SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1996
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
Midland, 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: (619) 679-3290
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(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
May 5, 1997, there were outstanding: (i) 1,957,217 shares of
common stock, (ii) 163,000 shares of Series A Preferred Stock
convertible into 5,705,000 shares of common stock and (iii)
149,259 shares of Series B Preferred Stock convertible into
22,388,850 shares of common stock. The foregoing are
registrant's sole classes of voting stock. The preferred stock
is considered to be a common stock equivalent for purposes of
this calculation. There were, therefore, 26,978,843 common share
equivalents held by affiliates, leaving 3,072,224 common share
equivalents held by non affiliates. The bid and asked prices per
share of common stock on that date were $.46 and $.53,
respectively, which was an average of $.495. The aggregate
market value, therefore, of the voting stock equivalents held by
non-affiliates on May 5, 1997, was $1,520,750.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date: As of May 5, 1997, there were 1,957,217
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.
Item 1. Description of Business
Business until February 18, 1997
The Company, during 1996, was engaged in the sale of gourmet
coffee, related products and accessories through service
concessions located in a chain of grocery stores in Southern
California. The Company owned and operated service concessions,
almost all of which were located in one supermarket chain in
Southern California, Ralph's.
Beginning in late October, 1996, the Company began to experience
difficulties in its relationship with Ralphs, the result of which
was that Ralphs refused to pay the Company for the coffee which
the Company was selling to Ralphs, which, in turn, caused the
Company to default on its obligations to Daymar and also to
Restaurant Blend, which, in turn, resulted in the Company being
unable to deliver coffee to Ralphs and its other sales outlets,
which, in turn, resulted in Ralphs and the Company's other sales
outlets notifying the Company of their intention to terminate
their respective relationships. The Company negotiated a
settlement with Ralphs in February, 1997, whereby their contract
was mutually terminated. Ralphs kept the slotting fees paid by
the Company and the Company was relieved of all liabilities
claimed by Ralphs. Subsequently, the Company settled all
liabilities with Brothers, Daymar, Restaurant Blend and most, if
not all, of its others creditors.
Secondary Offering:
The Company, on August 14, 1996, completed a secondary offering
to the public of 54,000 units (Units) , each Unit consisting of
one share of Series A Preferred stock (Series A Preferred Stock)
and fifty Redeemable Common Stock Purchase Warrants (Series A
Warrants). The Series A Preferred Stock and the Series A Warrants
are now being traded separately.
The Series A Preferred stock will automatically convert into
thirty-five shares of Common Stock on October 1, 1998. If the
Company fails to have $300,000 of pre-tax earnings for the twelve
months ended June 30, 1997, exclusive of extraordinary and
non-recurring items and, upon such failure, the Common Stock does
not trade for at least $2.50 for ten days between June 30, 1997,
and August 15, 1997, then the Company will declare a dividend on
each share of Series A Preferred Stock of one-tenth share of
Series A Preferred Stock and five Series A Warrants. The Company
will declare a similar dividend on the Series A Preferred Stock
unless the Common Stock trades above $2.50 per share for 20
consecutive days after August 14, 1997, but before August 15,
1998, and the Company fails to have pre-tax earnings of $450,000,
exclusive of extraordinary and non-recurring items. Each Series A
Warrant entitles the holder thereof to purchase one share of
Common Stock (Warrant Share) at an exercise price of $1.00 per
Warrant Share until August 14, 2001, unless earlier redeemed. The
Warrants are subject to redemption by the Company at a price of
$0.05 per Warrant at any time after August 15, 1997, on thirty
days prior written notice, provided that the closing sales price
per share for the Common Stock has equalled or exceeded $2.50 for
ten consecutive trading days. Each share of Series A Preferred
Stock is entitled to thirty-five votes on each matter submitted
to a vote to the Common Stock as if the two classes constituted
one class; however, the approval of the holders of two-thirds of
the outstanding Series A Preferred Stock is required to: (i)
amendment or repeal or revise the Company's Certificate of
Incorporation if such action would alter the preferences, rights,
privileges, or powers of, or the restrictions provided for the
benefit of, the Series A Preferred Stock; (ii) authorize, create
or issue any security having any preference or priority superior
to any preference or priority of the Series A Preferred Stock or
securities convertible into a security having such preferences;
(iii) reclassify any Common Stock into shares having any
preferences or priority as to dividends or assets superior to
that of the Series A Preferred Stock; or (iv) make any provision
in the Company's Bylaws fixing special qualifications of those
who may be holders of Series A Preferred Stock or any restriction
upon the right to transfer or hypothecate such shares. In the
event the Company is liquidated, dissolved or wound up, the
Company is required to pay out of the Company's assets $21.00 per
share of Series A Preferred Stock before any payment may be made
to holders of the Common Stock. If the assets of the Company are
insufficient to pay this amount, the assets will be distributed
ratably among the holders of the Series A Preferred Stock. The
Series A Preferred Stock also contains provisions that protect
the holders against dilution by adjustment of the conversion
price in certain events such as stock dividends paid on Common
Stock and distributions, stock splits, recapitalizations, mergers
or consolidations and certain issuances below the fair market
value of the Common Stock.
Each A Warrant entitles the holder to purchase one share of
Common Stock at a price of $1.00 per share. The Warrants are
currently exercisable until August 14, 2001, unless earlier
redeemed. The Series A Warrants are redeemable by the Company at
$.05 eac on 30 days' notice at any time after February 14, 1997,
if the closing bid price per share of Common Stock for ten
consecutive trading days' prior to the date notice of redemption
is given equals or exceeds $2.50 per share. In the event the
Company gives notice of its intention to redeem, a holder would
be forced either to exercise his or her Series A Warrant within
30 days after the date of notice or accept the redemption price.
The exercise price of the Series A Warrants may be reduced at any
time from time to time in the discretion of the Board of
Directors when it appears to be in the best interests of the
Company to do so. Any such reduction would impair the value to
holders exercising their Warrants prior to the effective date of
the reduction. The Series A Warrants contain provisions that
protect the holders against dilution by adjustment of the
exercise price in certain events, such as stock dividends and
distributions, stock splits, recapitalization, mergers or
consolidations and certain issuance's below the fair market value
of the Common Stock. The Company is not required to issue
fractional shares upon the exercise of a Series A Warrant. The
holder of a Series A Warrant will not possess any rights as a
stockholder of the Company until such holder exercises the Series
A Warrant.
The Company paid the underwriter of the offering a commission of
10% of the gross proceeds, 3% as a non-accountable expense
allowance and $24,000 in advance for a two year consulting
contract which is now in default by the underwriter. A referral
fee of $15,000 was paid at closing to William Walker, an
unaffiliated third party, for his services in introducing the
Company to the underwriter and assisting in arranging the
underwriting. The Company also delivered in exchange for nominal
consideration warrants to the underwriter in connection with the
offering allowing it to acquire Units at 120% of the public
offering price for a four-year period which began on August 14,
1996.
