<PAGE>
As filed with the Securities and Exchange Commission on May 15, 1996
Registration No. 33-80049
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
AMENDMENT NO. 5
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICA'S COFFEE CUP, INC.
(Name of Small Business Issuer as specified in its charter)
________________
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COLORADO 5499 88-1078201
<S> <C> <C>
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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12528 KIRKHAM COURT, NOS. 6 & 7 ROBERT MARSIK
POWAY, CALIFORNIA 92064 12528 KIRKHAM COURT, NOS. 6&7
(619) 679-3290 POWAY, CALIFORNIA 92064
(Address, including zip code, and (619) 679-3290
telephone number, including (Address, including zip code, and
area code, of registrant's telephone number, including
principal executive offices) area code, of agent for service)
________________
Copies to:
Robert A. Forrester, Esq. Maurice J. Bates, L.L.C.
1215 Executive Drive West 8214 Westchester
Suite 102 Suite 500
Richardson, Texas 75081 Dallas, Texas 75225
Phone (214) 437-9898 Phone (214) 692-3566
Fax (214) 480-8406 Fax (214) 987-2091
________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and
list the Securities Act Registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [_]
________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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(Registration Statement cover page cont'd)
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE
(1) (1) (1)
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<S> <C> <C> <C> <C>
Units(2) 322,000 $10.00 $3,220,000 $1,110.34
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.40(2)(3) 1,610,000 (3) (3) (3)
- --------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants (2)(3) 1,610,000 (3) (3) (3)
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.40(4) 1,610,000 $3.00 $4,830,000 $1,665.62
- --------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants 28,000 $0.01 $100.00 $0.04
- --------------------------------------------------------------------------------------------------------------------------
Units Underlying the
Underwriter's Warrants 28,000 $12.00 $336,000 $115.86
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.40(5) 140,000 (5) (5) (5)
- --------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants(5) 140,000 (5) (5) (5)
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.40(6) 140.000 $3.00 $420,000 $144.83
- --------------------------------------------------------------------------------------------------------------------------
Units Underlying Bridge Loan
Warrants(7) 78,600 $6.50 $510,900 $176.17
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.40(8) 393,000 (8) (8) (8)
- ---------------------------------------------------------------------------------------------------------------------------
Warrants Underlying Bridge Loan
Warrants(8) 393,000 (8) (8) (8)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.40(9) 362,614 $3.00 $1,087,842 $388.52
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.40(10) 350,000 $0.75 $302,250 $107.95
- ---------------------------------------------------------------------------------------------------------------------------
Total $3,709.32
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) These figures include the 42,000 Units covered by the Underwriters'
Over-Allotment Option, as well as the 210,000 shares of Common Stock and
210,000 Redeemable Common Stock Purchase Warrants included therein.
(3) Included in the Units. No additional registration fee is required.
(4) Issuable upon exercise of Redeemable Common Stock Purchase Warrants.
Pursuant to Rule 416 there are also registered an indeterminate number of
shares of Common Stock which may be issued pursuant to the anti-dilution
provisions applicable to the Redeemable Common Stock Purchase Warrants,
the Underwriter's Warrants and the Redeemable Common Stock Purchase
Warrants issuable under the Underwriter's Warrants.
(5) Included in the Units Underlying the Underwriter's Warrants. No
additional registration fees are required.
(6) Issuable upon exercise of the Redeemable Common Stock Purchase Warrants
underlying the Underwriter's Warrants.
(7) Estimated solely for the purpose of calculating the registration fee.
(8) Included in the Bridge Loan Units. No additional registration fee is
required.
(9) Issuable upon exercise of the Redeemable Common Stock Purchase Warrants
underlying the Bridge Loan Unit Warrants.
(10) Issuable at election of Holders of Bridge Loan Warrants in the event that
the offering is not concluded.
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AMERICA'S COFFEE CUP, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
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Form SB-2 Item Number and Caption Location In Prospectus
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1. Front of Registration Statement and
Outside Front Cover of Prospectus.................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................................................................. Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information and Risk Factors................................................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................................................... Use of Proceeds
5. Determination of Offering Price...................................................... Risk Factors; Underwriting
6. Dilution............................................................................. Dilution
7. Selling Security Holders............................................................. *
8. Plan of Distribution................................................................. Outside Front Cover Page; Risk Factors;
Underwriting
9. Legal Proceedings.................................................................... Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons.................................................................. Business; Management
11. Security Ownership of Certain Beneficial
Owners and Management................................................................ Principal Shareholders
12. Description of Securities............................................................ Description of Securities
13. Interest of Named Experts and Counsel................................................ *
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................................................................... Underwriting
15. Organization Within Last Five Years.................................................. *
16. Description of Business.............................................................. Business
17. Management's Discussion and Analysis
or Plan of Operation................................................................. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
18. Description of Property.............................................................. Business-Facilities
19. Certain Relationships and Related
Transactions......................................................................... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters.................................................................. Risk Factors; Common Stock Price Range
21. Executive Compensation............................................................... Management-Executive Compensation
22. Financial Statements................................................................. Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure........................................................................... *
</TABLE>
_____________________________
(*) None or Not Applicable
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion, Dated May 15, 1996
AMERICA'S COFFEE CUP, INC.
280,000 Units
Each Unit consisting of Five Shares of Common Stock and
Five Redeemable Common Stock Purchase Warrants
_________________
America's Coffee Cup, Inc. (the "Company") is hereby offering 280,000
units (the "Units"), each Unit consisting of five shares (the "Shares") of
Common Stock, $0.40 par value per share (the "Common Stock"), and five
Redeemable Common Stock Purchase Warrants (the "Warrants"). The Units, the
Shares and the Warrants are sometimes referred to as the "Securities." The
Shares and Warrants included in the Units may not be separately traded until
_____, 1996, unless earlier separated upon three days' prior notice form La
Jolla Securities Corporation and First London Securities Corporation (the
"Representatives") to the Company at the discretion of the Representatives. Each
Warrant entitles the holder thereof to purchase one share of Common Stock (a
"Warrant Share") at an exercise price of $3.00 per share until _____, 2001
commencing immediately upon issuance. The Warrants are subject to redemption by
the Company at a price of $0.05 per Warrant at any time after six months from
the date of this Prospectus, on thirty days prior written notice provided that
the closing sale price per share for the Common Stock has equalled or exceed
$4.50 for ten consecutive trading days. See "Description of Securities" and
"Underwriting."
The Common Stock is traded on the Bulletin Board maintained by the
National Association of Securities Dealers, Inc. under the symbol "ACFF." On
April 29, 1996, the last reported sales price for the Common Stock was $1.50 per
share. The Company intends to apply for quotation of its securities on the
Nasdaq Small-Cap Market at such time as it believes it meets the listing
requirements.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTIONS
ENTITLED "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION"
CONCERNING THE COMPANY AND THIS OFFERING.
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSE UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY (2)
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Per Unit (3) ...................................... $ $ $
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Total ............................................. $ $ $
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(1) Does not include compensation in the form of a non-accountable expense
allowance equal to 3.0% of the gross proceeds of this offering. The Company
has also agreed to sell to the Representatives warrants (the "Underwriters'
Warrants") exercisable for four years commencing one year from the date
hereof to purchase 28,000 Units at 120% of the offering price per Unit. For
information concerning indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting estimated offering expenses of $148,500 payable by the
Company.
(3) The Company has granted to the Underwriters a 45-day option beginning on
the date of this Prospectus to purchase up to 52,500 additional Units at
the Price to Public less the Underwriting Discount solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, the Underwriting Discounts and Commissions and Proceeds to
the Company will be $____, $____ and $____ respectively. See
"Underwriting."
The Securities are being offered, subject to prior sale, when, as and
if delivered to and accepted by the Representatives, and subject to approval of
certain legal matters by counsel and other conditions. The Representatives
reserve the right to reject any order, in whole or in part. It is expected that
delivery of the certificates representing the Shares and Warrants will be made
against payment therefor at the offices of the La Jolla Securities Corporation
in Dallas, Texas on or about ______, 1996.
_________________
LA JOLLA SECURITIES FIRST LONDON SECURITIES
CORPORATION CORPORATION
THE DATE OF THIS PROSPECTUS IS _____, 1996.
<PAGE>
[ARTIST'S RENDERING OF SERVICE CONCESSION]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information in this Prospectus. This
summary should be read in conjunction with, and is qualified in its entirety by,
the more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised. The Securities involve a high degree of risk.
Investors should carefully consider the information set forth under the heading
"Risk Factors." All references to share and per share data have been adjusted to
reflect reverse stock splits in the Common Stock prior to this offering.
THE COMPANY
America's Coffee Cup, Inc. is engaged in the sale of gourmet coffee and
related products to retail customers through end cap sales concessions in
supermarkets in southern California. The Company, as of January 31, 1996, had
installed, and was maintaining and operating end-cap sales concessions at 66
supermarkets. During February 1996, eleven of these locations were closed for
the purpose of relocating ten, which is scheduled to be completed by the end of
May 1996. An end-cap sales concession is a semi-circle structure that is
constructed around the end of an aisle in a supermarket. These end-caps are
normally placed in the heaviest traffic areas in the supermarket. Each
concession offers approximately 35 varieties of fresh whole-bean and pre-bagged
whole-bean gourmet coffee, including flavored coffee, as well as related
products and accessories.
The Company has been conducting its operations from one supermarket chain
in Southern California, Ralph's Grocery Company ("Ralph's"), since 1988, and on
July 1, 1994, entered into an agreement with Ralph's for a four year term. In
1996 the Company entered into a new agreement with Ralph's that effectively
extends the term during which the Company is licensed until December 31, 1999.
The Company agreed to pay $100,000 for this new term. See "Use of Proceeds."
This new agreement can be cancelled by Ralph's only for cause and, if not
terminated pursuant to a material breach, Ralph's is obligated to repay a pro
rata portion of the $100,000 plus all of the $1,500 fees the Company pays upon
opening each concession. Ralph's will retain ownership of the inventory in the
event of termination. This agreement gives the Company the exclusive right to
operate its service concessions in Ralph's, but the Company is also allowed to
conduct its business outside of Ralph's. Although the Company has agreed to test
sites in supermarkets other than Ralph's, the loss of Ralph's as a distribution
outlet would have a material adverse effect on the Company's operations, whether
Ralph's terminated the agreement for cause or failed to extend the agreement
after December 31, 1999. See "Business - Distribution of Coffee."
There were approximately 268 Ralph's stores at September 30, 1995. Ralph's
has been expanding by building new locations in Southern California. Ralph's was
recently acquired by a private entity, which owns Alpha Beta stores, among other
supermarkets. Approximately 15 Alpha Beta stores will be remodeled and renamed
Ralph's during 1996. These remodeled stores will support end-cap concessions and
all of these concessions will be installed by the end of 1996. Management
believes that the Company will have approximately 80 concessions within Ralph's
by the end of 1996 and that none of the proceeds from this offering are
necessary for this expansion.
In August 1995, the Company terminated its relationship with its former
coffee supplier and began purchasing coffee from an unaffiliated entity pursuant
to a contract which is currently on a month-to-month basis, allowing for
termination by either party on 30 days' prior written notice. The Company's new
supply arrangement will result in an average savings of $1.45 per pound of
coffee. The Company purchased 299,538 pounds of coffee in 1995; thus, if the
foregoing benefits had been previously available to the Company, a price savings
of approximately $434,330 would have resulted. There can be no assurance that
the price of coffee will not vary widely in the future.
Subsequent to the termination of the supply agreement with its former
supplier, the Company entered into new agreements with the former supplier to
satisfy outstanding debt and accounts payable. The Company subsequently settled
litigation arising out of these agreements. See "Business - Supply of Coffee,"
"Litigation - Brothers Litigation."
The Company concentrates on the marketing and sales of its products
directly to the retail consumer at each location through its own employees. The
employees offer free samples of freshly-brewed coffee at the concessions during
peak traffic hours and the concessions are "self serve" when the Company's
employees are not present. All employees are required to complete a Company
training program which enables them to provide information on the various types
of coffee and to sell the coffees being offered.
The Company is currently negotiating with several additional supermarket
chains in Southern California to further expand its distribution base. One chain
has orally agreed to test sites in six stores, another to test sites in ten
stores and a third to test sites in six stores. The locations are in the process
of being identified and the concessions will be opened in the first half of
1996. The tests are scheduled to run over a six month period. Negotiations with
additional chains are ongoing. In addition, the Company has recently hired a
Marketing Director to identify and pursue opportunities with other supermarket
chains in Southern and Northern California, Arizona and Illinois and other
targeted regions in the nation.
3
<PAGE>
The Company plans to establish or acquire a roasting facility to further
enhance its operating margins and assure the quality of its coffee. To
accommodate further growth, the Company has established two delivery systems in
Southern California, with a third to be established in late 1996.
America's Coffee Cup, Inc. has been in operation since 1988. In January of
1996 the Company changed its domicile from Delaware to Colorado. The executive
offices of the Company are located at 12528 Kirkham Court, Nos. 6 & 7, Poway,
California, 92064. The telephone number at this address is (619) 679-3290.
CALIFORNIA RESIDENTS
California residents must meet the following suitability standards to purchase
Units in the offering: A liquid net worth of $250,000 (i.e. a net worth
exclusive of home, home furnishings, and automobile) and $65,000 annual gross
income or $500,000 liquid net worth.
4
<PAGE>
THE OFFERING
Securities offered..................... 280,000 Units, each Unit consisting of
five shares of Common Stock and five
Warrants. The Shares and Warrants may
not be separately transferable until
____, 1996, unless earlier separated
upon three days notice from the
Representatives to the Company at the
discretion of the Representatives. See
"Description of Securities" and
"Underwriting."
Description of Warrants.................Each Warrant entitles the holder to
purchase one share of Common Stock at an
exercise price of $3.00 per share. The
Warrants are exercisable until the fifth
anniversary of the date of this
Prospectus. The Warrants are redeemable
by the Company at $0.05 per Warrant
under certain conditions. See
"Description of Securities" and
"Underwriting."
Common Stock outstanding:
Before the offering................ 845,567 Shares (1)
After the offering................. 2,245,567 Shares (1)(2)
Warrants outstanding:
Before the offering................ None
After the offering................. 1,400,000 Warrants (3)
Bridge Loan Warrants............... Two (4)
Use of Proceeds..................... Pay debt, acquire or establish a coffee
roaster, enhance distribution systems,
purchase inventory and working capital.
See "Use of Proceeds."
Risk Factors........................ The Securities are speculative, involve
a high degree of risk and should not be
purchased by investors who cannot afford
the loss of their entire investment. See
"Risk Factors."
Proposed Bulletin Board Symbols
Units........................... ACFU
Common Stock.................... ACFF
Warrants........................ ACFW
_________
(1) Includes 43,524 shares issued in February 1996, upon conversion of $87,047
of principal and interest on debt. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
(2) Excludes shares issuable upon the exercise of options and warrants
outstanding on the date of this Prospectus or to be issued as follows: (i)
1,400,000 shares issuable upon the exercise of warrants in this offering;
(ii) up to 210,000 shares underlying the Underwriters' over-allotment
option; (iii) 140,000 shares underlying the Underwriters' Warrants; (iv)
approximately 500,000 shares reserved for issuance under the Company's Stock
Option Plan; (v) 393,000 shares underlying the units acquirable upon
exercise of the Bridge Loan Warrants; (vi) 393,000 shares underlying the
warrants included in those units underlying the Bridge Loan Warrants; and
(vii) 403,000 shares reserved for issuance in the event that the Bridge Loan
Promissory Notes are not repaid when due and the holders elect to take
Common Stock in exchange.
(3) Excludes warrants issuable upon the date of this Prospectus or to be issued
as follows: (i) up to 210,000 warrants underlying the Underwriters' over-
allotment option; and (ii) 140,000 warrants underlying the Underwriters'
Warrants.
(4) The two Warrants entitle the holders to purchase an aggregate of 78,600
units. The exercise price of each unit is $6.50, and the unit consists of
five shares of Common Stock and five warrants. The exercise price of the
warrants is $3.00 per share. The Bridge Loan Warrants expires five years
from the effective date of this Prospectus. See "Description of Securities -
Bridge Loan Warrants."
5
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________________________________________________________________________________
SUMMARY FINANCIAL INFORMATION
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YEAR ENDED DECEMBER 31,
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OPERATING DATA: 1994 1995
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Net Sales.................................... $3,278,938 $3,095,955
Operating Income (Loss)...................... 63,982 (737,778)
Net Income (Loss) Before Extraordinary Item.. 2,961 (865,635)
Extraordinary Item........................... - 248,697
Net Income (Loss)............................ 2,961 (616,938)
Net Income (Loss) Per Common Share
Before Extraordinary Item.................... 0.01 (2.11)
Extraordinary Item........................... - 0.61
Net Income (Loss) Per Common Share........... 0.01 (1.50)
Supplemental Earnings Per Share Data:
Net Income (Loss) per Common Share (1)....... $(0.01) $(0.71)
Weighted Average Shares Outstanding (1)...... 210,825 845,447
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(2)(3)
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Working Capital.......................... $(729,459) $ 543,541 (4)
Total Assets............................. 1,005,430 2,378,430
Total Liabilities........................ 1,524,573 420,279 (5)
Stockholders' Equity (Deficit)........... $(519,143) $1,855,404 (5)
</TABLE>
________
(1) The loss per common share data is presented on a per share basis as if the
retirement of certain convertible debt in August 1995 and February 1996 in
exchange for the issuance of Common Stock had occurred prior to 1995 and
such Common Stock had been outstanding throughout that year; thus, the
supplemental earnings per share data reflect the issuance of 589,848 and
43,524 shares during that year as if retirement of the debt had occurred
prior to that period. See "Financial Statements - Note K."
(2) As adjusted to give effect to the sale of 280,000 Units at an offering price
of $10.00 per Unit and the application of the net proceeds therefrom of
approximately $2,287,500. See "Use of Proceeds" and "Capitalization."
(3) Does not reflect an extraordinary gain anticipated to occur upon the payment
of the Brothers obligation.
(4) Does not reflect expenditure of $600,000 or $337,500 to be applied from the
proceeds of this offering for the establishment or acquisition of a coffee
roaster and the enhancement of distribution systems, respectively, because
such funds will not be expended immediately following the close of this
offering but rather expended over an extended period or expended
significantly following the close of this offering.
(5) Includes a reduction of $78,750 in principal amount of debt converted into
Common Stock in February 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
________________________________________________________________________________
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THE PROSPECTUS BEFORE PURCHASING THE SECURITIES.
AUDITOR OF FINANCIAL STATEMENTS HAS EXPRESSED ITS CONCERN AS TO WHETHER COMPANY
MAY CONTINUE AS A GOING CONCERN
The Company has had recurring losses from operations and has a net capital
deficiency, each of which raise substantial doubt about its ability to continue
as a going concern. Accordingly, the accountant's report and opinion on the
financial statements for the fiscal years ended December 31, 1995 and December
31, 1994 includes an explanatory paragraph which serves to inform the users of
these financial statements about these uncertainties. The auditors have not
reassessed the future viability of the Company since the date of their opinion
on these financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Financial Statements."
VIABILITY OF COMPANY ABSENT THIS OFFERING
Since the rendering by the auditors of their opinion on the financial
statements of the Company for the fiscal years ended December 31, 1995 and
December 31, 1994 expressing concern on the future viability of the Company,
management has taken a number of steps which they believe will assure the future
viability of the Company irrespective of the outcome of this offering; however,
there can be no assurance that these efforts will be successful. If not
successful, the Company probably will not be able to expand beyond its current
chain of distribution, but management believes it would be able to pay its
existing and recurring debts as they become due because of increased margins to
be derived from price savings in the cost of its coffee, including the 38
remaining monthly payments of $30,246 to be made to a former supplier of coffee.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business - Supply of Coffee" and "Financial Statements."
