<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file no. 0-23936 (CA)
JAVA CENTRALE, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
California 68-0268780
- --------------------------------------- ---------------------------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1610 Arden Way, Suite 145
Sacramento, California 95815
- --------------------------------------- ---------------------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (916) 568-2310
--------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No. .
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. AS OF AUGUST 8, 1997,
16,655,044 SHARES OF COMMON STOCK (NO PAR VALUE) WERE OUTSTANDING.
1
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JAVA CENTRALE, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 381,274 $ 350,608
Notes receivable - current 235,227 448,369
Accounts receivable, net 541,384 591,536
Inventories 309,205 314,342
Prepaid expenses and other 324,219 397,322
------------ ------------
Total current assets 1,791,309 2,102,177
NOTES RECEIVABLE 681,310 989,603
PROPERTY AND EQUIPMENT, NET 2,645,673 2,781,158
INTANGIBLE ASSETS 3,965,845 4,040,845
DEFERRED CHARGES AND OTHER 307,598 316,775
NOTES RECEIVABLE-OFFICER 224,447 240,766
INVESTMENT 546,666 546,666
------------ ------------
$ 10,162,848 $ 11,017,990
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 931,482 $ 1,123,573
Accrued liabilities 766,005 620,424
Due to related parties 144,394 44,295
Current maturities of long-term debt 1,781,044 1,945,488
Convertible debt 1,000,000 1,197,068
Current capital lease obligations 27,768 27,768
------------ ------------
Total current liabilities 4,650,693 4,958,616
DEFERRED REVENUES 526,000 576,000
CONVERTIBLE DEBT 197,068 248,682
CAPITAL LEASES 89,815 95,667
OTHER LIABILITIES 88,169 69,573
STOCKHOLDERS' EQUITY:
Series B Redeemable Preferred Stock, $.01
per share per annum cumulative,
convertible, no par 25,000,000 shares
authorized - -
Common stock, no par, 25,000,000 shares
authorized, issued and outstanding
shares; 15,604,015 at June 30, 1997,
and 13,743,804 at March 31, 1997 18,860,934 18,507,874
Accumulated deficit (14,249,831) (13,438,422)
------------ ------------
4,611,103 5,069,452
------------ ------------
$ 10,162,848 $ 11,017,990
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Company cafe sales $ 2,184,837 $ 4,014,604
Franchise operations 50,000 80,000
Royalties 297,601 297,276
Sales of equipment and supplies 15,512 97,947
----------- -----------
Total revenue 2,547,950 4,489,827
Cost of company sales:
Food and beverage 744,298 1,421,894
Labor 764,098 1,486,062
Direct and occupancy 496,813 862,855
Cost of equipment and supplies 18,135 101,445
Depreciation 120,216 159,132
Other - 48,763
----------- -----------
Total cost of company sales 2,143,560 4,080,151
----------- -----------
General and administrative expenses 939,604 1,103,190
Depreciation and amortization 103,303 159,465
Bad debt expense 72,860 -
Loss associated with cafe closures 25,000 -
Gain on sale of cafes - (66,398)
----------- -----------
Operating loss (736,377) (786,581)
----------- -----------
Other income (expense):
Interest expense (108,671) (87,941)
Interest income 28,816 22,262
Other income 4,823 88,610
----------- -----------
Net loss $ (811,409) $ (763,650)
----------- -----------
----------- -----------
Net loss per weighted average equivalent
common share outstanding $ (0.06) $ (0.08)
----------- -----------
Equivalent common shares outstanding 14,377,880 8,994,033
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
1997 1996
---------- ----------
<S> <C> <C>
Increase (decrease) in cash
Net cash flows from operating activities: $ 77,321 $ (973,450)
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment (13,572) (184,544)
Proceeds from the sale of assets - 325,100
Increase (decrease) in other - 48,412
---------- ----------
Net cash provided by (used in)
investing activities (13,572) 188,968
---------- ----------
Cash flows from financing activities:
Proceeds from warrant conversions 141,680 -
Proceeds from short term borrowing 325,000 400,000
Proceeds from capital lease obligations - 64,455
Payment of notes payable (488,384) (461,369)
Repayment of capital lease (11,379) -
---------- ----------
Net cash provided by (used in)
financing activities (33,083) 3,086
---------- ----------
Net (decrease) in cash 30,666 (781,396)
Cash and cash equivalents, beginning of period 350,608 1,182,078
---------- ----------
Cash and cash equivalents, end of period $ 381,274 $ 400,682
---------- ----------
---------- ----------
Cash paid for:
Interest $ 32,562 $ 114,224
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NON-CASH TRANSACTIONS:
During the quarter ended June 30, 1997, the Company decreased deferred
revenues through accounts and notes receivable totaling $10,000 and during
the quarter ended June 30, 1996 the Company increased deferred revenues
through accounts and notes receivables totaling $20,000.
During the quarter ended June 30, 1997, the holders of the convertible
debt converted $248,682 of the notes into 1,335,197 common shares of stock
pursuant to the terms of the notes. During the quarter ended June 30, 1996,
the holders of the convertible debt converted $1,260,000 of the notes into
1,549,393 common shares of stock pursuant to the terms of the notes.
