<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1996 .
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-26110
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KUSHI MACROBIOTICS CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3768554
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
THREE STAMFORD LANDING, SUITE 210, STAMFORD, CT 06902
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(203) 973-2929
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(Issuer's telephone number, including area code)
1177 High Ridge Road, Stamford, CT 06905
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has 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 / / No /X/
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding as of May 10, 1995
----- ------------------------------
<S> <C>
Common 2,742,993
</TABLE>
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<PAGE> 2
KUSHI MACROBIOTICS CORP.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial statements:
Balance Sheets as of March 31, 1996
and December 31, 1995 3
Statements of Operations for the three months
ended March 31, 1996 and 1995 4
Statement of Cash Flows for the three months
ended March 31, 1996 and 1995 5
Notes to financial statements 6 - 9
Item 2. Management's Discussion and Analysis
or Plan of Operation 10 - 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a
Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE> 3
KUSHI MACROBIOTICS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,430,784 $ 2,069,501
Accounts receivable 128,381 --
Inventories 478,250 530,764
Vendor advances -- 175,884
Prepaid expenses and other current assets 30,606 57,328
Deferred expenses 110,110 214,669
----------- -----------
Total Current Assets 2,178,131 3,048,146
----------- -----------
PROPERTY AND EQUIPMENT, less accumulated
depreciation 159,892 168,631
OTHER ASSETS
Security deposits and other 52,682 52,682
----------- -----------
TOTAL ASSETS $ 2,390,705 $ 3,269,459
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other current liabilities $ 183,460 $ 169,111
OTHER LIABILITIES
Deferred income 35,000 37,500
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized;
Convertible preferred stock, 400,000 shares authorized;
issued and outstanding, 131,917 at 1996 and
184,451 at 1995 1,319 1,845
Common stock, $.001 par value, 15,000,000 shares authorized;
issued and outstanding 2,735,980 at 1996,
and 2,683,455 at 1995 2,736 2,684
Additional paid-in capital 6,021,867 5,796,394
Deficit accumulated during the development stage (3,853,677) (2,738,075)
----------- -----------
Total Shareholders' Equity 2,172,245 3,062,848
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,390,705 $ 3,269,459
=========== ===========
</TABLE>
3
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KUSHI MACROBIOTICS CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Sales $ 180,574 $ --
Cost of Sales 139,285 --
----------- ----------
Gross profit 41,289 --
----------- ----------
Costs and Expenses
Inventory write-down 22,344 --
General and administrative expenses 1,156,096 310,359
----------- ----------
1,178,440 310,359
----------- ----------
Loss from operations (1,137,151) (310,359)
----------- ----------
Other Income (Expense)
Amortization of debt discount -- (163,667)
Interest expense -- (20,458)
Interest income 21,547 8,979
----------- ----------
21,547 (175,146)
----------- ----------
Net loss $(1,115,604) $ (485,505)
=========== ==========
Net loss per common share $ (0.41) $ (0.18)
=========== ==========
Shares outstanding 2,742,993 2,742,993
=========== ==========
</TABLE>
4
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KUSHI MACROBIOTICS CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,115,604) $(485,505)
----------- ---------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 110,799 3,174
Amortization of discount on notes payable -- 163,667
Contribution of common stock purchase warrants 225,000
Changes in assets and liabilities:
Accounts receivable (128,381) --
Vendor advance 175,884 --
Prepaid expenses and other current assets 26,722 (7,000)
Inventories 52,514 --
Accrued expenses and other current liabilities 14,349 10,246
----------- ---------
Total Adjustments 476,887 170,087
----------- ---------
Net cash used by operating activities (638,717) (315,418)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property and equipment -- (15,989)
Restricted cash and equivalents -- (113,334)
----------- ---------
Net cash used by investing activities -- (129,323)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from private placement -- 255,850
Costs associated with private placement -- (5,000)
Payment of deferred registration costs -- (25,000)
Cost of stock retired -- (554)
----------- ---------
Net cash provided by financing activities -- 225,296
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (638,717) (219,445)
CASH AND CASH EQUIVALENTS - beginning 2,069,501 446,563
----------- ---------
CASH AND CASH EQUIVALENTS - end $ 1,430,784 $ 227,118
=========== =========
</TABLE>
5
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KUSHI MACROBIOTICS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 - GENERAL
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for the
interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation and which
are of a normal recurring nature have been included. The results of
operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full
year. These statements should be read in conjunction with the
financial statements and notes that are included in the Company's
Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission on March 29, 1996.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market (net
realizable value), determined on the first-in, first-out (FIFO)
basis. The components of inventory at March 31, 1996, are as
follows:
<TABLE>
<S> <C>
Finished goods $468,750
Ingredients 109,266
Packaging, labels, etc 86,222
--------
664,238
Valuation allowance 185,988
--------
Total Inventories $478,250
========
</TABLE>
NOTE 3 - SHAREHOLDERS' EQUITY
a) PRIVATE PLACEMENT
In October 1994, the Company offered for sale 80 units of securities
with each unit consisting of a $10,000 promissory note, 5,000 shares
each (2,335 after reverse split) of preferred stock at $1.00 per
share and common stock at $.01 per share. The notes, which bore
interest at 10% per annum, were payable December 15, 1996 or out of
the
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proceeds of an initial public offering ("IPO"), whichever is sooner.
