AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1997
REGISTRATION NO. 333-18093
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------
CAFE LA FRANCE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------
DELAWARE 5812 05-0486226
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
------------
THOMAS W. DEJORDY
CAFE LA FRANCE, INC.
216 WEYBOSSET STREET
PROVIDENCE, RHODE ISLAND 02903
(401) 453-2233
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND
NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------
COPY TO:
MICHAEL F. SWEENEY, ESQ. HENRY M. DIAMOND
DUFFY AND SWEENEY EARNHARDT CO., INC.
300 TURKS HEAD BUILDING 10 ABBOT PARK PLACE
PROVIDENCE, RHODE ISLAND 02903 PROVIDENCE, RHODE ISLAND 02903
(401) 455-0700 (401) 331-5400
------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]__________.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]__________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================================================
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED SHARE OR OPTION(1) OFFERING FEE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Common Stock 1,125,000 $4.00 $4,500,000 $ 1,363.63
- ----------------------------------------------------------------------------------------------------------------------
Underwriter's Option 56,250 $ .01 $ 562.50 $ .17
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Underlying
Underwriter's Option 56,250 $5.60 $ 315,000 $ 95.45
- ----------------------------------------------------------------------------------------------------------------------
TOTAL REGISTRATION FEE(2) $1,459.25
======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended (the
"Securities Act").
(2) No fee is due at this time, since $4,439.27 was paid on December 18, 1996 in
connection with the initial filing of this Registration Statement covering a
larger aggregate offering amount.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
================================================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 11, 1997
PROSPECTUS
- ----------
[LOGO)
UP TO 1,125,000 SHARES OF COMMON STOCK
Cafe La France, Inc., a Delaware corporation (the "Company"), hereby offers
(the "Offering") up to a maximum of 1,125,000 shares (the "Maximum Offering") of
its Common Stock, par value $.01 per share (the "Shares"). The Company currently
anticipates that the Shares offered hereby will be offered at $4.00 per Share.
However, the Company may amend this Prospectus to increase the Offering price
per Share as the Offering progresses to reflect the increasing valuation of the
Company during the Offering period. The minimum subscription is 100 Shares.
There is no minimum aggregate Offering amount or escrow of subscription funds,
and any funds received in this Offering will become immediately available to the
Company upon receipt and acceptance by the Company. See "UNDERWRITING" and "RISK
FACTORS -- No Minimum Offering; Greater Risk to Early Investors."
The Shares offered hereby are being sold through Earnhardt Co., Inc. (the
"Underwriter"), as selling agent, on a "best efforts" basis, up to a maximum of
1,125,000 Shares (the "Offering"). The Offering will terminate on June 30, 1997,
unless extended by the Company, without notice to investors, for up to an
additional 120 day period, or until the maximum number of shares is sold,
whichever occurs first (the "Termination Date"). The period during which the
Shares will be offered to investors is hereinafter referred to as the "Offering
Period."
Prior to this Offering, no public market for the Shares has existed and no
assurance can be given that any such market will develop in the future or be
sustained, if developed. The Offering price has been established by the Company
in consultation with the Underwriter and does not necessarily bear any
relationship to the Company's book value, assets, net worth or other established
criteria of value. The Company expects the Shares to be quoted on the NASD's OTC
Bulletin Board following the Termination Date by broker dealer firms who agree
to make a market in the Company's shares. When eligible, the Company will apply
for quotation of the Shares on The Nasdaq Small Cap(tm) Market ("Nasdaq"). See
"RISK FACTORS -- Arbitrary Determination of Offering Price" and "UNDERWRITING."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" (BEGINNING ON PAGE 6).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THESECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
PRICE TO PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ 4.00 $ .40 $ 3.60
- --------------------------------------------------------------------------------
Total Maximum(3) $4,500,000 $450,000 $4,050,000
================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of a common stock purchase option exercisable for shares of
Common Stock equal to 5% of the number of Shares sold at an exercise price
equal to 140% of the offering price of such Shares. The Company has agreed
to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended and to reimburse
the Underwriter for certain actual expenses not to exceed $12,000. See
"UNDERWRITING."
(2) Before deducting additional expenses of the Offering payable by the Company,
estimated to be $300,000, including, among other expenses, legal and
accounting fees, Blue Sky filing fees, printing costs and transfer agent
fees.
(3) Assuming the Maximum Offering is achieved. No minimum number of Shares is
required to be sold, and sales will be made on a continuing basis prior to
the termination of the Offering. See "RISK FACTORS -- No Minimum Offering;
Greater Risk to Early Investors" and "UNDERWRITING."
The Shares are being offered and sold on a "best efforts" basis by Earnhardt
Co., Inc. as selling agent (the "Underwriter") and possibly other broker-dealers
that enter into selected dealer agreements with the Underwriter. Neither the
Underwriter nor any selling group member, if any, will have any obligation to
purchase or accept any of the Shares. The Underwriter will receive a sales
commision of 10% for any Shares sold and a Common Stock purchase option
exercisable for shares of Common Stock equal to 5% of the number of Shares sold
at an exercise price of 140% of the Offering price of such Shares (the
"Underwriter's Option"). The Company reserves the right to withdraw, cancel or
modify this Offering and to reject any subscription in whole or in part. It is
expected that delivery of the certificates representing the Shares will be made
promptly after acceptance of any subscription by the Company. See
"UNDERWRITING."
The Offering will terminate on June 30, 1997 (or earlier if the Maximum
Offering is achieved), unless extended in the sole discretion of the Company for
up to an additional 120 days.
Earnhardt Co., Inc.
THE DATE OF THIS PROSPECTUS IS , 1997.
INSIDE FRONT COVER INFORMATION
THREE COLOR PHOTOGRAPHS OF INTERIOR AND EXTERIOR STORE LOCATIONS
A SIGNIFICANT AMOUNT OF THE SECURITIES TO BE SOLD IN THIS OFFERING MAY BE
SOLD TO CUSTOMERS OF THE UNDERWRITER. THIS MAY AFFECT THE MARKET FOR AND
LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL
BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE
CAN BE NO ASSURANCE. IN SUCH EVENT, THE POSSIBLIITY EXISTS THAT THE MARKET FOR
THE COMPANY'S COMMON STOCK COULD BE OR BECOME ILLIQUID, WHICH MAY AFFECT THE
SHAREHOLDERS' ABILITY TO TRADE THE COMPANY'S SECURITIES.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto included elsewhere in
this Prospectus. Unless otherwise specified, all information in this Prospectus
relating to the number of shares of Common Stock and per share data has been
adjusted to give effect to a 5 for 4 stock split declared by the Company's Board
of Directors on March 6, 1997.
THE COMPANY
Cafe La France, Inc. (the "Company"), through its operating subsidiaries,
consists of a chain of 18 cafes, eleven of which are owned and operated by the
Company and seven of which are operated as franchises by independent third
parties who have entered into franchise agreements with the Company. The
Company's menu features coffee beverages including espresso and cappuccino,
muffins, croissants, brownies and cookies baked on the premises, made-to-order
sandwiches, hot soups, salads and cold beverages. Target customers include urban
office employees, students and other adults who are time-sensitive yet desire a
higher quality breakfast and lunch experience than is typically found at quick
service restaurants. The Company seeks to locate its cafes in high visibility,
heavily-trafficked office or shopping areas that are easily accessible to its
target clientele. See "BUSINESS -- Site Selection and Design." The Company's
strategy is to create distinctive food offerings at reasonable prices that are
fresher, of higher quality and in greater variety than those offered by
competitors. See "BUSINESS -- Competition." The Company's founder, Thomas W.
DeJordy, opened his first Cafe La France retail store in 1989. Over the next few
years, additional Cafe La France outlets were established, including the first
franchise in August 1994. See "BUSINESS -- Company History." The majority of the
Company's 18 cafes are situated in urban locations, occupy 800-1300 square feet
of leased space, and are open Monday through Friday. With the exception of its
Lexington, Massachusetts cafe and its Baltimore, Maryland franchise, all cafes
are currently clustered in and around Providence, Rhode Island. See "BUSINESS --
Properties" and "BUSINESS -- Franchise Operations -- Locations."
The Company specializes in four sectors of the cafe business: (1) coffee
products, including six varieties of freshly ground and brewed coffees, espresso
drinks, gourmet teas, and iced coffees; (2) baked goods, including bagels,
biscotti, muffins, scones, and croissants; (3) lunch products, including several
varieties of sandwiches, soups and salads; and (4) catered products, including
baked goods and beverages appropriate for breakfast meetings, business lunches
and other professional gatherings. The Company's percentage of revenues from
each of its four major product categories, based on a representative sampling of
sales from Company owned cafes for the most recent fiscal year, are
approximately as follows: coffee products (40%); baked goods (18%); lunch
products (40%); and catering sales (2%). See "BUSINESS -- Products."
The Company's expansion strategy will initially focus on opening new stores
in urban areas which cater to working professionals. Management believes that
significant expansion opportunities exist in the Boston, Massachusetts area
primarily because of the large number of people working in Boston and the
increased likelihood of name recognition/brand identity in an area approximately
50 miles from its existing market. Management further believes that expansion
into an area geographically close to its Providence, Rhode Island headquarters
can be achieved with its existing corporate management personnel because of the
short travel time between Boston and Providence and because its Director of
Operations and Vice President -- Finance were hired in part to manage the
Company's expansion into Boston. Management is also exploring opportunities in
highly visible residential areas. Unlike urban locations, cafes in residential
settings would typically remain open seven days a week and may operate under a
different trade name. The timing and extent of the Company's growth and
expansion depends on the success of this Offering. See "BUSINESS -- Expansion
Strategy" and "USE OF PROCEEDS."
The Company's executive offices are located at 216 Weybosset Street,
Providence, Rhode Island. Its telephone number is (401) 453-2233.
3
THE OFFERING
Risk Factors.............. The Shares offered hereby are speculative in nature
and involve a high degree of risk. See "RISK
FACTORS."
Securities Offered by the
Company................. 1,125,000 Shares of Common Stock.
Shares of Common Stock
Outstanding
Before the Offering..... 1,616,628
Shares of Common Stock
Outstanding
After the Offering...... 2,741,628(1)(2)
Percent of Common Stock
owned by
current stockholders
after the Offering (2).. 58.97%
Gross Proceeds from the
Maximum Offering........ $4,500,000
Use of Proceeds........... The net proceeds of the Maximum Offering will be
used (i) to finance the expansion and development of
additional restaurants, (ii) to repay outstanding
indebtedness to certain noteholders and (iii) for
general corporate purposes. See "USE OF PROCEEDS."
Proposed OTC Trading
Symbol(3)............... CLAF
- -----------
(1) Assuming the Maximum Offering is achieved, as to which there can be no
assurance.
(2) Excludes (i) 500,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan, of which 79,025 options are outstanding
as of the date of this Prospectus at an exercise price of $2.76 per share,
(ii) 72,500 shares of Common Stock reserved for issuance upon exercise of
certain outstanding non-qualified options at an exercise price of $2.76 per
share, (iii) 112,500 shares of common stock reserved for issuance upon
exercise of certain warrants issued in the Company's 1996 private offering
of notes and warrants and (iv) the Underwriter's Option, exercisable in the
aggregate for up to 56,250 shares of Common Stock, assuming the Maximum
Offering is achieved. See "SHARES AVAILABLE FOR FUTURE SALE."
(3) No assurance can be given that a trading market will develop for the Shares
or, if developed, that such market will be sustained. See "RISK FACTORS --
Absence of Public Market."
4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR NINE MONTHS --------------------------
ENDED ENDED DECEMBER 29, DECEMBER 31,
SEPTEMBER 29, 1996 OCTOBER 1, 1995 1996 1995
------------------ --------------- ---- ----
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1):
Total revenues $2,198,753 $ 1,467,162 $ 635,027 $ 580,428
Operating loss (616,601) (488,012) (248,732) (84,351)
Net loss before income taxes (672,557) (516,858) (295,129) (95,354)
Net loss (673,307) (517,358) (295,879) (96,104)
Net loss per share(2) (.38) (.17) (.05)
Shares used in computing loss per share(2) 1,775,820 1,775,820 1,775,820
PRO FORMA DATA:
Historical net loss as above $ (673,307) $ (517,358) $ (295,879) $ (96,104)
Pro forma salary adjustment -- (50,000) -- (12,500)
---------- ----------- --------- ---------
Pro forma net loss $ (673,307) $ (567,358) $ (295,879) $ (108,604)
========== =========== ========= =========
CAFE OPERATING DATA:
System-Wide sales(3) $3,244,613 $ 1,927,386
Company owned cafes(4) 2,046,638 1,311,538
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 29, 1996 OCTOBER 1, 1995 DECEMBER 29, 1996 DECEMBER 31, 1995
------------------ --------------- ----------------- -----------------
AT END FOR FULL AT END FOR FULL AT END FOR FULL AT END FOR FULL
OF PERIOD PERIOD OF PERIOD PERIOD OF PERIOD PERIOD OF PERIOD PERIOD
--------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF CAFES OPEN:
Company owned 10 8 10 4 11 10 10 10
Franchised 7 4 5 5 6 6 8 5
-- -- -- - -- -- -- --
Total 17 12 15 9 17 16 18 15
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 29, 1996 AT DECEMBER 29, 1996
--------------------- --------------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $ (640,351) $ (923,178)
Total assets 885,654 1,038,128
Long term liabilities $ 418,762 $ 403,957
Total liabilities 1,204,332 1,622,685
Stockholders' equity (deficit) (318,678) (584,557)
</TABLE>
(1) Prior to October 2, 1995, each of the existing operating subsidiaries
included in the Company (CLF2, Inc. and CLF Franchise Corporation) had
elected those provisions of the Internal Revenue Code (Subchapter S) and
state laws which provide for the income of the Company to be taxed at the
stockholder level. The Company terminated the S-corporation elections
effective October 2, 1995, resulting in a nine month fiscal year for fiscal
1995 and the commencement of a new fiscal year beginning October 2, 1995 and
ending September 29, 1996.
(2) Prior to October 2, 1995, the Company elected S-corporation status and
therefore was not subject to federal and state corporate income taxes.
Accordingly, earnings per share data has been presented only for the fiscal
periods after October 1, 1995.
(3) Reflects total sales of Company owned cafes, commissary sales to franchisees
and initial franchise fees, and sales of franchised restaurants as reported
by franchisees or derived by the Company from other data reported by
franchisees. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
(4) Reflects total sales of Company owned cafes. Excludes commissary sales of
$54,645 for the fiscal year ended September 29, 1996 and $118,158 for the
nine months ended October 1, 1995.
5
RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, THE INFORMATION PRESENTED BELOW.
RECENT LOSSES; LIMITED OPERATING HISTORY; NO ASSURANCE OF FUTURE PROFITS;
Ability to Continue as a Going Concern. For the fiscal year ended September 29,
1996 and the nine months ended October 1, 1995, the Company had net losses of
$673,307 and $517,358 respectively, and for the quarter ended December 29, 1996,
the Company had a net loss of $295,879. Also, as of December 29, 1996, the
Company had an accumulated deficit of $1,562,748. Although the Company's losses
can be in part attributed to the hiring of additional management personnel in
preparation for implementing its expansion plan, there can be no assurance when,
if ever, the Company will achieve profitable operations. In addition, although
the first Cafe La France store opened in 1989 and the Company has grown steadily
ever since, the Company did not prepare financial statements on a consolidated
basis prior to the nine months ended October 1, 1995. See "BUSINESS -- Company
History." As a result, the Company has a limited combined operating history as a
multi-store operator/franchiser upon which investors may evaluate the Company's
performance. See "BUSINESS -- Company History" and "BUSINESS -- Expansion
Strategy." On March 10, 1997, as part of their updated report on the Company's
financial statements for the fiscal year ended September 29, 1996 included
herein, the Company's independent auditors expressed doubt about the Company's
ability to continue as a going concern because of recurring losses from
operations and a net capital deficiency. Management intends to use a substantial
portion of the proceeds from this Offering, after repayment of certain debt and
Offering expenses, to implement its expansion strategy which it believes will
result in increased revenues, reduced losses, and elimination of the "going
concern" opinion, although there can be no assurance as to when, if ever, the
Company will achieve profitability. If the Company is unable to substantially
carry out its expansion strategy or to significantly increase the profitability
of its existing cafes, management will be required to sharply curtail the
Company's overhead structure to continue its business operations. See "USE OF
PROCEEDS," "BUSINESS -- Expansion Strategy," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources," and Note 13 to the Consolidated Financial Statements.
NEED FOR ADDITIONAL CAPITAL; SUBSTANTIALLY ALL ASSETS PLEDGED. In order to
achieve and maintain the Company's geographic expansion through new store
openings and/or acquisition of existing cafes, the Company believes that it may
need to obtain additional bank financing or sell additional equity and/or debt
(or hybrid) securities in future public and/or private financings, particularly
in the event that the Maximum Offering hereunder is not achieved. The issuance
of such debt or equity financings may cause additional dilution to purchasers in
this Offering. The Company currently has no commitments for any such financings
and there can be no assurance that any such financings can be obtained on terms
acceptable to the Company. In addition, the lender under the Company's existing
line of credit has a first priority security interest on substantially all of
the assets of the Company which may limit the Company's ability to obtain
additional financing. See "DILUTION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources."
NO MINIMUM OFFERING; GREATER RISK TO EARLY INVESTORS. The Company has not
established any minimum offering amount or escrow account for the Offering.
Since the Offering is proceeding on a "best efforts" basis, there can be no
assurance that all or any of the Shares offered hereby will be sold. If any
Shares are sold, the Company anticipates using the first $500,000 in gross
proceeds from the Offering ($450,000 net proceeds) for general working capital
($150,000) and expenses of the Offering ($300,000). Accordingly, if no
additional proceeds are generated by the Offering, the Company will not be able
to implement its expansion strategy and such early investors could lose their
entire investment. If the Company receives gross proceeds of $1,500,000, the
Company intends to acquire and/or develop up to four - five new Company-owned
locations. Accordingly, investors contributing such funds bear less risk than
investors contributing up to the first $500,000 to the extent such additional
funds will improve the financial condition of the Company. Nevertheless, the
Company's expansion strategy will not be fully implemented unless the Maximum
Offering hereunder is achieved, as to which there can be no assurance, and as a
result earlier
6
investors in the Offering bear greater risk in comparison to later investors in
the Offering. Although the Company may determine to increase the offering price
of the Shares during the Offering Period to reflect the increasing valuation of
the Company as proceeds from the Offering are applied to fund its growth and
expansion, the Company makes no representations as to whether any such increased
price, if effected, will be an adequate or fair indication of the disparity in
risk between early investors and later investors. See "USE OF PROCEEDS,"
"BUSINESS -- Expansion Strategy" and "UNDERWRITING."
GEOGRAPHIC CONCENTRATION. Ten of the eleven cafes currently owned by the
Company and six of the Company's seven franchises are located in and around
Providence, Rhode Island. As a result, the Company's results of operations may
be materially affected by changes in the Rhode Island economy. Although the
Company anticipates the establishment of new cafes in Massachusetts and other
states in the Northeast and adjacent areas, there can be no assurance that the
Company will successfully expand into such markets or that the Company's
business concept will be successful in such new areas. In addition, the Company
is operating a recently acquired cafe under the name "The Village Bean" and may
seek to acquire and operate additional cafes under other names. There can be no
assurance that the Company's expansion plan will be successful under any such
trade names. See "BUSINESS -- Competition" and "BUSINESS -- Expansion Strategy."
UNCERTAINTY OF ACCOMPLISHING EXPANSION STRATEGY. The Company has grown from
four Company owned cafes and four independently operated franchises in 1994 to
eleven Company owned cafes and seven independently operated franchises as of the
date of this Prospectus, and anticipates additional growth. The Company's growth
strategy contemplates the establishment of new stores as well as acquisitions of
existing cafe-style coffee restaurants in desired locations as well as the
development of additional franchises. Such acquisitions, if any, may involve
potentially dilutive issuances of equity securities, the incurrence of
additional debt and/or the amortization of significant expenses related to
goodwill and other intangible assets acquired. The suitability of a candidate
for acquisition will be determined by the Board of Directors, and stockholders
will not have an opportunity to review the financial condition of any such
candidate or to approve any such transactions. The Company does not currently
have any definitive plans, proposals, arrangements or understandings for the
acquisition of any existing restaurants or locations, other than as follows: (i)
the Company has retained the services of a commercial realtor to identify and
locate up to 20 suitable properties in the Boston area available for lease over
the next 12-18 months; and (ii) the Company has entered into a lease agreement
with a landlord in the Boston area dated February 21, 1997 which lease is
contingent upon the Landlord displacing an existing restaurant tenant by August
1997. The Company will continue to evaluate acquisition opportunities in
accordance with its expansion strategy as described herein. See "BUSINESS --
Expansion Strategy." The continued growth of the Company in general will depend
on a number of factors, including the availability of suitable locations, the
negotiation of favorable lease or site acquisition terms, the identification,
training and retention of skilled management personnel, the availability of
adequate capital, general economic and business conditions, and other factors,
some of which are beyond the control of the Company. There can be no assurance
that the Company will achieve its expansion goals or manage its growth
effectively, and such failure could have a material adverse effect on the
Company's results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS -- Company History"
and "BUSINESS -- Expansion Strategy."
SIGNIFICANT INCREASING COMPETITION. The coffee, sandwich and baked goods
industry is highly competitive. Many of the Company's competitors are well
established and have substantially greater financial, marketing and other
resources than the Company. In addition, certain national and regional companies
such as Au Bon Pain and Starbucks have recently expanded into the greater
Providence, Rhode Island area, while other chain store operators/franchisors
such as Dunkin Donuts have been upgrading their menu selections to include more
baked goods such as fat-free muffins, bagels and sandwiches. The expansion and
menu modification by such chains or other similar competitors may adversely
affect the Company's future profitability or its ability to compete successfully
in the future. See "BUSINESS -- Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend on the
continued efforts and abilities of Thomas W. DeJordy, Chairman of the Board,
Chief Executive Officer and President, and Robert G. King, Vice President --
Finance, Treasurer and Director. The Company has entered into an employment
7
agreement with Mr. DeJordy which provides for a term of 3 years and contains
non-competition provisions, and the Company has entered into an employment
agreement with Mr. King which also provides for a term of 3 years and contains
non-competition provisions, contingent upon the success of this Offering. The
loss of services of any of its senior management personnel could adversely
affect the Company. The Company has acquired key man life insurance on the life
of Mr. DeJordy in the amount of $1 million, and intends to purchase such
insurance on the life of Mr. King with a portion of the proceeds of the Maximum
Offering, if achieved. In addition, as the Company's expansion occurs, the
success of the Company will depend in part on the Company's ability to attract
and retain additional qualified personnel. There is no assurance that the
Company will be able to hire or retain such personnel in the future. See
"MANAGEMENT -- Employment Agreements."
ABSENCE OF PUBLIC MARKET. There is no public market for the Company's Common
Stock and there can be no assurance that an active public market will develop in
the future as a result of the Offering. Although the Company expects that,
following the Offering, the Common Stock will be quoted by broker/dealer firms
in the over-the-counter market ("OTC") through the OTC "Electronic Bulletin
Board," there can be no assurance that a trading market will develop on the OTC,
or, if developed, will be sustained. Accordingly, an investor in the Shares may
not be able to sell his or her Shares readily, if at all. As a result, an
investor must be able to bear the economic risk of the investment in the Company
for an indefinite period of time. See "DESCRIPTION OF SECURITIES" -- Limitations
on Transfers of Shares."
ARBITRARY DETERMINATION OF OFFERING PRICE. The initial public offering price
of the Shares has been arbitrarily determined by consultation between the
Company and the Underwriter and does not necessarily bear any relationship to
the Company's assets, book value or financial condition, or to any other
recognized criteria of value. See "UNDERWRITING."
LACK OF DIVIDENDS. The Company currently intends to retain any future
earnings for use in its business and does not expect to pay any cash dividends
on any shares of Common Stock for the foreseeable future. In addition, the
Company's agreement with its primary bank lender prohibits the payment of
dividends without the bank's prior written consent. See "DIVIDEND POLICY."
CONTROL BY THE CEO. As of the date of this Prospectus, Mr. DeJordy, the
Company's Chairman, Chief Executive Officer and President, owns approximately
71.4% of the Company's 1,616,628 shares of issued and outstanding Common Stock,
and is able to control virtually all aspects of the Company's operations. If the
Maximum Offering is completed, Mr. DeJordy will continue to own approximately
42.1% of the outstanding Common Stock of the Company (assuming no exercise of
existing warrants or options -- see "SHARES AVAILABLE FOR FUTURE SALE") and will
have the potential to continue to control virtually all aspects of the Company's
operations. See "PRINCIPAL STOCKHOLDERS," "MANAGEMENT -- Employment Agreements"
and "DESCRIPTION OF SECURITIES -- Common Stock Options."
DEPENDENCE ON SUPPLIERS. The Company currently purchases all its coffee
products from New England Coffee, Inc. and most of its food-related products
from New Vermont Creamery, Inc. and Perkins Paper, Inc. The Company does not
have any written supply agreements with any of its suppliers, and believes that
alternative sources are available. Although the Company believes its suppliers
have sufficient capacity to meet any increase in demand resulting from the
Company's proposed expansion strategy, a disruption in supply or degradation in
quality could have an adverse impact on the Company's business and financial
results, particularly at a time when the Company is attempting to build brand
identity and customer loyalty. In addition, an increase in prices from its
suppliers, particularly with respect to coffee and food products, could also
have an adverse impact on the Company's business and financial results.
POSSIBLE DEPRESSIVE EFFECT OF FUTURE SALES OF COMMON STOCK. Upon completion
of this Offering, there will be 2,741,628 shares of Common Stock outstanding
(assuming no exercise of existing options or warrants), of which 1,125,000
shares of Common Stock sold in this Offering will be freely tradable in the
United States without restriction under the Securities Act, by persons other
than "affiliates" of the Company, as defined under the Securities Act -- if a
market for such Shares were to develop (See "Absence of Public Market" above).
Of the remaining 1,616,628 shares outstanding, (i) 362,384 shares were issued
pursuant to Rule 504 of Regulation D in the Company's 1995-1996 private offering
of Common Stock (See "CERTAIN TRANSACTIONS") and would be freely tradable under
federal securities laws after this Offering but for a 13 month
8
post-Offering "lock-up" provision contained in the subscription agreements
executed by investors in such offering, and (ii) 1,254,244 shares have not been
registered under the Securities Act and constitute "restricted securities" under
Rule 144 of the Securities Act ("Rule 144"). Ordinarily, under Rule 144, a
person holding restricted securities for a period of two years may, every three
months, sell in ordinary brokerage transactions or in transactions directly with
a market maker an amount equal to the greater of one percent of the Company's
then outstanding Common Stock or the average weekly trading volume during the
four calendar weeks prior to such sale. Rule 144 also permits sales by a person
who is not an affiliate of the Company and who has satisfied a three-year
holding period without any quantity limitation. The Company's Chairman and Chief
Executive Officer (Mr. DeJordy) has agreed not to sell any of his 1,154,556
shares of Common Stock, all of which constitute restricted securities, for a
period of 13 months from the date of this Prospectus without the prior written
consent of the Underwriter. Thereafter, Mr. DeJordy would be eligible to resell
such shares, subject to volume limitations and other conditions imposed by Rule
144. With respect to the remaining 99,688 shares of Common Stock which
constitute restricted securities, 68,875 shares held by non-affiliates would
become eligible for resale under Rule 144 on October 2, 1997 and 30,813 shares
held by non-affiliates would become eligible for resale on May 30, 1998, subject
to volume limitations and other conditions imposed by Rule 144. Future sales
under Rule 144 may have a depressive effect on the market price of the Common
Stock should a public market develop for such stock, as to which there can be no
assurance. In addition, warrants issued to investors in the Company's 1996
private offering of promissory notes and warrants (the "Bridge Warrants") will
become exercisable for 112,500 shares of Common Stock 13 months after this
Offering. Following registration thereof, which the Company is obligated to
undertake, resales of such shares could also have a depressive effect on the
market price of the Common Stock, should any such market develop. See "SHARES
ELIGIBLE FOR FUTURE SALE" and "UNDERWRITING."
GOVERNMENT REGULATION OF RESTAURANT AND FRANCHISE OPERATIONS. The Company is
subject to a variety of federal, state and local laws. Each of the Company's
cafes is subject to licensing and regulation by a number of government
authorities, including health, safety, sanitation, building and fire agencies in
the area in which the cafe is located. In addition, the Company is also subject
to federal and state laws regulating the offer and sale of franchises, which
laws impose registration and disclosure requirements on franchisors in the offer
and sale of franchises. Difficulties in obtaining or failure to obtain required
licenses or approvals could delay or prevent the development of a new cafe or
franchise in a particular area. The Company's cafe operations are also subject
to federal and state laws governing such matters as the minimum hourly wage,
unemployment tax rates, sales tax and similar matters over which the Company has
no control. Significant numbers of the Company's service, food preparation, and
other personnel are paid at rates related to the federal minimum wage, and
increases in the minimum wage could increase the Company's labor costs.
Management believes that the Company is in material compliance with all such
government regulations as of the date of this Prospectus. See "BUSINESS --
Franchise Operations -- Registration" and "BUSINESS -- Government Regulation."
REDUCED PROBABILITY OF CHANGE-OF-CONTROL OR ACQUISITION OF COMPANY DUE TO
EXISTENCE OF ANTI-TAKEOVER PROVISIONS. The Company has expressly elected to be
governed by Section 203 of the Delaware General Corporation Law (the "DGCL").
Section 203 is an anti-takeover law which, in general, restricts the ability of
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder. As a
result, potential acquirers of the Company may be discouraged from attempting to
effect an acquisition transaction with the Company, thereby possibly depriving
holders of the Company's securities of certain opportunities to sell or
otherwise dispose of such securities at above-market prices pursuant to such
transactions. In addition, the Company's Certificate of Incorporation authorizes
the Company's Board of Directors to issue Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, liquidation preferences and the number of shares
constituting any series or designation of such series, without further vote or
action by stockholders. Finally, the Company's By-Laws require a certain advance
notice procedure with regard to nomination of directors and other matters to be
brought before an annual meeting of stockholders other than by or at the
direction of the Board of Directors. As a result of the application of Section
203, the existence of "blank check" Preferred Stock, the advance notice
procedure in the By-Laws, and certain change in control provisions contained in
the
9
employment contract of the Company's President and Chief Executive Officer,
potential acquirers of the Company may find it more difficult or be discouraged
from attempting to effect an acquisition transaction with or a change of control
of the Company, thereby possibly depriving holders of the Company's securities
of certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions. See "MANAGEMENT -- Employment
Agreements" and "DESCRIPTION OF SECURITIES -- Delaware Law and Certain Charter
and By-Law Provisions."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE LAW.