COMPANY MAY NOT BE ABLE TO MANAGE EXPANSION
The funds from this offering will permit the Company to (i) fully provide
for the establishment of three delivery systems within Southern California, (ii)
vertically integrate its operations into the roasting of gourmet coffee beans,
(iii) expand the number of its sales facilities within Southern California and
(iv) expand outside of Southern California. This, management believes, will
allow for significant growth relative to the past operating results of the
Company. This proposed expansion will subject the Company to greater overhead,
marketing and support costs, and to other risks associated with entry into new
markets. In order to manage this growth, the Company must improve and expand its
operational, financial and management information and executive systems, and
hire, train and manage new employees. If the Company is not able to manage this
growth effectively, its operating results will be significantly and adversely
impacted. See "Business - Expansion Within Ralph's" and "Use of Proceeds."
ADDITIONAL FINANCING BEYOND THIS OFFERING MAY BE REQUIRED FOR EXPANSION
The Company has exerted its best efforts to estimate its costs of
expansion; however, any expansion is problematical and extremely difficult to
accurately gauge in terms of costs. If the estimates of management are not
accurate and there are cost overruns, the proceeds from this offering may be
inadequate to sustain the proposed expansion. This will require the Company to
obtain additional sources of capital, for which it currently has no commitment,
and which it may not be able to acquire when needed, or, if acquirable, not on
terms favorable to the Company. Any additional financing which may be required
to provide for the expansion of the Company, to the extent it is obtained
through the issuance of equity, may further dilute the interests of investors in
this offering. See "Business - Other Expansion Plans" and "Use of Proceeds."
COMPANY HAS NO ROASTING EXPERIENCE
Management has no previous experience in the acquisition, start-up,
ownership or operation of a coffee roaster. A portion of the proceeds of this
offering has been allocated to either acquiring or establishing such an
operation. Although management believes that the Company will be able to locate
an acquisition candidate for these purposes or that it will be able to establish
a roasting operation, there can be no assurance that it will be successful in
these endeavors or that, if successful, such operations will be profitable. See
"Business - Other
7
<PAGE>
Expansion Plans," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Use of Proceeds."
SERVICE CONCESSION EXPANSION NOT ASSURED AND COMPANY MAY NOT BE ABLE TO MANAGE
THIS EXPANSION
The immediate expansion plans of the Company for the installation of
service concessions rest entirely upon its current sole channel of distribution.
Although the Company has been informed by its supermarket outlet that additional
service concessions are scheduled to be installed during 1996, and some
installations have been scheduled, the Company has no binding agreement in this
regard. There can be no assurance that this expansion will in fact occur, or if
it does occur, it will be profitable or that management is capable of managing
the expansion. See "Business - Expansion Within Ralph's - Other Expansion Plans"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBSTANTIAL PART OF NET PROCEEDS FROM THIS OFFERING WILL BE USED TO REDUCE
PREVIOUSLY INCURRED DEBT
Approximately 27% of the net proceeds to be derived from this offering are
allocated to the repayment of debt which was previously incurred in favor of the
sole source of gourmet coffee supply to the Company until August 25, 1995, and
approximately 13% are allocated to repay interim financing incurred by the
Company. The proceeds which will be used to repay this debt, therefore, will not
be available for the future development and expansion of the business of the
Company. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital Resources,"
"Business - Supply of Coffee -- Litigation" and "Description of Securities -
Bridge Loan Warrants".
PART OF NET PROCEEDS FROM THIS OFFERING NOT SPECIFICALLY ALLOCATED
Approximately 8% of the net proceeds which are to be derived from this
offering are allocated to working capital reserves, and their uses have not been
specifically identified by management. These proceeds will be applied as
business exigencies arise, none of which management may presently anticipate.
Decisions as to the application of these funds will be made without shareholder
input; thus, investors in this offering will be entrusting this portion of their
funds to management without any commitment as to their use. See "Use of
Proceeds."
RECENT WHOLESALE COFFEE PRICES HAVE FLUCTUATED WIDELY
The price of raw coffee and the transportation costs of delivering roasted
coffee to the service concessions of the Company significantly increased during
the final month of 1994 and the first six months of 1995, although these prices
began receding to previous levels during the second quarter of 1995 and have
steeply declined since that time. These price fluctuations significantly and
detrimentally impacted the revenues of the Company during the final month of
1994 and the first nine months of 1995. Although management believes these
fluctuations were an anomaly, there can be no assurance that such price
fluctuations will not reappear in the future, to the detriment of the operating
results of the Company. See "Business - Supply of Coffee" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
BUSINESS AND REVENUES OF COMPANY ARE SEASONAL IN NATURE
The Company's business is seasonal in nature and is subject to economic
fluctuations. As a result of this seasonality, the Company has historically
reported substantial operating losses during the second and third calendar
quarters of each year, while posting positive operating cash flows during the
first and final quarters of each year, the effect of which has been a
substantial reduction in the net losses incurred by the Company for the year as
a whole. The business is seasonal because coffee is a warm drink which is more
heavily consumed during the late fall, winter and early spring. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and "Business - Business of Company is Seasonal in Nature."
COMPANY SELLS ITS PRODUCTS SOLELY THROUGH ONE DISTRIBUTION OUTLET
The Company maintains its service concessions solely in Southern
California, and all in one supermarket chain. Although the Company has an
exclusive license agreement with this chain, the agreement may be terminated
without cause by the supermarket chain. If the Company were to lose its primary
sales outlet, it would have to replace it, and there is no assurance the Company
would be successful. Also, the immediate expansion plans of the Company within
the Southern California market rest entirely on this sole source of
distribution, although the Company is not contractually obligated to maintain
its operations solely within this chain of stores. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business -
Distribution of Coffee."
8
<PAGE>
INDUSTRY IN WHICH COMPANY COMPETES IS HIGHLY COMPETITIVE
The Company maintains the only full-serve gourmet bin coffee sales center
in each of its locations; however, at least three other competitors, including
its previous sole supplier, sell pre-bagged gourmet coffee to the supermarkets
in which the Company is located. Although the shelves provided its competitors
are generally several aisles away, their coffee products compete directly with
the Company. These entities are all better capitalized than the Company and
could, if they chose to do so, intensify this competition by, for instance,
charging lower prices for their products, although as of the date of this
Prospectus, they have not chosen to do so. The Company has no competition of
which it is aware in its particular niche in the coffee industry. Regarding the
coffee market in general and the gourmet coffee market in particular, the
Company is not a significant participant. Almost all of its competitors are
better capitalized and have greater financial resources available to them. The
Company will, therefore, continue to be at a competitive disadvantage vis-a-vis
its competitors. See "Business - Competition."
LACK OF DIVERSIFICATION INCREASES COMPANY'S EXPOSURE TO ECONOMIC DOWNTURNS IN
THE COFFEE INDUSTRY
The Company operates within one industry, that of full-service, retail,
gourmet coffee bean sales through supermarkets. The current plan of operation
calls for expansion within, but does not anticipate diversification beyond, this
industry. The plan of operation, therefore, subjects the Company to the economic
fluctuations within this industry and increases the risks associated with its
operations. If this industry experiences a downturn, the operating results of
the Company would be materially and adversely affected, which may impair the
ability of the Company to continue as a going concern. See "Business - Other
Expansion Plans" and "Use of Proceeds."
SUCCESS OF COMPANY DEPENDS ON KEY PERSONNEL
The success of the Company is dependent upon the efforts of Mr. Robert W.
Marsik, the loss of whose services would be difficult to replace, particularly
on a short-term basis. The Company has an employment agreement with Mr. Marsik,
but has not obtained key man life insurance on his life. See "Management."
COMPANY HAS NOT PAID AND DOES NOT ANTICIPATE PAYING DIVIDENDS
Since inception, the Company has not paid any cash dividends on the Common
Stock. Any declaration of dividends in the future will be at the discretion of
the Board of Directors and will depend upon, among other things, earnings, the
operating and financial condition of the Company, capital expenditure
requirements, and general business conditions. There are no restrictions
currently in effect which preclude the Company from paying dividends. It is the
current intention of the Company, however, to retain any earnings in the
foreseeable future to finance the growth and development of its business. See
"Description of Securities - Common Stock" and "Dividend Policy."
NO PROTECTION, OTHER THAN COMMON LAW, FOR INTANGIBLE ASSETS
The Company has limited protection for its intangible assets, such as
copyright, tradename or trademark protection, and has no plans to apply for
such. Thus, the Company is relying upon common law protection for these assets,
including the tradename "America's Coffee Cup." There is no assurance the
Company would be successful in any suit to protect its intangible assets. Any
loss of the exclusive right to the use of these assets would result in increased
competition to the Company and have a negative effect on cash flows and
revenues. See "Business - Proprietary Rights Protection."
REPRESENTATIVES ARE NOT EXPERIENCED IN PUBLIC OFFERINGS
The Representatives do not have substantial experience in public offerings.
La Jolla Securities Corporation has co-managed and completed four underwritings.
First London Securities Corporation has co-managed and completed one offering.
There can be no assurance that the Representatives' lack of experience will not
adversely affect the offering. See "Underwriting."
UNDERWRITERS ARE NOT OBLIGATED TO MAKE A MARKET IN THE SECURITIES
There is no assurance the Underwriters will participate as market makers
for the Common Stock. Although they are not currently obligated to do so, if the
Underwriters should choose to become market makers for the Units, the Warrants
and/or the Common Stock, the Underwriters would not be under any obligation to
continue. See "Underwriting."
9
<PAGE>
REDEMPTION OF WARRANTS WOULD DEPRIVE HOLDERS OF VALUE
Commencing six months from the date of this Prospectus, the Company may
redeem the Warrants for $0.05 per Warrant, at any time, provided that the
average closing inside bid price per share of the Common Stock has equaled or
exceeded $4.50 for ten consecutive trading days within thirty days of the date
on which notice of redemption is given. Notice of redemption of the Warrants
could force the holders thereof (i) to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous or difficult for the
holders to do so, (ii) to sell the Warrants at the then current market price
when they might otherwise wish to hold the Warrants, or (iii) to accept the
redemption price, which could be less than the market value of the Warrants at
the time of redemption. See "Description of Securities - Warrants."
REDUCTION OF WARRANT EXERCISE PRICE WOULD IMPAIR VALUE TO PRIOR EXERCISING
HOLDERS
The exercise price of the Warrants may be reduced at any time and from time
to time when it appears in the best interests of the Company to do so. Any such
reduction would impair the value to holders exercising their Warrants prior to
the effective date of the price reduction. See "Description of Securities -
Warrants."
INABILITY TO EXERCISE WARRANTS MAY RESULT IN LOSS OF ALL VALUE IN WARRANTS
The Company must have an effective registration statement on file with the
Commission before any Warrant may be exercised or redeemed. It is possible that
the Company may be unable to cause a registration statement covering the Common
Stock underlying the Warrants to be effective. It is also possible that the
Warrants could be acquired by persons residing in states where the Company is
unable to qualify the Common Stock underlying the Warrants for sale. In either
event the Warrants may expire unexercised, which would result in the holders
losing all of the value of the Warrants. See "Description of Securities -
Warrants."
PREFERRED STOCK AUTHORIZED MAY BE ISSUED AT DILUTIVE PRICE TO THWART TAKEOVER
The Articles of Incorporation of the Company authorize the issuance of a
maximum of 1,000,000 shares of preferred stock, $0.40 par value per share (the
"Preferred Stock"), without shareholder approval and subject to such terms and
conditions as the Board of Directors in its discretion determines on a blank
check basis. As of April 30, 1996, there were no shares of Preferred Stock
outstanding. A series of this stock could be issued in the future, for example,
to thwart a possible takeover and may, in any event, operate to the significant
disadvantage of the holders of the Common Stock by including convertibility
features which are lower than the market price for the Common Stock, which would
dilute the value of existing shareholdings including the Securities. See
"Description of Securities - Preferred Stock."
OWNERSHIP OF MANAGEMENT
Upon completion of the offering, Messrs. Robert W. Marsik and Mark S.
Pierce will own or control approximately 8.45% and 8.36%, respectively, of the
outstanding shares of Common Stock; therefore, even following the completion of
this offering, they will continue to be in a position to significantly influence
the election of directors and to otherwise control the Company due to the quorum
and voting requirements of the Company. See "Management" and "Principal
Shareholders."
IMMEDIATE AND SUBSTANTIAL DILUTION WILL BE SUFFERED BY INVESTORS IN THIS
OFFERING
Purchasers of Units will suffer an immediate, substantial dilution of
approximately 67% in the net tangible book value of their shares of Common
Stock since the purchase price of the Units substantially exceeds the current
tangible book value per share of Common Stock. See "Dilution."
DETERMINATION OF OFFERING AND EXERCISE PRICES OF UNITS AND WARRANTS WAS
ARBITRARY
The proposed offering and exercise prices of the Units and Warrants and the
number of shares and Warrants constituting the Units were determined in
negotiations between the Company and the Representatives of the Underwriters
based upon an assumed market price of approximately $2.00 per share of Common
Stock. The number of shares of Common Stock and Warrants constituting the Units
may change at the time the Registration Statement of which this Prospectus is a
part is ordered effective by the Securities and Exchange Commission based upon
the then current market price of the Common Stock, the Company's financial
condition and results of operations for the fiscal year ended December 31, 1995
and other pertinent factors at the time of the effective date. See "Underwriting
- - Price of Offering."
10
<PAGE>
DISCLOSURE RELATING TO PENNY STOCKS
The Securities may be subject to the "penny stock rules" adopted pursuant
to Section 15 (g) of the Securities Exchange Act of 1934. The "penny stock
rules" apply to companies whose common stock trades at less than $5.00 per share
or which have a tangible net worth of less than $5,000,000 ($2,000,000 if the
company has been operating for three or more years). Such rules require, among
other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stocks" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities in limited.
LACK OF PRESENT MARKET FOR SECURITIES
The Common Stock is currently quoted on the Bulletin Board, maintained by
the National Association of Securities Dealers, Inc. ("Nasdaq"), and there is
presently only a very limited market for the Common Stock. Historically the
spread between the bid and the asked prices of the Company's Common Stock has
been large reflecting the limited trading in the stock. The trading price for
the Common Stock has fluctuated widely in the recent past. See "Common Stock
Price Range."
VOLATILITY OF COMMON STOCK
The price range of the Company's Common Stock has varied significantly in
the past three years, ranging from a high bid of $16.00 per share in the fourth
quarter of 1993 to a low bid of $0.20 per share in the third quarter of 1995.
The Company cannot account for the fluctuations in price except that it believes
that because of the thin market, any sales significantly impact the price.
11
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering are anticipated to be $2,287,500, after
deducting the Underwriters' discount, non-accountable expense allowance and
estimated offering expenses ($2,649,900 if the over-allotment option is
exercised). No value has been assigned to the Warrants included in the Units.
The Company intends to use the net proceeds of this offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
APPLICATION OF NET PROCEEDS AMOUNT PERCENT OF PROCEEDS
----------- -------------------
<S> <C> <C>
Payment of Brothers Obligation (1) $612,450 26.8%
Payment of 12% Bridge Loan Notes (2) 302,000 13.2
Payment of License Fee to Ralph's 100,000 4.4
Establishment or acquisition of a coffee roaster (3) 600,000 26.2
Enhancement of distribution systems 337,500 14.8
Inventory 150,000 6.5
Working capital 185,550 8.1
---------- -----
Total $2,287,500 100.0%
========== =====
</TABLE>
__________
(1) These proceeds will be used to discharge debts of the Company in favor of
its former coffee supplier consisting of unpaid trade accounts, slotting
fees paid on behalf of the Company to Ralph's, and from the buy-out of a
supply contract. This amount will increase to $1,025,280 if not repaid by
June 7, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Business - Supply of Coffee -- Litigation."
(2) These proceeds will be used to discharge the Bridge Loan Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," and "Description of
Securities - Bridge Loan Warrants."
(3) It is unknown at the present time whether the Company will use these
proceeds to establish or acquire a roasting facility. The Company has not
identified any assets or business for acquisition. Thus, it is not possible
to describe the assets or business. No assets or businesses will be acquired
from affiliates of the Company. See "Risk Factors."
The foregoing represents the best estimates by the Company of its use of
net proceeds based upon present planning and business conditions. The proposed
application of proceeds is subject to change as market and financial conditions
change. The Company, therefore, has reserved the right to vary its use of
proceeds in response to events which may arise and have not been anticipated.
Pending use, it is anticipated that the proceeds to the Company resulting
from this offering will be primarily invested in short-term, investment grade
obligations or bank certificates of deposit. It is anticipated that the net
proceeds of this offering will satisfy the financial needs of the Company for 24
months following the date of this Prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Business - Other Expansion Plans."
12
<PAGE>
DILUTION
As of December 31, 1995, the net tangible book value of the Company was
($871,534), or ($1.09) per share of Common Stock. In February of 1996, $87,047
in principal amount of debt and interest was converted into 43,524 shares of
Common Stock. Assuming such conversion and payment had occurred on December 31,
1995, the net tangible book value of the Company would have been ($784,487) or
($0.93) per share of Common Stock. The net tangible book value of the Company is
the aggregate amount of its tangible assets less its total liabilities. The net
tangible book value per share represents the total tangible assets of the
Company, less total liabilities of the Company, divided by the number of shares
of Common Stock outstanding. After giving effect to the sale of 280,000 Units
(1,400,000 shares of Common Stock and 1,400,000 Warrants) at an offering price
per unit of $10.00, or $2.00 per share of Common Stock (no value assigned to the
Warrants), and the application of the estimated net proceeds therefrom, the pro
forma net tangible book value per share would increase from ($0.93) to $0.67.
This represents an immediate increase in net tangible book value of $1.60 per
share to current shareholders and an immediate dilution of $1.33 per share to
new investors, or 67%, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $2.00
Net tangible book value per share before this offering... ($0.93)
Increase per share attributable to new investors......... $1.60
-----
Adjusted net tangible book value per share after this offering $0.67
-----
Dilution per share to new investors......................... $1.33
=====
Percentage dilution 67%
===
</TABLE>
The following table sets forth as of December 31, 1995 (i) the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price per share paid by the current shareholders,
and (ii) the number of shares of Common Stock included in the Units to be
purchased from the Company and total consideration to be paid by new investors
(before deducting underwriting discounts and other estimated expenses) at the
offering price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
---------------------- ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current shareholders 845,567 (1) 37.7% $ 774,236 21.7% $0.92
New investors 1,400,000 62.3 2,800,000 78.3 $2.50
--------- ----- --------- -----
Total 2,245,577 100.0% $3,574,236 100.0%
========= ====== ========== ======
</TABLE>
(1) Includes 43,524 shares of Common Stock issued in February 1996 upon
conversion of $78,750 principal amount of debt and $8,297 of interest.
(2) The foregoing table excludes shares issuable upon the exercise of options
and warrants outstanding on the date of this Prospectus or to be issued as
follows: (i) 1,400,000 shares issuable upon the exercise of warrants in
this offering; (ii) up to 210,000 shares underlying the Underwriters' over-
allotment option; (iii) 140,000 shares underlying the Underwriters'
Warrants; (iv) approximately 500,000 shares reserved for issuance under the
Company's Stock Option Plan; (v) 393,000 shares underlying the units
acquirable upon exercise of the Bridge Loan Warrants; (vi) 393,000 shares
underlying the warrants included in those units underlying the Bridge Loan
Warrants; and (vii) 403,000 shares reserved for issuance in the event that
the Bridge Loan Promissory Notes are not repaid when due and the holders
elect to take Common Stock in exchange.
13
<PAGE>
CAPITALIZATION
The following table sets forth the audited capitalization of the Company as
of December 31, 1995, and as adjusted to give effect to the sale of the Units
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
<S> <C> <C>
Short-term debt:
Current portion notes payable and
capital lease obligations....................... $ 722,717 $ 5,021
Long-term debt:
Notes payable and capital lease obligations..... 480,160 401,410(1)
Shareholders' equity (deficit):
Preferred Stock, $0.40 par value,
1,000,000 shares authorized, no
shares issued and outstanding
Common Stock, $0.40 par value,
10,000,000 shares authorized, 802,043 (2)
shares issued and outstanding 2,245,567 (2)
shares to be outstanding, as
adjusted (3)................................. 320,816 898,226
Additional paid in capital ..................... 366,373 2,163,510
Accumulated deficit............................. (1,206,332) (1,206,332)
----------- ------------
Total shareholders' equity (deficit).......... (519,143) 1,855,404
----------- ------------
Total Capitalization.......................... $ 683,734 $ 2,261,835
=========== ============
</TABLE>
___________________
(1) Reflects conversion of $78,750 principal amount of debt in February
1996. See Note 2 hereunder.
(2) Excludes 43,524 shares of Common Stock issued in February 1996, upon
conversion of $87,047 of principal and interest. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity."
