10KSB/A 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 2 TO FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. DECEMBER 29, 2002 02-27569 HEALTH EXPRESS USA, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) FLORIDA 65-0847995 ------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1761 WEST HILLSBORO BLVD., SUITE 203 DEERFIELD BEACH, FLORIDA 33442 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Issuer's telephone number: (954) 570-5900 Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE (TITLE OF CLASS) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that Health Express was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Health Express' knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year. $470,059 Based on the closing sale price on March 11, 2003, the aggregate market value of the voting common stock held by non-affiliates of Health Express is $4,145,000. As of March 11, 2003 Health Express had 10,377,705 shares of common stock outstanding. FORM 10-KSB FOR THE YEAR ENDED DECEMBER 29, 2002 TABLE OF CONTENTS
PART I ................................................................................................................... 1 INTRODUCTORY NOTE ........................................................................................................ 1 Forward-Looking Statements ............................................................................................ 1 Restatement For Discontinued Operations ............................................................................... 1 ITEM 1. DESCRIPTION OF BUSINESS ...................................................................................... 1 ITEM 2. DESCRIPTION OF PROPERTY ...................................................................................... 7 ITEM 3. LEGAL PROCEEDINGS ............................................................................................ 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................................................... 7 ITEM 5. MARKET FOR HEALTH EXPRESS USA, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .......................... 8 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................ 12 ITEM 7. FINANCIAL STATEMENTS ......................................................................................... 19 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND F1NANCIAL DISCLOSURE ......................... 19 PART III ................................................................................................................. 20 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT .................................................................................... 20 ITEM 10. EXECUTIVE COMPENSATION ....................................................................................... 21 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............................................... 23 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................................................... 25 PART IV .................................................................................................................. 26 ITEM 13.EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K ....................................................... 26 ITEM 14.CONTROLS AND PROCEDURES ...................................................................................... 28 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 . 1 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 ........................................................................... 1 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 ........................................................................... 1 FINANCIAL STATEMENTS ..................................................................................................... F-1
i PART I INTRODUCTORY NOTE FORWARD-LOOKING STATEMENTS This Amendment No. 2 to Form 10-KSB contains "forward-looking statements" relating to Health Express USA, Inc. ("Health Express") which represent Health Express' current expectations or beliefs including, but not limited to, statements concerning Health Express' operations, performance, financial condition and growth. For this purpose, any statements contained in this Amendment No. 2 to Form 10-KSB that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "anticipation", "intend", "could", "estimate", or "continue" or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of Health Express to continue its growth strategy and competition, certain of which are beyond Health Express' control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and Health Express undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. RESTATEMENT FOR DISCONTINUED OPERATIONS During the third quarter of 2002, Health Express committed to a plan to sell its interests in the Fort Lauderdale restaurant, and on September 23, 2002, we closed on the sale. In response to the filing of a Form SB-2 Registration Statement on April 4, 2003, the SEC issued a comment letter on May 2, 2003 ("Comment Letter"). Comment 40 in the Comment Letter requested that Health Express' financial statements be restated to account for the closure of the Fort Lauderdale restaurant in September 2002 as "discontinued operations" beginning with the period ended September 29, 2002, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144. The result of the application of SFAS No. 144 is to consolidate a significant portion of Health Express' operations, assets and liabilities into "discontinued operations" beginning with the three month period ended September 29, 2002. Health Express had previously accounted for the closure of the Fort Lauderdale restaurant as part of the process of moving to the new Boca Raton facility; the effect of applying SFAS No. 144 will be to separate these events for accounting and reporting purposes. Quantitatively, the net loss and stockholders' equity for Health Express will not change from what has been previously reported. This change will effect the comparison between the period ended September 29, 2002 to the year earlier periods, as Health Express will no longer show revenues or costs from the operation of the Fort Lauderdale restaurant in continuing operations. As of result of these changes to apply SFAS No. 144, Health Express is restating its financial statements for the affected periods, and is filing an amended quarterly report on Form 10-QSB for the three month period ended September 29, 2002 and this Amendment No. 2 to our annual report on Form 10-KSB for the year ended December 29, 2002. ITEM 1. DESCRIPTION OF BUSINESS BUSINESS DEVELOPMENT Health Express USA, Inc. ("Health Express") was incorporated in Florida on July 2, 1998 for the purpose of developing a health and gourmet fast food restaurant for franchising. On April 10, 2000, Health Express began operations of its first restaurant, Healthy Bites Grill, in Fort Lauderdale, Florida. Health Express operated the restaurant through a wholly owned subsidiary, Healthy Bites Grill, Inc. ("HBG"), incorporated in Florida on 1 January 26, 1999. The restaurant equipment and supplies were sold on September 23, 2002 to an unaffiliated third party buyer. The lease between Health Express and the landlord, which expires on January 31, 2004, was assigned to the buyer, but Health Express remains as a guarantor until January 31, 2004. The restaurant offered eat-in, take out, and drive-thru service. This restaurant proved to be a testing ground in determining, among other factors, consumer menu item preferences, ideal market demographics, kitchen equipment requirements, food pricing guidelines, employee training and labor and sales targets for profitable operations. Healthy Bites Grill is currently an active corporation but has not conducted business since the sale of the assets on September 23, 2002. Its activity is now shown as discontinued operations in the accompanying financial statements. On May 7, 2001, Health Express entered into a lease agreement for a second restaurant in Boca Raton, Florida (the "Boca Restaurant"). The Boca Restaurant started operations on June 24, 2002. Health Express also completed a Uniform Franchise Offering Circular ("UFOC") to launch the franchise program on October 1, 2002. Health Express operates the second restaurant through a wholly owned subsidiary, Healthy Bites Grill of Boca, Inc. ("HBGB") and franchise operations are conducted through a wholly owned subsidiary, Health Express Franchise Company ("HEFC"). Both HBGB and HEFC were incorporated in Florida on May 7, 2001. INDUSTRY OVERVIEW Health Express' vision is to merge three industries: fast food, quick casual operations and health food restaurants. The fast food industry, a staple of the American consumer, is a multi- billion-dollar industry of which Health Express is a part, is dominated by hamburger chains and followed by chicken, Mexican and Italian food segments. Dining out and dining fast are not the only trends when it comes to food. An increasing number of Americans are developing a healthy appetite for healthy eating, and that trend is growing(1). As the millennium began, Americans were spending a combined $32.1 billion a year on natural and organic products(2), up 14% from 1999 and up dramatically from the $4.2 billion in sales in 1990(3). Forty-eight percent of consumers use organic products at least occasionally, and retail sales of organic products- about $9 billion in 2001 are expected to grow by about 20% a year, reaching $20 billion by 2005(4). The trend toward a lifestyle balanced by proper exercise and nutrition naturally leads the health conscious consumer to look for a place to eat that will provide healthy and tasty foods at a reasonable price, without sacrificing convenience. Health Express seeks to fill this current void in the fast food industry. 1. NUTRITION AND YOU: TRENDS 2000 AMERICAN DIETETIC ASSOCIATION, JANUARY 2000. 2. NATURAL PRODUCTS RESEARCH REPORT, GOURMET RETAILER, OCT. 2001, P72. 3. NATURAL PRODUCTS SALES CONTINUE TO RISE IN 2000, FOOD INSTITUTE REPORT, OCT 8, 2001, P4. 4. NATURAL PRODUCTS RESEARCH REPORT, GOURMET RETAILER, OCT. 2001, P.72. OPERATIONS OF FLAGSHIP RESTAURANT LOCATION AND PRODUCTS Health Express began operations of its first restaurant on April 10, 2000. The restaurant was a free standing building on a corner lot adjacent to a major thoroughfare in Fort Lauderdale, Florida. This location provided Health Express with a testing ground to survey consumer appeal to a developing menu based on healthy and good tasting items. This menu, which is being used in the Boca Restaurant, is comprised, in part, by burgers, wraps and pockets, solo pizzas and salads. A juice bar offers smoothies, juices and power drinks. Burgers and wraps include the "Healthy Bites 2 Burger", grilled turkey burger and chicken breast, lean buffalo burgers and HB Philly (a grilled Portobello mushroom) and various pocket sandwiches. All pizzas are made with homemade tomato sauce and served with soy cheese or mozzarella with a variety of fresh toppings. Salads are prepared daily with fresh greens and are served with a variety of signature dressings. Oven baked fries, vegetarian chili and pasta salads are included in the a la carte selections. The restaurant equipment and supplies were sold on September 23, 2002 to an unaffiliated third party buyer. On September 23, 2002, Health Express sold certain of its assets to Richard A. Weitz and his assignee, Roll-A-Round Real Roast Beef, Inc., a closely-held Florida corporation. The assets purchased by Weitz included equipment and supplies which Health Express used at its restaurant operation located 1538-A East Commercial Blvd., Fort Lauderdale, Florida. The purchase price was $120,000 cash paid by Weitz at closing, less credits for repairs, taxes, broker commissions, attorney's fees and costs, and an escrow of $12,500 of the purchase price for any outstanding sales taxes or other liabilities for the 90 days following the closing of the transaction. The balance of the escrow funds have been forfeited by Health Express. The purchase price was determined through arms'-length negotiation between Health Express and Weitz. There was no relationship, material or otherwise, between Health Express or any of its affiliates, officers or directors, or any associate of any such directors or officers and Weitz or Roll-A-Round. The lease between Health Express and the landlord which expires on January 31, 2004 was assigned to Roll-A-Round and Health Express agreed to remain as a guarantor on the lease until January 31, 2004. Health Express opened the Boca Restaurant in June 2002, which is located adjacent to the only major shopping mall in Boca Raton, Florida. Boca Raton's population density is centralized in a relatively small area, close to the main north/south highway and includes a major university, a large financial and service business district and several strip malls. Surrounding these urban centers is a community of primarily higher income households, singles and a thriving "yuppie" community with discriminating taste and buying power. Management believes that Health Express' success lies in building customer relationships, pursuing new customers and improving the buying and warehousing of inventory to increase gross margins. Management believes that a significant customer base can be built by implementing an expansion program of additional restaurants, whether company-owned or franchised, and by designing sales and marketing programs to target South Florida areas. A new emphasis on consumer eating habits toward more healthy and nutritious foods, a robust retail market and a commercial and residential construction boom combine to create a dynamic business climate in South Florida. South Florida offers business a prime geographic location in areas that are quickly becoming "the place" for high tech companies-with global communications facilities, breathtaking views, art and culture, good higher education, first- rate housing, parks and open space, and unrivaled shopping and nightlife. SERVICES AND DISTRIBUTION All foods are prepared in the on-site kitchen. Customers can choose to eat inside our restaurant, within very pleasant and clean surroundings, or order meals for take-out or via our drive-thru facility. Food products are delivered directly to the restaurant from the various suppliers on a regular basis. COMPETITIVE BUSINESS CONDITIONS Health Express has substantial competition from the several existing fast food chains offering conventional fast food near our present location. However, they offer only a limited selection of health food items. In fact, these competitors are the ones that offer the type of fast food that the health conscious American consumer is now avoiding. The food service industry as a whole is intensely competitive with respect to food quality, concept, location, service, and price. In addition, there are many well-established food service competitors with substantially greater financial and other resources than Health Express and with substantially longer operating histories. Health Express believes that it competes with national, regional, and local take-out food service companies, quick service restaurants, casual full-service dine-in restaurants, delicatessens, cafeteria-style buffets, and prepared food stores, as well as with supermarkets and convenience stores. Management anticipates that it also may have competition from established health food stores and small single proprietary health food restaurants. Management believes that there are limited direct competitors in the area of healthy fast food in South Florida. It is also the opinion of management, although no assurances can be given, that Health Express has a competitive edge which is based on a combination of consumer demands for a reasonably priced healthy meal 3 in less time and with consistently good taste. Competitors in the health food market, such as Wild Oats or Whole Foods Market, are currently successful but do not offer fast food with the convenience of a drive-thru. There are numerous companies engaged in fast food operations and there are a growing number of health food restaurants. The principal competitive factor in the fast food industry is customer convenience and reasonable prices. The principal competitive factor in the emerging industry of health food restaurants is nutritious and tasty food at a reasonable price without sacrificing convenience. Many of these companies are larger and have greater access to experienced management and capital resources and, accordingly, Health Express may not be able to maintain a competitive position in the market place. Failure to maintain a competitive market position would have a detrimental effect on Health Express' operations and its business. SOURCES AND AVAILABILITY OF PRODUCTS AND SUPPLIES Health Express has selected to carry and use several products with national brand name recognition, which consumers already identify with as high quality products in the health food industry. The products include meal supplements such as Met-Rx protein shakes, Myoplex protein shakes, and numerous other recognized supplements. Food distributors include US Foods for bulk service ingredients, Green Garden for greens and sprouts, Spiegel for buffalo and sirloin meats and Elite for various produce. Health Express does not have contracts with the above suppliers but has established wholesale purchase arrangements for bulk purchases, as is industry practice. Management believes that there are ample additional sources of supplies should one of the above vendors be unable to serve our restaurants. INTELLECTUAL PROPERTY Health Express filed a federal registration for the trademark name "Healthy Bites Grill" for use by all future restaurant locations, whether Company owned or franchised, and on October 4, 2002 received approval and ownership from the U.S. Patent and Trademark Office for its exclusive use. Health Express does not own any patents. GOVERNMENTAL REGULATIONS AND APPROVALS As a marketer and distributor of food products, Health Express is subject to the Federal Food and Drug and Cosmetic Act and the regulations promulgated thereunder by the U.S. Food and Drug Administration ("FDA"). The FDA regulates manufacturing and holding requirements for food through its current good manufacturing practice regulations, specifies the standard of identity for certain foods and prescribes the format and content of certain information required to appear on food labels. In addition, Health Express is subject to the Perishable Agricultural Commodities Act and regulations promulgated thereunder by the U.S. Department of Agriculture ("USDA"). The USDA imposes standards for product quality and sanitation and the grading and commercial acceptance of produce shipments from Health Express' suppliers. Health Express, its