During the fiscal year ended March 31, 1997 the Company issued 200,000
shares of common stock valued at $50,000 pursuant to a consulting agreement.
During the quarter ended June 30, 1997 the Company recognized consulting
expense of $25,396 as a result of issuance of these shares.
During the fiscal year ended March 31, 1997, the Company issued warrants
valued at $240,351 pursuant to consulting agreements. During the quarter
ended June 30, 1997 the Company recognized consulting expenses of $31,350 as
a result of issuance of these warrants.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Sale of certain assets of Java Centrale, Inc., and subsidiary for the
quarter ended June 30, 1996.
<TABLE>
<S> <C>
Cash received $ 325,100
Note receivable 296,000
Net book value of assets sold (554,702)
----------
Gain on sale of assets $66,398
----------
</TABLE>
5
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JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared without audit and do not
include certain notes and certain financial presentations normally required
under generally accepted accounting principles and, therefore, should be read
in conjunction with the Company's financial statements included with the
Annual Report, on Form 10-K filed with the Security and Exchange Commission
for the fiscal year ended March 31, 1997. It should be understood that
accounting measurements at interim dates inherently involve greater reliance
on estimates than at year end. The results of operation at the three months
ended June 30, 1997 are not necessarily indicative of results that can be
expected for the full fiscal year.
The June 30, 1997 financial statements included herein are unaudited.
They contain, however, all adjustments which, in opinion of management are
necessary to present fairly the financial position of the Company at June 30,
1997 and March 31, 1997; and the results of its operations and its cash flows
for the three months ended June 30, 1997 and 1996 respectively.
Certain reclassifications have been made to the 1996 financial statement
to conform to the 1997 presentation.
NOTE 2 - STOCKHOLDERS' EQUITY
A. CONVERSION OF CONVERTIBLE DEBT.
The Company issued through private placements, convertible notes in the
amount of $3,500,000. The first note in the amount of $2,000,000 is due at
December 15, 1997 with interest payable quarterly beginning on March 15, 1996
at the rate of 8% per year. The note was convertible into common stock of the
Company after February 26, 1996 under certain terms and conditions. As of
June 30, 1997, $1,000,000 had been converted into 1,846,394 common shares,
leaving convertible notes payable of $1,000,000. Additionally in July, 1997
the Company agreed to restructure the remaining portion of the unconverted
note totaling $1,000,000 into a note due no later than January 1998, pledging
the Paradise Bakery, Inc. shares as collateral and added $250,000 to the
balance of the note to eliminate the conversion feature of the note.
The second series of notes in the amount of $1,500,000 are due January
29, 1998 with interest payable quarterly beginning on March 15, 1996 at the
rate of 8% per year. These are convertible into common stock of the Company
after April 12, 1996 under certain terms and conditions. As of June 30, 1997
$1,302,932 had been converted into 2,800,000 common shares leaving
convertible notes payable of $197,068. In July 1997 the remaining $197,068
of convertible debt was converted into 1,051,029 common shares.
B. WARRANTS EXERCISED
In May 1997 warrants were exercised for 575,000 common shares of stock
for proceeds of $141,679.
6
<PAGE>
C. SALE OF ASSETS
In December of 1996, the Company sold the assets of Oh La La! to Good
Food Fast Companies, Inc. "GFF" for $1,250,000 in cash, 233,333 shares of
preferred stock and $750,000 in convertible notes receivable due in 1999. On
March 31, 1997, the Company agreed with GFF to exchange $250,000 of the
convertible note receivable for the assumption of certain liabilities of the
Company, exchange 233,333 preferred shares for 233,333 shares of common
stock, accelerate a payment of $145,000 due under the note receivable to May
1997 and convert the remaining $355,000 balance of the note into 40,000
shares of GFF common stock. The common shares of GFF at June 30, 1997, have
been valued at $2.00 per share based on the fair value of such shares.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company began operations on March 5, 1992, and operated as a
development stage enterprise through the end of its fiscal year ended March
31, 1993. As a development stage enterprise, the Company focused its efforts
on financial planning, raising capital, research and development,
establishing sources of supply, developing markets, organizing the
corporation, acquiring assets, and developing its business plan. During this
time, the Company completed the filing of its Uniform Franchise Offering
Circulars. The Company also opened its training facility in Folsom,
California, which is now being used to provide training to franchisees and
their key employees in the operations of franchisee-owned Java Centrale cafes.
The Company has never earned a profit in any fiscal year. Since its
incorporation in 1992, the Company's operations have required (rather than
provided) cash every year. In order to meet these cash requirements, the
Company has from time to time sold common stock, borrowed short-term money,
sold company assets and issued convertible debt. The Company recorded a loss
in the development stage during its first fiscal year of operation and since
principal operations commenced and has recorded a loss for the fiscal years
ended March 31, 1993, 1994, 1995, 1996 and 1997. The net loss for fiscal
1997 was $5,326,192 with an additional loss of $811,409 for the quarter ended
June 30, 1997. There can be no assurance that losses will not continue, or
that the Company as currently constituted will become profitable in the
future. As of March 31, 1997, the Company had an accumulated deficit of
$13,438,422 and as of June 30, 1997 the Company had an accumulated deficit of
$14,249,831. In the fiscal year ended March 31, 1997, the Company sold
assets, raised debt and equity, and reduced expenses to meet its ongoing
liquidity needs. In the quarter ended June 30, 1997 the Company had warrants
exercised and borrowed short-term funds to meet on going liquidity needs.