(3) Excludes shares issuable upon the exercise of options and warrants
outstanding upon the date of this Prospectus or to be issued as follows:
(i) 1,400,000 shares issuable upon the exercise of Warrants in this
offering; (ii) up to 210,000 shares underlying the Underwriters over-
allotment option; (iii) 140,000 shares underlying the Underwriters
Warrants; (iv) approximately 500,000 shares reserved for issuance under the
Companys Stock Option Plan; and (v) 393,000 shares underlying the units
acquirable upon exercise of the Bridge Loan Warrants; (vi) 393,000 shares
underlying the warrants included in those units underlying the Bridge Loan
Warrants; and (vii) 403,000 shares reserved for issuance in the event that
the Bridge Loan Promissory Notes are not repaid when due and the holders
elect to take Common Stock in exchange.
14
<PAGE>
COMMON STOCK PRICE RANGE
The Common Stock is currently quoted on the Bulletin Board maintained by
the National Association of Securities Dealers, Inc., under the symbol "ACFF."
The following table sets forth the range of high and low bid prices per share of
the Common Stock as reported by National Quotation Bureau, Inc. for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993: High Bid (1) Low Bid (1)
---------------------------- ------------ -----------
<S> <C> <C>
1st Quarter.................... $0.50 $0.40
2nd Quarter.................... 7.50 4.00
3rd Quarter.................... 13.75 5.00
4th Quarter.................... 16.00 16.00
YEAR ENDED DECEMBER 31, 1994:
-----------------------------
1st Quarter.................... $16.00 $16.00
2nd Quarter.................... 16.00 4.00
3rd Quarter.................... 13.00 4.00
4th Quarter.................... 8.00 1.00
YEAR ENDED DECEMBER 31, 1995:
-----------------------------
1st Quarter.................... $8.00 $4.00
2nd Quarter.................... 4.00 4.00
3rd Quarter.................... 1.25 0.20
4th Quarter.................... 1.00 0.28
</TABLE>
________
(1) The Company is unaware of the factors which resulted in the
significant fluctuations in the bid prices per share during the
periods being presented, although it is aware that there is a very
thin market for the Common Stock, that there are very few shares being
traded and that any sales significantly impact the market. See "Risk
Factors."
The above prices represent inter-dealer quotations without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On March 12, 1996 there were three broker-dealers publishing quotes for the
Common Stock. The high bid and low asked prices on that date were $1.00 and
$1.50, respectively. During 1993 and 1995, the Company effectuated a one for ten
(1:10) and a one for four (1:4) reverse stock-split, respectively. The above
prices have been revised to reflect these splits. As of March 12, 1996, there
were 845,567 shares of Common Stock issued and outstanding which were held by
313 holders of record.
DIVIDEND POLICY
Since inception, the Company has not paid, and it has no current plans to
pay, cash dividends on the Common Stock. The Company currently intends to retain
all earnings to support the Company's operations and future growth. The payment
of any future dividends will be determined by the Board of Directors based upon
the Company's earnings, financial condition and cash requirements, possible
restrictions in future financing agreements, if any, business conditions and
such other factors deemed relevant. See "Risk Factors."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations
should be read in conjunction with the Company's audited financial statements
and notes thereto appearing elsewhere in this Prospectus.
The Company has had recurring losses from operations since inception and
has a net capital deficiency, each of which raise substantial doubts about its
ability to continue as a going concern. Accordingly, the auditors' report and
opinion on the financial statements for the fiscal years ended December 31, 1995
and December 31, 1994 included in this Prospectus includes an explanatory
paragraph about these uncertainties. However, management has taken a number of
steps which it believes will assure the future of the Company irrespective of
the outcome of this offering. Management believes that operations of the Company
would provide sufficient liquidity for the Company to be able to service the
remaining 38 monthly payments of $30,246 payable to a former coffee supplier.
There can be no assurance that such efforts will be successful. See "Risk
Factors" and "Business."
The Company opened its first service concession in August of 1988, and, as
of January 31, 1996, had expanded to 66 locations, all of which are located in
Southern California in a single supermarket chain, Ralph's. During February
1996, the Company agreed with Ralph's to close concessions at eleven locations
and relocate ten of the fixtures to stores with higher sales volume in
neighborhoods with higher per capital income. As of April 30 , 1996, four of
these locations had been installed and a schedule implemented to install the
remaining nine locations by the end of May 1996. The eleven closed locations
were operating, at best, at break even. Management believes that the ten new
locations have better prospects and will increase revenues on a per location
basis with a greater likelihood of profitability because of their favorable
locations. The following discussion should be read with the understanding that
the Company was a start-up entity with limited working capital. The Company has
historically shown substantial losses during the second and third calendar
quarters of each year, while posting positive operating cash flows during the
first and final quarters of the year, the effect of which has been a substantial
reduction in the net losses incurred by the Company in each year. See "Risk
Factors" and "Business - General" -- "Distribution of Coffee" -- "Facilities"
and "Business of Company is Seasonal in Nature."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995, AS COMPARED TO YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Revenues $3,278,938 $3,095,955
Cost of Sales 2,697,708 2,823,160
Operating Expenses 517,248 1,010,573
Income (Loss) from Operations 63,982 (737,778)
Other Income (Expenses) (60,221) (127,057)
Extraordinary Item - 248,697
Net Income $ 2,961 $ (616,938)
</TABLE>
Revenues for the year ended December 31, 1995, decreased by $182,983
(5.58%) to $3,095,955 from $3,278,938 during 1994, while the cost of these sales
increased by $125,452 (4.65%) to $2,823,160 from $2,697,708. The loss in
revenues and increase in costs were the results of price increases for raw
coffee which Brothers began charging the Company effective April 1, 1995. In
1995 the Company opened 16 new concessions. In 1994 the Company sold
approximately 330,000 pounds of coffee at an average price of $7.99 per pound
compared to approximately 300,000 pounds in 1995 at an average price of $9.32
per pound. These price increases were the direct result of significantly rising
prices in the green bean market which took place in the last month of 1994 and
the first six months of 1995. By the third quarter of 1995, green bean prices
had fallen back to 1994 levels, and have steeply declined since that time, but
the impact of these price decreases was not felt by the Company until the final
quarter of 1995. Fourth quarter 1995 sales exceeded the comparable period of
1994, as sales began to rebound due to the decrease in price and cost. These
fluctuations in green bean prices are believed by management to have been an
anomaly, but there can be no assurance that these fluctuations will not occur
again in the future. See "Risk Factors."
16
<PAGE>
Costs of sales, as a percentage of sales, increased to 91.18% in 1995 from
82.27% in 1994. This increase was due entirely to the coffee price increases
discussed in the preceding paragraph, which also affected the sales of the
Company. These price increases were mitigated somewhat by increased operating
efficiencies implemented by management, as discussed below. The material
variations within the sales costs were (i) an increase of $103,215 (7.56%) in
the aggregate cost of coffee to $1,467,735 from $1,364,520, (ii) a decrease in
wages of $21,579 (3.31%) to $629,803 from $651,382, and (iii) an increase of
$79,825 (11.83%) in store rent to $754,427 from $674,602, which was directly due
to the additional concessions opened during 1995.
Operating expenses during 1995 increased $493,325 (169.25%) to $1,010,573
from $517,248 during 1994 principally due to a $475,764 (96.60%) increase to
$968,285 from $492,521 of general and administrative expenses, which were the
result of expenses incurred in the sale of debt securities by the Company which
were expensed in 1995 as well as expenses incured in connection with the
conversion of debt by Mr. Pierce, an officer of the Company. Of the increase,
$231,230 was deemed by the Company's Board of Directors to be a compensation
expense. See "Certain Relationships and Related Transactions." In July of 1995
an officer to the Company converted $117,970 in principal and interest to Common
Stock for $0.20 per share. Based upon the Board of Directors assessment of the
value of the Common Stock, the Company requires total consideration of $530,863
or $0.90 per share. Of this amount, $231,230 was accrued as compensation expense
related to the conversion. Previously, $44,387 of legal services had been
accrued in general and administrative expenses that were also allocated to the
total consideration. Other expenses include an additional financing cost of
$19,036 relating to this transaction.
The result of the above was a loss from operations of $619,808 due
principally to the increase in whole bean coffee prices, which negatively
affected sales and costs, and to a $79,825 increase in rent expenses due to new
concession openings and the compensation expense discussed above.
Interest expense of $85,052 during the 1995 fiscal year also increased, as
compared to $63,679 during 1994. This increase was due almost entirely to the
interest accruing on the notes (described below), $110,000 principal amount
which was converted into Common Stock in August 1995, and $78,750 principal
amount which was converted into Common Stock in February, 1996.
The net loss for the year, however, did not increase in direct proportion
to operating losses due to a one-time, non-recurring, extraordinary gain of
$248,617 posted by the Company as a result of its renegotiation and termination
of its supply contract with its former coffee roaster, Brothers. The net loss
for the year was $616,938 net of the extraordinary gain.
The Company generated positive cash flows from its operations for the 1995
fiscal year, primarily because of the cash flows generated during the fourth
quarter of 1995, even though it expended an additional $93,570 during 1995 in
expanding its inventory of coffee and $68,181 in the pursuit of its proposed
public offering. These operating cash flows of $3,302 compared to an operating
cash deficit of $56,604 during 1994. Cash was used outside of operations to
purchase property and equipment ($76,148) and pay slotting fees ($5,000). Cash
was further used to repay a portion of the debt to Brothers ($223,291), a
portion of which was funded through the receipt in 1995 of additional proceeds
from the sale of debt securities in 1994 ($105,000). The foregoing resulted in a
deficit in cash from financing activities of $118,291 which, when combined with
the cash flows generated by operations in 1995, resulted in a decrease in cash
of $196,137 from 1994.
YEAR ENDED DECEMBER 31, 1994, AS COMPARED TO YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994
---------- ----------
<S> <C> <C>
Revenues $3,086,733 $3,278,938
Cost of Sales 2,611,701 2,697,708
Operating Expenses 533,088 517,248
Income (Loss) from Operations (58,056) 63,982
Other Income (Expenses) (55,785) (60,221)
Net Income (Loss) (114,641) 2,961
</TABLE>
Revenues increased during 1994 by $192,205 (6.2%) to $3,278,938 from
$3,086,733 in 1993. This increase was due primarily to the opening of an
additional six service concessions and the resulting impact on sales, as well as
ongoing sales contributed from these locations. The maturing sales base of
locations existing at the end of 1993 also contributed to the increase. The cost
of sales increased $86,007 (3.29%) to $2,697,708 in 1994 from
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<PAGE>
$2,611,701 in 1993, which was largely the result of the increased volume of
coffee sold by the Company. As a percentage of sales, however, the cost of sales
decreased 2.34% in 1994, as compared to 1993, due to favorable fluctuations in
the price of coffee. Operating expenses decreased $15,840 (2.97%) to $517,248 in
1994 from $533,088 in 1993, and, more significantly, as a percentage of
revenues, decreased 1.5% to 15.77% from 17.27%. The decrease in these costs was
due to the ongoing implementation of operating efficiencies and strict
management cost controls and the streamlining of the administrative functions of
the Company. Other income and expenses were largely comprised of the interest
expenses incurred in the obligations of the Company to its former coffee
supplier. As a result of the above, the Company generated net income of $2,961
in 1994, as compared to a loss of $114,641 in 1993.
For the fiscal year ended December 31, 1994, the Company generated a
negative cash flow of $56,604, as compared to a positive cash flow of $112,923
during 1993, due to principally an increase in accounts receivable and inventory
and a decrease in accounts payable during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company, since inception, has principally relied upon two sources for
its working capital for operations and expansion, cash flow generated from
operations and the extension of credit by Brothers in the forms of trade account
repayment terms, the advancement of fixture and delivery costs and the
advancement of slotting fees to Ralph's on behalf of the Company. In early 1995,
the Company began a program to increase cash flow from operations, the most
significant result of which was the replacement of Brothers with other
suppliers. New suppliers provide coffee to the Company at an average cost
savings per pound of $1.45, a decrease of approximately 33%. The Company expects
further revenue enhancements and other cost savings and expense reductions to
come from additional employee training to improve sales efforts at the service
concessions, from the conversion of debt aggregating $117,970 in principal and
accrued interest to Common Stock in August of 1995, which resulted in an
approximate savings of $13,200 per year in interest, from the termination on
July 31, 1995, of a consulting agreement with Fidiparex, S.A., which resulted in
an approximate savings of $40,000 per year, from the conversion to Common Stock
in February of this year of debt evidenced by debentures aggregating $87,047 in
principal and accrued interest, which resulted in an approximate savings of
$7,830 per year in interest expense, and the establishment of new supply
contracts for coffee accessory products. The Company plans to further increase
revenues through the expansion of concession stands in Ralph's. These savings
will be offset by a $20,000 consulting fee payable to the Underwriters, a recent
consulting agreement with one of the holders of the Bridge Loan Notes for $4,000
per month, a $15,000 increase in the annual salary of Mr. Marsik and the
employment of Mr. Vandenberg at an annual salary of $67,200. See "Management -
Employment Agreements" and "Underwriting."
Prior to August 25, 1995, the Company was obligated to purchase its
supply of gourmet coffee exclusively from Brothers, the country's largest
wholesale and retail supplier of gourmet coffee. On that date, the Company
entered into an agreement (the "Supply Termination Agreement") with Brothers to
supersede all previous agreements between the parties. Under the terms of the
Supply Termination Agreement, the Company and Brothers terminated the obligation
of the Company to purchase its supply of coffee exclusively from Brothers and
agreed to the consolidation, satisfaction and structured repayment of certain
debt which had been accrued by the Company in favor of Brothers during the term
of their relationship, which dated back to 1989. On the date of execution, the
Company paid to Brothers the sum of $75,000 and paid another $50,000
approximately 30 days later. The Company further agreed to pay Brothers
approximately $740,000, as evidenced by two unsecured promissory notes. Pursuant
to the Supply Termination Agreement, the Company and Brothers mutually released
all claims, demands and liabilities between them, with the exception of those
obligations specifically set forth in the agreement, as well as those accounts
payable accrued after June 1, 1995. Included within the debt released was
$350,000 in slotting fees which Brothers had paid on behalf of the Company to
Ralph's. The debt remaining to be repaid arose principally from the start-up and
expansion of the Company and consisted of (i) unpaid trade accounts accrued to
April 1, 1993, and (ii) slotting fees paid by Brothers on behalf of the Company
to obtain space for the concessions of the Company in Ralph's. Additionally, the
Company acquired from Brothers under this agreement all concession fixtures and
equipment in those stores installed prior to the date of the agreement, valued
at approximately $200,000.
On November 22, 1995, the Company executed a promissory note in the
principal amount of $292,312.78, which evidenced accrued accounts payable due
Brothers after the execution and delivery of the Supply Termination Agreement.
The Company made its first payment under this note on December 15, 1995, but
Brothers initiated suit on this note after this date in the Circuit Court for
the 15th Judicial District in and for Palm Beach County, Florida. The Company
and Brothers settled the matter without the necessity of an answer to the
complaint by the Company on January 25, 1996, by agreeing to a joint stipulation
for the settlement of all obligations between Brothers and the Company,
including the obligations under the Supply Termination Agreement and the note
discussed immediately above, an aggregate of $1,025,280 in principal as of
January 25, 1996. Brothers agreed to reduce this amount to $717,696 if paid by
April 1, 1996, and if not paid by April 1, 1996, the $1,025,280 would be payable
in 40 equal monthly installments of $30,246 beginning April 1, 1996 and ending
July 1, 1999. Brothers subsequently extended the April 1, 1996 due date until
June 7, 1996. Pursuant to the settlement agreement, the Company paid Brothers
$15,000 on January 25, February 17, and March 13, 1996, and $30,246 on April 1,
and May 1, 1996, which amounts were credited against the $717,696 due Brothers.
In consideration for the extension until June 7, 1996, the Company agreed to pay
interest at 10% per annum from April 1, 1996 on the balance then due, which
interest was paid with the $30,246 payment on May 1, 1996. See "Use of Proceeds"
and "Business - Litigation."
Beginning in January of 1996, the Company sold, directly and through an
unaffiliated intermediary, $262,000 of promissory notes (the "Bridge Loan
Notes") to two unaffiliated third parties. The Bridge Loan Notes bear interest
at the rate of 12% per annum and are due to be paid at the earlier of the close
of this offering or July 30, 1996. The Bridge Loan Notes are secured by a second
position in all tangible and intangible property which the Company now owns and
may subsequently acquire. The first three months of interest on these notes was
paid in advance at each closing, as were the due diligence and/or placement
fees, the result of which was a net of $235,800 in loan proceeds to the Company.
See "Description of Securities - Bridge Loan Warrants."
In conjunction with the Bridge Loan Notes, the Company issued to the
purchasers warrants (the "Bridge Loan Warrants") which allow the holders thereof
to acquire during a period ending five years from the commencement of this
offering up to 78,600 units, each unit consisting of four shares of Common Stock
and four warrants at a price of $6.50 per unit. When recorded in the financial
statements, the units are anticipated to be recorded at $786,000 and the
difference between these $786,000 and the proceeds of $510,900 will be recorded
as a finance expense. The shares of Common Stock and warrants underlying these
units have been included in this offering for sale by the holders of the Bridge
Loan Warrants. The agreements which led to the issuance of the Bridge Loan
Warrants have customary anti-dilution protections against such matters as
reverse stock splits, reclassifications and reorganizations. See "Underwriting -
Plan of Distribution for Bridge Loan Securities."
In addition, in May of 1996, the Company sold an additional note. The then
principal amount of $40,000 with $800 of said loan being paid in advance as
interest (the "May Note"). In addition, an affiliate of the holder of the May
Note became a consultant to the Company for $4,000 per month.
If this offering is not closed by July 30, 1996, the Company will (i) repay
the Bridge Loan Notes and May Note in full and (ii) at the option of the
holders thereof, issue a second warrant, in lieu of and on substantially similar
terms as the Bridge Loan Warrants, to purchase up to 135,000 shares of Common
Stock which are included in the Registration Statement at a price per share
which will equal 65% of the average bid price for these shares for the 20
trading days preceding the maturity date. If the Bridge Loan Notes are not
repaid from the proceeds of this offering, the holders thereof at their option
may either (i) call the Bridge Loan Notes and May Note and proceed against the
collateral or (ii) surrender the Bridge Loan Notes and May Note to the Company
in exchange for 403,000 shares of Common Stock which are also included in the
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<PAGE>
Registration Statement of which this Prospectus is a part. See "Risk Factors,"
"Use of Proceeds" and "Description of Securities - Bridge Loan Warrants ."
The Company raised approximately $233,750 in working capital during the
final month of 1994 from (i) a group of European investors who purchased two
year, unsecured, 9% interest bearing promissory notes in the principal amount of
$123,750 which are presently convertible into shares of Common Stock at a price
per share of $9.00 and (ii) parties then affiliated with a director who
purchased one year, unsecured, 11.5% interest bearing promissory notes in the
principal amount of $110,000 which were converted on August 17, 1995, into
589,848 "restricted" shares of Common Stock. In February of 1996, two European
investors converted $78,750 and $8,296.77, principal and interest, respectively,
for a total amount of $87,047 into 43,524 shares of Common Stock at $2.00 per
share. See "Management," "Certain Relationships and Related Transactions" and
"Description of Securities - Debt Securities."
Management expects that operations and the proceeds of this offering will
be sufficient to provide operating capital and capital for expansion. The lower
cost of coffee derived from new supply sources is anticipated to improve
operating cash flow as well as to pay any remaining indebtedness following the
close of this offering. See "Capitalization." The acquisition of a coffee
roaster, anticipated to cost approximately $600,000 and enhancement of the
distribution system, estimated to cost approximately $337,500 will be funded
from the proceeds of this offering. See "Use of Proceeds." Additional coffee
concessions are self funding. See "Business - Expansion Within Ralph's."
