FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1995
OR
[ ] 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 0-10633
SEVEN OAKS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0850341
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Colonial Road, Suite 100
Memphis, Tennessee 38117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (901) 683-7055
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
On September 13, 1995, the Registrant had 8,639,572 shares of its
Common Stock, $.10 par value, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
SEVEN OAKS INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets July 31, 1995 (unaudited)
and April 30, 1995.......................................... 1
Consolidated statements of operations three months
ended July 31, 1995 and 1994 (unaudited).................... 2
Consolidated statements of cash flows for the three
months ended July 31, 1995 and 1994 (unaudited)............. 3
Notes to condensed consolidated financial
statements (unaudited)...................................... 4
Item 2. Management's discussion and analysis of
financial condition and results of operations.... 6-9
PART II. OTHER INFORMATION:
Item 3. Defaults Upon Senior Securities................... 10
Item 5. Other Information................................. 10
Item 6. Exhibits and Reports on Form 8-K.................. 11
Item 1. FINANCIAL STATEMENTS.
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31 April 30
1995 1995
(Unaudited)
(Amounts in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 172 $ 60
Trade receivables:
Coupons processed 596 1,521
Coupons on-hand 289 1,191
Retailers 214 176
Allowance for doubtful accounts ( 105) (82)
Total trade receivables 994 2,806
Other receivables (Note 2) 243 237
Prepaid expenses & other assets 221 232
Total current assets 1,630 3,335
ASSETS HELD FOR SALE 194 194
INTANGIBLES AND OTHER ASSETS 39 39
PROPERTY AND EQUIPMENT:
At cost 5,762 5,790
Less accumulated depreciation 4,873 4,859
Property and equipment, net 889 931
TOTAL $ 2,752 $ 4,499
CURRENT LIABILITIES:
Accounts payable - retail stores $ 3,131 $ 4,476
Accrued expenses 933 1,113
Due to affiliate (Note 3) 133 133
Retail store deposits 1,792 1,797
Short-term debt 1,395 -
Total current liabilities 7,384 7,519
LONG-TERM LIABILITIES:
Long-term debt - 947
Due to affiliate (Note 3) 1,487 1,514
Other long-term liabilities 316 330
Total liabilities 9,187 10,310
DEFICIENCY IN ASSETS:
Common stock 864 864
Additional paid-in capital 12,725 12,725
Deficit (20,024) (19,400)
Total deficiency in assets (6,435) (5,811)
TOTAL $ 2,752 $ 4,499
Item 1. FINANCIAL STATEMENTS.
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
July 31,
1995 1994
(Amounts in Thousands,
except per share amounts)
REVENUE $ 524 $ 762
COSTS AND EXPENSES:
Processing costs 547 1,065
General, administrative
and selling 528 631
Bad debt expense 18 18
Interest 54 92
Total 1,147 1,806
LOSS FROM OPERATIONS ( 623) (1,044)
OTHER INCOME, NET ( 1) 44
NET LOSS $( 624) $(1,000)
NET LOSS PER SHARE $ (0.07) $ (0.16)
WEIGHTED AVERAGE SHARES OUTSTANDING 8,640 6,438
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
July 31,
1995 1994
(Amounts in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 624) $(1,000)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 103 144
(Gain) loss on sale of equipment 2 ( 1)
Provision for loss on trade receivables 18 18
Increase (Decrease) in cash resulting
from changes in assets and
liabilities:
Trade receivables 1,794 836
Other assets ( 3) 294
Accounts payable - retail stores (1,345) ( 531)
Retail store deposits ( 5) ( 220)
Other liabilities ( 194) 1,252
Net cash provided by (used in)
operating activities ( 254) 792
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 55) ( 2)
Net proceeds from sale of equipment 1
Net cash used in
investing activities ( 55) ( 1)
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (payments) on notes
payable 448 ( 920)
Net payments on affiliate debt ( 27)
Net cash provided by (used in)
financing activities 421 ( 920)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 112 ( 129)
CASH, BEGINNING OF YEAR 60 169
CASH, END OF YEAR $ 172 $ 40
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 54 $ 91
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of July 31, 1995, the
consolidated statements of operations for the three months ended
July 31, 1995 and 1994, and the consolidated statements of cash
flows for the three months then ended have been prepared by the
Company, without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Company
at July 31, 1995, and for all other periods presented have been
made.