Pursuant to the Company's Certificate of Incorporation, as authorized under the
DGCL, directors of the Company are not liable for monetary damages for breach of
fiduciary duty, except in connection with a breach of the duty of loyalty, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for dividend payments or stock repurchases illegal
under Delaware law or for any transaction in which a director has derived an
improper personal benefit. In addition, the Company's Certificate of
Incorporation provides that the Company must indemnify its officers and
directors to the fullest extent permitted by Delaware law for all expenses
incurred in the settlement of any actions against such persons in connection
with their having served as officers or directors of the Company. See
"MANAGEMENT -- Limitation on Liability of and Indemnification of Directors and
Officers."
TRANSACTIONS WITH CONTROLLING SHAREHOLDER AND AFFILIATES. During 1995, the
Company entered into a series of merger transactions involving its controlling
shareholder, Mr. DeJordy, pursuant to which the Company's Rhode Island
predecessor corporation became the parent corporation of the Company's two
subsidiaries: CLF Franchise Corporation and CLF2, Inc. In 1996, the Company
entered into employment agreements with Mr. DeJordy and Mr. King, its Vice
President -- Finance. Due to Mr. DeJordy's controlling shareholder interest in
the Company, such transactions were not "arms-length" transactions and
necessarily involved conflicts of interest. See "CERTAIN TRANSACTIONS."
IMMEDIATE AND SUBSTANTIAL DILUTION. Investors who purchase Shares in the
Offering will incur immediate and substantial dilution in the net tangible book
value of the Common Stock of approximately $2.86 per share or approximately 72%
of the public offering price per Share assuming the Maximum Offering is
achieved. See "DILUTION."
REQUIRED DISCLOSURE CONCERNING TRADING OF PENNY STOCKS OR LOW-PRICED
SECURITIES. The sale of the Shares offered hereby is, and any subsequent trading
in the Shares will likely be, subject to rules that regulate broker-dealer
practices in connection with transactions in "penny stocks." The Securities and
Exchange Commission (the "SEC") has adopted regulations that define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require the delivery by the
broker-dealer, prior to the transaction, of a disclosure schedule prepared by
the SEC relating to the penny stock market. In addition, the broker-dealer,
subject to certain exceptions, must make an individualized written suitability
determination for the purchase of a penny stock and receive the purchaser's
written consent prior to the transaction. The broker-dealer also must disclose
the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. These
requirements may severely limit the market liquidity of the Common Stock and the
ability of purchasers on this Offering to sell their Shares in the secondary
market.
10
THE COMPANY
Cafe La France, Inc. (the "Company"), through its operating subsidiaries,
consists of a chain of 18 cafes, eleven of which are owned and operated by the
Company and seven of which are operated as franchises by independent third
parties who have entered into franchise agreements with the Company. The
Company's menu features coffee beverages including espresso and cappuccino,
muffins, croissants, brownies and cookies baked on the premises, made-to-order
sandwiches, hot soups, salads and cold beverages. Target customers include urban
office employees, students and other adults who are time-sensitive yet desire a
higher quality breakfast and lunch experience than is typically found at quick
service restaurants. The Company seeks to locate its cafes in high visibility,
heavily-trafficked office or shopping areas that are easily accessible to its
target clientele. See "BUSINESS -- Site Selection and Design." The Company's
strategy is to create distinctive food offerings at reasonable prices that are
fresher, of higher quality and in greater variety than those offered by
competitors. See "BUSINESS -- Competition." The Company's founder, Thomas W.
DeJordy, opened his first Cafe La France retail store in 1989. Over the next few
years, additional Cafe La France outlets were established, including the first
franchise in August 1994. See "BUSINESS -- Company History." The majority of the
Company's 18 cafes are situated in urban locations, occupy 800-1300 square feet
of leased space, and are open Monday through Friday. With the exception of its
Lexington, Massachusetts cafe and its Baltimore, Maryland franchise, all cafes
are currently clustered in and around Providence, Rhode Island. See "BUSINESS --
Properties" and "BUSINESS -- Franchise Operations -- Locations."
The Company specializes in four sectors of the cafe business: (1) coffee
products, including six varieties of freshly ground and brewed coffees, espresso
drinks, gourmet teas, and iced coffees; (2) baked goods, including bagels,
biscotti, muffins, scones, and croissants; (3) lunch products, including several
varieties of sandwiches, soups and salads; and (4) catered products, including
baked goods and beverages appropriate for breakfast meetings, business lunches
and other professional gatherings. The Company's percentage of revenues from
each of its four major product categories based on a representative sampling of
sales from Company owned cafes for the most recent fiscal year, are
approximately as follows: coffee products (40%); baked goods (18%); lunch
products (40%); and catering sales (2%). See "BUSINESS -- Products."
The Company's expansion strategy will initially focus on opening new stores
in urban areas which cater to working professionals. Management believes that
significant expansion opportunities exist in the Boston, Massachusetts area
primarily because of the large number of people working in Boston and the
likelihood of name recognition/brand identity in an area less than 50 miles from
its existing market. Management further believes that expansion into an area
geographically close to its Providence, Rhode Island headquarters can be
achieved with its existing corporate management personnel because of the short
travel time between Boston and Providence and because its Director of Operations
and Vice President -- Finance were hired in part to manage the Company's
expansion into Boston. Management is also exploring opportunities in highly
visible residential areas. Unlike urban locations, cafes in residential settings
would typically remain open seven days a week and may operate under a different
trade name. The timing and extent of the Company's growth and expansion depends
on the amount of net proceeds raised in this Offering. See "BUSINESS --
Expansion Strategy" and "USE OF PROCEEDS."
The Company's executive offices are located at 216 Weybosset Street,
Providence, Rhode Island. Its telephone number is (401) 453-2233.
11
USE OF PROCEEDS
Because there is no minimum Offering amount for the Shares offered hereby
and because the Company currently anticipates that the Shares will be offered at
$4.00 per Share but that such price could increase as the Offering progresses,
the Company cannot determine the proceeds from the sale of the Shares offered
hereby. The Company's priorities in utilizing the net proceeds from the Offering
are as follows: (i) to pay certain vendors and expenses of the Offering; (ii) to
finance the expansion and development of additional cafes; (iii) to retire short
term outstanding indebtedness as necessary; and (iv) for general corporate
purposes. See "RISK FACTORS -- No Minimum Offering; Greater Risk to Early
Investors."
If the Maximum Offering is achieved and if all Shares sold therein were sold
at $4.00 per Share, the net proceeds to the Company after deducting selling
commissions ($450,000) and other estimated expenses of the Offering
(approximately $300,000) would be approximately $3,750,000.
If approximately $3,100,000 in gross proceeds is received, the net proceeds
to the Company after deducting selling expenses ($310,000) and other estimated
expenses of the Offering ($300,000) would be approximately $2,490,000. If
approximately $1,500,000 in gross proceeds is received, the net proceeds to the
Company after deducting selling expenses ($150,000) and other expenses of the
Offering ($300,000) would be approximately $1,050,000. The table below indicates
how such net proceeds would be utilized by the Company.
<TABLE>
<CAPTION>
NET PROCEEDS NET PROCEEDS NET PROCEEDS
OF $3,750,000 OF $2,490,000 OF $1,050,000
------------- ------------- -------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Development and Opening of New Cafe
Style Restaurants $2,500,000 66.7% $1,310,000 52.6% $ 560,000 53.3%
Repayment of Indebtedness 845,000 22.5% 845,000 33.9% 185,000 17.6%
General Working Capital 405,000 10.8% 335,000 13.5% 305,000 29.1%
---------- ----- ---------- ----- ---------- -----
$3,750,000 100.0% $2,490,000 100.0% $1,050,000 100.0%
</TABLE>
DEVELOPMENT AND OPENING OF NEW CAFE-STYLE RESTAURANTS. If the Company
achieves the Maximum Offering (approximately 3,750,000 in net proceeds), the
Company anticipates using approximately 66.7% of the net proceeds from the
Offering to support the opening and/or acquisition of approximately 20
additional Company-owned cafes by October 1998. Although there can be no
assurance that costs for any particular location will not vary from the
following figures, the Company estimates that each new Company-owned cafe will
cost approximately $100,000 to $150,000 to open, including costs for: leasehold
improvements ($20,000-$30,000); equipment, furniture and fixtures
($54,000-$75,000); opening inventory ($4,000-$6,000); initial advertising
($1,000-$2,000); working capital for 3 months (($15,000- $25,000); and
miscellaneous other costs ($6,000-$12,000). In the event that the Company
acquires an ongoing restaurant business, such costs may be higher as a result of
additional costs including costs for "goodwill" and professional fees. If the
Company raises $3.1 million in gross proceeds (approximately $2,490,000 in net
proceeds), the Company expects to utilize approximately $1,310,000 (52.6% of the
net proceeds therefrom) to open and/or acquire eleven - twelve new Company-owned
cafes by October 1998. If the Company raises $1.5 million in gross proceeds
(approximately $1,050,000 in net proceeds), the Company expects to apply such
proceeds to open and/or acquire four - five new locations. See "RISK FACTORS --
No Minimum Offering; Greater Risk to Early Investors."
REPAYMENT OF INDEBTEDNESS. If the Company achieves the Maximum Offering, the
Company anticipates using approximately 22.5% of the net proceeds from this
Offering to repay outstanding indebtedness, including (i) $600,000 in principal
amount plus accrued interest of approximately $60,000 to investors (the "Bridge
Lenders"), none of whom are affiliates of the Company, who invested in the
Company's 1996 private offering of 12% subordinated unsecured notes (the "Bridge
Notes") and common stock purchase warrants, each note bearing interest at 12%
per annum and payable upon the earlier one year from the date thereof (one year
from October 31, 1996 or November 15, 1996, respectively) or 10 days after the
completion of an initial public offering, (ii) $165,000 in short term
12
indebtedness owed to a certain non-affiliated lender (the "Cardillo Loan") and
(iii) $20,000 in the aggregate of short term unsecured loans obtained in
February 1997 and March 1997, respectively, from two non-affiliated lenders,
which loans are payable 90 days from their respective issuance dates. The
Company intends to repay the Bridge Notes during the Offering and prior to
maturity at the rate of 50% of each dollar of gross proceeds raised in this
Offering in excess of $1.5 million in gross proceeds. Thus, the holders of the
Bridge Notes will be repaid in full if the Company raises approximately $3.1
million in gross proceeds in this Offering. If the Company raises $1.5 million
in gross proceeds, the Company expects to repay the Cardillo Loan and the
$20,000 short term loans and use the balance of the net proceeds for general
working capital and to open or acquire four - five new Company-owned cafe
locations, as discussed in the preceding paragraph. See "RISK FACTORS -- No
Minimum Offering; Greater Risk to Early Investors."
GENERAL WORKING CAPITAL. If the Company achieves the Maximum Offering, the
Company anticipates using approximately $405,000 (10.8%) of the net proceeds for
general working capital purposes. If the Company raises $3.1 million in gross
proceeds, the Company expects to utilize $335,000 (13.5%) of the net proceeds
therefrom for general working capital. If the Company raises $1.5 million in
gross proceeds, the Company expects to utilize $305,000 (29.1%) of the net
proceeds therefrom for general working capital.
Pending such uses, the net proceeds of the Offering will be invested
principally in U.S. government securities, short term certificates of deposit,
money market funds, or other high-grade, short term, interest bearing
securities. The actual amount expended for each purpose described above, and the
timing of such expenditures, could vary depending on numerous factors, including
general business conditions.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since its
inception and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to reinvest earnings,
if any, in the development and expansion of its business. Any future
determination with respect to the payment of dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements, and financial position of the Company, general
economic conditions, and other pertinent factors. In addition, the Company's
agreement with its primary bank lender prohibits the payment of dividends
without the bank's prior written consent.
13
DILUTION
At December 29, 1996, the Company had a net tangible book value of
$(618,396) or $(0.38) per share based on 1,616,628 shares of Common Stock
outstanding. Net tangible book value per share represents the amount of the
Company's total assets less intangible assets and total liabilities, divided by
the number of shares of Common Stock outstanding. Without taking into account
any changes in the net tangible book value after December 29, 1996 other than to
give effect to the net proceeds from the Maximum Offering at an assumed public
offering price of $4.00 per Share, the pro forma net tangible book value of the
Common Stock at December 29, 1996 would have been $3,131,604 or $1.14 per
share.(1) This represents an immediate increase in net tangible book value of
$1.52 to existing holders of Common Stock, and an immediate dilution of $2.86
per share from the Offering price on a per share of Common Stock basis to
investors in this Offering. Dilution per share represents the difference between
the offering price per share of Common Stock and the pro forma tangible book
value per share of Common Stock immediately after the Offering. The following
table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Offering Price per Share $ 4.00
Net tangible book value per share before Offering $(0.38)
Increase in net tangible book value per share attributed to
the estimated net proceeds of the Maximum Offering $ 1.52
------
Pro forma net tangible book value per share after the Offering $ 1.14
------
Dilution of net tangible book value per share of Common Stock
to subscribers in the Offering $2.86
=====
</TABLE>
- -------------
(1) The computations in the foregoing table exclude: (i) 56,250 shares issuable
upon exercise of the Underwriter's Option (ii) 112,500 shares issuable upon
exercise of the Bridge Warrants; (iii) 500,000 shares reserved for issuance
under the Company's 1996 Stock Incentive Plan, of which 79,025 shares are
issuable upon exercise of outstanding incentive stock options granted to
employees; and (iv) 72,500 shares issuable upon exercise of outstanding
non-qualified options granted to certain consultants of the Company. See
"DESCRIPTION OF SECURITIES."
The following table sets forth, at December 29, 1996 and as adjusted to give
effect to the sale of the maximum number of Shares offered hereby, the number of
shares of Common Stock purchased, the percentage of Common Stock purchased, the
total consideration paid, the percentage of total consideration paid and the
average price per share paid by the existing stockholders of the Company and the
investors in the Offering, assuming a public offering price of $4.00 per Share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- -------------------
AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
New Investors 1,125,000 41.03% $4,500,000 79.80% $4.00
Existing Stockholders 1,616,628 58.97% $1,138,753(1) 20.20% $ .70
--------- ------ ---------- ------
2,741,628 100.00% $5,638,753 100.00%
========= ====== ========== ======
</TABLE>
- ------------
(1) Includes: (i) $1,000,000 in cash for the purchase of 362,384 shares from
investors in the Company's 1995-1996 private offering of Common Stock at a
price per share of $2.76 (ii) $85,042 in services in exchange for 30,813
shares issued to a consultant of the Company in 1996; and (iii) $53,711 for
1,223,431 shares (1,154,556 of which are held by the Company's founder).
14
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company at the dates and for the periods indicated. The selected consolidated
financial data for the Company for the fiscal year ended September 29, 1996 and
the nine months ended October 1, 1995 and as of September 29, 1996 are derived
from the Consolidated Financial Statements of the Company which have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, and
which are included elsewhere in this Prospectus. The selected consolidated
financial data at December 29, 1996 and for the three months ended December 29,
1996 and December 31, 1995 have been derived from the unaudited Consolidated
Financial Statements of the Company for such periods and include, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary for the fair presentation of the financial position and consolidated
results of operations at and for such periods. The Company's consolidated
results of operations for the thirteen weeks ended December 29, 1996 may not be
indicative of its consolidated results of operations for the full year. The
selected consolidated financial data should be read in conjunction with, and is
qualified in its entirety by, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Consolidated Financial Statements
of the Company and the Notes thereto appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS THREE MONTHS ENDED
ENDED ENDED ---------------------------
SEPTEMBER 29, OCTOBER 1, DECEMBER 29, DECEMBER 31,
1996 1995 1996 1995
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Income:
Sales from Company owned restaurants $2,101,283 $1,429,696 $ 621,320 $ 523,958
Franchise revenues 97,470 37,466 13,707 56,470
---------- --------- ---------- ----------
Total revenues 2,198,753 1,467,162 635,027 580,428
---------- --------- ---------- ----------
Costs and Expenses:
Costs of sales 884,068 607,995 236,089 240,808
Restaurant operating expenses 1,220,888 792,720 409,029 289,069
General and administrative expenses 641,879 510,895 191,335 118,890
Depreciation and amortization 68,519 43,564 47,306 16,012
---------- --------- ---------- ----------
Total costs and expenses 2,815,354 1,955,174 883,759 664,779
Loss from operations (616,601) (488,012) (248,732) (84,351)
Other Income (Expense):
Interest income 6,945 5,207 1,970 1,680
Interest expense (62,901) (34,053) (48,367) (12,683)
---------- --------- ---------- ----------
Net loss before income taxes (672,557) (516,858) (295,129) (95,354)
Income Taxes 750 500 750 750
---------- --------- ---------- ----------
Net loss $ (673,307) $ (517,358) $ (295,879) $ (96,104)
---------- --------- ---------- ----------
Loss per share(1) $ (.38) (.17) (.05)
---------- --------- ---------- ----------
Weighted Average Shares Outstanding(1) 1,775,820 1,775,820 1,775,820
PRO FORMA DATA:
Historical net loss as above $ (673,307) $ (517,358) $ (295,879) $ (96,104)
Pro forma salary adjustment -- (50,000) -- (12,500)
---------- --------- ---------- ----------
Pro forma net loss $ (673,307) $ (567,358) $ (295,879) $ (108,604)
========== ========== ========== ==========
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT SEPTEMBER 29, 1996 AT DECEMBER 29, 1996
--------------------- --------------------
<S> <C> <C>
Working capital (deficit) $ (640,351) (923,178)
Total assets 885,654 1,038,128
Long term liabilities 418,762 403,957
Total liabilities 1,204,332 1,622,685
Stockholders' equity (deficit) (318,678) (584,557)
</TABLE>
- -------------
(1) Prior to October 2, 1995, the Company elected S-corporation status and
therefore was not subject to federal and state corporate income taxes.
Accordingly, earnings per share data has been presented only for the periods
beginning after October 1, 1995.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company opened its first restaurant in 1989, and the profits from the
first location were used to open two more locations in 1990 and another three in
1991 and 1992. By 1992, the Company owned and was operating six cafes in
Providence, Rhode Island. In August, 1994, the Company sold its first franchise
(an existing Company store) and by December, 1994 Cafe La France comprised a
chain of eight cafes, of which four were Company owned and four were franchised,
all of which were operating in the state of Rhode Island. On December 12, 1994,
the Company entered into agreements with three affiliated entities to purchase
the assets and acquire the leases for five cafe restaurants located in
Providence. In late December, 1994 and January, 1995, the agreements were
amended pursuant to which the Company (i) purchased the assets and renegotiated
the leases for two locations for a purchase price of $100,000, and (ii) acquired
the rights to operate two locations and renegotiate the lease for a third
location for a purchase price of $25,000. In order to accomplish these
transactions and the remodeling necessary to convert the new locations to the
Cafe La France concept, the Company obtained a bank loan in the principal amount
of $350,000 on February 10, 1995. By October 1, 1995, the Company comprised a
total of 15 locations, of which ten were Company owned and five were franchised.
On October 1, 1995, Cafe La France, through its two companies CLF2, Inc. and
CLF Franchise Corporation, was owned 100% by Thomas W. DeJordy, the Company's
Founder. Both companies were Sub-chapter S Corporations. On October 2, 1995, the
Company adopted a new fiscal year ending the Sunday closest to September 30, and
Cafe La France was re-organized so that a holding company, Cafe La France, Inc.,
a Rhode Island corporation, was incorporated to own 100% of the stock of CLF2,
Inc. and CLF Franchise Corporation. Mr. DeJordy exchanged 100% of his stock in
CLF2, Inc. and CLF Franchise Corporation for 100% of the stock in Cafe La
France, Inc., the newly formed parent company. The 1995 year was ended on
October 1, 1995 (fiscal 1995 was a nine month year). The 1996 fiscal year began
on October 2, 1995, and the Company elected to be taxed as a Sub-chapter C
corporation beginning in fiscal 1996.
At the beginning of fiscal 1996, with a growing company now comprising 15
locations, but with limited capital, Mr. DeJordy embarked upon a plan to raise
$1,000,000 of equity financing to provide the necessary capital for continued
expansion, to renovate existing locations, to increase working capital, and to
build an overhead structure to support a growing concept and provide the
necessary support and controls to implement the Company's expansion strategy.
The Company raised $1,000,000 of private equity financing in fiscal 1996, hired
experienced operations and finance personnel to create a more experienced
corporate office to support a growing concept, and began the necessary
preparation for an initial public offering of its Common Stock.
During fiscal 1996, the Company opened two Company locations and three
franchise locations. The two Company locations included: (i) a cafe at 1255
Reservoir Avenue in Cranston, Rhode Island operating under the trade name "The
Coffee Bean" which opened in June 1996 under a five year lease and which is the
largest location presently operated by the Company (3,100 square feet); and (ii)
a cafe at 138 Danielson Pike in Scituate, Rhode Island operating under the trade
name "The Village Bean" which opened in August 1996 and which was acquired by
the Company pursuant to an asset purchase agreement dated August 1, 1996 for a
purchase price of $90,000. The three franchise locations included: (x) 327
Putnam Pike in Smithfield, Rhode Island which opened in October 1995 pursuant to
a franchise agreement dated June 2, 1995; (y) One North Charles Street in
Baltimore, Maryland which opened in November 1995 pursuant to a franchise
agreement dated October 17, 1995; and (z) 49 Exchange Street in Pawtucket, Rhode
Island which opened in December 1995 pursuant to a franchise agreement dated
September 1, 1995.
As of December 29, 1996, the Company consisted of 17 locations, including 11
Company-owned cafes and six franchises. Since that date, on March 1, 1997, the
Company entered into a franchise agreement with an unaffiliated party pursuant
to which one of the Company-owned cafes was converted to a franchise. This store
location, on North Main Street in Providence, Rhode Island, had been operated by
the Company since 1995, but, as a result of the closing of the Company's
commissary (which utilized a significant portion of this location) in December
1996, the Company determined that the size of the location (3,045 square feet)
was
16
excessive for the Company's current needs. Also, on March 25, 1997, the
Company's newly formed Massachusetts subsidiary, Cafe La France (MA), Inc.,
entered into a service contract for the operation of a cafe at 128 Spring
Street, Lexington, Massachusetts for a one year term commencing April 7, 1997.
See "BUSINESS -- Properties." All Company-owned locations and all franchises,
with the exception of the newly opened Lexington, Massachusetts cafe and one
franchise location in Baltimore, Maryland, are situated in Rhode Island.
The Company's revenues are derived from sales by Company owned restaurants
and commissary sales to franchise restaurants, and franchise revenues which
consist of royalties from franchised restaurants as well as franchise and
development fees. Initial franchise and development fees are recognized as
revenue when the Company performs substantially all initial services required by
the franchise agreement, which generally occurs shortly after restaurant
opening. Continuing royalties are recognized as earned. Initial franchise and
development fees received applicable to restaurants for which substantially all
initial services required by the franchise agreements have not been performed
are recorded as deferred franchise fees.
Cost of sales includes food, paper, and beverage costs associated with
Company-owned restaurants and the commissary. Restaurant operating expenses
consist primarily of labor costs, rent, advertising, utilities, maintenance and
insurance associated with Company owned restaurants and the commissary. General
and administrative expenses include corporate and administrative salaries,
accounting, legal and direct costs associated with franchise operations.
The Company's financial statements are based upon a 13 week quarter, in
which the first and second months of the quarter are four week months, and the
third month of the quarter is a five week month. The Company closes its books
each fiscal month at the close of business on Sunday, and the Company's year end
is the Sunday closest to September 30. Prior to 1995, the Company's year end was
a calendar year, and each monthly close occurred at the end of the calendar
month.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
operating data to total revenues, except as otherwise indicated.
<TABLE>
<CAPTION>
FISCAL NINE THREE MONTHS ENDED
YEAR ENDED MONTHS ENDED ---------------------------
SEPTEMBER 29, OCTOBER 1, DECEMBER 29, DECEMBER 31,
1996 1995 1996 1995
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales from Company owned restaurants(1) 95.6% 97.4% 97.8% 90.3%
Franchise revenues 4.4 2.6 2.2 9.7
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales(2) 42.1% 42.5% 38.0% 46.0%
Restaurant operating expenses(2) 58.1 55.4 65.8 55.2
General and administrative expenses 29.2 34.8 30.1 20.5
Depreciation and amortization 3.1 3.0 7.4 2.8
----- ----- ----- -----
Total costs and operating expenses 128.1% 133.2% 139.2% 114.5%
Loss from operations (28.1)% (33.2)% (39.2)% (14.5)%
Other Income (Expense):
Interest expense, net (2.5)% (2.0)% (7.3)% (1.9)%
Loss before income taxes (30.6)% (35.2)% (46.5)% (16.4)%
Income taxes -- -- (.1)% (.1)%
Net loss (30.6)% (35.2)% (46.6)% (16.5)%
</TABLE>
(1) Includes commissary sales to franchisees of $54,645 in fiscal 1996 and
$118,158 in the 1995 nine month period, and $13,290 in the three months
ended December 29, 1996 and $16,647 in the three months ended December 31,
1995.
(2) As a percentage of sales from Company owned restaurants and commissary sales
to franchisees.
17
THREE MONTHS ENDED DECEMBER 29, 1996 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1995
REVENUES
For the three months ended December 29, 1996, total revenues increased
$54,599 to $635,027, an increase of 9.4% over the three months ended December
31, 1995. The increase is attributed to $97,362 of higher sales from Company
owned stores due to the net addition of one Company owned store and an increase
in comparable sales of 3.3%, partially offset by a decrease in franchise
revenues of $42,763 due solely to $45,000 of initial franchise fees earned from
the opening of three franchise locations in the three months ended December 31,
1995. The higher revenues of $54,599 and sales of $97,362 are attributed to
increased unit sales, as the Company was opening one additional store, and the
increase in comparable sales of 3.3% of its existing Company-owned stores was
achieved with a menu price increase of less than 2%. No initial franchise fees
were earned in the three months ended December 29, 1996 as the Company did not
open any franchise locations in this quarter. Royalty income increased $2,237 or
19.5% for the three months ended December 29, 1996 due to higher franchise
sales. The Company had six franchise locations operating for the three months
ended December 29, 1996 versus five franchise locations operating for the three
months ended December 31, 1995.
COSTS AND OPERATING EXPENSES
Cost of Sales. For the three months ended December 29, 1996, cost of sales
which represent food and beverage costs were $236,089 or 38% of net restaurant
sales, a decrease of 8 percentage points from the 46.0% figure for the three
months ended December 31, 1995. The improvement of 8 percentage points in food
and beverage costs resulted from a new store procedure implemented in the third
quarter of fiscal 1996, along with a program to retrain store managers to
improve food waste. The new store procedure included a weekly physical inventory
at every store to accurately track weekly food costs, and immediate corrective
action by operations to identify and correct the problem if a store's weekly
food cost increased above an acceptable standard. Managers were also trained to
adjust their inventory ordering based upon the current weekly sales trends, and
thus reduce the amount of waste due to over- ordering. As a result of these
programs, and additional savings resulting from lower unit costs for certain
food and beverage products resulting from negotiations with suppliers, the
Company improved its restaurant gross margins in the three months ended December
29, 1996, reducing its restaurant food costs to 38%. Prices of the Company's
commodities (coffee, baked goods, lunch items) generally remained stable during
the three months ended December 29, 1996. The Company did not raise prices in
the three months ended December 29, 1996 except to offset the increase in
certain food costs due to inflation.
Restaurant Operating Expenses. Restaurant operating expenses comprise labor
expenses, occupancy expenses and other expenses. Labor expenses amounted to
$212,735 in the three months ended December 29, 1996 versus $179,461 in the
three months ended December 31, 1995, an increase of $33,274 or 18.5%. Occupancy
and other expenses amounted to $196,294 in the three months ended December 29,
1996 versus $109,608 in the three months ended December 31, 1995, an increase of
$86,686 or 79.1%.
Labor Expenses. For the three months ended December 29, 1996, labor costs
were $212,735, or 34.2% of sales from Company owned restaurants, an improvement
from the 34.3% of sales from Company owned restaurants experienced in the three
months ended December 31, 1995. Labor benefits, which include health insurance
and manager bonuses, increased from $876 to $6,793 as more managers qualified
for these benefits in the three months ended December 29, 1996 as compared to
the three months ended December 31, 1995, offset by a comparable labor decline
due primarily to improved labor scheduling and an increase in labor efficiency.
Occupancy and Other Expenses. Occupancy and other expenses increased 10.7%
as a percentage of total revenues in the three months ended December 29, 1996
versus the three months ended December 31, 1995, increasing from 20.9% to 31.6%.
Repairs, maintenance, and supplies increased 2.6% due to additional emphasis on
store managers to keep the stores cleaner and to perform preventive maintenance
on equipment to minimize the nonfunctioning of equipment during normal store
hours. Advertising and discount promotion increased 4.9% as the Company's
strategy in the three months ended December 29, 1996 was to increase
18
customer awareness of new product offerings. Equipment rent increased 1.2% as
the Company leased additional restaurant equipment in the three months ended
December 29, 1996 due to the renovation of two stores in September 1996.
General and Administrative Expenses. General and administrative expenses
increased by $72,445 or 60.9% to $191,335 in the three months ended December 29,
1996 from $118,890 in the three months ended December 31, 1995. As a percentage
of total revenues, general and administrative expenses increased from 20.5% in
the three months ended December 31, 1995 to 30.1% in the three months ended
December 29, 1996. The increase of 9.6% is attributed to an increase in salary
expense of $70,400, resulting from the hiring of more experienced operations and
finance personnel to build a more structured corporate office and prepare the
Company for the additional demands of a public company. In addition, the
Company's Founder and CEO, Thomas W. DeJordy, was paid a salary in the three
months ended December 29, 1996 totaling $32,500 versus receiving a salary of
$26,000 in the three months ended December 31, 1995.
DEPRECIATION AND AMORTIZATION
The Company amortizes the pre-opening costs of new restaurants (including
pre-opening hiring and training expenses) over the 52 week period immediately
following an opening. Leasehold improvements are amortized over the lesser of
their useful life (usually 15 years) or the term of the lease, with an average
expected lease term of at least 10 years (assuming exercise of renewal options).
Store fixtures and equipment is depreciated over an average of 10 years. Office
computers are depreciated over 5 years. For the three months ended December 29,
1996, depreciation and amortization increased by $31,294 to $47,306, increasing
to 7.4% of total revenues in the three months ended December 29, 1996 versus
2.8% of total revenues in the three months ended December 31, 1995. Of the
increase, $7,970 is attributed to additional capital invested in the renovation
of Company stores beginning in the third quarter of fiscal 1996, and the balance
of $23,324 is attributed to the amortization of the loan cost on the $600,000
short term notes payable issued in October and November, 1996.