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<PAGE>
BUSINESS
GENERAL
The Company is engaged in the sale of gourmet coffee, related products
and accessories through service concessions which are located in a chain of
grocery stores in Southern California. These concessions are located at the end
of an aisle that is near the entrance of each store, which allows maximum
exposure to customer traffic. Each concession occupies approximately 24 square
feet and is approximately six feet long, four feet deep and six and one-half
feet high. The existing concessions have, depending upon customer traffic in the
location, from 16 to 36 plastic bins displaying whole bean coffee which a
customer may bag himself. Located among the bins are one or two coffee grinders
which allow customers to grind the whole-bean coffee prior to bagging. The
Company also offers pre-bagged whole-bean coffee on shelves underneath the bins.
The selection between bin and pre-bagged coffee overlaps somewhat, but the
customer is offered a minimum selection of 35 varieties of coffee at each
concession. Next to the bins, coffee related products and accessories such as
carafes, grinders and French press pots are displayed for sale. The Company
sells its coffee under its own brand name, "America's Coffee Cup." This trade
name carries no trademark or copyright protection. See "Risk Factors" and
"Business-Proprietary Rights Protection."
Each concession also has a coffee brewer. The Company brews and offers
free samples of coffee by the cup at each concession during peak hours; however,
the principal purpose of the brewer is to entice customers to stop at the
concession through the aroma of coffee and free samples. Customers are then
offered taste tests of a variety of gourmet coffees. This sampling not only
assists in the sale of coffee and related products and accessories, but also
allows the Company to test market new flavors of coffee and whole-bean varieties
directly to the public in order to determine whether offering them for sale will
be commercially viable and to determine which of its flavors and bean varieties
are losing their appeal. Management believes, as a result of this sampling, that
the Company has a higher dollar volume of sales per square foot than that of its
competitors.
CORPORATE PHILOSOPHY
The Company's first objective is to become the leading specialty
coffee company in the distribution of gourmet coffee, coffee related products
and accessories through select supermarkets located in high income
neighborhoods. The Company intends to achieve this objective through a corporate
philosophy designed to differentiate and reinforce its coffee and engender a
high degree of customer loyalty. The essential elements of this philosophy
include: (i) The Highest Qualify Coffee. The Company buys only the highest
quality arabica beans available from the world's coffee-producing regions and
engages a roasting process that maximizes each coffee's individual taste and
aroma. The Company believes that its coffee is of the highest quality coffee
sold. (ii) Customer Services. The Company is establishing regional distribution
centers which will enable the Company to continue to promptly supply fresh,
high-quality coffee to the service concessions for sale to customers. Critical
to this sales process and the long-term success of the Company is the personal
interaction which employees of the Company have with the customer. (iii)
Customer Education. The Company educates its retail customers about the origin
and preparation of its coffees through in-store brewing demonstrations and
coffee tasting during peak traffic hours at all of its service concessions. The
Company believes that this has developed and will continue to develop a loyal
customer base and brand recognition. (iv) Employee Development. Through a
variety of educational workshops, seminars and other programs, the Company
trains its employees to provide each customer with a level of service and
quality that fosters a long-term relationship. The Company believes that its
dedication to employee training attracts highly qualified and motivated
employees.
DISTRIBUTION OF COFFEE
The Company, as of January 31, 1996, owned and operated 66 service
concessions, all of which were located in one supermarket chain in Southern
California, Ralph's. During February, the Company agreed with Ralph's to close
concessions at eleven stores and move ten of these concessions to stores with
higher sales volume in neighborhoods with higher per capita income. As of April
30, 1996, four of these locations had been installed and a schedule implemented
to complete the move to the remaining nine stores by the end of May.
On July 1, 1994, the Company and Ralph's renegotiated their
relationship, which began in 1988, and entered into a license which allows the
Company to operate its service concessions with Ralph's. In 1996 the Company and
Ralph's again renegotiated their relationship, extending the term of their
agreement to December 31, 1999, subject to mutual consent of both parties to
extend this term for successive one-year periods. The agreement is exclusive as
to Ralph's, but not to the Company. Under the July 1, 1994, contract, the
Company paid a one-time licensing fee of $700,000 to procure the license and
under the most recent contract, the Company agreed to pay an additional
licensing fee of $100,000. See "Use of Proceeds." The Company is also required
to pay $1,500 to Ralph's at the completion of installation at each location as
an additional license fee, as well as rent for each location during each four
week period equal to 10% of gross sales during the period or $1,000, whichever
is greater. Sales are
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electronically tracked by the store at the register. (At March 12, 1996 there
were two service concessions which were incurring rent expense based upon gross
sales.) The Company bears the cost and expense of installing each concession,
and at the termination of the agreement is required to remove all concessions at
its own expense. The Company is also obligated to operate, maintain and staff
the concessions at its own expense. Ralph's provides all light, heat,
electricity and air conditioning, and oversees the selection of the coffee,
coffee related products and accessories which are sold at these concessions, as
well as all advertising at each concession. The Company and Ralph's mutually
agree upon and select which stores have the market demographics necessary to
support a concession. Pursuant to this agreement, all inventory is billed to
Ralph's when delivered to a store, and the invoice is paid within 15 days; thus,
the Company recognizes revenue at delivery and invoicing and Ralph's becomes the
owner of the inventory at that time. This agreement may be terminated for cause
by Ralph's on 30 days' prior, written notice for failure to (i) make payments
under the agreement, (ii) follow the rules and regulations established by
Ralph's from time to time, or (iii) observe the other terms of the agreement.
If terminated without cause, a pro rata portion of the $100,000 fee would be
returned to the Company, and the Company would be returned all the one time
fees of $1,500 per location paid by the Company. If terminated, Ralph's remains
the owner of the inventory. In the event of a material breach of the agreement,
Ralph's can terminate the agreement upon ten days written notice without charge
to Ralph's. See "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business - Expansion Within
Ralph's."
EXPANSION WITHIN RALPH'S
There were approximately 268 Ralph's stores at January 31, 1996.
Ralph's began an expansion program in Southern California during 1995.
Management of Ralph's and the Company previously estimated that approximately 15
of these new locations would support the concessions of the Company. During
1995, five of these locations were installed with coffee concessions. If the
current construction schedule of Ralph's remains in place, the Company estimates
that an additional ten concessions will be installed and in operation by the end
of 1996. As of April 30, 1996 four concessions had been installed.
Ralph's was acquired in 1995 by The Yucaipa companies ("Yucaipa")
through the merger of Ralph's with Food-4-Less, a wholly-owned subsidiary of
Yucaipa. Food-4-Less operated, as of September 30, 1995, 468 supermarkets in
Southern California, Northern California and the Midwest under the Alpha Beta,
Food-4-Less, Boys, Viva, Cala, Bell, FoodsCo and Falley's names. The combined
entities own and operate 385 supermarkets in Southern California, primarily
under the Ralph's and Food-4-Less names, 25 in Northern California and 38 in the
Midwest. During 1995 and 1996, 117 Alpha Beta stores have been or will be
remodeled and renamed as Ralph's stores. Ralph's management anticipates
concluding this construction by mid-1996. Management of Ralph's and the Company
believe that approximately 15 of these remodels will support the Company's
concessions. Management believes that all of these remodels will be installed by
the end of 1996.
The direct cost of installing a fixture averages approximately $3,500,
which includes the approximate average cost of purchasing and installing the
fixture ($2,700) and the approximate average cost of purchasing and installing
the equipment for the fixture, including the brewer and grinders ($800). The
Company is invoiced for these costs by the vendors on the first day of the month
following delivery to the store. In addition, when the installation of a
fixture is complete, the Company is required to pay Ralph's under their
exclusive license agreement $1,500 as a construction fee.
The Company purchases on average approximately 1,000 pounds of coffee
from its supplier for each new concession. The coffee is invoiced to Ralph's at
retail when it is received at the store in accordance with the terms of the
license agreement between the Company and Ralph's. Ralph's pays the invoice
within 15 days; thus, the full retail price of the inventory, approximately
$10,250, is received by the Company within 15 days of the opening of each
location. The wholesale price for the coffee, approximately $3,050, is billed
to the Company by the supplier on the first day of the month following delivery
to a warehouse of the Company, which is generally within five days of delivery
to the store. The invoice from the supplier is due 30 days after receipt by the
Company.
The Company receives approximately $10,250 within 15 days of the
opening of each concession from the purchase of coffee, and immediately pays
Ralph's $1,500 for the concession. The Company pays approximately $3,500 in
direct costs for the purchase and installation of the fixture and $3,050 in
inventory costs, each of which do not become due until 30 days after the
invoices arrive, which is after the Company is paid by Ralph's. This leaves the
Company approximately $2,200 from the opening of each location to provide
working capital.
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<PAGE>
Given the foregoing, and assuming construction and remodeling continue
as planned and that the identified locations are installed with service
concessions, the Company expects to have approximately 80 concessions in
operation within Ralph's by the end of 1996. Management does not believe that
any of the proceeds from this offering will be necessary to provide for the
expansion within Ralph's. See "Risk Factors," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Business - Distribution of
Coffee."
The immediate expansion plans of the Company for the installation of
service concessions are dependent upon the Company maintaining its current
channel of distribution. Although the Company has been informed by Ralph's that
additional service concessions are to be installed during 1996 and some
installations have been scheduled, there can be no assurance that this expansion
will in fact occur since the Company has no binding agreement in this regard or
that, if such does occur, it will be profitable to the Company or that
management is capable of managing the expansion. See "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUPPLY OF COFFEE
Prior to August 25, 1995, the Company was obligated to purchase its
supply of gourmet coffee exclusively from Brothers, the country's largest
wholesale and retail supplier of gourmet coffee. On that date, the Company
entered into an agreement (the "Supply Termination Agreement") with Brothers to
supersede all previous agreements between the parties. Under the terms of the
Supply Termination Agreement, the Company and Brothers terminated the obligation
of the Company to purchase its supply of coffee exclusively from Brothers and
agreed to the consolidation, satisfaction and structured repayment of certain
debt which had been accrued by the Company in favor of Brothers during the term
of their relationship, which dated back to 1989. On the date of execution, the
Company paid to Brothers the sum of $75,000 and paid another $50,000
approximately 30 days later. The Company further agreed to pay Brothers
approximately $740,000, as evidenced by two unsecured promissory notes. Pursuant
to the Supply Termination Agreement, the Company and Brothers mutually released
all claims, demands and liabilities between them, with the exception of those
obligations specifically set forth in the agreement, as well as those accounts
payable accrued after June 1, 1995. Included within the debt released was
$350,000 in slotting fees which Brothers had paid on behalf of the Company to
Ralph's. The debt remaining to be repaid arose principally from the start-up and
expansion of the Company and consisted of (i) unpaid trade accounts accrued to
April 1, 1993, and (ii) slotting fees paid by Brothers on behalf of the Company
to obtain space for the concessions of the Company in Ralph's. Additionally, the
Company acquired from Brothers under this agreement all concession fixtures and
equipment in those stores installed prior to the date of the agreement, valued
at approximately $200,000.
On November 22, 1995, the Company executed a promissory note in the
principal amount of $292,312.78, which evidenced accrued accounts payable due
Brothers after the execution and delivery of the Supply Termination Agreement.
The Company made its first payment under this note on December 15, 1995, but
Brothers initiated suit on this note after this date in the Circuit Court for
the 15th Judicial District in and for Palm Beach County, Florida. The Company
and Brothers settled the matter without the necessity of an answer to the
complaint by the Company on January 25, 1996, by agreeing to a joint stipulation
for the settlement of all obligations between Brothers and the Company,
including the obligations under the Supply Termination Agreement and the note
discussed immediately above, an aggregate of $1,025,280 in principal as of
January 25, 1996. Brothers agreed to reduce this amount to $717,696 if paid by
April 1, 1996, and if not paid by April 1, 1996, the $1,025,280 would be payable
in 40 equal monthly installments of $30,246 beginning April 1, 1996 and ending
July 1, 1999. Brothers subsequently extended the April 1, 1996 due date until
June 7, 1996. Pursuant to the settlement agreement, the Company paid Brothers
$15,000 on January 25, February 17, and March 13, 1996, and $30,246 on April 1,
and May 1, 1996, which amounts were credited against the $717,696 due Brothers.
In consideration for the extension until June 7, 1996, the Company agreed to pay
interest at 10% per annum from April 1, 1996 on the balance then due, which
interest was paid with the $30,246 payment on May 1, 1996. See "Use of Proceeds"
and "Business - Litigation."
The Company has been purchasing coffee from Grounds for Coffee, an
unaffiliated entity located in Salt Lake City, since September 11, 1995,
pursuant to a contract which is currently on a month-to-month basis, allowing
for termination by either party with or without cause on 30 days' prior written
notice. The facilities of Grounds for Coffee are sufficient to allow for the
demands of the Company at present and into the foreseeable future. Invoices are
delivered monthly and are payable within 30 days. The price paid by the Company
is the base price for the green bean, plus (i) the cost of roasting and bagging,
(ii) an allowance for general and administrative expenses, and (iii) a
negotiated profit. The Company pays the cost of delivery from Salt Lake City to
its warehouses in California. The
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price per pound paid by the Company therefore fluctuates with the green bean
market and delivery costs. These costs have been trending downward for the five
months ended February 29, 1996, although green bean and delivery costs have
fluctuated widely during the past two years and there is no assurance that these
costs will continue to maintain their present levels. In addition to Grounds for
Coffee, the Company has sourced two other coffee roasters, both of which are
willing to begin delivering product immediately on the same or a more favorable
cost basis as Grounds for Coffee. Management is aware of at least one other
roaster which would also be cost competitive. The average price per pound for
coffee as of March 12, 1996, was $2.90, which is a savings of $1.45 per pound
over the $4.35 price per pound charged by Brothers. The Company purchased
299,538 pounds of coffee in 1995; thus, if the foregoing benefits had previously
been available to the Company, a cost savings of approximately $434,430 would
have resulted. See "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and "Business - Litigation."
OTHER EXPANSION PLANS
Immediately following the close of this offering, the Company intends
to either acquire or establish a roasting operation. Management believes this
will allow the Company to establish and maintain a consistent, high-quality
coffee for distribution through its service concessions, and will further allow
the Company to increase its operating cash flows and margins and meet its
anticipated increased demand for whole bean gourmet coffee. There are many
coffee roasters which management believes would be receptive to an acquisition
proposal, although it has not entered into substantive discussions with any
entity for this purpose. Further, there is a substantial labor pool which the
Company could access to establish a roasting operation, and there is an
established market for new and used equipment market for roasting equipment.
Thus, management believes that the Company will be able to acquire or establish
a roasting operation immediately following the close of this offering, although
there can be no assurance that the Company will be successful in this endeavor.
Further, there can be no assurance that the Company could operate a roasting
facility that would be commercially viable or that would produce a consistent,
high-quality product. Present management has no experience in either owning or
managing a roasting facility. See "Risk Factors," "Expansion Within Ralph's" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has established a warehouse and delivery system ("DSD") in
San Diego to supply coffee to the service concessions in that area. This
warehouse also houses the executive offices and has the capacity to house the
roasting facilities of the Company. The Company has purchased a delivery truck
and has employed one driver in connection with the operation of the DSD. The
Company has also leased a smaller DSD facility in the Los Angeles metropolitan
area and has purchased a delivery truck and hired one driver and two part-time
warehouse workers. The Los Angeles facility is smaller than the San Diego
facility, since the latter facility houses executive offices and has space
available to house the roasting operations of the Company. Each DSD is capable
of supplying approximately 35 to 45 locations. The Company will be required to
establish an additional DSD in the Los Angeles area during the latter part of
1996 to meet the demands of the additional locations resulting from the
expansion in the Ralph's stores and other grocery chains in Southern California.
The market for commercial warehouse space in Southern California is highly
competitive and the DSD space was leased at prices which are not substantially
in excess of the price previously being paid solely for the executive offices of
the Company. Further, there is also a competitive market for delivery trucks and
there is a substantial labor pool in this area for delivery drivers. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company recently hired a full-time marketing executive to
establish a plan to market and sell the service concession concept within
Southern California outside of Ralph's. If such efforts are successful, the
Company will develop such a plan to expand the geographical area of operations
north to the San Francisco Bay area, particularly the area bounded by San
Francisco, San Jose and Oakland, as well as to Arizona and Illinois. A portion
of the proceeds from this offering has been allocated to these purposes. See
"Risk Factors," "Business - General," "Use of Proceeds," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Management."
The Company has exerted its best efforts to estimate the costs of
expansion; however, any expansion is problematical and extremely difficult to
accurately gauge in terms of cost. If management's estimates are not accurate
and there are cost overruns, the proceeds from this offering may be inadequate
to sustain the proposed expansion outside of Ralph's. This would require the
Company to obtain additional sources of capital, for which it currently has no
commitment, and which it may not be able to acquire when needed, or, if
acquirable, not on terms favorable to the Company. Any additional equity
financing which may be required to provide for expansion may further dilute the
interests of investors in this offering. See "Risk Factors."
23
<PAGE>
The funds from this offering will permit the Company to (i) fully
provide for the establishment of three delivery systems within Southern
California, (ii) vertically integrate its operations into the roasting of some
gourmet coffee beans, (iii) expand the number of its sales facilities within
Southern California, and (iv) expand outside of Southern California. This,
management believes, will allow for significant growth relative to the past
operating results of the Company. This proposed expansion will subject the
Company to greater overhead, marketing and support costs, and to other risks
associated with entry into new markets. In order to manage this growth, the
Company must improve and expand its operational, financial and management
information and executive systems, and hire, train and manage new employees. If
the Company is not able to manage this growth effectively, its operating results
could be significantly and adversely impacted. See "Risk Factors" and "Use of
Proceeds."
BUSINESS OF COMPANY IS SEASONAL IN NATURE
The Company's business is seasonal in nature, showing substantial
losses during the second and third calendar quarters of each year, while posting
positive operating cash flows during the first and fourth quarters of each year.
The operating results of the first and fourth quarters have substantially
reduced the net losses incurred by the Company since inception, particularly
during 1995. The business is seasonal because coffee is a warm drink which is
more heavily imbibed during the late fall, winter and early spring. See "Risk
Factors" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations."
SUMMARY OF RECENT DEVELOPMENTS
In the current fiscal year, the Company's operations have been largely
affected by the closing of eleven concessions in February of 1996. As of
April 30, 1996, four locations have been subsequently opened and another nine
are anticipated to be opened by the end of May. The effect of the closings will
be to significantly reduce the Company's revenues for the first and second
quarters, although the Company's management believes that the effect on the
Company's loss will not be proportional because the closed locations were break
even, at best.
Management expects to report a net loss from operations in the first
quarter of 1996 of approximately $220,000 compared to a net loss of
approximately $55,000 in the comparable quarter of 1995 on revenues of
approximately $615,000 in 1996 compared to revenues of approximately $750,000 in
the first quarter of 1995, a decrease in revenues in excess of $130,000. Most of
this decrease in revenues is attributable to the closing of eleven concessions
in February of 1996. In addition to the lost revenues attributable to fewer
concessions, approximately half the decline in revenues is attributable to the
repurchase of inventory from Ralph's made in connection with the closed
concessions. As of April 30, 1996, four of these closed concessions had been
opened in other locations and another nine are scheduled to be open by the end
of May. Management believes that sales from reopened concessions will begin to
favorably affect operations late in the second quarter of 1996 and thereafter.
Additional factors, which constitute part of the Company's planned
expansion, contributed to the 1996 first quarter's increased loss over that
incurred in the same quarter of 1995, including approximately $34,000 in design
and production costs incurred in introducing a new coffee bag for a new product
line, and $33,000 increased marketing, general and administrative expense.
Management does not believe that the increased loss in 1996 reflects a material
adverse change or trend in operations.
The Company has also renegotiated its agreement with Ralph's. This
agreement extends the terms under which the Company is licensed to sell through
Ralph's until December 31, 1999. The Company will pay Ralph's an additional
$100,000 for such extension and the Company plans to pay such amount from the
proceeds of this offering.