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 be read in
conjunction with the financial statements and notes thereto
included in the Company's year end April 30, 1995, on Form
10-KSB. The results of operations for the period ended July 31,
1995, are not necessarily indicative of the operating results for
the full year.
2. OTHER RECEIVABLES
During the quarter ended July 31, 1995, the Company received
$12,000 of principal from two notes receivable previously written
off
at April 30, 1994. At July 31, 1995, the balance of these notes
was $785,000, which was fully reserved because of the uncertainty
of the Company's ability to continue to make lease payments under
its sale-leaseback agreement with respect to its processing plant
in Juarez, Mexico. Failure to make monthly lease payments or a
decision by the Company to terminate the lease agreement would
result in a cancellation and satisfaction of the outstanding
balance of the notes receivable from the owner of the processing
plant. The Company is currently performing under the terms of
its lease agreement.
3. LONG-TERM PAYABLE - AFFILIATE
As part of a management and financial restructuring agreement
completed September 7, 1994, the Company entered an agreement
with its largest trade creditor (hereinafter "Affiliate") to
repay approximately $1.8 million, which had previously been
carried as Accounts Payable - Retailers, over a period of up to
four years. The repayment is to be made out of part of the
processing fee that the Company will receive from processing
coupons for the Affiliate and its subsidiaries. As of July 31,
1995, the Company owed approximately $1.6 million under this
agreement, of which 92% was classified as long-term. Under
certain circumstances, including but not limited to the
termination of employment of the Chairman of the Board and
Chief Executive Officer, there would be a default under this
agreement that could accelerate the entire indebtedness then
outstanding.
4. SUBSEQUENT EVENTS
On September 1, 1995, the Company defaulted by not making its
semi-annual interest payment due on its 12%, $750,000 Debentures.
The interest accrued, but unpaid at September 1, 1995, was
$45,000. The Company remains in default with respect to the
interest payment at September 13, 1995. A cross-default under
the Company's line of credit ($645,000 at July 31, 1995) occurs
when the Company defaults on the payment of obligations due
under its indentures. Since the Company does not have waivers
on the above debt defaults, all amounts outstanding at July 31,
1995, totalling $1,395,000, have been classified as current
liabilities.
On September 8, 1995, the Company entered into a definitive
merger agreement with JSM Newco, Inc. and JSM Merger Sub, Inc.
("JSM"), wherein JSM upon closing the merger agreement would:
a. Acquire for $0.31 a share all outstanding shares of
the Company, except that a small number of
shareholders, including the executive officers and a
major customer of the Company, would retain some or
all of their common stock in the Company;
b. Provide access to a minimum of $3 million of
capital to the Company;
c. Repay principal and interest to the Company's
debentureholders; and,
d. Repay or refinance the Company's outstanding line
of credit.
The transaction is subject to approval of the shareholders of
the Company.
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
Summary
Seven Oaks International, Inc. and its wholly-owned
subsidiaries ("Company") process cents-off coupons, principally
as a clearinghouse between product manufacturers and retailers
throughout the United States. The Company sorts coupons for
retailers and submits the sorted coupons to manufacturers for
reimbursement. The Company generally makes advance payments to
retailers and then is reimbursed by the issuing manufacturers, or
their agents, for the face value of the coupons and the
specified per coupon handling fee. The Company also markets its
processing services to both retailers and manufacturers on a
contractual basis not related to the per coupon handling fee.
Under these plans, which typically produce less average revenue
per coupon, retailers are reimbursed directly by manufacturers
for submitted coupons without any advance payments by the
Company.
