UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934 (Fee Required) for the Fiscal Year Ended February 28, 1997
-----------------
Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934 (No Fee Required) for the Transition Period
from ________ to ________
Commission file number 33-2128-D
---------
KELLY'S COFFEE GROUP, INC.
--------------------------
(Name of Small Business Issuer in its Charter)
Colorado 84-1062062
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
647 Seventeenth Avenue
Longmont, Colorado 80502-1539
-----------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (303) 772-1784
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on Which Registered
------------------- -------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |_| No
|X|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Registrant's revenues for the fiscal year ended February 28, 1997:
$1,702,226
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on May 14, 1998 was approximately $118,000.
The number of shares outstanding of the Registrant's common stock on May
14, 1998 was 12,000,666.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
<PAGE>
Part I
Item 1. Description of Business
(a) Business Development. Kelly's Coffee Group, Inc., the Registrant (the
"Company"), was incorporated under the laws of the State of Colorado on April
20, 1987. The Company has undergone several name changes since its organization.
The Company has also been involved in several business activities, most of which
have been discontinued. The Company's principal business activity is the
manufacture of store fixtures and showcases and other specialty items for
jewelers and other retailers. The Company commenced these business activities in
December 1995.
In March, 1994, the Company acquired all of the stock of Kelly's Specialty
Group, Inc. ("Kelly's Specialty"). Kelly's Specialty operated directly, or
through franchise arrangements, specialty food retail stores offering
principally coffee and coffee-related products, gourmet fudge and related
confectionery products. These operations were discontinued in November 1996.
In two separate asset purchase agreements, each dated December 15, 1995,
the Company, through a newly formed subsidiary, Kelly-Berg Corporation of
Colorado, Inc. ("Kelly-Berg"), acquired substantially all of the assets of Berg
Selector Distributors, Inc. ("Selector") and Berg Showcase Manufacturing
("Showcase"). Showcase was acquired by assumption of a secured obligation from
Norwest Bank in the amount of $384,000 and the issuance of a promissory note in
the principal amount of $313,696. The purchase price for Selector was the
issuance of 15% of the outstanding stock of Kelly-Berg Corporation of Colorado,
Inc. to Terry Irby, a principal owner of Selector. A dispute subsequently arose
with the former owners of Selector and Showcase. See Item 3. All references in
this Report to the Company include Kelly-Berg Corporation of Colorado, Inc.,
unless the context requires otherwise.
Since the 1995 fiscal year, primarily as a result of the Company's changes
in operations and management, the Company failed to file the required reports
and other filings required to be filed with the Securities and Exchange
Commission in accordance with the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company intends to become current with regard to its
reporting requirements pursuant to the applicable provisions of the Exchange
Act, and through continued emphasis on its current sales and manufacturing
operations, the Company believes that it will be able to sustain its business
operations. However, the Company has suffered recurring losses from operations
and has a net capital deficiency. These factors have been noted in the report of
the auditors in Item 7.
The principal offices of the Company are located at 647 Seventeenth Avenue,
Longmont, Colorado 80502-1539; and its telephone number is (303) 772-1784.
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Exchange Act. All statements other than statements of
historical fact included in this Report, including without limitation, the
statements in Items 1, 6 and 7 regarding the Company's financial statements and
liquidity, the Company's operations and proposed operations, and other matters,
may be deemed forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance such expectations will prove to have been correct.
(b) Business of the Company. The Company is engaged in the design,
manufacture, installation and marketing of customized, high-end retail store
fixtures. The fixtures include lighted display cases, wall cases, counters,
cashier and wrapping stations, moving (motion) and display products, portable
(traveler) display cases, tables, stools and replacement parts for those items.
All of the Company's products are designed and manufactured on a customized
<PAGE>
basis per the customer's needs in terms of size, color of materials, lighting
options, as well as mall and store requirements. The Company's predecessor, Berg
Showcase Manufacturing, was started in Madison, Wisconsin by Mr. Benjamin Berg
in the 1950's. Mr. Berg operated an outfitting store that sold, among other
items, fishing tackle. Mr. Berg wanted to display several hundred fishing lures,
hand-tied flies and other related items in a limited amount of space. He
invented and designed a display with moving shelves that rotate forward or
backward at the flick of a switch, allowing the customer the selection option.
This case provided a tremendous amount of display area in a minimal amount of
space. This product, as it is known today as the A Model, was developed, and
later patented, and is still manufactured by the Company.
Production of the A Model began in 1952, and Mr. Berg's company was soon
recognized as a leading manufacturer of quality display cases. Mr. Berg later
sold his company, but development was continued of innovative fabrication and
design technologies.
