SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSBA
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number: 33-20492-D
America's Coffee Cup, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1078201
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
12528 Kirkham Court, Nos. 6 & 7, Poway, California 92064
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619)
679-3290
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Rule 405 of Regulation S-K is not contained herein and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall
be computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing:
On March 12, 1996, there were 845,577 shares of registrant's
common stock outstanding, which was its sole class of voting stock.
There were 377,483 shares held by affiliates, leaving 468,094
shares held by non-affiliates. The bid and asked prices per share
of this stock on that date was $1.00 and $1.50, respectively, which
was an average of $1.25. The aggregate market value, therefore, of
the voting stock held by non-affiliates on March 12, 1996, was
$585,117.50.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable
date: As of March 12, 1996, there were 845,577 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents if incorporated by reference and the
Part of this Form 10-KSB into which the document is incorporated:
None.
<PAGE>
TABLE OF CONTENTS
Item 1. Description of Business . . . . . . . . . . . . .
Item 2. Description of Properties . . . . . . . . . . . .
Item 3. Litigation. . . . . . . . . . . . . . . . . . . .
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Managements's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7. Financial Statements. . . . . . . . . . . . . . .
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9. Directors and Executive Officers of the Registrant
Item 10.Executive Compensation . . . . . . . . . . . . . . . .
Item 11.Security Ownership of Management and Certain Others. .
Item 12.Certain Transactions . . . . . . . . . . . . . . . . .
Item 13.Exhibits and Reports on Form 8-K . . . . . . . . . . .
<PAGE>
Item 1. Description of 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.
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 July
1, 1996, six of these locations had been installed and a schedule
implemented to complete the move to the remaining four stores by
the end of September.
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 within
Ralph's. In 1996 the Company and Ralph's again renegotiated their
relationship, extending the term of their agreement to December
31, 1996, 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. 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 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.
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 June 30, 1996 six of these
locations had been installed and a schedule set to complete the
remaining four by the end of September. All of the new locations
had originally been planned to be installed by the end of April,
1996; but because the new sites are to be located at newly
constructed Ralph's, installation has been delayed because of
delayed construction schedule at Ralph's.
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.
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 its
recently completed offering will be necessary to provide for the
expansion within Ralph's.
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.
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
re-paid 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 the completion of the Company's recently completed offering.
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,
1996, the Company agreed to pay interest at 10% per annum from
April 1, 1996 on the balance then due, which interest was paid in
addition to the $30,246 payment on May 1, 1996. The Company made
the June and July payments. The Company is in discussion with
Brothers to determine whether to continue monthly payments or
completely liquidate the debt.
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 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 June 30,1996, was approximately
$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.
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 si/nce 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.
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 use these intangible assets would result in increased
competition to the Company and negatively affect cash flows and
revenues.
Employees
The Company, as of June 30, 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.
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.
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.
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 June 30, 1996, six had been subsequently opened and
another four are anticipated to be opened by the end of September.
The effect of the closings was 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
on profits 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 six months of 1996 of approximately $493,000 compared to a
net loss of approximately $177,000 in the comparable six months of
1995. on revenues of approximately $1,194,000 in 1996 compared to
revenues of approximately $1,504,000 in the 1995 period, a decrease
in revenues of approximately $310,000. 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 $65,000 of the decline is
attributable to the repurchase of inventory from Ralph's made in
connection with the closed concessions. Management believes that
sales from reopened concessions will begin to favorably affect
operations in the third quarter and thereafter.
The Company will report for the first six months of 1996
improved gross margins to approximately 60% compared to
approximately 53% in the same period for 1995. This profit margin
reflects the lower purchase price of coffee from the Company's new
suppliers.
Additional factors, which constitute part of the Company's
planned expansion, contributed to the 1996 first half's increased
loss over the same period of 1995, including approximately $34,000
in design and production costs incurred in introducing a new coffee
bag for a new product line and increased marketing, general and
administrative expense, including costs incurred in distribution
route enhancements. 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 its
recently completed 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 additional notes for $90,000 in the second quarter of 1996.
