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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A2
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
(FEE REQUIRED)
For the fiscal year ended March 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(NO FEE REQUIRED)
For the transition period from: to
Commission file number: 1-12932
JAVA CENTRALE, INC.
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(Exact number of Registrant as specified in its charter)
California 68-0268780
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.
1610 Arden Way, Suite 145, Sacramento, California 95815
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (916) 568-2310
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed under 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 the filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's common stock held by
non-affiliates as of June 28, 1996 (based on the closing sale price of the
Common Stock on the National Association of Securities Dealers Automated
Quotation System) was $5,778,630.
As of June 28, 1996 there were outstanding 10,082,980 shares of the
Registrant's Common Stock.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business 3
Item 2. Description of Property 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Securities Holders 18
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 56
PART III
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and Management 64
Item 13. Certain Relationships and Related Transactions 66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 68
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS.
Java Centrale, Inc., a California corporation (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, and commenced principal
operations as of April 1, 1993, at which time it had operating two franchised
cafes. During the Company's first full year of principal operations, from April
1, 1993 through March 31, 1994, it opened four additional franchised cafes and
two franchised carts. At March 31, 1995, the Company was operating 14
Company-owned and 12 franchisee-owned cafes, and three Company-owned and ten
franchised carts, and the Company had an additional 84 signed agreements for
as-yet unopened franchisee-owned cafes, 45 of which relate to a single
franchisee. At March 31, 1996, the Company was operating 36 Company-owned
cafes, and four Company-owned carts and 55 franchisee-owned cafes, and eight
franchisee-owned carts, and the Company had an additional 90 signed agreements
for as-yet unopened franchisee-owned cafes. During the year ended March 31,
1996, eight Franchise Agreements have been terminated and refunded by the
Company prior to the opening of the cafe as a result of the franchisee's lack of
financing and inability to select an acceptable location in a timely manner. The
Company had one franchisee-owned cafe closed in fiscal year end March 31, 1996
due to lack of financial and operational performance. The Company has also
re-acquired five franchisee-owned operating cafes and 58 additional rights for
locations under Area Development Agreements as a result of the Company's
intention to sale and re-franchise these locations and the area rights. The
Company acquired three cafes for $60,569 in cash, 279,567 shares of restricted
common stock valued at $466,168 assumed $133,968 in long term debt and canceled
franchisee receivable of $106,393.
On November 14, 1994, the Company entered into a ten-year Joint Venture
Formation Agreement with Banyan Capital, Limited Partnership, a Delaware Limited
Partnership, Java Southeast Partners, L.P., a Delaware limited partnership
("CoffeeCo"), and Java Southeast, Inc., a Delaware corporation (the "Joint
Venture"), for the development of a minimum of 50 cafes in the State of Florida
over a five-year period, and for rights to other markets on the Eastern
Seaboard. Under the terms of the agreement, the Company expects to contribute up
to 227,983 shares of its newly issued Common Stock to the Joint Venture, in
exchange for up to 18.3% of the Joint Venture's outstanding shares. All Company
shares to be issued as part of this transaction would be subject to various
restrictions on transfer. In exchange for a per cafe fee and an ongoing
management fee, the Joint Venture will obtain an exclusive license for the
Florida market. The Company and Coffee Co completed the initial phase of the
Joint Venture in July 1995 and the Company contributed 89,428 common shares and
expects to contribute the remaining shares prior to the end of the agreement.
The Joint Venture has opened three cafes as of March 31, 1996 and the Company
expects a significant portion of the remaining 47 cafes to open in years 4 and 5
of the agreement. The Company has advanced $200,000 in December, 1995, and an
additional $27,500 in June, 1996. The Company has agreed to advance an
additional $222,500 in 1996 provided that (i) the Joint Venture keeps current on
royalties and pays the
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remaining portion of the area development fee, and (ii) the Company has received
financing in excess of $500,000 or has completed a significant sale of the
Company's cafes. The Company received $6,145 in royalties through April of 1996,
and $155,000 of the area development fee as of June 30, 1996.
On March 30, 1995, the Company completed its acquisition of substantially
all of the assets of Oh-La-La!, Inc., a Delaware corporation headquartered in
Northern California. At the time of this transaction, Oh-La-La! was the
Debtor-in-Possession in a Chapter 11 bankruptcy proceeding. The assets
purchased included tenant improvements, equipment, and goodwill. The purchase
price for the assets acquired was $2,104,000; liabilities in the amount of
$113,000 were assumed as part of the transaction.