INTEREST EXPENSE, NET
In the three months ended December 29, 1996, interest expense net of
interest income increased by $35,394 to $46,397, and increased as a percentage
of total revenues to 7.3% in the three months ended December 29, 1996 from 1.9%
in the three months ended December 31, 1995. $28,364 of the increase in interest
expense is attributed to higher debt outstanding during the three months ended
December 29, 1996 resulting from the receipt of $600,000 from the issuance of
short term notes payable with a $30,000 original issue discount, and a 12%
annual interest rate and a maturity including interest of the earlier of 12
months or 10 days after completion of an initial public offering, whichever
occurs earlier. The Company intends to repay these notes prior to maturity from
the gross proceeds of this Offering in an amount equal to 50% of such proceeds
in excess of $1.5 million. In addition, the Company incurred higher interest
expense due principally from the financing of Company stores renovations via
capital leases beginning in the quarter ended June 30, 1996. These capital
leases have a 36 month lease term with annual interest rates ranging from 10% to
12%.
INCOME TAXES
Prior to October 2, 1995, the Company elected S Corporation status for
federal income tax purposes. As a result, the Company paid no federal income
taxes and paid minimum state taxes of $500 in the nine month period ended
October 1, 1995. Beginning in fiscal 1996, on October 2, 1995, the Company
elected to be taxed as a Subchapter C Corporation. As a result of losses
incurred by the Company in the fiscal year 1996 and the three months ended
December 29, 1996, the Company has no federal income taxes payable for the three
months ended December 29, 1996 or the three months ended December 31, 1995. For
state tax purposes, the Company is required to pay the minimum state taxes of
$750 per year in fiscal 1996 and fiscal 1997.
FISCAL YEAR ENDED SEPTEMBER 29, 1996 COMPARED TO NINE MONTHS ENDED OCTOBER
1, 1995
REVENUES
For the year ended September 29, 1996, total revenues increased $731,951 to
$2,198,753, an increase of 49.9% over the nine month 1995 period. The increase
reflects the addition of six Company owned restaurants and two franchised
restaurants. Although comparable store sales declined 2.5% for the year, the
19
yearly numbers were negatively affected by one time events, such as the
extremely harsh winter experienced throughout the Northeast in 1996 and the
closing of cafes for renovation in the second, third and fourth fiscal quarters
of 1996. With the introduction of a new express lunch program in May 1996, and
the retraining of managers to improve customer service, Cafe La France
experienced large comparable sales increases in many of its locations beginning
in May 1996, and comparable sales were up 4.2% in June 1996, and up 12% in the
quarter ended September 1996. Franchise revenues increased $60,004 as the
Company opened three franchise locations in fiscal 1996 versus one franchise
opening in the 1995 period. In addition, the higher royalty income earned in
fiscal 1996 was principally due to more franchise locations operating in fiscal
1996. The Company had seven franchise locations operating on September 29, 1996
versus five franchise locations operating on October 1, 1995.
COSTS AND OPERATING EXPENSES
Cost of Sales. For the year ended September 29, 1996, cost of sales which
represent food and beverage costs were $884,068 or 42.1% of net restaurant
sales, a decrease from the 42.5% figure for the nine month period ended October
1, 1995. The improvement in food and beverage costs occurred as the Company
instituted a new store procedure in the third quarter of fiscal 1996 to improve
food cost control, along with a program to retrain restaurant managers to reduce
store waste as discussed above under "Cost of Sales" for the three months ended
December 29, 1996 compared to the three months ended December 31, 1995. As a
result of these programs, the Company improved its restaurant gross margins
during the third and fourth quarters of fiscal 1996, reducing its restaurant
food costs to 39.5% in the third quarter, and further reducing its fourth
quarter restaurant food costs to 39.3%. Prices of the Company's commodities
(coffee, baked goods and lunch items) generally remained stable during fiscal
1996. The Company did not raise prices in fiscal 1996 except to offset the
increase in certain food costs due to inflation.
Restaurant Operating Expenses. Restaurant operating expenses comprise labor
expenses and occupancy and other expenses. Labor expenses amounted to $698,625
in fiscal 1996 versus $488,377 in the 1995 nine month period, an increase of
$210,248 or 43.1%. Occupancy and other expenses amounted to $522,263 in fiscal
1996 versus $303,343 in the 1995 nine month period, an increase of $217,920 or
71.6%.
Labor Expenses. Opening a new restaurant requires the hiring and
training of new employees, both before and after opening. During the initial
months of operation immediately after a new restaurant opens, the Company
intentionally schedules more hourly employees per shift than it would in an
established restaurant with a staff experienced in Company procedures. As a
new restaurant's staff gains experience, the Company adjusts hourly employee
work schedules for maximum efficiency. During fiscal year 1996, labor costs
declined as a percentage of sales from Company owned restaurants due
primarily to improved hourly employee scheduling controls, and the increase
in labor efficiency in 1996 resulting from the opening of six restaurants in
fiscal 1995. For the year ended September 29, 1996, labor costs were
$698,625, or 33.2% of sales from Company owned restaurants, an improvement
from the 34.2% of sales from Company owned restaurants experienced in the 9
month period ended October 1, 1995.
Labor cost is primarily a function of four factors: wages rates and
salary levels; scheduling efficiency; the net restaurant sales over which
restaurant management salaries are spread; and most importantly, the
motivation of the staff. Although the Company is subject to changes in laws
and regulations which it cannot control, such as hourly wage and proposed
national health insurance, the Company strives to continue to improve
scheduling efficiency and to offer salaried and hourly employees appropriate
motivation.
Occupancy and Other Expenses. Occupancy and other expenses increased
3.1% as a percentage of total revenues in fiscal 1996 versus fiscal 1995,
increasing from 20.7% in fiscal 1995 to 23.8% in fiscal 1996. Repairs and
maintenance increased 1.4% due to additional emphasis on store managers to
keep the stores cleaner and to perform preventive maintenance on equipment
to minimize the nonfunctioning of equipment during normal store hours.
Advertising and discount promotion increased 1.2% as the Company's strategy
in the third and fourth quarters of fiscal 1996 was to increase customer
awareness of new product offerings and the express lunch program.
20
General and Administrative Expenses. General and administrative expenses
increased by $130,984 or 25.6% to $641,879 in fiscal 1996 from $510,895 in the
nine months ended October 1995. As a percentage of total revenues, general and
administrative expenses decreased from 34.8% in fiscal 1995 to 29.2% in fiscal
1996. The decrease of 5.6% was attributed to 1995 expense of $213,691, or 14.6%
of total revenues, for a corporate identity package by a marketing consulting
firm. The Company's 1996 comparable expense for the corporate identity package
was only $7,798, or .4% of total revenues. Offsetting this decrease in corporate
identity package in fiscal 1996, the Company increased its salary expense from
$61,551 in fiscal 1995 to $391,670 in fiscal 1996. As a percentage of total
revenues, salary expense increased from 4.2% to 17.8%. This increase of 13.6%
resulted from the hiring of more experienced operations and finance personnel to
build a more structured corporate office to support a growing concept and
prepare the Company for the additional demands of a public company. In addition,
the Company's Founder and CEO, Thomas W. DeJordy, was paid a salary in fiscal
1996 totaling $117,000, versus receiving Subchapter S distributions of $32,327
in the 1995 nine month period. Bad debt expense, as a percentage of total
revenues, decreased from 5.3% in 1995 to .8% in 1996. In 1995, the Company wrote
off $68,409 of notes receivable resulting from loans the Company made to two
franchisees and a former officer of the Company.
DEPRECIATION AND AMORTIZATION
The Company amortizes the pre-opening costs of new restaurants (including
pre-opening hiring and training expenses) over the 52 week period immediately
following an opening. Leasehold improvements are amortized over the lesser of
their useful life (usually 15 years) or the term of the lease, with an average
expected lease term of at least 10 years (assuming exercise of renewal options).
Store fixtures and equipment is depreciated over an average of 10 years. Office
computers are depreciated over 5 years. For the year ended September 29, 1996,
depreciation and amortization increased by $24,955 to $68,519, increasing to
3.1% of total revenues in fiscal 1996 versus 3.0% of total revenues in the 1995
nine-month period. The increase is attributed to additional capital spent in
fiscal 1996 to renovate existing restaurants.
INTEREST EXPENSE, NET
In the year ended September 29, 1996, interest expense net of interest
income increased by $27,110 to $55,956, and increased as a percentage of total
revenues to 2.5% in fiscal 1996 from 2.0% in the 1995 nine month period. The
increase in interest expense is attributed to higher debt outstanding during the
1996 fiscal year, as the Company financed the renovation of existing locations
with the sale and leaseback of equipment, financed the purchase of new office
computers through a capital lease, and financed the purchase of a new location
with debt maturing on October 15, 1996. On February 28, 1996, the Company
refinanced its existing bank financing by obtaining a term loan in the principal
amount of $350,000 from Home Loan and Investment Bank, F.S.B. (the "Loan"). The
Loan bears interest at the rate of 2 3/4 % above the prime rate as published by
the Wall Street Journal, with principal and interest payable monthly in equal
installments over a ten year term. The Loan is secured by substantially all of
the assets of the Company and is guaranteed by the Company's operating
subsidiaries, CLF2, Inc. and CLF Franchise Corporation, and by Mr. DeJordy. The
Company does not intend to repay the loan with proceeds from the Offering.
INCOME TAXES
Prior to October 2, 1995, the Company was treated as an S Corporation for
tax purposes. As a result, the Company paid no federal income taxes and paid
minimum state taxes of $500 in 1995. On October 2, 1995, the Company elected to
be taxed as a Subchapter C Corporation. As a result of a loss in fiscal 1996
totaling $673,307, the Company has no federal income taxes payable for fiscal
1996, and for state tax purposes, the Company will only be required to pay the
minimum state taxes of $750.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new
restaurants, to fund operating losses, to acquire new locations, and to remodel
existing Company owned restaurants. See "BUSINESS -- Properties."
21
On March 10, 1997, as part of their updated report on the Company's
financial statements for the fiscal year ended September 29, 1996 included
herein, the Company's independent auditors expressed doubt about the Company's
ability to continue as a going concern because of recurring losses from
operations and a net capital deficiency. Management intends to use a substantial
portion of the proceeds from this Offering, after repayment of certain debt and
Offering expenses, to implement its expansion strategy which it believes will
result in increased revenues, reduced losses, and elimination of the "going
concern" opinion, although there can be no assurance as to when, if ever, the
Company will achieve profitability. If the Company is unable to substantially
carry out its expansion strategy or to significantly increase the profitability
of its existing cafes, management will be required to sharply curtail the
Company's overhead structure to continue its business operations. See "USE OF
PROCEEDS," "BUSINESS -- Expansion Strategy," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources," and Note 13 to the Consolidated Financial Statements.
THREE MONTHS ENDED DECEMBER 29, 1996
Capital expenditures totaled $23,088 in the three months ended December 29,
1996 and $45,226 in the three months ended December 31, 1995. The Company has
historically funded its capital expenditures with cash provided by operations,
bank borrowings, and equipment leases. In the three months ended December 29,
1996, the Company funded its capital requirements from the receipt of $600,000
of proceeds received from a private offering of unsecured notes and Common Stock
purchase warrants. The interest rate on the notes is 12%, and the notes are
payable at the earlier of 12 months from the date thereof (12 months from
October 31, 1996 or November 15, 1996) or upon completion of an initial public
offering, whichever is earlier. The $600,000 of notes were issued with original
issue discount of $30,000. The Company intends to commence repaying such notes
prior to completion of this Offering from the gross proceeds of this Offering in
an amount equal to 50% of such proceeds in excess of $1.5 million.
At December 29, 1996, the Company had outstanding bank borrowings of
$336,892 which is amortized over 10 years at an interest rate of prime plus
2.75% (currently 11%), and is fully amortized by March 1, 2006. The outstanding
bank indebtedness is secured by substantially all of the assets of the Company.
The Company presently has no additional bank line of credit, but expects to
arrange a bank line of credit if the Maximum Offering is achieved. At December
29, 1996, the Company had additional long term debt totaling $22,877 which
matures in January 1999 at interest rates ranging from 10% to 15%. Also, at
December 29, 1996, the Company had short debt of $23,678 at an interest rate of
15%.
As mentioned above, the Company incurred indebtedness in the form of
promissory notes in the principal amount of $600,000 in connection with a
private offering of promissory notes and warrants to purchase Common Stock which
closed in October and November, 1996. Such notes include $30,000 original issue
discount and bear interest at the rate of 12% per annum and are due upon the
earlier of one year from the date thereon or earlier upon completion of an
initial public offering. The Company intends to commence repaying these notes
prior to completion of this Offering from the gross proceeds raised in this
Offering in an amount equal to 50% of such proceeds in excess of $1.5 million.
The Company intends to use approximately $661,000 from the proceeds of the
Maximum Offering to repay such notes and accrued interest thereon. See "USE OF
PROCEEDS" and Note 11 of Notes to Consolidated Financial Statements.
Based upon its contemplated expansion plans, the Company estimates that its
total capital expenditures will be approximately $731,000 in fiscal 1997 and
$1,769,000 in fiscal 1998 in the event the Maximum Offering is achieved. These
estimates include the estimated costs of developing new restaurants and
renovating existing Company owned restaurants. The Company expects that the net
proceeds from the Maximum Offering, if achieved, and cash provided by operating
activities will provide sufficient funds to finance its capital expenditures
through September, 1998.
On December 1, 1996, the Company closed its commissary which has been
providing certain baked goods and supplies to Company owned cafes and franchises
during the fiscal year ended September 29, 1996 and during October and November,
1996. The Company determined that it could obtain such goods from other
suppliers at less net cost to the Company. The Company incurred no incremental
cost to close the commissary, as the commissary inventory was non perishable
food and is being transferred to Company stores on a need basis over a four
month period. In addition, all commissary employees were
22
offered positions as hourly store employees. The Company is purchasing
comparable quality products from outside vendors at costs equal to or below the
cost purchased by the commissary.
The Company has no material commitments for capital expenditures, but the
Company plans to commit for significant capital outlays depending on the
progress of this Offering. The Company's business plan forecasts the opening of
four - five Company-owned locations from April, 1997 to September, 1997 at a
capital cost of $560,000 if this Offering generates $1.5 million in net
proceeds. In addition, the Company plans to spend about $51,000 in capital
expenditures from April, 1997 to September, 1997 to upgrade its store point of
sale registers and upgrade other restaurant equipment. In fiscal 1998, the
Company plans to spend $1,769,000 in capital expenditures, principally for the
opening of 15 Company-owned locations, assuming the Maximum Offering is
achieved. See "USE OF PROCEEDS."
For the quarter ended December 29, 1996, the Company incurred a net loss of
$295,879, with net cash used in operating activities totaling $242,927.
Depreciation and amortization totaled $47,306 for the quarter. The Company
incurred an additional $18,929 in investing activities, as the Company incurred
$23,088 in capital expenditures principally for the renovation of one
restaurant. The Company financed the above cost needs from the net proceeds of
issuance of short term notes payable and warrants totaling $600,000. The Company
also paid off short term notes payable of $169,816, prepaid the cost of $60,143
relating to the $600,000 notes payable and warrants, and paid $87,248 in costs
associated with this Offering. The Company's cash balance of $5,695 decreased
$382 during the quarter to $5,313 cash at December 29, 1996.
CURRENT OPERATING EXPENSES -- RECENT STAFF REDUCTION
During February, 1997, as a result of a delay in this Offering caused by the
termination of a letter of intent for a firm commitment offering by the
Company's former underwriter (See "UNDERWRITING"), the Company determined that
it was prudent to reduce certain operating expenses that it had been incurring
in preparation for becoming a public company. The Company temporarily laid-off
several employees and certain other employees agreed to defer a portion of their
compensation. The Company intends to rehire certain employees and pay deferred
compensation as necessary or desirable depending on the progress of this
Offering and the ability of the Company to implement its expansion strategy. See
"USE OF PROCEEDS" and "BUSINESS -- Expansion Strategy."
YEAR ENDED SEPTEMBER 29, 1996
Capital expenditures totaled $371,291 in fiscal 1996 and $225,296 in fiscal
1995.
At September 29, 1996, the Company had outstanding bank borrowings of
$342,923 on the terms discussed above. At September 29, 1996, the Company had
additional long term debt totaling $26,216 which matures in January 1999 at
interest rates ranging from 10% to 15%. Also at September 29, 1996, the Company
had short term debt of $123,477 at interest rates ranging from 10% to 15%, of
which $100,000 was paid subsequent to fiscal year-end.
OTHER INFORMATION
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," became effective for fiscal years
beginning after December 15, 1995. SFAS No. 121 provides guidance for
recognition of impairment losses related to long-lived assets (for example,
property and equipment), and certain intangibles and related goodwill for (i)
assets to be held and used, and (ii) assets to be disposed of. Specifically, any
impairment loss to be recognized must be recorded in continuing operations. The
Company must adopt the provisions of SFAS No. 121 in fiscal 1997. The Company
does not expect any material impact from implementation of this statement.
SFAS No. 123, "Accounting for Stock-Based Compensation," became effective
for fiscal years beginning after December 15, 1995. SFAS No. 123 introduces a
fair value-based method of accounting for stock-based compensation. Under SFAS
No. 123, the Company may either adopt the new fair value-based method or provide
pro forma disclosure of net income (loss) as if the accounting provisions of
SFAS No. 123 had been adopted. The Company intends to retain the intrinsic
method of accounting for stock-based employee compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and provide the required pro forma disclosure in fiscal 1997. SFAS
No. 123 is not expected to have any effect on the Company's financial position
or results of operations.
23
BUSINESS
OVERVIEW AND BUSINESS CONCEPT
The Company consists of a chain of 18 cafes operating under the trade name
"cafe la france," eleven of which are owned and operated by the Company and
seven of which are operated as franchises by independent third parties who have
entered into franchise agreements with the Company. The Cafe La France menu
features coffee beverages, including espresso and cappuccino, muffins,
croissants, cookies and brownies baked on the premises, and made-to-order
sandwiches, hot soups, salads and cold beverages. Target customers at all cafes
are urban office employees, students and other adults who are time-sensitive yet
desire a higher quality breakfast and lunch experience than is typically found
at quick service restaurants. The Company's strategy is to create distinctive
food offerings at reasonable prices that are fresher, of higher quality and in
greater variety than those offered by competitors. The Company believes its
quality menu selection, operating efficiency and convenient locations combined
with the natural look and feel of a true European cafe further differentiates
Cafe la France from its competitors.
INDUSTRY TRENDS
Until the late 1980's U. S. consumers were not fully acquainted with the
popular gourmet cafes of Europe. With increased travel and globalization of
consumer taste, and the intense media focus on healthy meals, the 1980's
witnessed a growing awareness of and demand for gourmet cafes featuring upscale
coffees and fresh, healthy foods. Shifting tastes (especially of baby boomers),
and the need for an open setting for conversation and interaction which could
replace bars or specialty places drove consumers to eagerly accept a new cafe
concept which specialized in high quality coffees and fresh, nutritional soups
and sandwiches.
The largest company to grow the cafe concept in the Northeast is Au Bon
Pain, headquartered in Boston, Massachusetts. Additional competition for the
cafe market also includes Starbucks and Dunkin Donuts which both specialize in
coffees and to a lesser extent baked goods and sandwich items.
The Company believes that the mood and trend of the 1990's, inspired by the
globally-conscious American consumer's image of a European cafe, is to capture
the natural look and feel of a true cafe without being "flashy," and that this
mood is better reflected by a comfortable, friendly atmosphere created through
the abundant use of wood, simple but elegant paraphernalia on walls, and
incandescent hanging lights. The Company's cafes, accordingly, are places where
people gather and talk, and enjoy specially brewed hot coffee, healthy
sandwiches and soups, cold beverages and fresh baked goods.
COMPANY HISTORY
The first Cafe La France coffee restaurant was opened in Providence, Rhode
Island in December 1989 by Thomas W. DeJordy, the Company's Chairman and Chief
Executive Officer. Over the next few years, additional Cafe La France outlets
were established in the Providence area and operated by separate corporations
owned by Mr. DeJordy. By December 1993, Mr. DeJordy's companies owned and were
operating a total of six cafes.
Recognizing the franchise potential of his business concept resulting from a
modest initial capital investment, limited hours of operation (generally 7:00
a.m. to 4:00 p.m.), an appealing but simple menu and the prospect for a
favorable rate of return on investment, Mr. DeJordy sold the first Cafe La
France franchise, an existing cafe, in August 1994, and by the end of that year,
a total of four franchises were operating in the Providence area. A separate
corporation, CLF Franchise Corporation, a Rhode Island corporation, was
organized in 1993 for the purpose of entering into the franchise agreements and
receiving all royalty income from the franchisees. By December 1994, the Cafe La
France business consisted of four cafes owned and operated by corporations
controlled by Mr. DeJordy and four franchises.
In December 1994 and January 1995, CLF2, Inc., a Rhode Island corporation
wholly-owned by Mr. DeJordy, entered into agreements with an affiliated group to
purchase the assets and acquire or renegotiate the existing leases of a chain of
five cafe locations (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Introduction"), and during the year the
locations were converted to the Cafe La France concept. On February 9, 1995,
three separate corporations owned by Mr. DeJordy and each operating a single
cafe la france store were merged into CLF2, Inc. As a result, CLF2,
24
Inc. became the sole corporate entity under which all Company owned cafes were
to operate, and CLF Franchise Corporation continued to be the corporation under
which the franchises were sold and the franchise income was received. By October
1, 1995, the Company had grown to 15 locations, of which 10 were owned by CLF2,
Inc. and 5 were operated by independent franchisees.
On July 14, 1995, a new corporation, Cafe la france, Inc. (the
"Predecessor"), was organized in Rhode Island to function as a holding company
to own 100% of the stock of the existing companies, CLF2, Inc. and CLF Franchise
Corporation. On October 2, 1995 Mr. DeJordy exchanged the stock of the two
existing companies for the stock of the Predecessor, and as a result became the
owner of 100% of the outstanding common stock of the Predecessor. The Subchapter
"S" federal income tax elections of the two subsidiaries were thereby terminated
and the Predecessor adopted a new fiscal year beginning October 2, 1995 and
ending September 29, 1996. The Predecessor was taxed as a regular Subchapter "C"
corporation and will file a consolidated return with the two subsidiaries for
the fiscal year ended September 29, 1996.
The Company was organized as a Delaware corporation on September 25, 1996.
On September 26, 1996, the shareholders of the Predecessor approved a merger of
the Predecessor with and into the Company. The merger was effected on October
25, 1996 and was structured to qualify as a tax-free reorganization pursuant to
the provisions of Section 368 of the Internal Revenue Code of 1986, as amended
(the "Reorganization"). In connection with the Reorganization, each existing
stockholder in the Predecessor received 290 shares of Common Stock in the
Company in exchange for each outstanding share of common stock of the
Predecessor owned thereby. On March 6, 1997, the Company's Board of Directors
declared a 5 for 4 stock split to be effected through a stock dividend payable
prior to the Offering to shareholders of record on such date.
With the exception of Company-owned locations in Massachusetts which may
operate through Cafe La France (MA), Inc., a subsidiary of the Company organized
on January 2, 1997, CLF2, Inc. will serve as the operating company for all
Company owned cafes and will provide all general and administrative support to
the Company, and CLF Franchise Corporation will continue to enter into the
franchise agreements and collect the franchise fees and royalty income from all
franchisees.
PRODUCTS
The Company specializes in four sectors of the cafe business: (1) coffee
products, including six varieties of freshly ground and brewed coffees, espresso
drinks, gourmet teas, and iced coffees; (2 baked goods, including bagels,
biscotti, muffins, scones, and croissants; (3) lunch products, including several
varieties of sandwiches, soups and salads; and (4) catered products, including
baked goods and beverages appropriate for breakfast meetings, business lunches
and other professional gatherings through a program called "Catering Express,"
as described below. The Company's percentage of revenues from each of its four
major product categories, based on a representative sampling from Company owned
cafes for the most recent fiscal year, are approximately as follows: coffee
products (40%); baked goods (18%); lunch products (40%); and catering sales
(2%).
The Company's menu emphasizes "freshness and consistency". The Company has
certain baked goods delivered fresh to its stores by local vendors each day.
Prior to December 1, 1996, the Company operated a commissary within one of its
Company owned stores, which also provided baked goods to Company owned stores
and franchises. The commissary was closed on December 1, 1996, as the Company
determined that it could obtain such goods from other suppliers at less net cost
to the Company. Each cafe also bakes muffins, croissants, cookies and brownies
on the premises, which allows for the freshest product to be served to the
customer, and minimizes waste due to stale products. The stores feature an
extensive coffee presence as well as a full complement of baked goods to include
bagels, biscotti, scones, and other baked goods in a display cabinet for maximum
customer eye appeal. The aroma of several varieties of coffee brewing, in
addition to the sound of milk frothing through the cappuccino machine, heightens
the coffee aura that encompasses the Cafe La France coffee restaurant.
The demographic profile of the Company's target customer base is educated,
white collar, health conscious, young and mature adults. Management believes
that the Company's target customer chooses healthier muffins over deep fried
donuts for breakfast, a good quality gourmet coffee, and fresh healthy
sandwiches at competitive prices. The fresh lean meats, the aroma of fresh
breads, the choice of two kinds of chicken salad, five varieties of fat free
muffins and "just made" cookies helps to make lunch at a cafe la france cafe an
enjoyable experience.
25
The Company's Catering Express program involves the sale of coffee and other
beverages and breakfast and luncheon items by any Cafe La France coffee
restaurant to local businesses and organizations. Selections appropriate for
corporate functions, including baked goods, sandwiches, and cheese and crackers,
are detailed on the Company's "Les Ordres Speciaux" menu and delivered on
attractive platters and baskets. Customers call their orders in directly by
telephone or by facsimile machine to Company headquarters and deliveries are
arranged through the nearest cafe location.
The Company believes it competes on the basis of quality of food and service
rather than price, although pricing is structured to give customers a sense of
good value at its cafes. The average customer purchase is approximately $1.50 to
$2.00 at breakfast and $4.00 to $5.00 at lunch. Approximately 45% of sales occur
in the morning before 11:00 a.m., and approximately 55% of sales occur
thereafter. Most stores are open for breakfast and lunch, and close by 4:00 p.
m. Increases in the average guest check are accomplished through menu
development, promotions, and suggestive selling by employees. The Company
believes that it enjoys a high degree of repeat business. Management believes
that the Company's menu items are priced to be industry competitive while
insuring that customers receive quality and value for their money.
EXPANSION STRATEGY
Although the Company has locations in both residential and urban areas, it
is the intent of management to concentrate on the expansion of its urban
locations which cater to working professionals. The majority of the Company's 18
stores (including seven franchise locations) are in urban locations and many are
typical of the format stores which management wants to develop with the proceeds
of this Offering. These stores are projected to occupy 1200 square feet, cost
approximately $100,000 to build and produce store contribution margins of 20% on
sales of $250,000. These store economics combined with a simple Monday through
Friday (7:00 a.m. to 4:00 p.m.) operation makes the urban Cafe La France concept
not only financially attractive but also a desirable concept for restaurant
managers and franchise owners who want "normal" working hours.
Cafe La France's management is also currently exploring opportunities in
highly visible residential areas. Unlike urban locations, these stores would
serve as a destination for consumers looking for baked goods, luncheon items,
and coffee seven days a week. To help gain market share and develop separate
brand awareness, management is looking to possibly acquire or develop a retail
operation which may operate under a different trade name than Cafe La France,
such as "The Village Bean" which the Company is currently using in Scituate,
Rhode Island. The Company has been operating its Cranston, Rhode Island store
under the name "The Coffee Bean" pursuant to a licensing agreement with the
former operator of this location, but intends to change such name by the end of
April 1997.
The Company initially intends to focus on the development of Company owned
cafes and franchises in the greater Boston, Massachusetts market. The Company
does not currently have any definitive plans, proposals, arrangements or
understandings for the acquisition of any existing restaurants or locations,
other than as follows: (i) the Company has engaged the services of a Boston
commercial realtor to serve as the Company's exclusive agent to locate up to 20
suitable properties available for lease in the area over the next 12-18 months;
and (ii) the Company has entered into a lease agreement with a landlord in the
Boston area dated February 21, 1997 which lease is contingent upon the Landlord
displacing an existing restaurant tenant by August 1997. Management believes
that expansion into the greater Boston, Massachusetts market can be accomplished
with existing management based in its Providence corporate offices because of
the short travel time to the Boston area and because of available capacity of
its training and management personnel based in Providence, including its
Director of Operations and its Vice President -- Finance, both of whom were
hired in 1996 in part to manage the Company's expansion into the Boston market.
During the past fiscal year, management believes that it has secured the
necessary management and accounting personnel and put into place the necessary
accounting and financial systems to open and/or acquire approximately five new
Company locations without substantially increasing its current fixed overhead
expenses. Management also believes that it made significant progress in reducing
the Company's cost of sales during the last six months of fiscal 1996 and the
first quarter of fiscal 1997 and expects to continue the procedures that
resulted in such progress in all new stores. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF
26
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Three Months Ended December 29,
1996 Compared To Three Months Ended December 31, 1995 -- Costs and Operating
Expenses" and "USE OF PROCEEDS."
COMPETITION
The Company believes that its major competitor in the Northeast (aside from
single-unit, family-owned stores) with an established market for both morning
and lunch business is Au Bon Pain, headquartered in Boston, Massachusetts. Au
Bon Pain has grown the number of its cafes to over 200 units located
predominantly in the Northeast, including 4 locations in Rhode Island.
Additional competition arises from companies which specialize in gourmet coffee,
with Starbucks the nationally recognized leader with over 1000 locations and
growing rapidly each year. Dunkin Donuts is also a major competitor with over
2000 locations nationwide and with a particular concentration in the Northeast,
including over 50 locations in Rhode Island. Moreover, Dunkin Donuts has
continued to upgrade the quality and variety of its coffee, pastries and
sandwiches as consumers have become more discerning about coffee and food
products generally. See "RISK FACTORS -- Competition."
The Cafe La France concept was developed as a mix between the gourmet coffee
cafe of Starbucks and the bakery cafe concept of Au Bon Pain. The concept was
designed to be simple in both menu design and interior physical design, with a
small physical area and a modest capital investment to open. Although there can
be no assurance that costs for any particular location will not vary from the
following figures, the Company estimates that each new cafe will cost
approximately $100,000 to $150,000 to open, including costs for: leasehold
improvements ($20,000-$30,000); equipment, furniture and fixtures
($54,000-$75,000); opening inventory ($4,000-$6,000); initial advertising
($1,000-$2,000); working capital for three months ($15,000-$25,000); and
miscellaneous professional fees and other costs ($6,000-$12,000). In the event
the Company acquires an on-going restaurant business, such costs may be higher
as a result of additional costs including costs for "goodwill" and professional
fees.