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 June
30, 1996, located in 60 separate locations within Ralph's in
Southern California, 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.
Item 2. Description of Properties.
The Company owns no real property.
Item 3. Litigation.
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, to be repaid/, with interest at the rate of
10% per annum, in 40 equal monthly installments of $30,246
beginning April 1, 1996, and ending July 1, 1999. This obligation
is unsecured. The Company paid $15,000 to Brothers on January 25,
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 the
completion of its recently completed public offering to make this
lump sum payment, provided that all of the other terms of the
settlement are adhered to. If the Company does not repay this
obligation or does not make the monthly payments, 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. The Company is current on these obligations.
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. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during
the fourth quarter of 1994.
PART 11
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock is currently traded 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 Common Stock, as reported
by National Quotation Bureau, Inc., for the periods indicated.
Year Ended December 31, 1993: High Bid(1) (2) Low Bid (1) (2)
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
(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.
(2) During 1993 and 1995, the Company effectuated a one for
ten (1:10) and a one for four (1:4) reverse stock-split,
respectively. These prices have been revised to reflect these
splits.
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. As of March 12, 1996, there were 845,577 shares of
Common Stock issued and outstanding which were held by 313 persons
of record.
Dividends. Since inception the Company has not paid any cash
dividends on its stock. Any declaration in the future of any cash
or stock dividends 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 granting 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.
Item 6. 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
Report.
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 Report 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 its
recently completed public offering. Management believes that
operations of the Company, along with the proceeds of the offering,
provide sufficient liquidity for the Company to be able to service
the remaining payments to a former coffee supplier. There can be
no assurance that such efforts will be successful.
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 capita income. As of July 1, 1996,
six of these locations had been installed and a schedule
implemented to install the remaining four locations by the end of
September, 1996. All of these new locations had originally been
planned to be installed by the end of April, 1996; however, because
the new sites are to be at newly constructed Ralph's, installation
has been delayed because of construction schedules at Ralph's. 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.
Results of Operations
Three Months Ended March 31, 1996, as Compared to Three Months
Ended March 31, 1995
1995 1996
Revenues $749,637 $616,581
Cost of Sales 312,595 245,582
Operating Expenses 473,252 586,947
Income (Loss) from Operations (36,210) (215,948)
Other Income (Expenses) (19,431) (8,545)
Net Income (Loss) (56,441) (224,493)
The Company incurred a net loss in the quarter ended March 31,
1996, of $244,043 compared to a net loss of $55,641 in the same
quarter in 1995. Revenues decreased $133,056 in the 1996 quarter
compared to the 1995 quarter, a decrease of approximately 18%. 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 the closing of concessions, approximately
half the decline in revenues is attributable to the repurchase of
coffee from Ralph's made in connection with the closed concessions.
The amount of this repurchase was subtracted from the first quarter
of 1996's revenues.
The Company's cost of goods sold as a percentage of revenue
improved in the 1996 first quarter as compared to the 1995 first
quarter, 39.8% and 41.7% respectively. This improvement in margin
reflects the beginning of the margin improvement the Company
anticipates from purchasing coffee from a new supplier at lower
costs. Gross Profit in the 1996 quarter was $370,999 compared to
$437,042 in the 1995 quarter, a decrease of $66,043 or
approximately 15%. Management of the Company believes
approximately $45,000 of this decrease in gross profit is
attributable to the lost margin incurred by the repurchase of
coffee from Ralph's discussed above. In addition gross margins in
the 1996 quarter were reduced by the cost of removing equipment,
fixtures and inventory from the closed concessions.
The increase in the loss in the 1996 quarter from the
comparable 1995 quarter is also attributable to an increase of
113,695, or approximately 24% in operating expenses to $586,947
from $473,252 General and administrative expenses increased
approximately $114,220. Management of the Company believes that
most of the increase in general and administrative expenses is
attributable to the Company's planned expansion with approximately
$34,000 in design and production costs incurred in introducing a
new coffee bag for a new product line and an approximately $33,000
increase in marketing expense. The Company's amortization expense
increased approximately $27,500 largely because of the Supply
Termination Agreement with Brothers.