The Company currently manufactures six different lines of display fixtures
with approximately 15 different sizes in each. The Company also manufactures on
request matching/contrasting benches, chairs, stools and tables for sales
personnel. The Company also provides signage and graphics, and has built
freestanding stores (kiosks) for its customers. The Company provides retail
decorative pieces from glass, mirror, wood and metal. The Company's longstanding
strength has been its ability to custom manufacture solutions for problems of
its customers and to provide a unique stylized signature for each customer,
allowing an individuality of expression.
The Company employs an exclusive "rail system" in its showcases. Instead of
using standard commercial grade aluminum angle and channel, the Company's
patented "rail system" provides an "interlocking" construction with all of its
panel pieces (wood, glass, metal). This "rail system" (extruded aluminum) is
larger, more aesthetically appealing, and provides much more structural
integrity to the finished product. The Company believes that this provides for
greater stability and durability, as well as a longer lasting product.
The Company's fixtures are designed to be rugged, attractive, versatile and
secure. The Company's goal is to provide store fixtures that give the most
visibility to the merchandise displayed and that remain attractive and
serviceable for a longer time than fixtures offered by its competitors. The
Company was a pioneer in the use of motion to attract attention to high profit
items. As a result, the Company's showcases are purchased primarily by jewelers
and watch dealers.
The Company also specializes in the manufacture and installation of kiosks.
The Company's kiosk is rated non-combustible for use in most shopping mall
corridor locations. Many municipalities have adopted ordinances requiring
free-standing kiosks to be constructed of completely non-combustible materials.
Stringent requirements can be met by the Company with little to no compromise in
the exterior appearance and aesthetic appeal that is important in the retail
market. The Company offers several free-standing sizes and configurations for
mall, lobby or in-store locations. Modular design and construction allows the
Company to address individual needs and incorporate specific features into each
customer's kiosk. Customized options include full choice of display heights,
laminate, specialty laminate, or mirrored panel finishes, manual or electrically
operated security gates, motion display units and custom center island work
stations.
The Company's manufacturing facility includes a custom glass and mirror
shop to accommodate the Company's manufacture of retail display cases. Because
of the exacting nature and equipment needs of the glass and mirror business, the
Company has also determined that there is demand for wholesaling glass and
mirror products to small retail shops in Colorado which are unable to fabricate,
polish, engrave, or bevel and need to outsource this work. Approximately 23% of
the Company's sales are derived from this activity.
2
<PAGE>
Substantially all of the Company's sales are "factory direct." The Company
maintains an in-house sales staff which is responsible for contacting existing
and prospective customers. A substantial portion of the Company's business is
"repeat" business from existing customers who are replacing existing display
cases or other fixtures, or expanding their existing locations or into new
locations. The Company also uses the services of one distributor who markets the
Company's products in the southern California area. From time to time, the
Company advertises in trade magazines and attends trade shows. The Company's
marketing activities have been limited due to financial constraints.
The Company competes with numerous manufacturers of store fixtures,
specialty items and kiosks. There are several companies with which the Company
competes in the design, manufacture and sale of display cases. The Company's
display cases are typically priced higher than its major competitors. The
Company believes that it offers a more attractive product. The major competitive
factors in the sale of store fixtures are price in relation to quality and
appearance, the utility of the product, customer lead time and ability to
respond to requests for special features. Certain customers are more price
sensitive than others, but all customers expect on-time, damage-free delivery.
In most instances, the Company installs the store fixtures it has manufactured.
The Company does not stock pre-built display cases, but instead manufactures all
of its products to the customized requirements of the customer.
The Company's principal competitors have greater financial and other
resources than the Company, and offer broader product lines. Competitive
pressures could result in increased price competition or in the introduction of
new products by the Company's competitors, which could have a material adverse
effect on the Company's results of operations.
Although the Company designs and markets a variety of display cases and
fixtures, as well as kiosks, the majority of the Company's business emanates
from the sale of customized jewelry display cases, principally to jewelry shops
and stores featuring watches. Until additional products are developed or
acquired, the Company is subject to the risks that demand for its existing
products may be diminished by changing market conditions, customer preferences
or competition, which could have a material adverse effect on the Company's
results of operations.
The Company's products are currently sold in several specific geographic
markets in the United States. Although the Company desires to expand to other
markets, the Company's expansion may meet market resistance. The Company also
desires to expand its direct sales force, as well as other marketing efforts,
but the Company's financial condition and liquidity issues may preclude these
efforts.
Principal components used by the Company in the production of display
cases, store fixtures and kiosks are typically readily available from multiple
sources. The Company uses a substantial amount of aluminum, and attempts to
maintain a sufficient amount of aluminum to meet anticipated customer demand, as
aluminum suppliers can sometime delay shipments during periods of heavy demand.
However, due to financial limitations, the Company may not be able to maintain a
sufficient inventory of aluminum or other materials.
The Company's customers include Movado, Lillie Rubin, Cartier, Piaget,
Citizen, Guess and Omega. The Company's principal customers during the fiscal
year ended February 28, 1997 were Lillie Rubin and Cartier, which accounted for
30% and 12%, respectively, of the Company's sales. Lillie Rubin has filed a
petition under Chapter XI of the U.S. bankruptcy laws and may not be a viable
customer of the Company.