The Company set aside an amount equal to two-thirds of the Note
proceeds in an interest bearing account ("restricted funds"). In the
event the Company did not become a public company or secure
additional private financing of at least $1.5 million within ten
months from the notes' issuance, these funds would have been
distributed pro rata to the note holders in partial payment of the
Notes.
During December 1994 and January 1995, the Company sold 79 units at
an offering price of $15,050 per unit, for an aggregate of
$1,185,950 before offering costs. The Company allocated $922,616 to
184,451 shares each of preferred and common stock, which management
believes approximates the fair market value of the stock at the time
of issuance. The balance of $263,616 ($3,333 per $10,000 note) was
allocated to the notes, which have a face value of $790,000.
Management believes that the discount of two-thirds was adequate to
reflect the fair value of the debt. The discount was amortized over
a ten-month period, the expected term of the notes. For the period
ended December 31, 1994 and for the nine months ended September 30,
1995, $20,667 and $505,999, respectively, was amortized as interest
expense. The IPO (as defined below) was completed in August 1995,
accordingly, the unamortized discount at June 30, 1995, of $184,333,
was charged to interest expense during July and August 1995.
In April 1995, the Company requested that each note holder release
his portion of the money in the fund set aside for repayment of the
notes to be used to accelerate operations. At June 30, 1995,
individual note holders consented to the release of an aggregate of
$463,333. An additional $43,334 of restricted funds were released to
operations by investors in July 1995, for an aggregate of $506,667.
The funds made available were used to further develop the Company's
product line and to acquire food ingredients and packaging materials
with long purchasing lead times.
The notes payable and accrued interest thereon were subsequently
paid in full on August 21, 1995, after the Company completed an
initial public offering of common stock and warrants.
b) INITIAL PUBLIC OFFERING
The Company's Registration Statement for the IPO was declared
effective by the Securities and Exchange Commission on August 11,
1995. The offering of 1,100,000 shares of common stock at $5.00 per
share and 1,610,000 common stock purchase warrants, including the
Underwriter's exercise of an over-allotment option for 210,000
warrants, at $.15 per warrant, generated gross proceeds of
$5,741,500. Net proceeds from the offering were $4,863,974, after
deducting $574,150 for the Underwriter's 10% discount; $155,122 for
the Underwriter's 3% non-accountable expense allowance and
reimbursable expenses; $100,000 for the Underwriter's
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financial consulting fee; and $48,254 for legal fees paid by the
Company at the closing of the IPO.
The Company granted to the Underwriter, for a period of 45 days from
August 11, 1995, the effective date of the IPO, an over-allotment
option to purchase up to 165,000 additional shares of the Company's
common stock and 210,000 warrants at the IPO price less an
Underwriter's 10% discount and 3% non-accountable expense allowance.
The Underwriter exercised the option to purchase the warrants but
did not exercise the option to purchase additional shares of common
stock. The Underwriter also received warrants to purchase 110,000
shares of common stock at an initial exercise price of $8.25 per
share and 140,000 common stock purchase warrants at an initial
exercise price of $.15 per warrant to purchase common stock at
$10.3125 per share for a period of four years commencing one year
from the date of the IPO.