When the Company makes advance payments to retailers, its
revenues are derived from retaining a portion of the handling
fee, generally $0.08 per coupon, paid by product manufacturers to
compensate retailers for the expense of accepting and submitting
coupons. Manufacturers pay retailers the handling fee in
addition to the face value of each coupon. The portion of the
handling fee retained by the Company varies per customer
according to the volume of coupons submitted and certain other
factors. The Company typically retains less of the handling fee,
and consequently recognizes less average revenue per coupon, from
large chains and associations of retail stores than from smaller,
independent retailers. Changes in the customer mix can affect
the Company's average revenue per coupon, which had averaged less
than $0.02 per coupon for the past several years and the first
quarter of fiscal 1995. The average exceeded $0.02 per coupon in
the third quarter of 1995, but declined to less than $0.02 per
coupon in the fourth quarter, because the mix of coupons
processed was affected by the increased processing for the
Affiliate on a Pay Direct Plan during the third quarter. Revenue
from processing coupons for the Affiliate represented 49% of
revenue for the first quarter ended July 31, 1995.
When acting as a clearinghouse between retailers and
manufacturers, the Company records as revenue only the portion of
the per coupon handling fees it retains. Neither the face value
of the coupons processed nor the portion of the handling fees
received by retailers is recorded as revenue by the Company. The
full face value of the coupons and the total per coupon handling
fees are accounted for as trade receivables, however, since the
Company is acting as a collection agent. When the Company's
revenue is compared to total receivables, the turnover in
receivables therefore appears considerably lower than the
Company's actual experience.
The Company's collection period for receivables has averaged
between five and six weeks in recent years. The principal factor
determining the length of this period is the time required by
manufacturers, or their agents, to process submitted coupons.
This step involves collecting marketing information about
redemption activity and verifying the coupons submitted for
payment by retailers or clearinghouses such as the Company.
Results of Operations and Profitability Trends
The number of coupons processed for the quarter ended July 31,
1995, was 36 million, down 35% from the quarter ended July 31,
1994. Revenue for the quarter ended July 1995 decreased $238,000
(31%) to $524,000 compared to $762,000 for the quarter ended July
1994, primarily because of the Company's decision to terminate a
processing agreement with a privately-held coupon processor
during the first quarter of the prior fiscal year. Termination
of this agreement accounted for the majority of the decline in
revenue and coupons processed during the quarter ended July 1995,
compared to the quarter ended July 1994.
Processing costs for the quarter ended July 31, 1995, declined
$518,000 (49%) to $547,000, compared to $1,065,000 for the
quarter ended July 31, 1994. A reduction in workforce, reduced
labor costs associated with a significant devaluation of the peso
in late 1994 and early 1995, and the termination of a lease on a
processing plant in Juarez, Mexico accounted for the significant
decline in processing costs. General, selling and administrative
expenses for the quarter ended July 31, 1995 decreased $103,000
(16%) to $528,000 compared to $631,000 for the quarter ended July
31, 1994. Reductions in bank charges, consulting fees,
advertising, and promotion costs accounted for the majority of
the decline.
Reduced borrowing levels reduced interest expense $38,000
(41%) for the quarter ended July 31, 1995 versus the comparable
quarter ended July 31, 1994.
The number of coupons processed during the first quarter ended
July 31, 1995, increased 32% from the fourth quarter ended April
30, 1995. This increase is attributed primarily to coupons
received under the Company's exclusive processing agreement with
a major wholesale grocery company that also is a 4.5% stockholder
("Affiliate"). Receipt of coupons from that wholesaler has been
phased in over several months. In September 1995, the Affiliate
indicated that it would commence full shipments to the Company.
The coupons processed under this "Pay Direct" service agreement
are (as is typically the case with Pay Direct accounts) at a
lesser fee than that received under "Funded Plan" agreements with
retailers where the Company has to finance the face value of
coupons. Consequently, the increased volume at a lower fee
reduced the average fee per coupon for the first quarter versus
the fourth quarter of the fiscal year ended April 30, 1995.