CUSTOMER SERVICE AND CAFE OPERATIONS
The Company believes that its quality of customer service and operational
efficiency at each cafe is a competitive advantage. The entire Cafe La France
organization is focused on executing the Company's philosophy of 100% customer
satisfaction to insure that each customer is completely satisfied in product
quality, price, and speed of service, and will become a frequent repeat
customer. Consistent with this philosophy, quality standards have been
established for all food and beverage products, the speed and friendliness of
the service, and the cleanliness and physical environment of the cafes. The
Company believes that speed of service is especially integral to its success.
Cafe operating systems are being designed to achieve a three minute elapsed time
between a customer's arrival in line and receipt of the customer's order. The
systems are capable of handling significant lunch time volumes, preparing up to
150 custom-made sandwiches per hour.
SITE SELECTION AND DESIGN
The Company seeks to locate its cafes in high visibility, heavily
trafficked, office or shopping areas that are easily accessible to its target
customers. With the exception of its newly-opened Lexington, Massachusetts
location and its Baltimore, Maryland franchisee, all stores are currently
clustered in and around Providence, Rhode Island. Management believes that
clustering its cafes increases name recognition and provides significant
operational efficiencies. Management also believes that Cafe La France's menu,
and cafe decor enable the Company to obtain access to future sites that are not
available to traditional quick service restaurants because of space
considerations and the venting/cooking requirements of such restaurants.
Each cafe relies on a substantial volume of repeat business. In evaluating a
potential new urban location, the Company studies the area within a radius of
two blocks. Information is obtained regarding quick service breakfast or lunch
competitors within the area. Detailed office occupancy, demographic and
pedestrian traffic count information is also collected. Based on this
information, sales, construction
27
and equipment costs, and return on investment are projected. In evaluating a
potential residential or suburban location, the Company studies the area within
a radius of 5 miles, and evaluates such factors as parking, demographics
(including population density and pedestrian and automobile traffic),
visibility, zoning requirements (including setback and signage) and neighboring
retail outlets.
In its cafe design, the Company attempts to create a comfortable, home-like
and friendly atmosphere through the use of wooden fixtures, simple wall
decorations, and incandescent hanging lights to reflect the ambiance of the true
European cafes. The design visually reinforces the distinctive difference
between Cafe La France and other quick service restaurants serving breakfast and
lunch. The Company recently completed a design program under the direction of a
nationally recognized marketing firm to develop a uniform decor protocol for its
new stores that will emphasize the Company's French cafe atmosphere. Over the
last year, the Company has renovated its current stores to utilize the same
decor features. Management believes that maximum use of natural light and an
abundance of wood craftsmanship combined with simple yet comfortable furniture
and fixtures results in a friendly, enjoyable and comfortable setting which
contributes to a loyal, satisfied and growing customer base.
The Company utilized the services of Leonard/Monahan, Inc. of Providence,
Rhode Island in early 1995 to create the Company's identity package.
Leonard/Monahan, Inc. has created designs for Polaroid Corporation and H. P.
Hood Company. Their services for the Company have included interior and exterior
store design, as well as design of packaging materials, sales literature,
manuals, uniforms, public relations, media consulting, and franchise brochures.
PROPERTIES
All Company-owned cafes, in addition to the corporate offices, are located
in leased premises with lease terms typically for five years and a five year
renewal period thereafter. Lease costs are typically triple net leases, with a
minimum base occupancy charge and a charge for common area maintenance costs,
insurance and real estate taxes. The following is a list of leases under which
the Company's operating subsidiary, CLF2, Inc., is obligated:
<TABLE>
<CAPTION>
INITIAL ANNUAL
APPROXIMATE INITIAL RENEWAL LEASE
LOCATION SQUARE FEET LEASE TERM TERM PAYMENTS(1)
-------- ----------- ---------- ---- -----------
<S> <C> <C> <C> <C>
Corporate Offices .............. (a) 800 1/9/96-3/99 None (a) $9,600
216 Weybosset Street (b) 800 9/96-11/99 None (b) $9,600
Providence, RI Total = 1600
COMPANY OWNED CAFES:
Arcade Building ................ 1137 2/94-2/99 5 Years $ 11,100(2)
Westminster Street
Providence, RI
73 Empire Street ................ 800 5/91-5/98 10 Years $ 12,000
Providence, RI
228 Weybosset Street ........... 1200 12/91-12/96 7 Years $ 15,000
Providence, RI (this renewal option
has been exercised
by the Company)
One Citizens Plaza ............. 2067 7/95-6/00 5 Years $ 18,000(3)(4)
Providence, RI
483 Hope Street ................ 2100(5) 1/95-1/00 5 Years $ 23,100
Bristol, RI
1255 Reservoir Avenue .......... 3100(6) 6/96-6/01 5 Years $ 46,500(2)
Cranston, RI
258 Thayer Street .............. 1900 7/96-7/01 5 Years $ 57,000(2)
Providence, RI
28
INITIAL ANNUAL
APPROXIMATE INITIAL RENEWAL LEASE
LOCATION SQUARE FEET LEASE TERM TERM PAYMENTS(1)
-------- ----------- ---------- ---- -----------
Amtrak Station ................. 860 9/95-9/98 None $ 9,000(3)(7)
Providence, RI
138 Danielson Pike ............. 1300 8/96-8/01 10 Years $ 19,200(8)
Scituate, RI
Prince's Hill Marketplace ...... 1786 8/95-8/00 15 years $ 20,280
County Road
Barrington, Rhode Island
The Mall at Chestnut Hill ...... 2,083 4/97-9/97(9) None $ 83,320
Chestnut Hill, MA(9) 9/97-1/08
Ledgemont I .................... 1,000 4/97-3/98 None $ 0(10)
128 Spring Street
Lexington, MA
</TABLE>
- -----------
(1) Does not include, where applicable, charges for taxes, insurance and common
area maintenance.
(2) Subject to an annual increase of between 3% and 5%.
(3) Plus a percentage of gross sales in excess of a target figure.
(4) Also includes rental of certain restaurant equipment.
(5) The Company has subleased approximately 800 square feet of this leasehold to
an unaffiliated Rhode Island limited liability company d/b/a "Daily Bread,"
a retailer of European-style gourmet breads.
(6) The Company has subleased approximately 800 square feet of this leasehold to
an unaffiliated Rhode Island limited liability company d/b/a "Daily Bread,"
a retailer of European-style gourmet breads.
(7) Subject to an annual increase of 16.7%.
(8) Subject to an increase based on the Consumer Price Index.
(9) The Company, through its Massachusetts subsidiary Cafe La France (MA), Inc.,
executed this lease on February 21, 1997. However, the subject premises is
currently occupied by another tenant and the landlord must either (i)
provide the Company with the leased space by September 1, 1997 or (ii)
terminate this lease. No rent is payable by the Company until the existing
tenant has vacated and the Company takes possession of the space.
(10)The Company, through its Massachusetts subsidiary Cafe La France (MA), Inc.,
executed a service contract to operate a cafe rent-free on March 25, 1997,
and may receive a monthly fee dependent on average daily sales. The service
contract is cancellable on 30 days prior notice.
CLF2, Inc. is also the lessee on leases for the following franchise
locations and has entered into subleases with such franchisees on the same terms
and conditions as the original leases:
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
LOCATION SQUARE FEET LEASE TERM
-------- ----------- ----- ----
<S> <C> <C> <C>
100 Fountain Street ....................... 700 7/94-7/99 10 Years
Providence, RI
One Old Stone Square ...................... 554 1/95-1/00 5 Years
Providence, RI
University Heights ........................ 3045 5/93-4/98 5 years
North Main Street
Providence, Rhode Island
</TABLE>
The Company considers its physical properties to be in good operating
condition and suitable for the purposes for which they are used. The Company
believes that its facilities are adequate for the reasonably foreseeable future.
29
MARKETING AND ADVERTISING
In general, the Company has relied on limited radio advertising,
word-of-mouth and customer satisfaction to entice new customers into its coffee
restaurants. In addition, the Company has conducted local advertising and
promotions for new store openings. Typically, the Company will target all
potential customers within the immediate area of a new store by distributing
flyers announcing the grand opening of a store. In addition, the Company's store
manager will visit with local business persons to make an introduction and to
acquaint them with Cafe La France by providing sample menus and "Catering
Express" brochures.
As the Company expands the number of outlets in the existing market,
management intends to develop an advertising campaign to increase the number of
visits by new customers. The cost of the advertising campaign will be funded by
the Company and by a weekly contribution from franchisees equal to up to 2% of
gross receipts pursuant to an advertising expense-sharing provision in the
Company's franchise agreements. Advertising in new markets will begin when the
number of total locations in a new geographical area provide sufficient
economies of scale to fund an advertising program. The Company anticipates that
it will spend less than $5,000 in fiscal 1997 for marketing and advertising
costs.
TRAINING AND DEVELOPMENT
The Company has developed a three-step training program to assure a smooth
opening for each new Company-owned and each franchise location. The training
program covers three to four weeks, with each step covering one week and an
additional week between Step 2 and Step 3 in order to prepare for the grand
opening of a cafe, as outlined below.
Step 1: Orientation
In this classroom-style training session, new managers learn to understand
the basics of the restaurant business, management's philosophy of operating a
successful cafe, and the techniques of implementing the Company's business
concept. Topics in this one week session include company history, customer
service, cost controls, accounting, vendor relations, staffing, menu knowledge,
sanitation procedures, quality assurance, system standards, government
regulation, loss prevention, and human resources.
Step 2: Operations
The objective of Operations training is to familiarize the manager with
every aspect of operating a store within the system guidelines. During this one
week step, training is on-site at a designated Company training store where the
trainee manager follows an experienced manager through his or her daily tasks
and responsibilities. In addition, a member of the control team works as a
coordinator to assure that all topics are thoroughly covered. A complete
understanding is required in areas such as daily opening procedures, sandwich
preparation, coffee and espresso preparation, sanitation, cash register
operations, ordering, inventory, safety, and banking procedures.
Step 3: Support
The third week of training coincides with the grand opening of the new cafe.
During this training period, a Company support person actually works side by
side with the trainee manager, assisting with daily management duties as
necessary. As the week progresses, the trainee manager requires less support, so
that the support person leaves the store by the end of the first week but
continues to be available to offer the new manager assistance on an as-needed
basis.
EMPLOYEES
The Company as of April 1, 1997 had 81 employees, including 36 full-time
employees, and 45 part-time employees. Nine of the Company's employees,
including its two executive officers, are employed at the Company's executive
offices located at 216 Weybosset Street in downtown Providence, Rhode Island.
Each store is staffed with a restaurant manager and a number of hourly
employees, both
30
full time and part time, based upon the sales volumes of the store. None of the
Company's employees is covered by a collective bargaining agreement. The Company
provides health insurance to approximately 20 of its full-time employees. The
Company considers its employee relations to be good.
During February 1997, as a result of a delay in this Offering caused by the
termination of a letter of intent for a firm commitment offering by the
Company's former underwriter (See "UNDERWRITING"), the Company determined that
it was prudent to reduce certain operating expenses that it had been incurring
in preparation for becoming a public company. The Company temporarily laid-off
several employees and certain other employees agreed to defer a portion of their
compensation. The Company intends to rehire certain of these employees and pay
deferred compensation as necessary or desirable depending on the progress of
this Offering and the ability of the Company to implement its expansion
strategy. See "USE OF PROCEEDS" and "BUSINESS -- Expansion Strategy."
MANAGEMENT INFORMATION SYSTEMS
Each Cafe La France store uses a computerized cash register to collect point
of sale information including: sales by menu item, department, and major
category (coffee, food, other beverage, other); sales by hour, day and week;
customer count; and average guest check. This detailed sales information, which
is currently gathered manually and assembled in spread-sheet form, allows the
Company to spot significant sales trends by store, provides data to help keep
the cafe menus fresh, highlights slow selling items, and allows management to
analyze the effect of marketing promotions and advertising. The Company expects
to use a portion of the proceeds of this Offering to upgrade its cash register
system to provide additional information and to upgrade its software to enable
the Company to electronically compile and analyze the sales information
described herein on a daily basis at its central office location.
The corporate general ledger system is a network-based software package
which includes all general ledger functions, accounts payable, accounts
receivable, inventory control, payroll, and order entry. The Company uses all
the above functions, with the exception of payroll processing, which is
currently performed by an outside company.
Each month the Company generates computerized profit and loss reports by
store to track individual store profitability and spot unfavorable trends for
immediate follow-up. In addition, the Company tracks store sales daily and
weekly for comparison to the prior year and the current year's budget, and
tracks cost of goods sold weekly by store.
TRADEMARKS/SERVICEMARKS
The Company's logo consists of a coffee cup with an accent mark above and
the words "cafe la france" below. The Company registered its logo with the
United States Patent and Trademark Office and received servicemark protection in
the 50 states on January 2, 1996, under Registration Number 1,945,392. The
Company has also registered the servicemark "cafe la france" in Massachusetts
and Rhode Island.
GOVERNMENT REGULATION
Each Company-owned and franchised cafe is subject to licensing and
regulation by state and local health, sanitation, fire and other departments,
and to the regulations of certain federal agencies, including the Occupational
Safety and Health Administration. Difficulties or failures in obtaining the
required licensing or approvals could result in delays or cancellations in the
opening of cafes.
In addition, the Company is subject to the Fair Labor Standards Act and
various state laws governing such matters as minimum wages, overtime and other
working conditions.
The Company is also subject to federal and a substantial number of state
laws regulating the offer and sale of franchises. Such laws impose registration
and disclosure requirements on franchisers in the offer and sale of franchises
and may apply substantive standards to the relationship between franchiser and
franchisee. See "FRANCHISE OPERATIONS -- Registration" below.
31
FRANCHISE OPERATIONS
Locations
The Company seeks to locate both its Company owned cafes and its
franchises in areas of high walk-by consumer traffic in urban areas ( for
example, street corners), in or near office buildings with a significant
white-collar workforce in suburban areas, or on "main street" in upscale
communities. Currently, the Company has seven franchise locations as
follows:
<TABLE>
<CAPTION>
DATE APPROXIMATE GROSS SALES
FRANCHISEE OPENED SQUARE FEET ROYALTY RATE
---------- ------ ----------- ------------
<S> <C> <C> <C>
Washington Highway ................ 8/94 1280 4%
Lincoln, RI
100 Fountain Street ............... 10/94 700 5%
Providence, RI
One Old Stone Square .............. 10/94 554 5%
Providence, RI
327 Putnam Pike ................... 10/95 650 5%
Smithfield, RI
1 North Charles Street ............ 11/95 1000 5%
Baltimore, MD
49 Exchange Street ................ 12/95 1300 5%
Pawtucket, RI
University Heights ................ 3/97(1) 3045 5%
North Main Street
Providence, Rhode Island
</TABLE>
- -----------
(1) This location had been operated by the Company since 1995, but, as a result
of the closing of the Company's commissary (which utilized a significant
portion of this location) in December 1996, the Company determined that the
size of the location (3,045 square feet) was excessive for the Company's
needs, and a franchisee was approved who subleased the entire space from the
Company and operates the store as a franchise. See "Recent Franchise
Addition" below.
In October, 1995, the Company entered into an area development agreement
with its Baltimore franchisee to have 7 locations operating in the Baltimore,
Maryland area by May 1999. The Baltimore franchisee opened his first location in
November 1995, and is actively seeking a second location as of the date of this
Prospectus.
Franchise Growth Potential and Cost
The Company has developed its cafe concept to maximize the future growth of
franchise locations, and believes that the following key attributes will
contribute to such growth: (i) a low initial franchise fee of $15,000, coupled
with a low royalty rate of 5% of gross sales and a low advertising/promotional
rate of 2% of gross sales, to allow for affordability by people who are losing
jobs through attrition or seek productive investment in an entrepreneurial
business; (ii) a limited and simple menu for ease of operation; (iii) reduced
hours of operation, as most urban locations are open five days a week for
breakfast and lunch, and close by 4:00 P. M. each afternoon; (iv) a modest
initial capital investment of approximately $100,000 to $150,000 depending on
the location and facility size; and (v) a concept and menu which management
believes will capture the growing demand in the United States for healthier food
in a convenient and comfortable setting at a reasonable price.
All franchisees are required to send their managers through the Company's
training program, as discussed above in the "Training and Development" section.
32
Registration
The Company originally prepared a Franchise Offering Circular for
Prospective Franchisees dated April 28, 1995 pursuant to the applicable Federal
Trade Commission Rule on Franchising and Rhode Island law which originally
qualified the Company to sell franchises under the name "cafe la france" in 37
states. The Company recently revised its Franchise Offering Circular to include
updated Financial Information from its most recent Fiscal Year and other
relevant information. The revised Offering Circular was approved by the Rhode
Island Department of Business Regulation effective January 13, 1997. Such
approval is valid through January 1998, and permits the Company to offer
franchises for sale in 38 states and jurisdictions, including all six New
England states. The Company has also received regulatory approval of its
Franchise Offering Circular in Maryland, effective March 26, 1997 for one year,
and is contemplating seeking regulatory approval in New York and areas of the
Midwest. The Company anticipates attracting additional franchisees through
advertisement in journals, newspapers, magazines, and franchise trade shows. The
Company plans to concentrate on area development franchise agreements rather
than on single franchise locations to optimize franchise growth and reduce
related expenses. The Company is obligated to file its independent accountant's
updated report which contains an explanatory paragraph expressing doubt about
the Company's ability to continue as a going concern, which may negatively
impact the Company's ability to sell additional franchises.
Recent Franchise Addition
Since December 29, 1996, the Company has entered into a franchise agreement
with an unrelated party pursuant to which a Company-owned cafe has been
converted to a franchise. This location on North Main Street in Providence had
been operated by the Company since 1995 but, as a result of the closing of the
Company's commissary (which utilized a significant portion of this location) in
December 1996, the Company determined that the size of the location (3,045
square feet) was excessive for the Company's needs, and on March 3, 1997 a
franchisee was approved who subleased the space from the Company and began
operating the store as a franchise.
LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or
proceeding which is required to be disclosed under Item 103 of Regulation S-B.
33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key employees of the Company are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas W. DeJordy 33 Chairman of the Board, President, Chief
Executive Officer and Director
Robert G. King 51 Vice President -- Finance, Treasurer and
Director
Richard LaFrance 49 Director
Daniel B. Forlasto 35 Director of Operations
</TABLE>
THOMAS W. DEJORDY, Chairman of the Board, President and Chief Executive
Officer, founded the Company in 1989 and has worked in every capacity for the
Company since inception. Prior to organizing the Company, Mr. DeJordy was
self-employed as a stockbroker. Mr. DeJordy is a 1985 graduate of Holy Cross
College.
ROBERT G. KING, Vice President -- Finance, Treasurer, and Director, joined
the Company in January 1996. Prior to that time, Mr. King served as Chief
Financial Officer of Olde World Bakeries, Ltd. from September 1994 through July
1995, and as Chief Financial Officer for The Coffee Connection from November
1993 through July 1994 (during which period he coordinated the sale of this
chain to Starbucks in April 1994). From 1985 through September 1992, Mr. King
served as Senior Vice President and Chief Financial Officer of The Ground Round
and was instrumental in taking this 210 unit chain public in 1991. From 1975 to
1985, Mr. King worked for the Howard Johnson Company in various financial
positions, including Vice President from 1982 to 1985. Mr. King is a Certified
Public Accountant, and holds a BS/BA degree and a MBA degree from Babson College
and a Masters of Science in Taxation from Bentley College.
RICHARD LAFRANCE, a Director, has served as the Chief Executive Officer of
LaFrance Bros., Inc., a company which owns and operates White's of Westport (a
1600 seat full service function facility and restaurant), since 1991. Since
1989, he has served as the President of LaFrance Hospitality Corp. and since
1995 as the President of Fairhaven Hospitality Corp., operators of Hampton Inn
Hotels located in southeastern Massachusetts. Mr. LaFrance is a 1968 graduate of
the University of Notre Dame, and is a director of Fall River 5(cent) Savings
Bank and a former director of the Massachusetts Restaurant Association. The
Company's name is not derived from or related to Mr. LaFrance.
DANIEL B. FORLASTO, Director of Operations, joined the Company in May 1996.
From January 1996 to April 1996 Mr. Forlasto served as General Manager for
Northeast Restaurants, Inc. (Chilis) and from September 1995 to January 1996 Mr.
Forlasto served as Vice President of Operations, North East, for Stacey's
Buffet, Inc. and was responsible for all operations of eight restaurants in the
New England area. From September 1992 to September 1995, Mr. Forlasto served as
Lead General Manager for Old Country Buffet/Buffet Inc. Mr. Forlasto also served
as Training General Manager for Ponderosa Steakhouse (a division of Metromedia
Steakhouse, Inc.) from 1987 to 1992.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no additional
compensation for attendance at Board meetings. Non-employee directors receive a
per diem fee of $150 and are reimbursed for their expenses in connection with
attending Board meetings. Non-employee directors may also participate in the
1996 Stock Incentive Plan or a directors' stock option plan, if established by
the Board of Directors.
34
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer for services rendered in all capacities to the Company
during the fiscal year ended September 29, 1996, the fiscal year (9 months)
ended October 1, 1995, and the fiscal year ended December 31, 1994. No other
executive officers earned in excess of $100,000 of salary and bonus for the
periods indicated. See "EMPLOYMENT AGREEMENTS" below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
- --------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS
--------------------------- ---- ---------- -----
<S> <C> <C> <C>
Thomas W. DeJordy ................................. 1996 $117,000 $ 0
Chairman and 1995 $ * $ *
Chief Executive Officer 1994 $ * $ *
</TABLE>
- ----------
* No salary or bonus was received by Mr. DeJordy for the calendar year 1994
and for the nine month period ended October 1, 1995, however, the Company's
consolidated financial statements contain a pro forma expense adjustment to
reflect a salary expense of $50,000 for such period, reflecting the
estimated value of Mr. DeJordy's management services. Mr. DeJordy received
Subchapter S distribution of $32,795 for the calendar year 1994 and $32,327
for the nine month period ending October 1, 1995.
EMPLOYMENT AGREEMENTS
In November 1996, the Company and Mr. DeJordy entered into an employment
agreement which provides for a term of three years at an initial base annual
salary of $132,000, adjusted upwards by 5% annually. In addition, Mr. DeJordy is
entitled to receive annual bonuses of $15,000, $20,000 and $25,000,
respectively, in fiscal years ending 1997, 1998 and 1999, and an annual
performance bonus in fiscal 1998 and fiscal 1999 if the Company achieves net
income objectives approved by the Board of Directors. Under the terms of the
agreement, Mr. DeJordy is entitled to receive an option to purchase up to
200,000 shares of Common Stock pursuant to the Company's 1996 Stock Incentive
Plan provided that the Company raises at least $3.1 million in this Offering or
the Company's Common Stock is listed on the NASDAQ Small Cap Marketplace or the
Company completes a firm commitment public offering within two years. If the
Company raises less than $3.1 million of gross proceeds but more than $1.5
million, Mr. DeJordy will receive only 100,000 options. Mr. DeJordy will receive
no options if less than $1.5 million is raised in this Offering . Such option
will have an exercise price equal to the price per share of the Common Stock
offered hereby to the public, and shall vest over 5 years, subject to
modification as a result of applicable incentive stock option rules. Mr.
DeJordy's employment agreement also contains change-of control provisions that
require the Company to pay Mr. DeJordy 1.5 or 2.5 times his annual salary in the
event of a change-of-control during the term of the Agreement, subject to
certain conditions. Mr. DeJordy's Agreement also provides for health insurance
benefits and contains non-competition provisions that prohibit him from
competing with the Company and acquiring any new interests in the cafe business.
The period covered by the non-competition provisions will end upon the later of
the expiration of the agreement or one year after Mr. DeJordy's resignation or
termination. To activate this non-competition provision, the Company must notify
Mr. DeJordy and pay him the sum of $100,000. See "PRINCIPAL STOCKHOLDERS."
The Company and Mr. King also entered into an employment agreement in
November 1996 which provides for a term of three years at an initial annual
compensation of $108,000 and the grant of an option to purchase 54,375 shares at
$2.76 per share (25% of which was vested upon issuance, with the balance to vest
in equal monthly amounts over a 27 month period). Mr. King is also entitled to
receive an additional option to purchase 75,000 shares of Common Stock at an
exercise price equal to the price per share of the Common Stock offered hereby
to the public, vesting monthly over a three-year period, if this Offering raises
gross proceeds of at least $1.5 million. Mr. King's employment agreement
contains change-of-control provisions requiring the Company to pay Mr. King 100%
of his annual salary in the event of a change-of-control during the term,
subject to certain conditions. Mr. King's employment agreement also contains
health insurance benefits, discretionary annual cash performance-based bonuses,
and a one year non-competition covenant
35
following termination, which is activated by a payment from the Company to Mr.
King in the amount of one year's annual base salary. Mr. King's employment
agreement is terminable by the Company in the event this Offering is not
successfully completed.
During the fiscal year ended September 29, 1996, and the current fiscal
year, Messrs. DeJordy and King have agreed to defer payment of a portion of
their salaries pending completion of this Offering in order to conserve cash. If
the Company raises: (i) at least $1 million but less than $1.5 million in this
Offering, 50% of Mr. DeJordy's and Mr. King's salary will be paid currently
thereafter; (ii) between $1.5 million and $2.0 million in this Offering, 75% of
Mr. DeJordy's and Mr. King's salary will be paid currently thereafter; or (iii)
over $2.0 million in this Offering, 100% of Mr. DeJordy's and Mr. King's salary
will be paid currently thereafter. In the event the Company raises $1.5 million
in gross proceeds, all deferred salary will be paid to Messrs. DeJordy and King
over a period of six (6) months in six equal consecutive payments.
1996 STOCK INCENTIVE PLAN
The following is a summary of the principal features of the Cafe La France
1996 Stock Incentive Plan (the "Plan").
PURPOSE. The purpose of the Plan is to advance the interests of the Company
by providing material incentive for the continued services of key and valuable
employees, directors, and non-employees who perform services for the Company.
Under the Plan, participants may be awarded options to purchase Common Stock, in
accordance with the terms of the Plan as described below.
OPERATION AND ELIGIBILITY. The Plan will be administered by a Committee of
the Board of Directors. The Committee shall have the authority under the Plan to
make awards to eligible participants in the form of (i) incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or (ii) non-qualified stock options. Employees of the Company and
non-employees who perform services for the Company, including non-employee
directors, shall be eligible for awards under the Plan as determined by the
Committee, except that only employees are eligible to receive incentive stock
options. The aggregate number of shares of Common Stock that may be the subject
of options awarded under the Plan shall not exceed 500,000 shares, all or any
portion of which may be granted in the form of incentive stock options. Shares
of Common Stock reserved for issuance but never issued, such as shares covered
by expired or terminated options, generally will be available for subsequent
awards. Pursuant to Mr. DeJordy's employment agreement with the Company, Mr.
DeJordy shall receive an option to purchase 200,000 shares of Common Stock upon
the successful completion of this Offering. Mr. King, pursuant to his employment
agreement, shall receive an option to purchase 75,000 shares of Common Stock, at
the public offering price of the Shares offered hereby, subject to applicable
incentive stock option rules.
TERMS AND CONDITIONS OF OPTIONS
(a) Option price: The option price per share for any option granted under
the Plan shall be determined by the Committee; provided, however, that in the
case of an incentive stock option, the option price per share shall not be less
than l00% of the fair market value of the Common Stock at the time of grant.
(b) Period within which option may be exercised: The period of each option
shall be fixed by the Committee, but no incentive stock option may be exercised
after the expiration of ten years from the date the option is granted. The
Committee may, in its discretion, determine as a condition of any option, that
all or a stated percentage of the shares covered by such option shall become
exercisable, in installments or otherwise, only after the completion of a
specified service requirement by the Optionee.
(c) Special Rules for l0% Shareholder: Notwithstanding the above, the option
price per share of an incentive stock option granted to an employee who, at the
time such option is granted, owns shares possessing more than l0% of the total
combined voting power of all classes of shares of the Company shall be at least
ll0% of the fair market value of the Common Stock subject to the option. In
addition, any such incentive stock option may not be exercised after the
expiration of five years from the date the option is granted.
(d) Grant limitation: The aggregate fair market value of Common Stock with
respect to which incentive stock options are exercisable for the first time by
any employee during any calendar year (determined at the time the incentive
stock option is granted) shall not exceed $l00,000.
36
(e) Termination of option by reason of termination of employment: Unless the
Committee in its discretion determines otherwise, if an Optionee's employment
with the Company terminates, all options which are not exercisable on the date
of termination of employment shall immediately terminate, and any remaining
options shall terminate if not exercised before the expiration of the following
periods, or the expiration of the term of the option, if earlier: (i) thirty
(30) days following termination of employment, if termination was not a result
of retirement on or after age 55, or of death or disability (disability within
the meaning of Section 22(e)(3) of the Internal Revenue Code), or (ii) three (3)
months following termination of employment because of retirement on or after age
55, or (iii) one (l) year following date of death or commencement of disability,
if the Optionee was employed by the Company at the time of death or the
commencement of disability. Notwithstanding the foregoing, if the Optionee's
employment is terminated for cause, any remaining portion of the option shall
immediately terminate.
(f) Non-transferability: Except in limited circumstances, each option and
all rights thereunder shall be exercisable during the Optionee's lifetime only
by him and shall be non-assignable and non-transferable by the Optionee except,
in the event of the Optionee's death, by his will or by the laws of descent and
distribution.
(g) Modification or cancellation of option. The Committee shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionee, the modification of the terms of any option agreement
(subject to the limitations contained in the Plan), including the acceleration
of the exercisability of any option for any reason including a change in the
control or ownership of the Company, or the cancellation of any or all
outstanding options granted under this Plan. In substitution for canceled
options, the Committee may grant new options (subject to the limitations
contained in the Plan) covering the same or different numbers of shares of
Common Stock at an option price per share in all events not less than fair
market value on the date of the new grant.
(h) Disposition of shares. No option shall qualify as an incentive stock
option if the shares of Common Stock acquired pursuant to the exercise of the
option are transferred, other than by will or by the laws of descent and
distribution, within two years of the date such option was granted or within one
year after the transfer of Common Stock to the employee pursuant to such
exercise.
METHOD OF EXERCISE. An option granted under the Plan may be exercised by
written notice to the Committee, stating the number of shares of Common Stock in
respect of which the Option is being exercised. The notice shall either be
accompanied by the payment of the full option price for such shares or with a
request for a loan from the Company for all or a part of the purchase price. The
purchase price may be paid (i) in cash (including personal check), (ii) by the
delivery to the Company of Common Stock already owned by the Optionee, (iii)
subject to the prior approval of the Committee and if permitted by applicable
law, by delivery to the Company of the promissory note of the Optionee, or (iv)
by any combination of the above. A certificate or certificates for the shares of
Common Stock of the Company purchased through the exercise of an option shall be
issued in regular course after the exercise of the option and payment therefore.