The Company has no long-term contracts with any of its customers. The
Company depends on "repeat" orders from its major customers to sustain its
operations. The Company believes that, if it continues to provide these
3
<PAGE>
customers with high-quality display cases and other products, it will continue
to attract business from these customers. The loss of any of the Company's major
customers would have a material adverse effect on the Company's results of
operations.
Inasmuch as the Company's major customers are involved in the retail sale
of jewelry and watches, which sales tend to be higher during major holiday
seasons, such as Christmas and Valentine's Day, the Company's business may be
affected by seasonal factors. Quarterly revenue levels are subject to
substantial fluctuations and are often difficult to predict.
The Company relies on two key patents in connection with the sale of its
products. Although the Company is not aware of any existing or threatened patent
infringement claims asserted against it and does not believe that its products
infringe the proprietary rights of any third parties, there can be no assurance
that infringement claims will not be asserted against the Company. Regardless of
the validity or the successful assertion of such claims, the Company would incur
significant costs and diversion of resources with respect to the defense
thereof.
It is the Company's goal to use its construction and design experience to
eventually "build out" Company-owned coffee stores under the name, "Kelly's
Coffee House." The Company has leased retail space in Denver, Colorado, hired an
architect and employed a graphic artist to design a store at that location. The
Company's ability to carry out its plan to engage again in a coffee-related
business is subject to substantial risk. See Item 6.
The Company's operations are subject to various federal, state and local
laws and regulations with respect to environmental matters. The Company believes
that it is in substantial compliance with present laws and regulations and that
there are no material liabilities related to such items.
The Company currently employs 32 persons, most of whom are engaged in
manufacturing operations. The Company has no collective bargaining agreements
with respect to any of its employees. The Company believes that its employee
relations are satisfactory.
Item 2. Description of Property.
The Company owns no real property. The Company leases an administrative and
sales office in Longmont, Colorado, and a manufacturing plant in Longmont,
Colorado. The Company's leases are with non-affiliates. The Company believes
that its current manufacturing facility is in satisfactory condition and is
adequate for its current needs.
Item 3. Legal Proceedings.
The Company was named as a defendant, together with Stuart A. Benson, a
former officer and director of the Company, in an action brought by Sherman,
Nathanson & Miller, a law firm which alleges it performed services on behalf of
the Company and Mr. Benson. The action was commenced in June 1996 in the
Superior Court of the State of California for the County of Los Angeles-Central
District. The plaintiff also alleges that the Company was a mere instrumentality
through which defendant Benson conducted his personal financial affairs. The
Company has informed the plaintiff that it does not believe that it should be
responsible for the fees and expenses of the law firm, as those should be the
responsibility of Mr. Benson. The Company is unaware of the disposition, if any,
of this action.
In March 1997, the Company and Terrence A. Buttler, the Company's
President, filed an action against Mr. Benson, and certain relations and
associated entities of Mr. Benson. The action was filed in the United States
District Court for the District of Colorado. No entry of appearance or
responsive pleading was filed by or on behalf of any of the defendants. The
Clerk of the Court entered default on June 30, 1997. The defendants filed a
4
<PAGE>
motion to set aside default and for leave to file answer in July 1997, which was
denied by the Court in November 1997 as to Mr. Benson and certain of the other
defendants. Action with respect to the other defendants is pending. In the
Complaint, the Company and Mr. Buttler contend that while Mr. Benson was an
officer and director of the Company, he misused company funds for his personal
benefit. The Company and Mr. Buttler also contend that Mr. Benson has not
surrendered certain corporate records to the Company and that Mr. Benson was
unjustly enriched at the expense of the Company and Mr. Buttler. The Company and
Mr. Buttler seek damages and an accounting from Mr. Benson and his relations.
The Company has engaged in settlement discussions with certain of the
defendants, but no definitive settlement has been reached. The Company is
preparing materials regarding claims for damages to submit to the court. The
Company is uncertain as to whether it will recover any funds pursuant to this
litigation, or if such funds are recovered, whether they will be material.
In December 1995, the Company purchased the assets of Showcase. The former
owners of Showcase attempted to rescind the agreement in March of 1996 claiming
non-performance by the Company and its former officers who signed as guarantors.
The dispute was submitted to binding arbitration. The arbitrators awarded
$775,270 to the former owners, but did not rescind the transaction. The Company
and its officers who signed as guarantors were held jointly and severally liable
for this amount. The entire amount has been recorded as a liability on the
Company's balance sheet because collection from the former officers is
uncertain. See Item 7.
Item 4. Submission of Matters to a Vote of Securityholders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of securityholders, and therefore, this item is
inapplicable.