Interest expense was substantially reduced during the first
quarter of 1996 because of the conversion of approximately $205,000
in debt securities in the last six months of 1995 and in February
of 1996.
The Company generated negative cash flows from operations of
$205,118 during the first three months of 1996 due primarily to the
relocation within Ralph's, the build out of the warehouse and
delivery systems discussed above, and the purchase of inventory.
This compared to a positive operating cash flow of $44,051 from
operations in the first quarter of 1995. Cash was used outside of
operations to purchase property and equipment ($111,558) and repay
the brothers debt ($5,000). Cash was generated from the sale of
the Bridge Loan Notes ($262,000) and the conversion of outstanding
debt ($69,637) which, when combined with the cash flows used in
operations during the first quarter of 1996, resulted in a decrease
in cash of $30,039 during the period, as compared to an increase of
$107,640 in cash during the comparable period of 1995.
Year Ended December 31, 1995, as Compared to Year Ended December
31, 1994
1994 1995
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 (Loss) $2,961 $(616,938)
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.
Cost 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 incurred in connection with the
conversion of debt by affiliates of Mr. Pierce, a director of the
Company, and others. Of the increase, $231,230 was deemed by the
Board of Directors to be a compensation expense. In July of 1995,
affiliates of Mr. Pierce, a director of the Company, and others,
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 required 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's cash flows were affected by an expenditure of an
additional $93,570 during 1995 in expanding its inventory of coffee
and $68,181 in the pursuit of its proposed public offering. In
1995, the Company incurred an operating cash deficit of $114,668
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 $321
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
Years Ended December 31,
1993 1994
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
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 $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 of the recent public offering, a recent consulting
agreement with one of the holders of certain 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.
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
re-paid 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 the close of the recently completed public offering.
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 amount due Brothers. In consideration for the extension, the
Company agreed to pay interest at 10% per annum from April 1, 1996
on the balance then due, which interest was paid in addition to the
$30,246 payment on May 1, 1996. The Company made the June and July
payments. The Company is in discussions with Brothers to determine
whether to continue monthly payments or complete liquidation of the
debt.
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 bore interest at the rate of 12% per annum and
were paid at repaid from the proceeds of its the Company's recently
completed offering. 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. These notes
will be paid in full from the proceeds of the recently completed
public offering.
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 the recently completed public offering up
to 78,600 units, each unit consisting of five shares of Common
Stock and five 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 the $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 were
included in the recently completed public 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.
In addition, in May of 1996, the Company sold an additional
note. The principal amount of the note was $40,000 with $800 of
interest thereon being paid in advance (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.
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.
Management expects that operations and the proceeds of the
recently complete public 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 the recently completed offering. Additional
coffee concessions are self-funding.
The following table sets forth all current directors and
executive officers of the Company, as well as their ages:
Name Age Position
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
Robert W. Marsik, effective May 17, 1993, was elected a
Director and appointed 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.
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.
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 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.
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
Long-Term Compensation
Awards
Name and Annual Securities
Principal Fiscal Year Compensation Underlying Options
Salary Bonus
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
(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 Report, 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 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, 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 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.
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.
Item 7. Financial Statements.
(Financial Statements begin on the following page.)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants. . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets as of December 31, 1994 and 1995. . . . . . . . .
Statements of Operations for the years ended December 31, 1994 and
1995
Statements of Changes in Stockholders' Equity (Deficit) for the
years
ended December 31, 1994 and 1995. . . . . . . . . . . . . . .
Statements of Cash Flows for the years ended December 31, 1994 and
1995
Notes to Financial Statements. . . . . . . . . . . . . . . . . .