products and facilities are also subject to state and local regulations through such measures as the licensing of its facilities and enforcement by state and local health agencies. CONSUMER RESEARCH Health Express has conducted internally generated surveys through the use of consumer response cards collected at its restaurants where they are available at the counter for voluntary use by customers. The responses generated by these cards have provided management with valuable information concerning consumer preferences and demands. Health Express has been able to make menu changes to keep pace with these preferences. As a result, Health Express has developed a healthy broad-based menu, which is currently incorporated in its UFOC. FACILITIES AND EMPLOYEES Health Express leases corporate headquarters in Deerfield Beach, Florida for management, accounting, and administrative services. The Boca Restaurant is on a leased property located approximately three miles from the corporate office. There are currently four employees at the corporate level and approximately 20 employees at the Boca Restaurant, of which 10 are full time and 10 are part time. None of the present employees are represented by a labor union and it is 4 anticipated that no future employees will be union represented. Health Express considers its employee relations to be good. Each additional restaurant location, whether company-owned or franchised, will require approximately 12 to 20 employees. Health Express will require accounting on a regular basis from all locations for centralized management reporting of results of operations, accomplished through the use of a standard point-of-sale system by all restaurant operations. Health Express, presently, does not own or plan to own real estate However, management may decide to invest in real estate, if the right opportunity presents itself. RISKS RELATED TO OUR BUSINESS We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline. HEALTH EXPRESS HAS HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE Since our inception we have not been profitable and have lost money on both a cash and non-cash basis. For the year ended December 29, 2002, we lost $1,069,054. Health Express has not been profitable since inception. Our accumulated deficit was $7,874,684 as at the end of December 29, 2002. Future losses are likely to occur, as we are dependent on spending money to pay for operation of our restaurant and development and marketing of our franchise program. No assurances can be given that we will be successful in reaching or maintaining profitable operations. Accordingly, we may experience liquidity and cash flow problems despite the closing of our Fort Lauderdale restaurant and the signing of our first franchisee. HEALTH EXPRESS MAY NEED TO RAISE ADDITIONAL CAPITAL OR DEBT FUNDING TO SUSTAIN OPERATIONS Unless Health Express can become profitable with the existing sources of funds we have available and our current restaurant and franchising program, we will require additional capital to sustain operations and we may need access to additional capital or additional debt financing to grow our sales. In addition, to the extent that we have a working capital deficit and cannot offset the deficit from profitable sales we may have to raise capital to repay the deficit and provide more working capital to permit growth in revenues. We cannot assure you that financing whether from external sources or related parties will be available if needed or on favorable terms. Our inability to obtain adequate financing will result in the need to reduce the pace of business operations. Any of these events could be materially harmful to our business and may result in a lower stock price. WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM DECEMBER 29, 2002 AND DECEMBER 30, 2001 FROM OUR INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE CAN BECOME PROFITABLE OR OBTAIN ADDITIONAL FUNDING Our independent auditors have added an explanatory paragraph to their audit opinions issued in connection with our financial statements for the years ended December 29, 2002 and December 30, 2001, which states that the financial statements raise substantial doubt as to Health Express' ability to continue as a going concern. Our ability to make operations profitable or obtain additional funding will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We expect to be able to continue operations for 12 months with the cash currently on hand, anticipated from our operations and from the equity line provided by Cornell Capital Partners which was signed in March 2003. Based on our current budget assessment, and excluding any acquisitions which may occur in 2003, we believe that we may need to obtain approximately $1.0 million in additional debt or equity capital from one or more sources to fund operations for the next 12 months. These funds are expected to be obtained from the sale of securities, including the sale of stock under the equity line of credit. 5 WE ARE SUBJECT TO A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS ON DECEMBER 29, 2002 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES We had a working capital deficit of $272,149 at December 29, 2002, which means that our current liabilities as of that date exceeded our current assets on December 29, 2002 by $272,149. Current assets are assets that are expected to be converted to cash within one year and, therefore, may be used to pay current liabilities as they become due. Our working capital deficit means that our current assets on December 29, 2002 were not sufficient to satisfy all of our current liabilities on that date. If our ongoing operations do not begin to provide sufficient profitability to offset the working capital deficit we may have to raise capital or debt to fund the deficit. OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE SIGNIFICANTLY Prior to this filing, there has been a limited public market for our common stock and there can be no assurance that a more active trading market for our common stock will develop. An absence of an active trading market could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to enter the market from time to time in the belief that Health Express will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our stock will be stable or appreciate over time. OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS Our common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline. Penny stocks are stock: o With a price of less than $5.00 per share; o That are not traded on a "recognized" national exchange; o Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or o In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $10.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years. Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL Our success largely depends on the efforts and abilities of key executives, including Douglas Baker, our Chief Executive Officer, President, and Marco D'Alonzo, our Chief Operating Officer and Secretary. The loss of the services of Mr. Baker or Mr. D'Alonzo could materially harm our business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management attention away from operational issues. We do not presently maintain key-man life insurance policies on Mr. Baker or Mr. D'Alonzo. We also have other key employees that manage our operations and if we were to lose their services, senior management would be required to expend time and energy to replace and train replacements. To the extent that we are smaller than our competitors and have fewer resources we may not be able to attract the sufficient number and quality of staff. 6 OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT OR IMPOSSIBLE TO EVALUATE OUR PERFORMANCE AND MAKE PREDICTIONS ABOUT OUR FUTURE Health Express has been in business for less than five years and has just signed an agreement with its first franchisee. Based on this limited operating history and the infancy or our franchising program, it is difficult or impossible for us to evaluate our operational and financial performance, or to make accurate predictions about our future performance. While we believe that we have refined our operational systems so that we can offer a true turn-key program to a franchisee, there is no assurance that our franchisee program will be successful or well received by potential franchisees. WE WERE REQUIRED TO RESTATE OUR 2002 ANNUAL FINANCIAL STATEMENTS Health Express has restated its 2002 financial statements to apply an accounting principle related to the accounting and disclosure for a discontinued operation pursuant to SFAS No. 144. As a result of a comment letter issued by the Securities and Exchange Commission on May 2, 2003, Health Express has restated its 2002 annual and third quarter interim financial statements to reflect the closure of the Fort Lauderdale restaurant in September 2002 as a discontinued operation. The SEC has determined that the discontinued operations provisions included in SFAS No. 144 must be applied to the closing of the Fort Lauderdale restaurant. Health Express had previously accounted for the closure of the Fort Lauderdale restaurant as part of the process of relocating to the new Boca Raton facility, and therefore included its activities in continuing operations. The financial statement impact of the application of the restatement is to reclassify and consolidate a significant portion of Health Express' operations, assets and liabilities beginning with the interim period ended September 29, 2002. Health Express' net loss, the related per share amounts, and stockholders' equity will not change from what was previously reported. Health Express is unable to assess the impact that such a restatement may have on its potential investors, potential franchisees, or the possible impact of actions that may be taken by regulators or others. ITEM 2. DESCRIPTION OF PROPERTY Health Express leases approximately 1,400 square feet for its corporate headquarters located at 1761 W. Hillsboro Blvd, Suite 203, Deerfield Beach, Florida. The lease commenced on May 15, 2002 for a term of three years. The monthly rent is $1,400. Additional rent of $816.67 plus sales tax is adjusted annually as set forth in the lease. The Boca Restaurant, located at 21300 St. Andrews Boulevard, opened on June 24, 2002 and is adjacent to the city's major shopping mall which is approximately two miles from the north/south interstate. The Boca Restaurant is a freestanding building, previously used as a fast food restaurant with an existing drive-thru facility. On May 7, 2001, Health Express entered into a five-year lease, with two five-year options. Initial monthly rental payments are $8,333.33 plus common area maintenance of $1,900 and real estate taxes of $1,400. This restaurant is approximately 4,000 square feet with a capacity of inside seating for approximately 98 customers. Located within a strip mall, it offers ample parking and easy access for both northbound and southbound traffic. ITEM 3. LEGAL PROCEEDINGS Health Express is not involved, nor has been involved in any legal proceedings since its inception. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 29, 2002, there were 10,328,181 shares of common stock outstanding. The holders of a majority of Health Express' issued and outstanding Common Stock (approximately 59.4%) executed and delivered to Health Express a Written Consent dated October 29, 2002, consenting to two actions. The first action was to elect Douglas Baker, Marco D'Alonzo, Edward Meyer and Susan Greenfield to serve as directors of Health Express until the next annual meeting of shareholders or until their respective successors are duly elected and qualified. The second action was to ratify the appointment of Ahearn, Jasco & Company, P.A., as independent public accountants of Health Express for the fiscal year ending December 29, 2002. Health Express filed an Information Statement with the SEC on these matters that was also mailed to all of Health Express' shareholders. 7 PART II ITEM 5. MARKET FOR HEALTH EXPRESS USA, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Health Express' common stock currently trades on the Over-The-Counter Bulletin Board (OTC:BB) under the trading symbol "HEXS". The following table sets forth the highest and lowest bid prices for the common stock for each calendar quarter and subsequent interim period since January 1, 2001, as reported by the National Quotation Bureau, and represent interdealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.
------------------------------------------------------------------------------- BID PRICES -------------------------------------- HIGH LOW ------------- ------------------ ------------------------------------------------------------------------------- 2001 ------------------------------------------------------------------------------- First Quarter $1.22 $0.75 Second Quarter $2.50 $0.80 Third Quarter $2.55 $0.80 Fourth Quarter $1.39 $0.80 ------------------------------------------------------------------------------- 2002 ------------------------------------------------------------------------------- First Quarter $1.25 $0.95 Second Quarter $1.97 $0.85 Third Quarter $1.40 $0.30 Fourth Quarter $1.50 $0.43 ------------------------------------------------------------------------------- 2003 ------------------------------------------------------------------------------- First Quarter $1.07 $0.65
Health Express presently is authorized to issue 50,000,000 shares of Common Stock with $ 0.001 par value. As of March 11, 2003, there were 99 holders of record of Health Express' common stock and 10,377,705 shares issued and outstanding. Health Express is authorized to issue 10,000,000 shares of $0.01 par value preferred stock, none of which is outstanding. The preferred stock, which is commonly known as "blank check preferred", may be issued by the Board of Directors with rights, designations, preferences and other terms, as may be determined by the Directors in their sole discretion, at the time of issuance. DIVIDENDS Health Express has not declared or paid cash dividends on its Common Stock since its inception and does not anticipate paying such dividends in the foreseeable future. The payment of dividends may be made at the discretion of the Board of Directors and will depend upon, among other factors, on Health Express' operations, its capital requirements, and its overall financial condition. CHANGES IN SECURITIES During the years ended December 31, 2000, December 30, 2001 and December 29, 2002, Health Express issued the following unregistered securities: 8
---------------------------------------------------------------------------------------------------------------------------------- SHARES COMMON STOCK DATE ISSUED TOTAL($) ---------------------------------------------------------------------------------- ------------ -------- --------------- ---------------------------------------------------------------------------------------------------------------------------------- Conversion of 35,000 warrants at $0.35 per share - by Accredited Investors, unaffiliated to Health Express 01/18/00 35,000 $ 12,250.00 Options exercised - 59,500 shares at $0.35 per share to Doug Baker 02/01/00 59,500 $ 20,825.00 Conversion of 14,500 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 02/01/00 14,500 $ 5,075.00 Issuance of 14,000 restricted shares at $2.50 per share - Bruno Sartori 02/09/00 14,000 $ 35,000.00 Issuance of 500 restricted shares at $2.50 per share - to unaffiliated third party contractor 02/18/00 500 $ 1,000.00 Issuance of 1,245 restricted shares at $2.50 per share - to unaffiliated third party contractor 02/24/00 1,245 $ 3,112.50 Conversion of 75,000 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 02/28/00 75,000 $ 26,250.00 Conversion of 65,000 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 03/13/00 65,000 $ 22,750.00 Issuance of 550 restricted shares at $2.50 per share - to unaffiliated third party contractor 03/14/00 550 $ 1,375.00 Options exercised - 28,000 shares at $0.35 per share to Marco D'Alonzo 03/27/00 28,000 $ 9,800.00 Issuance of 5,500 restricted shares at $2.50 per share - to unaffiliated third party contractor 03/27/00 5,500 $ 13,750.00
9
---------------------------------------------------------------------------------------------------------------------------------- SHARES COMMON STOCK DATE ISSUED TOTAL($) ---------------------------------------------------------------------------------- ------------ -------- --------------- ---------------------------------------------------------------------------------------------------------------------------------- Conversion of 28,000 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 03/27/00 28,000 $ 9,800.00 Issuance of 120,500 restricted shares at $1.50 per share - in private offering to accredited investors unaffiliated to Health Express 04/07/00 120,500 $180,750.00 Issuance of 9,000 restricted shares at $1.25 per share for - Bruno Sartori 06/01/00 9,000 $ 11,250.00 Issuance of 10,000 restricted shares at $1.25 per share - David Maltrotti 06/01/00 10,000 $ 12,500.00 Conversion of 30,000 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 06/16/00 30,000 $ 10,500.00 Issuance of 100 restricted shares at $1.25 per share - promotional prizes to person unaffiliated to Health Express 06/16/00 100 $ 1,125.00 Issuance of 300,000 restricted shares at $1.00 per share - private placement to accredited investors unaffiliated to Health Express 06/16/00 300,000 $300,00.00 Issuance of 1,500 restricted shares at $0.75 per share - Restaurant Manager to Health Express 08/22/00 1,500 $ 1,125.00 Issuance of 200 restricted shares at $0.75 per share - promotional prizes to two persons (100 shares each) unaffiliated to Health Express 06/16/00 200 $ 150.00 Issuance of 100 restricted shares at $0.75 per share - promotional prizes to person unaffiliated to Health Express 11/06/00 100 $ 75.00 Issuance of 1,000 restricted shares at $0.75 per share - Restaurant Manager to Health Express 11/06/00 1,000 $ 750.00 Issuance of 6,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 11/06/00 6,000 $ 4,500.00 Issuance of 6,000 restricted shares at $0.75 per share for - Bruno Sartori 11/06/00 6,000 $ 4,500.00 Issuance of 100 restricted shares at $0.75 per share - to Employee of Health Express 12/07/00 100 $ 75.00 Issuance of 6,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 12/07/00 6,000 $ 4,500.00 Issuance of 500 restricted shares at $0.75 per share - Restaurant Manager of Health Express 12/07/00 500 $ 375.00 Conversion of 5,700 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 12/07/00 5,700 $ 1,995.00 Conversion of 3,600 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 01/01/01 3,600 $ 1,260.00 Issuance of 100,000 restricted shares at $0.75 per share - Doug Baker 01/11/01 100,000 $ 75,000.00 Issuance of 100,000 restricted shares at $0.75 per share - Bruno Sartori 01/11/01 100,000 $ 75,000.00 Issuance of 6,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 01/26/01 6,000 $ 4,500.00 Issuance of 1,000 restricted shares at $0.75 per share - Restaurant Manager at Health Express 01/26/01 1,000 $ 750.00 Issuance of 500 restricted shares at $0.75 per share - Restaurant Manager at Health Express 01/26/01 500 $ 375.00 Issuance of 6,000 restricted shares at $0.75 per share for - Bruno Sartori 01/26/01 6,000 $ 4,500.00 Conversion of 57,200 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 01/30/01 57,200 $ 20,020.00 Options exercised - 7,634 shares at $1.31 per share to Bruno Sartori 01/31/01 7,634 $ 10,000.54 Conversion of 28,600 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 01/31/01 28,600 $ 10,010.54 Issuance of 29,000 restricted shares at $0.35 per share private placement to accredited investors, unaffiliated to Health Express 02/22/01 29,000 $ 10,150.00 Issuance of 500 restricted shares at $0.75 per share to restaurant Manager for Health Express 03/03/01 500 $ 375.00