On December 31, 1995, the Company acquired 100% of the outstanding shares
of Paradise Bakery, Inc., for $5,375,000 cash and $1,350,000 notes payable of
which $385,000 represented an amount due from Founders Venture, Inc. prior to
the Founders Venture merger. Paradise Bakery, Inc., operates seven
Company-owned bakery/cafes and 44 franchisee-owned bakery/cafes.
On January 17, 1996, the Company merged into Paradise Bakery, Inc., 100% of
the outstanding shares of Founder Ventures, Inc., for 431,853 common shares of
the Company. Founder Venture, Inc., operated seven franchisee-owned Paradise
bakery/cafes prior to the merger.
On January 17, 1996, the Company acquired certain assets of Venture 88,
Inc., for 74,073 shares of the Company and $153,929 assumption of liabilities
and issued $46,071 in notes payable. The assets acquired were for three
franchisee-owned Paradise bakery & cafes prior to the acquisition.
The Company's revenues are currently derived primarily from Company-owned
facilities, initial franchise fees, franchise royalties, equipment sales, and
product overrides on sales to its franchisees. Franchise fees range from
$15,000 to $25,000 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 5% of the total purchases
of coffee from the Company's contract roaster.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Not applicable.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
JAVA CENTRALE AND OH-LA-LA! BUSINESS
The Company sells over 40 different varieties of whole bean and fresh
ground coffees as well as various flavorful brewed coffees, espresso beverages,
Italian sodas and other upscale beverages. The Company's products are sold to
the consumer exclusively through a system of Company-operated and franchised
European style gourmet coffee cafes, carts and kiosks. In addition to selling
numerous coffees and other specialty beverages, the Company-operated and
franchised cafes offer the consumer a wide selection of gourmet
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sandwiches, salads, soups, pastries and desserts and also sell coffee-making
equipment and accessories such as brewers, espresso makers, grinders, mugs and
carafes. The Company's carts and kiosks offer the same selection of espresso
based specialty beverages and Italian sodas as are offered in the Company's
cafes, as well as brewed coffees and a selection of morning pastries.
The Company believes that its flavored specialty coffees offer what the new
consumer in the specialty coffee market is looking for. Market research shows
that when new consumers enter the specialty coffee market they begin by
purchasing flavored coffees and flavored coffee products. Based on the
Company's experience in its Company-owned and franchised locations, the flavored
coffee customers move to unflavored coffees and coffee products as their tastes
and preferences mature. Therefore, by offering a wide selection of flavored, as
well as unflavored, coffees and coffee products in its cafes, carts and kiosks,
the Company believes that its products will be more attractive to the new
consumers and that the Company will retain the loyalty and patronage of the new
consumers as their enjoyment of specialty coffee broadens.
The Company believes that the "cafe" approach of selling its products will
distinguish the Company from its competition in the specialty coffee market
because its competitors focus primarily on retail sales of coffee, coffee
beverages and coffee related items. The Company's cafes offer convenient and
comfortable indoor and outdoor seating which encourages the customers to relax
and enjoy their purchases in the cafe. The Company also believes that the
comfortable and convenient atmosphere of its cafes encourages many of its
customers who frequent the cafes during the business hours of weekdays to return
in the evenings and on weekends to relax with their family and friends.
Additionally, by offering gourmet sandwiches, salads, pastries and other food
and dessert items, the Company believes that consumers are attracted into the
cafes during various parts of the day when they might not otherwise frequent the
cafe exclusively for coffee.
PARADISE BAKERY BUSINESS
Paradise Bakery is a company owned and franchisee-owned quick service
restaurant concept designed to meet consumer demands for value, quality, and
taste in a casual and appealing environment. The environment includes mall
locations and in-line cafe locations, as well as, carts and kiosks. Featured
menu items, depending upon the type of location, include as assortment of bakery
products, featuring cookies, muffins, croissants and desserts, prepared and
freshly baked daily at each location, as well as, specialty soups, salads, and
sandwiches.
Paradise has operated a successful and growing business for 19 years. Most
of the existing locations are in high profile upscale areas in California,
Arizona, Colorado, Oregon, Washington, Texas, and Hawaii and operate in shopping
malls and range in size from 450-3700 square feet.