<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
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
BALANCE SHEET
(America's Coffee Cup, Inc.-Unaudited)
As of December 31,
ASSETS 1994 1995
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) 53,657 411,900
OTHER ASSETS
License agreement, net 306,250 218,750
Slotting fee, net - 61,581
Deferred offering costs 3,879 72,060
TOTAL OTHER ASSETS 310,129 352,391
$851,333 $1,079,245
LIABILITIES AND STOCKHOLDERS' 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, $.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) 84,830 320,817
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 -
Accumulated deficit (589,394) (766,145)
TOTAL SHAREHOLDERS' DEFICIT (433,067) (445,328)
$851,333 $1,079,245
<PAGE>
AMERICA'S COFFEE CUP, INC.
STATEMENT OF OPERATIONS
For the years ended
December 31, 1994 December 31, 1995
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
(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 492,521 574,698
Depreciation 24,727 42,288
TOTAL OPERATING EXPENSES 517,248 616,986
INCOME (LOSS) FROM OPERATIONS 63,982 (344,191)
OTHER INCOME (EXPENSES)
Interest expense (63,679) (85,052)
Loss on disposition of equipment - (2,075)
Other 3,458 (20,624)
TOTAL OTHER INCOME (EXPENSES)(60,221) (107,751)
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 3,761 (451,942)
Income Taxes (Note E) (800) (800)
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 2,961 (452,742)
Extraordinary item, net of tax
(Note L) - 322,512
NET INCOME (LOSS) $2,961 $(130,230)
NET INCOME (LOSS) PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM $0.01 $(1.11)
Extraordinary Item - 0.79
NET INCOME (LOSS) PER COMMON SHARE $0.01 $(0.32)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 210,825 408,691
<PAGE>
AMERICA'S COFFEE CUP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Additional
Common Stock paid-in Accumulated
Shares Amounts capital deficit Total
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) 589,848 117,970 - - 117,970
Issuance of
convertible
debt exchanged
for common
stock at less
than par value
(Note K) - 117,970 (71,449) (46,521) -
Issuance of
common stock
due to reverse
stock splits
(Note K) 120 47 (48) - (1)
Net loss - - - (130,230) (130,230)
Balance, December
31, 1995 802,043 $320,817 $ - $(766,145)$(445,328)<PAGE>
AMERICA'S COFFEE CUP, INC.
STATEMENTS OF CASH FLOWS
For the years ended
December 31, December 31,
1994 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,961 $(130,230)
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
Extraordinary item - extinguishment
of debt (Note L) - (322,512)
Convertible debt exchanged for
common stock at less than par
value (Note K) - 117,966
Conversion of accounts payable
to long term debt - 292,314
Changes in assets and liabilities:
Accounts receivable (35,160) 78,738
Inventory (19,130) (93,570)
Prepaid expenses and other 25,004 (8,711)
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) 3,302
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (32,702) (76,148)
Purchase of slotting fee - (5,000)
NET CASH USED IN OPERATING ACTIVITIES (32,702) (81,148)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from related party debt 4,500 -
Payments on related party debt (25,000) -
Payments on long-term debt (25,036) (223,291)
Proceeds from issuance of
convertible debt 128,750 105,000
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 83,214 (118,291)
NET DECREASE IN CASH (6,092) (196,137)
CASH, BEGINNING OF YEAR 234,956 228,864
CASH, END OF YEAR $228,864 $32,727
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 1). 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.
Slotting Fee relates to the slotting fee paid to a grocery
retailer for the right to sell within the grocery store chain. The
slotting fee asset was received as part of the Supply Termination
Agreement (Note 1) 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 is computed by dividing net
income (loss) by the weighted average number of shares outstanding
during the period. The Company's common stock equivalents were
antidilutive 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,
The weighted average number of shares outstanding for the year
ended December 31, 1995 is 409,69 1, as compared to 802,043 total
shares actually outstanding on that date. The increase in the
number of shares issued and outstanding as of December 3 1, 1995 is
a result of 589,848 shares of common stock issued to related and
unrelated parties as a result of the conversion of a related party
notes payable on August 17, 1995 (Note K) and 120 shares of common
stock issued to various shareholders as a result of the reverse
stock splits, whereby full shares were issued on September 1, 1995
to all shareholders for any fractional shares which had resulted
from the reverse stock split.