5
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock is quoted on the Electronic Bulletin Board under
the symbol, KLYS. Trading in the common stock in the over-the-counter market has
been limited and sporadic and the quotations set forth below are not necessarily
indicative of actual market conditions. Further, these prices reflect
inter-dealer prices without retail mark-up, mark-down, or commission, and may
not necessarily reflect actual transactions. The high and low bid prices for the
common stock for each quarter of the fiscal years ended February 28, 1997 and
1996 are as follows:
Quarter Ended High Bid Low Bid
------------- -------- -------
February 28, 1997 $.06 $.01
November 30, 1996 .10 .06
August 31, 1996 .28 .13
May 31, 1996 .35 .13
February 28, 1996 .35 .15
November 30, 1995 1.00 .38
August 31, 1995 1.75 .56
May 31, 1995 1.75 .56
In March, 1998, the number of holders of record of the Company's common
stock was 317. No cash dividends were paid during the fiscal years February 28,
1997 and 1996.
Item 6. Management's Discussion and Analysis or Plan of Operation.
In the next 12 months, the Company , through its operating subsidiaries,
intends to increase its revenue base by offering additional products and
services to its existing customer base. The Company also intends to increase its
marketing efforts through an increase in its sales staff and by attending trade
shows. Subject to the availability of sufficient funds, the Company intends to
reestablish its presence in the coffee retail store business. The Company has
plans to open one retail coffee store in Denver, Colorado and is considering the
possibility of acquiring small, currently operating coffee shops.
The ability to conduct these operations will depend on the Company's
ability to obtain sufficient funding. The Company is considering raising capital
through sales of equity or debt securities. The Company does not have available
internal sources of liquidity and it is unlikely that bank financing would be
available to it in the near future. The Company has no commitments for financing
from outside sources, and there can be no assurance that the Company will be
able to successfully raise this capital or that, if it does, it will be able to
operate profitably.
During the next 12 months, the Company plans to realize operating
efficiencies by maintaining the most experienced staff at minimum required
levels. Previous job specific employees are being cross trained in multiple
manufacturing areas to minimize bottlenecks. The Company has also implemented
tighter inventory controls to reduce excess quantities and maximize usage of
scrap. The Company has moved its facilities to an "Enterprise Zone" that yields
significant tax incentives to businesses located there.
6
<PAGE>
Results of Operations
For the years ended February 28, 1997 and 1996, the Company and its 85%
owned subsidiary realized net sales of $1,702,226 and 493,822 respectively.
Taking into account costs of sales and expenses, the Company's net loss in these
periods totaled $248,000 ($0.02 per share) and $1,685,836 ($0.23 per share),
respectively.
Capital Resources
At November 30, 1997, the Company had total current liabilities of
$2,681,945 and total current assets of $615,301, for a working capital deficit
of $2,066,644. The Company's cash position continues to be poor, and the Company
continues to experience liquidity problems. The Company's plan to ease its
liquidity concerns and improve its operations is described above. There can be
no assurance that the Company's plans will be successful. Moreover, the level of
the Company's indebtedness could have important consequences to the Company,
including: (i) a significant amount of the Company's cash flow from operations
must be dedicated to debt service and will not be available for other purposes;
(ii) the Company's ability to obtain additional financing in the future may be
limited; and (iii) the Company's level of indebtedness could make it more
vulnerable to economic downturns, limit its ability to withstand competitive
pressures and limit its flexibility in reacting to changes in its industry and
economic conditions generally. Many of the Company's competitors currently
operate on a less leveraged basis and may have significantly greater operating
and financial flexibility than the Company.
7
<PAGE>
CONTENTS
Independent Auditors' Report ..................................... F-1
Consolidated Balance Sheet ....................................... F-2
Consolidated Statements of Operations ............................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) ........ F-5
Consolidated Statements of Cash Flows ............................ F-6
Notes to the Consolidated Financial Statements ................... F-8
8
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Kelly's Coffee Group, Inc. and subsidiary
Longmont, Colorado
We have audited the accompanying consolidated balance sheet of Kelly's Coffee
Group, Inc. and Subsidiary as of February 28, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended February 28, 1997 and February 29, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated Financial
statements based on our audits.
Except as discussed in the following paragraph, 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 consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
We did not observe the physical inventories (stated at $477,216), taken as of
February 29, 1996, since that date was prior to our initial engagement as
auditors for the Company, and the Company's records do not permit adequate
retroactive tests of inventory quantities.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to observe the physical
inventories taken as of February 29, 1996, the consolidated financial statements
referred to in the first paragraph present fairly, in all material respects, the
consolidated financial position of Kelly's Coffee Group, Inc. and Subsidiary as
of February 28, 1997, and the results of their operations and their cash flows
for the years ended February 28, 1997 and February 29, 1996 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 6 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency which together raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 6. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Jones. Jensen & Company
September 15, 1997
F-1
<PAGE>
Item 7. Financial Statements.