Mega-Hell and Mill Agro Acquisitions:
On February 18, 1997 (the Closing Date), the Company executed,
delivered and closed under a Plan and Agreement of Purchase (the
Purchase Agreement) with the shareholders (the Shareholders) of
MILL-AGRO (HELLAS) SA, a Panamanian company, and MEGAHEL
NAUTICAL SA, a Greek company (both of which business entities
are collectively referred to herein as the Subsidiaries), whereby
the Company acquired from the Shareholders all of the outstanding
proprietary interest of these entities, thereby making them
wholly-owned subsidiaries of the Company. The Subsidiaries have
now changed, or will forthwith change, their names to Midland
Steamship SA and Midland Agricultural SA. In turn, the Company
changed its name from America's Coffee Cup, Inc., to Midland,
Inc.
The Company issued and caused to be delivered to the
Shareholders, immediately subsequent to the Closing Date, 74,604
shares of its previously authorized Series A Preferred Stock and
149,259 shares of a Series B Preferred Stock (Series B Preferred
Stock), which was created immediately after the closing.
The Series B Preferred Stock consists of 149,259 shares, with
each share (i) to be automatically converted into 150 shares of
Common Stock on October 1, 1998, or sooner at the election of the
holder, (ii) being entitled to 150 votes on each matter submitted
to the shareholders of Registrant, with certain super-majority
provisions being applicable in certain instances, (iii) not being
entitled to a liquidation preference, (iv) not being redeemable
and (v) not being entitled to dividends. This series has certain
non-dilution provisions applicable to it in the event of stock
dividends, stock splits and other extraordinary corporate events.
As a result of the purchase of the Subsidiaries, there are now
149,259 shares of Series B Preferred Stock outstanding.
Immediately following the execution, delivery and consummation of
the Purchase Agreement, the Board of Directors was expanded to
six in number and, joining Messrs. Robert W. Marsik and Mark S.
Pierce to fill the empty seats on the board were, Messrs. Chris
Traios, Charles Stidham, E. Robert Barbee and Arthur Malcolm.
All directors have been appointed to serve until the next annual
meeting of shareholders and until their successor are duly
elected and qualified, or until they earlier resign or are
dismissed. No director has any contractual rights to his
position.
The newly constituted Board of Directors then appointed (i) Mr.
Traios as Chairman of the Board of Directors and as Chief
Executive Officer and President, (ii) Mr. Marsik as Executive
Vice-President, Chief Financial Officer and Treasurer, (iii) Mr.
Stidham as Executive Vice-President (Managing Director) of North
American Shipping and Trading Operations, (iv) Mr. E. Robert
Barbee as Vice-President and (v) Mr. Pierce as Secretary.
The Company, immediately following closing, changed its name to
Midland, Inc. The Subsidiaries have now changed, or will
forthwith change, their names to Midland Steamship SA and Midland
Agricultural SA. The Company has also formed, or will forthwith
form, two additional subsidiaries, Midland Liners SA and Midland
Shipping SA, in order to provide for the anticipated expansion of
the business of the Company into the container and shipping
business.
The Shareholders on the Closing Date delivered a Balance Sheet of
the Subsidiaries as of December 31, 1996, which had been reported
on by Republic Of Greece, Ministry of Commerce on February 14,
1997. The Shareholders undertook to deliver audited financial
statements in accordance with applicable securities laws within
75 days of the Closing Date. They accomplished this on April 16,
1997. The audited statements delivered conformed with the audit
of the Ministry Of Commerce and the Board of Directors in place
prior to the Closing Date approved the acquisition in full.
The assets of the Subsidiaries, as of December 31, 1996, and as
reported on by the Republic of Greece, Ministry of Commerce on
February 14, 1997, aggregated $3,675,163 in amount and consisted
of office, furniture and various equipment, accounts receivable,
freight advances, bank balances, and fixed assets consisting of
two hydrofoils, one hopper-barge, one motor-tanker and one motor
bulk carrier, all of which are used in the shipping business of
the Subsidiaries. The liabilities of the Subsidiaries, as of
December 31, 1996, and as reported on by the Republic of Greece,
Ministry of Commerce on February 14, 1997, aggregated $1,545,435
in amount and consisted primarily of accounts payable. The
result of the foregoing was an equity amount of $2,129,728.
The audited financial statements for the Subsidiaries showed the
following as of and for the year ended December 31, 1996, on a
consolidated basis:
Revenues: $26,578,829
Cost of Sales: 22,766,401
Operating Expenses: 1,759,327
Other Expenses: 476,001
Net Income: 2,283,533
Business of the Company following the acquisition of the
Subsidiaries:
Mill-Agro is a Panamanian corporation located in Piraeus Greece
which, subsequent to its acquisition by the Company was renamed
Midland Agriculture S.A. This subsidiary trades in agricultural
commodities. The primary countries of origin for these
commodities are Russia and the United States. Mill-Agro sells to
wholesalers in Greece, Spain, Italy, Israel, Egypt and the United
States. Mill-Agro was formed in November, 1995.
Megahel Nautical is a Greek corporation which was renamed Midland
Steamshipping Co. after the acquisition by the Company. This
subsidiary owns and operates high speed and normal ferries
between Piraeus and various Greek Islands in the Mediterranean
Sea. Megahel owns four hydrofoils, each of which has a capacity
of 108 passengers and make short runs during the tourist season.
This subsidiary also owns one conventional passenger ferry with a
capacity of 800 people and 92 automobiles. This vessel makes
regularly scheduled runs to various ports in the Greek islands
year around. Megahel was formed in November, 1995.
Midland Liners M. Co. is a new subsidiary which was formed to
provide for the shipment of containers in the Black and
Mediterranean seas. This corporation is operating from port
facilities in Thesseloniki. The first customer for these
services is Johnson & Johnson (Hellas), with weekly runs to
Taganrog, Rusia. Midland Liners has also received shipment
requests from Daewoo and other manufacturers and suppliers in
Russia. The shipment into Taganrog is currently the only
scheduled shipment of containers into this southern Russian port.
Service to other Mediterranean ports will be added as the
corporation expands its fleet. This subsidiary started its
operations with one leased container ship, and added a asecond
and third vessel in March and April of 1997.
Midland Navigation Co. is also a new subsidiary which was formed
to provide bulk transport services. This subsidiary owns and
operates two 5,00 metric ton dry bulk transport ships. The
corporation transports dry bulk cargo for the trading operations
of the Subisidiares.