Much of the Company's financing during 1996 has come from bridge
loans. The Company issued two of these notes, whose principal amounts total
$262,000, in January of 1996. The Company issued a third note for an additional
$40,000 in May of 1996.
PROPRIETARY RIGHTS PROTECTION
The Company has limited protection for its intangible assets, such as
copyright, tradename or trademark protection, and has no plans to apply for
such. Thus, the Company is relying upon common law protection for these assets,
including the tradename "America's Coffee Cup." There is no assurance the
Company would be successful in any suit to protect its tradename. Any loss of
the exclusive right to the use of these intangible assets would result in
increased competition to the Company and negatively affect cash flows and
revenues. See "Risk Factors."
EMPLOYEES
The Company, as of March 12, 1996, had eight full-time employees,
including Mr. Marsik, and also had 70 part-time employees, all of whom work at
the service concessions selling coffee. See "Business-General."
COMPETITION
The Company maintains the only full-service gourmet bin coffee in
Ralph's; however, at least three other competitors, including Brothers, sell
pre-bagged gourmet coffee in these locations. Although the spaces provided its
competitors are generally several aisles over, they compete directly with the
Company. These entities are all better capitalized than the Company and could,
if they chose to do so, intensify this competition by charging lower prices for
their products, although they have not as yet chosen to do so. The Company has
no competition that it is aware of in its particular niche in the coffee
industry. The Company is a minor participant in the coffee market in general and
the gourmet coffee market in particular. Almost all of its competitors are
better capitalized and have greater financial resources available to them. The
Company will, therefore, continue to be at a competitive disadvantage vis-a-vis
its competitors. See "Risk Factors."
It is possible that the supermarket chains which the Company is
soliciting for expansion outside of Ralph's could install and operate
concessions by themselves or contract with the Company's sources of supply.
Management believes this is unlikely, however, because it has taken the Company
years to refine its sales techniques and business concept. Management believes
this could not be duplicated in a time frame which would make it financially
advantageous for a super market or roaster to open its own concessions since no
store or roaster, to management's knowledge, competes directly with the business
of the Company. Further, Management believes it is very unlikely that any source
of supply to the Company would contract directly with the store due to the
impact on the roaster's reputation from such a predatory practice. Thus, the
benefit of immediate implementation and outside management of the concession
concept by the Company makes it cost effective from the stand-point of the store
and, management believes, counterbalances the possibility of the store opening
its own concessions.
24
<PAGE>
FACILITIES
The executive offices of the Company occupy approximately 2,880 square
feet at 12528 Kirkham Court, Nos. 6 & 7, Poway, California 92064, which also
includes a warehouse and the capacity for roasting operations, and are being
leased for approximately $1,900 per month from an unaffiliated third-party. The
lease began on September 15, 1995, for a three year term. The telephone number
at this address is (619) 679-3290. The warehouse location in the Los Angeles
area is 1,800 square feet. The Company pays approximately $1,100 per month for
three years pursuant to a lease dated August 29, 1995. The service concessions
were, as of March 12, 1996, located in 56 separate locations within Ralph's in
Southern California, with nine replacement locations scheduled for installation
by the end of May, the spaces for which are leased subject to an agreement with
Ralph's. These concessions were all in good condition as of that date, are owned
and operated by the Company and occupy approximately 24 square feet each. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business - Distribution of Coffee."
LITIGATION
Brothers Litigation
Brothers initiated suit against the Company in December 1995, in the
Circuit Court for the 15th Judicial District in and for Palm Beach County,
Florida. The suit claimed that the Company had failed to make payments under a
promissory note for accrued payables due Brothers after the execution and
delivery of the Supply Termination Agreement. The Company was prepared to defend
the suit vigorously, as the first and only payment then due had been made. The
Company and Brothers settled the matter on January 25, 1996 without the
necessity of the Company filing an answer, by agreeing to a joint stipulation
for the settlement of all obligations between Brothers and the Company,
including the two promissory notes included under the Supply Termination
Agreement and the note for accrued payables incurred thereafter, an aggregate of
$1,025,280 in principal as of January 25, 1996. Under the terms of this
settlement, the amount which the Company was required to pay Brothers by April
1, 1996, was $717,696, resulting in a release to the Company of an additional
$307,584 of debt, which will have an equal impact on shareholders' equity. As
originally agreed, if this payment was not made by April 1, 1996, the total
amount due Brothers would increase to $1,025,280, which will be required to be
repaid, with interest at the rate of 10% per annum, in 40 equal monthly
installments of $30,246.57 beginning on April 1, 1996, and ending on July 1,
1999. This obligation is unsecured. The Company, paid $15,000 to Brothers on
January 25, 1996, February 17, and March 13, 1996 and $30,246 on April 1, and
May 1, 1996, all of which were credited to the $717,696 balance. Brothers
subsequently agreed to allow the Company until June 7, 1996, to make this lump
sum payment; provided, however, that all of the other terms of the settlement
are adhered to. If the Company does not repay this obligation by June 7, 1996,
and then does not make the monthly repayments, a judgment will be entered
against it in the amount of $1,025,280, less the good faith payments and all
other payments to the date thereof, plus interest, and the costs and expenses of
entering the judgment and collecting the same. Brothers would then be entitled
to exercise its rights as a judgment creditor and attach and sell all of the
assets of the Company, subject to the rights of existing lien holders. See "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources" and
"Business-Supply of Coffee." Brothers has the right to enter judgment against
the Company in the event the Company defaults under the terms of the stipulation
for settlement.
Matossian and Fidiparex S.A. Threatened Litigation
In December of 1995 counsel for Robert Matossian and Fidiparex S. A.
demanded rescission of and subsequent conversion into Common Stock of notes
which the Company entered into with certain affiliates of Mark S. Pierce on
December 30, 1994, alleging, among other claims, breach of fiduciary duty to the
Company by Messrs. Marsik and Pierce. The notes were converted into Common Stock
on August 17, 1995. Mr. Matossian was a consultant to the Company from June 1,
1993 until July 31, 1995, when the consulting agreement was terminated by the
Company. See "Certain Relationships and Related Transactions." Mr. Matossian was
also a director of the Company with Mr. Pierce and Robert W. Marsik during the
time that the notes were entered into and the conversion of the notes effected.
25
<PAGE>
MANAGEMENT
The following table sets forth all current directors and executive
officers of the Company, as well as their ages:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert W. Marsik 49 Director and President, Chief Executive and
Financial Officer and Treasurer
Mark S. Pierce 38 Director and Secretary
Michael D. Vandenberg 38 Director of Marketing
Roger F. Tompkins 52 Director
</TABLE>
ROBERT W. MARSIK, effective May 17, 1993, was elected a Director and
appointed of President of the Company. On September 1, 1995, he also assumed the
positions of Chief Executive and Financial Officer and Treasurer. From March
1990 to May 1993, Mr. Marsik served as President of PCI Instruments Company
("PCI"), an Englewood, Colorado, manufacturer of test instruments targeted at
the electrical contractor market. While at PCI, Mr. Marsik developed and
implemented a nationwide marketing plan for five commercial/industrial products.
Mr. Marsik graduated in 1970 from the University of Maryland at College Park,
Maryland, with a degree in Business Administration/Marketing. Mr. Marsik filed
for personal bankruptcy on July 1, 1993, and received a discharge. Mr. Marsik
has entered into an employment agreement with the Company. See "Risk Factors"
and "Management - Employment Agreement."
MARK S. PIERCE has been counsel to the Company since September, 1993,
and in October, 1994, was elected a Director and secretary. He has been a
director of Intercell Corporation since April, 1992, and was an executive
officer from that time until July 7, 1995, when it acquired the assets of
another business. Intercell is a publicly-held corporation with a class of
equity securities registered under Section 12(g) of the Exchange Act. Mr. Pierce
was the secretary and a director of Forestry International, Inc., a publicly-
held Colorado corporation from December 24, 1992, until April 7, 1995, at which
time he resigned to pursue other business interests. Mr. Pierce was a director,
and subsequently an executive officer, from May 22, 1992, until January 14,
1994, of Indemnity Holdings, Inc. a publicly-held corporation which is now known
as Star Casinos International, and which is now engaged in the development of
gambling casinos in Colorado and off the coast of Florida. From September 1,
1993, until April 7, 1995, Mr. Pierce was the President and a director of a
small, privately-held merchant banking firm with six employees, including
himself. In his capacity, he was involved in the supervision of five employees
and worked with independent consultants in the areas of marketing, public
relations, accounting, law and corporate finance. Prior to September 1, 1993,
Mr. Pierce was engaged in the private practice of law in Denver, Colorado, where
he specialized in mergers, acquisitions, the representation of publicly-held
companies, bankruptcy and international transactions. Mr. Pierce graduated from
the University of Wyoming in Laramie, Wyoming, in May, 1979, with a Bachelor of
Science degree in Accounting with honors. He passed his examination as a
Certified Public Accountant in May, 1979. Mr. Pierce received his Juris
Doctorate from the University of Colorado in Boulder, Colorado, during May of
1983. He is a member of the Colorado Bar Association, and is a member of the
securities and international subsections of this association.
ROGER F. TOMPKINS has served as a director of the Company since
September 1, 1995. From November, 1985, until January, 1996, Mr. Tompkins was a
director and the sole executive officer of Power Capital Corporation, a
consulting firm which, through a wholly-owned subsidiary, Concepts Associates,
Inc., during Mr. Tompkins' tenure, specialized in mergers, acquisitions,
corporate finance and public relations. Power Capital is publicly-held, and
acquired in January of this year a business in China which is developing a
Sheraton Hotel and adjoining commercial complex in the Beijing metropolitan
area. Mr. Tompkins resigned as an officer and a director of Power Capital after
this acquisition. Since August, 1980, Mr. Tompkins has been a director and an
executive officer of Concepts Associates, which, until January of 1996, was a
wholly-owned subsidiary of Power Capital. Mr. Tompkins purchased Concepts
Associates from Power Capital in January and is now conducting the previous
business of Power Capital through Concepts Associates. From its inception in
February, 1988, until May, 1992, Mr. Tompkins served as Chairman of the Board of
Directors and Chief Executive Officer of Stone Mountain Industries, Inc., a
publicly-held corporation with a class of equity securities registered under
Section 12(g) of the Exchange Act which is now known as Star Casinos
International, Inc., and is now engaged in the development of gambling casinos
in Colorado and off the coast of Florida. During 1961 and 1962, Mr. Tompkins
attended Farleigh Dickenson University but did not receive a degree.
26
<PAGE>
MICHAEL F. VANDENBERG was hired as the Director of Marketing for the
Company on October 9, 1995. From June, 1994 until October 9, 1995 he held the
position of Key Account Manager for the Boston region of Brothers Gourmet
Coffee. From March, 1994 to June 1994, he was the Sales Manager for in
California for Jo Ann Benci Service in Los Angeles. From 1978 until March, 1994,
Mr. Vandenberg worked for Nestle Beverage/Sark's Gourmet Coffee as a route
salesmen, route supervisor and Operations Manager. In November, 1992 he was
promoted to Account Manager. Mr. Vandenberg graduated from the El Camino College
in June, 1986, with an emphasis in Business Management.
No current director has any arrangement or understanding whereby they
are or will be selected as a director or as an executive officer, other than Mr.
Marsik. All directors will hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified, unless
they earlier resign or are removed from office. The executive officers of the
Company are elected by the Board of Directors at its annual meeting immediately
following the shareholders' annual meeting. The Company does not have any
standing audit, nominating or compensation committee, or any committee
performing similar functions. See "Management - Executive Compensation."
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid to Mr. Marsik for the years ended December 31, 1993, 1994 and 1995. Mr.
Marsik was the sole executive officer during 1993, 1994 and until October 9,
1995, when Mr. Vandenberg was hired.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS
------
NAME AND ANNUAL COMPENSATION SECURITIES
-------------------
PRINCIPAL POSITION FISCAL YEAR SALARY BONUS UNDERLYING OPTIONS
- ------------------ ----------- ------ ----- ------------------
<S> <C> <C> <C> <C>
Robert W. Marsik, President 1995 $85,000 -0- -0-
Chief Executive, Financial and 1994 72,000 -0- -0-
Accounting Officer, Treasurer 1993 48,700 -0- $10,625
</TABLE>
_____________
(1) In December 1993, Mr. Marsik was granted a bonus of 2,875 shares of
"restricted" Common Stock of the Company, which was valued at $10,625.
No compensation was paid to any member of the Board of Directors in
their capacities as such during 1993 or 1994. Effective January 1, 1995, the
Company established a deferred compensation plan (the "Plan") for the purpose of
attracting new directors and retaining existing directors. The form of the Plan
is commonly referred to as a "Rabbi Trust." The Plan has a term of three years
which began on January 1, 1995, and is administered by and subject to the
discretion and fiduciary obligations of the Plan's trustee, Patrick J. Tobin,
Esq. Under the terms of the Plan, each director serving the Company will receive
in arrears approximately 555 shares of common stock per month for his services.
Each share earned will be held in trust under the Plan and will not be
distributed until the later to occur of December 31, 1997, or the termination of
the participant director's employment or affiliation with the Company. Further,
any participant receiving shares from the Plan is restricted from transferring
the shares so that no more than 10% of the total number of shares vested and
distributed under the Plan for the benefit of the individual are available for
sale in any three month period. The shares distributed will bear a "restrictive"
legend to enforce the foregoing. The Plan shares are subject to the claims of
the creditors of the Company until such time as they are distributed to
participating directors. For this reason, there is no taxable deduction to the
Company for employment expense at the time of grant or vesting and,
correspondingly, no taxable income to the participating directors at these
times. Only at the time of distribution will a taxable event on any of the
shares be recognized. As of the date of this Prospectus, no shares had been
awarded under the Plan to any director, and shares which have been earned have
not yet been issued and when issued, will be held in trust subject to the claims
of the creditors of the Company until the later to occur of December 31, 1997,
or the termination of the participant director's employment or affiliation with
the Company.
EMPLOYMENT AGREEMENTS
Mr. Marsik has entered into a new employment contract with the Company
which began on September 1, 1995, and has a five year term ending September 1,
2000. Mr. Marsik has entered into an employment contract with the Company which
began on September 1, 1995, and has a five year term ending September 1, 2000.
Mr. Marsik receives a base salary of $100,000 per year and $500 per month as a
car allowance under this agreement, as well as health insurance under the
Company's policy and vacation benefits. Mr. Marsik and the management and
operations teams which he selects, including Mr. Vandenberg,
27
<PAGE>
will, beginning in 1996, also receive performance bonuses under this agreement
as follows: (i) 10% of those gross revenues exceeding $4,500,000 to and
including $5,500,000; (ii) 9% from $5,500,001 to $6,500,000; (iii) 8% from
$6,500,001 to $7,500,000; (iv) 7% from $7,500,001 to $8,500,000; (v) 6% from
$8,500,001 to $9,500,000; and (vi) 5% of those gross revenues exceeding
$9,500,000. These bonuses will be payable through the delivery of one-half in
cash and one-half in Common Stock valued at the market price at the date of
payment. This agreement also prohibits Mr. Marsik from competing with the
Company for a period of three years after termination, irrespective of the
reason for termination.
Mr. Vandenberg entered into an employment agreement with the Company
on October 2, 1995, beginning October 9, 1995. His annual salary is $67,200, and
he is entitled to a $500 per month car allowance, two weeks of vacation during
the first two years of employment and three weeks thereafter, and health
insurance coverage for him and his family under the Company's current policy.
Mr. Vandenberg may also become entitled to an annual commission of up to 35% of
his base salary, or $22,800 annually. This commission will have three segments:
(i) 37.5% of the commission will be tied to Mr. Vandenberg's establishing new
accounts for concessions and causing these accounts to set up test stores, and
to generating new accounts for whole bean coffee other than through concessions;
(ii) 37.5% will be tied to specific dollar volume sales goals; and (iii) 25%
will be tied to retaining new accounts once established. Mr. Vandenberg may also
earn bonuses of: (i) options over a five year period to acquire up to 50,000
shares of Common Stock under the ISOP discussed below based upon new business
and the retention of that business; and (ii) Common Stock equaling up to 10,000
shares per year, which will be tied to establishing new accounts and setting up
test stores for concessions and generating new accounts for whole bean coffee
outside of concessions. The Company and Mr. Vandenberg have yet to agree on and
establish the foregoing commissions and bonuses, but they will be paid under the
terms of the bonus provisions which apply to Mr. Marsik and will reduce the
amounts available to other members of the operations teams, including Mr.
Marsik. The agreement may be terminated by Mr. Vandenberg and by the Company at
any time; provided, however, that the Company must pay Mr. Vandenberg one month
severance pay, plus any accrued salary, vacation and commissions to the date of
termination in the event that it terminates the agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
The commission and bonuses which will be paid to Messrs. Marsik and
Vandenberg, as well as to other individuals who may be hired by the Company as a
part of the operations team, will decrease cash flows of the Company by one-half
of the total amount of these commissions and bonuses and will reduce operating
profits or increase operating losses by the full amount. These payments will be
paid one-half in cash and one-half in Common Stock under the ISOP discussed
below, irrespective of the cash flows or profits generated or losses averted.
The bonuses and commissions were computed by the Company based upon its past
operating results. If the foregoing sales objectives are achieved, which
requires an increase by approximately 27.16% over 1994 results, management
believes there will be sufficient cash flow and operating profit available to
absorb these increases in compensation.
STOCK OPTION PLAN
On September 1, 1995, the Board of Directors and shareholders of the
Company adopted an incentive stock option plan ("ISOP") for employees of the
Company and its subsidiaries. The ISOP is intended to advance the best interests
of the Company by providing those persons who have a substantial responsibility
for its management and growth with additional incentive by increasing their
interest in the success of the Company, thereby encouraging them to remain in
its employ. Further, the availability and offering of options under the ISOP
supports and increases the ability of the Company to attract and retain
individuals of exceptional managerial talent upon whom, in large measure, the
sustained progress, growth and profitability of the Company depends. Only
employees who have contributed to the profitability or administration of the
Company and/or its subsidiaries are eligible to participate and are only
entitled to receive that number of shares which fairly reflects the value of
their services. The ISOP is presently being administered by the Board of
Directors. The 500,000 shares available for grant under the ISOP have been
registered under the Securities Act. All options granted under the ISOP will be
evidenced by agreements which will be subject to the provisions of the ISOP, as
well as such further provisions as may subsequently be adopted. The option price
per share will be determined by the Board of Directors at the date of grant, but
will at least equal the fair market value of the Common Stock on the date of
grant. Any person owning 10% or more of the voting power of the Company who may
receive grants under the ISOP will have an exercise price equaling or exceeding
110% of the fair market value. All options must be granted within ten years of
the date of the ISOP, and no option may extend beyond the expiration of five
years from the date of grant. As of January 31, 1996, no options had been
granted under the ISOP.