Paradise does not have any direct competition in all areas of its business
given the mix of production, pricing, and positioning. However, it does have
segment competition from various companies providing portions of Paradise's
menu. The Company believes that Paradise does not compete with most other
specialty restaurant providers.
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Paradise also intends to introduce a new coffee program, Coffees of
Paradise, in the fourth quarter of 1996 as well as new bakery products,
sandwiches, and salads.
The Company currently operates both Company-owned and franchisee-owned
bakery/cafes. The Company plans to expand the franchisee-owned system by late
1996 by allowing existing franchisees to expand and by developing new
franchises.
In order to facilitate this expansion, the Company began work on renewing
the filing of the Paradise Bakery Uniform Franchise Offering Circular with the
various states agencies. This was necessary as the registrations were not kept
current prior to the time of the acquisition. In June of this year, the Company
completed filings in Texas, Arizona, and Colorado to allow the sale of two
company-owned bakery/cafes and for existing franchisees in Arizona and Colorado
to develop additional locations. The Company projects that the other filings
needed to execute the expansion plan for Paradise Bakery will be completed by
August, 1996.
INDUSTRY OVERVIEW
JAVA CENTRALE AND OH LA LA!
The market in the United States for specialty coffees is growing and highly
fragmented. The market for specialty coffee is discussed in THE MARKET FOR
COFFEE AND TEA: A MARKET INTELLIGENCE REPORT, a study published in 1994 by
FIND/SVP, an independent market research firm. According to that study, which is
the source for all market information in this Annual Report unless otherwise
noted, specialty coffees, also known as "gourmet coffees", include "true"
gourmet coffees (Arabica beans sold in whole bean and ground form) and premium
coffees (upscale coffees mass marketed by the leading coffee companies). The
study was published in 1994 using historical information through 1993. All
figures for the years after 1993 are forecasts contained in that study.
The study indicates that retail sales of specialty coffee increased from
approximately $1 billion in 1990 to approximately $1.6 billion in 1993. The
study projects that sales of specialty coffee in the United States will reach
approximately $2.1 billion by 1998. The specialty coffee dollar share of the
retail market was 20% in 1990 and 31% in 1993 and is projected by the FIND/SVP
study to be 38% in 1998.
The Company believes that the increasing popularity of specialty coffees
over the last several years can be attributed to five major factors which have
led to the transformation of specialty coffee from a highly specialized and
small segment of the coffee industry in the United States to an independent and
growing sector of the market. These five major factors are: (1) the trend toward
healthy eating, including the reduced consumption of alcoholic beverages, (2)
the availability of automatic drip coffee makers for the home, (3) the rising
price of regular coffee, (4) the rise of the gourmet foods market, and (5)
several technological innovations, including improved decaffeination methods and
the introduction of the one-way valve for coffee packaging, which allows carbon
dioxide to escape but does not permit oxygen to enter, thereby stretching the
shelf life of coffee from just a few days to nearly one year. The Company
believes that the continuing trend towards healthy eating together with a
widening consumer awareness of gourmet coffees, as well as lower prices for, and
greater availability of, a wider variety of beans, will all combine to increase
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consumer demand and recognition of the specialty coffee market over the next
several years. Based upon the above-described factors, the Company believes that
there will be continued rapid growth in the specialty coffee market through the
year 2000 and beyond.
PARADISE BAKERY
The bakery/cafe segment is growing in total. The bakery/cafe is made up of
primarily regional operators. The Company believes that the increasing
popularity of the bakery/cafe segment results from the trend of eating
healthier, customers seeking fresh products, the general growth in the gourmet
food markets, and value for freshness. The Company believes the bakery/cafe
segment will continue to grow and that further consolidation of regional
operators will continue.
COMPANY STRATEGY
The Company's objective is to become a leading specialty coffee retailer
and a leading bakery/cafe with fresh baked products through its Company-owned
and franchisee-owned cafes in the United States and Canada. The Company intends
to achieve this goal by selling only the highest quality products by providing a
superior level of customer service and by utilizing a market strategy which is
designed to emphasize the differences between the Company's products and those
of its competitors and to establish a high degree of customer loyalty and repeat
business. Each of the essential elements of this corporate strategy of the
Company is discussed below.