During the option period no person entitled to exercise any option granted under
the Plan shall have any of the rights or privileges of a stockholder with
respect to any shares issuable upon exercise of such option until certificates
representing such shares shall have been issued and delivered.
CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of outstanding
options shall not affect in any way the right or ability of the Company or its
stockholders to make or authorize any or all changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Common Stock or the rights hereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business or substantially all of the outstanding stock of the Company,
or any other corporate act or proceeding, whether of a similar character or
otherwise.If the Company shall effect a subdivision, consolidation or
reclassification of shares or other capital readjustment or recapitalization,
the payment of a stock dividend, or other increase or reduction of the number of
shares of the voting shares outstanding, without receiving compensation therefor
in money, services or property, then the number, class, and per share price of
Common Stock shall be appropriately adjusted in such a manner as to entitle an
Optionee to receive upon exercise of an option, for the same aggregate cash
consideration, the same total number and class of shares as he would have
received as a result of the event requiring the adjustment.
37
If the Company is merged into or consolidated with another corporation,
regardless of whether or not the Company is the surviving corporation, or if the
Company is liquidated, or sells or otherwise disposes of substantially all of
its assets or substantially all of the stock of the Company while this option
remains outstanding, unless the Board determines otherwise, all outstanding
options shall expire as of the effective date of any such merger, consolidation,
liquidation, sale, or other disposition, provided that (x) notice of such
merger, consolidation, liquidation, sale or other disposition shall be given to
such Optionee at least 30 days prior to the effective date of such merger,
consolidation, liquidation, sale or other disposition and (y) an Optionee shall
have the right to exercise an option to the extent that the same is then
exercisable during the 30 day period preceding the effective date of such
merger, consolidation, liquidation, sale or other disposition.
In general, the issue by the Company of shares of stock of any class, for
cash or property, or for labor or services, either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number of shares or the price of Common Stock then subject
to outstanding options.
AMENDMENT OR TERMINATION. The Committee may terminate the Plan at any time,
and may amend the Plan at any time or from time to time; provided, however, that
any amendment that would increase the aggregate number of shares that may be
issued under the Plan, or materially modify the requirements as to eligibility
for participation in the Plan shall be subject to the approval of the Company
stockholders to the extent required by Internal Revenue Code Section 422, other
applicable laws or any other governing rules or regulations.
DURATION OF PLAN. No incentive stock option may be granted later than 10
years after the earlier of the date the Plan is adopted or the date the Plan is
approved by the Company's stockholders.
LIMITATION ON LIABILITY OF AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL affords a Delaware corporation the power to
indemnify its present and former directors and officers under certain
conditions. Article Twelfth of the Company's Certificate of Incorporation
provides that any person made a party to or otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter, a "proceeding"), by reason of the fact that such person is or was
a director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by the Company to the fullest extent authorized by the DGCL
against all expense, liability and loss, provided, however, that the Company
shall indemnify such person in any proceeding initiated by such person only if
such proceeding was authorized by the Directors of the Company. The right of
indemnification described herein includes the right to be paid expenses incurred
in defending any proceeding in advance of its final disposition, provided that
such person, if required by the DGCL, undertakes to repay all amounts advanced
if it shall be ultimately determined that such director or officer is not
entitled to be indemnified under Article Twelfth or otherwise.
Section 102(b)(7) of the DGCL gives a Delaware corporation the power to
adopt a charter provision eliminating or limiting the personal liability of
directors to the corporation or its stockholders for breach of fiduciary duty as
directors, provided that such provision may not eliminate or limit the liability
of directors for (i) any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) any acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) any
payment of a dividend or approval of a stock purchase that is illegal under
Section 174 of the DGCL, or (iv) any transaction from which the director derived
an improper personal benefit. Article Twelfth of the Company's Certificate of
Incorporation states that to the maximum extent permitted by Section 102(b)(7)
of the DGCL, no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages resulting from such director's
breach of fiduciary duty as a director of the Company, except for liability
involving one of the four exceptions described in (i) through (iv) above. In
addition, the Certificate of Incorporation will provide that if the DGCL is
amended to authorize the further limitation or elimination of the liability of a
director, then the liability of the directors shall be eliminated or limited to
the fullest extent permitted by the DGCL, as so amended.
38
Section 145 of the DGCL also affords a Delaware corporation the power to
obtain insurance on behalf of its directors and officers against liabilities
incurred by them in those capacities. Article Twelfth of the Company's
Certificate of Incorporation provides that the Company may maintain insurance to
protect the Company and its directors and officers against expenses, liabilities
and losses whether or not the Company would have the power to indemnify such
person against such expense, liability or loss under the DGCL. If the Offering
is successful, the Company intends to procure a directors' and officers'
liability and company reimbursement liability insurance policy that will (a)
insure directors and officers of the Company against losses (above a deductible
amount) arising from certain claims made against them by reason of certain acts
done or attempted by such directors or officers and (b) insure the Company
against losses (above a deductible amount) arising from any such claims, but
only if the Company is required or permitted to indemnify such directors or
officers for such losses under statutory or common law or under provisions of
its Certificate of Incorporation or By-Laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
In November, 1996, the Company entered into employment agreements with
Messrs. DeJordy and King. See "MANAGEMENT -- Employment Agreements."
On October 25, 1996, Cafe la france, Inc., a Rhode Island corporation and
holder of all of the outstanding stock of the Company's operating subsidiaries
(the "Predecessor"), was merged with and into the Company. The merger was
structured to qualify as a tax-free reorganization pursuant to the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the
"Reorganization"). In connection with the Reorganization, each existing
stockholder in the Predecessor received 290 shares of Common Stock in the
Company in exchange for each outstanding share of common stock of the
Predecessor owned thereby. Mr. DeJordy received 923,650 (1,154,556 following the
March 1997 5 for 4 stock split) shares of Common Stock in the Company in
exchange for 3,185 shares of the predecessor. Prior to such date, on October 2,
1995, Mr. DeJordy contributed all of the outstanding stock of the Company's
operating subsidiaries, CLF2, Inc. and CLF Franchise Corporation, to the
Predecessor in exchange for 3,375 shares of common stock of the Predecessor.
Prior to that date, on February 9, 1995, three corporations wholly owned by Mr.
DeJordy (CLF7, Inc., CLF3, Inc. and CLF9, Inc.) were merged with and into CLF2,
Inc. (also wholly-owned by Mr. DeJordy), in a tax free reorganization, and the
stock of such non-surviving corporations was canceled.
On February 28, 1996, Home Loan and Investment Bank provided a term loan
(the "Loan") in the principal amount of $350,000 to the Company. The Loan is
personally guaranteed by Mr. DeJordy. The Company does not intend to repay the
Loan from the proceeds of this Offering unless required to by the Bank.
From June 1995 through May 1996, the Predecessor conducted a private
offering of Common Stock pursuant to Regulation D under the Securities Act to
help provide the necessary funds to finance the Predecessor's operations and
expansion. The Predecessor sold a total of 999.66 shares at $1000 per share (the
equivalent of approximately 290,000 post-Reorganization shares of Common Stock)
or 22.4% of the shares of Common Stock currently outstanding, and raised gross
proceeds of $999,667 from such sales. Mr. LaFrance, a director of the Company,
purchased 100 shares, (29,000 shares following the merger and 36,250 following
the March 1997 5 for 4 stock split) under the same terms offered purchasers in
such offering.
During the fiscal year ended September 29, 1996, and the current fiscal
year, Messrs. DeJordy and King have agreed to defer payment of a portion of
their salaries pending completion of this Offering in order to conserve cash. If
the Company raises: (i) at least $1 million but less than $1.5 million in this
Offering, 50% of Mr. DeJordy's and Mr. King's salary will be paid currently
thereafter; (ii) between $1.5 million and $2.0 million in this Offering, 75% of
Mr. DeJordy's and Mr. King's salary will be paid currently thereafter; or (iii)
39
over $2.0 million in this Offering, 100% of Mr. DeJordy's and Mr. King's salary
will be paid currently thereafter. In the event the Company raises $1.5 million
in gross proceeds, all deferred salary will be paid to Messrs. DeJordy and King
over a period of six (6) months in six equal consecutive payments.
Each of the foregoing transactions were among affiliated parties and
necessarily involved conflicts of interest. It is the Company's policy that all
transactions between the Company and its affiliated entities, executive officers
or directors will be subject to the review and approval of the majority of the
Company's directors that do not have an interest in the transaction following
all disclosure of any potential or actual conflict, and will be on terms which
will be no less favorable to the Company than the Company could obtain from
non-affiliated parties.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of common stock of the Company as of the date hereof by (i)
each of the Company's directors, (ii) each of the Company's executive officers
named in the Summary Compensation Table and (iii) all current executive officers
and directors of the Company as a group. The common stock is the only class of
equity securities of the Company which will be outstanding after the Offering.
No other person beneficially owns more than 5% of the outstanding shares of
common stock. There are currently 34 stockholders of the Company.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OWNED OWNED
NUMBER OF BEFORE AFTER
NAME AND ADDRESS TITLE SHARES OWNED THE OFFERING THE OFFERING
---------------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Thomas W. DeJordy ................. Chairman, CEO 1,154,556(1) 70.7%(1) 41.8%(1)
216 Weybosset Street President and Director
Providence, RI
Robert G. King .................... Vice President -- 24,167(2) 1.5% .9%
Finance and Director
Richard LaFrance .................. Director 36,250 2.2% 1.3%
--------- ---- ----
All current directors and executive
officers (3 persons) ............ 1,214,973 74.0% 43.9%
========= ==== ====
</TABLE>
- -----------
(1) Certain of Mr. DeJordy's relatives also own shares of Common Stock, as to
which Mr. DeJordy disclaims beneficial ownership.
(2) Includes 24,167 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of the date of
this Prospectus, pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended.
40
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 9,000,000 shares of Common Stock, par
value $.01 per share, of which 1,616,628 shares are currently outstanding.
Holders of Common Stock have one vote for each share held of record on all
matters to be voted upon by stockholders, including the election of directors,
will have no cumulative voting rights with respect to any matter, and will be
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor and, upon liquidation of such
corporation, to share ratably in the net assets available for distribution.
Shares of Common Stock are not redeemable and have no preemptive, conversion or
similar rights. All of the issued and outstanding shares of Common Stock are,
and all shares of Common Stock to be outstanding upon completion of the Offering
will be, upon receipt of the payment therefor, validly issued, fully paid and
nonassessable.
LIMITATIONS ON TRANSFERS OF SHARES
There is currently no public market for the Company's Common Stock. Although
there can be no assurance, the Company expects that, following the Offering, the
Common Stock will be traded in the over-the-counter market ("OTC") through the
OTC "Electronic Bulletin Board." Even if the Company's Common Stock is quoted on
the OTC Electronic Bulletin Board, there can be no assurance that a trading
market will develop, or, if developed, will be sustained following the Offering.
The Company previously applied for listing on the Nasdaq SmallCap Market
when this Offering was originally structured as a firm commitment underwriting
(See "UNDERWRITING") and intends to reactivate that application when, and if,
the Company meets the listing requirements of the Nasdaq SmallCap Market. The
principal initial listing requirements, as recently revised by the NASD, include
$4,000,000 of net tangible assets, a minimum bid price of $4.00 per share, three
market makers, 300 shareholders and two outside directors. No assurance can be
given as to when, if ever, the Company's Common Stock will qualify for listing
on the Nasdaq SmallCap Market.
COMMON STOCK OPTIONS
The Company's 1996 Stock Incentive Plan (the "Plan") enables the Company to
issue incentive and non-qualified stock options to deserving employees and
non-employees who perform services for the Company. Under the Plan, the Company
has reserved 500,000 shares of its authorized common stock for option grants.
The Company believes that the Plan will enhance its ability to attract and
retain key employees and other persons who are in a position to make significant
contributions to the Company's success. See "MANAGEMENT -- 1996 Stock Incentive
Plan."
The Company has issued incentive stock options under the Plan to purchase
79,025 shares of Common Stock to certain employees which options are exercisable
for $2.76 per share. The Company also has agreed to issue an option for 200,000
shares of Common Stock under the Plan to Mr. DeJordy upon completion of this
Offering, at an exercise price equal to the price of the Common Stock offered
hereby, provided that the Offering results in at least $3.1 million of gross
proceeds or the Company's Common Stock is listed on the NASDAQ Small Cap
Marketplace or the Company completes a firm commitment public offering within
two years. If the Offering raises less than $3.1 million of gross proceeds but
more than $1.5 million, Mr. DeJordy will receive only 100,000 options. Mr.
DeJordy will receive no options if less than $1.5 million is raised in this
Offering. The options are subject to modification as a result of applicable
incentive stock option rules. The Company has also agreed to issue an option for
75,000 shares to Mr. King at an exercise price equal to the price of Common
Stock offered hereby provided the Company raises at least $1.5 million in this
Offering. See "MANAGEMENT -- Employment Agreements." In addition, the Company
has issued nonqualified options to purchase 72,500 shares of Common Stock to
certain consultants. Such options are exercisable for $2.76 per share.
UNDERWRITER'S OPTION
In connection with this Offering, the Company has agreed to sell to the
Underwriter and/or its designees, for nominal consideration, an option to
purchase from the Company 5% of the number of Shares sold in the Offering (the
"Underwriter's Option"). The Underwriter's Option is initially exercisable at a
price of $5.60
41
per share of Common Stock (140% of the Offering Price of the Shares) for a
period of four years commencing one year from the effective date of this
Prospectus and is restricted from sale, transfer, assignment or hypothecation
for a period of twelve months from the date hereof, except to officers of the
Underwriter and by operation of law.
For the term of the Underwriter's Option, the holder thereof has the
opportunity to profit from a rise in the market price of the Company's
securities which may result in a dilution of the interest of the stockholders.
BRIDGE WARRANTS. During 1996, the Company completed a private offering of
$600,000 of 12% promissory notes (the "Notes") and common stock purchase
warrants (the "Bridge Warrants"). The The Bridge Warrants become exercisable for
$.01 per share for a period of 60 days beginning 13 months after the successful
completion of this Offering. The Bridge Warrants are exercisable for a total of
112,500 shares of Common Stock in the Company. The Company has agreed to file a
registration statement to register the shares acquirable upon exercise of the
Bridge Warrants for resale after the successful completion of this Offering. The
Bridge Warrants are nontransferable and do not confer upon their holders any
voting or other rights as stockholders of the Company.
PREFERRED STOCK. The Board of Directors has the authority to issue Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series of the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of the Company's
common stock. At present, the Company has no plans to issue any of the Preferred
Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
SECTION 203. In the Certificate of Incorporation, the Company has expressly
elected to be governed by Section 203 of the DGCL. Section 203 prevents an
"interested stockholder" (defined in Section 203 generally as a person owning
15% or more of a corporation's outstanding voting stock), from engaging in a
"business combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote and not by written consent of the holders of two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder.
ADVANCE NOTICE FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS OF
DIRECTORS. The By-Laws of the Company will establish an advance notice procedure
with regard to the nomination, other than by or at the direction of its Board of
Directors or a committee thereof, of candidates for election as directors (the
"Nomination Procedure") and with regard to certain matters to be brought before
an annual meeting of stockholders of the Company (the "Business Procedure"). The
Nomination Procedure will require that a stockholder give prior written notice,
in proper form, of a planned nomination for the Board of Directors to the
Secretary of the Company. The requirements as to the form and timing of that
notice are specified in the By-Laws. If the election inspectors determine that a
person was not nominated in accordance with the Nomination Procedure, such
person will not be eligible for election as a director. Under the Business
Procedure, a stockholder seeking to have any
42
business conducted at an annual meeting must give prior written notice, in
proper form, to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the By-Laws. If the Chairman or other
officer presiding at a meeting determines that other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting. Although the By-Laws of the
Company do not give the Board of Directors any power to approve or disapprove
stockholder nominations for the election of directors or of any other business
desired by stockholders to be conducted at an annual or any other meeting, the
By-Laws (i) may have the effect of precluding a nomination for the election of
directors or precluding the conduct of business at a particular annual meeting
if the proper procedures are not followed or (ii) may discourage or deter a
third party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company, even if the
conduct of such solicitation or such attempt might be beneficial to the Company
and its stockholders.
TRANSFER AGENT. The Company has appointed American Securities Transfer &
Trust Incorporated as its Transfer Agent for the Common Stock.
SHARES AVAILABLE FOR FUTURE SALE
FUTURE SALES OF COMMON STOCK. Upon completion of this Offering, there will
be 2,741,628 shares of Common Stock outstanding (assuming no exercise of
existing options or warrants), of which 1,125,000 shares of Common Stock sold in
this Offering will be freely tradable in the United States without restriction
under the Securities Act, by persons other than "affiliates" of the Company, as
defined under the Securities Act -- if a market for such Shares were to develop
(See "RISK FACTORS -- Absence of Public Market"). Of the remaining 1,616,628
shares outstanding, (i) 362,384 shares were issued pursuant to Rule 504 of
Regulation D in the Company's 1995-1996 private offering of Common Stock (See
"CERTAIN TRANSACTIONS") and would be freely tradable under federal securities
laws after this Offering but for a 13 month post-Offering "lock-up" provision
contained in the subscription agreements executed by investors in such offering,
and (ii) 1,254,244 shares have not been registered under the Securities Act and
constitute "restricted securities" under Rule 144 of the Securities Act ("Rule
144"). Ordinarily, under Rule 144, a person holding restricted securities for a
period of two years may, every three months, sell in ordinary brokerage
transactions or in transactions directly with a market maker an amount equal to
the greater of one percent of the Company's then outstanding Common Stock or the
average weekly trading volume during the four calendar weeks prior to such sale.
Rule 144 also permits sales by a person who is not an affiliate of the Company
and who has satisfied a three-year holding period without any quantity
limitation. The Company's Chairman and Chief Executive Officer (Mr. DeJordy) has
agreed not to sell any of his 1,154,556 shares of Common Stock, all of which
constitute restricted securities, for a period of 13 months from the date of
this Prospectus without the prior written consent of the Underwriter.
Thereafter, Mr. DeJordy would be eligible to resell such shares, subject to
volume limitations and other conditions imposed by Rule 144. With respect to the
remaining 99,688 shares of Common Stock which constitute restricted securities,
68,875 shares held by non-affiliates would become eligible for resale under Rule
144 on October 2, 1997 and 30,813 shares held by non-affiliates would become
eligible for resale on May 30, 1998, subject to volume limitations and other
conditions imposed by Rule 144. Future sales under Rule 144 may have a
depressive effect on the market price of the Common Stock should a public market
develop for such stock as to which there can be no assurance. In addition, the
Bridge Warrants will become exercisable for 112,500 shares of Common Stock 13
months after this Offering. Following registration thereof, which the Company is
obligated to undertake, resales of such shares could also have a depressive
effect on the market price of the Common Stock.
43
UNDERWRITING
Earnhardt Co., Inc. (the "Underwriter") has agreed, subject to the terms and
conditions of an Underwriting Agreement, to use its best efforts as the
Company's selling agent to offer up to a maximum of 1,125,000 Shares of Common
Stock to the public at the public offering price set forth on the cover page of
the Prospectus. The Underwriter has made no commitment to purchase all or any
part of the Shares offered hereby. The Underwriter has agreed to use its best
efforts to find purchasers for the Shares offered hereby from the date of this
Prospectus through June 30, 1997, at the discretion of the Company for up to an
additional 120 days.
As compensation for its services as Underwriter, the Company has agreed to
pay the Underwriter a 10% cash commission on all sales of Shares sold in the
Offering. The Company has also agreed to issue to the Underwriter, an option
(the "Underwriter's Option"), which confers the right to purchase shares of
Common Stock equal to 5% of the number of Shares sold in the Offering. The
Underwriter's Option is initially exercisable at the price (the "Exercise
Price") of $5.60 per Share (140% of the public offering price of the Shares) for
a period of four years commencing one year from the effective date of this
Prospectus. The Underwriter's Option contains provisions providing for
adjustment of the Exercise Price and the number and type of securities issuable
upon the exercise thereof upon the occurrence of certain events.
The Underwriter has advised the Company that it may reallow all or a portion
of such cash commission and the Underwriter's Option to other dealers who
participate in the Offering, if any. The Underwriter shall also be reimbursed by
the Company for its reasonable, actual accountable out-of- pocket expenses not
to exceed $12,000.
Certain principal stockholders and the Company have agreed that, for a
period of 13 months from the date of this Prospectus, they will not sell any
securities (except for shares of Common Stock issued pursuant to exercise of
options which may be granted under the Plan) without the Underwriter's prior
written consent, which shall not be unreasonably withheld.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
The foregoing is a brief summary of all material provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Commission as an exhibit to the Registration Statement of which this Prospectus
is a part.
This Offering was originally structured as a "firm commitment" offering with
a different underwriter. As a result of the termination by that underwriter of
its involvement as managing underwriter and because of the substantial delay
involved in finding a new firm commitment underwriter, the Company engaged
Earnhardt Co., Inc. as a "best efforts" underwriter. The Company, in connection
with the original firm commitment underwriting, applied for listing of the
Shares on the Nasdaq SmallCap Market and intends to reactivate such application
at such time as it may be able to comply with the SmallCap listing standards, as
to which there can be no assurance. See "DESCRIPTION OF SECURITIES --
Limitations on Transfers of Shares." In addition, the Company may seek to amend
this Offering at such time as the Company can engage a firm commitment
underwriter to complete the sale of any unsold Shares. There can be no assurance
that any such firm commitment underwriting will develop, regardless of the
progress of this Offering.
Prior to the Offering, there has been no public market for any of the
Company's securities and there can be no assurance that such a market will
develop in the immediate future. The initial public offering price of the Shares
has been determined by consultations between the Company and the Underwriter,
with due consideration given to the pricing of the Offering resulting from
negotiations with the former "firm commitment" underwriter. The Offering price
of the Shares is not necessarily related to the Company's assets, earnings, or
book value or any other established criteria of value. Factors considered in
determining the Offering price of the Shares included estimates of business
potential, historical earnings, future prospects, gross proceeds to be raised,
44
percentage of stock owned by officers and directors on the date hereof, the type
of business in which the Company engages, and an assessment of the Company's
management. The foregoing factors were evaluated in light of the existing state
of the securities market.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Duffy & Sweeney, 300 Turks Head Building, Providence, Rhode Island
02903. Michael F. Sweeney, Esquire, a partner in the law firm of Duffy &
Sweeney, is Secretary of the Company. Gordon A. Carpenter, Esq., 91 Friendship
Street, Providence, RI has acted as counsel to the Underwriter in connecton with
the Offering.
EXPERTS
The financial statements of Cafe La France, Inc. as of September 29, 1996
and for the year ended September 29, 1996 and the nine-month period ended
October 1, 1995 have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, as permitted by the Rules and Regulations of the Commission.
For further information with respect to the Company and to the Securities
offered hereby, reference is made to the Registration Statement including the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document summarize only the material
provisions thereof and are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement and exhibits and
schedules thereto may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained at prescribed rates by writing to the Commission's Public
Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission.
The Company will provide without charge to each person who receives a copy
of the Prospectus, upon written or oral request of such person, a copy of any of
the information that was incorporated by reference in the Prospectus (not
including exhibits to the information that was incorporated by reference unless
the exhibits are themselves specifically incorporated by reference). Requests
for copies of said documents should be made to should be directed to Thomas W.
DeJordy, President, 216 Weybosset Street, Providence, Rhode Island 02903,
telephone (401) 453-2233.
Prior to this Offering, the Company has not been a reporting company under
the Securities Exchange Act of 1934, as amended. Subsequent to this Offering,
the Company intends to furnish to its stockholders annual reports, which will
include financial statements audited by independent accountants, and such other
periodic reports as it may determine to furnish or as may be required by law.
45
CAFE LA FRANCE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheet as of September 29, 1996, and as of December 29, 1996
(unaudited) F-3
Consolidated Statements of Income for the Year Ended September 29,
1996 and Nine Months Ended October 1, 1995, and for the Three
Months Ended December 29, 1996 and December 31, 1995 (unaudited) F-4
Consolidated Statements of Stockholders' Deficit for the Year Ended
September 29, 1996 and Nine Months Ended October 1, 1995, and for
the Three Months Ended December 29, 1996 and December 31, 1995 (unaudited) F-5
Consolidated Statements of Cash Flows for the Year Ended September
29, 1996 and Nine Months Ended October 1, 1995, and for the Three
Months Ended December 29, 1996 and December 31, 1995 (unaudited) F-6
Notes to Financial Statements F-7
</TABLE>
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CAFE LA FRANCE, INC.
We have audited the accompanying consolidated balance sheet of Cafe La
France, Inc. and subsidiaries as of September 29, 1996 and the related
consolidated statements of income, shareholders' deficit and cash flows for the
year ended September 29, 1996 and the nine-months ended October 1, 1995. 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.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cafe La
France, Inc. and subsidiaries as of September 29, 1996 and the results of their
operations and their cash flows for the year ended September 29, 1996 and the
nine-months ended October 1, 1995 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
13 to the financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 13. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG PEAT MARWICK LLP
Providence, Rhode Island
November 7, 1996, except as to notes 7, 11 and 13,
which are as of March 10, 1997
F-2
CAFE LA FRANCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 29,
1996 1996
----------- ------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets (note 5):
Cash $ 5,695 $ 5,313
Accounts receivable, less allowance for doubtful accounts of $19,000 at
September 29, 1996 and $20,500 at December 29, 1996 (unaudited) (note 2) 16,569 16,359
Notes receivable from franchisees -- current portion 19,185 18,730
Inventories 45,284 64,220
Prepaid expenses 15,784 61,422
Prepaid initial public offering costs 41,440 128,688
Preopening costs 1,262 818
----------- -----------
Total current assets 145,219 295,550
----------- -----------
Property and equipment (note 5):
Equipment and store furnishings 591,286 603,599
Office furniture and fixtures 30,909 31,017
Leasehold improvements 156,699 167,366
Vehicles 16,609 16,609
----------- -----------
795,503 815,591
Less accumulated depreciation 156,986 178,232
----------- -----------
Net property and equipment 638,517 640,359
----------- -----------
Other assets (note 5):
Notes receivable from franchisees -- long term portion 32,946 29,242
Operating rights, net of accumulated amortization of $4,985 at September 29,
1996 and $5,724 at December 29, 1996 (unaudited) 24,570 23,831
Loan origination costs 10,281 10,008
Deposits 34,121 39,138
----------- -----------
Total other assets 101,918 102,219
----------- -----------
Total assets $885,654 $1,038,128
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred franchise fee $5,000 $5,000
Notes payable (note 3) 193,293 623,678
Current installments of long-term debt (note 5) 36,715 38,192
Current installments of obligation under capital leases (note 4) 48,141 44,433
Trade accounts payable 208,552 197,359
Income taxes payable (note 6) 750 250
Accrued expenses 293,119 309,816
----------- -----------
Total current liabilities 785,570 1,218,728
----------- -----------
Long-term liabilities:
Long-term debt, excluding current installments (note 5) 332,424 321,577
Obligations under capital leases, excluding current installments (note 4) 63,450 55,181
Deferred credits (note 4) 22,888 27,199
----------- -----------
Total liabilities 1,204,332 1,622,685
----------- -----------
Stockholders' deficit (notes 5, 7 and 11):
Preferred stock $.01 par value. Authorized 1,000,000 shares; none issued -- --
Common stock $.01 par value. Authorized 9,000,000 shares; issued and outstanding
1,616,628 shares 16,166 16,166
Additional paid-in capital 932,025 962,025
Accumulated deficit (1,266,869) (1,562,748)
----------- -----------
Total stockholders' deficit (318,678) (584,557)
----------- -----------
Commitments and contingencies (notes 4 and 11)
Total liabilities and stockholders' deficit $ 885,654 $ 1,038,128
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
CAFE LA FRANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS THREE MONTHS ENDED
SEPTEMBER 29, ENDED OCTOBER 1, ------------------------
---------- ---------- December 29, December 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Income:
Sales from Company-owned restaurants $ 2,101,283 $ 1,429,696 $ 621,320 $ 523,958
Franchise revenues (note 2) 97,470 37,466 13,707 56,470
---------- ---------- ---------- ----------
Total income 2,198,753 1,467,162 635,027 580,428
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 884,068 607,995 236,089 240,808
Restaurant operating expenses 1,220,888 792,720 409,029 289,069
General and administrative expenses 641,879 510,895 191,335 118,890
Depreciation and amortization 68,519 43,564 47,306 16,012
---------- ---------- ---------- ----------
Total costs and expenses 2,815,354 1,955,174 883,759 664,779
---------- ---------- ---------- ----------
Loss from operations (616,601) (488,012) (248,732) (84,351)
Other income (expense):
Interest income 6,945 5,207 1,970 1,680
Interest expense (62,901) (34,053) (48,367) (12,683)
---------- ---------- ---------- ----------
Net loss before income taxes (672,557) (516,858) (295,129) (95,354)
Income taxes (note 6) 750 500 750 750
---------- ---------- ---------- ----------
Net loss $ (673,307) $ (517,358) $ (295,879) $ (96,104)
============ ============ ============ ============
Loss per share $ (.38) $ (.17) $ (.05)
============ ============ ============
Weighted average shares outstanding 1,775,820 1,775,820 1,775,820
============ ============ ============
Pro forma data -- unaudited (note 12)
Historical net loss as above $ (673,307) $ (517,358)
Pro forma salary adjustment -- (50,000)
----------- -----------
Pro forma net loss $ (673,307) $ (567,358)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
CAFE LA FRANCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT DEFICIT
---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ -- 9,788 43,923 (43,877) 9,834
Net loss -- -- -- (517,358) (517,358)
Dividends and distributions to stockholders -- -- -- (32,327) (32,327)
---------- --------- ---------- ----------- -----------
Balance October 1, 1995 -- 9,788 43,923 (593,562) (539,851)
Net loss -- -- -- (673,307) (673,307)
Issuance of stock -- 3,145 891,335 -- 894,480
Five-for-four stock split -- 3,233 (3,233) -- --
---------- --------- ---------- ----------- -----------
Balance September 29, 1996 -- 16,166 932,025 (1,266,869) (318,678)
Issuance of warrants in connection with bridge
financing -- -- 30,000 -- 30,000
Net loss -- -- -- (295,879) (295,879)
---------- --------- ---------- ----------- -----------
Balance December 29, 1996 (unaudited) $ -- 16,166 962,025 (1,562,748) (584,557)
=========== ========= ========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
CAFE LA FRANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS THREE MONTHS ENDED
SEPTEMBER 29, ENDED OCTOBER 1, --------------------------
------------ ------------ December 29, December 31,
1996 1995 1996 1995
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net loss $(673,307) $(517,358) $(295,879) $(96,104)
Adjustments to reconcile net loss to net cash flow used
in operating activities:
Depreciation 63,129 35,868 21,245 13,274
Amortization 5,390 7,696 26,061 2,737
Loss on uncollectible notes receivable (note 9) -- 68,409 -- --
Decrease (increase) in accounts receivable 1,361 (3,830) 208 (29,604)
Increase in inventory (21,111) (16,173) (18,936) --
Decrease in prepaid expenses 41,581 52,388 19,902 3,490
Increase in preopening costs (1,262) -- -- --
Increase in operating rights (1,955) (27,600) -- (1,955)
Increase in deposits (8,626) (16,965) (5,016) (1,838)
(Decrease) increase in deferred franchise fee (25,000) 30,000 -- (25,000)
(Decrease) in franchise deposit -- -- -- (15,000)
(Decrease) increase in accounts payable (68,710) 155,301 (14,550) (206,650)
Increase in accrued liabilities 1,939 206,718 20,227 21,594
Increase (decrease) in accrued income taxes 750 -- (500) 750
Increase in deferred credits 12,269 2,601 4,311 1,038
--------- --------- --------- ---------
Net cash used in operating activities (673,552) (22,945) (242,927) (333,268)
Cash flows from investing activities:
Capital expenditures (268,898) (192,558) (23,088) (45,226)
Loans made on notes receivable -- (15,915) -- --
Payments received on notes receivable 16,368 8,916 4,159 2,617
--------- --------- --------- ---------
Net cash used in investing activities (252,530) (199,557) (18,929) (42,609)
Cash flows from financing activities:
Proceeds from issuance of notes payable 207,491 23,865 600,000 49,705
Principal payments on notes payable (8,573) (6,871) (169,816) (87,500)
Proceeds from issuance of long term debt 350,000 425,000 -- --
Principal payments on long-term debt (431,243) (173,955) (9,341) (627)
Principal payments on capital lease obligations (28,014) (9,847) (11,978) (3,234)
Stockholder distributions -- (32,327) -- --
Proceeds from issuance of stock, net 894,480 -- -- 420,648
Increase in prepaid initial public offering costs (41,440) -- (87,248) --
Debt issuance costs (10,918) (4,825) (60,143) --
--------- --------- --------- ---------
Net cash provided by financing activities 931,783 221,040 261,474 378,992
Increase (decrease) in cash 5,701 (1,462) (382) 3,115
Cash at beginning of period (6) 1,456 5,695 (6)
--------- --------- --------- ---------
Cash at end of period $ 5,695 $ (6) $ 5,313 $ 3,109
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 57,270 $ 34,053 $ 24,104 $ 11,941
========= ========= ========= =========
Income taxes paid $ 250 $ 500 $ 1,250 $ --
========= ========= ========= =========
Noncash financing and investing activities:
Capital lease obligations of $102,393 and $32,738 were incurred in 1996 and
1995, respectively, when the Company entered into leases for new machinery and
equipment.