The Subsidiaries have offices in Houston, Texas, San Diego,
California, Piraeus and Thessaloniki, Greece, and Mosow and
Taganrog, Russia. The Subsidiaries also operate port facilities
in Piraeus, Thesseloniki and Taganrog. The Subsidiaries have
more than 100 permanent and temporary employees in three
countries. Future plans call for a joint venture on a sunflower
seed plant to process cooking oil for resale to former Eastern
Block countries.
Facilities:
The executive offices of the Company presently occupy
approximately 2,880 square feet at 12528 Kirkham Court, Nos. 6 &
7, Poway, California 92064. The lease began on September 15,
1995, for a three year term. The telephone number at this
address is (619) 679-3290. The Company, as a result of the
acquisition discussed above, will be moving its principal
executive offices to Houston, Texas, in the near term.
Management is presently negotiating the release of the Company
from the lease of the office and warehouse space in San Diego.
Item 2. Description of Properties.
The Company and the Subsidiaries own no real property.
Item 3. Litigation.
There is no pending litigation to which the Company is presently
a party which has not been satisfied prior to the date of this
filing, and which is required to be disclosed under this item,
other than the following:
Matossian and Fidiparex S.A.: 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 had entered into with certain affiliates of a former
director of the Company, Mr. Mark S. Pierce, on December 30,
1994, alleging, among other claims, breach of fiduciary duty to
the Company by Messrs. Robert W. 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 his consulting agreement was terminated
by the Company. Mr. Matossian was also a director of the Company
with Messrs. Pierce and Marsik during the time that the notes
were entered into and the conversion of the notes effected.
Matossian, through various nominees on his behlaf, filed suit
purportedly on behalf of the Company against Messrs. Pierce and
Marsik essentially reiterating the foregoing points. The suit
was filed in the San Diego, California, Superior Court (Case No.
704105). Messrs. Pierce and Marsik and the Company filed
counter-claims against Mr. Matossian and his nominees alleging
breach of contract and fiduciary duty to the Company, securities
fraud and other related claims. The Company is of the opinion
that Matossian has no claims, and has been advised by independent
counsel that the claims of Matossian are frivolous and groundless
and initiated solely for the purpose of attempting to interpose
corporate black mail to gain a pecuniary settlement. Matossian
had previously offered to settle his so-called claims for 260,000
shares of Common Stock and $162,500 in cash.
Office Park Litigation: In March, 1997, the Company was sued by
the owner of the office park facility in which its Los Angeles
operations were located. The suit claims that the Company has
breached the lease, and seeks damages for rent from the date of
the claimed breach, December, 1996, through the end of the lease
in September, 1998. The maximum exposure from the suit
approximates $30,000, and is currently being negotiated for
settlement as a part of the debt restructuring initiated by the
Company in the final quarter of 1996.
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 1996.
Part II
Item 5. Market for Common Equity and Related Stockholder
Matters.
Market: The Common Stock is currently traded on the Bulletin
Board maintained by the National Association of Securities
Dealers, Inc. (NASD), under the symbol MIDL. The following table
sets forth the range of high and low bid prices per share of
Common Stock, as reported by the NASD for the periods indicated.
Year Ended December 31, 1993: High Bid(1) Low Bid (1)
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
Year Ended December 31, 1996:
1st Quarter $ 1.00 $ 0.875
2nd Quarter 2.375 1.00
3rd Quarter 1.50 0.50
4th Quarter 1.0625 0.125
Year Ended December 31, 1997:
1st Quarter $1.25 $0.25
2nd Quarter .5625 0.3125
(1) 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 May 5, 1997, there were two
broker-dealers publishing quotes for the Common Stock. The high
bid and low asked prices on that date were $.46 and $.53,
respectively. As of May 5, 1997, there were 1,957,217 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 had recurring losses from its coffee operations from
inception and had a net capital deficiency at December 31, 1995,
each of which raised substantial doubts about its ability to
continue as a going concern at year end. 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, as a result of the acquisition of
the Subsidiaries, the auditor's report for December 31, 1996, no
longer contains an expression of this concern.
The following discussion is of the business of the Company only
since the Subsidiaries were not acquired until after the end of
the year. As a result, the discussion required by applicable
regulation is no longer particularly relevant to an understanding
of the current business of the Company and, accordingly, has been
truncated.
Results of Operations
Year Ended December 31, 1996, as Compared to Year Ended December
31, 1995:
1995 1996
Revenues $3,095,955 $2,087,694
Cost of Sales 2,823,160 2,278,618
Operating Expenses 1,010,573 913,807
Income (Loss) from
Operations (737,778) (1,104,731)
Other Income (Expenses) (127,057) (366,976)
Extraordinary Item 248,697 707,234
Net Income (Loss) (616,938) (765,273)
Revenues for the year ended December 31, 1996, decreased by
$1,008,261 (33%) to $2,087,694 from $3,095,955 during 1995, while
the cost of these sales decreased $544,542 (19%) to $2,278,618
from $2,823,160. The loss in revenues and decrease in costs were
primarily the result of the Company ceasing its coffee business
during the final quarter of 1996.
Operating expenses during 1996 decreased $96,766 (10%) to
$913,807 from 1,010,573 during 1995 principally due to the
cessation of the coffee business during Q4. Other expenses
increased substantially for this reason as well due to the loss
on disposition of equipment used in the coffee business.
The loss from operations, as a result of the above, increased
$239,896 (33%) to $1,104,731 in 1996 from $737,778 in 1995, and
the loss before extraordinary items increased $606,872 (70%) to
$1,471,707 in 1996 from $864,835 in 1995. In 1996, the Company
settled several obligations for less than their accrued value,
which resulted in an extraordinary gain of $707,234, and in 1995
settled the Brothers' litigation for less than its accrued
amount, which resulted in an extraordinary gain of $248,697.
Thus, the net loss increased $148,335 (24%) to $765,273 in 1996
from $616,938 in 1995.
The Company's cash flows were negatively affected by the
operating losses discussed above, which resulted in a use of cash
in the amount of $372,122 in operations during 1996, as compared
to a use of cash of $114,668 in operations during 1995, an
increased use of $257,454 (225%). The amounts of $76,553 and
$81,148, respectively, were expended by the Company in 1996 and
1995 in investing activities, principally from expenditures
incurred in the disposal of property and equipment.
The sum of $415,948 in cash was generated by the Company in 1996
from financing activities as follows: (i) $78,750 from the
conversion of debt to Common Stock and (ii) $534,253 from the
proceeds of the secondary public offering of the Units concluded
on August 14, 1996, less (iii) $197,055 from the repayment by the
Company of long-term debt. In 1995, the sum of $321 was used in
financing activities by the Company.
The result of the above was that the Company had no cash at the
1996 year end, as compared to 32,727 at the end 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. 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.
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.
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, then an
officer of the Company, and others.
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.