Gross revenue for the first quarter of fiscal 1996 increased
$27,000 (5.5%) from the fourth quarter of the fiscal year ended
April 30, 1995, primarily because of the increased number of
coupons processed for the Affiliate.
On May 10, 1995, the Company signed a letter agreement, and on
July 31, 1995 a formal agreement was executed, to become the
exclusive processor for the Affiliate's independent retailer
coupon program. This agreement is expected to approximately
triple the number of coupons expected to be processed for the
Affiliate under the exclusive processing agreement with the
Affiliate on a fully phased-in basis. The Company commenced
processing coupons under this agreement late in May 1995. The
number of coupons processed for the Affiliate during the quarter
ended July 31, 1995 increased 45% compared to the fourth quarter
ended April 30, 1995.
The net loss of $624,000 for the first quarter ended July 31,
1995 was a reduction of $530,000 (46%) compared to the loss of
$1,154,000 for the fourth quarter ended April 30, 1995.
Excluding a one-time charge of $337,000 in the fourth quarter of
the fiscal year ended April 30, 1995, which was associated
with the consolidation of the Company's El Paso, Texas operations
into the Juarez, Mexico facility, the reduction in loss was
$193,000 (24%). Processing expenses were reduced $51,000, and
general, selling and administrative expenses were reduced
$54,000, in the quarter ended July 31, 1995 compared to
the prior quarter ended April 30, 1995.
Liquidity and Capital Resources
For most of the Company's fiscal year ended April 30, 1995 and
continuing through September 13, 1995, the Company's liquidity
has not been sufficient to continue generally meeting payment
schedules established for its clearinghouse customers. As of
July 31, 1995, the Company's current liabilities exceeded
current assets by $5.8 million. In July 1995, the Company
formulated a plan to repay its clearinghouse customers all
amounts in arrears, which approximated $2.2 million at July 31,
1995, along with 9% interest. The repayments, which began in
July 1995, are scheduled to be made over various payout periods.
The Company suspended payouts under the program in August
1995, due to insufficient working capital to continue the
payments.
Trade receivables, which represent a major component of the
Company's balance sheet, totaled $1.0 million as of July 31,
1995, down from $2.8 million at April 30, 1995. The reduction of
$1.8 million in trade receivables principally reflected a higher
percentage of coupons being handled on a "Pay Direct" basis
(which typically earns lower per coupon fees for the Company than
"Funded Accounts"), a somewhat faster collection period (from
manufacturers) and a loss of customers.
As of July 31, 1995, the Company had $645,000 of outstanding
borrowings under its $1.0 million line of credit and $750,000 of
12% debentures outstanding. The Company defaulted on its
semi-annual interest payment due September 1, 1995 under the
terms of the indenture governing the debentures. The accrued,
but unpaid interest on the debentures amounted to $45,000 at that
date. The default had not been cured as of September 13, 1995.
Under the Company's line of credit, a cross-default occurs when
the company defaults under the terms of its indenture.
The Company and its subsidiaries have pledged substantially
all of their assets in connection with the financings described
above, except operating assets in its plant in Juarez, Mexico and
two notes receivable from the sale/leaseback of that plant. The
notes receivable balances at July 31, 1995 total $785,000, but
should the Company default under its lease agreement these
notes would be deemed to have been satisfied. Because of the
uncertainty of the Company's ability to continue to make the
lease payments, these notes receivable balances have been fully
reserved in the Company's financial statements (and are not
reflected as an asset).
The uncertainty regarding the future availability of outside
funds and Seven Oaks' recurring losses led the Company's
independent auditors to issue an opinion on the financial
statements in fiscal 1993 which expressed substantial doubt about
Seven Oaks' ability to remain a going concern. The independent
auditor's reports accompanying the financial statements for
fiscal 1995 and 1994 disclaims an opinion on the financial
statements of Seven Oaks.