Currently the Company has a material working capital shortfall.
During fiscal 1997 and to date, the Company has been operating at a loss
primarily due to its administrative overhead and the under performance of the
cafes in its Java Centrale system. Commencing in April 1996, the Company
instituted a plan to reduce its administrative expenses, but this plan has
not been successful enough to cause the Company to become profitable.
Further, the Company's Java Centrale system has in general not grown as fast
or proved to be as profitable as expected, and the Company has experienced
higher than anticipated expenses in pursuing the development of these cafes,
the closing of certain outlets in this system and settling disputes with
franchisees.
The Company's financing plan over the last year to meet its ongoing
liquidity needs has been to raise new equity through private placements,
refinance or obtain new debt funding and sell assets of the Company's
operation. The Company is maintaining its financing plan of seeking new
equity, obtaining or refinancing debt and pursuing the sale of assets related
to the Company's operation. In February 1997, the Company hired an outside
advisor to assist with the refinancing of the debt or the raising of new
equity and to date there has been no financing completed. In July, 1997 the
Company entered into a letter of intent with a placement agent provided for
the sale of the Company's common stock and warrants in a private placement on
a best efforts basis to be completed by September 1997. The Company can make
no assurance as to the outcome of the private placement sale of its common
stock.
The Company's continuing operating losses have left it in a materially
weak cash-flow position, one effect of which has been that the Company has
been unable to develop its more profitable Paradise Bakery system as rapidly
and extensively as it has planned to do.
8
<PAGE>
Since April of 1996, the Company has relied on a series of short-term
loans from Alta Petroleum, Inc. in the aggregate amount of $775,000, sale of
assets totaling $1,321,000, the raising of $900,000 in equity, and the
exercising of warrants totaling $141,679 to finance its continuing cash flow
shortfalls. There can be no assurance that any similar financing, asset sales
or equity placements will continue to be available to the Company in the
future. Consequently, under current circumstances the Company does not
anticipate that it will be able to continue existing operations in the future
unless it can obtain new short-term or long-term financing, raise new equity
or make a significant sale of assets. The Company's Board of Directors is
currently evaluating a number of options for the resolution of its immediate
and long-term financial needs, including among other potential alternatives
the sale of its Java Centrale and/or Paradise Bakery systems, obtaining a
long-term loan secured by its Paradise Bakery assets, a private and/or public
sale of Company stock and/or other securities, and a strategic merger. Some
of the alternatives currently being studied by the Company's Board of
Directors might result in a change in the management and/or control of the
Company. However, no final resolution of these issues has yet been arrived
at.
As of June 30, 1997, the Company had operating 17 Company-owned
locations and 65 franchisee-owned locations, as compared to 36 Company-owned
locations, and 65 franchisee-owned locations as of June 30, 1996.
The Company entered into agreements with franchisees to open no cafes
during the quarter ended June 30, 1997, as compared to entering into
agreements with franchisees to open three cafes during the quarter ended June
30, 1996
The Company opened two franchisee-owned cafes, and no Company-owned
cafes, during the quarter ended June 30, 1997, as compared to opening one
franchisee-owned cafe during the quarter ended June 30, 1996.
The Company closed one Company-owned cafe associated with the
termination of a management agreement as a result of financial difficulties,
and no franchisee-owned cafes in the quarter ended June 30, 1997 as compared
to closing one Company-owned cafe and closing no franchisee-owned cafes
during the quarter ended June 30, 1996. These cafes closed primarily due to
poor financial performance.
The Company sold no Company-owned locations to franchisees during the
quarter ended June 30, 1997, as compared to selling three Company-owned
locations, and selling three Company-owned carts to a licensee for the
quarter ended June 30, 1996.
In December of 1996, the Company sold the assets of Oh La La! to Good
Food Fast Companies, Inc. "GFF" for $1,250,000 in cash, 233,333 shares of
preferred stock and $750,000 in convertible notes receivable due in 1999. On
March 31, 1997, the Company agreed with GFF to exchange $250,000 of the
convertible note receivable for the assumption of certain liabilities of the
Company, exchange 233,333 preferred shares for 233,333 shares of common
stock, accelerate a payment of $145,000 due under the note receivable to May
1997 and convert the remaining $355,000 balance of the note into 40,000
shares of GFF common stock. The common shares of GFF at June 30, 1997, have
been valued at $2.00 per share based on the fair value of such shares. As
of June 30, 1997, following the related conversions, the Company owned
approximately 30% of the outstanding common shares of GFF. The Company did
not recognize any earnings from GFF under the equity method of accounting due
to immateriality.