10
---------------------------------------------------------------------------------------------------------------------------------- SHARES COMMON STOCK DATE ISSUED TOTAL($) ---------------------------------------------------------------------------------- ------------ -------- --------------- ---------------------------------------------------------------------------------------------------------------------------------- Issuance of 1,000 restricted shares at $0.75 per share to restaurant Manager for Health Express 03/03/01 1,000 $ 750.00 Options exercised - 3,500 shares at $0.35 per share to Douglas Baker 03/03/01 3,500 $ 1,225.00 Conversion of 23,000 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 03/05/01 23,000 $ 8,050.00 Options exercised - 3,500 shares at $0.35 per share to Marco D'Alonzo 03/07/01 3,500 $ 1,225.00 Options exercised - 14,500 shares at $0.35 per share to Marco D'Alonzo 03/20/01 14,500 $ 5,075.00 Issuance of 6,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 03/20/01 6,000 $ 4,500.00 Conversion of 14,500 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 03/20/01 14,500 $ 5,075.00 Issuance of 40,000 shares of restricted stock at $0.75 per share-Marco D'Alonzo 04/06/01 40,000 $ 30,000.00 Issuance of 40,000 shares of restricted stock at $0.75 per share-Douglas Baker 04/06/01 40,000 $ 30,000.00 Issuance of 20,000 shares of restricted stock at $0.75 per share-Bruno Sartori 04/06/01 20,000 $ 15,000.00 Issuance of 500 restricted shares at $0.75 per share to restaurant Manager for Health Express 04/06/01 500 $ 375.00 Issuance of 1,000 restricted shares at $0.75 per share to restaurant Manager for Health Express 04/06/01 1,000 $ 750.00 Options exercised - 17,200 shares at $0.35 per share to Marco D'Alonzo 04/10/01 17,200 $ 6,020.00 Issuance of 2,000 shares of restricted share at $0.75 per share-Edward Meyer 04/10/01 2,000 $ 1,500.00 Issuance of 6,000 shares of restricted stock at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 04/10/01 6,000 $ 4,500.00 Conversion of 17,200 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 04/10/01 17,200 $ 6,020.00 Issuance of 1,666,667 shares at $0.60 per share private platement to Rider Insurance Company 05/04/01 1,666,667 $ 1,000.00 Issuance of 15,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 06/28/01 15,000 $ 11,250.00 Issuance of 37,400 restricted shares at $1.00 per share - For Franchise to Francorp 07/23/01 37,400 $ 37,400.00 Issuance of 2,000 restricted shares at $1.00 per share - to unaffiliated third party contractor 07/23/01 2,000 $ 2,000.00 Issuance of 15,000 restricted shares at $1.00 per share - to unaffiliated third party Attorney 11/20/01 15,000 $ 15,000.00 Issuance of 500 restricted shares at $0.25 per share - to employee 01/24/02 500 $ 125.00 Issuance of 2,000 restricted shares at $0.25 per share - to Restaurant Managers 01/24/02 2,000 $ 500.00 Issuance of 16,700 restricted shares at $0.25 per share - to Bruno Sartori 01/24/02 16,700 $ 4,175.00 Issuance of 1,008,000 restricted stock at $0.25 per share - private offering to accredited investors, unaffiliated with Health Express, and Susan Greenfield, who purchased 336,000 shares 02/15/02 1,008,000 $252.000.00 Issuance of 129,000 restricted stock at $0.75 per share - private offering(a) 05/06/02 129,000 $ 96,750.00 Issuance of 24,000 restricted stock at $0.75 per share - private offering(a) 05/13/02 24,000 $ 18,000.00 Issuance of 16,000 restricted stock at $0.75 per share - private offering(a) 05/20/02 16,000 $ 12,000.00 Issuance of 25,000 restricted stock at $1.50 per share - Bruno Sartori 05/28/02 25,000 $ 37,500.00 Issuance of 25,000 restricted stock at $1.50 per share - to employee 05/28/02 25,000 $ 37,500.00 Issuance of 96,000 restricted stock at $0.75 per share - private offering(a) 06/03/02 96,000 $ 72,000.00 Issuance of 64,000 restricted stock at $0.75 per share - private offering(a) 06/21/02 64,000 $ 48,000.00 Issuance of 16,000 restricted stock at $0.75 per share - private offering(a) 07/10/02 16,000 $ 12,000.00 Issuance of 300,000 restricted stock at $0.35 per share - private offering(b) 09/06/02 300,000 $105,000.00 Issuance of 142,858 restricted stock at $0.35 per share - private offering(b) 10/18/02 142,858 $ 50,000.00
11
---------------------------------------------------------------------------------------------------------------------------------- SHARES COMMON STOCK DATE ISSUED TOTAL($) ---------------------------------------------------------------------------------- ------------ -------- --------------- ---------------------------------------------------------------------------------------------------------------------------------- Issuance of 200,000 restricted stock at $0.35 per share - private offering(b) 10/23/02 200,000 $ 70,000.00 Issuance of 5,000 restricted stock at $0.35 per share - interest expense to Daniel Sartori trust, Bruno Sartori trustee 11/21/02 5,000 $ 1,750.00 Issuance of 25,000 restricted stock at $0.35 per share - to Bruno Sartori 12/05/02 25,000 $ 8,750.00 Issuance of 10,000 restricted stock at $0.35 per share - to Patricia Durante 12/05/02 10,000 $ 3,500.00
(a) Health Express sold 345,000 shares of common stock and warrants to accredited investors, unaffiliated with Health Express, under Rule 505 of Regulation D of the Securities Act, for total proceeds of $258,750. The offering was terminated on July 17, 2002. (b) During 2002, Health Express sold 642,858 shares of common stock to accredited investors under Section 4(2) of the Securities Act at $.35 per share for total proceeds of $225,000. On January 17, 2003, Health Express sold $250,000 of convertible debentures to Cornell Capital Partners, L.P. Cornell Capital Partners was the purchaser of the convertible debentures. These debentures accrue interest at a rate of 5% per year and mature three years from the issuance date. The debentures are convertible at the Cornell Capital Partners' option any time up to maturity at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. At maturity, Health Express has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. In accordance with applicable accounting standards for such issuances, Health Express will record a charge of $62,500 upon the issuance of the convertible debentures to account for the imbedded beneficial conversion feature. In addition, Health Express will record other charges, as follows: $37,500 in professional fees, $20,000 in commissions, and $75,000 for the Equity Line of Credit commitment fee. The amounts were withheld from the proceeds of the debenture at closing. Health Express has the right to redeem the debentures upon thirty days notice for 120% of the amount redeemed. Upon such redemption, Cornell Partners shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed by Health Express with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. On March 13, 2003, Health Express entered into an Equity Line of Credit Agreement with Cornell Capital Partners, L.P. This agreement also terminated an Equity Line of Credit Agreement dated January 16, 2003, with substantially identical terms except that the January agreement contained an impermissible condition relating to the requirement that an active bid exist for Health Express to make draws under the Equity Line of Credit. In addition, the warrant in the January agreement was terminated. The March 2003 agreement eliminated the impermissible condition. Under the March agreement, Health Express may issue and sell to Cornell Capital Partners common stock for a total purchase price of up to $5.0 million. Subject to certain conditions, Health Express will be entitled to commence drawing down on the Equity Line of Credit when the common stock to be issued under the Equity Line of Credit is registered with the Securities and Exchange Commission and the registration statement is declared effective and will continue for two years thereafter. The purchase price for the shares will be equal to 95% of, or a 5% discount to, the market price, which is defined as the lowest closing bid price of the common stock during the five trading days following the notice date. The amount of each advance is subject to an aggregate maximum advance amount of $100,000, with no advance occurring within seven trading days of a prior advance. In addition, in each advance notice Health Express shall establish a minimum acceptable price, whereby the amount requested in the advance notice shall automatically decrease by 20% for each day of the five succeeding trading days that the closing bid price is below the minimum acceptable price. Cornell Capital Partners is entitled to a one-time commitment fee of $90,000, of which $75,000 has been paid in cash on January 23, 2003, from the proceeds of the convertible debentures and the balance will be paid from the proceeds of the initial advance under the Equity Line of Credit. Cornell Capital Partners is entitled to retain a fee of 5% of each advance. The net effect of the 5% discount at the 5% retainage is that Cornell Capital will pay 90.25% of the applicable closing bid price. In addition, Health Express entered into a placement agent agreement with TN Capital Equities, Ltd., a registered broker-dealer. Pursuant to the placement agent agreement, Health Express will pay a one-time placement agent fee of 9,524 shares of common stock equal to approximately $10,000 based on Health Express' stock price on January 24, 2003. 12 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, and the Notes thereto included herein. The information contained below includes statements of Health Express' or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on forward-looking statements, see the information set forth in the Introductory Note to this Annual Report under the caption "Forward Looking Statements", which information is incorporated herein by reference. DISCONTINUED OPERATIONS AND RESTATEMENT OF CERTAIN ITEMS ON HEALTH EXPRESS' FINANCIAL STATEMENTS In response to the filings of a Form SB-2 Registration Statement on April 4, 2003, the SEC has requested that Health Express' financial statements be restated to account for the closure of the Fort Lauderdale restaurant in September 2002 as "discontinued operations" beginning with the period ended September 29, 2002, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144. The result of the application of SFAS No. 144 is to consolidate a significant portion of Health Express' operations, assets and liabilities into "discontinued operations" beginning with the three month period ended September 29, 2002. This change effects the comparison between the year ended December 29, 2002 to the year ended December 30, 2001, as Health Express will no longer show revenues or costs from the operation of the Fort Lauderdale restaurant in continuing operations. Quantitatively, the net loss and stockholders' equity for Health Express will not change from what has been previously reported. As of result of these changes from applying SFAS No. 144, Health Express has restructured the following descriptions of its results of operations to reflect the restatement of its financial statements for its fiscal 2002 and 2001 year ends. GOING CONCERN As reflected in Health Express' financial statements for the twelve months ended December 29, 2002, Health Express' accumulated deficit of $7,874,684 and its working capital deficiency of $272,149 raise substantial doubt about its ability to continue as a going concern. The ability of Health Express to continue as a going concern is dependent on Health Express' ability to raise additional debt or capital, including the ability to raise capital under the Equity Line of Credit. The financial statements for December 29, 2002 do not include any adjustments that might be necessary if Health Express is unable to continue as a going concern. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. At each balance sheet date, management evaluates its estimates, including but not limited to, those related to inventories, accrued liabilities, and the valuation allowance offsetting deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The estimates and critical accounting policies that are most important in fully understanding and evaluating our financial condition and results of operations include those listed above, as well as our valuation of equity securities used in transactions and for compensation, and our revenue recognition methods for restaurant operations and franchising. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 29, 2002, COMPARED TO THE YEAR ENDED DECEMBER 30, 2001 REVENUES Health Express reported net revenues of $470,059 and $0 for the years ended December 29, 2002 and 2001, respectively. This increase in net revenues of $470,059 was primarily attributable to sales at Health Express' new Boca Raton, Florida restaurant, which opened June 24, 2002 13 and the reclassification of the Fort Lauderdale restaurant as discontinued operations. Accordingly, the comparison between the two years is not indicative of growth in our operations. The sales at Health Express' Fort Lauderdale, Florida restaurant decreased over the comparable period in the prior year. On September 23, 2002, Health Express sold the restaurant equipment and supplies of its Fort Lauderdale, Florida restaurant to an unrelated party. As a result, Health Express currently has one restaurant location: the Boca Raton, Florida restaurant. On February 20, 2003, Health Express sold its first franchise location to one of Health Express' directors. The franchisee has identified a location and is finalizing the lease. COST OF COMPANY RESTAURANT SALES Health Express reported cost of company restaurant sales of $616,546, or 131% of net revenues, for the year ended December 29, 2002. In the comparable period in the prior year, Health Express reported cost of sales of $105,156. This increase in cost of company restaurant sales of $511,390 was primarily attributable to cost of company restaurant sales at Health Express' new Boca Raton, Florida restaurant, which opened June 24, 2002, and the reclassification of the Fort Lauderdale restaurant as discontinued operations. Accordingly, the comparison between the two years is not indicative of a manifest change in our cost of company restaurant sales. Cost of sales consists primarily of food and paper costs, labor and occupancy costs.
------------------------------------------------------------------------------- EXPENSES 2002 2001 -------------------------------------------- --------------- ---------------- ------------------------------------------------------------------------------- Food and paper $ 171,097 $ -- Labor 196,976 -- Occupancy 68,562 -- Marketing 33,643 -- Repairs 8,722 -- Pre-Opening expenses 98,136 105,156 Other 39,410 --
The increase in these expenses was primarily attributable to the expenses associated with opening the Boca Raton, Florida restaurant in June 2002. Health Express hired 10 full-time and 10 part-time employees in connection with the Boca Raton, Florida restaurant, which primarily accounted for the increase in labor expenses. Health Express entered into a five-year lease on May 15, 2002 for the Boca Raton, Florida restaurant, accounting for significantly all of the increase in occupancy expenses. OTHER EXPENSES Other expenses consisted of the following expenses:
------------------------------------------------------------------------------- EXPENSES 2002 2001 -------------------------------------------- --------------- ---------------- ------------------------------------------------------------------------------- Compensation $ 182,996 $ 476,355 Compensatory Stock and Options 138,597 269,875 Depreciation 65,026 625 General and Administrative 305,183 259,486
Compensation expense decreased by $293,359 to $182,996 in the year ended December 29, 2002 from $476,355 in the comparable period in the prior year. This decrease was primarily attributable to decreased corporate 14 salaries due to necessary cost cutting. Stock and option expense decreased to $138,597 in the year ended December 29, 2002 from $269,875 in the comparable period in the prior year. This decrease of $131,278 was primarily attributable to management's decision to not issue as much stock compensation in 2002 compared to 2001. Depreciation expense increased by $64,401 to $65,026 from $625 in the comparable period in the prior year. This increase was primarily attributable to a full year of depreciation for the Boca Raton restaurant reduced by closing of the Fort Lauderdale restaurant. General and administrative expenses increased to $305,183 in the year ended December 29, 2002 from $259,486 in the comparable period in the prior year. This increase of $45,697 was primarily attributable to increased insurance and professional fees in 2002. General and administrative expenses consisted primarily of the following expenses: professional fees, advertising and insurance. NET LOSS Health Express reported a consolidated net loss of $1,069,054 or $(0.11) per basic and diluted common share for the year ended December 29, 2002, compared to a loss of $1,375,776 or $(0.17) per basic and diluted common share for the year ended December 30, 2001. Health Express began restaurant operations on April 10, 2000 and reported revenues in 2002 of $470,059 compared to revenues for 2001 of $0. Restaurant operations reported a total loss of $146,487 for 2002 compared to $105,156 for 2001. The Fort Lauderdale restaurant is shown as discontinued operations on the financial statements. The increase in the loss is attributed to higher food and labor costs (see Restaurant Operations below). Non-cash expenses, principally stock, warrants and stock options compensation are included in the consolidated loss for the year 2002 and 2001. The following summary sets forth cash and non-cash expenses for the year 2002 and 2001.