Liquidity and Capital Resources:
The Company, from inception and until August 14, 1996,
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. The Company, on August 14, 1996, received the proceeds
of its secondary public offering of Units. During the fourth
quarter of 1996, the Company also received the release of
liabilities aggregating $707,234 as it negotiated with its
creditors following the cessation of its coffee business. Prior
to this, the expenses of the Company in conducting the offering
and meeting those obligations incurred outside of operations and
expansion were satisfied from the proceeds which resulted from a
series of bridge loans.
Management expects, due to the acquisition of the Subsidiaries,
that current operations will be sufficient to provide operating
capital for operations.
Item 7. Financial Statements.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
AMERICA'S COFFEE CUP, INC.:
We have audited the accompanying balance sheets of America's
Coffee Cup, Inc. (a Colorado corporation) as of December 31, 1996
and 1995, and the related statements of operations, changes in
shareholders' deficit and cash flows for the years then ended.
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, 1996 and 1995,
and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting
principles.
Harlan & Boettger
San Diego, California
March 28, 1997
AMERICA'S COFFEE CUP, INC.
BALANCE SHEETS
December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash $ - $ 32,727
Accounts receivable,
net of allowance for
doubtful accounts
of $87,635 and $0 58,424 130,455
Inventories (Note B) 5,000 135,776
Prepaid expense and other 27,487 15,996
TOTAL CURRENT ASSETS 90,911 314,954
PROPERTY AND EQUIPMENT,
net (Note C) 25,795 338,085
OTHER ASSETS
License agreement, net 131,250 218,750
Slotting fee, net 41,448 61,581
Deferred offering costs - 72,060
172,698 352,391
$ 289,404 $1,005,430
LIABILITIES AND
SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 512,500 $ 259,457
Bank overdraft 74,134 -
Accrued expenses 239,194 62,239
Current portion of long-
term debt (Note D) 109,614 722,717
TOTAL CURRENT LIABILITIES 935,442 1,044,413
LONG-TERM DEBT, less current
portion (Note D) 25,375 480,160
SHAREHOLDERS' DEFICIT
Preferred stock, $0.40 par
value (1,000,000 shares
authorized, 54,000 and
-0- issued and outstanding
December 31, 1996 and
1995, respectively)
(Note G) 21,600 -
Common stock, $0.40 par
value (10,000,000 shares
authorized, 845,567 and
802,043 shares issued and
outstanding as of December
31, 1996 and 1995,
respectively) (Note G) 338,226 320,816
Additional paid-in-capital 940,366 366,373
Accumulated deficit (1,971,605) (1,206,332)
TOTAL SHAREHOLDERS'
DEFICIT (671,413) (519,143)
$ 289,404 $ 1,005,430
AMERICA'S COFFEE CUP, INC.
STATEMENTS OF OPERATIONS
For the years ended
December 31, December 31,
1996 1995
REVENUES $ 2,087,694 $3,095,955
COST OF SALES 2,278,618 2,823,160
Gross (loss) profit (190,924) 272,795
OPERATING EXPENSES
General and administrative
expenses 857,807 968,285
Depreciation 56,000 42,288
TOTAL OPERATING EXPENSES 913,807 1,010,573
LOSS FROM OPERATIONS (1,104,731) (737,778)
OTHER INCOME (EXPENSES)
Interest expense (78,691) (85,052)
Finance expense (Note J) - (19,306)
Loss on disposition
of equipment (305,818) (2,075)
Other 17,533 (20,624)
TOTAL OTHER EXPENSES (366,976) (127,057)
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,471,707) (864,835)
Income Taxes (Note E) 800 800
NET LOSS BEFORE
EXTRAORDINARY ITEM (1,472,507) (865,635)
Extraordinary item,
net of tax (Note K) 707,234 248,697
NET LOSS $ (765,273) $ (616,938)
NET LOSS PER COMMON SHARE
BEFORE EXTRAORDINARY ITEM $ (1.76) $ (2.12)
Extraordinary item .84 0.61
NET LOSS PER COMMON SHARE $ (.91) $ (1.51)
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 838,313 408,691
AMERICA'S COFFEE CUP, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
Common Stock Preferred Stock
Shares Amount Shares Amount
Balance,
December 31, 1994 212,075 $ 84,830 - $ -
Issuance of common
stock for
convertible debt
(Note J) 589,848 235,939 - -
Issuance of common
stock due to
reverse stock split
(Note J) 120 47 - -
Net Loss - - - -
Balance,
December 31, 1995 802,043 320,816 - -
Issuance of common
stock for
convertible debt
(Note J) 43,524 17,410 - -
Issuance of preferred
stock as part of
initial public
offering - - 54,000 21,600
Net Loss - - - -
Balance,
December 31, 1996 845,567 $338,226 54,000 $21,600
Addititional Paid-In Accumulated
Capital Deficit Total
Balance,
December 31, 1994 $ 71,497 $(589,394) $(433,067)
Issuance of common
stock for
convertible debt
(Note J) 294,924 - 530,863
Issuance of common
stock due to
reverse stock split
(Note J) (48) - (1)
Net Loss - (616,938) (616,938)
Balance,
December 31, 1995 366,373 (1,206,332) (519,143)
Issuance of common
stock for
convertible debt
(Note J) 61,340 - 78,750
Issuance of preferred
stock as part of
initial public
offering 512,653 - 534,253
Net Loss - (765,273) (765,273)
Balance,
December 31, 1996 $940,366 $(1,971,605) $(671,413)
AMERICA'S COFFEE CUP, INC.
STATEMENTS OF CASH FLOW
For the years ended
December 31, December 31,
1996 1995
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $ (765,273) $(616,938)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization 56,000 137,334
Loss on disposition
of equipment 305,818 2,075
Issuance of common
stock options for
services - 7,988
Issuance of common
stock for services
(Note J) - 412,893
Extraordinary item
- extinguishment
of debt (Note K) (707,234) (248,697)
Conversion of accounts
payable to long term
debt - 292,314
Changes in assets and
liabilities:
Accounts receivable 72,031 78,738
Inventories 130,776 (93,570)
Prepaid expense and
other (11,491) (8,715)
Deferred offering
costs and other
assets 172,698 (68,181)
Accounts payable 253,043 (75)
Bank overdraft 74,134 -
Accrued expenses 47,376 (9,834)
NET CASH USED IN
OPERATING ACTIVITIES (372,122) (114,668)
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from disposal
of property and
equipment (76,553) (76,148)
Purchase of slotting fee - (5,000)
NET CASH USED IN INVESTING
ACTIVITIES (76,553) (81,148)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from conversion of
debt to common stock 78,750 -
Proceeds from issuance of
preferred stock 534,253 -
Payments on long-term debt
current portion (197,055) -
Payments on long-term debt - (105,321)
Proceeds from issuance of
convertible debt - 105,000
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES 415,948 (321)
NET DECREASE IN CASH (32,727) (196,137)
CASH, BEGINNING OF YEAR 32,727 228,864
CASH, END OF YEAR $ - $ 32,727
AMERICA'S COFFEE CUP, INC.