HIGHEST QUALITY COFFEE. The Company believes that its specifications for
the selection, roasting and delivery of its coffee beans and beverages are among
the highest in the coffee industry. However, due to the competitive nature of
this industry and the importance placed on this type of proprietary information
independent proof of this assertion is not available to the Company. The Company
believes that its roasting specifications for each variety of Arabica bean which
it offers provide for roasting of the bean to the degree that accentuates the
character of the individual coffee. Certain coffees have a tendency to have
more fragile characteristics that need to be roasted lighter in order to protect
the integrity of that particular variety, while other coffees having stronger
characteristics that overpower subtle nuances within that variety are enhanced
by a darker level of roasting. Since coffee beans are an agricultural product
that varies from season to season and from farm to farm, the Company reviews its
roasting specifications regularly and, if necessary, modifies those
specifications in order to bring each variety of coffee bean to its optimum
flavor potential.
PRODUCT IS THE CONCEPT. The foundation of Paradise's business is its
deliciously fresh products which consist of bakery items, sandwiches and salads.
Paradise uses only the finest ingredients in preparing its food products. In
order to enhance a quality image, we use well known brands as in selected
products. Each day our cookies, muffins, and brownies are prepared from
scratch. Our pastries, cinnamon rolls, pecan rolls, bagels and croissant
products are baked on premise daily. All Paradise fresh baked menu items are
preservative-free and are approved by the Heart Association. Paradise features
certain bakery products that are low in fat, yet rich in nutrients with no
artificial flavors or colors. Our sandwiches and salads are made to order. The
price value relationship is easily understood by our customer, since we serve
generous portions at reasonable prices.
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CUSTOMER SERVICE. A basic premise of the Company's business philosophy is
that it serves many customers on many different levels. The Company views its
vendors and suppliers as one level of customers, its franchises and Company
facility managers as another level of customers, and the end consumer/customer
as a third level customer who benefits from the relationships between the
Company and all of its levels of customers. Therefore, the Company provides the
same type of attention and service to each of these levels as would be expected
by the end consumer/customer of the Company's products.
MERCHANDISING AND MARKETING. The Company has a comprehensive
merchandising, marketing and image program featuring its logo and trademarks on
its signs, cafe interiors, cups, bags, packaging, promotional pieces and
literature. The program is designed to create a distinctive brand image and
brand awareness as well as provide the consumer with repeat customer incentives.
The Company has wide range of literature that gives the customer a source for
information about the origins and characteristics of coffees, as well as
grinding, brewing and storing methods and techniques that the Company believes
will result in the best coffee beverages.
SITE SELECTION. The Company's goal in cafe site selection is to locate its
cafes in high-traffic, high-visibility locations within areas that have
appropriate demographics, other retail business use and residential backup.
EXPANSION/ACQUISITION. The Company's strategy is to focus entirely on
growth through new franchised sites primarily in the western part of the United
States for Java Centrale and both eastern and western parts of the United States
for Paradise.
The Company has had an acquisition strategy by acquiring two brand names,
Oh La La! and Paradise Bakery.
On March 30, 1995 the Company acquired substantially all of the operating
assets of Oh-La-La!, Inc., a Delaware corporation headquartered in San
Francisco, California, operating 14 locations.
On December 31, 1995, the Company acquired 100% of the outstanding stock of
Paradise Bakery, Inc., a Delaware corporation, operating seven Company-owned and
44 franchisee-owned bakery/cafes. Additionally, on January 1, 1996, the Company
acquired 10 Paradise Bakery franchisee-owned bakery/cafes in two separate
agreements. The Company believes that the acquisition of Paradise Bakery will
allow the Company to further enhance the Company's expansion strategy by
franchising and developing Paradise Bakery.
SOURCING. The Company currently obtains its coffees pursuant to the
Producer Agreement between the Company and Coffee Bean International ("CBI"), an
independent roaster. Pursuant to the Producer Agreement, several different
varieties of green coffee beans are purchased, roasted, packaged and shipped by
CBI in accordance with the Company's specifications specifically detailed in the
Producer Agreement. All green beans purchased in accordance with the Producer
Agreement are of the Arabica species and the Company believes that the Arabica
beans which are purchased pursuant to the Producer Agreement are among the best
available from each producing region.
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RETAIL SALES. The Company sells over 40 different varieties of whole bean
and fresh ground coffees together with rich flavorful brewed coffees, espresso
beverages, Italian sodas and other upscale beverages, through its system of
Company-operated and franchised European style gourmet coffee cafes, carts and
kiosks.