9
<PAGE>
In August 1997, Directors Lyle Edwards and Kevin Baker resigned from the
Board of Directors of Java Centrale, Inc. The board has appointed Bradley B.
Landin, the Senior Vice President of Operations for the Company, as a
director to fill a vacancy. The board is continuing to evaluate other
candidates for the other vacancy.
RESULTS OF OPERATIONS
The Company's revenues are currently derived primarily from
Company-owned locations, initial franchise fees, resulting from cafe
openings, franchise royalties, equipment sales, and product overrides on
sales to its franchisees. Franchise fees range from $15,000 to $35,000 per
cafe. The Company is entitled to 4%-6% of the gross receipts from each
franchised cafe and 2%-10% of the gross receipts from each franchised cart.
Product overrides range from 3% to 10% of the total purchase of coffee from
the Company's contract roaster.
QUARTER 1997 AS COMPARED TO QUARTER 1996
Total Company revenues for the quarter ended June 30, 1997 totaled
$2,548,000, as compared to $4,490,000 for the quarter ended June 30, 1996, a
decrease of $1,942,000, or 43%. The principal components of this increase
were:
The Company's revenues from Company-owned retail operations decreased by
$1,830,000, or 46%, to $2,185,000 for the quarter ended June 30, 1997, from
$4,015,000 for the quarter ended June 30, 1996. This decrease resulted
primarily from a decrease of $953,000 associated with revenues from the Oh La
La! Division, which was sold in December 1996, a decrease of $699,000
associated with the revenues from the operations of Company-owned cafes which
were closed or sold, during the fiscal year 1997 and a decrease in revenues
from the Company-owned Paradise Bakery location of approximately $180,000.
Revenues from the Company's franchising operations decreased $30,000, or
38% to $50,000 for the quarter ended June 30, 1997, from $80,000 for the
quarter ended June 30, 1996. This decrease is a result of recognized
franchise fees totaling $50,000 associated with the opening of two Java
Centrale franchisee-owned cafes for the quarter ended June 30, 1997, as
compared to the recognition $80,000 in franchise fees associated with the
opening of one Java Centrale franchise-owned cafe and the sale of one Java
Centrale Company-owned cafe to a franchisee and two Paradise Bakery
Company-owned cafes to a single franchisee during the quarter ended June 30,
1996.
Revenues from the Company's royalties of $297,600 for the quarter ended
June 30, 1997 and $297,300 for the fiscal year ended June 30, 1997 remained
virtually the same. Royalties associated with Java Centrale decreased
$27,000 to $79,000 for the quarter ended June 30, 1997 as compared to
$106,000 for the quarter ended June 30, 1996 due to the closure of
franchisee-owned cafes. Additionally royalties associated with Paradise
Bakery increased $28,000 to $219,000 for the quarter ended June 30, 1997 as
compared to $191,000 for the quarter ended June 30, 1996 due to the increases
in revenues from franchisee-owed cafes.
Revenues from the Company's equipment sales decreased $82,000, or 84%,
to $16,000 for the quarter ended June 30, 1997 from $98,000 for the quarter
ended June 30, 1996. This decrease resulted from discontinuing the sale of
equipment directly to franchisees in May of 1996.
Total expenses for the quarter ended June 30, 1997 were $3,284,000, an
decrease of $1,992,000, or 38%, over expenses of $5,276,000 for the quarter
ended June 30, 1996. The principal components of the increase in expenses
resulted from:
10
<PAGE>
The cost of food and beverage, labor and operating costs for the
Company's retail operations decreased $1,854,000 for the quarter ended June
30, 1997, to $2,125,000 as compared to $3,979,000 for the quarter ended June
30, 1996. This decrease results primarily from a decrease of $834,000 in
expenses associated with the operating Oh La La! Division, which was sold in
December 1996, a decrease in expenses of $923,000 associated with the
operations of Company-owned cafes, which was sold or closed during the fiscal
year ended March 31, 1997, and approximately $90,000 associated with
decreased operating costs associated with the operation of the Paradise
Bakery Company-owned locations.
The Company's cost of equipment decreased by $18,000, or 18%, in the
quarter ended June 30, 1997, to $83,000, as compared to $101,000 for the
quarter ended June 30, 1996. This decrease resulted from discontinuing the
sale of equipment directly to franchisees in May of 1996.
Selling, general, and administrative expenses decreased $163,000 or 15%,
during the quarter ended June 30, 1997, to $940,000 from $1,103,000 during
the quarter ended June 30, 1996. This decrease results from decreased
expenses associated with the operations of the Oh La La! Division, which sold
in December 1996, totaling $57,000, decreased personnel cost of $163,000,
decreased travel expense of $32,000, decreased marketing costs of $13,000 and
decreased legal and accounting fees of $11,000. Additionally, there were
increased consulting fees of $106,000, of which $64,900 was associated with
the Companies capital raising efforts.
For the quarter ended June 30, 1997, the Company had an operating loss
of $736,000, a net loss of $811,000, and a loss per share of $.06, as
compared to an operating loss of $787,000, a net loss of $764,000, and a loss
per share of $.08 for the quarter ended June 30, 1996.