In connection with the issuance of notes payable, the Company issued warrants
with a value of $30,000.
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Cafe La France, Inc. (the Company) operates Company-owned restaurants and
sells franchise rights to operate restaurants through its two wholly-owned
subsidiaries (note 7c). As of September 29, 1996 and October 1, 1995, the
Company had ten Company-owned restaurants and seven and five franchised
restaurants, respectively, the majority of which are located in the Rhode Island
area.
(b) Franchise Revenues
Franchise agreements are executed for each franchised restaurant and provide
the terms of the franchise arrangement between the Company and the franchisee.
The franchise agreement requires the franchisee to pay an initial,
non-refundable franchise fee plus continuing royalties based upon a percentage
of restaurant sales. Other fees may be charged to cover the costs of
advertising, audit and accounting fees, transfer fees and training. The
franchisor is obligated to provide initial training and other management
services such as menu selections, provision of supplier contacts, and the non-
exclusive use of the trademark within an exclusive territory as mutually agreed
upon by the franchisor and franchisee as governed by the franchise agreement.
Initial franchise fees are recognized as revenue when the Company performs
substantially all initial services required by the franchise agreement, which
generally occurs shortly after restaurant opening. Continuing royalties are
recognized as earned with an appropriate provision for estimated uncollectible
amounts. Initial franchise fees received applicable to restaurants for which
substantially all initial services required by the franchise agreement have not
been performed are recorded as deferred franchise fees in the accompanying
balance sheet.
Deferred initial franchise fees that are expected to be recognized within 12
months of the balance sheet date are classified as current portion of deferred
franchise fees in the accompanying balance sheet.
(c) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments purchased with a maturity to the Company of three months or less.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(e) Operating Rights
Operating rights, which represent the excess of purchase price over fair
value of net assets acquired, are amortized on a straight-line basis over 10
years. The Company periodically assesses the recoverability of this intangible
asset by determining whether the amortization of the operating rights balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of operating rights impairment,
if any, is measured based on projected future operating cash flows discounted at
a rate commensurate with the risks involved. The assessment of the
recoverability of the operating rights will be impacted if estimated future
operating cash flows are not achieved.
F-7
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(f) Preopening Costs
Direct, incremental restaurant pre-opening costs, comprised primarily of the
cost of hiring and training restaurant employees, are amortized over the initial
12 months of a restaurant's operations.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets for financial reporting purposes. Leasehold improvements are amortized on
a straight-line basis over the lesser of the remaining lease term, including
renewal periods when the Company intends to exercise renewal options, or the
estimated useful life of the asset.
(h) Advertising and Promotion
Expenses Advertising costs are expensed during the year in which they are
incurred. Promotion costs are expensed over the period of the promotional event.
Advertising expense was $5,953 and $7,092 for the year ended September 29, 1996
and the nine month period ended October 1, 1995, respectively. Included in
prepaid assets at September 29, 1996 is $12,902 of printed promotional brochures
used in on-going promotional programs.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to October 2, 1995, each of the existing legal entities included in
the Company had elected those provisions of the Internal Revenue code
(Subchapter S) and state laws which provide for the income of the Company to be
taxed at the stockholder level. During the period ended October 1, 1995 no
income tax expense or benefit was recorded by the Company other than state
minimum tax.
(j) Loss Per Share
Loss per share for the year ended September 29, 1996 is based on the average
number of shares of common stock and common stock equivalents outstanding, using
the treasury stock method, during the year after giving effect to a 290-for-1
stock exchange in connection with a merger on October 25, 1996 and a
five-for-four stock split to be effected as a dividend declared on March 6, 1997
(note 7c). Common stock equivalents include shares issuable upon exercise of
outstanding stock options and warrants. In addition, pursuant to SEC Staff
Accounting Bulletin 83, common stock options and warrants granted and shares
issued during the 12 months immediately preceding the offering date at a price
below the proposed offering price of the Company's initial public offering are
reflected in the earnings per share calculation as if they had been outstanding
for the full year (using the treasury stock method and the proposed initial
public offering price). For purposes of this calculation, common stock
equivalents totaled 159,192 incremental shares under the treasury stock method.
Weighted average shares outstanding used in the loss per share calculation
were 1,775,820.
F-8
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(k) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
(l) Fiscal Periods
Prior to October 2, 1995, the Company's financial reporting was done on a
calendar basis. Effective October 2, 1995, the Company changed to a 52/53-week
fiscal year comprised of four thirteen-week periods ending the Sunday closest to
September 30.
(2) FRANCHISE FEE REVENUE
Franchise revenues consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED --------------------
SEPTEMBER 29, OCTOBER 1, December 29, December 31,
1996 1995 1996 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C>
(Unaudited)
Initial franchise fees $ 45,000 $ 15,000 $ -- $ 45,000
Royalty revenue 52,470 22,466 13,707 11,470
------------- ----------- ------------ ------------
Total $ 97,470 $ 37,466 $ 13,707 $ 56,470
============== =========== ============ =============
</TABLE>
The associated franchise receivables included within accounts receivable in
the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 29,
1996 1996
------------ ---------------
(UNAUDITED)
<S> <C> <C>
Royalty receivables $ 17,660 $ 18,996
Less allowance for doubtful accounts 10,000 11,500
------------- ------------
$ 7,660 $ 7,496
============== ============
</TABLE>
(3) NOTES PAYABLE
The Company has short-term notes payable outstanding of $123,477 relating to
the purchase of various equipment and leasehold improvements. Interest rates on
these notes range from 10%-15%, and they are all due within one year of
September 29, 1996. The Company also has an amount outstanding of $69,816
relating to an unsecured promissory note. Interest on this note is 15%. The note
is due the earlier of March 19, 1997, or ten days after the successful
completion of an initial public offering by the Company (note 11).
(4) LEASES
The Company leases certain equipment under capital leases. The economic
substance of the leases is that the Company is financing the acquisition of the
assets through the leases, and accordingly, it is recorded in the Company's
assets and liabilities. The amount shown as property and equipment is $153,543
with related accumulated depreciation of $29,575.
F-9
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LEASES -- (CONTINUED)
The Company leases several restaurant facilities under noncancelable
operating leases. These leases generally contain renewal options for periods
ranging from 5 to 15 years and require the Company to pay executory costs such
as maintenance and insurance. Rent expense for operating leases aggregated
$259,445 and $180,943 for the year ended September 29, 1996 and the period ended
October 1, 1995, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining lease terms in excess of one year and future minimum
capital lease payments as of September 29, 1996 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING: LEASES LEASES
- -------------- ------------- -------------
<S> <C> <C>
1997 $ 60,186 $ 283,308
1998 49,346 260,749
1999 22,947 205,203
2000 -- 183,291
2001 -- 176,676
Thereafter -- 870,262
------------- -------------
Total minimum lease payments 132,479 $ 1,979,489
------------- -------------
Less amount representing interest 20,888
-------------
Present value of minimum capital lease payments 111,591
Less current installments of obligations under capital leases 48,141
-------------
Obligations under capital leases, excluding current installments $ 63,450
==============
</TABLE>
Deferred credits in the accompanying balance sheet represent accruals for
escalating rental payments on operating leases.
(5) LONG-TERM DEBT
Long-term debt at September 29, 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Term loan payable to bank, secured by substantially all of the assets of the Company,
with monthly principal payments through February 2006, interest at the prime rate
plus 2.75% $ 342,923
Installment note secured by equipment, payable in monthly installments through March
1998 at an interest rate of 15% 14,560
Installment note secured by vehicle, payable in monthly installments through February
1999 at an interest rate of 9.99% 11,656
------------
Total long-term debt 369,139
Less: current installments 36,715
-------------
Long-term debt, excluding current installments $ 332,424
===============
</TABLE>
The prime rate at September 29, 1996 was 8.25%.
The term loan payable to bank contains restrictions on the payment of
dividends without the bank's prior written consent.
The aggregate maturities of long-term debt for each of the five years
subsequent to September 29, 1996 are as follows: 1997 -- $36,715; 1998 --
$35,501; 1999 -- $29,492; 2000 -- $30,706; 2001 -- $30,304; and thereafter
$206,421.
F-10
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Effective October 2, 1995, the Company adopted FASB Statement No. 109,
Accounting for Income Taxes. Prior to October 2, 1995, each of the existing
legal entities included in the Company had elected those provisions of the
Internal Revenue code (Subchapter S) and state laws which provide for the income
of the Company to be taxed at the stockholder level. The Company terminated the
S corporation elections as of October 2, 1995, and is subject to federal and
state income taxes. Management anticipates the filing of consolidated federal
and state returns. The income tax provision is based on consolidated filings.
The provision for income taxes attributed to earnings before income tax are:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED ------------------
SEPTEMBER 29, OCTOBTER 1, December 29, December 31,
1996 1995 1996 1995
------------- ------------ ------- ---------
<S> <C> <C> <C> <C>
(Unaudited)
Current:
Federal $ -- $ -- $ -- $ --
State 750 500 750 750
---- ---- ---- ----
750 500 750 750
==== ==== ==== ====
Deferred:
Federal -- -- -- --
State -- -- -- --
---- ---- ---- ----
---- ---- ---- ----
Total Provision $750 $500 $750 $750
==== ==== ==== ====
</TABLE>
A reconciliation of the statutory United States federal income tax
rate to the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED ------------------
SEPTEMBER 29, OCTOBER 1, December 29, December 31,
1996 1995 1996 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C>
(Unaudited)
Federal statutory income tax rate 34% 34% 34% 34%
State income taxes, net of Federal benefit -- -- -- --
Effect of S corporation elections -- (34) -- (34)
Valuation reserve (34) -- (34) --
------------- ------------ ------------ ------------
Effective tax rate -- -- -- --
============= ============= ============= =============
</TABLE>
All earnings of the Company before tax are from domestic sources. The tax
effect of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 29,
1996 1996
------------- -------------
<S> <C> <C>
(Unaudited)
Assets:
Deferred rent expense $ 5,276 $ 7,130
Settlement reserve 6,267 4,977
Bad debt reserve 8,170 8,815
Net operating loss carry-forwards 339,543 473,391
------------- -------------
Gross deferred tax assets 359,256 494,313
Less valuation reserve 320,714 447,875
------------- -------------
Net deferred tax assets 38,542 46,438
Liabilities:
Excess tax depreciation 28,486 36,130
Conversion from accrued to cash basis for tax purposes 10,056 10,308
------------- -------------
Gross deferred tax liability 38,542 46,438
------------- -------------
Net deferred tax asset $ -- $ --
============== ===============
</TABLE>
F-11
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES -- (CONTINUED)
At September 29, 1996 deferred tax assets and non-current deferred tax
liabilities were $0. The valuation reserve against gross deferred tax assets
increased by $320,714 for the year ended September 29, 1996. The valuation
reserve at September 29, 1996 is $320,714. (Continued)
Unused net operating loss of approximately $780,000 will expire primarily
during fiscal year end September 2011 and September 2001 for federal and state
purposes, respectively.
(7) STOCKHOLDERS' EQUITY
(a) Sale of Common Stock
During fiscal year 1996 the Company sold 1,085 (393,189 after effect of the
reorganization and stock split (note 7c)) shares of common stock of Cafe la
france, Inc. as part of a private offering, for proceeds net of expenses of
$894,480.
(b) Preferred Stock
The Company has 2,000 authorized shares of preferred stock at a par value of
$.01. No shares were issued and outstanding at September 29, 1996. In connection
with the reorganization (note 7c) the Company authorized 1,000,000 shares of
preferred stock.
(c) Reorganization and Stock Split
Effective October 25, 1996, Cafe la france, Inc. a Rhode Island corporation
owning 100% of CLF2, Inc. and CLF Franchise Corporation, the Company's operating
subsidiaries, was merged with Cafe La France, Inc., a Delaware corporation. On
that date, each share of the stock in the Rhode Island corporation was exchanged
for 290 shares of common stock of Cafe La France, Inc., the Delaware
corporation. On March 6, 1997, the Company declared a five-for-four stock split
to be effected as a dividend. Except for the common stock balance at October 1,
1995 and prior, all share and per share data presented in the accompanying
consolidated financial statements have been restated to reflect the increased
number of authorized and outstanding shares of common stock.
(d) Warrants
In connection with the bridge financing (note 11) the Company issued a
warrant to purchase shares of common stock with each financing unit sold. The
number of shares to be received under the warrant is determined by dividing 75%
of the amount of each note by the price per share of common stock offered to the
public in an initial public offering. Each warrant shall become exercisable for
a period of 60 days commencing thirteen months after the successful completion
of an initial public offering of common stock by the Company at an exercise
price of $.01 per share.
(e) Stock Option Plans
In September 1996 the Board of Directors and shareholders established a
qualified Employee Stock Option Plan (the Plan) which provides for a maximum of
500,000 shares of common stock options to be granted to employees. Incentive
stock options to purchase 79,025 shares at $2.76 per share (the fair market
value at date of grant) have been granted to employees under the Plan (after
effect of stock split (note 7c)). The options vest over a three year period.
Under the Plan, no options are exercisable for a period of more than ten years
after date of grant. No options are exercisable at September 29, 1996.
The Company has also issued 72,500 non-qualified options to purchase shares
at $2.76 per share (the fair market value at date of grant) to two non-employee
consultants in connection with a private placement offering made by the Company
during 1996 (after effect of stock split (note 7c)). The options vested
immediately. No options have been exercised at September 29, 1996.
F-12
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) FINANCIAL INSTRUMENTS
The carrying values of the Company's long-term debt approximates their fair
values based on current interest rates of similar instruments and the majority
of the long-term debt fluctuating with the prime rate of interest. The carrying
values of the Company's other financial instruments at September 29, 1996,
including cash, accounts receivable, other current assets, accounts payable, and
accrued expenses approximate their fair values because of their short maturity.
(9) RELATED PARTY TRANSACTION
During 1995 the Company held a note receivable from a former president of
the Company. The note receivable in the amount of $37,772, was deemed
uncollectible and included as general and administrative expenses for the nine
months ended October 1, 1995. The Company also had notes receivable from two
franchisees, totaling $30,637, that were deemed uncollectible and expensed
during the nine months ended October 1, 1995.
(10) DEPENDENCE ON SUPPLIERS
The Company purchases all of its coffee products and most of its food
products from three main suppliers. The Company does not have any written supply
agreements with any of its suppliers. Although the Company believes its
suppliers have sufficient capacity to meet any increase in demand resulting from
the Company's growth strategy, a disruption in supply or degradation in quality
could have an adverse impact on the Company's business and financial results.
(11) SUBSEQUENT EVENTS
Subsequent to September 29, 1996, the Company obtained financing in the form
of unsecured promissory notes amounting to $154,063, bearing interest at 15% per
annum. The notes were due upon the earlier of (i) six months from the date of
the note, or (ii) ten days after the successful completion of an initial public
offering of common stock by the Company. The note payable of $69,816 at
September 29, 1996 (note 3) as well as the notes amounting to $154,063 were
prepaid without penalty with a portion of the proceeds of a bridge financing in
the amount of $600,000 closed by the Company in October and November 1996. The
bridge financing consisted of units of subordinated, unsecured promissory notes
in the principal amount of $25,000 each, bearing interest at the rate of 12% per
annum, and a non-transferable warrant exercisable for that number of shares of
the Company's common stock determined by dividing 75% of the amount of each note
by the price per share of the Company's common stock offered to the public in an
initial public offering of common stock by the Company. The principal and
interest payable under the notes are payable upon the earlier of (i) one year
from the date of each note, or (ii) ten days after the successful completion of
a firm commitment initial public offering of common stock by the Company. The
warrants were valued at $30,000 and the associated original issue discount of
the notes are being amortized to interest expense.
On November 30, 1996,the Company revoked the franchise license of one of its
franchisees. The Company is currently operating the location. On December 1,
1996, the Company closed its commissary. The commissary derived revenue and
incurred expenses primarily from the sale of food to franchises and intercompany
food sales and purchasing. Company owned restaurants and franchisees will
purchase food products from Cafe La France approved vendors based upon an
approved product listing on a go forward basis. On March 1, 1997, the Company
owned store adjacent to the commissary was franchised by the Company and the
entire space occupied by the store and commissary was subleased by the Company
to a franchisee.
F-13
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SUBSEQUENT EVENTS -- (CONTINUED)
On December 13, 1996, the President of the Company entered into an escrow
agreement whereby if the Company does not meet or exceed specific net earnings
goals in fiscal years 1998, 1999 and 2000, 300,000 shares owned by the
president, which are currently in escrow, will be permanently transferred to the
Company for a price of $.01 per share. In connection with the termination of an
agreement with an underwriter regarding an initial public offering by the
Company, the escrow agreement required by the former underwriter was terminated.
On March 5, 1997, the shares were returned to the President of the Company.
On February 11, 1997, the Company received notification from an underwriter
of the termination of an agreement with the Company to undertake a role as
managing underwriter in a proposed initial public offering of the Company. In
connection with this termination, the Company is liable for certain
out-of-pocket expenses incurred by the former underwriter, which are not
considered material.
On February 21, 1997, the Company entered into an operating lease agreement
for a restaurant facility. The lease term commences upon the eviction of a
current tenant and performance of certain renovations to the property by the
lessor and continues through January 31, 2008 with a minimum annual base rent of
$83,320. In the event the lessor is unable to complete the above requirements on
or before September 1, 1997, the Company and lessor have the right to terminate
the lease upon thirty days prior written notice to the other party.
On March 4, 1997, CLF 2, Inc. a wholly owned subsidiary of the Company,
entered into a loan agreement with a third party in the amount of $165,000
inclusive of interest. This loan is collateralized by a security interest in the
Company's assets used in one of its stores and the rights to operate a franchise
at such location, and a limited guaranty from the President of the Company
secured by a pledge of an amount of his stock in the Company. In the event of
default, the lender will be entitled to enter into a franchise agreement with
CLF Franchise Corporation, also a wholly owned subsidiary of the Company, for
operation of a franchise at the store location offered as collateral, and the
Company will waive the $15,000 initial franchise fee for this location. In
connection with this agreement, CLF Franchise Corporation has also agreed to
waive the applicable $15,000 initial franchise fee for one other franchise
location that is opened by the lender prior to March 4, 1998. In February and
March 1997, the Company obtained two short term unsecured loans from
non-affiliates aggregating $20,000 in principal and interest at the rate of 12%
per annum, which notes are due 90 days from their respective dates of issuance.
(12) PRO FORMA ADJUSTMENT TO THE FINANCIAL STATEMENTS
A pro forma adjustment has been made to the results of the nine months ended
October 1, 1995 to reflect additional compensation expense which would be deemed
to be paid to the President of the Company for that year.
(13) LIQUIDITY
The Company's consolidated financial statements for the year ended
September 29, 1996, have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company incurred a net loss of
$673,307 for the year ended September 29, 1996, and had an accumulated deficit
of $1,266,869 at September 29, 1996. The Company also had a working capital
deficit at September 29, 1996 of $640,351. Management recognizes that the
Company must generate additional resources or consider modifications to its
current business or other reductions in its operating costs to enable it to
continue operations with available resources. Management's plans include an
initial public offering of the Company's
F-14
CAFE LA FRANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) LIQUIDITY -- (CONTINUED)
common stock. During February 1997, management has made reductions in overhead
costs and has entered into agreements with certain employees to defer salaries
until such time that the Company completes a successful public offering or
achieves profitability. However, no assurances can be given that the Company
will be successful in raising additional capital, or obtaining substantial
increased profitability from its existing ten Company owned cafes and seven
franchise cafes. If the Company is unable to obtain adequate additional
financing or substantially increase profitability of its cafes, management will
be required to sharply curtail the Company's overhead structure.
F-15
INSIDE BACK COVER INFORMATION
THREE COLOR PHOTOS DEPICTING INTERIOR STORE LOCATION;
CAFE LA FRANCE LOGO; AND CAFE LA FRANCE PROMOTIONAL MATERIAL.
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES: (I) OTHER THAN THOSE
SPECIFICALLY OFFERED HEREBY, (II) IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, (III) IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, (IV) TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION,
OR (V) TO ANY PERSON WHO IS NOT A UNITED STATES RESIDENT OR WHO IS OUTSIDE THE
JURISDICTION OF THE UNITED STATES. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE AS
OF WHICH SUCH INFORMATION IS PROVIDED IN THIS PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary 3
Risk Factors 6
The Company 11
Use of Proceeds 12
Dividend Policy 13
Dilution 14
Selected Consolidated Financial Data 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16
Business 24
Management 34
Certain Transactions 39
Principal Stockholders 40
Description of Securities 41
Shares Available for Future Sale 43
Underwriting 44
Legal Matters 45
Experts 45
Additional Information 45
Index to Financial Statements F-1
</TABLE>
UNTIL , 1997 (90 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO)
UP TO 1,125,000 SHARES OF COMMON STOCK
----------
PROSPECTUS
----------
[LOGO)
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") affords a
Delaware corporation the power to indemnify its present and former directors and
officers under certain conditions. Article Twelfth of the Company's Certificate
of Incorporation provides that any person made a party to or otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter, a "proceeding"), by reason of the fact that such
person is or was a director or officer of the Company, or is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the DGCL against all expense, liability and loss, provided, however, that the
Company shall indemnify such person in any proceeding initiated by such person
only if such proceeding was authorized by the Directors of the Company. The
right of indemnification described herein includes the right to be paid expenses
incurred in defending any proceeding in advance of its final disposition,
provided that such person, if required by the DGCL, undertakes to repay all
amounts advanced if it shall be ultimately determined that such director or
officer is not entitled to be indemnified under Article Twelfth or otherwise.
Section 102(b)(7) of the DGCL gives a Delaware corporation the power to
adopt a charter provision eliminating or limiting the personal liability of
directors to the corporation or its stockholders for breach of fiduciary duty as
directors, provided that such provision may not eliminate or limit the liability
of directors for (i) any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) any acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) any
payment of a dividend or approval of a stock purchase that is illegal under
Section 174 of the DGCL, or (iv) any transaction from which the director derived
an improper personal benefit. Article Twelfth of the Company's Certificate of
Incorporation states that to the maximum extent permitted by Section 102(b)(7)
of the DGCL, no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages resulting from such director's
breach of fiduciary duty as a director of the Company, except for liability
involving one of the four exceptions described in (i) through (iv) above. In
addition, the Certificate of Incorporation provides that if the DGCL is amended
to authorize the further limitation or elimination of the liability of a
director, then the liability of the directors shall be eliminated or limited to
the fullest extent permitted by the DGCL, as so amended.
Section 145 of the DGCL also affords a Delaware corporation the power to
obtain insurance on behalf of its directors and officers against liabilities
incurred by them in those capacities. Article Twelfth of the Company's
Certificate of Incorporation provides that the Company may maintain insurance to
protect the Company and its directors and officers against expenses, liabilities
and losses whether or not the Company would have the power to indemnify such
person against such expense, liability or loss under the DGCL.
Reference is also made to of the Underwriting Agreement between the Company
and the Underwriter, filed as Exhibit 1 to this Registration Statement, for a
description of indemnification arrangements between the Company and the
Underwriter.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered other than the
underwriting discounts and commissions. All amounts shown are estimates except
the Securities and Exchange Commission registration fee, the NASD filing fee and
the NASDAQ listing application fee:
<TABLE>
<CAPTION>
ITEM AMOUNT
<S> <C>
SEC registration fee $ 4,440
NASD filing fee $ 1,965
NASDAQ listing application fee(1) $ 1,000
Blue Sky fees and expenses $ 22,500
Printing and engraving expenses(2) $ 40,000
Accounting fees and expenses $ 25,000
Legal fees and expenses $ 160,000
Transfer agent and registrar fee $ 1,000
Expenses of prior underwriter(1) $ 25,000
Miscellaneous $ 19,095
---------
Total $ 300,000
=========
</TABLE>
(1) Paid by the Company in December 1996 when the Offering was structured as a
"Firm Commitment" offering. See "UNDERWRITING."
(2) Includes Edgar filing service charges.
(3) Includes up to $12,000 of accountable expenses payable to the Underwriter.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following securities were sold by the
Registrant without registration under the Securities Act:
(a) During 1996, the Company completed a private offering of 12%
promissory notes (the "Notes") and common stock purchase warrants (the
"Bridge Warrants") to 13 accredited investors. The Bridge Warrants become
exercisable for $.01 per share for a period of 60 days beginning 13 months
after the successful completion of this Offering. The Bridge Warrants are
exercisable for a total of 112,500 shares of Common Stock in the Company.
The Company has agreed to file a registration statement to register the
resale of the shares acquirable upon exercise of the Bridge Warrants. The
Bridge Warrants are nontransferable and, prior to exercise, do not confer
upon their holders any voting or other rights as stockholders of the
Company.
(b) On various dates between October 6, 1995 and July 22, 1996, the
Company issued a total of 999.66 shares (the equivalent of 362,384
post-Reorganization shares of Company Common Stock) for an aggregate
purchase price of $1,000,000.
(c) On October 25, 1996, Cafe La France, Inc., a Rhode Island
corporation and holder of all of the outstanding stock of the Company's
operating subsidiaries, was merged with and into the Company in a tax-free
reorganization pursuant to the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Reorganization"). In connection with
the Reorganization, each existing stockholder in the Rhode Island
corporation received 290 shares of Common Stock in the Company in exchange
for each outstanding share of common stock of the Rhode Island corporation
owned thereby.
II-2
(d) On October 2, 1995, Mr. DeJordy contributed all of the outstanding
stock of the Company's operating subsidiaries, CLF2, Inc. and CLF Franchise
Corporation, to the Company in exchange for 3,375 shares (the equivalent of
1,223,438 post-Reorganization shares) of Common Stock of the Company.
The issuances described in Item 26(a) were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, as amended, and Regulation D thereunder, relating to sale of securities by
an issuer not involving any public offering. The issuances described in Item
26(b) were made in reliance upon the exemption under Section 4(2) of the
Securities Act relating to the sale of securities by an issuer not involving any
public offering and Rule 504 of Regulation D promulgated thereunder and under
Section 3(b) of the Securities Act. The exchanges described under Items 26(c)
and (d) did not involve "sales" subject to the registration requirements of the
Securities Act.
ITEM 27. EXHIBITS
The following exhibits are filed as part of this Registration
Statement with the Securities and Exchange Commission, pursuant to Item
601 of Regulation S-B. All exhibits refer to the Company unless otherwise
indicated.
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
------- -----
<S> <C>
1 -- Form of Underwriting Agreement and Selected Dealer Agreement
+2 -- Agreement and Plan of Merger and Reorganization
+3.1 -- Certificate of Incorporation, filed with the Delaware
Secretary of State on September 25, 1996
+3.2 -- By-Laws of the Company
4.1 -- Specimen Common Stock Certificate
+4.2 -- Form of Underwriter's Share Purchase Option
+4.5 -- Form of Bridge Warrant registration right (See Exhibit 10.16)
+4.6 -- Relevant portion of Article II and VII of By-Laws (included
in Exhibit 3.2)
5.1 -- Opinion of Duffy & Sweeney regarding the legality of the
securities offered
+10.1 -- 1996 Incentive Stock Option Plan
+10.2 -- Form of Incentive Stock Option Agreement for 1996 Incentive
Stock Option Plan
+10.3 -- Incentive Stock Option Agreement between the Company and
Robert G. King dated
November 1, 1996
+10.4 -- Form of Non Qualified Stock Option Agreement
+10.5 -- Employment Agreement with Thomas W. DeJordy dated November 1,
1996, as amended on February 1, 1997
+10.6 -- Employment Agreement with Robert G. King dated November 1,
1996, as amended on February 1, 1997
+10.7 -- Standard Form of Store Franchise Agreement
+10.8 -- Loan Agreement dated February 28, 1996 between the Company
and Home Loan and Investment Bank ("Home Loan")
+10.9 -- $350,000 Term Promissory Note dated February 28, 1996 issued
to Home Loan
+10.10 -- Security Agreement dated February 28, 1996 between the
Company and Home Loan
+10.11 -- Guaranty of CLF Franchise Corporation and CLF2, Inc.