The Company has pursued various financing alternatives both
before and after its fiscal year ended April 30, 1995. Those
efforts led to the execution on September 8, 1995 of an Agreement
and Plan of Merger with a privately-held company. In the
proposed merger, the privately-held company would acquire in the
merger shares representing over 70% of the currently outstanding
shares of Common Stock of the Company. The merger provides,
among other things, for the purchaser to pay $0.31 a share to
allshareholders other than designated managers and the Affiliate,
who will retain some or all of their shares of the Company's
Common Stock; to make available to the Company sufficient
capital to satisfy past due liabilities to trade creditors,
customers and lenders; and to repay or refinance the Company's
outstanding line of credit, for the Company's future operations.
The Company has no commitments for capital expenditures for
fiscal 1996.
Income Taxes
As of July 31, 1995, the Company had net operating loss
carryforwards of approximately $25.2 million for income tax
reporting purposes. The effect of these carryforwards in adding
to the Company's cash flow is dependent on the Company's ability
to restore and maintain operating profitability. The proposed
merger disclosed in Note 4 of the Financial Statements is
expected to substantially reduce the ability of the Company to
use the carryforwards for periods subsequent to the merger.
Inflation
Inflation is not presently having a material effect on the
Company's operations in the United States. The wages to Mexican
employees represent approximately 38% of the Company's processing
costs and are dependent on the exchange rate of the Mexican peso.
There was no significant change in the value of the peso relative
to the dollar during the three months ended July 31, 1995.
PART II. OTHER INFORMATION.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As described under the heading "Liquidity and Capital
Resources" in Item 2 of Part I hereof, and it Note 4 to the
financial statements, the Registrant defaulted subsequent to July
31, 1995, under the Indenture, dated as of March 1, 1995, between
Coupon Redemption, Inc. and Union Planters National Bank,
Trustee, governing the Company's 12% debentures, of which
approximately $750,000 in principal amount are outstanding. The
default occurred when the Registrant did not make its $45,000
semi-annual payment of interest due on September 1, 1995. The
default has not been cured as of September 13, 1995. Under the
Company's line of credit, a cross-default occurs when the company
defaults under the terms of its indenture.
ITEM 5. OTHER INFORMATION
Directors of the Company have not been elected since the
annual shareholders meeting held in February 1994. Three of the
directors elected at that time resigned in connection with the
Managerial and Financial Restructuring transaction on September
7, 1994 (which is described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Managerial and Financial Restructuring" in the Company's Form 10-
KSB for the fiscal year ended April 30, 1995). Two interim
directors were appointed at that time by the directors then
remaining on the Board of Directors. Two other directors were
appointed in November 1994 and May 1995, respectively by
unanimous vote of the directors sitting on the board at the times
of their appointment. Each director will serve until the next
meeting held for the purpose of electing directors and other
business to be presented to shareholders for vote, or until their
successors are elected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
10(a) Agreement and Plan of Merger by and between JSM Newco,
Inc., JSM Merger Sub, Inc., and Seven Oaks
International, Inc. dated September 8, 1995.
B. Reports on Form 8-K.
On August 16, 1995, the Registrant filed a report on Form 8-K
reporting its First Amended and Restated Processing Agreement,
dated July 31, 1995, between Fleming Companies, Inc., Coupon
Redemption, Inc., and Seven Oaks International, Inc.
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.
Seven Oaks International, Inc.
Registrant
Date September 13, 1995 /s/ Peter R. Pettit
Peter R. Pettit, Chairman
and Chief Executive Officer
Date September 13, 1995 /s/ Jimmy H. Cavin
Jimmy H. Cavin
Chief Financial Officer
SEVEN OAKS INTERNATIONAL, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
Page
10(a) Agreement and Plan of Merger by and between
JSM Newco, Inc., JSM Merger Sub, Inc., and
Seven Oaks International, Inc. dated
September 8, 1995