the event that the Bankruptcy Court finds that
more than one proposed reorganization plan meets the requirement of the
Bankruptcy Court, the Bankruptcy Court will decide what plan to confirm
after considering the preferences of parties entitled to vote.
Confirmation of any reorganization plan is likely to require a
substantial period of time during which the Company will remain under the
jurisdiction of the Bankruptcy Court. The Company is unable to predict
the amount of recovery if any, which will ultimately be achieved by the
Company's creditors and stockholders, the likelihood that any plan
proposed for the Company will be accepted by the Company's creditors and
stockholders or will be confirmed by the Bankruptcy Court or approved by
any other regulatory bodies (to the extent their jurisdiction is not pre-
empted by the Bankruptcy Code), or the length of time it will take to
receive such confirmation and approvals and implement the plan.
(b) 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. The
Company believes it will be successful in this litigation. 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.
(c) The Company and certain 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.
(d) 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.
(e) On December 23, 1996, Steven Bazsuly and Global Foods, Ltd.
(collectively, the "Plaintiffs") filed a complaint against the Company in
the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach
County, State of Florida General Civil Division alleging breach of
contract. The Plaintiffs claim that, pursuant to certain contracts, they
are entitled to an 8% commission on amounts received from alleged
referrals of certain investors and lenders. On February 27, 1997, the
Circuit Court Judge entered a Default Judgment against the Company in the
amount of $502,539.39, including interest and court costs totaling
$62,539.39. On March 19, 1997, the Company filed a Motion For Relief
From And To Vacate Final Judgment After Entry Of Default And To Set Aside
Default requesting that the default judgment be vacated and that the
Court enter its order authorizing the filing of the Answer and
Affirmative Defenses filed therewith. The Company's Answer denied the
Plaintiffs' allegations and submitted Affirmative Defenses.
(f) Food manufacturing facilities are subject to inspections by
various regulatory authorities, including the Food and Drug
Administration ("FDA") and US 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 expert consultants covering [specific points
described in the June 19, 1990 Decree], and presented to and approved by
the FDA 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 after shipment in interstate commerce."
On November 27, 1996, counsel for the US Department of Justice (the
"Justice Department") wrote to the Company d.b.a. 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.
Pursuant to an FDA proposed Modified Consent Decree of Permanent
Injunction, the Company, among other things, would be restrained and
enjoined from receiving, manufacturing, processing, preparing, packing,
labeling, holding, or distributing any article of food unless and until
(i) the Company has submitted, and received FDA approval of, a Hazard
Analysis Critical Control Point ("HACCP") plan; (ii) the Company has
received independent expert certification that an adequate HACCP plan has
been established and implemented; (iii) the Company has certified in
writing to FDA that it has implemented i. and ii.; (iv) FDA notifies the
Company in writing that it is in compliance with the requirements set
forth in i. through iii.; and (v) articles of food on hand at the
facilities or under the Company's control on the date of the modified
Decree have been or will be tested for contamination by Listeria
Monocytogenes bacteria and reports submitted to FDA, and such food could
not be distributed without written approval from FDA and such additional
analyses as FDA deems necessary to assure that such food is not
contaminated. The Company has not yet signed the Modified Consent Decree
of Permanent Injunction. The Company is investigating alternatives for
its sandwich production.
The Board of Directors, by resolution effective March 31, 1997,
voted unanimously to "discontinue all production operations at its
Norfolk, Virginia, plant effective as of March 31, 1997, or as soon
thereafter as is reasonably possible."
(g) 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 3- DEFAULTS UPON SENIOR SECURITIES
As further discussed in Item 1 - Legal Proceedings, on April 4, 1997, ,
the Company filed its petition requesting to continue in the management
and control of its business and property as debtor-in-possession under
the Bankruptcy Code. Pursuant to the terms of the Company's agreements
with Strategica, its convertible debenture holders, and certain other
loans and leases, a filing of a voluntary or involuntary petition under
the Bankruptcy Code constitutes an event of default. Accordingly, such
agreements are currently in default; notwithstanding the defaults, the
Company previously classified its loan with Strategica as a current
liability due to the agreement's burdensome and ambiguous terms, and all
but $400,000 of the convertible debentures were classified as current
liabilities according to their terms.
The Company's 11% Convertible Preferred Stock ("COPS") has a dividend or
payment in lieu thereof, payable quarterly commencing June 30, 1996. In
September 1996, the Company issued 105 shares of COPS in payment of the
June 30, 1996 dividend. Through April 14 1997, the Company had not
fulfilled the dividend requirements of the COPS for subsequent quarterly
dividends. As of March 31, 1997, the amount in arrears totaled
approximately $241,000, of which $161,000 was more than 30 days in
arrears.
The Company has a $3,053,000 loan payable to Strategica which requires
monthly interest payments at 12 1/2%. On January 10, 1997, Strategica
advised the Company that it considered the loan in default due to the
results of operations reported in this Form 10-Q. The Company has
classified this loan as a current liability since September 3, 1995. See
also Management's Discussion and Analysis of Financial Condition and
Results of Operations in Part I, Item 2 and Note 8 to the Company's
consolidated financial statements for the fifty-two week period ended
September 1, 1996 included in the Company's Form 10-KSB.
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
(14)
4.17 Form of Security Agreement issued by the Company in 1996
(14)
4.18 Form of Warrant Agreement issued by the Company in 1996 (14)
4.19 Form of Subscription Agreement issued by the Company in
1996 (14)
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. (14)
27.1 Financial Data Schedule
______________________
(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,
l994
(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 8K, 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, l994
(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
(14) Incorporated by reference to the Company's Form 10-KSB for the year ended
September 1, 1996
(b) Reports on Form 8-K
February 14, 1997
______________________
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report be signed on its behalf by the
undersigned thereunto duly authorized.
THE APPLETREE COMPANIES, INC.
April 21, 1997 /s/ John W. Donlevy
----------------------------
John W. Donlevy
President/C.E.O.
(Principal Executive Officer)
April 21, 1997 /s/ Justin A. DiMacchia
----------------------------
Justin A. DiMacchia
Vice President/C.F.O.
(Principal Finance and
Accounting Officer)
15
27
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