CAFES AND KIOSKS
Distribution of the Company's products is done exclusively through a system
of Company-operated and franchised cafes and kiosks under the three brand names.
As of March 31, 1996, the Company had franchise agreements for 117 cafe
franchises and eight cart locations in 14 states of which 55 franchisee-owned
cafes and eight franchisee-owned carts were in operation. As of March 31, 1996,
there were 36 Company-owned cafes and four Company-owned carts in operation.
The following table represents the Company's operations:
Operating Units as of March 31, 1996
Cafe Cart
Company Franchised Company Franchised
Java Centrale 8 21 1 8
Oh La La! 10 - 3 -
Paradise Bakery 18 34 - -
Total 36 55 4 8
As of March 31, 1996, the Company had received $1,825,500 in cash representing
initial fees under its franchise agreements, and was entitled to receive an
additional $320,000 in cash fees when it completes its obligations under such
agreements, which obligations are expected to be completed no later than
December of 1999. The Company's revenues are currently derived primarily from
Company-owned facilities, initial franchise fees, franchise royalties, equipment
sales, and product overrides on sales to its franchisees.
DEVELOPMENT TIME. After the signing of a franchise agreement for a
particular location or locations, the amount of time necessary to develop that
location and eventually open and operate the cafe or kiosk varies depending on
several factors including site selection, preparation and approvals of plans,
acquisition of necessary permits, length of construction period and whether the
training of the employees will take place on-site or off-site. Based on the
Company's experience to date, the average development time of a single-unit cafe
franchise has been 4 to 8 months.
In addition to these development factors, multi-unit franchisees are
obligated under their franchise agreements to build cafes based on a three to
five year development schedule in which the majority of the locations are opened
in the first half of the development
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schedule. In the case of multi-unit developments, it is necessary to develop
real estate relationships that are likely to provide more than one desirable
location and, therefore, extra time and care is devoted to contracting with the
right firm for that purpose in the market in question. This recruiting process
could require an additional thirty to sixty days. In the case of a single unit
franchise where the territory is a subset of the larger market, the Company
typically selects the most experienced commercial real estate firm that
specializes in retail locations in that defined area. All of these factors
affect the Company's ability to open cafes within a specific time frame.
Although the development of a single franchised or Company-owned cafe will
always be subject to these timing factors, the number of cafes opened in any
given month or year will increase dramatically as additional franchises are sold
and leases for Company locations are signed.
PRODUCT MIX. The Company's Java Centrale cafes sell over 40 different
varieties of whole bean and fresh ground coffees together with rich flavorful
brewed coffees, espresso beverages, Italian sodas and other upscale beverages.
The Company's cafes offer six brewed coffees daily: one light and one dark
varietal, a Java Centrale House Blend, a varietal decaffeinated coffee, a
flavored coffee, and a flavored decaffeinated coffee. In addition, the Company
has developed its own line of contemporary espresso based beverages which are
designed to appeal primarily to younger customers and women. In addition to
selling numerous coffees and other specialty beverages, the cafes offer the
consumer a wide selection of gourmet sandwiches, salads, soups, pastries and
desserts as well as coffee-making equipment and accessories such as brewers,
espresso makers, grinders, mugs and carafes.
The Company's Java Centrale kiosks offer the full range of espresso based
specialty beverages and Italian sodas offered in the Company's cafes, as well as
brewed coffees and a selection of morning pastries.
Paradise Bakery has developed a brand identity of quality over its 19 years
of existence. It uses only the finest ingredients in preparing all food
products. Its bakery line consists of a variety of muffins, cookies, and
brownies, as well as, a line of pastry products, cinnamon and pecan rolls.
Typically, a Paradise store will feature each day, between ten and twelve
sandwiches, three tossed salads, plus three of four pasta type salads, as well
as, three or four varieties of soup/chowder.
PRICING. The Company prices its coffees, menu items and retail goods at or
above the prevailing high-end prices for these items in each of its markets. The
products offered by the Company are of the highest quality and would command a
premium price based on value alone. Additionally, the Company's research on
specialty consumers has shown that they expect to pay a higher price for
specialty food and beverage products and look with suspicion on products, even
products of high quality, that are priced below the market. This strategy
differentiates the Company from many of its retail competitors that are required
to compete on a PRICE ONLY basis. The Company believes that this pricing
strategy assures that necessary margins are protected and thereby allows the
Company and its franchisees to focus primarily on product quality and service to
earn and retain customers.