28
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, on June 1, 1993, entered into a Financing Agreement of
Understanding with Fidiparex, S.A. ("Fidiparex"), which is controlled by Robert
Matossian, a former director and current shareholder of the Company. Pursuant to
this agreement, a $100,000 principal amount line of credit was extended by
Fidiparex to the Company, of which $25,000 was drawn during the years 1993 and
1994. The $25,000 was repaid prior to December 31, 1994, the date on which the
line of credit expired. Mr. Matossian, through an affiliated entity, also
received $5,000 per month for his services from June 1, 1993, through July,
1995. These fees were paid pursuant to a contract dated June 1, 1993, which was
terminated on July 31, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
The Company, on December 30, 1994, sold to affiliates of Mr. Pierce,
then a director, $110,000 in principal amount of 11.5% promissory notes. These
notes were required to be either redeemed or converted into shares of Common
Stock by December 30, 1995, unless earlier converted at the election of the
holders at the lower of $2.00 per share or the market therefor at the date of
conversion. Market price was defined in the notes as being the average bid price
on the day of the conversion. These notes were converted on August 17, 1995,
into 589,848 "restricted" shares of Common Stock at a conversion price of $0.20
per share. The conversion price was for an amount less than the par value of the
stock and, accordingly, additional consideration had to be contributed for the
payment of these shares. The Company's Board of Directors deemed the total
consideration to be $0.90 per share, or an aggregate of $530,863. The Company
determined that $44,387 of legal fees would be allocated to this amount in
addition to the principal and interest converted to Common Stock. In addition,
Mr. Pierce had asserted that the original note purchased by him had been
purchased in connection with material misrepresentations about the status of
the Company. Mr. Pierce agreed to release all claims against the Company in
connection with this purchase and the Company's Board of Directors valued such
release as equal to $119,970. The directors valued the personal guarantees
discussed below at $19,306 and the balance, $231,230, the directors determined
was a compensation expense. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
On October 9, 1995, the Company purchased two trucks for use in its
delivery system at an aggregate purchase price of $62,884. The Company paid
$9,740 in cash at closing, and the remaining $55,000 was financed through an
unaffiliated third-party for a five year period at an annual percentage rate of
11% with monthly payments of $1,175. Because the Company was unable to obtain
credit for these purchases and was unable to provide adequate security for the
purchases, Mr. Pierce, guaranteed the obligations. The Company executed a
revolving line demand promissory note in favor of Mr. Pierce which will become
operative in the event that Mr. Pierce is called upon to satisfy his guarantee
of these obligations. This note bears interest at the rate of 18% per annum and
is secured by all assets of the Company, including the trucks.
The Company believes that the foregoing transactions with its officers
and directors were on terms no less favorable than could have been obtained from
independent third parties. All future transactions, including all loans, between
the Company and its officers, directors and principal shareholders or affiliates
of any of them, will also be on terms no less favorable than could be obtained
from independent third parties and will be approved by a majority of the
independent, disinterested directors.
29
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership as of March 12, 1996, of the Common Stock outstanding
before and after the offering, by (i) each person known by the Company to be the
beneficial owner of more than five percent of the Common Stock, (ii) each
director and executive officer of the Company, and (iii) all directors and
executive officers as a group. Except as otherwise indicated, each stockholder
identified in the table possesses sole voting and investment power with respect
to its or his shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF OWNERSHIP PERCENTAGE OF OWNERSHIP
BENEFICIAL OWNER BENEFICIALLY OWNED PRIOR TO OFFERING AFTER THE OFFERING
---------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Robert W. Marsik (1) 189,804 22.45% 8.45%
Mark S. Pierce 187,679(2) 22.20 8.36
Roger F. Tompkins - - -
Michael D. Vandenberg - - -
All executive officers and directors 377,483 44.65% 16.81%
======= ====== ======
as a group (4 persons)
</TABLE>
__________
(1) Mr. Marsik purchased 187,679 shares from Mr. Pierce's pension fund and minor
son on September 1, 1995. The purchase price will be paid over a three year
period ending September 1, 1998. The shares were pledged to secure the
purchase price and Mr. Pierce holds the certificates as security. Mr.
Marsik was current in his payment obligation as of date of this Prospectus.
(2) Shares beneficially owned by Mr. Pierce through his pension fund, of which
he is the sole beneficiary and trustee.
The address for Robert W. Marsik and Michael D. Vandenberg is 12528
Kirkham Court, Nos. 6 & 7, Poway, California 92064; the address for Mark S.
Pierce is 4221 East Pontatoc Canyon Drive, Tucson, Arizona 85718; the address
for Roger F. Tompkins is 331 Kenilworth Circle, Stone Mountain, Georgia 30083.
The Company is not aware of any arrangement which may at a subsequent date
result in a change of control of the Company, other than as set forth above in
footnote one. No arrangement or understanding presently exists for the election
of directors or executive officers, other than the employment agreement of Mr.
Marsik. See "Employment Agreements."
30
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares
of Common Stock, $0.40 par value and 1,000,000 shares of preferred stock, $0.40
par value (the "Preferred Stock"). Upon consummation of this offering, 2,245,567
shares of Common Stock will be outstanding, without giving effect to the
Underwriter's over-allotment option or the exercise of the Underwriters'
Warrants and no shares of Preferred Stock will be outstanding.
UNITS
Each Unit consists of five shares of Common Stock and five Warrants.
The five shares of Common Stock and the five Warrants included in the Units may
not be separately traded for six months after the date of this Prospectus,
unless separated at the discretion of the Representative.
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock,
$0.40 par value per share. After giving effect to this offering, the issued and
outstanding capital stock of the Company will consist of 2,245,567 shares of
Common Stock. The holders of the Common Stock are entitled to share ratably in
any dividends paid on the Common Stock when, as and if declared by the Board of
Directors out of funds legally available. Each holder of Common Stock is
entitled to one vote for each share held of record. The Common Stock is not
entitled to cumulative voting or preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in the net assets legally
available for distribution. All outstanding shares of Common Stock are fully
paid and nonassessable.
WARRANTS
In connection with this offering, the Company has authorized the
issuance of up to 1,750,000 Warrants (including 210,000 Warrants that may be
issued upon exercise of the Underwriters' over-allotment option and 140,000
Warrants which may be issued upon exercise of the Underwriters' Warrants) and
has reserved an equivalent number of shares of Common Stock for issuance upon
exercise of such Warrants. Each Warrant will entitle the holder to purchase one
share of Common Stock at a price of $3.00 per share. The Warrants will be
exercisable at any time after the Warrants become separated from the Common
Stock and separately traded until the fifth anniversary of the date of this
Prospectus, unless earlier redeemed. The Warrants are redeemable by the Company
at $.05 per Warrant, upon 30 days' notice, at any time after six months from the
date of this Prospectus, if the closing inside bid price per share of the Common
Stock for ten consecutive trading days' prior to the date notice of redemption
is given equals or exceeds $4.50 per share. In the event the Company gives
notice of its intention to redeem, a holder would be forced either to exercise
his or her Warrant within 30 days after the date of notice or accept the
redemption price. See "Risk Factors."
The exercise price of the Warrants may be reduced at any time from
time to time in the discretion of the Board of Directors when it appears to be
in the best interests of the Company to do so. Any such reduction would impair
the value to holders exercising their Warrants prior to the effective date of
the reduction. See "Risk Factors."
The Warrants will be issued in registered form under a Warrant
Agreement between the Company and Securities Transfer Corporation (the "Warrant
Agent"). The shares of Common Stock underlying the Warrants, when issued upon
exercise of a Warrant, will be fully paid and nonassessable, and the Company
will pay any transfer tax incurred as a result of the issuance of Common Stock
to the holder upon its exercise.
The Warrants contain provisions that protect the holders against
dilution by adjustment of the exercise price in certain events, such as stock
dividends and distributions, stock splits, recapitalization, mergers or
consolidations and certain issuance's below the fair market value of the Common
Stock. The Company is not required to issue fractional shares upon the exercise
of a Warrant. The holder of a Warrant will not possess any rights as a
stockholder of the Company until such holder exercises the Warrant.
The foregoing discussion of certain terms and provisions of the
Warrants is qualified in its entirety by reference to the detailed provisions of
the Warrant Agreement, the form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
For the Company to redeem or a holder to exercise the Warrants there
must be a current registration statement in effect with the Commission and
qualification under applicable state securities laws (or applicable exemptions
from state qualification requirements) with respect to the shares or other
securities underlying the Warrants. The Company has agreed to use all reasonable
efforts to cause a registration statement or a post-effective amendment to this
registration statement with respect to such securities under the Securities Act
to be filed and to
31
<PAGE>
become and remain effective during the term of the Warrants and to take such
other actions under the laws of various states as may be required to cause the
redemption of the Warrants or the sale of Common Stock upon exercise of Warrants
to be lawful. The Company will not call for redemption or not be required to
honor the exercise of Warrants if, in the opinion of the Board of Directors upon
advice of counsel, such would be unlawful. See "Risk Factors."
BRIDGE LOAN WARRANTS
In conjunction with the Bridge Loan Notes, the Company issued in
January of 1996 to the two holders thereof, the Bridge Loan Warrants, which
allow the holders to acquire at any time and from time to time during a period
ending five years from the effective date of this Prospectus up to 78,600 units
at a price of $6.50 per unit, each unit consisting of five shares of Common
Stock and five warrants, each Warrant to purchase one share of Common Stock at
$3.00 per share for five years. The shares of Common Stock and warrants
underlying these units have been included in this Registration Statement of
which this Prospectus is a part for sale to the holders of the units acquirable
upon exercise of the Bridge Loan Warrants. The agreement which lead to the
issuance of the Bridge Loan Warrants has customary anti-dilution protections
against such matters as reverse stock splits, reclassifications and
reorganizations.
In May of 1996, the Company issued an additional $40,000 note (the
"May Note") to one of the holders of the existing Bridge Loan Notes. The note
does not have a warrant attached. If this offering is not closed by July 31,
1996, the Company will (i) repay the Bridge Loan Notes and the May Note in full
and (ii) at the option of the holders thereof, issue a second warrant, in lieu
of and on substantially similar terms as the Bridge Loan Warrants, to purchase
up to 362,614 shares of Common Stock which are included in the Registration
Statement at a price per share which will equal 65% of the average bid price for
these shares for the 20 trading days preceding the maturity date. If the Bridge
Loan Notes and the May Note are not repaid from the proceeds of this offering,
the holders thereof at their option may either (i) call the Bridge Loan Notes
and the May Note and proceed against the collateral or (ii) surrender the Bridge
Loan Notes and the May Note to the Company in exchange for 403,000 shares of
Common Stock which have also been included in the Registration Statement of
which this Prospectus is a part. See "Risk Factors," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
This Prospectus also relates to the offer and sale of shares of Common
Stock issuable upon exercise of the Bridge Loan Warrants by the holders thereof
from time to time in the market at prevailing market prices pursuant to this
Prospectus. Such shares may be sold directly to or through underwriters, dealers
or agents in market transactions or privately-negotiated transactions at market-
based or negotiated prices.
PREFERRED STOCK
The Board of Directors, without further action by the shareholders, is
authorized to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix and determine, in its sole discretion and on a blank check
basis, as to any series, any and all of the relative rights and preferences of
shares in such series, including, without limitation, preferences, limitations
or relative rights with respect to redemption rights, conversion rights, voting
rights, dividend rights and preferences on liquidation. The Company has no
present intention to issue any Preferred Stock, but may determine to do so in
the future.
It is possible that the Board of Directors could issue Preferred Stock
to thwart a possible takeover. This could be accomplished, for example, by
giving such shares the right to unilaterally veto an acquisition or by providing
a convertibility feature at below market price, which would give the holder the
right to acquire a substantial number of shares of Common Stock, and would
significantly dilute the value of the Company to existing shareholders,
including investors in this offering, and depress the market value of the Common
Stock. This would materially and adversely impact the value to the existing
holders of the Common Stock. See "Risk Factors."
DEBT SECURITIES
On December 30, 1994, the Company sold to unaffiliated investors, on
whose behalf a former director was acting, approximately $123,750 in principal
amount of debt. This debt is evidenced by promissory notes which may be redeemed
at any time upon payment of the outstanding principal and interest thereunder
and must be paid by December 30, 1996. Interest accrues at the annual rate of
9%, which is required to be paid only upon maturity or redemption. The notes are
convertible, in whole or in part at any time, at a price of $9.00 per share of
Common Stock. Pursuant to an offer made by the Company, two of the holders of
these securities converted principal and interest of $78,750 and $8,296,
respectively, for a total of $87,046, into Common Stock valued at $2.00 per
share in February of 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
32
<PAGE>
SHAREHOLDER REPORTS
The Company will furnish to its shareholders annual reports containing
audited financial statements reported on by independent public accountants for
each fiscal year and will make available quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,245,567
shares of Common Stock outstanding, assuming the underwriters' over-allotment is
not exercised. Of these, the 1,400,000 shares sold in this offering (1,610,000
if the Underwriters' over-allotment option is exercised in full) will be
tradable in the public market without restriction under the Securities Act,
except shares purchased by an "affiliate" (as defined in the Securities Act) of
the Company. In addition, the Company has registered in the Registration
Statement, of which this Prospectus is a part, 393,000 shares to be issued
pursuant to the Bridge Loan Warrants which will be eligible for sale to the
public in the open market. Of the remaining 845,577 shares of Common Stock,
633,102 shares (the "Restricted Shares") will be "restricted shares" within the
meaning of the Securities Act and may be publicly sold only if registered under
the Securities Act or sold in accordance with an exemption from registration,
such as that provided by Rule 144 under the Securities Act. However, the
officers and directors who are holders of the 377,483 shares, (45% of the
outstanding Common Stock before the offering and 17% after the offering), have
agreed that they will not, without the prior written consent of the
Representatives, offer, sell or otherwise dispose of any shares of Common Stock
beneficially owned by them or acquired upon the exercise of stock options for a
period of two years after closing of this offering. The Company will announce
any waiver of this lock-up.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell Restricted Shares if at
least two years have passed since the later of the date such shares were
acquired from the Company or any affiliate of the Company. Rule 144 provides
that within any three-month period such person may only sell up to the greater
of 1% of the then outstanding shares of Common Stock (approximately 22,455
shares following completion of this offering) or the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
the date on which notice of the sale is filed with the Commission. Sales
pursuant to Rule 144 are subject to certain other requirements relating to
manner of sale, notice of sale and availability of current public information.
Any person who has not been an affiliate of the Company for a period of 90 days
preceding a sale of Restricted Shares is entitled to sell such shares under Rule
144 without regard to such limitations if at least three years have passed since
the later of the date such shares were acquired from the Company or any
affiliate of the Company. Shares held by persons who are deemed to be affiliated
with the Company are subject to such sales limitations regardless of how long
they have been owned or how they were acquired.
33
<PAGE>
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell on a firm commitment
basis to the Underwriters named below, and each of the Underwriters, for whom La
Jolla Securities Corporation and First London Securities Corporation (the
"Representatives") are acting as the Representatives, have severally agreed to
purchase the number of Units set forth opposite their names in the following
table. The Underwriters' obligations are such that if any shares are purchased
they are committed to purchase all Units.
<TABLE>
<CAPTION>
Underwriters Number of Units
- ------------ ---------------
<S> <C>
La Jolla Securities Corporation
First London Securities Corporation
-------
Total 280,000
=======
</TABLE>
The Representatives have advised the Company that the Underwriters
propose to offer the Units to the public at the public offering price per share
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of not more than $ per Unit, of which $ may be
reallowed to other dealers. After the offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction will change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase up to
42,000 additional Units to cover over-allotments, if any, at the same price per
Unit as the Company will receive for the 280,000 Units that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional Units that the number of
Units to be purchased by it shown in the above table represents as a percentage
of the 280,000 Units offered hereby. If purchased, such additional Units will
be sold by the Underwriters on the same terms as those on which the initial
280,000 Units are being sold.
The Underwriters have the right to offer the Securities only through
licensed securities dealers in the United States who are members of the National
Association of Securities Dealers, Inc. and may allow such dealers such portion
of its ten (10%) percent commission as each Underwriter may determine.
The Underwriters will not confirm sales to any discretionary accounts.
The Company has agreed to pay the Representatives a non-accountable
expense allowance of 3% of the gross amount of the Units sold ($84,000 upon the
sale of the Units offered) at the closing of the offering. The Underwriters'
expenses in excess thereof will be paid by the Representatives. To the extent
that the expenses of the underwriting are less than that amount, such excess
will be deemed to be additional compensation to the Underwriters. A referral fee
of $15,000 will be paid at closing to William Walker, an unaffiliated third
party, for his services in introducing the Company to the Representatives and
assisting in arranging for the underwriting.
The Company has agreed to enter into a two year consulting agreement
with La Jolla Securities Corporation to act as a financial advisor to the
Company at a fee of $20,000 per year ($40,000 in total), commencing 90 days
after the closing of the offering.
34
<PAGE>
For a period of 24 months following the completion of this offering,
the Company will allow an observer designated by the Representatives and
acceptable to the Company to attend all meetings of the Board of Directors.
Such observer will have no voting rights, will be reimbursed for all out-of-
pocket expenses incurred in attending meetings, and will be indemnified by the
Company against all claims, liabilities, damages, costs and expenses arising out
of his participation at Board meetings.
The Underwriters are not obligated to make a market in the Securities.
There is no assurance the Underwriters will participate as market makers for the
Common Stock. Although they are not currently obligated to do so, if the
Underwriters should choose to become market makers for the Units, the Warrants
and/or the Common Stock, the Underwriters would not be under any obligation to
continue.
The Underwriting Agreement provides for indemnification between the
Company and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among the Company and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act and the Exchange Act.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company on
the successful defense of any action, suit or proceeding) is asserted by such a
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
UNDERWRITERS' WARRANTS
Upon closing of this offering, the Company has agreed to sell to the
Underwriters for nominal consideration the Underwriters' Warrants. The
Underwriters' Warrants are exercisable at 120% of the public offering price for
a four-year period commencing one year from the effective date of this offering.
The Underwriters' Warrants may not be sold, transferred, assigned or
hypothecated for a period of two years from the date of this offering except to
the officers of the Underwriters and their successors and dealers participating
in the offering and/or their partners or officers. The Underwriters' Warrants
will contain antidilution provisions providing for appropriate adjustment of the
number of shares subject to the Warrants under certain circumstances. The
holders of the Underwriters' Warrants will have no voting, dividend or other
rights as shareholders of the Company with respect to shares underlying the
Underwriters' Warrants until the Underwriters' Warrants have been exercised.
The Underwriters' Warrants and the securities issuable thereunder have
been registered under the Securities Act in connection with this offering;
however, such securities may not be offered for sale except in compliance with
the applicable provisions of the Securities Act. The Company has agreed that,
if it shall cause a Post-Effective Amendment or a new Registration Statement or
Offering Statement under Regulation A to be filed with the Commission, the
Underwriters shall have the right during the five year period commencing on the
date of this Prospectus to include in such Post-Effective Amendment or new
Registration Statement or Offering Statement the Underwriters' Warrants and/or
the securities issuable upon their exercise at no expense to the Underwriters.
For the exercise period during which the Underwriters' Warrants are
exercisable, the holder or holders will have the opportunity to profit from a
rise in the market value of the Common Stock, with a resulting dilution in the
interest of the other stockholders of the Company. The holder or holders of the
Underwriters' Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital from an
offering of its unissued Common Stock on terms more favorable to the Company
than those provided for in the Underwriters' Warrants. Such factors may
adversely affect the terms on which the Company can obtain additional financing.
To the extent that the Underwriters realize any gain from the resale of the
Underwriters' Warrants or the securities issuable thereunder, such gain may be
deemed additional underwriting compensation under the Securities Act.
35
<PAGE>
PRICING THE OFFERING
The proposed offering and exercise prices of the Units and Warrants
and the number of shares and Warrants constituting the Units were determined in
negotiations between the Company and the Representatives of the Underwriters
based upon an assumed market price of approximately $2.00 per share of Common
Stock. The number of shares of Common Stock and Warrants constituting the Units
may change at the time the Registration Statement of which this Prospectus is a
part is ordered effective by the Commission based upon the then current market
price of the Common Stock, the Company's financial condition and results of
operations for the fiscal year ended December 31, 1995 and other pertinent
factors at the time of the effective date. See "Risk Factors."
PLAN OF DISTRIBUTION FOR BRIDGE LOAN SECURITIES
The shares of Common Stock which may be purchased pursuant to the
Bridge Loan Warrants may be sold from time to time by the holders thereof
through underwriters, dealers or agents, who may receive compensation in the
form of underwriting discounts, concessions or commissions from such holder.
Such sales may be effectuated at any time or from time to time, so long as the
Registration Statement, of which this Prospectus is a part, remains effective,
through transactions that may take place in the market or markets where the
Common Stock is traded, in privately-negotiated transactions or through sales to
one or more broker-dealers for resale, as principals, at market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices or at negotiated prices. Such sales may be sold in one or more of the
following transactions: (i) a block trade in which the broker or dealer so
engaged will attempt to sell the securities as agent but may position and resell
a portion of the block as principal to facilitate the transaction; (ii)
purchases by a broker or dealer as principal and sale by such broker or dealer
for its account pursuant to this Prospectus, (iii) an exchange distribution in
accordance with the rules of such exchange; (iv) ordinary brokerage transactions
and transactions in which the broker solicits purchasers; and (v) a combination
of any such methods of sale. The Company will not receive any of the proceeds
from the sale by the holder of the Bridge Loan Warrants. The Company will pay
the expenses incident to the offering of the Common Stock offered hereby
relating to the preparation of the Registration Statement, of which this
Prospectus is a part. The Company intends to file a Post Effective Amendment to
this Registration Statement to provide a separate Prospectus to the Bridge Loan
Warrant holders.