------------------------------------------------------------------------------- 2002 2001 -------------------------------------------- --------------- ---------------- ------------------------------------------------------------------------------- Restaurant revenues $ 470,059 $ -- Food, labor, controllable and other restaurant expenses 616,546 (105,156) --------------- ----------------- Loss from restaurant operations (146,487) (105,156) Other cash expense: General and administrative 486,820 (357,643) Franchise operations (7,758) (66,000) Discontinued operations, including the loss on the disposal of property & equipment in 2002 (222,794) 266,702 Non-cash expenses: Depreciation (65,026) (625) Stock and stock options compensation (140,169) (502,250) Franchise operations-stock compensation -- (77,400) -------------- ------------------ Consolidated Loss $ (1,069,054) $ (1,375,776) =============== ==================
15 RESTAURANT OPERATIONS Restaurant operations reported sales, food, beverage and paper costs, labor, and controllable and other expenses for the year 2002 and 2001 as follows:
2002 % 2001 % ---------------- ----------------- ---------------- ------------ Sales $ 470,059 $ -- Food, beverage & paper cost 171,097 36% -- 0% Labor 196,976 42% -- 0% Controllable and other expenses 248,473 53% 105,156 0% ---------------- ---------------- Loss from restaurant operations $ (146,487) $ (105,156) ================ ================ Restaurant operations for 2002 reported the following on a quarterly basis:
FOURTH THIRD SECOND FIRST TOTAL ----------------- ------------- -------------- --------------- ------------ --------------------------------------------------------------------------------------------------------------------------------- Sales $ 206,538 $ 250,455 $ 13,066 $ -- $ 470,059 Food & paper cost 72,933 94,488 3,676 -- 171,097 % 35% 38% 28% 0% -- Labor 72,884 118,492 5,600 -- -- % 35% 47% 43% 0% 196,976 Controllable & other 92,438 47,412 69,868 38,755 248,473 % 45% 59% 62% 0% -- ----------------- ------------- -------------- --------------- ------------- Loss from restaurant operations $ (31,717) $ (9,937) $ (66,078) $ (38,755) $ (146,487) ================= ============= ============== =============== =============
DEMOGRAPHICS - CENSUS ANALYSIS A study of the demographics of the population based on Florida Census data as reported by the Federal Financial Institutions Examinations Council (FFIEC) for the Boca Raton location reflects the following. The statistics are based on zip code and tract and represent census data from population within the location's zip code or tract.
------------------------------------------------------------- BOCA RATON -------------------- INCOME LEVEL UPPER ------------------------------------------------------------- 2001 Median Family Income $ 90,024 Tract Population 4,572 Median age of housing 7 Minority 7%
16 Management believes that Boca Raton area provides the ideal demographics for the restaurant's quality foods. FRANCHISING OPERATIONS On July 10, 2001, Health Express entered into an agreement with Francorp, Inc., a franchise consulting group, to develop and implement a comprehensive franchise program. Under the Franchise Development Agreement, Francorp was paid $60,000 in cash, 37,400 shares of our common stock, and warrants to purchase 38,000 shares of our common stock. The Franchise Development Agreement requires Francorp to complete all of its work within one year. This program provides assistance in various phases including: o Strategic planning and program structure o Franchise documentation o Franchise operations manuals o Franchise marketing plan o Franchise sales consulting o One year consulting services Francorp, with the assistance of Health Express, has completed a review draft of the Operations Manuals and a Recipe and Prep Book. The Operations Manuals and Recipe and Prep book outline specific operational procedures with recommended guidelines for menu item pricing and labor costs. These recommended guidelines will be strictly implemented at the new Boca Raton restaurant, which will serve as the prototype for future franchisee operations. Health Express began franchising efforts on October 1, 2002. The initial expenditure to Francorp was expensed and paid in the fiscal year 2001 to enable Health Express to complete all the necessary documents to enable them to move forward as a franchise operation. Expenses in 2002 were minimal because of the upfront fees paid to Francorp to cover the completion of this project. Because Health Express did not begin selling franchises until October 2002, Health Express did not incur any marketing and advertising expense for that year. Health Express does expect to incur operational, marketing and advertising expenses going forward as the necessary funds become available. The franchise marketing program began in earnest in May of 2003, when the Health Express advertised this opportunity on a web based directory known as "Be-The-Boss". The current marketing program provides the opportunity for an interested party to visit Health Express' website, submit an inquiry, and then upon pre-qualification, to receive more specific and detailed information based on their state of residence and level of qualification. Health Express believes that prior industry experience is not required, but is desirable, as the technical skills required to learn the business can be taught during the training period. However, all franchise candidates must possess certain personal qualities such as: service and people oriented, positive can-do attitude, results driven action-oriented, higher than average attention to detail, assertive, with strong communication and planning skills. On February 20, 2003, Health Express sold its first franchise to one of Health Express' directors. The franchisee has identified a location and is currently finalizing a lease located in South Florida. The Franchise Agreement was entered into February 14, 2003 between Healthy Express Franchise Company and The Junie Corp. Under the Franchise Agreement, The Junie Corp. has the right to operate one Healthy Bites Grill restaurant, was obligated to pay an initial franchise fee of $30,000 and a grand opening of $5,000 at the time of signing of the agreement, and is obligated to pay continuing fees comprised of a royalty fee of 4% of gross revenue of the restaurant and an advertising fee of 2% of gross revenues of the restaurant. LIQUIDITY AND CAPITAL RESOURCES Health Express' financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Health Express incurred a net loss of $1,069,054 and $1,375,776 for the years ended December 29, 2002 and December 30, 2001, respectively, and has an accumulated deficit of $7,874,684 at December 29, 2002. Management recognizes that Health Express must generate additional resources to enable it to continue operations. Management is planning to obtain additional capital principally through the sale of equity securities. The realization of assets 17 and satisfaction of liabilities in the normal course of business is dependent upon Health Express obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that Health Express will be successful in these activities. Should any of these events not occur, the accompanying consolidated financial statements will be materially affected. Health Express is at present meeting its current obligations from its monthly cash flows, which during 2001, 2002 and to date in 2003 has included cash from operations, investor capital, and loans from related parties. However, due to insufficient cash generated from operations, Health Express currently does not internally generated cash sufficient to pay all of its incurred expenses and other liabilities. As a result, Health Express is dependent on investor capital and loans to meet its expenses and obligations. Although investor funds and related party loans have allowed Health Express to meet its obligations in the recent past, there can be no assurances that Health Express' present methods of generating cash flow will be sufficient to meet future obligations. Historically, Health Express has, from time to time, been able to raise additional capital from sales of its capital stock, but there can be no assurances that Health Express will be able to raise additional capital in this manner. Health Express also received $66,660 in short-term financing from three directors of Health Express at various times during 2002. The notes payable bear interest at 5.5% per annum and are payable on June 30, 2003. On March 6, 2003, an additional $25,000 was received from one of the directors of Health Express. The note payable bears interest at 5.5% per annum and is payable on June 30, 2003. Health Express received $70,000 in financing from a related party on May 20, 2002. The note was payable on September 20, 2002 and included interest at 5.5% per annum. On November 8, 2002, $50,000 of the note payable, after repayment of $20,000 principal, was extended through March 31, 2003 at an interest rate of 7% per annum and the issuance of 5,000 shares of Health Express' restricted common stock to the note holder. The shares issued were valued at $1,750, and this amount was recorded as interest expense. There is no assurance that these individuals would be willing to make such loans in the future, or if such loans were available, that they would be at terms acceptable to Health Express. Management realizes that Health Express must ultimately be able to generate sufficient cash flows from the profitable operation of the business to allow it to successfully sustain itself independent of outside capital and loans. Health Express' 2003 capital raising activities are described below. Cash used in operating activities was $642,214 for the year ended December 29, 2002 compared to $707,013 for 2001. The decrease in cash used was due primarily to the decreased loss from continuing operations of $262,814, increased depreciation expense of $64,401 and an increase in accounts payable and accrued liabilities of $101,851, which were partially offset by a decrease in non-cash expenses of $439,481 relating to stock issuance and charges for options and warrants. Cash used in investing activities was $398,575 in 2002 compared to $166,885 in 2001. This increase was principally due to the purchase of property and equipment for the Boca Raton restaurant of $518,607, which was partially offset by the sale of restaurant assets of $120,000 (which was the Fort Lauderdale, Florida restaurant). Cash provided by financing activities was $852,410 during fiscal year 2002 compared to $1,075,897 during the same period in 2001. This decrease was mainly due to higher proceeds from sales of equity securities in 2001. The restaurant operations have incurred losses since inception. Management believes that it will require approximately $185,000 in additional capital to fund restaurants operations for the Boca Restaurant. Health Express has currently approximately $7,700 in cash and cash equivalents as of February 28, 2003. The original flagship restaurant in Fort Lauderdale, Florida lost approximately $223,000 and $267,000 for the period of December 31, 2001 through September 23, 2002 and the year ending December 30, 2001, respectively. The restaurant equipment and supplies were sold on September 23, 2002 to an unaffiliated third party buyer. This restaurant is now reported as discontinued operations in the accompanying financial statements. To raise additional capital, Health Express is seeking additional financing through the sale of debt and/or equity securities. On January 17, 2003, Health Express sold $250,000 convertible debentures to Cornell Capital Partners. Cornell Capital Partners was the purchaser of the convertible debentures. These debentures accrue interest at a rate of 5% per year and mature three years from the issuance date. The debentures are convertible at Cornell Capital Partners' option any time up to maturity at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. At maturity, Health Express has the option to either pay 18 the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. In accordance with applicable accounting standards for such issuances, Health Express will record a charge of $62,500 upon the issuance of the convertible debentures to account for the imbedded beneficial conversion feature. In addition, Health Express will record other charges, as follows: $37,500 in professional fees, $20,000 in commissions, and $75,000 for the Equity Line of Credit commitment fee. The amounts were withheld from the proceeds of the debenture at closing. Health Express has the right to redeem the debentures upon thirty days notice for 120% of the amount redeemed. Upon such redemption, Cornell Partners shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed by Health Express with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. On March 13, 2003, Health Express entered into an Equity Line of Credit Agreement with Cornell Capital Partners. Under this agreement, Health Express may issue and sell to Cornell Capital Partners common stock for a total purchase price of up to $5.0 million. Subject to certain conditions, Health Express will be entitled to commence drawing down on the Equity Line of Credit when the common stock to be issued under the Equity Line of Credit is registered with the Securities and Exchange Commission and the registration statement is declared effective and will continue for two years thereafter. The purchase price for the shares will be equal to 95% of, or a 5% discount to, the market price, which is defined as the lowest closing bid price of the common stock during the five trading days following the notice date. The amount of each advance is subject to an aggregate maximum advance amount of $100,000, with no advance occurring within seven trading days of a prior advance. In addition, in each advance notice Health Express shall establish a minimum acceptable price, whereby the amount requested in the advance notice shall automatically decrease by 20% for each day of the five succeeding trading days that the closing bid price is below the minimum acceptable price. Cornell Capital Partners is entitled to a one-time commitment fee of $90,000, of which $75,000 has been paid in cash from the proceeds of the convertible debentures on January 23, 2003, and the balance will be paid from the proceeds of the initial advance under the Equity Line of Credit. Cornell Capital Partners is entitled to retain a fee of 5.0% of each advance. The net effect of the 5% discount and the 5% retainage of each advance is that Cornell Capital Partners shall pay 90.25% of the applicable closing bid price for each share of Health Express' common stock. In addition, Health Express entered into a placement agent agreement with TN Capital Equities, Ltd., a registered broker-dealer. Pursuant to the placement agent agreement, Health Express will pay a one-time placement agent fee of 9,524 shares of common stock equal to approximately $10,000 based on Health Express' stock price on January 24, 2003, the date Health Express agreed to engage the placement agent. Health Express expects to raise sufficient cash through these means to meet its short-term capital requirements. However, no assurance is given that Health Express will be able to raise sufficient funds to meet long-term capital needs. The Health Express' directors, officers and employees also may provide additional funds by exercising their stock options, however, they are under no obligation to do so and they have made no commitment to exercise. If 2,038,000 outstanding warrants at exercise prices of $1.00 and $2.00, and 3,556,800 options held by the directors are exercised at an exercise price of $0.35, Health Express will receive $2,076,000 and $1,244,880, respectively. However, none of the warrant holders are required to, nor have they committed to, exercise their respective warrants. Health Express may also seek alternative sources of financing, including from more conventional sources such as bank loans and credit lines. However, no assurances can be given that Health Express will be able to meet its needs through the sale of securities or otherwise. Further, the availability of any future financing may not be on terms that are satisfactory to Health Express. From time to time, Health Express may evaluate potential acquisitions involving complementary businesses, content, products or technologies. Health Express' future capital requirements will depend on many factors, including growth of Health Express' restaurants business, the success of its franchising operations, economic conditions and other factors including the results of future operations. If Health Express is unable to raise sufficient funds to meet its long-term capital needs, there is a risk that Health Express will be required to cease operations. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following chart sets forth Health Express' contractual obligations and commercial commitments and the time frames for which such commitments and obligations come due. 19
PAYMENTS DUE BY PERIOD ------------------------------------------------------------------------------------- TOTAL ------------------------------------------------------------------------------------- CONTRACTUAL LESS THAN AFTER OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS -------------------------- -------------- ------------ ------------ ------------ ------------ Debenture (1) $ 250,000 $ -- $ 250,000 $ -- $ -- Lease Obligations (2) 461,293 136,875 283,785 40,633 -- Notes Payable-Related Parties 116,660 116,660 -- -- -- Employment Contracts (3) 700,000 340,000 180,000 180,000 -- -------------- ----------- ----------- ------------ ------------ Total Contractual Cash Obligations $ 1,527,953 $ 593,535 $ 713,735 $ 220,633 $ -- ============== ============ ============ ============ ============
(1) Long Term Debt Obligations include principal amount of $250,000 debenture, excluding interest and assuming denture is redeemed in cash rather than through the issuance of common stock. (2) Health Express leased two properties; one in Deerfield Beach, Florida, for administrative offices and one in Boca Raton, Florida, for its restaurant operations. These amounts represent the future minimum lease payments due under these leases. Health Express is also the guarantor of a lease located in Fort Lauderdale, Florida. This lease related to Health Express' former restaurant location that was sold in September 2002. Health Express will remain a guarantor until January 31, 2004, and Health Express' maximum contingent obligation under the guarantee is $70, 650 as of December 29, 2002. (3) These represent the minimum contractual obligations to Messrs. Baker, D'Alonzo and Nevin under their current employment agreements. CURRENT ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of long-lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of and APB No. 30, Reporting the Results of Operations - Reporting the Effects of the Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and the interim periods within. The adoption of SFAS No. 144 did not have an immediate impact on Health Express' financial statements; however, as described in Note 10 to the financial statements, Health Express disposed of a component in September 2002 and has accounted for the disposal under the applicable provisions of SFAS No. 144. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities." Statement 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that currently are accounted for pursuant to the guidance that the Emerging Issues Task Force set forth in Issue No. 94-3. The scope of Statement 146 also includes (1) costs related to terminating a contract that is not a capital lease, (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract and (3) costs to consolidate facilities or relocate employees. Statement 146 is required to be effective for our exit or disposal activities initiated after December 29, 2002. We do not believe that the adoption of SFAS No. 146 will have a material impact on our financial position, results of operations or cash flows. ITEM 7. FINANCIAL STATEMENTS The consolidated financial statements of Health Express required by Regulation S-B are attached to this report. Reference is made to Item 13 below for an index to the financial statements. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in accountants or any disagreements with our accountants on accounting and financial disclosures. 20 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT As of March 11, 2003, the directors and executive officers of Health Express, their age, positions in Health Express, the dates of their initial election or appointment as directors or executive officers, and the expiration of the terms are as follows:
--------------------------------------------------------------------------------------------------------------------- NAME OF DIRECTOR/ EXECUTIVE OFFICER AGE POSITION PERIOD SERVED --------------------------------- -------- ---------------------------------- -------------------------- --------------------------------------------------------------------------------------------------------------------- Douglas Baker 40 Director and Chief Executive July 2, 1998 to date Officer Raymond W. Nevin 56 President February 3, 2003 to date Marco D'Alonzo 37 Director, Secretary and Chief July 2, 1998 to date Operating Officer Susan Greenfield 38 Director May 7,2001 to date Edward Meyer 45 Director and Audit Committee June 6, 2000 Member Patricia Durante 42 Chief Financial Officer February 18, 2003 to date