DESIGN. The Company's Java Centrale cafes are designed to provide the
customer with a modern, comfortable and convenient cafe and meeting place with a
European flair. The design uses a combination of primary colors that give the
cafes a different and
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distinctive look when compared with the facilities of the Company's competitors.
The Company believes that the distinctive look of its cafes will help the
consumer to more readily remember its name and its products, thereby resulting
in a higher level of repeat customer business for its cafes.
The Company's Paradise Bakery cafe design has evolved over the years always
adapting to the ever changing consumer needs. Presently, the Paradise design
has a tropical theme utilizing the color palette of light blue, pink and white.
The attractive cafe designs and functional building plans are an integral part
of the Paradise success formula. These designs provide an exciting environment
that supports product display, encourages impulse sales and provides color
efficiency.
Paradise is presently in the process of upgrading its design to meet
today's consumer demands for novel food products and services to meet their
constantly evolving needs and tastes. The most recent design change reflects a
more open, unique eating experience at Paradise by enabling the customer to come
into a tantalizing theater brimming with irresistible foods and beverages. The
color palette is changing to light, effervescent, bright fruit and vegetable
colors, such as mango, lemon, grape, tomato, and avocado. Other changes include
extensive use of product display, fresh food graphics, and enhanced graphic
communication system.
SUPPLIES. The Company and its franchisees purchase their food, beverages
and supplies only from Company-approved suppliers. All products must meet the
standards and specifications set by the Company. Management of the Company
constantly monitors the quality of the coffee, food, beverages and other
supplies provided to the cafes, carts and kiosks. The Company has been
successful in negotiating national distribution and price concessions from
suppliers for bulk purchases of coffee, food and paper supplies used by the
Company's system of cafes, carts and kiosks. The Company believes that these
arrangements have achieved cost savings, improved quality and consistency and
helped decrease volatility of coffee, food and supply costs. The Company
believes that essential coffee, food and beverage products are available or,
upon short notice, could be made available from alternate qualified suppliers.
MANAGEMENT AND EMPLOYEES. Each Company-owned or franchised cafe employs an
average of approximately 15 hourly employees, most of whom work part-time. The
management staff of a typical cafe operated by the Company consists of a general
manger, an assistant manager and one crew leader. A typical franchised location
is managed directly by the franchisee and an assistant manager and one crew
leader. Company cafe managers report to a district manger, while franchised
locations work in conjunction with one of the Company's franchise field
representative. The district mangers or franchise field representatives are
responsible for assuring compliance with the Company's products and facilities'
standards and supervising and assisting in the implementation of the Company's
local cafe marketing programs.
TRAINING. The Company's Java Centrale cafe training program has two parts.
The first part is an intensive two week program at the Company's training
facility in Folsom, California consisting of both classroom and on-the-job
training. The classroom training includes such topics as the origins of coffee,
coffee comparisons, food safety and sanitation, employment laws and regulations,
interviewing and hiring of employees, and systems to
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control both food and labor costs. The on-the-job training concentrates on
using the grinding, brewing and espresso making equipment, preparing and serving
the various brewed coffees and espresso beverages, and preparing and serving the
various menu items. In all cases, the in-cafe training emphasizes the
importance of fast and friendly customer service.
The second part of the training takes place at the cafe prior to opening.
The Company's training team works with the franchisee or Company-owned cafe
manager over a thirteen day period to prepare the facility for business and
train the opening crew. The schedule provides for one day of staging and
planning, eight days of crew orientation and training, one day working with
management to take the beginning inventory and prepare the cafe for business,
and the first three days of operations.
The Company's franchise field representatives generally visit each
franchised cafe on a monthly basis. The franchise field representative acts as
a business consultant to franchisees in an effort to ensure that each cafe and
cart is providing the highest quality products and fast, friendly service. In
addition, the field representative assists in developing business and marketing
plans, as well as in the training and development of the franchisee's staff. In
effect, the franchise field representative acts as the communication link
between the Company and each franchisee. The Company plans to have a ratio of
one field representative for each 15 to 20 franchised cafes and carts.
The Paradise training program currently consists of two weeks at the
Company's cafe in Santa Ana, California. The training program will be enhanced
later in 1996 as Paradise Bakery's franchising activity is started.