+10.12 -- Security Agreement dated February 28, 1996 between Home Loan
and CLF2, Inc.
+10.13 -- Security Agreement dated 2/28/96 between Home Loan and CLF
Franchise Corporation
II-3
+10.14 -- Letter Agreement of Home Loan dated October 23, 1996
consenting to the Agreement and Plan of Merger and
Reorganization (See Exhibit 2 above)
+10.15 -- Form of 12% Subordinated Unsecured Promissory Note dated
October 31, 1996 and
November 15, 1996 evidencing $600,000 bridge loans to the
Company made on such dates
+10.16 -- Form of Non-Transferable Common Stock Purchase Warrants,
issued to purchasers of unsecured promissory notes dated
October 31, 1996 and November 15, 1996
+10.17 -- $165,000 Promissory Note of CLF2, Inc. dated March 5, 1996
+10.18 -- Security Agreement of CLF2, Inc. dated March 5, 1996
+10.19 -- Guaranty of Company dated March 5, 1997
+10.20 -- Letter Agreement of Home Loan consenting to $165,000 Note
(See Exhibit 10.17)
10.21 -- Lock-up Letter Agreement between Thomas W. DeJordy and the
Underwriter
11 -- Computation of Net Loss Per Share
+21.1 -- Subsidiaries of the registrant
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Duffy & Sweeney (included in Exhibit 5.1 to this
Registration Statement)
24.1 -- Power of Attorney -- Richard La France
27.1 -- Financial Data Schedule
</TABLE>
* To be filed by amendment.
+ Previously filed.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "securities Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Company hereby undertakes that, if relying on Rule 430A under the
Securities Act:
(1) for determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under Rule 424(b)(1) or (4), or 497(h) under
the Securities Act shall be treated as part of this Registration Statement
as of the time the Commission declared it effective.
(2) for determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be treated
as a new registration statement for the securities offered in this
Registration Statement and that offering of the securities at that time
shall be treated as the initial bona fide offering of those securities.
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED IN THE CITY OF PROVIDENCE, RHODE ISLAND ON APRIL 10, 1997.
CAFE LA FRANCE, INC.
By: /s/ THOMAS W. DEJORDY
---------------------------------
THOMAS W. DEJORDY,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND DIRECTOR
By: /s/ ROBERT G. KING
---------------------------------
ROBERT G. KING, CHIEF
FINANCIAL OFFICER,
TREASURER, PRINCIPAL
ACCOUNTING OFFICER AND
DIRECTOR
By: * RICHARD LAFRANCE
---------------------------------
RICHARD LAFRANCE, DIRECTOR
*By: /s/ THOMAS W. DEJORDY
--------------------------------
THOMAS W. DEJORDY,
ATTORNEY-IN-FACT
II-5
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1 -- Form of Underwriting Agreement and Selected Dealer Agreement
+2 -- Agreement and Plan of Merger and Reorganization
+3.1 -- Certificate of Incorporation, filed with the Delaware Secretary
of State on September 25, 1996
+3.2 -- By-Laws of the Company
4.1 -- Specimen Common Stock Certificate
+4.2 -- Form of Underwriter's Share Purchase Option
+4.5 -- Form of Bridge Warrant registration right (See Exhibit 10.16)
+4.6 -- Relevant portion of Article II and VII of By-Laws (included
in Exhibit 3.2)
5.1 -- Opinion of Duffy & Sweeney regarding the legality of the
securities offered
+10.1 -- 1996 Incentive Stock Option Plan
+10.2 -- Form of Incentive Stock Option Agreement for 1996 Incentive
Stock Option Plan
+10.3 -- Incentive Stock Option Agreement between the Company and
Robert G. King dated
November 1, 1996
+10.4 -- Form of Non Qualified Stock Option Agreement
+10.5 -- Employment Agreement with Thomas W. DeJordy dated November 1,
1996, as amended
+10.6 -- Employment Agreement with Robert G. King dated November 1,
1996, as amended
+10.7 -- Standard Form of Store Franchise Agreement
+10.8 -- Loan Agreement dated February 28, 1996 between the Company
and Home Loan and Investment Bank ("Home Loan")
+10.9 -- $350,000 Term Promissory Note dated February 28, 1996 issued
to Home Loan
+10.10 -- Security Agreement dated February 28, 1996 between the
Company and Home Loan
+10.11 -- Guaranty of CLF Franchise Corporation and CLF2, Inc.
+10.12 -- Security Agreement dated February 28, 1996 between Home Loan
and CLF2, Inc.
+10.13 -- Security Agreement dated 2/28/96 between Home Loan and CLF
Franchise Corporation
+10.14 -- Letter Agreement of Home Loan dated October 23, 1996
consenting to the Agreement and Plan of Merger and
Reorganization (See Exhibit 2 above)
+10.15 -- Form of 12% Subordinated Unsecured Promissory Note dated
October 31, 1996 and November 15, 1996 evidencing $600,000
debenture bridge loans to the Company made on such dates
+10.16 -- Form of Non-Transferable Common Stock Purchase Warrants,
issued to purchasers of unsecured promissory notes dated
October 31, 1996 and November 15, 1996
+10.17 -- $165,000 Promissory Note of CLF2, Inc. dated March 5, 1996
+10.18 -- Security Agreement of CLF2, Inc. dated March 5, 1996
+10.19 -- Guaranty of Company dated March 5, 1997
+10.20 -- Letter Agreement of Home Loan consenting to $165,000 Note
(See Exhibit 10.17)
10.21 -- Lock-up Letter Agreement between Thomas W. DeJordy and the
Underwriter
11 -- Computation of Net Loss Per Share
+21.1 -- Subsidiaries of the registrant
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Duffy & Sweeney (included in Exhibit 5.1 to this
Registration Statement)
24.1 -- Power of Attorney -- Richard La France
27.1 -- Financial Data Schedule
</TABLE>
* To be filed by amendment.
+ Previously filed.
EXHIBIT 1
UNDERWRITING AGREEMENT
between
CAFE LA FRANCE, INC.
and
EARNHARDT CO., INC.
Dated: April ____, 1997
CAFE LA FRANCE, INC.
UNDERWRITING AGREEMENT
MAXIMUM 1,125,000 SHARES COMMON STOCK, PAR VALUE $.01 PER SHARE
Providence, Rhode Island
April _____, 1997
Earnhardt Co., Inc.
Ten Abbott Park Place
Third Floor
Providence, RI 02903
Ladies and Gentlemen:
The undersigned, Cafe La France, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with Earnhardt Co., Inc. (being
referred to herein variously as "you" or the "Underwriter") as follows:
1. EMPLOYMENT OF UNDERWRITER.
1.1 EXCLUSIVE AGENCY. The Company hereby employs the Underwriter as its
exclusive agent to sell for the Company's account on a "best efforts basis" to
the public up to a maximum of 1,125,000 shares (the "Shares") of Common Stock,
$.01 par value (the "Common Stock"). The initial offering price of the Shares is
$4.00 per share. In reliance upon the representations and warranties and subject
to the terms and conditions hereof, the Underwriter agrees to use its best
efforts, as agent for the Company, promptly following the notice of the
effective date of the Registration Statement (as hereinafter defined) to sell up
to a maximum of 1,125,000 Shares. It is understood between the parties that the
Underwriter shall not be obligated to sell any Shares and shall only be
obligated to offer the Shares to the public on a best efforts basis, and that
there is no firm commitment by the Underwriter to purchase any or all of the
Shares.
1.2 TERMINATION OF AGENCY. The Company and the Underwriter agree that
the agency between the Company and the Underwriter will terminate on June 30,
1997 unless extended by the Company (without notice to investors) for up to an
additional 120 days (the date of such termination being hereinafter referred to
as the "Termination Date").
1.3 PAYMENT FOR SHARES. The Underwriter shall deliver to the Company
checks, and money orders from investors, and direct investors to send wire
transfers directly, to the Company for Shares. Funds received by the Company
shall be deposited in a separate non-interest bearing account restricted for the
purposes of this Agreement. Funds shall be releasable to the Company for its use
only as and with respect to Shares for which certificates are issued on a
Closing Date (as defined below). Once tendered, orders cannot be revoked or
funds returned without the consent of the Company. All orders for Shares will be
accepted or rejected by the Company by noon of the next business day following
their receipt and accompanying payment by the Company and payments accompanying
rejected orders will be promptly returned to investors upon their rejection.
1.4 DELIVERY OF SHARES. During the Offering Period, on such date or
dates as may be agreed upon by the Company and the Underwriter (each, a "Closing
Date"), which date shall not be more than five business days after the notice of
such closing by the Company or the Termination Date, as the case may be, the
Company shall deliver all Shares sold and paid for in good funds in accordance
with this Agreement and not theretofore delivered.
1.5 COMMISSIONS. The Underwriter shall receive a commission of ten
(10%) percent of the offering price for each of the Shares sold by the
Termination Date payable at each Closing Date.
1.6 SELECTED DEALERS. The Underwriter shall have the right to offer the
Shares through dealers of securities selected by it and to allow those dealers
concessions and discounts out of the commissions and/or the Underwriter's Share
Purchase Option (described below) to be received by the Underwriter, as the
Underwriter may determine.
1.7 UNDERWRITER'S SHARE PURCHASE OPTION.
1.7.1 SHARE PURCHASE OPTION. The Company hereby agrees to
issue and sell to the Underwriter (and/or its designees) at a purchase price of
$100 on the Closing Date an option ("Underwriter's Share Purchase Option") for
the purchase of an aggregate of 5% of the Shares sold pursuant to this
Agreement. The initial exercise price for the Shares covered by the
Underwriter's Share Purchase Option shall be $5.60 per share ("Underwriter's
Shares"), 140% of the public offering price of the Shares. The Underwriter's
Shares are identical to the Shares sold to the public. The Underwriter's Share
Purchase Option and the Underwriter's Shares are hereinafter referred to
collectively as the "Underwriter's Securities." The Shares sold to the public
and the Underwriter's Securities are hereinafter referred to collectively as the
"Securities".
1.7.2 PAYMENT AND DELIVERY. Delivery and payment for the
Underwriter's Share Purchase Option shall be made on the Termination Date. The
Company shall deliver to the Underwriter, upon payment therefor, one or more
Underwriter's Share Purchase Option(s) in the name or names and in such
authorized denominations as the Underwriter may request.
2
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to the Underwriter as follows (and as to those relating to the Company
includes as appropriate its subsidiaries):
2.1 FILING OF REGISTRATION STATEMENT.
2.1.1 PURSUANT TO THE ACT. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form SB-2 (Registration No. 333-18093),
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Shares under the Securities Act of 1933, as amended ("Act"),
which registration statement and amendment or amendments have been prepared by
the Company in conformity with the requirements of the Act, and the rules and
regulations ("Regulations") of the Commission under the Act. Except as the
context may otherwise require, such registration statement, as amended, on file
with Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof incorporated therein and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430A of the Regulations), and as the same may be thereafter amended, is
hereinafter called the "Registration Statement," and the form of the final
prospectus dated the Effective Date (or, if applicable, the form of final
prospectus filed with the Commission pursuant to Rule 424 of the Regulations),
and as the same may be thereafter amended or supplemented, is hereinafter called
the "Prospectus." The Registration Statement has been declared effective by the
Commission on the date hereof. The Company is eligible to use Form SB-2 under
the Act.
2.1.2 PURSUANT TO THE EXCHANGE ACT. If required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company
will file a retroactive statement thereunder for the Shares. The Company will
use its best efforts to have such registration statement declared effective by
the Commission as soon as practicable after the date of filing.
2.2 NO STOP ORDERS, ETC.. Neither the Commission nor, to the best of
the Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the company's knowledge, threatened to institute any
proceedings with respect to such an order.
2.3 DISCLOSURE IN REGISTRATION STATEMENT.
2.3.1 10B-5 REPRESENTATION. At the time the Registration
Statement became effective and at all times subsequent thereto up to each
Closing Date and during such period as the Prospectus may be required to be
delivered in connection with sales by the Underwriter or a dealer, the
Registration Statement and the Prospectus will contain all material statements
which are required to be stated therein in accordance with the Act and the
Regulations, and will in all material respects conform to the requirements of
the Act and the Regulations; neither the
3
Registration Statement nor the Prospectus, nor any amendment or supplement
hereto, on such dates, will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, not misleading. When any Preliminary Prospectus was
first filed with the Commission (whether filed as part of the Registration
Statement for the registration of the Securities or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or
supplement thereto was or are first filed with the Commission, such Preliminary
Prospectus and any amendment thereof and supplements thereto complied or will
comply in all material respects with the applicable provisions of the Act and
the Regulations and did not and will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The representation and
warranty made in this Section 2.3.1 does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriter by the Underwriter
expressly for use in the Registration Statement or Prospectus or any amendment
thereof or supplement thereto.
2.3.2 DISCLOSURE OF CONTRACTS. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement, which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Prospectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, and none of such contracts or instruments has been
assigned by the Company, and neither the Company nor, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder. None of
the material provisions of such contracts or instruments violates or will result
in a violation of any existing applicable law, rule, regulation, judgment, order
or decree of any governmental agency or court having jurisdiction over the
Company or any of its respective assets or businesses, including, without
limitation, those relating to environmental laws and regulations. The Company
knows of no situation, condition or circumstance that would prevent compliance
by any party with respect to such contract or instrument.
2.3.3 PRIOR SECURITIES TRANSACTIONS. No securities of the
Company have been sold by the Company within the three years prior to the date
hereof, except as disclosed in the Registration Statement.
2.4 RECENT SECURITIES TRANSACTIONS, ETC. Subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, and except as may
4
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money; or (ii) declared or paid any dividend or made
any other distribution on or in respect to its capital stock.
2.5 INDEPENDENT ACCOUNTANTS. KPMG Peat Marwick, LLP, whose report is
filed with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 FINANCIAL STATEMENTS. The financial statements, including the notes
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position, the results of operations and
the stockholders' equity and cash flows of the Company and its consolidated
subsidiaries at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved, and
the Regulations; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Termination Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on each Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquired any authorized but unissued shares of Common Stock of the Company or
any security convertible or exchangeable into shares of Common Stock of the
Company, or any contracts or commitments to issue or sell shares of Common Stock
or an such options, warrants, rights or convertible or exchangeable securities.
2.8 VALID ISSUANCE OF SECURITIES; ETC.
2.8.1 OUTSTANDING SECURITIES. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no known rights of
rescission with respect thereto, and are not subject to personal liability by
reason of being such holders; and none of such securities were issued in
violation of any contractual rights granted by the Company. The outstanding
options and rights to purchase shares of Common Stock constitute the valid and
binding obligations of the Company enforceable in accordance with their terms.
The authorized Common Stock and outstanding options and rights to purchase
shares of Common Stock conform to all statements relating thereto contained in
the Registration Statement and the Prospectus.
2.8.2 SHARES SOLD PURSUANT TO THIS AGREEMENT. The Shares have
been duly authorized and, when issued and paid for, will be validly issued,
fully paid and non-assessable; the holders thereof are not and will not be
subject to personal liability by reason of being such
5
holders; the Shares are not and will not be subject to any contractual rights
granted by the Company; and all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Underwriter's Share Purchase Option will constitute the
valid and binding obligation of the Company to issue and sell, upon exercise
thereof and payment therefor, the number and type of securities of the Company
called for thereby, and the Underwriter's Share Purchase Option is enforceable
against the Company in accordance with its terms, except (i) as enforceability
may be limited by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally, (ii) as enforceability of any
indemnification provision may be limited under federal and state securities
laws, and (iii) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
2.8.3 SHARE PURCHASE OPTION. The Underwriter's Share Purchase Option
has been duly authorized and, when duly issued and delivered, will constitute
valid and legally binding obligations of the Company enforceable in accordance
with their terms. The Underwriter's Shares have been duly authorized and, when
issued and sold, upon receipt of the proper consideration therefor, will be
validly issued, fully paid and non-assessable and free of preemptive rights and
no personal liability will attach to the ownership thereof.
2.9 REGISTRATION RIGHTS OF THIRD PARTIES. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
other rights of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration to be filed by the Company.
2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS. This Agreement has been
duly and validly authorized by the Company and constitutes the valid and binding
agreements of the Company, enforceable against the Company in accordance with
its terms, except (i) as enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (ii) as enforceability of any indemnification provision may be
limited under federal and state securities laws, and (iii) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to discretion of the court before which any
proceeding therefor may be brought.
2.11 NO CONFLICTS, ETC. The execution, delivery, and performance by the
Company of this Agreement, and the Share Purchase Option and the consummation by
the Company of the transactions herein and therein contemplated and the
compliance by the Company with the terms hereof and thereof do not and will not,
with or without the giving of notice or the lapse of time or both, (i) result in
a breach of, or conflict with any of the material terms and provisions of, or
constitute a default under, or result in the creation, modification, termination
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company pursuant to the terms of, any indenture, mortgage, deed of trust,
note, loan or credit agreement
6
or any other agreement or instrument to which the Company is a party or by which
the Company may be bound or to which any of the property or assets of the
Company is subject; (ii) result in any violation of the provisions of the
Certificate of Incorporation or the By-Laws of the Company; (iii) violate any
existing applicable law, rule, regulation, judgment, injunction, order or decree
of any governmental agency or other authority or of any court domestic or
foreign, having jurisdiction over the Company or any of its properties or
business; or (iv) have a material adverse effect on any permit, license,
certificate, registration, approval, consent, license or franchise concerning
the Company.
2.12 NO DEFAULTS; VIOLATIONS. Except as described in the Prospectus, no
default exists in the due performance and observance of any material license,
contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or
any other agreement or instrument to which the Company is a party or by which
the Company may be bound or to which any of the properties or assets of the
Company is subject. The Company is not in violation of any term or provision of
its Certificate of Incorporation or By-Laws or in violation of any franchise,
license, permit, applicable law, rule, regulation, judgment or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or any of its properties or business, except as described in the
Prospectus.
2.13 CORPORATE POWER; LICENSES; CONSENTS.
2.13.1 CONDUCT OF BUSINESS.. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own or lease it properties and conduct its
business as described in the Prospectus, and the Company is and has been doing
business in compliance with all such material authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local laws, rules
and regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
2.13.2 TRANSACTIONS CONTEMPLATED HEREIN. The Company has all
corporate power and authority to enter into this Agreement and the Share
Purchase Option and to carry out the provisions and conditions hereof and
thereof, and all consents, authorizations, approvals and orders required in
connection therewith have been obtained. No consent, authorization or order of,
and no filing with, any court government agency or other body is required for
the valid issuance, sale and delivery, of the Securities pursuant to this
Agreement and the Underwriter's Share Purchase Option, and as contemplated by
the Prospectus, or in connection with the Company's compliance with other
provisions thereto and thereof except with respect to applicable federal and
state securities laws.
2.14 TITLE TO PROPERTY; INSURANCE. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security
7
interests, defects and restrictions of any material nature whatsoever, other
than those referred to in the Prospectus and liens for taxes not yet due and
payable. The Company has adequately insured its properties against loss or
damage by fire or other casualty and maintains, in adequate amounts, such other
insurance as is usually maintained by companies engaged in the same or similar
business.
2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. There is no action, suit,
proceeding, inquiry, arbitration, investigation, litigation or governmental
proceeding pending or threatened against, or involving the properties or
business of, the Company which might materially and adversely affect the
financial position, prospects, value or the operation or the properties of the
business of the Company, or which question the validity of the capital stock of
the Company or this Agreement or of any action taken or to be taken by the
Company pursuant to, or in connection with, this Agreement. There are no
outstanding orders, judgments, injunctions or decrees of any court, arbitration
or other tribunal or governmental agency or other authority naming the Company
and enjoining the Company from taking, or requiring the Company to take, any
action, or to which the Company, its properties or business is bound or subject.
2.16 GOOD STANDING. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which ownership or leasing of
any properties or the character of its operations requires such qualification or
licensing, except where the failure to qualify would not have a material adverse
effect on the Company.
2.17 TAXES. The Company has filed and will file all returns (as
hereinafter defined) required to be filed with taxing authorities prior to the
date hereof or has duly obtained extensions of time for the filing thereof. The
Company has paid all taxes (as hereinafter defined) shown as due on such returns
that were filed and has paid all taxes imposed on or assessed against the
Company. The provisions for taxes payable, if any, shown on the financial
statements filed with or as a part of the Registration Statement are sufficient
for all accrued and unpaid taxes, whether or not disputed, and for all periods
to and including the dates of such financial statements. Except as disclosed in
writing to the Underwriter, (i) no issues have been raised (and are currently
pending) by any taxing authority in connection with any of the returns or taxes
asserted as due from the Company, and (ii) no waivers of statutes of limitation
with respect to the returns or collection of taxes have been given by or
requested from the Company. The term "taxes" mean all federal, state, local
foreign, and other net income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties or other taxes, fees, assessments,
or charges of any kind whatever, together with any interest and any penalties,
additions to tax, or additional amounts with respect thereto. The term "returns"
means all returns, declarations, reports, statements, and other documents
required to be filed in respect to taxes.
8
2.18 EMPLOYEES' OPTIONS. Except as described in the Prospectus, the
Company has no employee stock option or similar plans relating to employee
acquisitions of Common Stock or other securities of the Company.
2.19 TRANSACTIONS AFFECTING DISCLOSURE TO NASD.
2.19.1 FINDER'S FEES. Except as disclosed in the Registration Statement
or disclosed to the Underwriter in writing, there are no claims, payments,
issuances, arrangements or understandings for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuances
with respect to the Company that may affect the Underwriter's compensation, as
determined by the National Association of Securities Dealers, Inc. ("NASD").
2.19.2 PAYMENTS WITHIN TWELVE MONTHS. Except as disclosed in
the Registration Statement or to the Underwriter in writing, the Company has not
made any direct or indirect payments (in cash, securities or otherwise) to (i)
any person, as a finder's fee, investing fee or otherwise, in consideration of
such person raising capital for the Company or introducing to the Company
persons who provided capital to the Company, (ii) to any NASD member, or (iii)
to any person or entity that has any direct or indirect affiliation or
association with any NASD member within the twelve month period prior to the
date on which the Registration Statement was filed with the Commission ("Filing
Date") or thereafter.
2.19.3 USE OF PROCEEDS. None of the net proceeds of the
offering will be paid by the Company to any participating NASD member or any
affiliate or associate of any NASD member, except as specifically disclosed in
the Registration Statement.
2.19.4 INSIDER'S NASD AFFILIATION. Except as disclosed in the
Registration Statement or disclosed to the Underwriter in writing, no officer or
director of the Company or owner of any of the Company's unregistered securities
has any direct or indirect affiliation or association with any NASD member. The
Company will advise the Underwriter and the NASD if any holder of the Company's
unregistered securities becomes an affiliate or associated person of an NASD
member participating in the offering.
2.20 RELATIONS WITH EMPLOYEES.
2.20.1 EMPLOYEE MATTERS. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws or regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company, and none has ever
occurred. No question concerning representation
9
exists respecting the employees of the Company and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company, if any.
2.20.2 EMPLOYEE BENEFIT PLANS. Except as disclosed in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," and "employee welfare benefit plan," or a
"multi-employer plan" as such terms are defined in Section 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not, and has at no time, maintained
or contributed to a defined benefit plan, as defined in Section 3(35) of ERISA.
No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Internal Revenue Code of 1986, as amended ("Code") which could subject the
Company to any tax penalty for prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all material
reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. The Company has never completely or partially
withdrawn from a "multi-employer plan."
2.20.3 OFFICERS' CERTIFICATE. Any certificate signed by any
duly authorized officer of the Company and delivered to you or to your counsel
shall be deemed a representation and warranty by the Company to the Underwriter
as to the matters covered thereby.
2.21 AGREEMENTS WITH INSIDERS.
2.21.1 LOCK-UP AGREEMENTS. The Company has caused to be duly
executed a legally binding and enforceable agreement pursuant to which certain
of the officers, directors and principal stockholders of the company
(collectively, "Insiders"), agree not to sell any shares of Common Stock owned
by them (either pursuant to Rule 144 of the Regulations or otherwise) for a
period of 13 months following the Effective Date except with the consent of the
Underwriter.
2.21.2 CERTAIN TRANSACTIONS. Except as set forth in the
Prospectus, no officer, director, stockholder, or key employee of the Company,
or any "affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells service or products which are
furnished or sold or are proposed to be furnished or sold by the Company or (B)
purchases from or sells or furnishes to the Company any goods or services or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in the
Prospectus under "Certain Transactions," there are no existing agreements,
arrangements, understandings or
10
transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company and any officer, directors,
stockholders, or key employee of the Company or affiliate or associate of any of
the foregoing persons or entities.
2.22 SUBSIDIARIES. Except as disclosed in the Registration Statement,
the Company does not have any subsidiaries, and has no interests either directly
or indirectly in other entities including, but not limited to, corporations,
partnerships, trusts, joint ventures or other business entities.
2.23 NO OTHER OFFERINGS. The Company is no currently offering any other
securities, nor has it offered or sold any securities during the past three (3)
years, except as described in the Registration Statement.
2.24 CORPORATE MINUTES. The minute books of the Company have been made
available to the Underwriter and Underwriter's counsel and contain a complete
summary of all meetings and actions of the directors and stockholders of the
Company, respectively, since the time of its respective incorporation and
reflect all transactions referred to in such minutes accurately in all material
respects.
2.25 INVESTMENT COMPANY ACT. The Company is not now, and after the sale
of the Shares and the application of the net proceeds from such sales as
described in the Prospectus under the caption "Use of Proceeds," the Company
will not be, an "investment company" or an affiliated person of, or "promoter"
or "principal underwriter" for, or an entity "controlled" by an investment
company, within the meaning of the Investment Company Act of 1940, as amended
(the "Investment Company Act").
3. COVENANTS OF THE COMPANY. The Company covenants and agrees as follows:
3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company will deliver to
the Underwriter, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the Underwriter
shall reasonably object.
3.2 FEDERAL SECURITIES LAWS.
3.2.1 COMPLIANCE. During the time when a Prospectus is
required to be delivered under the Act, the Company will use all reasonable
efforts to comply with all requirements imposed upon it by the Act, the
Regulations and the Exchange Act and by the regulations under the Exchange Act,
as from time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Shares in accordance with the provisions hereof and
of the Prospectus. If at any time when a Prospectus relating to the Shares is
required to be delivered under the Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
11
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company will
notify the Underwriter promptly and prepare and file with the Commission,
subject to Section 3.1 hereof, an appropriate amendment or supplement in
accordance with Section 10 of the Act.
3.2.2 FILING OF FINAL PROSPECTUS. The Company will file the
Prospectus (in form and substance satisfactory to the Underwriter) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.3 BLUE SKY FILING. The Company will endeavor in good faith, in
cooperation with the Underwriter, at or prior to the time the Registration
Statement becomes effective, to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as the Underwriter may reasonably
designate, provided that such qualification shall not be required in any
jurisdiction where, as a result thereof, the Company would be subject to service
of general process or to taxation as a foreign corporation doing business in
such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may be required by the
laws of such jurisdiction.
3.4 DELIVERY TO THE UNDERWRITER OF PROSPECTUSES. The Company will
deliver to the Underwriter, without charge, from time to time during the period
when the Prospectus is required to be delivered under the Act or the Exchange
Act such number of copies of each Preliminary Prospectus and the Prospectus as
the Underwriter may reasonably request and, as soon as the Registration
Statement or any amendment or supplement thereto becomes effective, deliver to
you two original executed Registration Statements, including exhibits, and all
post-effective amendments thereto and copies of all exhibits filed therewith or
incorporated therein by reference and all original executed consents of
certified experts.
3.5 EVENTS REQUIRING NOTICE TO THE UNDERWRITER. The Company will notify
the Underwriter immediately and confirm the notice in writing (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Shares for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose, (iv) of the
mailing and delivery to the Commission for filing of any amendment or supplement
to the Registration Statement or Prospectus, (v) of the receipt of any comments
or request for any additional information from the Commission, and (vi) of the
happening of any event during the period described in Section 3.4 hereof which,
in the judgment of the Company, renders the current Registration Statement or
the Prospectus untrue and which requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. If the Commission or any state
12
securities commission shall enter a stop order or suspend such qualification at
any time, the Company will make every reasonable effort to obtain promptly the
lifting of such order.
3.6 UNAUDITED FINANCIALS. The Company will furnish to the Underwriter
as early as practicable subsequent to the date hereof and at least three full
business days prior to the Termination Date, a copy of the latest available
unaudited interim financial statements ("Unaudited Financials") of the Company
(which in no event shall be as of a date more than thirty days prior to the
Effective Date).
3.7 UNDERWRITER'S SHARE PURCHASE OPTION. On the Termination Date, the
Company will execute and deliver the Underwriter's Share Purchase Option to the
Underwriter substantially in the form filed as an exhibit to the Registration
Statement.
3.8 PAYMENT OF EXPENSES. The Company hereby agrees to pay on each
Closing Date all expenses incident to the performance of the obligations of the
Company under this Agreement which are then unpaid, including but not limited to
(i) the preparation, printing, filing and delivery of the Registration
Statement, the Prospectus and the Preliminary Prospectuses and the printing and
mailing of this Agreement and related documents, including the cost of all
copies thereof and any amendments thereof or supplements thereto supplied to the
Underwriter in quantities as may be required by the Underwriter, (ii) the
printing, engraving, issuance and delivery of the Shares and the Underwriter's
Share Purchase Option, including any transfer or other taxes payable thereon,
(iii) the qualification of the Shares under state or foreign securities or Blue
Sky laws, including the filing fees under such Blue Sky laws, the costs of
printing and mailing the "Preliminary Blue Sky Memorandum," and all amendments
and supplements thereto, (iv) fees and disbursements of the transfer agent, (v)
any listing of the Shares on the Bulletin Board or Nasdaq and (vi) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section 3.8. The
Company further agrees to reimburse the Underwriter for reasonable actual
accountable out-of-pocket expenses not to exceed $12,000.
3.9 APPLICATION OF NET PROCEEDS. The Company will apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "USE OF PROCEEDS" in the Prospectus. The
Company will file such reports with the Commission with respect to the sale of
the Shares and the application of the proceeds therefrom as may be required
pursuant to Rule 463 under the Act and will file with the appropriate state
securities administrators any sales or other reports required by the rules and
regulations of such states, and will supply copies of all such reports to the
Underwriter.
3.10 DELIVERY OF EARNINGS STATEMENT TO SECURITY HOLDERS. The Company
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month following
the Effective Date (and confirm to the Underwriter it has done so), an earnings
statement (which need not be certified by an independent public or independent
certified public accountants unless required by the Act or the
13
Regulations, but which shall satisfy the provisions of Rule 158(a) under Section
11(a) of the Act) covering a period of at least twelve consecutive months
beginning after the Effective Date.