The operating loss decreased $51,000 to $736,000 during the quarter
ended June 30, 1997 as compared to $787,000 during the quarter ended June 30,
1996. The decrease is primarily a result of lower general and administrative
expenses totaling $164,000, decreased depreciation and amortization of
$56,000 from the sale of the Oh La La! Division, increased losses associated
with a cafe closure of $25,000, bad debt expense of $73,000 associated with
certain franchisees related notes and royalties, and no gain from the sale of
assets during the quarter ended June 30, 1997 as compared to a gain from the
sale of assets of $66,000 during the quarter ended June 30, 1996.
The net loss increased $47,000 to $811,000 during the quarter ended June
30, 1997 as compared to $764,000 during the quarter ended June 30, 1996. The
increased net loss of is primarily a result of the above decreased operating
loss of $51,000, and an increase in interest expense and fees associated with
the Company's financing of $20,000, and associated with both the sale of the
Oh La La! Division and the sale and closure of cafes interest income
increased $6,500 and other income decreased $84,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's initial capitalization was obtained through the issuance
of 2,500,000 shares of no par common stock for $10,000 on March 5, 1992. In
addition, the Company issued 2,950,000 shares of Series A cumulative
preferred stock, in exchange for 2,950,000 shares of no par cumulative
preferred stock, which were subscribed for on March 5, 1992 for proceeds of
$590,000, on March 12, 1993. On March 30, 1993, the Company sold 5,000,000
shares of no par value redeemable Series B cumulative preferred stock for
$1,000,000. The proceeds from the issuance of all such stock were used for
capital acquisitions and operating costs of the Company during its
development stage. On May 19, 1994, the Company raised $7,288,000 in net
proceeds from an initial public offering of 1,500,000 shares of common stock.
Of the 4,291,820 shares outstanding after the offering, 855,300
11
<PAGE>
were placed in escrow and are subject to an Escrow Agreement which provides
for the release of such shares on or before March 31, 1999, with earlier
release based upon the financial performance of the Company.
In the 1996 fiscal year the Company issued 1,604,692 common shares for
$3,540,722 in proceeds in a series of private placements. The Company also
issued convertible debt in three separate private transactions totaling
$3,500,000. As of March 31, 1997 $2,054,250 had been converted into
3,311,183 common shares. During the quarter ended June 30, 1997 an
additional $248,682 of convertible debt had been converted into 1,335,197
shares of the Company's common stock. As of June 30, 1997, $2,302,932 of
convertible debt had been converted into 4,646,394 shares of the Company's
common stock.
From July 1, 1997, to August 8, 1997, an additional $197,068 of
convertible debt has been converted into 2,386,226 shares. Additionally, in
July 1997, the Company has agreed to restructure the remaining portion of the
unconverted note totaling $1,000,000, into a note due no later than January
1998, pledging of the Paradise Bakery, Inc. shares as collateral and adding
$250,000 to the balance of the note to eliminate the conversion feature of
the note. The Company will recognize the $250,000 as additional interest
expense over the remaining life of the note.
In December of 1996, the Company sold the assets of Oh La La! to Good
Food Fast Companies, Inc. "GFF" for $1,250,000 in cash, 233,333 shares of
preferred stock and $750,000 in convertible notes receivable due in 1999. On
March 31, 1997, the Company agreed with GFF to exchange $250,000 of the
convertible note receivable for the assumption of certain liabilities of the
Company, exchange 233,333 preferred shares for 233,333 shares of common
stock, accelerate a payment of $145,000 due under the note receivable to May
1997 and convert the remaining $355,000 balance of the note into 40,000
shares of GFF common stock. The common shares of GFF at June 30, 1997, have
been valued at $2.00 per share based on the fair value of such shares. As
of June 30, 1997, following the related conversions, the Company owned
approximately 30% of the outstanding common shares of GFF. The Company did
not recognize any earnings from GFF under the equity method of accounting due
to immateriality.
In July 1996, the Company borrowed $350,000 under a note due in April
1997. This note was paid with the proceeds of the long-term debt in November
1996, when the Company completed a financing of $779,000 in long-term debt,
pledging the assets of Paradise Bakery. Although the Company is currently in
default of certain financial covenants under this note, it is current with
the required monthly payments under the note. The Company also used proceeds
of the $779,000 to pay a note due Chart House Enterprises in the amount of
$330,000.
In May 1996, the Company completed the sale of two Company-owned
Paradise Bakery cafes to a franchisee for proceeds of $280,000, which were
applied to the note due Sanwa Bank from the merger of Founders Venture, Inc.
In April 1996, the Company completed a financing for $400,000, which
pledged the assets of Oh La La!. This note was paid from the proceeds of the
cash portion on the sale of Oh La La! in December 1996.