All per share references have been adjusted for the effect of
the reverse stock splits.
Income Taxes
Income taxes provide for the tax effects of transactions
reported in the fmancial 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:
1994 1995
Coffee $3,490 $97,175
General merchandise 38,716 38,601
$42,206 $135,776
C. Property and Equipment:
Property and equipment as of December 31, 1994 and 1995
consists of the following:
1994 1995
Office equipment and furniture $34,760 $ 42,499
Store equipment and fixtures 155,801 485,710
Automobiles and delivery trucks 16,785 79,669
207,346 607,878
Less accumulated depreciation 153,689 195,978
$53,657 $411,900
D. Long-Term Debt:
Long-term debt as of December 31, 1994 and 1995 consisted of
the following:
1994 1995
Notes payable to affiliates of a
director and others, unsecured,
interest payable at 1 1.50%,
due by December 3 1, 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 1) - 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, 11)94
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 1) 482,031 458,231
960,781 1,202,877
Less current maturities (152,550) (722,717)
$808,231 $480,160
The following is a summary of principal maturities of
long-term debt:
December 31,
1996 $ 722,717
1997 31,507
1998 31,597
1999 405,836
2000 11,220
Thereafter -
$1,202,877
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:
Twelve months ended
December 31,
State Federal
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
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:
1994 1995
Net operating loss carryforward $ 384,000 $ 430,000
Valuation allowance (384,000) (430,000)
Net deferred tax assets $ - $ -
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 covt!red
under the umbrella four year agreement.
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 (ISOP) plan. The Company is authorized to issue common
stock options granted under the ISOP up to the amount of 500,000
shares over a 10 year period beginning September 1, 1995.
ISOP 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 ISOP
options shall not exceed $100,000 per individual per year. The
ISOP 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 ISOP 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 ISOP.
H. Supplemental Cash Flow Information:
Cash paid for interest and income taxes for the years ended
December 31, 1994 and 1995:
For the years ended
December 31, 1994 December 31, 1995
Interest $22,003 $52,720
Income taxes $ 800 $ 800
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 1).
As discussed in Note I, the Company terminated its exclusive
supply agreement with BGC and in doing so received $337,440 in
assets and restnictured the existing debt. As a result of this
noncash transaction, the Company recorded $322,512 as an
extraordinary item.
The Company purchased two delivery trucks in 1995 which were
financed for a total of $53,583.
1. 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 extiiiquishment of debt as summarized below:
Assets Received:
Slotting fee $ 64,125
Store fixtures 179,550
Store equipment 93,765
$337,440
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 722,512
Debt Assumed:
Note payable to BGC (Note D) 1995 (400,000)
Net, extinguishment of debt $322,512
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 $445,328 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 1.
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 temlinated
its exclusive supply agreement with its sole supplier, BGC. The
Company in rum 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 is 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.
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 $1 10,000 in principal amount of these notes
was converted into common stock of the Company, along with the
interest accrued thereon, at the market price for the common stock
on the date of conversion, as was agreed to upon the issuance of
the notes in December of 1994. The conversion resulted in the
Company issuing 2,359,392 pre-split/589,848 post-split shares of
common stock at a conversion price based upon the market at the
time of $.05 per pre-split share and $.20 per post-split share.
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%.
L. Extraordinary Gain:
Under the terms of the Supply Termination Agreement (Note 1),
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 $322,512. 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 conunencing 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.
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 seulement 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.<PAGE>
Item 8. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 9. Directors and Executive Officers of the Registrant.
The following table sets forth all current directors and
executive officers of the Company, as well as their ages:
Name Age Position
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
Robert W. Marsik, effective May 17, 1993, was elected a
Director and appointed 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.
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.
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 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.
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
Long-Term Compensation
Awards
Name and Annual Securities
Principal Fiscal Year Compensation Underlying Options
Salary Bonus
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
(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 Report, 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 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, 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 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.
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.
Item 10. Executive Compensation.
The following table sets forth information concerning the
compensation paid to Mr. Marsik for the 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.
No executive officer was paid a salary and bonus in excess of
$100,000 for the last three fiscal years.