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet
ASSETS
------
February 28,
1997
------------
CURRENT ASSETS
Inventory (Note 1) $481,869
Accounts receivable, net (Note 1) 63,239
--------
Total Current Assets 545,108
FIXED ASSETS (Notes 1 and 2) 364,562
OTHER ASSETS
Goodwill (Note 1) 24,078
--------
TOTAL ASSETS $933,748
========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
February 28,
1997
------------
CURRENT LIABILITIES
Cash overdraft $ 5,026
Accounts payable 337,495
Accounts payable related party (Note 9) 41,568
Accrued expenses 53,803
Net liabilities of discontinued operations (Notes 4 and 8) 1,160,106
Arbitration award payable (Note 7) 775,270
Notes payable - current portion (Note 3) 104,344
-----------
Total Current Liabilities 2,477,612
Notes payable - less current portion (Note 3) 12,634
----------
TOTAL LIABILITIES 2,490,246
----------
COMMITMENTS AND CONTINGENCIES (Note 4)
MINORITY INTEREST (Note 1) 56,832
----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value, 50,000 shares
authorized, none issued and outstanding --
Common stock $0.001 par value, 100,000,000
shares authorized 12,000,666 shares issued
and outstanding 12,001
Additional paid-in capital 1,600,488
Accumulated deficit (3,225,819)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,613,330)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 933,748
===========
Theaccompanying notes are an integral part of thee
consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended
-------------------------------------
February 28, February 29,
1997 1996
------------ ------------
<S> <C> <C>
SALES $ 1,702,226 $ 493,822
COST OF SALES 934,319 360,005
------------ ------------
GROSS MARGIN 767,907 133,817
------------ ------------
OPERATING EXPENSES
Depreciation and amortization 62,216 14,102
Rent -- 16,203
General and administrative 1,039,200 284,315
------------ ------------
Total Operating Expenses 1,101,416 314,620
------------ ------------
NET LOSS FROM OPERATIONS (333,509 (180,803)
------------ ------------
OTHER EXPENSE
Interest expense (4,212) (14,779)
------------ ------------
Total Other Expense (4,212) (14,779)
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS
AND MINORITY INTEREST (337,721) (195,582)
------------ ------------
DISCONTINUED OPERATIONS (Note 8)
Loss from operations of Kelly's Specialty Group (284,117) (1,517,393)
Gain on disposal of Kelly's Specialty Group 320,000 --
------------ ------------
GAIN (LOSS) FROM DISCONTINUED OPERATIONS 35,883 (1,517,393)
------------ ------------
MINORITY INTEREST IN LOSS 52,841 27,139
------------ ------------
NET LOSS $ (248,997) $ (1,685,836)
============ ============
LOSS PER SHARE $ (0.02) $ (0.23)
============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 11,163,464 7,347,041
============ ============
The accompanying notes are an integral part of
these consolidatd financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
Preferred Stock Common Stock Additional Stock
--------------- ------------------------ Paid-in Subscriptions Accumulated
Shares Amount Shares Amount Capital Receivable Deficit
----- ------ ------ ------ ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
February, 28, 1995 - -- $ 5,052,797 $ 5,053 $ 691,618 (45,667) $(1,290,986)
Common stock issued
for services rendered - -- 888,933 889 110,228 -- --
Common stock issued
for cash - -- 3,611,570 3,612 495,168 -- --
Collection of stock
subscriptions receivable - -- -- -- -- 45,667 --
Net loss for the
year ended
February 29, 1996 - -- -- -- -- -- (1,685,836)
----- ---- ----------- ----------- ----------- ----------- -----------
Balance,
February 29, 1996 - -- 9,553,300 9,554 1,297,014 -- (2,976,822)
Common stock issued
for services rendered - -- 2,347,366 2,347 291,074 -- --
Common stock issued
in settlement of
accounts payable - -- 100,000 100 12,400 -- --
Net loss for the
year ended
February 28, 1997 - -- -- -- -- -- (248,997)
----- ---- ----------- ----------- ----------- ----------- -----------
Balance,
February 28, 1997 - $-- 12,000,666 $ 12,001 $ 1,600,488 $ -- $(3,225,819)
===== ==== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
</TABLE>
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended
---------------------------
February 28, February 29,
1997 1996
------------ ------------
CASH FLOWS OPERATING ACTIVITIES
Net loss $ (248,997) $(1,685,836)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 62,216 14,102
Minority interest in loss (52,841) (27,139)
Common stock issued for services rendered 215,921 111,117
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 61,167 152,715
(Increase) decrease in inventory (4,653) (14,057)
Increase (decrease) in cash overdraft 5,026 --
Increase (decrease) in related party payables 41,568 --
Increase (decrease) in accounts payable and
accrued expenses 98,058 81,960
Increase (decrease) in net liabilities of
discontinued operations (251,804) 828,539
----------- -----------
Net Cash Used in Operating Activities (74,339) (538,599)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (63,443) --
----------- -----------
Net Cash Used in Investing Activities (63,443) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable (14,155) --
Collection of subscriptions receivable -- 45,667
Proceeds from notes payable 112,500 --
Common stock issued for cash -- 498,780
----------- -----------
Net Cash Provided by Financing Activities 98,345 544,447
----------- -----------
INCREASE (DECREASE) IN CASH (39,437) 5,848
CASH, BEGINNING OF YEAR 39,437 33,589
----------- -----------
CASH, END OF YEAR $ -- $ 39,437
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
---------------------------
February 28, February 29,
1997 1996
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 4,212 $ --
Income taxes paid $ -- $ --
NONCASH FINANCING ACTIVITIES
Common stock issued for services rendered $215,921 $111,117
Common stock issued for accounts payable $ 12,500 $ --
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
February 28, 1997 and February 29, 1996
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
a. Organization
---------------
The consolidated financial statements include those of Kelly's Coffee
Group, Inc. and its 85% owned subsidiary Kelly - Berg Corporation of
Colorado, Inc. (Kelly - Berg) collectively, they are referred to herein as
"the Company". All intercompany accounts and transactions have been
eliminated.