3.11 STABILIZATION. Neither the Company, nor, to its knowledge, any of
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares.
3.12 INTERNAL CONTROLS. The Company has maintained, maintains and will
continue to maintain a system of internal accounting controls sufficient to
provide reasonable assurances that: (i) transactions are executed in accordance
with management's general or specific authorization, (ii) transactions are
recorded as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.13 KEY MAN INSURANCE. Thomas W. DeJordy shall be President of the
Company on each Closing Date. Prior to the first Closing Date, the Company will
have obtained key person life insurance on the life of Mr. DeJordy in an amount
of not less than $1,000,000 and will use its best efforts to maintain such
insurance during the five year period commencing with the first Closing Date.
3.14 REPORTS. During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders (but only to the extent required by
any exchange or interdealer quotation system on which the Company's securities
are then traded or quoted) annual reports (including financial statements
audited by independent public accountants) and unaudited quarterly reports of
earnings, and will deliver to the Underwriter:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in
the form furnished to the Company's stockholders;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity and cash flow of the Company for such fiscal year,
accompanied by a copy of the report thereon of independent certified
public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
14
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
NASD, Bulletin Board or any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company which was released or prepared by or on behalf of the Company;
and
(vi) any additional information of a public nature concerning
the Company (and any future subsidiaries) or its businesses which the
Underwriter may reasonably request.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and such subsidiaries are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
3.15 TRANSFER AGENT. The Company will maintain a transfer agent (the
"Transfer Agent") and, if necessary under the laws of the jurisdiction of
incorporation of the Company, a registrar (which may be the same entity as the
Transfer Agent) for the Common Stock.
4. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to sell the Shares on a "best efforts" basis, as provided herein,
shall be subject to the continuing accuracy of the representations and
warranties of the Company as of the date hereof and until the Termination Date,
to the accuracy of the statements of officers of the Company made pursuant to
the provisions hereof and to the performance by the Company of its obligations
hereunder and to the following conditions:
4.1 REGULATORY MATTERS.
4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The
Registration Statement shall have become effective not later than 10:00 a.m. New
York time on the day following the date of this Agreement or such later date and
time as shall be consented to in writing by you, and, at each Closing Date, no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for such purpose shall have been instituted or
shall be pending or contemplated by the Commission and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of the Underwriter.
4.1.2 NO BLUE SKY STOP ORDERS. No order suspending the sale of
the Securities in any jurisdiction designated by you pursuant to Section 3.3
hereof shall have been issued on the Closing Date, and no proceedings for that
purpose shall have been instituted or shall be contemplated.
15
4.2 CLOSING DATE OPINION OF COUNSEL. On each Closing Date, the
Underwriter shall have received the opinion of Duffy & Sweeney, counsel to the
Company, dated the Closing Date, addressed to the Underwriter and in form and
substance satisfactory to the Underwriter.
4.3 OFFICERS' CERTIFICATES.
4.3.1 OFFICERS' CERTIFICATE. At each Closing Date, the
Underwriter shall have received a certificate of the Company signed by the
President of the company, dated such Closing Date, to the effect that the
Company has performed all covenants and complied with all conditions required by
this Agreement to be performed or complied with by the Company prior to and as
of such Closing Date, and that the conditions set forth in Section 4.4 hereof
have been satisfied as of such date and that, as of such Closing Date, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the Underwriter will have received such other and
further certificates of officers of the Company as the Underwriter may
reasonably request.
4.3.2 SECRETARY'S CERTIFICATE. At each Closing Date, the
Underwriter shall have received a certificate of the Company signed by the
Secretary of the Company, dated such Closing Date, certifying (i) that the
By-Laws and Certificate of Incorporation, as amended, of the Company are true
and complete, have not been modified and are in full force and effect, (ii) that
the resolutions relating to the public offering contemplated by this Agreement
are in full force and effect and have not been modified, (iii) all
correspondence between the Company or its counsel and the Commission, (iv) all
correspondence between the Company or its counsel and the Bulletin Board
concerning inclusion on Bulletin Board and (v) as to the incumbency of the
officers of the Company. The documents referred to in such certificate shall be
attached to such certificate.
4.4 NO MATERIAL CHANGES. Prior to and on each Closing Date, (i) there
shall have been no material adverse change or development involving a
prospective material change in the condition, financial or otherwise, or
prospects or the business activities, of the Company from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus,
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is materially adverse to the Company, (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness which default would have a material adverse effect on
the Company, (iv) no material amount of the assets of the Company shall have
been pledged or mortgaged, except as set forth in the
16
Registration Statement and Prospectus, (v) no action, suit or proceeding, at law
or in equity, shall have been pending or threatened against the Company or
affecting any of its property or business before or by any court or federal or
state commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except as
set forth in the Registration Statement or Prospectus, (vi) no stop order shall
have been issued under the Act and no proceedings therefor shall have been
initiated or threatened by the Commission, and (vii) the Registration Statement
and the Prospectus and any amendments or supplements thereto contain all
material statements which are required to be stated therein in accordance with
the Act and the Regulations and conform in all material respects to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
4.5 OPINION OF COUNSEL FOR THE UNDERWRITER. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to the
Underwriter, and you shall have received from such counsel as you may choose any
requested favorable opinion, dated the Closing Date with respect to such of
these proceedings as you may reasonably require. On or prior to the Effective
Date and each Closing Date, the Underwriter or counsel for the Underwriter shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.5, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligation of the Company
to sell and deliver the Shares is subject to the following conditions at each
Closing Date:
5.1 The Registration Statement shall have become effective not later
than 10:00 a.m. New York time, on the day following the date of this Agreement,
or on such later date as the Company and the Underwriter may agree in writing.
5.2 No stop orders suspending the effectiveness of the Registration
Statement shall have been issued under the Act or any proceedings therefor
initiated or threatened by the Commission.
6. INDEMNIFICATION.
6.1 INDEMNIFICATION OF THE UNDERWRITER.
6.1.1 GENERAL. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless the Underwriter, its directors,
officers, agents and employees and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever) to which they or any of them may become subject under the Act, the
Exchange Act or any other statute or common law or
17
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement of a material fact contained in (i) any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time to time
each may be amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement or prospectus in which is included
securities of the Company issued or issuable upon exercise of the Underwriter's
Share Purchase Option; or (iii) any application or other document or written
communication (in this Section 6, collectively called "application") executed by
the Company or based upon written information furnished by the Company in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
NASD, Bulletin Board or any securities exchange, or the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading, unless such statement or omission
was made in reliance upon, and in strict conformity with, written information
furnished to the Company with respect to the Underwriter by or on behalf of the
Underwriter expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment or supplement thereof, or in any
application, as the case may be. The Company agrees promptly to notify the
Underwriter of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the issue and sale of the Securities or in connection with the Registration
Statement or Prospectus. The indemnity obligations of the Company in the Section
6.1.1 shall be in addition to the obligations which the Company may have under
common law or otherwise.
6.1.2 PROCEDURE. If any action is brought against the
Underwriter or controlling person in respect of which indemnity may be sought
against the Company pursuant to Section 6.1.1, the Underwriter shall promptly
notify the Company in writing of the institution of such action and the Company
shall assume the defense of such action, including the employment of counsel
(subject to the approval of the Underwriter) and payment of actual expenses. The
failure of the Underwriter to notify the Company shall not relieve the Company
of liability to the Underwriter pursuant to such notice unless the Company is
materially prejudiced by such failure. The Underwriter or controlling person
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of the Underwriter
or such controlling person unless (i) the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action, or (ii) the Company shall not have employed counsel to have charge of
the defense of such action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to the Company (in
which case the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
the fees and expenses of not more than one additional firm of attorneys selected
by the Underwriter and/or controlling person shall be borne by the Company.
Notwithstanding anything to the contrary contained herein, if the Underwriter or
controlling person shall assume the defense of such action as provided above,
the Company shall have the right to approve the terms of any settlement of such
action, with the Underwriter's consent, which shall not be unreasonably
withheld.
18
6.2 INDEMNIFICATION OF THE COMPANY. The Underwriter agrees to indemnify
and hold harmless the Company, its directors, officers, agents and employees and
each person, if any, who control the Company ("controlling person") within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
any and all loss, liability, claim, damage and expense described in the
foregoing indemnity from the Company to the Underwriter, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, directly relating to the transactions effected by the Underwriter in
connection with this offering made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
in any application in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in such Preliminary Prospectus, the
Registration Statement of Prospectus or any amendment or supplement thereto or
in any application in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
in any such application. In case any action shall be brought against the Company
or any other person so indemnified based on any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
any application, and in respect of which indemnity may be sought against the
Underwriter, the Underwriter shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the Underwriter by the provisions of Section 6.1.2.
6.3 CONTRIBUTION.
6.3.1 CONTRIBUTION RIGHTS. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 6 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 6 provides for indemnification in such case, or (ii) contribution
under the Act, the Exchange Act or otherwise may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 6, then, and in each such case, the Company and the Underwriter shall
contribute to the aggregate losses, liabilities, claims, damages and expenses in
such proportions that the Underwriter is responsible for ten percent (10%) and
the Company is responsible for the balance. If such allocation is not permitted
by applicable law, such losses, liabilities, claims, damages, and expenses shall
be allocated (A) in such proportion as is appropriate to reflect the relative
benefits received by each of the contributing parties, on the one hand, and the
party to be indemnified on the other hand, from the offering of the Shares or
(B) if the allocation provided by clause (A) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (A) above but also the relative fault of
each of the contributing parties, on the one hand, and the
19
party to be indemnified, on the other hand, in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Notwithstanding the provisions of this
Section 6.3, the Underwriter shall not be required to contribute any amount in
excess of the amount by which (i) the total price at which the Shares
distributed to the public were offered and sold to the public exceeds (ii) the
sum of (x) the amount of any damages which the Underwriter has otherwise been
required to pay in respect of such losses, liabilities, claims, damages and
expenses and (y) the Underwriter's proportionate share of such losses,
liabilities, claims, damages and expenses. For the purposes of this Section,
each director, officer and employee of the Underwriter, and each person, if any,
who controls the Underwriter within the meaning of Section 15 of the Act shall
have the same rights to contributions as the Underwriter.
6.3.2 CONTRIBUTION PROCEDURE. Within fifteen days after
receipt by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party or its representative of the commencement thereof within
the aforesaid fifteen days, the contributing party will be entitled to
participate therein with the notifying party and any other contributing party
similarly notified. Any such contribution party shall not be liable to any party
seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution on account of any
settlement of any claim, action or proceeding which was effected by such party
without the written consent of such contributing party which consent shall not
be unreasonably withheld. The contribution provisions contained in this Section
are intended to supersede, to the extent permitted by law, any right to
contribution under the Act, the Exchange Act or otherwise available.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at each Closing Date and such representations, warranties and
agreements of the Underwriter and the Company, including the indemnity agreement
contained in Section 6 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Underwriter,
the Company or any controlling person and shall survive termination of this
Agreement or the issuance and delivery of the Securities until the earlier of
the expiration of any applicable statute of limitations and the third
anniversary of the applicable Closing Date, at which time the representations,
warranties and agreement shall terminate and be of no further force and effect.
20
8. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
8.1 EFFECTIVE DATE. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective. You may prevent this Agreement from becoming effective without
liability to any other party, except as noted below, by giving the notice
indicated below in this Section 8 before the time this Agreement becomes
effective.
8.2 TERMINATION. You shall have the right to terminate this Agreement
at any time, (i) if any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, general securities markets in the United States; or (ii) if trading on
the New York Stock Exchange, the American Stock Exchange, The Boston Stock
Exchange, the Bulletin Board or otherwise in the over-the-counter market shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been fixed, or
maximum ranges for prices for securities shall have been required by the NASD or
by order of the Commission or any other government authority having
jurisdiction, or (iii) if the United States shall have become involved in a war
or major hostilities, or (iv) if a banking moratorium has been declared by a New
York state or federal authority, or (v) if a moratorium on foreign exchange
trading has been declared which materially adversely impacts the United States
securities market, or (vi) if the Company shall have sustained a material loss
by fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have been
insured, will, in your opinion, make it inadvisable to proceed with the of the
Securities, or (vii) if Thomas W. DeJordy shall no longer serve the Company in
his present capacity, or (viii) if the Company has breached any of its
representations, warranties, or obligations hereunder, or (ix) if the
Underwriter shall have become aware after the date hereof of such a material
adverse change in the condition (financial or otherwise), business, or prospects
of the Company, or such adverse material change in general market conditions, as
in the Underwriter's sole judgment would make it impracticable to proceed with
the offering, sale and/or delivery of the Securities.
8.3 NOTICE. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 8, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
8.4 INDEMNIFICATION. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement,
and whether or not this Agreement is otherwise carried out, the provisions of
Section 6 shall not be in any way affected by, such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
21
9. MISCELLANEOUS.
9.1 NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed as follows:
If to the Underwriter: Earnhardt Co., Inc.
One Willison Park
Morristown, New Jersey 07960
Attn: Eric Earnhardt
Copy to: Gordon A. Carpenter, Esq.
91 Friendship Street
Providence, Rhode Island 02903
If to the Company: Cafe La France, Inc.
216 Weybosset Street - 4th Floor
Providence, Rhode Island 02903
Attn: Thomas W. DeJordy, President
Copy to: Duffy & Sweeney
300 Turks Head Building
Providence, Rhode Island 02903
Attn: Michael F. Sweeney, Esq.
9.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
9.3 AMENDMENT. This Agreement may only be amended by a written
instrument executed by each of the parties hereto (except that any person may
unilaterally by notice revise such person's address for communications).
9.4 ENTIRE AGREEMENT. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with this
Agreement) constitutes the entire agreement of the parties hereto with respect
to the subject matter hereof, and supersede all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
9.5 BINDING EFFECT. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers, employees and agents referred to in Section 6
hereof, and their respective successors other than a purchaser as such, of the
Shares, legal representatives and assigns, and no other person shall
22
have or be construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provisions herein
contained.
9.6 GOVERNING LAW, JURISDICTION. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Rhode
Island, without giving effect to conflicts of law. The Company hereby agrees
that any action, proceeding or claim against it arising out of or relating in
any way to this Agreement shall be enforced in the Courts of the State of Rhode
Island of the United States of America federal district court in Rhode Island,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any such
process or summons to be served upon the Company may be served by transmitted a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 9 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company and the Underwriter
agree that the prevailing party(ies) in any such action shall be entitled to
recover from the other party(ies) all of its reasonable attorneys' fees and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
9.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
9.8 WAIVER, ETC. The failure of any of the parties hereto at any time
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor to in any way affect the validity of
this Agreement or any provision hereof or the right of any parties hereto to
thereafter enforce each and every provision of this Agreement. No waiver of any
breach, non-compliance or non-fulfillment of any of the provisions of this
Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of
the provisions of this Agreement shall be effective unless set forth in a
written instrument executed by the party or parties against whom or which
enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver of
any other or subsequent breach, non-compliance or non-fulfillment.
9.9 PARTIES IN INTEREST. This Agreement is made solely for the benefit
of the Underwriter, the Company and, to the extent expressed, to any person
controlling the Company, the Underwriter or each officer, director, partner,
employee and agent of the Company or Underwriter, respectively, the directors of
the Company, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors and assigns, and, no other
person will acquire or have any right under or by virtue of this Agreement.
23
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
CAFE LA FRANCE, INC.
By:________________________________
Thomas W. DeJordy, President
Accepted as of the date first above written.
Providence, Rhode Island
EARNHARDT CO., INC.
By:_____________________________
Title:
24
SELECTED DEALER SELLING AGREEMENT
Earnhardt Co., Inc. (the "Agent") as an exclusive agent for Cafe La France, Inc.
(the "Company") relative to its offering of up to 1,125,000 shares (the
"Shares") of Common Stock, $.01 per share, of the Company, hereby appoints
_________________ as a selected dealer (the "Dealer") and agrees to allow a
selling concession of ___ percent (__%) of the total sales price as set forth in
the Prospectus [and to cause the Company to issue to the Dealer an Underwriter's
Share Purchase Option (as defined in the Underwriting Agreement between the
Company and the Agent) for _____ percent (_____%) of the Shares sold by the
Dealer]; provided that any customer/purchaser of the Dealer has been furnished
with all needed Prospectus and other documents that may be required, all to the
satisfaction of the Company and its counsel. No member of the NASD will re-allow
commissions to any non-member broker/dealer, including foreign broker/dealers
registered pursuant to the Securities and Exchange Act of 1934 (the "Exchange
Act"). The following provisions will also apply:
1. The Company and the Agent reserve the right to reject all
subscriptions, in whole or in part, to make allotments and to close the
subscription books at any time without notice. Payment of shares sold by you is
to be made by check, money order, or banker's draft only and shall be made
payable to "Cafe La France." With respect to all shares sold by you pursuant
hereto, you will promptly transmit (by noon of the next business day) to the
Agent, at the address set forth below for forwarding on to the Company, all
checks, money orders and banker's drafts received in payment in the full amount
of the Offering Price for the number of shares purchased without deduction for
any commission or concession, in compliance with Rule 15c2-4 under the Exchange
Act. Closings and Share certificate issuances shall be in accordance with the
Underwriting Agreement.
2. If a payment is received which proves insufficient or worthless, any
compensation that may have been paid to the Dealer with respect to such
subscription shall be returned either by the Dealer's remittances in cash or by
charge against the account of the Dealer, as the Agent may elect.
3. A registration statement covering the offering of the Shares has
been filed with the Securities and "Exchange Commission. You will be promptly
advised when the registration statement becomes effective. You as the Dealer
agree that you will comply with the applicable provision of the Securities Act
of 1933 (the "Securities Act") and of the rules thereunder. No person is
authorized by the Company or the Agent to give any information or to make any
representations other than those contained in the Prospectus in connection with
the sale of the Common Stock. Nothing contained herein shall render the Dealer a
partner of the Agent or with one another.
4. Upon becoming a Dealer and in offering and selling the shares, you
agree to comply with all applicable requirements of the Securities Act, the
Exchange Act, any applicable state securities or "Blue Sky" laws, and the Rules
of Fair Practice of the NASD,
including but not limited to, Article III, Sections: 1,8,24,35 and 36 thereof,
and the interpretations of said section promulgated by the Board of Governors of
such Association. Upon application you will be informed as to the states of
which we have been advised by counsel to the Company that the shares of the
Company's Common Stock have been qualified for sale or are exempt from
registration under the respective securities or Blue Sky laws of such states,
but we assume no obligation or responsibility as to the right of any Dealer to
sell the shares in any state, or as to any sale therein.
5. In addition to compliance with the provisions of paragraph 4 hereof,
you will not, until advised by us in writing or by wire that the entire offering
has been distributed and closed, bid for or purchase Shares in the open market
or otherwise make a market in the Shares or otherwise attempt to induce others
to purchase shares in the open market. Nothing contained in this paragraph 5
shall, however, preclude you from acting as agent in the execution of
unsolicited orders of customers in transactions effectuated for them through a
market maker.
6. You represent that you are a member in good standing of the NASD and
registered as a broker/dealer with the Securities and Exchange Commission and
that in taking sales you will abide by the Rules of Fair Practice of the NASD.
You as a member of the NASD by signing this agreement, acknowledge that you are
familiar with the cited laws, rules and regulations and agree that you will not
directly and/or indirectly violate any provisions of applicable law in
connection with your sales. You will deliver a copy of the Prospectus and any
current amendment of or supplement to the Prospectus to each investor prior to
accepting such investor's payment.
7. By accepting this Agreement, each Dealer has assumed full
responsibility for thorough and prior training of its representatives concerning
the selling methods to be used in connection with the offer and sale of the
Shares, giving special emphasis to the NASD's principles of full and fair
disclosure to prospective investors and suitability standards.
8. Each Dealer agrees to indemnify and hold harmless the Agent, the
Company and the other Dealers against and from any liability, loss, damage or
expense arising out of any failure by the Selected Dealer to comply with the
Securities Act, the Exchange Act, applicable securities laws of any state, the
rules and regulation of the SEC or the Rules of Fair Practice of the NASD, due
to any act or omission by the Dealers or its agents or employees.
9. As the Agent, we shall have full authority to take such action as we
may deem advisable in all matters pertaining to the offering or arising
thereunder. We will not be under any liability or in respect of the value,
validity, or form of the Shares, or the delivery of the certificates for the
Shares or the performance by anyone of any agreement on its part, or the
qualification of the Shares for sale under the laws of any jurisdiction, or for
or in respect of any matter connected with this Agreement, except for lack of
good faith obligation expressly assumed by us in this Agreement, and any
liability due to our act or omission arising under the Securities Act or the
Exchange Act.
10. This Agreement will terminate when the offering is completed.
11. Notice to us shall be deemed duly given if telegraphed, mailed or
delivered, or if given verbally and confirmed by us in writing, and should be
addressed to us at the following address:
Earnhardt Co., Inc.
Ten Abbott Park Place
Third Floor
Providence, RI 02903
(401) 331-5400
(401) 272-4487 (Fax)
Notice to you shall be deemed to have been duly given if telegraphed, mailed or
delivered to you at the address set forth by you in this Agreement, or if given
verbally and confirmed in writing.
If you desire to participate in the offering of the Shares as herein above set
forth, please sign the acceptance below and provide the pertinent information
requested.
Very truly yours,
EARNHARDT CO., INC.
By:____________________________
Title:
Dated: ____________, 1997
Acknowledged and Agreed:
(Dealer)
By:______________________________
Authorized Signatory
Dated: _____________, 1997
Name, Address and Telephone Numbers of Dealer
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
EXHIBIT 4.1
FRONT
COMMON STOCK COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE IN
DENVER, COLORADO AND NEW YORK, NEW YORK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 127697 10 0
THIS CERTIFIES THAT
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF ONE CENT ($.01) EACH OF
THE COMMON STOCK OF
CAFE LA FRANCE, INC., transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to the laws of the State of Delaware
and the Certificate of Incorporation and the By-Laws of the Corporation, as the
same may be from time to time amended, to all of which the holder by acceptance
hereof assents. This certificate is not valid unless countersigned by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers. Dated:
Robert G. King
TREASURER
[illegible]
PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, Colorado 80201
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
BACK
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with rights
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT -- ..................... Custodian............................
(Cust) (Minor)
Under Uniform Gifts to Minors
Act ..........................
(State)
Additional abbreviations may also be used though not in the above list.
For value received,________________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
------------------------------
------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
------------------- --------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- --------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
EXHIBIT 5.1
April 10, 1997
Cafe La France, Inc.
216 Weybosset Street
Providence, RI 02903
Re: Registration Statement on Form SB-2 (Registration No. 333-18093)
In our capacity as counsel to Cafe La France, Inc., a Delaware
corporation (the "Company"), we have been asked to render this opinion in
connection with a Registration Statement on Form SB-2 (the "Registration
Statement") which will be filed on or about the date hereof with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"), for registration under the Act of an aggregate of (i) 1,125,000 shares
(the "Shares") of the Company's Common Stock, par value $.01 per share ("Common
Stock"); and (ii) up to 56,250 shares of Common Stock issuable upon exercise of
an option (the "Underwriter's Option") to be issued to Earnhardt Co., Inc. (the
"Underwriter"). The Shares are to be offered and sold to the public by the
Underwriter as the Company's selling agent pursuant to the Registration
Statement. Capitalized terms used herein and not otherwise defined herein shall
have the meanings set forth in the Registration Statement.
In connection with this opinion, we have examined the Company's
Certificate of Incorporation, the By-Laws of the Company, the Registration
Statement, including the exhibits thereto, corporate proceedings of the Company
relating to the issuance of the Shares and the Underwriter's Option, and such
other instruments and documents as we have deemed relevant under the
circumstances. In addition, we have examined and relied upon such other
certificates, documents and materials and have made such other inquiries of fact
or law as we have deemed necessary or appropriate in connection with this
opinion.
In making the aforesaid examination, we have assumed the genuineness of
all signatures and the conformity to original documents of all copies furnished
to us as original or photostatic copies. We have also assumed that the corporate
records furnished to us by the Company include all corporate proceedings
regarding the issuance of the Shares and the Underwriter's Option taken by the
Company to date.
Based upon and subject to the foregoing, we are of the opinion that:
1. The maximum of 1,125,000 Shares proposed to be sold by the Company
will, when sold pursuant to the Registration Statement and the resolutions of
the Board of Directors of the Company authorizing the same, be legally issued,
fully paid and non-assessable.
2. The maximum of 56,250 shares of Common Stock issuable upon exercise of
the Underwriter's Option will, when issued in accordance with the terms and
conditions of the Underwriter's Option to be granted by the Company to the
Underwriter, a form of which is filed as an exhibit to the Registration
Statement, be legally issued, fully paid and non-assessable.
We hereby consent to the use of our opinion as herein set forth as an
exhibit to the Registration Statement and further consent to the reference to
our firm under the caption "Legal Matters" in the Prospectus forming a part of
the Registration Statement.
By giving the foregoing consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission thereunder.
This opinion is rendered to you in connection with the Offering and may
not be relied upon or furnished to any other person in any context without our
written consent.
Very Truly Yours,
/s/ Duffy & Sweeney
Duffy & Sweeney
EXHIBIT 10.21
March 21, 1997
Earnhardt Co., Inc.
One Willison Park
Morristown, NJ 07960
Re: Cafe La France, Inc.
Gentlemen:
In consideration of the agreement by you to act as "best efforts" selling
agent for the initial public offering by Cafe La France, Inc., a Delaware
corporation (the "Company") of up to 1,125,000 shares of common stock, par
value $.01 per share (the "Shares"), pursuant to the underwriting agreement to
be entered into by and between Earnhardt Co.,Inc. and the Company, the
undersigned agrees that for a period of thirteen (13) months from the effective
date of the Company's registration statement on Form SB-2 regarding the offering
of the Shares, the undersigned will not, without your prior written consent,
publicly offer, sell or dispose of, directly or indirectly, any shares of common
stock of the Company currently outstanding and beneficially owned by the
undersigned.
The undersigned further advises you that as of the date hereof, the
undersigned beneficially owns 1,154,563 shares of common stock of the Company,
including 62,500 which have been pledged as security for a personal guaranty by
the undersigned of the obligations of the Company's subsidiaries under that
certain Security Agreement between CLF2, Inc. and Michael A. Cardillo dated
March 4, 1997.
Very truly yours,
/s/ Thomas W. DeJordy
---------------------
Thomas W. DeJordy
EXHIBIT 11
CAFE LA FRANCE, INC.
COMPUTATION OF LOSS PER SHARE
YEAR ENDED SEPTEMBER 29, 1996 AND THREE MONTHS ENDED
DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
Three Months Ended
Year Ended -----------------------------------------------
September 29, 1996 December 29, 1996 December 31, 1995
--------------------------- -------------------------- --------------------------
Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net loss applicable to common shares: $(673,307) $(673,307) $(295,879) $(295,879) $ (96,104) $ (96,104)
========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding(1):
Outstanding at beginning of period.... 1,616,628 1,616,628 1,616,628 1,616,628 1,616,628 1,616,628
Assumed exercise of stock options and
warrants... 159,192 159,192 159,192 159,192 159,192 159,192
---------- ---------- ---------- ---------- ---------- ----------
Total............................ 1,775,820 1,775,820 1,775,820 1,775,820 1,775,820 1,775,820
========= ========= ========= ========= ========= =========
Net loss per common share (2) $ (.38) $ (.38) $ (.17) $ (.17) $ (.05) $ (.05)
========== =========== ========== =========== ========== ===========
</TABLE>
- --------------------------
(1) Pursuant to SEC Staff Accounting Bulletin 83, common stock options and
warrants granted and shares issued during the 12 months immediately preceding
the offering date at a price below the proposed offering price of the Company's
initial public offering are reflected in the earnings per share calculation as
if they had been outstanding for the full year (using the treasury stock method
and the proposed initial public offering price).
(2) Prior to October 2, 1995, the Company elected S-corporation status and
therefore was not subject to federal and state income taxes. Accordingly,
earnings per share data has been presented only for periods beginning after
October 1, 1995.
INDEPENDENT AUDITORS CONSENT
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
Our report dated November 7, 1996, except as to notes 7, 11 and 13, which are as
of March 10, 1997, contains an explanatory paragraph that states that the
Company has suffered recurring losses from operations and has a net capital
deficiency, which raise substantial doubt about its ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Providence, Rhode Island KPMG PEAT MARWICK LLP
April 10, 1997
EXHIBIT 24.1
------------
CAFE LA FRANCE, INC.
POWER OF ATTORNEY TO SIGN
REGISTRATION STATEMENTS ON
FORM SB-2 AND FORM S-8
KNOW ALL MEN BY THESE PRESENTS, that the Undersigned does hereby
constitute and appoint Thomas W. DeJordy and Robert G. King and each of them
with full power of substitution and full power to act without the other, his
true and lawful attorney-in-fact and agent for him in his name, place and stead,
in any and all capacities, to sign the following: (i) a Registration Statement
on Form SB-2 of Cafe La France, Inc. (the "Company") relating to the sale by the
Company of shares of the Company's common stock, and any or all amendments
(including post-effective amendments) thereto; (ii) a Registration Statement on
Form S-8 of the Company relating to the 1996 Incentive Stock Option Plan of the
Company, and any or all amendments (including post-effective amendments)
thereto; and to file each of the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commision,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing necessary to be
done in order to effectuate the same as fully, to all intents and purposes, as
they or he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or either of them, may lawfully do or cause
to be done by virtue hereof.
Date: March 12, 1997 /s/ Richard LaFrance
------------------------ --------------------------
Richard LaFrance, Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> SEP-29-1996 SEP-29-1996
<PERIOD-START> OCT-02-1995 SEP-30-1996
<PERIOD-END> SEP-29-1996 DEC-29-1996
<CASH> 5695 5313
<SECURITIES> 0 0
<RECEIVABLES> 54754 55,589
<ALLOWANCES> 19000 20500
<INVENTORY> 45284 64220
<CURRENT-ASSETS> 145219 295,550
<PP&E> 795503 815591
<DEPRECIATION> 156986 178232
<TOTAL-ASSETS> 885654 1038128
<CURRENT-LIABILITIES> 785570 1218728
<BONDS> 0 0
0 0
0 0
<COMMON> 948191 978191
<OTHER-SE> (1266869) (1562748)
<TOTAL-LIABILITY-AND-EQUITY> 885,654 1038128
<SALES> 2101283 621320
<TOTAL-REVENUES> 2198753 635027
<CGS> 884068 236089
<TOTAL-COSTS> 2815354 883759
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 55956 46397
<INCOME-PRETAX> (672557) (295129)
<INCOME-TAX> 750 750
<INCOME-CONTINUING> (673307) (295879)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (673307) (295879)
<EPS-PRIMARY> (.38) (.17)
<EPS-DILUTED> (.38) (.17)
</TABLE>