As of March 31, 1997, the Company had the $175,000 management line of
credit available to it. In July 1996, Baycor, Gary Nelson,
12
<PAGE>
President and Chief Executive Officer, and Steven J. Orlando, Chief Financial
Officer, agreed to loan the Company $175,000 from time to time as needed
until April 1997, when the line of credit will be due and payable. The
lenders would receive a general lien on Java Centrale assets and will be at
an interest rate of prime plus 2% per annum. In replacement of the line of
credit, in April of 1997 Gary Nelson advanced the Company $50,000 and Steven
Orlando deferred $28,000 in salary due from December 1996 through April 1997
and Baycor deferred the receipt of salary and expenses, without interest,
during the 1997 fiscal year. The amount remaining unpaid as of June 30, 1997
was $94,394.
The Company currently has no available credit lines. During the quarter
ended June 30, 1997 the Company borrowed an additional $275,000 thereby
increasing the balance on the note to Alta Petroleum, Inc. to $575,000. Alta
Petroleum has extended the due date of the note to September 30, 1997.
The Company has never earned a profit in any fiscal year. Since its
incorporation in 1992, the Company's operations have required (rather than
provided) cash every year. In order to meet these cash requirements, the
Company has from time to time sold common stock, borrowed short-term money,
sold company assets and issued convertible debt. The Company recorded a loss
in the development stage during its first fiscal year of operation and since
principal operations commenced and has recorded a loss for the fiscal years
ended March 31, 1993, 1994, 1995, 1996 and 1997. The net loss for fiscal
1997 was $5,326,192 with an additional loss of $811,409 for the quarter ended
June 30, 1997. There can be no assurance that losses will not continue, or
that the Company as currently constituted will become profitable in the
future. As of March 31, 1997, the Company had an accumulated deficit of
$13,438,422 and at June 30, 1997 had an accumulated deficit of $14,249,831.
In the quarter ended June 30, 1997 the Company had warrants exercised and
borrowed short-term funds to meet on going liquidity needs. Currently the
Company has a material working capital shortfall.
The Company's financing plan over the last year to meet its ongoing
liquidity needs has been to raise new equity through private placements,
refinance or obtain new debt funding and sell assets of the Company's
operation. The Company is maintaining its financing plan of seeking new
equity, obtaining or refinancing debt and pursuing the sale of assets related
to the Company's operation. In February 1997, the Company hired an outside
advisor to assist with the refinancing of the debt or the raising of new
equity and to date there has been no financing completed. In July, 1997 the
Company entered into a letter of intent with a placement agent provided for
the sale of the Company's common stock and warrants in a private placement on
a best efforts basis to be completed by September 1997. The Company can make
no assurance as to the outcome of the private placement sale of its common
stock.
During fiscal 1997 and to date, the Company has been operating at a loss
primarily due to its administrative overhead and the under performance of the
cafes in its Java Centrale system. Commencing in April 1996 the Company
instituted a plan to reduce its administrative expenses, but this plan has
not been successful enough to cause the Company to become profitable.
Further, the Company's Java Centrale system has in general not grown as fast
or proved to be as profitable as expected, and the Company has experienced
higher than anticipated expenses in pursuing the development of these cafes,
the closing of certain outlets in this system and settling disputes with
franchisees.
The Company's continuing operating losses have left it in a materially
weak cash-flow position, one effect of which has been that the Company has
been unable to develop its more profitable Paradise Bakery system as rapidly
and extensively as it has planned to do.
Since April of 1996, the Company has relied on a series of short-term
loans from Alta Petroleum, Inc. in the aggregate amount of $775,000, sale of
assets totaling $1,321,000, the raising of $900,000 in equity, and the
exercising of warrants totaling $141,679 to finance its continuing cash flow
13
<PAGE>
shortfalls. There can be no assurance that any similar financing, asset sales
or equity placements will continue to be available to the Company in the
future. Consequently, under current circumstances the Company does not
anticipate that it will be able to continue existing operations in the future
unless it can obtain new short-term or long-term financing, raise new equity
or make a significant sale of assets. The Company's Board of Directors is
currently evaluating a number of options for the resolution of the Company's
immediate and long-term financial needs, including among other potential
alternatives the sale of its Java Centrale and/or Paradise Bakery systems,
obtaining a long-term loan secured by its Paradise Bakery assets, a private
and/or public sale of Company stock and/or other securities, and a strategic
merger. Some of the alternatives currently being studied by the Company's
Board of Directors might result in a change in the management and/or control
of the Company. However, no final resolution of these issues has yet been
arrived at.
During the quarter ended June 30, 1997 the Company incurred a net loss
of $811,000 and provided net cash of $77,321 from operations, $303,035
resulted from the Company receiving balloon note payments from two
franchisees during the quarter. To fund its operations, the Company requires
either additional financing, significant sales of additional franchises, or a
substantial increase in its network of Company-owned cafes.
The Company had developed a specific operating plan to meet the ongoing
liquidity needs of the Company's operations for the fiscal year ended March
31, 1997 and thereafter. During the fiscal year ended March 31, 1997, the
Company reduced administrative salaries, certain employee benefit costs, and
marketing expenses. The Company also sold 20 of its existing Company-owned
cafes and carts for proceeds of $1,321,000 in cash and is actively pursing
the sale of additional assets. Despite the sale (and possible future sales)
of these assets, the Company does intend to operate Company-owned locations.