Kelly's Coffee Group, Inc. (Kelly's) was incorporated under the laws of the
State of Colorado on April 20, 1987. The Company was formerly named Welcom
Capital, Incorporated and Great Earth Vitamin Group, Inc. Subsequent to
February 28, 1994 the Company changed its name to Kelly's Coffee Group,
Inc. On December 20, 1995, the Kelly's acquired an 85% interest in Kelly -
Berg by assuming liabilities of Kelly - Berg (Note 7). The Company has
selected the last day of February as its year end. Until November of 1996,
at which time they discontinued these operations, the Company sold
franchises for business which offer gourmet coffees, teas, hand-made fudge,
pastries and other items to retail customers.
Kelly - Berg was incorporated under the laws of the State of Colorado on
December 19, 1995. Kelly - Berg was organized for the purpose of owning and
holding the assets purchased from Berg Showcase Manufacturing Corporation,
Inc. and to act as the operating entity resulting from the asset purchase
agreement. Kelly - Berg manufactures store fixtures and merchandise
showcases for jewelry, cosmetics and other retail items. Kelly - Berg does
business as Berg Showcase Manufacturing.
b. Per Share Information
------------------------
Per share information is based upon the weighted average number of shares
outstanding during the period.
c. Income Taxes
---------------
The Company follows the provisions of Financial Accounting Standards
Statement #109.
d. Goodwill
-----------
Goodwill resulting from the purchase of Kelly - Berg of $27,882 is
amortized over a period of ten years using the straight line method.
Amortization for the years ended February 28, 1997 and February 29, 1996
was $3,295 and $509 respectively.
e. Concentrations of Credit Risk
--------------------------------
The Company has no significant concentrations of credit risk other than in
the normal course of business.
F-8
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
February 28, 1997 and February 29, 1996
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
f. Property, Equipment and Depreciation
---------------------------------------
Property and equipment are stated at cost. Depreciation of equipment is
computed using the straight - line method over the estimated useful lives
of the related assets, primarily five to seven years.
g. Cash Equivalents
-------------------
The Company considers all highly liquid investments, with a maturity of
three months or less when purchased, to be cash equivalents.
h. Estimates
------------
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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
i. Inventory
------------
Inventory is stated at the lower of cost or market, with cost determined on
a first-in, first-out basis and market based on the lower of replacement
cost or realizable value.
j. Accounts Receivable
----------------------
The Company provides an allowance for losses on trade receivables based on
a review of the current status of existing receivables and management's
evaluation of periodic aging of accounts. Accounts receivable are shown net
of a $43,038 allowance for doubtful accounts at February 28, 1997.
k. Principles of consolidation
------------------------------
The consolidated financial statements include the accounts of the Company
and its 85% owned subsidiary. All material intercompany accounts and
transactions have been eliminated in consolidation.
F-9
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
February 28, 1997 and February 29, 1996
NOTE 2 - FIXED ASSETS
Fixed Assets consisted of the following: February 28,
1997
------------
Office equipment $ 50,621
Production equipment 353,822
Vehicles 32,633
---------
437,076
Less accumulated depreciation (72,514)
Total Fixed Assets $ 364,562
=========
Depreciation expense was $58,921 and $13,593 for the years ended February
28, 1997 and February 29, 1996, respectively.