Summary Compensation Table
Long-Term Compensation
Awards
Name and Annual Securities
Principal Fiscal Year Compensation Underlying Options
Salary Bonus
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
(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 pmpose 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 3
1, 1997, or the temiination 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 arc 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 claim 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 report, 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 3 1, 1997, or the termination of the
participant director's employment or affiliation with the Company.
Employment Agreements. Mr. Marsik has entered into an
employment contract with the Company whiclrbegan 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, 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 Conunon
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, iffespectivc 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
satiny is $67,200, and he is entitled to a $500 per month car
allowance, two weeks of vacation during the fast two years of
employment and three weeks thereafter, and health insurance
coverage for him and Ns famdy under die Company's cm-rent policy.
Mr. Vandenberg may also become entitled to an annual commission of
up to 35% of lus base salary, or $22,800 annually. This commission
will have three segments: (i) 37.5% of the conunission will be tied
to Mr. Vandenberg's establishing new accounts for concessions and
causing these accounts to set up test stores, and generating new
accounts for whole bean coffee other than through concessions (it)
37 5/,, will be tied to specific dollar volume sales goals; and
(in) 250/0 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 (it) Common Stock equaling up to I 0,000
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 conunissions to the date of
termination in the event that it tentiinates the agreement.
The commissions 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 bv 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, 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
ol'Lhe Company by providing those persons who have a substantial
responsibility for its management and growth with additional
incentive bv increasing their interest in the success of the
Company; thereby encouraging them tc) 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 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 Linder 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 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 uinder
the ISOP will have an exercise price equaling or exceeding I 0% 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 the date
of'this report no options had been granted under the ISOP
Item 11. Security Ownership of Management and Certain Others.
The following table sets forth certain information regarding
the beneficial ownership as of March 12, 1996, of the Common Stock
by (i) each person known by the Company to be the beneficial owner
of more than five percent of the Conunon Stock, (6) each director
and executive officer of the Company, and (in) all directors and
executive officers as a group. Except as otherwise indicated, each
stockholder identified in the table possesses sole voting and
investment power %kith respect to its or his shares.
Name of Number of Shares Percentage of Ownership
Beneficial Owner Beneficially Owned Prior to Offering
Robert W Marsik (1) 189,804 22.45%
Mark S. Pierce 187,679 (2) 22.19%
Roger F Tompkins - -
Michael D. Vandenberg - -
All executive officers and 377,483 44,64%
directors as a group (4 persons)
(1) Mr. Marsik purchased 187,679 of these shares from Mr. Pierce's
pension fund and his 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
under his payment obligations in this regards on the date of this
report.
(2) These shares are 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 Kirkhwn 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, immediately above. No arrangement or
understanding presently exists for the election of directors or
executive officers, other than the employment agreement of Mr.
Marsik.
Item 12. Certain Transactions.
The Company, on June 1, 1993, entered into a Financing
Agreement of Understanding with Fidiparex, S.A. ("Fidiparex") which
is controlled by Mr. Robert Matossian, a former director and
currently an insignificant 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.
The Company, on December 30, 1994, sold to affiliates of Mr.
Pierce, then a director, $110,000 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 $530,963. 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 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.
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 or 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 parties.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 32,727
<SECURITIES> 0
<RECEIVABLES> 130,455
<ALLOWANCES> 0
<INVENTORY> 135,776
<CURRENT-ASSETS> 314,954
<PP&E> 411,900
<DEPRECIATION> 137,334
<TOTAL-ASSETS> 1,079,245
<CURRENT-LIABILITIES> 1,044,413
<BONDS> 0
0
0
<COMMON> 320,817
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> $1,079,245
<SALES> 3,095,955
<TOTAL-REVENUES> 3,095,955
<CGS> 2,823,160
<TOTAL-COSTS> 2,823,160
<OTHER-EXPENSES> 616,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,052
<INCOME-PRETAX> (451,942)
<INCOME-TAX> 0
<INCOME-CONTINUING> (451,942)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (452,742)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
