SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(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: 0 24736
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 and
(ii) 63,000 shares of Series A Preferred Stock convertible into
2,205,000 shares of common stock. The preferred stock is
considered to be a common stock equivalent for purposes of this
calculation. There were, therefore, 4,162,217 common share
equivalents outstanding, of which affiliates held 1,978,703,
leaving 2,183,514 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, approximately
was $1,080,840.
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 of common
stock outstanding and 2,183,514 common share equivalents.
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 each 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 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.
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, the Shareholders and the Subsidiaries subsequently
rescinded the Purchase Agreement under applicable federal
securities laws effective the date of the original acquisition;
thus, for legal and accounting purposes it is as if the acquisition
had never taken place. The recission resulted in (i) the return of
all Series A and Series B Preferred Stock issued in the acquisition
of the Subsidiaries and (ii) the resignation of Mr. Traios from the
Board of Directors and from all officerial positions which he held
with the Company. Mr. Marsik then assumed the positions of
Chairman of the Board of Directors, Chief Executive, Financial and
Accounting Officer, President and Treasurer.
Facilities: The executive offices of the Company, as of May 5,
1997, occupied 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. Management subsequently negotiated
the release of the Company from the lease of this office and
warehouse space.
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, as well as
63,000 shares of Series A Preferred Stock then convertible into
2,205,000 shares of Common Stock; thus, there were, for purposes of
this filing, common share equivalents of 4,162,217 outstanding on
May 5, 1997.
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, 1996,
and 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, 1996, December
31, 1995, and December 31, 1994, included in this filing includes
an explanatory paragraph about these uncertainties.
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. The Company has, since
August 14, 1996, relied solely upon the proceeds resulting from its
secondary offering, which have been insufficient to sustain
operations or pay existing debt.
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.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note L 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. The financial statements do no include any
adjustments that might result from the outcome of this uncertainty.
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.
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-yearlicense 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.
Incentive Stock Option Plan:
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. Going Concern.
The Company has suffered recurring operating losses and, at
December 31, 1996, had a working capital deficiency of $844,531 and
a net deficiency in assets of $671,413. These conditions raise
substantial doubt about the entity's ability to continue as a going
concern.
The ability of the Company to continue as a going concern is
dependent upon its ability to obtain additional working capital and
obtain profitable operations. The financial statements do not
include any adjustments that might be necessary should the Company
be unable to continue as a going concern.
M. 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.
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, as of the date of
the original filing of this report:
Name Age Position
Robert W. Marsik 51 Chairman of the Board of Directors,
Chief Executive, Financial and
Accounting Officer, President
and Treasurer
Charles L. Stidham 54 Director, Executive Vice
President of North American
Shipping and Trading Operations
E. Robert Barbee 56 Director, Vice-President
Mark S. Pierce 40 Director and Corporate Secretary
Arthur Malcolm 75 Director
Profiles of Directors and Executive Officers:
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.
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.
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 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
Robert W. Marsik 189,804 - Common Stock 23.18%
22,142 - Series A Preferred (2)
Mark S. Pierce 585,039 - Common Stock 24.36%
12,254 - Series A Preferred (3)
All executive officers and directors as a
group (2 persons) 47.54%
1. The shares and percentages are based upon the assumed
conversion of all outstanding shares of Series A Preferred Stock,
which would have result in there having been 4,162,217 shares of
Common Stock outstanding at May 5, 1997.
2. These shares will be automatically converted into 774,970
shares of Common Stock on October 1, 1998.
3. These shares will be automatically converted into 428,890
shares of Common Stock on October 1, 1998.
The address for Mr. Pierce is Route 106T, Story, Wyoming 82842; and
the address for Mr. Marsik 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 9th day of September, 1997.
MIDLAND, INC.
(Registrant)
By: /s/ Robert W. Marsik
Robert W. Marsik, Chief Executive,
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 9th day of
September, 1996.
By: /s/ Robert W. Marsik
Robert W. Marsik,Director
By: /s/ Charles Stidham
Charles Stidham, Director
By: /s/ E. Robert Barbee
E. Robert Barbee,Director
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