ADVERTISING AND PROMOTION. Marketing promotions are designed and planned
by the Company's Vice President of Marketing and are implemented after a
committee of the Company's executive officers has approved all promotions. In
the future, production of some marketing materials is expected to be paid for
through a national advertising fund that collects 2% of gross receipts (not
including sales tax) from each franchised cafe. The fund will become active and
collections will commence after the opening of the Company's 25th Java Centrale
cafe, whether Company-owned or franchised. Until that time, substantially all
marketing production costs will be borne directly by the Company. The Company
intends to charge for a national advertising fund by March, 1998. The Company
anticipates no effect on its operating results during fiscal 1997.
The Company has detailed "Local Cafe Marketing Program" which provides the
franchisee with camera ready artwork, pre-packaged local promotions, a
step-by-step plan for marketing in the cafe's immediate area, and examples of
successful campaigns from other franchisees.
The Company currently collects $164 per month from each Paradise Bakery
location. The advertising funds are being used to develop point of sale
material and local promotion.
FRANCHISE OPERATIONS
STRATEGY. The Company's growth strategy for the next five years is to focus
on the development of franchised cafes of Java Centrale and bakery/cafes of
Paradise Bakery in key metropolitan markets. Based upon the Company's operating
history to date, the Company
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believes that it can continue to attract financially and personally qualified
franchisees based on the strength of its cafe and bakery/cafe concepts and the
favorable potential returns available from a relatively low capital investment.
AGREEMENTS. The Company offers single unit Franchise Agreements and
multi-unit Area Development Agreements. The single unit Franchise Agreement
grants to the franchisee an exclusive license to operate a cafe at a specified
location in accordance with the Company's terms and conditions and to utilize
the Company's trademarks, service marks and other rights of the Company relating
to the sale of its items. The term of a Franchise Agreement for a cafe is ten
years, renewable at the option of the franchisee for successive five year
periods, if certain conditions pertaining to such renewal are met. The Area
Development Agreement grants to the franchisee the right to develop and open a
specified number of cafes in a defined geographic area within a limited period
of time and thereafter to operate each cafe in accordance with the terms and
conditions of the Franchise Agreement executed for each cafe location.
Either party may terminate a Franchise Agreement, or an Area Development
Agreement by giving notice of default in the event the other party breaches or
fails to comply with any of the terms, covenants, conditions or restrictions
applicable to such party, or if such party breaches any warranty or
representation contained in the Franchise Agreement or the Area Development
Agreement. The Company may also terminate a Franchise Agreement or an Area
Development Agreement without notice for several reasons, including among
others, the franchisee's bankruptcy or insolvency, cessation of business,
committing a default within 12 months of curing the same default or committing
repeated defaults, whether or not such defaults are cured after notice. The
franchisee may also terminate a Franchise Agreement in the event there is a
permanent and incurable inability of the Company or an authorized supplier to
supply the products required to be furnished under the Franchise Agreement or in
the event there is a supply interruption that lasts more than 180 days.
Although franchise fees are payable to the Company upon the execution of a
single-unit Franchise Agreement or an Area Development Agreement, the Company
only recognizes such fees as revenue when all material services or conditions
relating to the sale of the franchise have been substantially performed or
satisfied by the Company. See "Note B of Notes to Financial Statements".
FRANCHISE FEES AND ROYALTIES
CAFES. Under the Company's current Franchise Agreement for cafes, each
franchisee is generally required to pay a franchise fee of $25,000. The
franchise fee is generally paid to the Company upon the execution of the
Franchise Agreement and is non-refundable. If the franchisee thereafter
executes another Franchise Agreement for an additional cafe at a different
location, the franchisee is generally required to pay a franchise fee of $15,000
for each such additional cafe location, which franchise fee is non-refundable.
If a franchisee purchases an area pursuant to an Area Development Agreement, the
franchisee must pay an Area Development Fee of $5,000 for each cafe to be
developed in accordance with the Agreement's development schedule. The Area
Development Fee is paid to the Company in full upon the execution of the Area
Development Agreement and is not refundable. In addition to the Area
Development Fee, the Company is entitled to receive a
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Cafe Fee for each cafe location to be opened under the terms of the Agreement.
The first Cafe Fee of $20,000 is due upon execution of the Area Development
Agreement and is non-refundable. The subsequent Cafe Fees of $10,000 per
location are due when leases are signed and are non-refundable.