There are no family relationships between or among the directors, executive officers or any other person. None of Health Express' directors or executive officers is a director of any company that files reports with the SEC. None of Health Express' directors have been involved in legal proceedings. Health Express' directors are elected at the annual meeting of stockholders and hold office until their successors are elected. Health Express' officers are appointed by the Board of Directors and serve at the pleasure of the Board and are subject to employment agreements, if any, approved and ratified by the Board. DOUGLAS BAKER Mr. Baker has more than 10 years of sales experience in the competitive financial service industry. He has been actively involved in the financial public relations industry since 1994. He has been a licensed stockbroker, 220 insurance agent and mortgage broker. From 1994 to 1998 he was Vice President and co-owner with Marco D'Alonzo of First Equity Group, Inc. a financial public relations company, where he was in charge of company operations including cash flow management, budgeting, public relations and human resources. Thereafter, Mr. Baker founded Health Express. MARCO D'ALONZO Mr. D'Alonzo is experienced in corporate, financial and business affairs. He has owned and operated two financial related businesses. From 1994 to 1998 he was also co-owner with Mr. Baker of First Equity Group, Inc., where he acted as President, with duties including marketing, business development and client relations. Thereafter, Mr. D'Alonzo founded Health Express. RAYMOND W. NEVIN Mr. Nevin has more than 30 years of senior leadership experience in the restaurant industry, with an emphasis on growth management. From July 1988 to May 1992, he served as president and CEO of Damon's The Place for Ribs. Mr. Nevin grew Damon's from $38 million to over $100 million in 4 years. From August 1992 to January 2002, he served as president and COO of Pizza U.S.A. Management. Mr. Nevin managed operations and national growth, implemented numerous operational improvements, and initiated the franchise program. From February 2002 to January 2003, he served as V.P. of Sales for TurboChef Technologies, Inc., a manufacturer of high speed commercial cooking equipment; Mr. Nevin managed senior level consultative selling. Mr. Nevin joined Health Express initially as a consultant, and was appointed president in February of 2003. 22 SUSAN GREENFIELD From 1987 to the present, Ms. Greenfield has served as Treasurer of Rider Insurance Company, which specializes and leads the industry in insuring motorcycles within the state of New Jersey. Rider Insurance is a principal shareholder of Health Express. Ms. Greenfield has served on the Board of Trustees for the June Bleiwise Supporting Foundation since 1996. Ms. Greenfield received her Bachelor of Science degree in Education from the University of Miami in 1987. PATRICIA DURANTE Ms. Durante is a Certified Public Accountant with a background in both public and private businesses. Ms. Durante has worked for a large international CPA firm and has owned her own CPA firm. Ms. Durante has also worked as controller for various public companies from 1985 to 1991 when she started her own CPA firm. From 2000 to April 30, 2003, Ms. Durante has worked for Mackenzie Investment Management Inc., a mutual fund company, as Tax and Financial Reporting Manager. Prior to that, from 1991 through 1999, Ms. Durante had her own CPA firm, Patricia M. Durante, CPA, P.A., where she prepared tax returns, financial statements and SEC reporting for several small public companies. Ms. Durante currently devotes an average of approximately 20 hours per week to Health Express. EDWARD MEYER Mr. Meyer is a Certified Public Accountant. Since January, 2003, Mr. Meyer has been Controller of Dean Baldwin Painting, an aircraft strip and paint services company. From February, 2002 to November, 2002, Mr. Meyer was Controller of the South Florida Blood Bank. Between January, 2001 and February, 2002, he was self-employed as an accounting consultant. From December, 1999 to January, 2001, Mr. Meyer was Controller for U.S. Pool, a pool services company. His experience extends from a background in public accounting to more than 15 years as a controller with the private sector. Mr. Meyer provides advisory services in the areas of cash management, controlled growth, managing accounts receivables and payables and other areas which require management experience. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder require Health Express' officers and directors, and persons who beneficially own more than ten percent of a registered class of Health Express' equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish Health Express with copies. Based on its reviews of the copies of the Section 16(a) forms received by it, or written representations from certain reporting persons, Health Express believes that, during the last fiscal year, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with and filed timely. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth, for the fiscal year ended December 29, 2002 and December 30, 2001 and 2000 certain information regarding the compensation earned by Health Express' Chief Executive Officer and each of Health Express' most highly compensated executive officers whose aggregate annual salary and bonus for fiscal 2002 exceeds $100,000, (the "Named Executive Officers"), with respect to services rendered by such persons to Health Express and its subsidiaries. 23
SUMMARY COMPENSATION TABLE ---------------------------------------------------------------------------------------------------------------------------- ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------------- ------------------------------------------ NAME AND PRINCIPAL OTHER RESTRICTED STOCK UNDERLYING OTHER POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION ------------------- ------- ------------- -------- ------------- -------------- ------------ ------------ ---------------------------------------------------------------------------------------------------------------------------- Douglas Baker, 2002 $28,014 none none none none none CEO and 2001 $18,955 none none $105,000 none none President 2000 none none $ 19,129 none none none ---------------------------------------------------------------------------------------------------------------------------- Marco D'Alonzo, 2002 $28,335 none none none none none COO and 2001 $18,553 none none $ 30,000 none none Secretary 2000 none none $ 15,918 none none none ---------------------------------------------------------------------------------------------------------------------------- Bruno Sartori, 2002 $ 500 none none $ 50,425 none none CFO(1) 2001 $16,596 none none $ 90,000 none none 2000 none none $ 38,025 $ 55,250 150,000 none ---------------------------------------------------------------------------------------------------------------------------- David Maltrotti, 2000 none none $ 7,050 $ 12,500 none none Executive(2) 1999 none none $ 22,180 $ 12,000 200,000 none Vice-President ---------------------------------------------------------------------------------------------------------------------------- Russ Lo Bello(3) 2002 $20,000 none none none none none President
(1) Mr. Sartori's employment agreement expired on August 31, 2002. The exercise period for the balance of 142,366 unexercised options to purchase shares of Health Express' common stock was extended to expire on August 31, 2007, unless sooner exercised in accordance with their terms. (2) Mr. David Maltrotti's services with Health Express terminated effective June 30, 2000. The options to purchase 200,000 shares of Health Express common stock were canceled as of the date of termination. (3) Mr. Lo Bello was employed as President of a subsidiary from May 5, 2002 through August 23, 2002. OPTION GRANTS The following table contains information concerning the stock option grants to each of the Named Executive Officers for the fiscal years ended December 31, 2000 and December 31, 1999. No stock options were granted for the fiscal years ended December 30, 2001 or December 29, 2002. No stock appreciation rights were granted to these individuals during any year.
------------------------------------------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS % OF TOTAL NUMBER OPTIONS OF SECURITIES GRANTED UNDERLYING TO EMPLOYEES YEAR OF OPTIONS IN CALENDAR EXERCISE PRICE EXPIRATION NAME GRANT GRANTED YEAR ($/Sh)(1) DATE -------------------------- --------------- --------------- --------------- --------------- -------------- Douglas Baker 1999 2,000,000 47.62 $0.35 (2) Marco D'Alonzo 1999 2,000,000 47.62 $0.35 (2) Bruno Sartori 2000 150,000 65.22 $1.31 (3)
(1) The exercise price is to be paid in cash. (2) The options are exercisable in whole or in part at any time until the earlier to occur of (i) the exercise of all options;(ii) he is no longer employed by Health Express; and (iii) the expiration of ten years from the date of grant. 24 (3) The options, as originally issued, were exercisable in whole or in part at any time until the earlier to occur of (i) the exercise of all options: (ii) he is no longer employed by Health Express; and (iii) the expiration of the two years and three months from the date of the grant. The exercise period for the unexercised options was extended by the Board to expire on August 31, 2007, and the employment requirement waived. FISCAL YEAR-END OPTION VALUES The following table sets forth information regarding each exercise of stock options and the value realized and the number and values of unexercised options held by each of the Named Executive Officers as of December 29, 2002.
---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT 12/29/02 OPTIONS AT 12/29/02 ACQUIRED VALUE --------------------------------------- ------------------------------ NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------------ ----------------- -------------- ------------------ ------------------- --------------- --------------- Douglas Baker 160,000 $56,000 1,840,000 -0-(1) $1,380,000 -0- Marco D'Alonzo 283,200 $99,120 1,716,800 -0-(1) $1,287,600 -0- Bruno Sartori 7,634 none 142,366 -0-(2) -0- -0-
(1) Equal to the fair market value of securities underlying the option at the fiscal year end ($1.10) minus the exercise price ($ 0.35) payable for those securities. (2) No value is recognized on outstanding options exercisable at 12/31/00 because the value of the underlying securities $1.10 per share of common stock is greater than the exercise price for those securities ($1.31) As of December 29, 2002, Health Express has not entered into any Long-Term Incentive Plan Awards since inception. COMPENSATION OF DIRECTORS During the year 2001, Health Express issued 2,000 shares of its common stock to Edward Meyer as compensation for services as a director. Health Express did not issue any shares of common stock as compensation to any director in 2002. EMPLOYMENT AGREEMENTS On December 6, 2002, Health Express entered into employment agreements with Douglas Baker and Marco D'Alonzo for a one-year term expiring on December 5, 2003. Unless either party shall give to the other written notice of termination on or before October 31, 2003, the term of this Agreement shall, on December 6, 2003, be extended for a period of one year, commencing as of December 6, 2003 and expiring on December 5, 2004. The salaries for both officers will be equal to an annual amount of $125,000 and will be accrued if Health Express is unable to pay any or all of the salary. On August 31, 2002, the employment agreement for Bruno Sartori as Chief Financial Officer of Health Express expired and Mr. Sartori notified the Board of Directors that he would not seek to extend the agreement. On August 30, 2002, the Board approved an extension of the exercise period for the unexercised options granted to Mr. Sartori under his employment agreement for a five-year period ending August 31, 2007. On February 3, 2003, Health Express entered into an employment agreement with Raymond Nevin as its President, after a 90 day probationary period, for a period of five (5) years from the date of the agreement. The initial salary will be at an annual amount of $90,000 and will increase to an annual amount of $110,000 after the sale of three (3) Healthy Bites Grill Franchises. Mr. Nevin will also be granted cash and stock bonuses based on achieving certain milestones as spelled out in the employment agreement. 25 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
---------------------------------------------------------------------------------------------------------------------------------- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ---------------------------------------------------------------------------------------------------------------------------------- AMOUNT AND NATURE OF NAME AND BENEFICIAL PERCENTAGE OF TITLE OF CLASS ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS (4) ------------------------ ---------------------------------------- ----------------- -------------------- ---------------------------------------------------------------------------------------------------------------------------------- Common Douglas Baker 4,024,420(1) 38.8 % 5206 NW 28 St. Margate, Florida 33063 Common Marco D'Alonzo 3,616,393(1) 34.9 % 4892 N. Citation Drive, No. 106 Delray Beach, Florida 33445 Common Rider Insurance Company 3,666,667(2) 35.3 % 120 Mountain Avenue Springfield, New Jersey 07081 Common Cornell Capital Partners, Ltd. 625,000(3) 5.30% 101 Hudson Street-Suite 3606 Jersey City, NJ 07302
---------------------------------------------------------------------------------------------------------------------------------- SECURITY OWNERSHIP OF MANAGEMENT ---------------------------------------------------------------------------------------------------------------------------------- AMOUNT AND NATURE OF NAME AND BENEFICIAL PERCENTAGE OF TITLE OF CLASS ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS (4) ------------------------ ---------------------------------------- ----------------- -------------------- ---------------------------------------------------------------------------------------------------------------------------------- Common Douglas Baker 4,024,420(1) 38.8% 5206 NW 28 St. Margate, Florida 33063 Common Marco D'Alonzo 3,616,393(1) 34.9% 4892 N. Citation Drive, No. 106 Delray Beach, Florida 33445 Common Susan Greenfield 336,000 3.2% 19277 Natures View Court Boca Raton, Florida 33498 Common Edward Meyer 2,000 * 2809 Embassy Drive West Palm Beach, Florida 33701 Common Raymond Nevin 0 * 650 Canistel Lane Boca Raton, Florida 33486 Common Patricia Durante 10,000 * 6620 Marbletree Lane Lake Worth Florida 33467 ALL OFFICERS AND DIRECTORS AS A GROUP (6) PERSONS 7,988,813 77.0%
The following table sets forth information with respect of the beneficial ownership as of March 11, 2003 for any person who is known to Health Express to be the beneficial owner of more than 5% of Health Express' common stock. * Less than 1% (1) Mr. D'Alonzo and Mr. Baker have options to purchase 1,716,800 and 1,840,000 shares, respectively, of common stock at an exercise price of $0.35 per share. The options are exercisable for a period of ten years from June 15, 1999 and are included in the calculation of ownership in accordance with Rule 13(d) of the Securities Act. (2) Rider Insurance Company has warrants to purchase 2,000,000 shares of Health Express' common stock at an exercise price of $1.00. The warrants are exercisable for a period of ten years from May 2, 2001. (3) Consists of 625,000 shares of common stock underlying convertible debentures assuming a conversion price of 80% of $0.50. (4) Applicable percentage of ownership is based on 10,377,705 shares of common stock outstanding as of March 11, 2003 for each stockholder. Beneficial ownership is determined in accordance within the rules of the Commission and generally includes voting of investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of March 11, 2003 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such persons, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN The following table sets forth the securities that have been authorized under equity compensation plans as of December 29, 2002. 26
------------------------------------------------------------------------------------------------------------------------------ NUMBER NUMBER OF SECURITIES OF SECURITIES WEIGHTED- REMAINING AVAILABLE TO BE ISSUED AVERAGE FOR FUTURE ISSUANCE UPON EXERCISE EXERCISE PRICE UNDER EQUITY OF OUTSTANDING OF OUTSTANDING COMPENSATION PLANS OPTIONS, OPTIONS, (EXCLUDING SECURITIES WARRANTS AND WARRANTS AND REFLECTED RIGHTS RIGHTS IN COLUMN (a)) -------------------- ---------------- ------------------- (a) (b) (c) ------------------------------------------------------------------ -------------------- ---------------- ------------------- ------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders 0 -- 0 ------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders 6,082,166 $0.622 0 -------------------- ---------------- ------------------- ------------------------------------------------------------------------------------------------------------------------------ TOTAL 6,082,166 -- 0 ==================== =============== =================== ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------
27 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the past two (2) years, Health Express has not entered into a transaction with a value in excess of $60,000 with a director, officer or beneficial owner of 5% or more of Health Express' Common Stock, except as disclosed in the following paragraphs. During the fiscal year 2001 Mr. Baker and Mr. D'Alonzo received as additional compensation 140,000 and 40,000 shares of Health Express' common stock, respectively. Health Express also received $66,660 in short-term financing from three directors of Health Express, Mr. Baker, Mr. D'Alonzo, Ms. Greenfield, at various times during 2002. The notes payable bear interest at 5.5% per annum and are payable on June 30, 2003. On March 6, 2003, an additional $25,000 was received from, Susan Greenfield, one of the directors of Health Express. The note payable bears interest at 5.5% per annum and is payable on June 30, 2003. Health Express received $70,000 in financing from a related party, the Daniel Sartori trust, Bruno Sartori trustee on May 20, 2002. The note was payable on September 20, 2002 and included interest at 5.5% per annum. On November 8, 2002, $50,000 of the note payable, after repayment of $20,000 principal, was extended through March 31, 2003 at an interest rate of 7% per annum and the issuance of 5,000 shares of Health Express' restricted common stock to the note holder. The shares issued were valued at $1,750, and this amount was recorded as interest expense. On December 6, 2002, Health Express entered into employment agreements with Douglas Baker and Marco D'Alonzo for a one-year term expiring on December 5, 2003, renewable for a second year. Unless either party shall give to the other written notice of termination on or before October 31, 2003, the term of this Agreement shall, on December 6, 2003, be extended for a period of one year, commencing as of December 6, 2003 and expiring on December 5, 2004. The salaries for both officers will be equal to an annual amount of $125,000 and will be accrued if Health Express is unable to pay any or all of the salary. On February 3, 2003, Health Express hired Raymond Nevin to be the new president of Health Express and entered into a five-year employment agreement with him. His initial salary will be $90,000 per year and will increase to an amount of $110,000 after the sale of the first three franchises. On February 20, 2003, Health Express sold its first franchise to one of Health Express' directors, Susan Greenfield. The franchisee has identified a location and is currently finalizing a lease located in South Florida. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. The franchise fee paid was $30,000 with an additional $5000 advertising deposit. Mr. Bruno Sartori was employed as Health Express' Chief Financial Officer pursuant to an employment agreement entered into on May 30, 2000 that expired on August 31, 2002. He was compensated a total of 66,700 shares of Health Express' Common Stock for the year 2002, 126,000 shares of Health Express' Common Stock for the year 2001 and 35,000 shares of Health Express' Common Stock for the year 2000. The agreement also granted Mr. Sartori options to acquire 150,000 shares of Health Express' Common Stock at a purchase price of $1.31 per share of which 7,634 were exercised. The exercise period of the remaining 142,366 options was extended in August 2002 until August 31, 2007. Health Express did not give anything of value to, or receive anything of value from, any promoter during fiscal year 2002. 28 PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: See Index to Consolidated Financial Statements attached, which are filed as part of this report. REPORTS ON FORM 8-K Current Report on Form 8-K filed on October 9, 2002 pursuant to Item 5 (Other Events) reporting that on September 23, 2002, Health Express sold equipment and supplies that Health Express used at its restaurant in Fort Lauderdale Florida. It also reported that on August 23, 2002, Health Express terminated Russ Lo Bello as President of a subsidiary of Health Express and that on September 4, 2002, Bruno Sartori, Health Express' Chief Financial Officer, confirmed to the Board of Directors that as a result of the expiration of his employment agreement on August 31, 2002, he would no longer be Chief Financial Officer of Health Express effective September 1, 2002.