The Company also completed a number of debt financing totaling $1,729,000
the sale of equity for $900,000 to meet its ongoing liquidity needs in the
fiscal year ended March 31, 1997. Additionally during the quarter ended June
30, 1997 the Company borrowed $275,000 in short-term loans and had warrants
exercised in the amount of $141,679 to meet its ongoing liquidity needs.
Based on the Company's current cost structure and other expense
calculations, and the Company's current and anticipated revenue streams,
including sales of new Java Centrale franchises and the operating income
expected to be produced by the Company's Paradise Bakery system, the Company
cannot estimate that it will break even on cash flow in the current fiscal
year. The Company does not expect to achieve profitability until after March
31, 1998 and then only if the Company's growth projections can be met and its
cost structure remains stable. There can be no assurance that enough new
franchises will be sold to provide the necessary liquidity, or that the
Company's liquidity goals will be reached in the immediate future if ever.
The Company has certain debt obligations that are in default for
non-compliance with financial covenants and non-payment to the scheduled
required payments. These obligations have been classified as currently due
in the financial statements and the Company cannot make any assurances as to
the ultimate disposition of these debt obligations which total approximately
$1,097,621 as of August 1997. The Company's plan of operation to provide
ongoing liquidity continues to include the sale of certain operating assets,
the active pursuit of debt and equity and the restructure of debt. The
Company can not make any assurance that this plan will be achieved.
14
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On June 27, 1997 Mr. Peter Merganthaler, an individual resident of
the State of Florida, filed suit against the Company in the 15th Judicial
Circuit Court in Palm Beach Country, Florida alleging breach of two 1995
financial consulting agreements. The relief sought by Mr. Merganthaler
includes payment of approximately $30,000 in consulting fees, $20,000 in out
of pocket expenses and $500,000 in commissions on private placements of the
Company's Common Stock. The Company believes that the Company has substantial
defenses to all of the claims asserted by Mr. Merganthaler, and it intends to
deny the allegation made in his complaint. On that basis, the Company
believes that the ultimate disposition of this lawsuit will not have a
material adverse effect on the Company's financial condition or operating
results.
On March 30, 1995, the Company issued to Oh La La!, Inc, Debtor-in
Possession, a promissory note in principal amount of $932,342 (the "Note").
The Note was convertible into shares of the Company's common stock, at its
option and under certain circumstances. In September of 1995 the Company
notified representatives of PSSS, Inc., successor in interest to Oh La La!,
Inc., that the required circumstances had been met and that it intended to
convert the note into shares of its common stock, and a number of shares
sufficient to convert the outstanding principal balance of the Note was
delivered to representatives of PSSS, Inc. In November of 1996, PSSS, Inc.
notified the Company that it rejected the September 1995 conversion because
the shares delivered to it were not sufficient to convert the
then-outstanding interest due on the Note, and on May 28, 1997, PSSS, Inc.
sent Java a formal demand letter for the immediate payment of the principal
amount of the Note plus $122,602.97 in accrued interest to date of such
letter. To date, there has been no formal resolution of the claim asserted
by PSSS, Inc. The Company's management believes that the Company has
substantial defenses to the claim that the September 1995 conversion was
ineffective, and on that basis believes that the ultimate disposition of the
claims asserted by PSSS, Inc. in this matter will not have a material adverse
effect on the Company's financial condition or operating results.
ITEM 2. CHANGES IN SECURITIES
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
a. The Company is in default on the payment of interest due on a
note payable in the aggregate principal amount of $417,412.
Principal of $246,250 and interest of $18,469 was due and payable
on June 30, 1997. The Company has not received a demand for
acceleration of payment. The principal holder of this note is
Chart House Enterprises, Inc. A note receivable that is held by
Paradise Bakery from a franchisee secures this note payable.
The Company's subsidiary Paradise Bakery, Inc. is in default of
certain financial covenants on a loan payable in the amount of
$680,209. The Company has not received a demand for
acceleration of payment. Monthly scheduled payments are current.
The principal holder of this loan is Imperial Business Credit and
is secured by substantially all Paradise Bakery assets.
15
<PAGE>
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS; REPORTS OF FORM 8-K
A. EXHIBITS
The Company is filing herewith the Exhibits listed on Schedule I
attached hereto.
B. REPORTS ON FORM 8-K
During the quarter ended June 30, 1997 the Company filed a Form 8-K/A
in regards to the sale of the Oh La La! Division to Good Foods Fast
Companies, Inc.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JAVA CENTRALE, INC.
(Registrant)
Date: August 14, 1997
By:
------------------------------------------
Gary C. Nelson
President and Chief Executive Officer
By:
------------------------------------------
Steven J. Orlando
Vice President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
INDEX TO EXHIBITS
Exhibits marked with an asterisk (*) represent management contracts or
compensatory plans or arrangements.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.49* Cancellation of stock options and warrants dated July 31, 1997
between the registrant and Richard D. Shannon for 450,000
commons shares at $.75 per share.