Under agreements which may be entered into by the holders of the
Bridge Loan Warrants, underwriters, dealers and agents who participate in the
distribution of the Common Stock offered hereby may be entitled to
indemnification by such holder against certain liabilities, including
liabilities under the Securities Act, or to contribution with respect to
payments which the underwriters, dealers or agents may be required to make in
respect thereto. Underwriters, dealers and agents may be customers of, engaged
in transactions with, or perform services for the Company or the holder of the
Bridge Loan Warrants in the ordinary course of business.
LEGAL MATTERS
Certain matters with respect to the validity of the Securities offered
hereby will be passed upon for the Company by Robert A. Forrester, 1215
Executive Drive West, Suite 102, Richardson, Texas, 75081. Certain legal matters
will be passed upon for the Underwriters by Maurice J. Bates, L.L.C., 8214
Westchester, Suite 500, Dallas, Texas, 75225.
EXPERTS
The audited balance sheet of the Company as of December 31, 1995, and
the results of operations for the years ended December 31, 1994 and December 31,
1995, included in this Prospectus have been so included in reliance on the
report of Harlan & Boettger, 12626 High Bluff Drive, Suite 200, San Diego,
California, 92130, independent accountants, given on the authority of such firm
as experts in auditing and accounting.
36
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act
with respect to the Securities. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits. For
further information with respect to the Company and the Securities, reference is
made to the Registration Statement and the exhibits filed as a part thereof.
Statements made in this Prospectus as to the contents of any contract or any
other document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference to such exhibit. The Registration Statement,
including exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission at 7 World Trade Center, 13th Floor, New York, New York 10048 and
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits thereto may be obtained from the
Commission at such offices upon payment of prescribed rates.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Commission. Reports and other information can be inspected
and copied at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549; at its New York Regional Office, Room 1400,
7 World Trade Center, New York, New York 10048; and at its Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2411.
Copies of such material can be obtained from the Public Reference Section at
prescribed rates. The Company intends to furnish its stockholders with annual
reports containing audited financial statements and such other periodic reports
as the Company may determine to be appropriate or as may be required by law.
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of December 31, 1994 and 1995 F-3
Statements of Operations for the years ended December 31, 1994 and
1995 F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years
ended December 31, 1994 and 1995 F-5
Statements of Cash Flows for the years ended December 31, 1994 and
1995 F-6
Notes to Financial Statements F-7 - F-18
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AMERICA'S COFFEE CUP, INC.:
We have audited the accompanying balance sheet of America's Coffee Cup, Inc. (a
Colorado corporation) as of December 31, 1995, and the related statements of
operations, changes in stockholders' deficit and cash flows for the years ended
December 31, 1994 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of America's Coffee Cup, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note J to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these
matters are also described in Note J. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
February 16, 1996
F-2
<PAGE>
AMERICA'S COFFEE CUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS As of December 31,
---------------------------
1994 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 228,864 $ 32,727
Accounts receivable, no allowance deemed necessary 209,193 130,455
Inventories (Note B) 42,206 135,776
Prepaid expense and other 7,284 15,996
---------- -----------
TOTAL CURRENT ASSETS 487,547 314,954
PROPERTY AND EQUIPMENT, net (Note C) 53,657 338,085
OTHER ASSETS
License agreement, net 306,250 218,750
Slotting fee, net - 61,581
Deferred offering costs 3,879 72,060
---------- -----------
310,129 352,391
---------- -----------
$ 851,333 $ 1,005,430
========= ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 259,534 $ 259,457
Accrued expenses 64,085 62,239
Current portion of long-term debt (Note D) 152,550 722,717
---------- -----------
TOTAL CURRENT LIABILITIES 476,169 1,044,413
LONG-TERM DEBT, less current portion (Note D) 808,231 480,160
SHAREHOLDERS' DEFICIT
Common stock, $0.40 par value (10,000,000 shares authorized,
212,075 and 802,043 shares issued and outstanding as of
December 31, 1994 and 1995, respectively) (Note G) 84,830 320,816
Preferred stock, $0.40 par value (1,000,000 shares authorized,
none issued and outstanding December 31, 1994 and 1995,
respectively) (Note G) - -
Additional paid-in-capital (Note K) 71,497 366,373
-----------
Accumulated deficit (589,394) (1,206,332)
---------- -----------
TOTAL SHAREHOLDERS' DEFICIT (433,067) (519,143)
---------- -----------
$ 851,333 $ 1,005,430
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AMERICA'S COFFEE CUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
For the years ended
------------------------------------
December 31, December 31,
1994 1995
-------------------- --------------
<S> <C> <C>
SALES $3,278,938 $3,095,955
COST OF SALES
Beginning inventory 23,076 42,206
Purchases, coffee 1,364,520 1,467,735
Wages 651,382 629,803
Other expense 26,334 64,765
Service concession rent 674,602 754,427
---------- ----------
Cost of goods available for sale 2,739,914 2,958,936
Less ending inventory (42,206) (135,776)
---------- ----------
TOTAL COST OF SALES 2,697,708 2,823,160
---------- ----------
Gross Profit 581,230 272,795
OPERATING EXPENSES
General and administrative expenses 492,521 968,285
Depreciation 24,727 42,288
---------- ----------
TOTAL OPERATING EXPENSES 517,248 1,010,573
---------- ----------
INCOME (LOSS) FROM OPERATIONS 63,982 (737,778)
OTHER INCOME (EXPENSES)
Interest expense (63,679) (85,052)
Finance expense (Note K) - (19,306)
Loss on disposition of equipment - (2,075)
Other 3,458 (20,624)
---------- ----------
TOTAL OTHER INCOME (EXPENSES) (60,221) (127,057)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 3,761 (864,835)
Income Taxes (Note E) (800) (800)
---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,961 (865,635)
Extraordinary item, net of tax (Note L) - 248,697
---------- ----------
NET INCOME (LOSS) $ 2,961 $ (616,938)
========== ==========
NET INCOME (LOSS) PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM $ 0.01 $ (2.11)
Extraordinary item - 0.61
---------- ----------
NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (1.50)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 210,825 408,691
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AMERICA'S COFFEE CUP, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional
------------ paid-in- Accumulated
Shares Amounts capital deficit Total
------------ -------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 212,075 $ 84,830 $ 71,497 $ (592,355) $(436,028)
Net income - - - 2,961 2,961
------- -------- -------- ----------- ---------
Balance, December 31, 1994 212,075 84,830 71,497 (589,394) (433,067)
Issuance of common stock for
convertible debt (Note K) 589,848 235,939 294,924 - 530,863
Issuance of common stock due to
reverse stock splits (Note K) 120 47 (48) - (1)
Net loss - - - (616,938) (616,938)
------- -------- -------- ----------- ---------
Balance, December 31, 1995 802,043 $320,816 $366,373 $(1,206,332) $(519,143)
======= ======== ======== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AMERICA'S COFFEE CUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
-----------------------------------
December 31, December 31,
1994 1995
-------------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,961 $(616,938)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 68,477 137,334
Loss on disposition of equipment - 2,075
Issuance of common stock options for services 7,988 7,988
Issuance of common stock for services (Note K) - 412,893
Extraordinary item - extinguishment of debt (Note L) - (248,697)
Conversion of accounts payable to long term debt - 292,314
Changes in assets and liabilities:
Accounts receivable (35,160) 78,738
Inventories (19,130) (93,570)
Prepaid expense and other 25,004 (8,715)
Deferred offering costs and other assets 18,690 (68,181)
Accounts payable (150,657) (75)
Accrued expenses 25,223 (9,834)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (56,604) 114,668
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (32,702) (76,148)
Purchase of slotting fee - (5,000)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (32,702) (81,148)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 4,500 -
Payments on related party debt (25,000) -
Payments on long-term debt (25,036) (105,321)
Proceeds from issuance of convertible debt 128,750 105,000
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 83,214 (321)
--------- ---------
NET DECREASE IN CASH (6,092) (196,137)
CASH, BEGINNING OF YEAR 234,956 228,864
--------- ---------
CASH, END OF YEAR $ 228,864 $ 32,727
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
Organization
The Company was incorporated as FOA Industries, Inc. (FOA) under the laws of
the State of Delaware on February 10, 1988. On June 19, 1989, FOA acquired
all of the assets and liabilities of A.C.C., a California limited
partnership engaged in the retail gourmet coffee business. In conjunction
with this transaction, A.C.C. and its general partner, America's Coffee Cup,
Inc. ( a California corporation), were dissolved and the Company changed its
name to America's Coffee Cup, Inc. During November 1995, the Company changed
its state of incorporation from Delaware to Colorado.
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Cash
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less and money market funds to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
under the first-in, first-out (FIFO) method, for all coffee and general
merchandise product inventory.
Property and Equipment
Property and equipment is carried at cost and includes store equipment and
fixtures which were acquired as a result of the Supply Termination Agreement
(Note I). Maintenance, repairs and minor renewals are expensed as incurred.
When properties are retired or otherwise disposed, the related cost and
accumulated depreciation are eliminated from the respective accounts and any
gain or loss on disposition is reflected in income or expense. Depreciation
is provided on the straight-line method over the estimated useful lives
ranging from 5 to 7 years.
Other Assets
Other assets consist primarily of a license agreement, slotting fee, and
deferred offering costs.
License Agreement relates to the license renewal fee paid to grocery
-----------------
retailer for the right to use and occupy designated end cap space for the
sale of the Company's products. The license agreement is being amortized to
cost of sales on a straight-line method over the four year life of the
agreement.
F-7
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (Continued):
Other Assets: (continued)
Slotting Fee relates to the slotting fee paid to a grocery retailer for the
------------
right to sell within each grocery store location. The slotting fee asset was
received as part of the Supply Termination Agreement (Note I) and is being
amortized to cost of sales on a straight-line method over the four year life
of the asset.
Deferred offering costs include the costs associated with the proposed
-----------------------
secondary public offerings for each respective period. The costs related to
secondary public offerings are capitalized and will be netted against the
amount received from the public offerings. All deferred offering costs have
been or will be expensed in the event the offering is not consummated.
Deferred offering costs as of December 31, 1994 were incremental out-of-
pocket expenses associated with a failed public offering effort. The
deferred offering costs as of December 31, 1994 were expensed during the
third quarter of 1995.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the
service concessions located within the stores.
Net Income (Loss) Per Common Share
Net income (loss) per common share shown on the statements of operations is
computed by dividing net income (loss) by the actual weighted average number
of shares outstanding during the period. The Company's common stock
equivalents were anti-dilutive for the year ended December 31, 1995 and were
not material for the year ended December 31, 1994, therefore, they were not
included in the computation of net income (loss) per common share. The per
share computations reflect the effect of a 10-1 reverse stock split that
occurred on November 26, 1993 and the effect of a 4-1 reverse stock split
that occurred on September 1, 1995.
As a result of shares of Common Stock issued in conjunction with debt
conversions in August 1995 and February 1996, supplementary loss per share
for 1995, as if the debt conversions would have occurred at the beginning of
the year is $(0.71) per share. This is a result of an assumed reduction in
interest expense of $19,712 and total weighted average shares outstanding of
845,447, which assumes that 589,848 and 43,524 shares converted in August
1995 and February 1996, respectively, were considered outstanding during all
of 1995.
F-8
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (Continued):
Income Taxes
Income taxes provide for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of various assets for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating
losses that are available to offset future taxable income.
Concentration of Credit Risk
The Company's sales are substantially all from one large grocery retailer
located in Southern California. Credit is extended on an evaluation of the
grocery retailers' financial condition and collateral is not required. There
have been no significant credit losses and no allowance for doubtful
accounts has been deemed necessary for any reported period.
B. Inventories:
Inventories as of December 31, 1994 and 1995 consist of the following:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Coffee $ 3,490 $ 97,175
General merchandise 38,716 38,601
------- --------
$42,206 $135,776
======= ========
</TABLE>
C. Property and Equipment:
Property and equipment as of December 31, 1994 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Office equipment and furniture $ 34,760 $ 42,499
Store equipment and fixtures 155,801 411,895
Automobiles and delivery trucks 16,785 79,669
-------- --------
207,346 534,063
Less accumulated depreciation 153,689 195,978
-------- --------
$ 53,657 $338,085
======== ========
</TABLE>
F-9
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
D. Long-Term Debt:
Long-term debt as of December 31, 1994 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------- ---------------
<S> <C> <C>
Notes payable to affiliates of a director and
others, unsecured, interest payable at 11.50%,
due by December 31, 1995. Notes are convertible
in whole or in part at any time on or before
maturity for "restricted" common shares at a
conversion rate of the lesser of $8.00 per share
or the current market price (see Note K for
conversion of debt) $ 50,000 $ -
Note payable to an automotive financing company,
secured by the property, interest payable at
10.25%, principal and interest due monthly over
a period of sixty (60) months - 53,583
Notes payable to a group of foreign investors,
unsecured, interest payable at 9.0%, due by
December 31, 1996. Notes are convertible in
whole or in part at any time on or
before maturity for "restricted" common shares
at a conversion rate of $9.00 per (post
September 1, 1995, reverse 1:4 split) share
(subsequent to year-end the Company modified
the conversion price to $2.00 per share) 78,750 123,750
Note payable to Brothers Gourmet Coffee, Inc.
(BGC), interest payable quarterly at the higher
of 8% or the prime rate set forth by the First
Union Bank of North Carolina (7.25% at December
31, 1994) plus 2%, payable in interest only
installments, with the outstanding principal
balance due June 30, 1998 (see Notes I and M) 350,000 -
Note payable to BGC, non-interest bearing,
secured by fixtures and equipment, payable
in $25,000 monthly payments starting January
15, 1996 until paid in full (see Notes I and M) - 275,000
Note payable to BGC, interest payable at the
rate of 10%, payable in $26,795 monthly
installments starting January 15, 1996
until paid in full (see Note I) - 292,313
Note payable to BGC, unsecured, interest
payable quarterly at the higher of 8% or
the prime rate set by the First Union Bank of
North Carolina (7.25% at December 31, 1994 and
8.00% at September 30, 1995) plus 2%, payable
in semi-annual installments of 2.5% of
the then outstanding principal balance, due
April 1, 2003 (See Note I) 482,031 458,231
--------- ----------
960,781 1,202,877
Less current maturities (152,550) (722,717)
--------- ----------
$ 808,231 $ 480,160
========= ==========
</TABLE>
F-10
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
D. Long-Term Debt: (continued)
The following is a summary of principal maturities of long-term debt:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1996 $ 722,717
1997 31,507
1998 31,597
1999 405,836
2000 11,220
Thereafter -
----------
$1,202,877
==========
</TABLE>
E. Income Taxes:
At December 31, 1994 and 1995, the Company, before any limitations, had a
federal net operating loss carryforward of approximately $1,042,000 and
$1,110,000, and a state net operating loss carryforward of approximately
$505,000 and $546,000, respectively. The state and the federal net operating
loss carryforwards, if not utilized, will expire as follows:
<TABLE>
<CAPTION>
Twelve months ended
December 31,
--------------------------
State Federal
-------- ----------
<C> <S> <C>
1996 $ 91,500 $ -
1997 163,500 -
1998 125,500 -
1999 - -
2000 124,500 -
2001 41,000 -
2002 - -
2003 - 38,000
2004 - 184,000
2005 - 328,000
2006 - 252,000
2008 - 205,000
2009 - 35,000
2010 - 68,000
-------- ----------
$546,000 $1,110,000
======== ==========
</TABLE>
F-11
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
E. Income Taxes: (continued)
The realization of any future income tax benefits from the utilization of
net operating losses has been determined to be limited. Federal and state
tax laws provide that when a more than 50% change in ownership of a company
occurs within a three year period, the net operating loss is limited. As a
result of the conversion of the one-year convertible notes into common stock
(see Note K), the Company has determined that the net operating losses are
limited. The net operating loss carryfowards have been limited to
approximately $60,000 per year until expiration. Losses generated after the
conversion date will not be limited by any change that resulted from the
conversion of the one-year convertible notes.
The provision for income taxes for the years ended December 31, 1994, and
1995 consisted solely of the $800 minimum California franchise tax.
The Company's total deferred tax assets as of December 31, 1994 and 1995,
were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Net operating loss carryforward $ 384,000 $ 430,000
Valuation allowance (384,000) (430,000)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
</TABLE>
A valuation allowance has been established for the entire amount of the
deferred tax asset. The likelihood of full utilization by the Company of the
net operating losses incurred to date over the available carryover period is
highly unlikely based on the current operations of the Company. The net
change in the valuation allowance from December 31, 1994 to December 31,
1995 is due primarily to the net operating loss for the year.
F. License Fees and Other Commitments:
Effective July 1, 1994, the Company entered into a four-year license
agreement with Ralphs Grocery Company ("Ralphs"), in which both the Company
and BGC, its previous exclusive coffee supplier, each were charged a
$350,000 license renewal fee for the right to use and occupy approximately
40 square feet at each of the licensed locations for its retail service
concessions and any future locations. The Company's share of the license
renewal fee of $350,000 was paid for by BGC and was recorded as an
additional note payable due to BGC (Note D).
The Company has recorded its portion of the license fee at cost and is
amortizing the fee over the four-year license term. Amortization expense for
the year ended December 31, 1994 and 1995 was $43,750 and $87,500,
respectively, which is included in the cost of sales. The unamortized
license fee balance of $306,250 and $218,750, respectively, is included in
the accompanying balance sheet.
In addition to the renewal fee, the Company will continue to pay rent to
Ralphs in an amount equal to $1,000 for each four-week period per location
or 10% of total retail sales, whichever is greater. The Company incurred
rent expense of $674,602 and $757,412, for the years ended December 31, 1994
and 1995. The rental agreement with Ralphs is a year-to-year agreement
covered under the umbrella four year agreement.
F-12
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
G. Common Stock:
Stock Options
During 1993, the Company granted to its president and certain key employees,
options to purchase 2,250 shares of common stock of the Company. All options
issued and outstanding were exercisable at a price of $1.60 per (post
September 1, 1995, reverse split) share. As of December 31, 1994 and 1995 no
options had been exercised. The 2,250 options granted were exercisable in
increments of 750, on or after June 15, 1993, 1994 and 1995, and as of
December 31, 1995 no options remained outstanding. The Company has accrued
compensation expense in each period in which the services were performed.
Accordingly, the Company has included compensation expense of $7,988 related
to these options for 1993, 1994 and 1995.
During 1995, the Company adopted an employee incentive stock option (ISO)
plan. The Company is authorized to issue common stock options granted under
the ISO up to the amount of 500,000 shares over a 10 year period beginning
September 1, 1995.
ISO options may be granted by the Company to any full-time employee of the
Company or any subsidiary corporation. The total aggregate fair market value
of the shares with respect to ISO options shall not exceed $100,000 per
individual per year. The ISO option price is the fair market value of the
Company's common stock at the time the option is granted. For the year ended
December 31, 1995, no ISO options have been granted by the Company.
Stock Awards
The president and management team of the Company will receive as part of
their employment agreement, shares of common stock, which will be awarded in
any year, during a five year period ending September 1, 2001, in which the
Company shows a net profit, based on performance levels set by the Company.
There were no awards of options for the year ended December 31, 1995. Any
options granted will be included under the terms of the ISO.
H. Supplemental Cash Flow Information:
Cash paid for interest and income taxes for the years ended December 31,
1994 and 1995:
<TABLE>
<CAPTION>
For the years ended
---------------------------
December 31, December 31,
1994 1995
----------- ------------
<S> <C> <C>
Interest $22,003 $52,720
======= =======
Income taxes $ 800 $ 800
======= =======
</TABLE>
F-13
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
H. Supplemental Cash Flow Information: (continued)
Noncash Investing and Financing Activities
During 1994, the Company entered into a note payable agreement with BGC for
the Company's share of the license renewal fee of $350,000 which was paid to
Ralphs by BGC. The Company is currently amortizing the license renewal fee
over the length of the contract. The Company has not made any principal
payments on this note payable to BGC (see Notes D and I).