NOTES TO FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
Organization
The Company was incorporated as FOA Industries, Inc. (FOA) under
the laws of the State of Delaware on February 10, 1988. On June
19, 1989, FOA acquired all of the assets and liabilities of
A.C.C., a California limited partnership engaged in the retail
gourmet coffee business. In conjunction with this transaction,
A.C.C. and its general partner, America's Coffee Cup, Inc. ( a
California corporation), were dissolved and the Company changed
its name to America's Coffee Cup, Inc. During November 1995, the
Company changed its state of incorporation from Delaware to
Colorado.
Basis of Accounting
The Company's policy is to use the accrual method of accounting
and to prepare and present financial statements which conform to
generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Cash
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less and money market funds to be
cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined under the first-in, first-out (FIFO) method, for all
coffee and general merchandise product inventory. Reserves are
established for obsolescence or other impairments to its
marketability.
Property and Equipment
Property and equipment is carried at cost and includes store
equipment and fixtures which were acquired as a result of the
Supply Termination Agreement (Note I). Maintenance, repairs and
minor renewals are expensed as incurred. When properties are
retired or otherwise disposed, the related cost and accumulated
depreciation are eliminated from the respective accounts and any
gain or loss on disposition is reflected in income or expense.
Depreciation is provided on the straight-line method over the
estimated useful lives ranging from 5 to 7 years.
Other Assets
Other assets consist primarily of a license agreement, slotting
fee, and deferred offering costs.
License Agreement relates to the license renewal fee paid to a
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.
Other Assets: (continued)
Slotting Fee relates to the slotting fee paid to a grocery
retailer for the right to sell within each grocery store
location. The slotting fee asset was received as part of the
Supply Termination Agreement (Note I) and is being amortized to
cost of sales on a straight-line method over the four year life
of the asset.
Deferred offering costs include the costs associated with the
proposed secondary public offerings for each respective period.
The costs related to secondary public offerings are capitalized
and will be netted against the amount received from the public
offerings. 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, 1995 and 1994 were expensed during the third quarter
of 1996 and 1995, respectively.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment
to the service concessions located within the stores.
Net Income (Loss) Per Common Share
Net income (loss) per common share shown on the statements of
operations is computed by dividing net income (loss) by the
actual weighted average number of shares outstanding during the
period. The Company's common stock equivalents were anti
dilutive for the year ended December 31, 1996 and 1995,
therefore, they were not included in the computation of net
income (loss) per common share.
Income Taxes
Income taxes provide for the tax effects of transactions reported
in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the
basis of various assets for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for
operating losses that are available to offset future taxable
income.
Concentration of Credit Risk
The Company's sales are substantially all from one large grocery
retailer located in Southern California. Credit is extended on
an evaluation of the grocery retailers' financial condition and
collateral is not required.
B. Inventories:
Inventories as of December 31, 1996 and 1995 consist of the
following:
1996 1995
Coffee $ 13,896 $ 97,175
General merchandise 18,383 38,601
32,279 135,776
Inventory reserve 27,279 -
$ 5,000 $135,776
C. Property and Equipment:
Property and equipment as of December 31, 1996 and 1995 consists
of the following:
1996 1995
Office equipment and furniture $ 43,223 $ 42,499
Store equipment and fixtures 20,000 411,895
Automobiles and delivery trucks - 79,669
63,223 534,063
Less accumulated depreciation 37,428 195,978
$ 25,795 $338,085
D. Long-Term Debt:
Long-term debt as of December 31, 1996 and 1995 consisted of the
following:
1996 1995
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 $ 39,479 $ 53,583
Notes payable to a group of
foreign investors, unsecured,
interest payable at 9.0%,
due by December 31, 1997. 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 (in 1996 the
Company modified
the conversion price to $2.00
per share) 45,000 123,750
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. For 1996,
this amount was combined
with the notes due BGC below - 275,000
Note payable to BGC, interest
payable at the rate of 10%,
payable in $30,247 monthly
installments starting January
15, 1996 until paid in full.
For 1996, the notes above and
below were combined in this note. 854,648 292,313
Note payable to BGC, unsecured,
interest payable quarterly at
the higher of 8% or the prime
rate set by the First Union Bank
of North Carolina (7.25% at
December 31, 1994 and 8.00% at
September 30, 1995) plus 2%,
payable in semi-annual
installments of 2.5% of the
then outstanding principal
balance, due April 1, 2003.
For 1996, amount was combined
with the notes due BGC above. - 458,231
939,127 1,202,877
Less current maturities 913,752 722,717
$ 25,375 $ 480,160
The following is a summary of principal maturities of long-term
debt:
December 31,
1997 $ 913,752
1998 14,104
1999 11,271
Thereafter - $ 939,127
E. Income Taxes:
At December 31, 1996 and 1995, the Company, before any
limitations, had a federal net operating loss carryforward of
approximately $1,900,000 and $1,110,000, and state net operating
loss carryforwards of approximately $990,000 and $546,000,
respectively.
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,
1996, and 1995 consisted solely of the $800 minimum California
franchise tax.
The Company's total deferred tax assets as of December 31, 1996
and 1995, were as follows:
1996 1995
Net operating loss carryforward $ 850,000 $ 430,000
Valuation allowance (850,000) (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, 1996 to December 31, 1995
is due primarily to the net operating loss for the year.
F. License Fees and Other Commitments:
Effective December 31, 1995, the Company entered into a four-year
license agreement with Ralphs Grocery Company ("Ralphs"), in
which the Company was charged a $100,000 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 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 years ended December 31, 1996 and
1995 was $87,500, which is included in the cost of sales. The
unamortized license fee balance of $131,250 and $218,750,
respectively, is included in the accompanying balance sheet.
In addition to the renewal fee, the Company pays rent to Ralphs
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 $757,412 and $706,927, for the years
ended December 31, 1996 and 1995, respectively. The rental
agreement with Ralphs is a year-to-year agreement covered under
the umbrella four year agreement.
G. Shareholders' Equity:
Series A Preferred Stock
Of the 1,000,000 shares of Preferred Stock, the Company the
designated 360,000 shares as Series A Preferred Stock, and 54,000
of such Preferred Shares were issued in the offering. Each share
of Series A Preferred Stock will automatically convert into
thirty five shares of Common Stock on October 1, 1998. Each
share of Series A Preferred Stock is entitled to thirty-five
votes with the Series A Preferred Stock and Common Stock voting
together as though they constitute one class.