Professional fees and other costs of approximately $210,000 (e.g.,
blue sky qualification fees, printing costs, etc.) incurred in
connection with the offering were charged to additional paid-in
capital upon completion of the offering.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
a) Office Lease
In August 1995, the Company entered into a five-year lease for
approximately 4,000 square feet of office space located in Stamford,
CT. The lease provides for monthly payments of approximately $5,000
in the first year, escalating to $6,000 per month during the fifth
year of the agreement. The Company moved into this facility in
October 1995.
b) Warehouse Lease
In August 1995, the Company entered into a five-year lease for
27,000 square feet of warehouse space located in Parsippany, NJ. The
lease provides for monthly payments of approximately $10,000 during
the term of the lease. The Company occupied such space beginning in
September 1995.
c) Litigation
During March 1996, the Company terminated its Vice President of
Sales for cause. He then instituted a suit against the Company in
Superior Court in Stamford, CT claiming wrongful termination and is
asking for $1,000,000 in damages plus interest and expenses. The
Company is vigorously defending the suit.
NOTE 5 SUBSEQUENT EVENTS
a) On May 6, 1996, the Company (KMAC) and American Phoenix Group Inc.
(APHX)
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jointly announced a signed letter of intent to merge the two
companies. After the merger, the shareholders of APHX will own 70%
of the equity of the combined entity ("KMC") and the shareholders of
KMAC will own 30%. Prior to the merger, KMAC will form a new
corporation, Kushi Cuisine Inc. ("Kushi"), and transfer to Kushi all
of the assets and liabilities of the existing Kushi Cuisine food
business. At the closing of the merger (and simultaneously
therewith), the shares of Kushi will be distributed to the
stockholders of KMC (post-Merger) in a tax-free distribution. Mr.
Michio Kushi shall be the initial Chairman of Kushi and shall
appoint its initial board of directors. Following the merger, APHX
will appoint the board of directors of KMC.
b) In April 1996, the Company sublet and vacated its warehouse space
located in Parsippany, NJ. The subtenant entered into an agreement
to sublet the warehouse from the Company for substantially the same
terms and for the same period as the Company's lease with the
landlord. The subtenant will pay rent directly to the landlord
during the term of the agreement. The Company remains liable for
performance on the lease if the subtenant defaults on the agreement.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a natural foods company marketing premium quality
breakfast cereals, pasta & sauce combinations, rice and bean medleys, soups,
condiments and snacks under the Kushi Cuisine brand name. From its inception in
May 1994 until December 31, 1995, the Company was a development stage enterprise
devoting all of its efforts and resources to developing thirty one (31) premium
quality macrobiotic food products. The activities undertaken during the
Company's development phase were market research, product concept development
and formulation, and design and implementation of marketing and public relations
programs. The Company's operations were funded during the development stage with
a private placement offering of notes and securities completed in January 1995,
and an initial public offering of common stock and common stock purchase
warrants in August 1995, and completion of a private placement offering of notes
and securities and an initial public offering of common stock and common stock
purchase warrants to fund operations. The Company began selling and shipping
products in December 1995. The majority of the Company's sales are to
distributors that in turn sell the products to retailers, and ultimately
consumers. Initial sell-in requires numerous sales calls, sampling, follow-up
sales calls, buyer deliberations, and price and delivery negotiations with
customers. The Company's financial performance reflects the time consuming and
costly process of gaining nationwide distribution in the food business.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to March 31, 1995
During the three months ended March 31, 1996, the Company established
relationships with and began shipping Kushi Cuisine products to major
distributors. The Company generated net revenues during the period of
approximately $181,000. Since the Company's sales to date have principally been
initial shipments to new customers and there has not been sufficient time to
receive repeat orders, management is not yet able to assess the response of
retailers and consumers to the product line concept. Total cost of sales were
$139,000 or 77% of revenues. Introductory allowances and price discounts of as
much as 25% of listed prices reduced net revenues and compressed gross margins
during the period.