---------------------------------------------------------------------------------------------------------------------------------- EXHIBIT NO. ---------------------------------------------------------------------------------------------------------------------------------- 2.1 Articles of Incorporation, as amended Incorporated by reference to Exhibit 2 to Form 10-SB filed on October 6, 1999 3.1 By-laws Incorporated by reference to Exhibit 3(a) to Form 10-SB filed on October 6, 1999 3.2 Articles of Incorporation of Healthy Bites Grill of Incorporated by reference to Exhibit 3(b) to Form Boca, Inc. 10-QSB filed on August 13,2001 3.3 Articles of Incorporation for Health Express Incorporated by reference to Exhibit 3(b) to Form Franchise Company 10-QSB filed on August 13, 2001 4.1 Warrants for 38,000 shares issued to Francorp, Inc. Incorporated by reference to Exhibit 4 to Form 10 QSB filed on August 13, 2001 4.2 Warrants for 2,000,000 shares issued to Rider Incorporated by reference to Exhibit 4 to Form 10 Insurance Company OSB filed on August 13, 2001 10.1 Lease between Health Express USA, Inc. and Saul Strachman Incorporated by reference to Exhibit 10(a) to Form 10-SB filed on October 6, 1999 10.2 Lease betwen Healthy Bites Grill of Boca, Inc. Incorporated by reference to Exhibit 10 to Form 10-QSB filed on May 14, 2001 10.3 Employment agreement of Bruno Sartori Incorporated by reference to Exhibit 10 to Form 10-QSB on November 14, 2000 and incorporated herein by such reference. 10.4 Employment Agreement of Douglas Baker Incorporated by reference to Exhibit 10.4 to Form 10-KSB filed on March 26, 2003
29
---------------------------------------------------------------------------------------------------------------------------------- EXHIBIT NO. ---------------------------------------------------------------------------------------------------------------------------------- 10.5 Employment Agreement of Marco D'Alonzo Incorporated by reference to Exhibit 10.5 to Form 10-KSB filed on March 26, 2003 10.6 Employment Agreement of Raymond Neving Incorporated by reference to Exhibit 10.6 to Form 10-KSB filed on March 26, 2003 10.7 Franchise Development Agreement with Francorp, Inc. Incorporated by reference to Exhibit 10(c) to Form 10-QSB filed on August 13, 2001 10.9 Franchise Agrement between Health Express Incorporated by reference to Exhibit 10.9 to Form 10-KSB filed on March 26, 2003 10.10 Lease between Crown Diversified Industries and Incorporated by reference to Exhibit 10 to Form Health Express, Inc. dated May 2, 2002 10-QSB filed on May 15, 2002 10.11 Standard Asset Purchase Contract and Receipt Incorporated by reference to Exhibit 99.2 to Form 8-K filed on October 9, 2002 10.12 Fourth Addendum to Standard Asset Purchase Incorporated by reference to Exhibit 99.3 to Form 8-K filed on October 9, 2002 10.13 Addendum to Fourth Addendum to Standard Asset Incorporated by reference to Exhibit 99.4 to Form Purchase Contract and Receipt dated September 8-K filed on October 9, 2002 23, 2002 10.14 Agreement between Health Express, Inc. and Roll-A-Round Incorporated by reference to Exhibit 99.5 to Form Real Roast Beef, Inc. dated September 23, 2002 8-K filed on October 9, 2002 10.15 Lease Amendment and Assignment Agreement Incorporated by reference to Exhibit 99.5 to Form dated September 18, 2002 8-K filed on October 9, 2002 10.16 Addendum to Lease Amendment and Assignment Incorporated by reference to Exhibit 99.7 to Form Agreement dated September 23, 2002 8K filed on October 9, 2002 10.17 Escrow Agreement dated September 23, 2002 Incorporated by reference to Exhibit 99.8 to Form 8K filed on October 9, 2002 10.19 Equity Line of Credit Agreement dated March 13, Incorporatd by reference to Exhibit 10.19 to 2003 between Health Express and Cornell Capital Amendment No. 1 to Form 10-KSB filed on April Partners, LP 24, 2003 10.20 Registration Rights Agreement dated March 13, Incorporated by reference to Exhibit 10.20 to 2003 between Health Express and Cornell Capital Partners, Form 10-KSB filed on March 26, 2003 10.21 Escrow Agreement dated March 13, 2003 among Incorporated by reference to Exhibit 10.20 the Registrant, Cornell Capital Partners, LP, Butler to Form 10-KSB filed on March 26, 2003 10.22 Securities Purchase Agreement dated January 17, Incorporated by reference to Exhibit 10.20 to Form 2003 among Health Express and the Buyers Form 10-KSB filed on March 26, 2003
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---------------------------------------------------------------------------------------------------------------------------------- EXHIBIT NO. ---------------------------------------------------------------------------------------------------------------------------------- 10.23 Escrow Agreement dated January 17, 2003 among Incorporated by reference to Exhibit 10.20 to Health Express, the Buyers and Butler Gonzolaz, LP to Form 10-KSB filed on March 26, 2003 10.24 Debenture Agreement dated January 17, 2003 Incorporated by reference to Exhibit 10.20 between Health Express and Cornell to Form 10-KSB filed on March 26, 2003 Capital Partners LP 10.25 Investors Registration Rights Agreement dated Incorporated by reference to Exhibit 10.20 March 13, 2003 between Health Express and the Investors to Form 10-KSB filed on March 26, 2003 10.26 Placement Agent Agreement dated March 13, 2003 among Incorporated by reference to Exhibit 10.20 Health Express NT Capital Equities, Ltd. and Cornell to Form 10-KSB filed on March 26, 2003 Partners LP 99.1 Certification by Chief Executive Officer and Chief Provide herewith Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification by Chief Executive Officer pursuant Provided herewith to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 99.3 Certification by Chief Financial Officer pursuant Provided herwith to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
ITEM 14. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Within 90 days prior to the date of this Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports that are filed with the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last valuation. (b) CHANGES IN INTERNAL CONTROLS: There were no significant changes in Health Express' internal controls or in other factors that could significantly affect these controls during the quarter covered by this report or from the end of the reporting period to the date of this Form 10-KSB. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Health Express has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. June 20, 2003 HEALTH EXPRESS USA, INC. HEALTH EXPRESS USA, INC. June 20, 2003 By: /s/ Douglas Baker ------------------------------------ Douglas Baker, Chief Executive Officer and Director By: /s/ Patricia Durante ------------------------------------ Patricia Durante, Chief Financial Officer Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been duly signed by the following persons on behalf of Health Express and in the capacities and on the dates indicated /s/ MARCO D' ALONZO --------------------------------------- June 20, 2003 Chief Operating Officer Secretary and Director /s/ RAYMOND NEVIN --------------------------------------- June 20, 2003 President /s/ EDWARD MEYER --------------------------------------- June 20, 2003 Director /s/ SUSAN GREENFIELD --------------------------------------- June 20, 2003 Director 32 HEALTH EXPRESS, INC. CONSOLIDATED FINANCIAL STATEMENTS Page(s) ------ Independent Auditor's Report F-2 Consolidated Balance Sheets as of December 29, 2002 and F-3 December 30, 2001 (Audited) Consolidated Statements of Operations for the Years Ended December 29, 2002 and December 30, 2001 (Audited) F-4 Consolidated Statements of Cash Flows for the Years Ended December 29, 2002 and December 30, 2001 (Audited) F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 29, 2002 and December 30, 2001 (Audited) F-6 Notes to Consolidated Financial Statements F-7-F-16 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Health Express USA, Inc. We have audited the accompanying consolidated balance sheets of Health Express USA, Inc. and its subsidiaries (collectively, the "Company") as of December 29, 2002 and December 30, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health Express USA, Inc. and its subsidiaries as of December 29, 2002 and December 30, 2001 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered cumulative losses from operations since inception. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1 to the financial statements, the Company has restated its 2002 financial statements to correct a mistake in the application of an accounting principle related to the accounting and disclosure for a discontinued operation pursuant to SFAS No. 144. /s/ Ahearn, Jasco + Company, P.A. AHEARN, JASCO + COMPANY, P.A. Certified Public Accountants Pompano Beach, Florida May 16, 2003 F-2 PART II Item 7: Financial Statements HEALTH EXPRESS USA, INC. CONSOLIDATED BALANCE SHEETS December 29, 2002 and December 30, 2001 Restated
ASSETS December 29, December 30, 2002 2001 ---------------- ------------------ CURRENT ASSETS Cash and cash equivalents $ 7,564 $ 211,169 Inventory 18,907 - Prepaid expenses and other 6,188 18,221 Assets of discontinued operations - 9,679 ---------------- ------------------ TOTAL CURRENT ASSETS 32,659 239,069 PROPERTY AND EQUIPMENT, net 567,323 110,172 DEPOSITS 62,478 62,510 OTHER ASSETS OF DISCONTINUED OPERATIONS - 221,563 ---------------- ------------------ TOTAL $ 662,460 $ 633,314 ================ ================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 111,906 $ 6,547 Accrued liabilities 72,655 50,651 Notes payable - related parties 116,660 - Liabilities of discontinued operations 3,587 19,635 ---------------- ------------------ TOTAL CURRENT LIABILITIES 304,808 76,833 ---------------- ------------------ OTHER LIABILITIES OF DISCONTINUED OPERATIONS - 5,694 ---------------- ------------------ STOCKHOLDERS ' EQUITY Preferred stock, $0.01 par value;10,000,000 shares authorized zero shares issued and outstanding Common stock, $0.001 par value; 50,000,000 shares authorized 10,368,181 and 8,550,123 issued and outstanding at December 29, 2002 and December 30, 2001 respectively 10,368 8,550 Additional paid-in capital 8,221,968 7,347,867 Accumulated deficit (7,874,684) (6,805,630) ---------------- ------------------ TOTAL STOCKHOLDERS' EQUITY 357,652 550,787 ---------------- ------------------ TOTAL $ 662,460 $ 633,314 ================ ==================
See notes to consolidated financial statements F-3 HEALTH EXPRESS USA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 29, 2002 AND DECEMBER 30, 2001 Restated
Year Year Ended Ended December 29, 2002 December 30, 2001 ---------------------- --------------------- REVENUES, net $ 470,059 $ - COST OF COMPANY RESTAURANT SALES Food and paper 171,097 - Labor 196,976 - Occupancy 68,562 - Marketing 33,643 - Repairs 8,722 - Pre-opening expenses 98,136 105,156 Other direct costs 39,410 - --------------------- -------------------- Total Cost of Company Restaurant Sales 616,546 105,156 --------------------- -------------------- OTHER EXPENSES Compensation 182,996 476,355 Compensatory stock and options 138,597 269,875 Depreciation 65,026 625 General and administrative 305,183 259,486 --------------------- -------------------- TOTAL OTHER EXPENSES 691,802 1,006,341 --------------------- -------------------- TOTAL EXPENSES 1,308,348 1,111,497 --------------------- -------------------- LOSS FROM OPERATIONS (838,289) (1,111,497) OTHER NON-OPERATING INCOME (EXPENSE) Interest Income 495 8,474 Interest Expense (8,466) (6,051) --------------------- -------------------- TOTAL OTHER NON-OPERATING (EXPENSE), net (7,971) 2,423 LOSS BEFORE PROVISION FOR INCOME TAXES (846,260) (1,109,074) PROVISION FOR INCOME TAXES - - --------------------- -------------------- LOSS FROM CONTINUING OPERATIONS (846,260) (1,109,074) DISCONTINUED OPERATIONS Loss from operations of discontinued Fort Lauderdale restaurant, net of taxes (including loss on disposal of $30,970 and $0) (222,794) (266,702) --------------------- --------------------- LOSS ON DISCONTINUED OPERATIONS (222,794) (266,702) --------------------- -------------------- NET LOSS $ (1,069,054) $ (1,375,776) ===================== ==================== LOSS PER COMMON SHARE: From continuing operations, basic and diluted $ (0.09) $ (0.14) ===================== ===================== From discontinued operations, basic and diluted $ (0.02) $ (0.03) ===================== ==================== Net loss per common share, basic and diluted $ (0.11) $ (0.17) ===================== ==================== Weighted average common shares outstanding 9,576,062 7,883,566 ===================== ====================
See notes to consolidated financial statements F-4 HEALTH EXPRESS USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 29, 2002 AND DECEMBER 30, 2001 Restated
Year Year Ended Ended December 29, 2002 December 30, 2001 ----------------------- --------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,069,054) $ (1,375,776) Loss from discontinued operations 222,794 266,702 ----------------------- --------------------- Loss from continuing operations (846,260) (1,109,074) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities Depreciation 65,026 625 Common stock issued for compensation and interest 93,800 309,775 Charges for stock options and warrants 46,369 269,875 Changes in certain assets and liabilities Inventory, prepaid expenses and other assets (6,874) (18,221) Accounts payable and accrued liabilities 127,363 25,512 ----------------------- --------------------- Net cash used in continuing operations (520,576) (521,508) Net cash used in discontinued operations (121,638) (185,505) ----------------------- --------------------- NET CASH USED IN OPERATING ACTIVITIES (642,214) (707,013) ----------------------- --------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (518,607) (109,236) Changes in deposits 32 (57,649) ----------------------- --------------------- Net cash used in continuing operations (518,575) (166,885) Net cash provided by discontinued operations 120,000 - ----------------------- --------------------- NET CASH USED IN INVESTING ACTIVITIES (398,575) (166,885) ----------------------- --------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable - related parties 136,660 - Repayment of notes payable - related parties (20,000) - Net proceeds from issuance of common stock 735,750 1,082,870 ----------------------- --------------------- Net cash provided by continuing operations 852,410 1,082,870 Net cash used in discontinued operations (15,226) (6,973) ----------------------- --------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 837,184 1,075,897 ----------------------- --------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (203,606) 201,999 CASH AND CASH EQUIVALENTS, Beginning of the period 211,169 9,170 ----------------------- --------------------- CASH AND CASH EQUIVALENTS, End of the period $ 7,563 $ 211,169 ======================= ===================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 5,806 $ 6,051 ======================= ===================== Cash paid during the period for income taxes $ - $ - ======================= ===================== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the quarters ending March 31, 2002 and 2001, shareholders made capital contributions to the Company in the form of the Company's common stock with values of approximately $71,500 and $150,000, respectively. See notes to consolidated financial statements F-5 HEALTH EXPRESS USA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 29, 2002 AND DECEMBER 30, 2001