Series A Warrants
In connection with the offering, the Company authorized the
issuance of up to 5,205,650 Series A Warrants (including 405,000
Series A Warrants that may be issued upon exercise of the
Underwriters' overallotment option, 270,000 Warrants which are
issuable pursuant to the Underwriters Warrants and 652,050
Warrants together with an equivalent number of shares of Common
Stock for issuance upon conversion of the Series A Preferred
Stock) and has reserved an equivalent number of shares of Common
Stock for issuance upon exercise of the Series A Warrants
actually issued. Each Warrant will entitle the holder to
purchase one share of Common Stock at a price of $1.00 per share.
The Warrants are currently exercisable anre are separately traded
until August 14, 2001, unless earlier redeemed. The Series A
Warrants are redeemable by the Company at $.05 per Warrant, upon
30 days' notice, at any time after February 14, 1997, if the
closing bid price per share of the Common Stock for ten
consecutive trading days' prior to the date of notice of
redemption is given equals or exceeds $2.50 per share. In the
event the Company gives notice of its intention to redeem, a
holder would be forced either to exercise his or her Series A
Warrant within 30 days after the date of notice or accept the
redemption price.
The exercise price of the Series A Warrants may be reduced at any
time and from time to time at the discretion of the Board of
Directions when it appears to be in the best interests of the
Company to do so. Any such reduction would impair the value to
holders exercising their Warrants prior to the effective date of
the reduction.
Series B Preferred Stock
In connection with the acquisition discussed in Note L, the
Company issued 149,259 shares of Series B Preferred Stock. The
shares of Preferred Stock were immediately convertible into 150
shares of Common Stock for each share of Series B Preferred Stock
at any time (maximum of 22,388,850 shares of Common Stock) at the
option of the Holder. Until such time as the Holders convert
they shall be allowed to vote at any stockholders meeting as if
the Preferred shares had been converted, (i.e., each share of
Series B Preferred Stock shall be entitled to a vote of 150
shares of Common stock at any and all shareholders meetings.
During 1995, the Company adopted an employee incentive stock
option (ISO) plan. The Company is authorized to issue common
stock options granted under the ISO up to the amount of 500,000
shares over a 10 year period beginning September 1, 1995.
ISO options may be granted by the Company to any full-time
employee of the Company or any subsidiary corporation. The total
aggregate fair market value of the shares with respect to ISO
options shall not exceed $100,000 per individual per year. The
ISO option price is the fair market value of the Company's common
stock at the time the option is granted. For the year ended
December 31, 1996 and 1995, no ISO options had been granted by
the Company.
In conjunction with certain bridge loans obtained for the purpose
of completing the public offering in 1996, the Company issued
warrants to purchase 1,809,955 units, each unit consisting of
four shares of Common Stock and two warrants at a price of $.39
per unit.
H. Supplemental Cash Flow Information:
Cash paid for interest and income taxes for the years ended
December 31, 1996 and 1995:
For the years ended
December 31, December 31
1996 1995
Interest $78,691 $52,720
Income taxes 800 800
Noncash Investing and Financing Activities
As discussed in Note I, the Company terminated its exclusive
supply agreement with BGC during 1995 and in doing so received
$263,625 in assets and restructured the existing debt. As a
result of this noncash transaction, the Company recorded $248,697
as an extraordinary item for the period ended December 31, 1995.
During August 1995, debt and related interest totaling $117,970,
along with other consideration, was converted into 589,848 post
split shares of common stock. Also in 1995, the Company
purchased two delivery trucks which were financed for a total of
$53,583.
As discussed in Note K, the Company restructured its debt and in
doing so recognized an extraordinary gain of $707,234 for the
period ended December 31, 1996.
I. Termination Agreement:
On August 25, 1995 the Company entered into an agreement (the
Supply Termination Agreement) with BGC. Under the terms of the
Supply Termination Agreement, the Company and BGC terminated the
obligation of the Company to purchase its supply of coffee
exclusively from BGC and further agreed to the restructuring and
repayment of certain debt with BGC.
As satisfaction for allowing the Company to terminate the supply
agreement the Company recorded assets, assumed liabilities and
recorded net extinquishment of debt as of December 31, 1995 as
summarized below:
Assets Received:
Slotting fee $ 64,125
Store fixtures 153,900
Store equipment 45,600
$ 263,625
Debt Forgiveness:
Note payable to BGC (Note D) 350,000
Accrued interest on note
payable to BGC 35,072 385,072
Total assets and debt forgiven 648,697
Debt Assumed:
Note payable to BGC (Note D) (400,000)
Net, extinguishment of debt $ 248,697
J. Related Party Transactions:
During February 1996, two holders of convertible debt (Note D)
exercised their conversion rights and converted $78,750 plus
interest into 43,524 shares of common stock.
During December, 1994 the Company issued one year convertible
promissory notes aggregating $110,000 in principal amount to
affiliates of Mr. Pierce, a director of the Company.
Subsequently, on June 30, 1995, $40,000 in principal amount of
these notes, along with the interest accrued thereon, was
assigned by an affiliate of Mr. Pierce to an unaffiliated third
party. On August 17, 1995, prior to the September 1995 reverse
1:4 split of the capital stock of the Company, all $110,000 in
principal amount of these notes was converted into common stock
of the Company, along with the interest accrued thereon. The
conversion resulted in the Company issuing 2,359,392 pre
split/589,848 post-split shares of common stock at a conversion
price of $0.90 per common share, an amount in excess of the
market at the time of $.05 per pre-split share and $.20 per post
split share as was agreed upon based on the conversion agreement.
If the notes would have been converted at market price pursuant
to the conversion agreement, the recipients would have obtained
the resulting common shares at less than their par value.
Accordingly, these shareholders were called upon under Delaware
law by the issuer to contribute additional consideration. Based
upon the Board of Directors' assessment of the value of common
stock, the Company required total consideration of $0.90 per
share or $530,863. This consideration is summarized as follows:
Exchange of note and accrued interest $117,970
Release of accrued legal fees 44,387
Guarantee of debt obligations 19,306
Release of potential contingent liability 117,970
Compensation to noteholders 231,230
Total consideration $530,863
The accrued guarantee of debt obligations related to Mr. Pierce's
guarantee of certain loans of the Company. The Board of
Directors valued the guarantee based upon independent value
criteria.
The release of potential contingent liability relates to a
settlement with Mr. Pierce, on behalf of the noteholders, whereby
the noteholders agreed to release any recourse against the
Company for material and fraudulent misrepresentations made to
the noteholders in connection with the the cquisition of the
notes in December of 1994.
Subsequent to the conversion on September 1, 1995, an affiliate
of Mr. Pierce and his minor son sold 187,679 of these post-split
shares to Mr. Marsik, then and currently an executive officer and
director of the Company, in exchange for Mr. Marsik's promising
to pay $37,528.27 in the aggregate for the shares, which
obligations were secured by all of the shares purchased and bear
interest at the rate of 11 1/2% per annum. Subsequent to year-end,
the note was satisfied and the shares were released to Mr. Marsik
without reservation.