As discussed in Note I, the Company terminated its exclusive supply
agreement with BGC and in doing so received $263,625 in assets and
restructured the existing debt. As a result of this noncash transaction, the
Company recorded $248,697 as an extraordinary item.
During August 1995, debt and related interest totaling $117,970, along with
other consideration, was converted into 589,848 post split shares of common
stock (Note K). Also in 1995, the Company purchased two delivery which were
financed for a total of $53,583.
I. Termination Agreement:
On August 25, 1995 the Company entered into an agreement (the "Supply
Termination Agreement") with BGC. Under the terms of the Supply Termination
Agreement, the Company and BGC terminated the obligation of the Company to
purchase its supply of coffee exclusively from BGC and further agreed to the
restructuring and repayment of certain debt with BGC.
As satisfaction for allowing the Company to terminate the supply agreement
the Company recorded assets, assumed liabilities and recorded net
extinquishment of debt as summarized below:
<TABLE>
<CAPTION>
Assets Received:
<S> <C> <C>
Slotting fee $ 64,125
Store fixtures 153,900
---------
Store equipment 45,600
---------
$ 263,625
---------
Debt Forgiveness:
Note payable to BGC (Note D) 350,000
Accrued interest on note
payable to BGC 35,072
---------
385,072
---------
Total assets and debt forgiven 648,697
Debt Assumed:
Note payable to BGC (Note D) 1995 (400,000)
---------
Net, extinguishment of debt $ 248,697
=========
</TABLE>
F-14
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
I. Termination Agreement: (continued)
The Company has made principal payments in the amount of $140,000 on the
obligation under the terms of the Supply Termination Agreement.
Accordingly, the Company has recorded the slotting fee based on the
remaining fair market value and will amortize over the remaining life of the
slotting fee, and recorded the store equipment and fixtures at the fair
market value of the assets purchased through the Supply Termination
Agreement. There is no income tax effect as a result of the Company's
existing net operating losses.
J. Going Concern:
The Company has had recurring losses from operations and had a net
deficiency in assets of $519,143 and $433,067 at December 31, 1995 and
December 31, 1994, respectively, and had working capital of only $11,378 at
December 31, 1994 and a working capital deficiency of $729,459 at December
31, 1995. Additionally, the Company has significant debt payments due to BGC
as discussed under the settlement evidenced by joint stipulation discussed
in Note I. These conditions raise substantial doubt about the entity's
ability to continue as a going concern.
Several steps have been taken by the Company in an attempt to increase
working capital and improve profitability. During 1994 and 1995, the Company
issued convertible notes to affiliates of one director and to certain
foreign investors, each of which may be converted into common stock or will
be due and payable at the end of 1995 or 1996. This provided working capital
of $233,750.
The Company has signed a letter of intent with a licensed NASD broker/dealer
for a secondary public offering to commence during the first half of 1996
and finish by the end of the first six months. This offering is expected to
raise $3.5 million in new funds. Additionally, the Company previously
discussed adding additional service concessions in up to 15 new Ralphs
stores and also up to 15 stores now being converted from Alpha Beta stores
to Ralphs stores, as a result of the merger between the two companies. The
Company is also continuing to pursue expansion into other grocery chains
both in Southern and Northern California, as well as Arizona and Illinois.
The Company has also successfully terminated its exclusive supply agreement
with its sole supplier, BGC. The Company in turn has entered into an
agreement with a new supplier at more favorable prices which will positively
impact operating costs in future periods.
The ability of the Company to continue as a going concern is dependent upon
its ability to obtain additional working capital and obtain profitable
operations. The accompanying financial statements do not include any
adjustments that may be necessary should the Company be unable to continue
as a going concern.
F-15
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
K. Related Party Transactions:
During December 1994, the Company issued one year convertible promissory
notes aggregating $110,000 in principal amount to affiliates of Mr. Pierce,
a director of the Company. Subsequently, on June 30, 1995, $40,000 in
principal amount of these notes, along with the interest accrued thereon,
was assigned by an affiliate of Mr. Pierce to an unaffiliated third-party.
On August 17, 1995, prior to the September 1995, reverse 1:4 split of the
capital stock of the Company, all $110,000 in principal amount of these
notes was converted into common stock of the Company, along with the
interest accrued thereon. The conversion resulted in the Company issuing
2,359,392 pre-split/589,848 post-split shares of common stock at a
conversion price of $.90 per common share, an amount in excess of the market
at the time of $.05 per pre-split share and $.20 per post-split share as was
agreed upon based on the conversion agreement.
If the notes would have been converted at market price pursuant to the
conversion agreement, the recipients would have obtained the resulting
common shares at less than their par value. Accordingly, these shareholders
were called upon under Delaware law by the issuer to contribute additional
consideration. Based upon the Board of Directors' assessment of the value of
the common stock, the Company required total consideration of $0.90 per
share or $530,863. This consideration is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Exchange of note and accrued interest $117,970
Release of accrued legal fees 44,387
Guarantee of debt obligations 19,306
Release of potential contingent liability 117,970
Compensation to Mr. Pierce for services 231,230
--------
Total consideration $530,863
========
</TABLE>
The accrued guarantee of debt obligations related to Mr. Pierce's guarantee
of certain loans of the Company. The Board of Directors valued the guarantee
based upon independent valuation criteria.
The release of potential contingent liability relates to a settlement with
Mr. Pierce whereby Mr. Pierce agreed to release any recourse against Company
for any potential claims against the Company and a former director for
alleged misrepresentations made to Mr. Pierce in connection with his
acquisition of the note in December of 1994.
Subsequent to the conversion, on September 1, 1995, an affiliate of Mr.
Pierce and his minor son sold 187,679 of these post-split shares to Mr.
Marsik, then and currently an executive officer and director of the Company,
in exchange for Mr. Marsik's promising to pay $37,528.27 in the aggregate
for the shares, which obligations are secured by all of the shares purchased
and bear interest at the rate of 11 1/2% per annum.
Prior to the conversion, there were approximately 212,082 post-split shares
of Common Stock outstanding, and subsequent to the conversion, there were
approximately 802,043 shares outstanding. Mr. Marsik, as of December 31,
1995, owned, directly and beneficially, 189,801 post-split shares of common
stock and Mr. Pierce owned, indirectly through an affiliate, 187,679 post-
split shares, which represented 23.67% and 23.40% ownership, respectively,
of the outstanding common shares at the time or an aggregate of 47.07%.
F-16
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
L. Extraordinary Gain:
Under the terms of the Supply Termination Agreement (Note I), the Company
and BGC restructured the repayment of certain debt. As a result of the
receipt of certain assets, and restructuring of debt, the Company
effectively received a net extinguishment of debt from BGC of $248,697. This
amount has been recorded as an extraordinary gain. There is no income tax
effect as a result of the Company's existing net operating losses.
M. Subsequent Events:
Threatened Litigation
During January 1996, allegations were made against the Company and two
directors by a former director claiming breach of fiduciary duties by
management as a result of conversion of shares of common stock for
convertible debt, unauthorized board actions and improper publication and
disclosure which has been made in the past with respect to such actions. The
former director, through legal counsel, has offered to settle the case for
an aggregate of 260,000 shares of common stock and a payment of $162,500 in
cash. The assertions are preliminary and the outcome cannot be determined at
this time. However, the Company believes it has valid defenses and intends
to dispute these assertions vigorously. Management currently is unable to
estimate a range of loss, if any, regarding this action. Management believes
that its final outcome should not have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
Accordingly, no provision has been made in the accounts for any liability
for these assertions.
Public Offering
The Company has signed a letter of intent with an underwriter to file a
Registration Statement on Form SB-2 with the Securities and Exchange
Commission to offer up to 350,000 equity units to the general public. Each
equity unit, anticipated to be offered at $10, will consist of four shares
of common stock and two redeemable common stock purchase warrants. The
common stock and the warrants will be detachable and separately transferable
one hundred eighty days after the closing of the offering. Each warrant
entitles the registered holder thereof to purchase, at any time over a five
year period commencing on the date of the Prospectus, one share of common
stock at $3.00 per share. Commencing six months from the date of the
Prospectus, the warrants are subject to redemption at $0.05 per warrant on
thirty days written notice.
Bridge Financing
Beginning in January 1996, the Company received $262,000 in bridge financing
from a group of lenders. This borrowing bears interest at 12% and is due on
the earlier of the close of the Company's initial public offering of July
30, 1996. In conjunction with this bridge financing, the Company issued
warrants to purchase 78,600 units, each unit consisting of four shares of
Common Stock and two warrants at a price of $6.50 per unit. When recorded in
the financial statements, the units are anticipated to be valued at $786,000
and the difference between this and the cash proceeds of $510,900 will be
recorded as a financing expense.
F-17
<PAGE>
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
M. Subsequent Events: (continued)
Stipulated Settlement with Former Supplier
Subsequent to year end, BGC initiated suit against the Company, claiming
that the Company was delinquent in the repayment of certain trade accounts
payable which were evidenced by a promissory note, but which were not
included in the Supply Termination Agreement (see Note I). The Company was
prepared to defend the suit vigorously, as it had complied with the
repayment provisions of the promissory note; however, the Company and BGC
came to a full and final settlement of all matters between them without the
necessity of the Company even filing an answer.
The settlement is evidenced by a joint stipulation which has been entered in
the court records in the matter and provides that the sum of $717,696 shall
be paid by the Company to BGC by April 1, 1996. If this payment is not made,
the amount due to BGC from the Company increases to $1,025,280, which is
approximately equal to total notes recorded due to BGC on the accompanying
December 31, 1995 balance sheet as follows: note payable for $292,313; note
payable for $275,000; and note payable for $458,231 (see note D). Interest
on this new unsecured note will be at ten percent (10%) per annum and
require monthly payments of $30,246.57 beginning April 1, 1996, and ending
July 1, 1999.
F-18
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
__________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 12
Dilution.............................. 13
Capitalization........................ 14
Common Stock Price Range and
Dividend Policy....................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 16
Business.............................. 20
Management............................ 26
Certain Relationships
and Related Transactions............ 29
Principal Shareholders................ 31
Description of Securities............. 31
Shares Eligible For Future Sale....... 33
Underwriting.......................... 34
Legal Matters......................... 36
Experts............................... 36
Additional Information................ 37
Index to Financial Statements......... F-1
</TABLE>
_______________________________
UNTIL ___, 1996 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
280,000 UNITS
EACH UNIT CONSISTING OF
FIVE SHARES OF COMMON STOCK
AND
FIVE COMMON STOCK
PURCHASE WARRANTS
OFFERING PRICE
$
PER UNIT
AMERICA'S COFFEE CUP, INC.
PROSPECTUS
LA JOLLA SECURITIES CORPORATION
FIRST LONDON SECURITIES CORPORATION
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Company's Articles of Incorporation, the Company will
have authority under the Colorado Business Corporation Act to indemnify its
officers and Directors to the extent provided for in such statute.
The only statute, charter provision, bylaw, contract or other
arrangement under which any controlling person, director or officer of
registrant is insured or indemnified in any manner against any liability which
they may incur in their capacity as such are: (i) the Colorado Corporation Code,
as enacted and in effect upon adoption of registrant's Articles of Incorporation
and Bylaws and (ii) the underwriting agreement between registrant and the
various underwriters in this offering. The provisions of the Colorado
Corporation Code provide that registrant may, but is not obligated to, indemnify
against liability an individual made a party to a lawsuit because they were
previously or are currently a director or officer of registrant, if such person
acted in good faith and reasonably believed their actions were in the best
interests of registrant. Registrant may not indemnify such persons if they are
found liable to registrant in a shareholders' derivative suit or are found
liable for receiving an improper personal benefit. Registrant is required to
indemnify such persons if they are ultimately successful in the suit. Pending a
final determination, registrant may advance funds to these persons, but only if
provision is made for the return of all funds advanced in the event such persons
are subsequently found to not be entitled to indemnification. The general
effect of this statute is to make indemnification available to the officers and
directors of registrant regarding actions taken in their official capacity,
unless they are found liable to registrant for their actions, they received an
improper benefit therefrom, or they did not act in good faith while reasonably
believing their actions were in the best interests of registrant.
Indemnification under this section would include actions of the officers and
directors of registrant taken in connection with this offering. The
underwriting agreement provides that each underwriter shall indemnify any
controlling person, director or officer of registrant in the event that these
persons are found to be liable to any investor in this offering as a result of
any misstatement or omission furnished to registrant in writing by the
underwriter against whom indemnification is sought.
If available at reasonable cost, the Company intends to maintain
insurance against any liability incurred by its officers and directors in
defense of any actions to which they are made parties by reason of their
positions as officers and directors.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses in connection with the public offering of Common
Stock by the Company offered pursuant to this Registration Statement are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee $ 3,935.000
Boston Stock Exchange filing fee................ 250.00
Accounting fees and expenses.................... 15,000.00
Legal fees and expenses......................... 50,000.00
Printing and engraving.......................... 30,000.00
Fees of Transfer Agent and Registrar............ 4,500.00
Blue Sky fees and expenses...................... 10,000.00
Underwriters' nonaccountable expense allowance.. 84,000.00
Miscellaneous................................... 34,815.00
-----------
Total........................................... $ 232,500.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 1, 1993, registrant sold 2,125 shares of its Common Stock at a
price of $5.00 per share. The aggregate sales price of $10,625 for these shares
was paid in lieu of a bonus for the execution and delivery of an employment
agreement with the principal executive and accounting officer of registrant. The
purchaser was a resident of the United States, and was accredited and
sophisticated. Registrant relied upon the exemptive provisions set forth in
Section 4(2) of the Securities Act in this offering. No underwriter was used to
offer or sell the securities.
In December, 1994, registrant sold to (i) a group of European
investors $123,750 in principal amount of its two-year, unsecured, 9% interest
bearing promissory notes which are presently convertible into shares of Common
Stock at a price per share of $2.25 on the date of issuance, $9.00 per share
after the reverse 1:4 share split in
II-1
<PAGE>
September, 1995(the "Two Year Notes"), and (ii) residents of the United States
$110,000 in principal amount of its one year, unsecured, 11.5% interest bearing
promissory notes (the "One Year Notes"). The purchasers of this debt were
accredited and sophisticated. Registrant relied upon the exemptive provisions of
Section 4(2) of the Securities Act in this offering. No underwriter was used to
offer or sell the securities.
On August 17, 1995, registrant sold 589,848 shares of its Common Stock
at a price of approximately $0.20 per share, which was paid through the
conversion of the One Year Notes, which then evidenced approximately $117,969.50
in debt. The purchasers were residents of the United States and the Bahamas, and
were either accredited and/or sophisticated investors with whom registrant had,
either directly or through its affiliates, a previous business relationship.
Registrant relied upon the exemptive provisions set forth in Section 4(2) of the
Securities Act in this offering. No underwriter was used to offer or sell the
securities.
Beginning in January, 1996, registrant offered and sold, directly and
through an unaffiliated intermediary, promissory notes (the "Bridge Loan Notes")
to unaffiliated third parties who were residents of the United States and were
either accredited and/or sophisticated investors with whom registrant had,
either directly or through its affiliates, a previous business relationship.
Registrant relied upon the exemptive provisions set forth in Section 4(2) of the
Securities Act in this offering. The principal amount of the Bridge Loan Notes
sold to the date of this filing aggregated $262,000. These loans are convertible
at the option of the respective holders into up to 350,000 shares of Common
Stock. In conjunction with the issuance of these notes, registrant issued to the
purchasers 78,600 warrants (the "Bridge Loan Warrants") which allow the holders
to acquire upon exercise up to 78,600 units at a price of $6.50 per unit, with
each unit consisting of four shares of Common Stock and four warrants, which
each allow the acquisition of an additional share of Common Stock at a price of
$3.00.
In February, 1996, registrant sold 43,254 shares of Common Stock at a
price of $2.00 per share, which was paid through the conversion of certain
promissory notes which then evidenced approximately $87,046.77 in debt. The
purchasers were residents of Switzerland and were not subject to the United
States securities laws. The certificates were marked with a restrictive legend
which prohibits transfer of the shares in the United States unless registered
under the Securities Act of 1933. No underwriter was used to offer or sell the
securities.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C>
Exhibit 1.1 Revised Form of Underwriting Agreement (2)
Exhibit 3.1 Certificate of Incorporation as Amended (2)
Exhibit 3.2 Bylaws of the Registrant (2)
Exhibit 3.3 Articles of Incorporation, as Amended - Colorado (2)
Exhibit 3.4 Bylaws - Colorado (2)
Exhibit 4.1 Form of Representatives' Warrant and Registration Rights Agreement (2)
Exhibit 4.2 Common Stock Purchase Warrant Agreement (2)
Exhibit 5.1 Opinion of Robert A. Forrester (2)
Exhibit 10.1 Supply Termination Agreement with Brothers Gourmet Coffees, Inc. (2)
Exhibit 10.2 Form of Underwriters' Financial Consulting Agreement (2)
Exhibit 10.3 Employment Agreement between Registrant and Mr. Marsik (2)
Exhibit 10.4 Employment Agreement between Registrant and Mr. Vandenberg (2)
Exhibit 10.5 Agreement with Ralph's Grocery (2)
Exhibit 10.6 Brothers Settlement Stipulation (2)
Exhibit 10.7 Bridge Loan Loan Documents: (2)
(i) Promissory Note
(ii) Security Agreement
(iii) Financing Statement
(iv) Warrant Agreement
(v) Registration Rights Agreement
Exhibit 10.8 The Growth Fund of Southern California Loan Documents: (2)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
(i) Promissory Note
(ii) Security Agreement
(iii) Financing Agreement
(iv) Warrant Agreement
(v) Registration Rights Agreement
Exhibit 10.9 Wanable License Agreement (2)
Exhibit 10.10 Brothers Extension Letter of March 6, 1996 (2)
Exhibit 10.11 Brothers Extension Letter of April 30, 1996 (2)
Exhibit 10.12 1996 Agreement with Ralph's (2)
Exhibit 10.13 Bridge Loan Note dated May 7, 1996 (2)
Exhibit 10.14 Rider to Bridge Loan Note dated May 7, 1996 (2)
Exhibit 10.15 Consulting Agreement with Moreau (2)
Exhibit 24.1 Consent of Robert A. Forrester (Contained in Exhibit 5.1) (2)
Exhibit 24.2 Consent of Harlan & Botteger, Certified Public Accountants (1)
</TABLE>
______________
(1) Filed herewith.
(2) Previously Filed
(3) To be filed by Amendment
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
At the closing of this Offering, to provide certificates evidencing
the Units in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to the
purchasers.
The undersigned Registrant hereby undertakes it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental change in the
Registration Statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the Offering.
In addition, the undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective. For the purposes of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective. For the purposes of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Poway, State of California, on May 14, 1996.
AMERICA'S COFFEE CUP, INC.
(Registrant)
By:/s/ Robert W. Marsik
---------------------
President
(Principal Executive Officer
and Principal Financial Officer)
POWER OF ATTORNEY
-----------------
Know all men by these presents, that each of the undersigned hereby
constitutes and appoints Robert W. Marsik, his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments), and to file same,
with all exhibits thererto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto such attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such
attorney-in-fact and agent or any of them, or his substitute, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933 this registration
statement has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert W. Marsik President and Director May 14, 1996
- ------------------------------- (Principal Executive Officer
Robert W. Marsik and Principal Financial Officer)
/s/ Mark S. Pierce Director May 14, 1996
- -------------------------------
Mark S. Pierce
/s/ Roger F. Tompkins Director May 14, 1996
- -------------------------------
Roger F. Tompkins
</TABLE>
II-5
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated February 16, 1996,
relating to the financial statements of America's Coffee Cup, Inc., which is
contained in this Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ Harlan & Boettger
San Diego, California
May 14, 1996