Total operating expenses of approximately $1,178,500 were recorded
during the three months ended March 31, 1996 compared to $310,000 during the
same period in 1995, when the Company had limited operations and was privately
held. Operating expenses during the current period included non-recurring
charges totaling $555,000, including $280,000 of consulting fees and expenses
for ACG International, Inc. ("ACG"), $225,000 for a contribution of 200,000
common stock purchase warrants to a charity in honor of the Company's late Vice
Chairman, and $50,000 of accrued fees and expenses related to ongoing
litigation. The ACG expenses result from the Board of Directors engaging the
firm to evaluate the Kushi Cuisine business and to implement programs to
redirect and accelerate the growth of the Company, while managing its cost
structure and expenses. The ACG engagement, which ended in April, resulted in an
international distribution agreement,
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increased domestic distribution, reduced overhead costs and possible merger &
acquisition transactions. Excluding non-recurring charges, operating expenses
during the current period were approximately $622,000, including payroll and
related costs of $130,000, consulting costs and professional fees of $125,000,
distribution and warehouse costs of $80,000, rent and related costs of $55,000,
public relations costs of $48,000, travel and entertainment expenses of $35,000
and inventory write-down of $22,000.
The Company incurred no interest expense during the three months ended
March 31, 1996. During the three months ended March 31, 1995, total interest
expense was $184,125, principally due to the amortization of notes payable
discount. Total interest income generated during the current period was $21,500
compared to $9,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $2,000,000 at March
31, 1996 compared to $2,879,000 at December 31, 1995 and $283,000 at March 31,
1995. The increase in working capital compared to March 31, 1995 of
approximately $1,717,000 was due to the infusion of cash from the net proceeds
of the initial public offering ("IPO") of the Company's common stock and
warrants. The IPO, which became effective on August 11, 1995, generated
approximately $4,863,974 of net proceeds. At March 31, 1996, the Company had
total cash and cash equivalents of $1,430,784.
Working capital at March 31, 1996, declined by $879,000 compared to
December 31, 1995. The decline in working capital during the current period
reflects the ongoing costs of launching the Kushi Cuisine product line and
slower than anticipated revenue growth to date. Although current revenue trends
are improving and operating costs have been reduced, revenues and margins are
currently not adequate to support the business over the long term. Accordingly,
the Board of Directors determined in December 1995, that merger and acquisition
or alliances with other companies are necessary to protect the interest of
stockholders and to ensure the long term viability of the Kushi Cuisine
business.
On May 6, 1996, the Company announced that American Phoenix Group Inc.
("APHX") and Kushi Macrobiotics Corp. ("KMAC") had signed a letter of intent to
merge the two companies. After the merger, the shareholders of APHX will own 70%
of the equity of the combined entity and the shareholders of KMAC will own 30%.
Prior to the merger, KMAC will form a new corporation, Kushi Cuisine Inc.
("Kushi"), and transfer to Kushi all of the assets and liabilities of the
existing Kushi Cuisine food business. At the closing of the merger (and
simultaneously therewith), the shares of Kushi will be distributed to the
stockholders of KMC (post-Merger) in a tax-free distribution.
Assuming the merger of APHX and KMAC is consummated, the Kushi food
business will survive the merger with all of its assets and other resources
intact. Accordingly, management believes but can give no assurance that
currently available cash resources are adequate to fund operations through
December 31, 1996.
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KUSHI MACROBIOTICS CORP.
PART II
Item 1. Legal Proceedings -
During March 1996, the Company terminated its Vice President of
Sales for cause. He then instituted a suit against the Company in
Superior Court in Stamford, CT claiming wrongful termination and is
asking for $1,000,000 in damages plus interest and expenses. The
Company is vigorously defending the suit.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KUSHI MACROBIOTICS CORP.
By: /S/ DANIEL A. FRANCE
-----------------------------------
VP, Chief Financial and Accounting Officer
Dated: May 14, 1996
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EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-QSB
and is qualified in its entirety by reference to such Form 10-QSB, March 31,
1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,430,784
<SECURITIES> 0
<RECEIVABLES> 128,381
<ALLOWANCES> 0
<INVENTORY> 478,250
<CURRENT-ASSETS> 2,178,131
<PP&E> 175,876
<DEPRECIATION> 15,984
<TOTAL-ASSETS> 2,390,705
<CURRENT-LIABILITIES> 183,460
<BONDS> 0
0
1,319
<COMMON> 2,736
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,390,705
<SALES> 180,574
<TOTAL-REVENUES> 180,574
<CGS> 139,285
<TOTAL-COSTS> 139,285
<OTHER-EXPENSES> 1,178,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,115,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,115,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,115,604)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