K. Extraordinary Item:
Under terms of certain settlement agreements entered into with
creditors subsequent to December 31, 1996, the Company through a
negotiator, (see Note L) has reduced its liabilities and debt
related to its coffee operations by $707,234. Accordingly, the
Company has retroactively restated the balance sheet and
statement of operations as of and for the period ended December
31, 1996 to recognize the reduction of liabilities and debt and
record an extraordinary gain for the forgiven amount. There is
no income tax effect as a result of the Company's existing net
operating losses.
L. Subsequent Events:
Liquidation and Acquisition
During February 1997, the Company removed its fixed assets from
stores and began to liquidate its coffee operations.
Accordingly, the Company has scrapped the majority of their fixed
assets and used some of the newer coffee equipment and fixtures
to satisfy approximately $175,000 in accounts payable due to a
product supplier. As a result, the Company has recorded losses
from disposal of property, plant and equipment of approximately
$292,521. During the same period, the Company entered into an
agreement with a Panamanian trading company named Mill-Agro, SA
and a Grecian shipping company named Megahel Nautical, SA. Under
the terms of the agreement, the Company issued 74,604 shares of
Series A and 149,259 shares of Series B Preferred Stock (Note G)
in exchange for 100% of the outstanding shares of Mill and
Megahel. The new name for the combined companies will be
Midland, Inc. The major operations of Midland, Inc. will be in
Piraeus, Greece, Houston, Texas, and San Diego, California. The
majority of assets include ships and port facilities in both
Greece and Russia with additional offices in Moscow and Taganrog.
Due to this acquisition, a change in control of the Company has
taken place and four new members were added to the Board of
Directors.
Debt Negotiation and Reduction
During January 1997, the Company retained a firm which
specializes in debt negotiating and reduction to assist in the
liquidation of the coffee operations. As a result, the
outstanding liabilities and debt of the Company was reduced from
approximately $1,400,000 to approximately $700,000. The 1996
balance sheet presented has been restated to reflect this
reduction and an extraordinary gain has been recorded as a
separate line item on the income statement (Note L).
Office Park Litigation
During March 1997, the Company was served with a notice of suit
from the landlord of the Company's warehouse facility in Los
Angeles. The suit seeks compensation for damages related to the
loss of rental income and the reimbursement of legal expense
incurred due to the breach of the lease agreement in December
1996. Under the terms of the lease agreement, the Company is
liable for the monthly lease payments of approximately $1,200
starting in December 1996 and running through September 1998 plus
common area maintenance fees. The Company believes the maximum
amount of exposure related to this suit is approximately $30,000.
However, the Company plans on settling with the landlord for an
amount substantially below this amount using the same negotiating
company discussed above. Additionally, the Company is confident
that the warehouse will be sublet and thus will reduce their
liability by that number of months remaining in the lease
agreement.
Threatened Litigation
During 1996, the Company and two directors were named as
defendants in a lawsuit filed 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.
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.
Table of Directors and Executive Officers:
The following table sets forth all current directors and
executive officers of the Company, as well as their ages:
Name Age Position
Chris Traios 38 Chairman of the Board of Directors,
Chief Executive Officer, President
Charles L. Stidham 54 Director, Executive Vice-President
of North American Shipping and Trading
Operations
E. Robert Barbee 56 Director, Vice-President
Robert W. Marsik 51 Director, Chief Financial and
Accounting Officer, Treasurer
and Executive Vice-President
Mark S. Pierce 40 Director and Corporate Secretary
Arthur Malcolm 75 Director
Profiles of Directors and Executive Officers:
Chris Traios has been Chairman of the Board of Directors, Chief
Executive Officer and President of the Company since February 18,
1997. He has held similar positions with the Subsidiaries since
their inception. Prior to founding the Subsidiaries, Mr. Traios
was the managing director of Nattem, S.A., which was also located
in Piraeus, Greece. Nattam was involved in the ship construction
and trading businesses, and employed approximately 850 employees,
generating approximate gross annual revenues of $40,000,000 (US).
Charles L. Stidham has been a Director of and the Executive Vice
President of North American Shipping and Trading Operations for
the Company since February 18, 1997. From 1993 until 1997, Mr.
Stidham was an independent consultant to Megalith Corporation in
Dallas, Texas. From 1992 until 1993, he was the Chairman of the
Board of Directors of LAZ Financial Corporation in Dallas, Texas.
This corporation was publicly-held and was engaged in the oil
industry, having approximately 15 employees, $3,000,000 in sales
and $1,600,000 in income during this period. Mr. Stidham has
been a director of Fujacorp Industries, a non-trading public
corporation, since 1989. He attended Southern Technical Institue
(now Georgia Tech) in Atlanta, Georgia, from 1962 until 1964, and
the University of Texas in Austin, Texas, from 1971 until 1973,
receiving a Bachelors in Business Administration (Management) in
1973 from this latter institution. Mr. Stidham received a Juris
Doctorate from the University of Texas School of Law in Austin,
Texas, in 1975.
E. Robert Barbee has been a Director of and the Vice-President
for the Company since February 18, 1997. Mr. Barbee has been the
owner of Oil Patch Pipe and Supply, Inc., in Kilgor, Texas, from
1979 to the present. Mr. Barbee attended Kilgor College in
Kilgor, Texas, from 1960 until 1961 and Stephen F. Austin State
University in Texas from 1968 until 1971, receiving a Bachelors
in Business Administration (General Business) from this latter
institution in 1970.
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. On February 18, 1997, concurrent with the
acquisitions of the Subsidiaries, Mr. Marsik resigned as
President and Chief Executive Officer, retained the positions of
Chief Financial and Accounting Officer and Treasurer, and assumed
the position of Executive Vice-President. 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
entered into an employment agreement with the Company which was
terminated after year end.
Mr. Pierce has been counsel to the Company since October, 1994,
and has served as a director since that time as well. He is also
the sole director and executive officer of Famous Sam's Group,
Inc., a publicly-held Nevada corporation which currently has no
business operations. He was a director and an executive officer
of Intercell Corporation, a publicly-held Colorado corporation,
from April, 1992, until July 7, 1995, when it acquired the assets
of another business. 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. he was
a director, and subsequently an executive officer, from May 22,
1992, until January 14, 1994, of Indemnity Holdings, Inc. a
publicly-held Colorado corporation. 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 this company, 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, in
his first sitting. Mr. Pierce received his Juris Doctorate from
the University of Colorado in Boulder, Colorado, during May of
1983. He is a member of the American and Colorado Bar
Associations, and is a member of the securities and international
subsections of this latter association.
Arthur Malcolm has been a director of the Company since February
18, 1997. He is a licensed doctor living in Dallas, Texas,
having received his medical degree from the University of Toronto
in 1947. Since 1990, Dr. Malcolm has provided emergency medical
care through various hospitals and E.R. groups.