Common Stock ------------------------- Additional Shares at Par Paid-In Accumulated Issued Value Capital Deficit Total ---------- ----------- ----------- ------------ ----------- STOCKHOLDERS' EQUITY, January 1, 2001 6,467,722 $ 6,468 $ 5,687,429 $(5,429,854) $ 264,043 Shares contributed and cancelled (200,000) (200) 200 -- -- Issuance of 29,000 shares of restricted stock at $0.35 private offering 29,000 29 10,121 -- 10,150 Issuance of 1,666,667 shares of restricted stock at $0.60 private offering 1,666,667 1,667 998,333 -- 1,000,000 Issuance of 140,500 shares of restricted stock at $ 0.35 - exercise of warrants 140,500 140 49,035 -- 49,175 Issuance of 46,334 shares of restricted stock- exercise of options 46,334 46 23,499 -- 23,545 Issuance of 399,900 shares of restricted stock for compensation and prizes 399,900 400 309,375 -- 309,775 Additional paid in capital for stock options and warrants -- -- 269,875 -- 269,875 Net loss for the year ended December 30, 2001 -- -- -- (1,375,776) (1,375,776) ---------- ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY, December 30, 2001 8,550,123 8,550 7,347,867 (6,805,630) 550,787 Issuance of 1,008,000 shares of restricted stock at $0.25 private offering 1,008,000 1,008 250,992 -- 252,000 Issuance of 345,000 shares of restricted stock at $0.75 private offering 345,000 345 258,405 -- 258,750 Issuance of 642,858 shares of restricted stock at $0.35 private offering 642,858 643 224,357 -- 225,000 Shares contributed and cancelled (287,000) (287) 287 -- -- Issuance of 109,200 shares of restricted stock for compensation and interest 109,200 109 93,691 -- 93,800 Modification of terms of stock options -- -- 46,369 -- 46,369 Net loss for the year ended December 29, 2002 -- -- -- (1,069,054) (1,069,054) ---------- ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY, December 29, 2002 10,368,181 $ 10,368 $ 8,221,968 $(7,874,684) $ 357,652 ========== =========== =========== =========== ===========
See notes to consolidated financial statements F - 6 HEALTH EXPRESS USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 29, 2002 AND DECEMBER 30, 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Health Express USA, Inc. was incorporated in the State of Florida on July 2, 1998. Its wholly owned subsidiaries, organized in Florida, are Healthy Bites Grill, Inc., which was incorporated on January 26, 1999 and Healthy Bites Grill of Boca, Inc. and Health Express Franchise Company, which were incorporated on May 7, 2001. The consolidated financial statements are presented following the elimination of any inter-company balances and transactions. Health Express USA, Inc. and its subsidiaries are collectively referred to herein as the "Company" or "Health Express". The Company is primarily engaged in operating a gourmet, fast-food health and nutrition restaurant, which began operations in Fort Lauderdale, Florida on April 10, 2000 through its wholly owned subsidiary, Healthy Bites Grill, Inc. The Fort Lauderdale restaurant equipment and supplies were sold on September 23, 2002. The Fort Lauderdale restaurant is reported as discontinued operations on the financial statements. On June 24, 2002, the Company began operations at a second restaurant in Boca Raton, Florida through its wholly owned subsidiary, Healthy Bites Grill of Boca, Inc. The Company plans to expand through franchising. Franchise operations will be conducted through its wholly owned subsidiary, Health Express Franchise Company. The financial statements and notes are the representation of the Company's management, which is responsible for their integrity and objectivity. The accounting policies of the Company are in accordance with accounting principles generally accepted in the United States of America. GOING CONCERN CONSIDERATIONS The Company's financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $1,069,054 and $1,375,776 for the years ended December 29, 2002 and December 30, 2001, respectively, and has an accumulated deficit of $7,874,684 at December 29, 2002. The Company has incurred cumulative losses since inception, has funded operations through investor capital, and has yet to generate sufficient revenues from its operating activities to cover its expenses. Management recognizes that the Company must generate additional resources to enable it to continue operations. Management is planning to obtain additional capital principally through the sale of equity securities. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon the Company obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that the Company will be successful in these activities. Should any of these events not occur, the accompanying consolidated financial statements will be materially affected. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. REVENUE RECOGNITION Revenue from restaurant sales is recognized at the time of the transaction with the customer, and since all sales are for cash or by credit cards, there are no trade receivables. Revenues are shown net of customer discounts or allowances taken at the time of the sale. Once franchise activities begin, the Company will record revenues from franchise activities in accordance with applicable accounting standards for franchisors. F-7 INVENTORY Inventory, consisting of food, beverages and supplies, is carried at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory of paper products held in storage by a supplier is stated at cost on a specific identification basis. PROPERTY AND EQUIPMENT Property and equipment are recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to five years. Expenditures for routine maintenance and repairs are charged to expense as incurred. ADVERTISING The Company expenses advertising costs to operations in the year incurred. Advertising expense was $33,643 and $0 for the years ended December 29, 2002 and December 30, 2001, respectively. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, net operating loss carry forwards and tax credit carry forwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax rates when such changes occur. NET LOSS PER SHARE The Company follows the provisions of SFAS No. 128, "Earnings per Share," which requires companies with complex capital structures or common stock equivalents to present both basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the "if converted" method for convertible securities and the treasury stock method for options and warrants. STOCK BASED COMPENSATION The Company accounts for stock based compensation under the provisions of SFAS No. 123, "Accounting for Stock Based Compensation". For stock and options issued to employees, and for transactions with non-employees in which services were performed in exchange for the Company's common stock, the transactions are recorded on the basis of fair value of the services received or the fair value of the equity instruments issued, whichever was more readily measurable. CASH AND CASH EQUIVALENTS Cash and cash equivalents, if any, include all highly liquid debt instruments with an original maturity of three months or less at the date of purchase. The Company occasionally maintains cash balances in financial institutions in excess of federally insured limits. F-8 FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts payable and accrued liabilities are reported in the financial statements at cost, which approximates fair value due to the short-term maturity of those instruments. The fair values of the Company's debt and capital lease obligations are the same as the reported amounts because rates and terms approximate current market conditions. STATEMENT OF COMPREHENSIVE INCOME In accordance with SFAS No. 130, "Reporting Comprehensive Income", the Company is required to report its comprehensive income. Other comprehensive income refers to revenue, expenses, and gains and losses that under generally accepted accounting principles are included in comprehensive income (loss) but are excluded from net income (loss), as these amounts are recorded directly as an adjustment to stockholders' equity. A statement of comprehensive income (loss) is not presented since the Company has no items of other comprehensive income. Comprehensive income (loss) is the same as net income for the periods presented herein. SEGMENT REPORTING Under SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," the Company's operations are now defined as consisting of two operating segments, restaurant operations and franchising. During the quarter ended June 30, 2001, the Company began its franchising efforts, but has yet to generate any revenues from this activity. Franchising operations reported an operating loss for the year ended December 29, 2002 and the period from May 7, 2001 through December 30, 2001 of $7,758 and $143,400, respectively. The remainder of the Company's loss is attributable to its restaurant operations. The franchising segment has no depreciation or amortization, and the only asset is a minimal amount of cash. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of long-lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of and APB No. 30, Reporting the Results of Operations - Reporting the Effects of the Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and the interim periods within. The adoption of SFAS No. 144 did not have an immediate impact on the Company's financial statements; however, as described in Note 10 to the financial statements, the Company disposed of a component in September 2002 and has accounted for the disposal under the applicable provisions of SFAS No. 144. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities." Statement 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that currently are accounted for pursuant to the guidance that the Emerging Issues Task Force set forth in Issue No. 94-3. The scope of Statement 146 also includes (1) costs related to terminating a contract that is not a capital lease, (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract and (3) costs to consolidate facilities or relocate employees. Statement 146 is required to be effective for our exit or disposal activities initiated after December 29, 2002. The adoption of SFAS No. 146 is not expected to have a significant impact on the Company's financial position, results of operations or cash flows. RESTATEMENT The Company has restated its 2002 financial statements to correct a mistake in the application of an accounting principle related to the accounting and disclosure for a discontinued operation pursuant to SFAS No. 144. As a result of a comment letter issued by the Securities and Exchange Commission on May 2, 2003, the Company has restated its 2002 annual and third quarter interim financial statements to reflect the closure of the Fort Lauderdale restaurant in September 2002 as a F-9 discontinued operation. The SEC has determined that the discontinued operations provisions included in SFAS No. 144 must be applied to the closing of the Fort Lauderdale restaurant. The Company had previously accounted for the closure of the Fort Lauderdale restaurant as part of the process of relocating to the new Boca Raton facility, and therefore included its activities in continuing operations. The financial statement impact of the application of the restatement is to reclassify and consolidate a significant portion of the Company's operations, assets and liabilities beginning with the interim period ended September 29, 2002. The Company's net loss, the related per share amounts, and stockholders' equity will not change from what was previously reported. OTHER Certain 2001 amounts have been reclassified to conform to the presentation used for the 2002 financial statements. The Company's interim accounting periods end on the last Sunday of each calendar quarter, and the fiscal year ends on the last Sunday in December. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 29, 2002 and December 30, 2001:
2002 2001 --------------- --------------- Construction costs and leasehold improvements $ 486,521 $ 107,721 - restaurants Restaurant equipment 143,243 -- Office equipment 3,536 3,402 --------------- --------------- Total cost 633,300 111,123 Less: Accumulated Depreciation 65,977 951 --------------- --------------- Property and equipment, net $ 567,323 $ 110,172 =============== ===============
Depreciation expense (including amortization of leases) totaled $65,026 and $625 for the years ended December 29, 2002 and December 30, 2001, respectively. No depreciation expense was recorded in 2001 for construction costs incurred for the Boca Raton restaurant since it had not yet started operations. NOTE 3 - CAPITAL LEASE OBLIGATIONS The Company acquired certain restaurant equipment under the provisions of various long-term leases and has capitalized the minimum lease payments. The equipment was returned and the lease terminated after the sale of the Fort Lauderdale restaurant equipment and supplies on September 23, 2002. As of December 29, 2002 and December 30, 2001 the leased property has a recorded cost of $0 and $27,001, respectively. Depreciation expense in the amount of $6,575 and $9,000 was recorded in the period from December 31, 2001 through September 23, 2002 and for the year ended December 30, 2001, respectively. All of these amounts have been reclassified to discontinued operations. NOTE 4 - STOCKHOLDERS' EQUITY PREFERRED STOCK On June 10, 1999, the shareholders and directors voted to amend the Company's articles of incorporation to create a class of preferred stock comprised of 10,000,000 shares with a par value of $0.01. The preferred stock may be issued from time to time in one or more series and with such designations, rights, preferences, privileges, qualifications, limitations, and restrictions as shall be stated and expressed in a resolution of the Board of Directors providing for the creation and issuance of such preferred stock. No shares have been issued under this class of preferred stock. COMMON STOCK The Company was originally incorporated with 7,500 shares of $1 par value common stock. On July 24, 1998, the shareholders and directors voted to amend the Company's articles of incorporation to change the number of authorized shares to 15,000,000 with a par value of $0.001. There were no prior outstanding shares of common stock. On June 10, 1999, the articles of incorporation were further amended to increase the authorized shares from 15,000,000 to 50,000,000. F-10 ISSUANCE OF COMMON STOCK During the year ended December 30, 2001, the Company sold 1,882,501 shares of common stock thorough private offerings and the exercise of warrants and stock options that resulted in net proceeds of $1,082,870 and issued 399,900 shares of restricted stock for compensation and prizes. Management of the Company placed a value of $309,775 on the shares issued, and recorded a corresponding compensation charge, which was the fair value of the restricted shares at issuance. During the year ended December 30, 2001 Mr. Marco D'Alonzo, a director and officer, made a contribution to the Company of 200,000 shares of common stock. During the year ended December 29, 2002, the Company sold 1,995,858 shares of common stock thorough private offerings that resulted in net proceeds of $735,750. The Company issued 345,000 stock purchase warrants pursuant to an offering for sale to accredited investors under Regulation D of the Securities Act of up to 250 units at $6,000 per unit. The offering was terminated on July 17, 2002. Additionally, the Company issued 104,200 shares of restricted stock for compensation placing a value of $92,050 on the shares issued and recording a compensation charge for the same amount. The value was the fair value of the restricted shares at issuance. The Company issued 5,000 shares as consideration to a note holder for extending the note's maturity date. Management of the Company placed a value of $1,750 on the shares issued and recorded this amount as interest expense. The value was the fair value of the restricted shares at issuance. During 2002, there were 287,000 shares of common stock contributed and cancelled by the Company. INITIAL UNIT OFFERING WARRANTS The Company's initial private placement, dated August 1, 1998, represented the issuance of 200,000 units, with each unit consisting of one share of common stock at a price of $0.10 and warrants to purchase seven shares of common stock at $0.70 per share. Total common stock initially available to be issued through the exercise of these warrants was 1,400,000. On June 3, 1999, the Company split the warrants by reducing the exercise price of the outstanding warrants by one-half, to $0.35 per share, and increasing the number by a multiple of two. The expiration date for the exercise of the warrants was originally August 31,1999 and had been extended to June 30, 2001. Outstanding but unexercised warrants expired on June 30, 2001. OTHER WARRANTS On July 31, 2001 the Company issued warrants to Francorp, Inc. for the purchase of 38,000 shares of the Company's common stock at an exercise price of $2.00 per share resulting in a warrant charge of $40,000. These warrants were immediately exercisable and non-forfeitable upon issuance, and were valued following the applicable provisions of SFAS No. 123. The exercise period of the warrants expires on July 31, 2006. See Note 7, Commitments and Contingencies - Other Agreements. On May 2, 2001 the Company issued warrants to Rider Insurance Company for the purchase of 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share. The issuance was in conjunction with their purchase of common stock in the Company. The exercise period of the warrants expires on May 2, 2011. STOCK OPTIONS - EMPLOYEES During the year ended December 30, 2001, the Company issued 200,000 stock options that are exercisable for 200,000 shares of common stock at fair value exercise price of $2.00, which were immediately vested. In accordance with SFAS No. 123, the granting of these stock options resulted in compensation expense of $165,000. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: F-11 a risk free interest rate of 5.0%, zero dividend yield, volatility of 55% and a weighted average expected life of the options of three years. These options were forfeited in 2002 when the employee left the Company. Additionally, in 2001, the Company recorded a remaining option charge based on an established vesting schedule of $64,875. During the year ended December 29, 2002, the Company modified the expiration date of 142,366 stock options by extending the expiration date from August 31, 2002 to August 31, 2007. In accordance with SFAS No. 123, the modification of these stock options resulted in compensation expense of $46,368. The fair value impact for the modification of these options was estimated at the modification of grant using a Black-Scholes option pricing model with the following weighted average assumptions: a risk free interest rate of 3.0%, zero dividend yield, volatility of 98% and a weighted average expected life of the options of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company's employees stock options have characteristics different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. STOCK OPTION - SUMMARY The following table represents the Company's stock option activity for the years ended December 29, 2002 and December 30, 2001: OPTIONED SHARES WEIGHTED AVERAGE EXERCISE PRICE