NOTE 3 - NOTES PAYABLE
February 28,
1997
------------
The following is a description of the notes payable:
Note payable, dated September 17, 1996, payable
to a corporation owned by an officer of the Company,
accruing interest at 12.5%, principal and interest
due September 20, 1997 (Note 9). $ 100,000
Note payable, dated January 29, 1996, accruing
interest at 13.5%, principal and interest payments
of $429 due monthly, maturing January 1, 2001. 16,978
---------
Total 116,978
Less Current Portion (104,344)
--------
Total Long-Term Liabilities $ 12,634
========
Schedule of Maturities
1998 $ 104,344
1999 3,660
2000 4,186
2001 4,788
---------
Total $ 116,978
=========
F-10
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
February 28, 1997 and February 29, 1996
NOTE 4 - COMMITMENTS AND CONTINGENCIES
On October 20, 1996, the Company sold the franchise rights of Kelly's
Coffee & Fudge Factory to Kelly's Franchising of America, Inc. (KFA),
which is controlled by a former officer of the Company, and a major
creditor of the Company. The Asset Purchase Agreement transfers all
obligations regarding franchise agreements, lease agreements relating
to franchises and other obligations related to the operation of the
franchising operations. Additionally, the obligation to the major
creditor who shares control of KFA totaling $320,000 was assumed by
KFA.
It has come to the attention of the Company's management that KFA may
have sold Kelly's Coffee & Fudge Franchises under the name of Kelly's
Coffee Group, Inc. The Company is unaware of any claims against it as
a result of these activities. (Also see Note 10).
NOTE 5 - INCOME TAXES
As of February 28, 1997, there are no current or deferred income taxes
payable. As of February 28, 1997, the Company had net operating loss
carryfowards of approximately $3,225,000 which expire in 2012. No tax
benefit has been reported in the financial statements because the
Company is uncertain if the carry forwards will expire unused.
Accordingly, the potential tax benefits are offset by a valuation
account of the same amount.
NOTE 6 - BASIS OF PRESENTATION - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company
has sustained operating losses since its inception and has a net
capital deficiency. Management anticipates taking steps to reduce
operating expenses, is attempting to raise additional capital, and has
entered into a business combination agreement as described in Note 1.
NOTE 7 - ACQUISITIONS
On December 20, 1995, the Company entered into an asset purchase
agreement with Berg Showcase Manufacturing, Inc. (Berg) whereby, the
Company assumed certain liabilities of Berg and its previous owners in
exchange for the assets of Berg including trade names, patents and
fixed assets.
The former owners of Berg attempted to rescind the agreement in March
of 1996 claiming non-performance by the Company and its officers who
signed as guarantors. The dispute was settled through binding
arbitration. The agreement was not rescinded, and Berg was awarded a
settlement of $775,270. The Company and its former officers who signed
as guarantors are held jointly and severally liable for this amount.
The entire amount has been recorded as a liability of the Company
because collection from the former officers is uncertain. The amount
of the award has been recorded as the purchase price of the assets.
The accompanying financial statements include the operations of Berg
from December 19, 1995 forward.
F-11
<PAGE>
KELLY'S COFFEE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
February 28, 1997 and February 29, 1996
NOTE 8 - DISCONTINUED OPERATIONS
The Company decided to either sell or dispose of its franchising
operations during October 1996. As a result, the assets and
liabilities of those operations are being netted together as
discontinued operations resulting in a balance of net liabilities at
February 28, 1997. The breakout of the amounts at February 28, 1997 is
summarized as follows:
February 28,
1997
-------------
Assets of Discontinued Operations $ 97
Liabilities of Discontinued Operations (1,160,203)
-----------
Net Liabilities of Discontinued Operations $(1,160,106)
===========
In addition, the operating results of the franchising operations are
being netted together as loss on discontinued operations. The
resulting gain and loss for the years ended February 28, 1997 and
February 29, 1996 were $35,883 and $1,517,393, respectively. Revenues
were $0 and $478,122 respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
On September 17, 1996, the Company received a loan of $112,500 from an
officer. Principal and interest payments of $16,668 were made during
the year. The balance at February 28, 1997 was $100,000. During the
year ended February 28, 1997, an officer made advances to the Company
totaling $41,568. The Company has made no payments on these advances.
NOTE 10 - LITIGATION
On July 14, 1995, Ronald S. Gabriel filed a law suit against the
Company for past due rent and damages of approximately $60,000. The
Company never occupied the space because the Lessor was not able to
provide the parking necessary for the Company to be licensed to
operate in the space. The Company believes that this suit has no merit
and that the judgement will be in its favor.
The Company was named as a defendant in a lawsuit filed on June 5,
1996 by former attorneys of the Company. The attorneys are seeking to
collect amounts owed them by the Company totaling $90,000, which
amounts have been accrued by the Company. The attorneys have also
named a former officer of the Company in the lawsuit and are actively
seeking to collect the amounts owed by the Company from him as he was
a guarantor on the obligation.
The Company's President has filed a lawsuit against a former officer
of the Company seeking to recover tangible and intangible assets,
money and business records. The outcome of this litigation is
uncertain.