4.50* Cancellation of stock options and warrants dated July 31, 1997
between the registrant and Gary C. Nelson for 450,000 commons
shares at $.75 per share. This agreement is omitted, as it is
identical to the one above in exhibit 4.49.
4.51* Cancellation of stock options and warrants dated July 31, 1997
between the registrant and Steven J. Orlando for 450,000
commons shares at $.75 per share. This agreement is omitted,
as it is identical to the one above in exhibit 4.49.
4.52* Cancellation of stock options and warrants dated July 31, 1997
between the registrant and Thomas A. Craig for 150,000 commons
shares at $.75 per share. This agreement is omitted, as it is
identical to the one above in exhibit 4.49.
4.53* Cancellation of stock options and warrants dated July 31, 1997
between the registrant and Bradley B. Landin for 150,000
commons shares at $.75 per share. This agreement is omitted,
as it is identical to the one above in exhibit 4.49.
4.54* Cancellation of stock options and warrants dated July 31, 1997
between the registrant and Lyle Edwards for 50,000 commons
shares at $.75 per share. This agreement is omitted, as it is
identical to the one above in exhibit 4.49.
4.55* Cancellation of stock options and warrants dated July 31, 1997
between the registrant and Kevin Baker for 100,000 commons
shares at $.75 per share. This agreement is omitted, as it is
identical to the one above in exhibit 4.49.
11 Statement re: Computation of Per share Earnings (Loss)
27 Financial Data Schedule
</TABLE>
18
<PAGE>
[LOGO]
July 31, 1997
Mr. Gary Nelson, President
Java Centrale, Inc.
1610 Arden Way #145
Sacramento, CA 95815
Re: Cancellation of Options and Warrants
Dear Gary:
I hereby forfeit all of my current stock options and/or warrants granted to
me and all other options that I expect to be granted.
I understand and agree that I have no further interest or commitments in
stock options from Java Centrale, Inc.
The following options have been granted to me: 50,000
------
The following warrants have been granted to me: 400,000
-------
Sincerely,
/s/ Rick Shannon
Rick Shannon
<PAGE>
EXHIBIT 11
JAVA CENTRALE, INC., AND SUBSIDIARY
COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
1997 1996
---------- ---------
<S> <C> <C>
Weighted average number of common shares
outstanding 14,377,894 8,988,946
---------- ---------
---------- ---------
Net Loss ($811,409) ($763,650)
---------- ---------
---------- ---------
Net loss per weighted average equivalent common
shares outstanding ($0.06) ($0.08)
---------- ---------
---------- ---------
Share Months Outstanding
1997 1996
---------- ---------
Calculation of weighted average shares
outstanding (2)
Balance at beginning of period
April 1, 1996 - 8,533,587 shares 25,600,761
April 24, 1996 - 83,723 shares 184,191
May 20, 1996 - 442,142 shares 604,261
May 28, 1996 - 124,378 shares 136,816
May 31, 1996 - 2,105 shares 2,105
June 5, 1996 - 271,001 shares 225,834
June 7, 1996 - 68,376 shares 52,422
June 14, 1996 - 67,919 shares 36,223
June 18, 1996 - 133,200 shares 53,280
June 19, 1996 - 132,334 shares 48,522
June 27, 1996 - 224,215 shares 22,422
April 1, 1997 - 13,743,818 shares 41,231,454
April 10, 1997 - 106,667 shares 284,445
April 22, 1997 - 300,000 shares 680,000
April 29, 1997 - 150,000 shares 305,000
May 13, 1997 - 75,000 shares 117,500
May 30, 1997 - 121,951 shares 121,951
June 9, 1997 - 156,838 shares 104,559
June 10, 1997 - 156,863 shares 104,575
June 17, 1997 - 223,077 shares 89,231
June 24, 1997 - 569,801 shares 94,967
Options outstanding (1) (1)
Warrants outstanding (1) (1)
---------- ---------
Total 43,133,682 26,966,837
---------- ----------
---------- ----------
Weighted average number
of common shares outstanding 14,377,894 8,988,946
---------- ----------
---------- ----------
</TABLE>
(1) Not calculated as anti-dilutive
(2) All share and per share data have been retroactively restated to
reflect the 2.5 to 1 stock split.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 381,274
<SECURITIES> 0
<RECEIVABLES> 1,855,413
<ALLOWANCES> 391,492
<INVENTORY> 309,205
<CURRENT-ASSETS> 1,791,309
<PP&E> 3,756,849
<DEPRECIATION> 1,111,176
<TOTAL-ASSETS> 10,162,848
<CURRENT-LIABILITIES> 4,650,693
<BONDS> 375,052
0
0
<COMMON> 18,860,934
<OTHER-SE> (14,249,831)
<TOTAL-LIABILITY-AND-EQUITY> 10,162,848
<SALES> 2,200,349
<TOTAL-REVENUES> 2,547,950
<CGS> 762,433
<TOTAL-COSTS> 2,143,560
<OTHER-EXPENSES> 1,190,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,855
<INCOME-PRETAX> (811,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> (811,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (811,409)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