WEIGHTED OPTIONED AVERAGE SHARES EXERCISE PRICE --------------- ------------------ Options outstanding at January 1, 2001 3,795,500 $ 0.39 Granted during 2001 200,000 $ 2.00 Exercised during 2001 (46,334) $ 0.51 --------------- ------------------ Options outstanding at December 30, 2001 3,949,166 $ 0.47 Forfeited during 2002 (250,000) $ (1.71) --------------- ------------------ Options outstanding at December 29, 2002 3,699,166 $ 0.39 =============== ==================
At December 29, 2002, all of the outstanding options are currently exercisable. Of this total, 142,366 options are exercisable at $1.31 each through August 31, 2007, and the balance at $0.35 each through June 14, 2009. NOTE 5 - INCOME TAXES A summary of the provision for income taxes for the period ended December 29, 2002 and December 30, 2001 is as follows:
2002 2001 ---------------- ------------------ Currently payable $ -- $ -- Deferred benefit 404,300 550,100 less: Valuation allowance (404,300) (550,100) ---------------- ------------------- Provision for income $ -- $ -- ================ ==================
F-12 The deferred benefit, prior to the reduction for the valuation allowance, differs from the amount computed using the federal tax rate primarily due to the effects of state taxes and permanent differences. Of the deferred benefit before the allowance, approximately $84,000 in 2002 and $93,000 in 2001 relates to discontinued operations; however, after the application of the valuation allowance, there is no tax benefit in either year attributable to discontinued operations. Net deferred tax assets at December 29, 2002 and December 30, 2001 are as follows:
2002 2001 --------------- -------------- Available net operating loss carryovers $ 1,027,100 $ 683,300 Stock option/compensation charges 1,893,900 1,866,600 Other deferred tax assets 69,400 36,200 Less: Valuation allowance (2,990,400) (2,586,100) --------------- -------------- Net deferred tax assets $ -- $ -- =============== ==============
The Company has used an estimated federal tax rate of 34% and a net effective state rate of 4% for all deferred tax computations. There are no significant deferred tax liabilities. The Company has recorded a valuation allowance in accordance with the provisions of SFAS No. 109 to reflect the estimated amount of deferred tax assets that may not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income using the periods in which temporary differences and/or carryforward losses become deductible. The Company has available tax net operating carryovers ("NOLs") as of December 29, 2002 of approximately $2.9 million. The NOLs will expire beginning in 2018. Certain provisions of the tax law may limit NOL carryforwards available for use in any given year in the event of a significant change in ownership interest. There have already been significant changes in stock ownership, however, management believes that an ownership change has not yet occurred which would cause the NOL carryover to be limited. NOTE 6 - LEASE COMMITMENTS The Company leases two properties; one in Deerfield Beach, Florida for administrative offices and one in Boca Raton, Florida for its restaurant operations with scheduled annual rental increases. The total rental payments are being amortized over the lives of the leases on a straight-line basis in accordance with SFAS No. 13. The Deerfield Beach office lease commenced on May 15, 2002 and is for a three year period terminating on May 31, 2005. The Boca Raton lease commenced on May 7, 2001 and is for a five-year period terminating on April 30, 2006. . Future annual minimum rental payments subsequent to December 29, 2002 are as follows: YEAR ENDING DECEMBER, -------------- 2003 $ 136,875 2004 150,125 2005 133,660 2006 40,633 --------------- Total $ 461,293 ================ F-13 Total rent expense for the years December 29, 2002 and December 30, 2001 was $ 142,171 and $ 9,969, respectively. The rent for the Fort Lauderdale restaurant has been included in discontinued operations. NOTE 7 - COMMITMENTS AND CONTINGENCIES = OTHER AGREEMENTS The Company has established vendor relationships with various food and supplies distributors. No contracts or commitments have been entered into and purchases are on terms or on a COD basis. There were no purchase commitments as of December 29, 2002. On July 10, 2001 the Company entered into an agreement with Francorp, Inc., a consulting firm specializing in the development and implementation of comprehensive franchise programs. The total fee for the agreement was $136,000, which was paid for in cash in the amount of $60,000 plus 37,400 shares of the Company's stock. The management of the Company placed a value on the stock of $37,400. On July 31, 2001 the Company also issued Francorp, Inc. warrants for 38,000 shares of the common stock at a purchase price of $2.00 per share. The warrants expire on July 31, 2006. LITIGATION, CLAIMS, AND ASSESSMENTS In the ordinary course of business, the Company is exposed to various claims, threats, and legal proceedings. In management's opinion, the outcome of any such matters will not have a material impact upon the Company's financial position and results of operations. GUARANTEE The Fort Lauderdale restaurant equipment and supplies were sold on September 23, 2002. The lease between the Company and the landlord, which expires on January 31, 2004, was assigned to the Buyer, but the Company remains as a guarantor until January 31, 2004. No claim has been made against the Company under the guarantee. NOTE 8 - NET LOSS PER COMMON SHARE For the periods ended December 29, 2002 and December 30, 2001, basic and diluted weighted average common shares include only common shares outstanding, as the inclusion of common share equivalents would be anti-dilutive. However, the common stock equivalents, if converted, would have increased common shares outstanding at December 29, 2002 and December 30, 2001 by approximately 6,082,166 shares and 5,987,166 shares, respectively. A reconciliation of the number of common shares shown as outstanding in the consolidated financial statements with the number of shares used in the computation of weighted average common shares outstanding is shown below:
2002 2001 ------------ ---------- Common shares outstanding at December 29th and December 30th 10,368,181 8,550,123 Effect of weighting (792,119) (666,557) ------------ ---------- Weighted average common shares outstanding 9,576,062 7,883,566 ============ ==========
F-14 NOTE 9 - RELATED PARTY TRANSACTIONS The Company received $70,000 in financing from a related party on May 20, 2002. The note was payable on September 20, 2002 and included interest at 5.5% per annum. On November 8, 2002, $50,000 of the note payable, after repayment of $20,000 principal, was extended through March 31, 2003 at an interest rate of 7% per annum and the issuance of 5,000 shares of the Company's restricted common stock to the note holder. The shares issued were valued at $1,750, and this amount was recorded as interest expense. The Company also received $66,660 in short-term financing from three directors of the Company at various times during 2002. The notes payable bear interest at 5.5% per annum and are payable on June 30, 2003. NOTE 10 - DISCONTINUED OPERATIONS During the third quarter of 2002, the Company committed to a plan to sell its interests in the Fort Lauderdale restaurant, and on September 23, 2002, we closed on the sale. In accordance with SFAS No. 144, we have classified the results of operations of the Fort Lauderdale restaurant in discontinued operations. The financial results of the Fort Lauderdale restaurant included in discontinued operations were as follows:
DECEMBER 29, DECEMBER 30, FOR THE FISCAL YEARS ENDED 2002 2001 ------------------------------------------------- ------------- -------------- Revenue $ 200,427 $ 398,886 Cost of Company Restaurant Sales (287,571) (542,957) Other Expenses (104,690) (122,631) --------------- -------------- Loss from Operations (191,834) (266,702) Interest Income 10 -- Loss on disposal of restaurant (30,970) -- --------------- -------------- Loss from discontinued operations, net of tax $ (222,794) $ (266,702) =============== ==============
The current and non-current assets and liabilities of the Fort Lauderdale restaurant as of December 29, 2002 and December 30, 2001, were as follows:
December 29, December 30, 2002 2001 -------------- ------------- Inventory $ -- $ 9,679 Total current assets of discontinued operations -- -- -- 9,679 -------------- ------------ Property and equipment, net -- 221,563 -------------- ------------ Total other assets of discontinued operations -- 221,563 -------------- ------------ Accounts payable 3,587 545 Accrued liabilities -- 9,558 Current portion of capital lease obligations -- 9,532 -------------- ------------ Total current liabilities of discontinued operations -- 19,635 -------------- ------------ Long-term portion of capital lease obligation -- 5,694 -------------- ------------ Total other liabilities of discontinued operations -- 5,694 -------------- ------------
There is no tax benefit in either year attributable to discontinued operations. F-15 NOTE 11 - SEGMENT INFORMATION The Company is organized into two reportable operating segments, restaurant operations and franchising. Restaurant operations previously included the operations of the Company's restaurant in Fort Lauderdale, Florida, which ceased its operations on September 23, 2002. The amounts below were revised to exclude amounts related to the discontinued operations. Franchise operations consists primarily of legal fees and costs associated with the preparation of the Uniform Franchise Offering Circular. See Note 1 - Organization.
RESTAURANT CONSOLIDATED OPERATIONS FRANCHISING TOTAL --------------- ---------------- ----------------- REVENUES Year ended December 29, 2002 $ 470,059 $ 0 $ 470,059 Year ended December 30, 2001 $ -- $ 0 $ 0 OPERATING LOSS FROM CONTINUING OPERATIONS Year ended December 29, 2002 $ 830,531 $ 7,758 $ 838,289 Year ended December 30, 2001 $ 968,097 $ 143,400 $ 1,111,497 SEGMENT ASSETS Year ended December 29, 2002 $ 662,356 $ 104 $ 662,460 Year ended December 30, 2001 $ 402,722 $ 0 $ 402,722 DEPRECIATION Year ended December 29, 2002 $ 65,026 $ 0 $ 65,026 Year ended December 30, 2001 $ 625 $ 0 $ 625
NOTE 12 - SUBSEQUENT EVENTS On January 17, 2003, Health Express sold $250,000 of convertible debentures to Cornell Capital Partners, L.P. Cornell Capital Partners was the purchaser of the convertible debentures. These debentures accrue interest at a rate of 5% per year and mature three years from the issuance date from the proceeds of the convertible debentures of January 23, 2003. The debentures are convertible at the Cornell Capital Partners' option any time up to maturity at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. At maturity, Health Express has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. In accordance with applicable accounting standards for such issuances, the Company will record a charge of $62,500 upon the issuance of the convertible debentures to account for the imbedded beneficial conversion feature. In addition, the Company will record other charges, as follows: $37,500 in professional fees, $20,000 in commissions, and $75,000 for the Equity Line of Credit commitment fee (see below). The amounts were withheld from the proceeds of the debenture at closing. Health Express has the right to redeem the debentures upon thirty days notice for 120% of the amount redeemed. Upon such redemption, Cornell Partners shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed by Health Express with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. On March 13, 2003, Health Express entered into an Equity Line of Credit Agreement with Cornell Capital Partners, L.P. This agreement also terminated an Equity Line of Credit Agreement dated January 16, 2003, with substantially identical terms except that the January agreement contained an impermissible condition relating to the requirement that an active bid exist for Health Express to make draws under the Equity Line of Credit. In addition, the warrant in the January agreement was terminated. The March 2003 agreement eliminated the impermissible condition. Under the March agreement, Health Express may issue and sell to Cornell Capital Partners common stock for a total purchase price of up to $5.0 million. Subject to certain conditions, Health Express will be entitled to commence drawing down on the Equity Line of Credit when the common stock to be issued under the Equity Line of Credit is registered with the Securities and Exchange Commission and the registration statement is declared effective and will continue for two years thereafter. The purchase price for the shares will be equal to 95% of, or a 5% discount to, the market price, which is defined as the lowest closing bid price of the common stock F-16 during the five trading days following the notice date. The amount of each advance is subject to an aggregate maximum advance amount of $100,000, with no advance occurring within seven trading days of a prior advance. In addition, in each advance notice Health Express shall establish a minimum acceptable price, whereby the amount requested in the advance notice shall automatically decrease by 20% for each day of the five succeeding trading days that the closing bid price is below the minimum acceptable price. Cornell Capital Partners is entitled to a one-time commitment fee of $90,000, of which $75,000 has been paid in cash from the proceeds of the convertible debentures of January 23, 2003, and the balance will be paid from the proceeds of the initial advance under the Equity Line of Credit. Cornell Capital Partners is entitled to retain a fee of 5% of each advance. In addition, Health Express entered into a placement agent agreement with TN Capital Equities, Ltd., a registered broker-dealer. Pursuant to the placement agent agreement, Health Express will pay a one-time placement agent fee of 9,524 shares of common stock equal to approximately $10,000 based on Health Express' stock price on January 23, 2003. On February 20, 2003, the Company sold its first franchise to one of the Company's directors, Susan Greenfield The franchisee has identified a location and is currently finalizing a lease located in South Florida. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. The franchise fee paid was $30,000 with an additional $5,000 advertising deposit. On March 6, 2003, the Company received an additional $25,000 from one of the directors of the Company. The note payable bears interest at 5.5% per annum and is payable on June 30, 2003. F-16