F-12
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
9
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
(a) Identification of Directors and Executive Officers. The following table
sets forth the names and ages of the directors and executive officers of the
Company, all positions and offices with the Company held by such persons and the
time during which each such person has served as a director of the Company.
<TABLE>
<CAPTION>
Date First
Name Age Elected Director Position with the Company
- ---- --- ---------------- -------------------------
<S> <C> <C>
Terrence A. Buttler 42 1996 President and Director
Carl J. Conte 30 1996 Treasurer and Director
Kathy S. Fox 49 1997 Secretary and Director
</TABLE>
Mr. Buttler joined the Company in 1996. Prior to joining the Company, he
was associated with the brokerage firm of Paramount Investments where he served
as Sales Manager in 1994 and as Chief Executive Officer in 1995 and 1996. He was
previously Vice President of Sales for R.B. Webster, a brokerage firm.
Mr. Conte has served as Vice President of Operations of Genesis Media, a
telecommunications firm, in Los Angeles, California, since 1997. From 1996 to
1997, he was the Sales Manager of the Company. From 1994 to 1996, he was
associated with the brokerage firm of Paramount Investors.
Ms. Fox has provided administrative and accounting services to the Company
since 1996. From 1994 to 1995, she served as Operations Manager for Cool Heat, a
manufacturer. From 1989 to 1995, she was materials manager for OP Children's
Wear, a manufacturer, where she was responsible for product planning, product
specifications and costing. In August 1996, Ms. Fox filed a petition for
personal bankruptcy under the United States Bankruptcy Code.
(b) Identification of Significant Employees. Tom Beshears, age 34, is the
President of the Company's majority owned subsidiary, Kelly-Berg. Mr. Beshears
has worked for Kelly-Berg in various capacities since 1986.
(c) Family Relationships. There is no family relationship between any
present director, executive officer or person nominated or chosen by the Company
to become a director or executive officer.
(d) Involvement in Certain Legal Proceedings. No present director or
executive officer of the Company has been the subject of any civil or criminal
proceeding during the past five years which is material to an evaluation of his
integrity or ability to serve as an officer or director, nor is any such person
the subject of any order, judgment or decree of any federal or state authority
which is material to an evaluation of his abilities or integrity.
10
<PAGE>
Item 10. Executive Compensation.
During the fiscal year ended February 28, 1997, the Company paid Terrence
A. Buttler salary of $45,000.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth ownership of the presently issued and
outstanding shares of the Company's $.001 par value common stock held by each
director, individually, and all officers and directors as a group, and all
persons who own 5% or more of the outstanding shares of the Company's common
stock as of May 14, 1998. The Company has authorized preferred stock, but no
preferred stock is issued and outstanding.
Beneficial Owner Number of Shares Percent of Class
- ---------------- ---------------- ----------------
Terrence A. Buttler 2,500,000 20.8%
Carl J. Conte -0- -0-
Kathy S. Fox 25,000 1.2
All Officers and
Directors as a Group
(3 persons) 2,525,000 21.0
Canton Financial Co. 1,300,000 10.8
Robert Pallota 900,000 7.5
In addition, Mitch Feinglas is the record owner of 1,400,000 shares of the
Company's common stock, but the Company contests this ownership.
Item 12. Certain Relationships and Related Transactions.
See Notes 4, 7, 9 and 10 to the Notes to Financial Statements in Item 7.
11
<PAGE>
Exhibits
(i) The following exhibits are incorporated herein by reference to the Company's
Registration Statement on Form S-18 as filed with the Securities and Exchange
Commission on September 16, 1988 (Commission File No. 33-22128), and are
numbered in accordance with such Registration Statement, or Exhibit number:
Exhibit Number and Brief Description
3.1 Articles of Incorporation
3.3 Bylaws
4.1 Specimen Certificate of Common Stock
4.2 Proposed Form of Common Stock Purchase Warrants
4.3 Warrant Agreement
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KELLY'S COFFEE GROUP, INC.
By: /s/ Terrence A. Buttler
--------------------------------------
Terrence A. Buttler, President
Date: May 18, 1998
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the registrant and in the capacities and
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Terrence A. Buttler President, Chief Executive
- ------------------------ Officer and Director May 18, 1998
Terrence A. Buttler
/s/ Carl J. Conte Treasurer and Director May 18, 1998
- ------------------------
Carl J. Conte
/s/ Kathy S. Fox Secretary and Director May 18, 1998
- ------------------------
Kathy S. Fox
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 63
<ALLOWANCES> 0
<INVENTORY> 482
<CURRENT-ASSETS> 545
<PP&E> 365
<DEPRECIATION> 0
<TOTAL-ASSETS> 934
<CURRENT-LIABILITIES> 2478
<BONDS> 0
0
0
<COMMON> 1612
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 934
<SALES> 1702
<TOTAL-REVENUES> 1702
<CGS> 934
<TOTAL-COSTS> 1101
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (338)
<DISCONTINUED> 36
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (249)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