No current director has any arrangement or understanding whereby
they are or will be selected as a director or as an executive
officer. 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.
Compensation:
The following table sets forth information concerning the
compensation paid to Mr. Marsik for the years ended December 31,
1994, 1995 and 1996. Mr. Marsik was the sole executive officer
during 1994 and until October 9, 1995, when an additional
individual who is no longer employed by the Company was hired,
and who served the Company through 1996.
Summary Compensation Table
Annual Compensation
Name, Principal Year Salary Bonus
Position
Robert W. Marsik, 1996 100,000 0
President, CEO 1995 $ 85,000 0
and CFO 1994 72,000 0
Employment Agreements:
Mr. Marsik previously entered into an employment contract with
the Company on September 1, 1995, which had a five year term
ending September 1, 2000. Mr. Marsik, pursuant to this agreement,
received a base salary of $100,000 per year and $500 per month as
a car allowance, as well as health insurance under the Company's
policy and vacation benefits. The contract was terminated on the
acquisition of the Subsidiaries on February 18, 1997. The
Company and its current officers are presently negotiating
agreements as to 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 the 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 May 5,
1997, 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 May 5, 1997, of the Common Stock by
(i) each person known by the Company to be the beneficial owner
of more than five percent of the Common Stock, (ii) each director
and executive officer of the Company, and (iii) all directors and
executive officers as a group. Except as otherwise indicated,
each stockholder identified in the table possesses sole voting
and investment power with respect to its or his shares.
Name of Number of Shares Percentage of
Beneficial Owner Beneficially Owned Ownership
Chris Traios 74,604 Series A Preferred 83.2%
149,260 Series B Preferred
Robert W. Marsik 189,804 - Common Stock 3.2%
22,142 - Series A Preferred
Mark S. Pierce 585,039 - Common Stock 3.4%
12,254 - Series A Preferred
All executive officers and
directors as a group (4 persons) 89.8%
1. Mr. Traios controls two entities which own these shares.
2. These shares will be automatically converted into 2,611,140
shares of Common Stock on October 1, 1998.
3. These shares will be automatically converted into 22,389,000
shares of Common Stock on October 1, 1998.
4. These shares will be automatically converted into 774,970
shares of Common Stock on October 1, 1998.
5. These shares will be automatically converted into 428,890
shares of Common Stock on October 1, 1998.
6. The shares and percentages are based upon the assumed
conversion of all outstanding shares of Series A and B Preferred
Stock, which would have result in there having been 30,051,067
shares of Common Stock outstanding at May 5, 1997.
The address for Mr. Traios is 3 Irodotou Str., Piraeus, Greece;
the address for Mr. Pierce is 4221 E. Pontatoc Canyon Dr.,
Tucson, Arizona 85718; and the address for Mr. Marsik and is
12528 Kirkham Court, Nos. 6 & 7, Poway, California 92064.
No arrangement or understanding presently exists for the election
of directors or executive officers.
Item 12. Certain Transactions.
The Company, on December 30, 1994, sold to affiliates of Mr.
Pierce, then a director, $110,000 in principal amount of its
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 post-split restricted
shares of Common Stock at a conversion price of $0.20 per share.
The agreed to conversion price was for an amount less than the
par value of the stock and, accordingly, additional consideration
was agreed to be paid for the conversion. The independent
members of the Board of Directors and the converting noteholders
negotiated and agreed to a conversion price of $.90 per share,
which resulted in the Company receiving total consideration of
$530,863 on conversion of the notes. The conversion price
consisted of (i) $117,970 in principal and accrued interest, (ii)
the release of $44,387 in legal fees, (iii) the release of the
Company by the noteholders from all liability resulting from the
blatantly false and fraudulent misrepresentations of Robert
Matossian on behalf of the Company in obtaining the original sale
of the notes, valued by the independent members of the board at
$117,970, (iv) the delivery by Mr. Pierce of his personal
guarantee of certain debt obligations of the Company, as
discussed in the next paragraph, which was valued by the
independent directors at $19,306 and (v) the balance being deemed
compensation to the noteholders.
On October 9, 1995, the Company purchased two trucks for use in
its delivery system at an aggregate purchase price of $62,884.
The Company paid $9,740 in cash at closing, and the remaining
$55,000 was financed through an unaffiliated third-party for a
five year period at an annual percentage rate of 11% with monthly
payments of $1,175. Because the Company was unable to obtain
credit for these purchases and was unable to provide adequate
security for the purchases, Mr. Pierce guaranteed the
obligations. The Company executed a revolving line demand
promissory note in favor of Mr. Pierce which would have become
operative in the event that Mr. Pierce was called upon to satisfy
his guarantee of these obligations. The note bore interest at the
rate of 18% per annum and was secured by all assets of the
Company, including the trucks. The trucks were sold subsequent
to year end, and a payment satisfying the deficiency was
negotiated with and agreed to between the Company, Mr. Pierce and
the original lender.
The Company, on February 17, 1997, issued 22,142 shares of Series
A Preferred Stock as a bonus to Mr. Marsik. This bonus was
issued in recognition of (i) his serving the Company from
November 1, 1996, through most of the first quarter of 1997
without payment, all in violation of his employment agreement,
(ii) his services in wrapping up the former operations of the
Company, which involved more time and effort than could have been
reasonably asked of Mr. Marsik, and (iii) his locating the
Subsidiaries and putting the time and effort into their
acquisition that was necessary to consummate the transaction.
This bonus was approved by the independent members of the board.
The Company, on February 17, 1997, issued 12,254 shares of Series
A Preferred Stock (valued at $24,508, the market price therefor)
and 397,360 shares of Common Stock (valued at $47,205, the market
price therefor) in exchange for the forgiveness of attorneys fees
and costs which had not been paid since September 1, 1996. This
issuance was approved by the independent members of the board.
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 or
any of them, will also be on terms no less favorable than could
be obtained from independent third parties and will be approved
by a majority of the independent, disinterested directors.
Item 13. Exhibits and Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Section 13 or 15(d) of
the Securities Exchange Act of 1934, registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Poway, State of
California on the --- day of -----, 1997.
AMERICA'S COFFEE CUP, INC.
(Registrant)
By: /s/ Chris Traios
Robert W. Marsik, Chief Executive Officer
By: /s/ Robert W. Marsik
Robert W. Marsik, Chief Financial
and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following person
on behalf of the registrant in the capacity on this 6th day of
August, 1996.
By: /s/ Chris Traios
Robert W. Marsik,Director
By: /s/ Charles Stidham
Robert W. Marsik,Director
By: /s/ E. Robert Barbee
E. Robert Barbee,Director
By: /s/ Robert W. Marsik
Robert W. Marsik,Director
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