The rights of each cafe, whether opened on an individual basis or by an
area franchise, include the right to operate satellite locations within the
exclusive territory of that cafe. Satellite locations are kiosk or counter
operations located in self-contained facilities where full cafe operation is not
feasible. Facilities occupied by one of franchisee's satellite locations are
governed by the existing Franchise Agreement, and once opened are considered a
part of the franchised business. The Company is generally entitled to a
satellite location opening fee of $3,500 which is paid to the Company upon
approval of the satellite location and is non-refundable.
Each cafe franchisee is generally required to pay the Company on a
weekly/monthly basis a 4%-6% royalty on cafe or satellite location gross
receipts (not including sales tax) and to pay on a weekly basis 2% of the cafe's
gross receipts (not including sales tax) to the Company's national advertising
fund after the Company has 25 cafes in operation, whether Company-owned or
franchised. Each cafe franchisee is also required to spend 2% of its gross
receipts (not including sales tax) on local cafe marketing.
FRANCHISEE SUPPORT SERVICES
SITE SELECTION. The Company assists the franchisee with site selection for
cafes. Through the Company's network of commercial real estate site selectors,
the Company often finds a site that meets its demographic criteria before the
franchisee. In any case, each site must be mutually approved by the franchisee
and the Company before a lease is signed.
CONSTRUCTION AND EQUIPMENT. The Company as of April, 1996, discontinued
operation of the turn-key construction and equipment option to franchisees. The
Company will offer a selected national equipment supplier and assist in the
construction solutions. The Company believes that the change to an outside
third party will allow the franchisee to build the cafe at the best price and
value.
FIELD SUPPORT. The Company maintains a staff of well-trained and
experienced franchise field representatives who help to train franchisees and
assist them in opening new cafes and who monitor the operations of existing
locations. These services are provided as part of the Company's franchise
program.
MARKETING AND ADVERTISING SUPPORT. The Company provides franchisees with a
full range of marketing materials and consumer literature. The Company
regularly prepares and provides to franchisees feature promotions relating to a
specific coffee, beverage, food or retail item. These items, in conjunction
with the Company's Local Cafe Marketing Manual, provide the core of the
marketing and advertising support system. The franchise field representative
and the Company's marketing department work with the franchisee to implement and
monitor the effectiveness of the various promotions.
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COMPETITION
The Company's whole bean coffees compete directly against specialty coffees
sold at retail through supermarkets specialty retailers and a growing number of
specialty coffee stores. The Company's coffee beverages compete directly
against all restaurant and beverage outlets that serve coffee and a growing
number of espresso stands, carts, and stores. Both the Company's whole bean
coffees and coffee beverages compete indirectly against all other coffees on the
market. The Company believes that its customers choose among retailers
primarily on the basis of quality and convenience, and to a lesser extent, on
price.
Management believes that supermarkets pose the greatest competitive
challenge in the whole bean coffee market, in part because supermarkets offer
customers the convenience of not having to make a separate trip to the Company's
stores. A number of nationwide coffee manufacturers, such as Kraft, General
Foods, Procter & Gamble and Nestle are distributing premium coffee products in
supermarkets and those products may serve as substitutes for the Company's
coffees. Regional specialty coffee companies, such as Green Mountain Coffee,
Inc., Hillside Coffee and Sarks, also sell whole bean coffees in supermarkets.
In addition, the Company competes for whole bean coffee sales with other
franchise operators and locally owned specialty coffee stores. There are a
number of competing specialty coffee retailers with significantly more locations
than the Company, such as Starbucks Corporation, which has a total of 800+
retail stores and licensed airport stores located in the United States and
Canada, Gloria Jean's Coffee Bean Corp., a franchisor of approximately 230+
specialty coffee stores located primarily in shopping malls throughout the
United States, Barnie's Coffee and Tea Co., a franchisor with approximately 90
locations in the United States, and The Coffee Beanery Ltd., a franchisor of
specialty coffee stores which operates approximately 165 locations in the United
States.
The Company's primary competitors for beverage sales are restaurants,
shops, and street carts. Although competition in the beverage market is
currently fragmented, a major competitor with substantially greater financial,
marketing, and operating resources than the Company could enter this market at
any time and compete directly against the Company.
The Company competes with fast food chains, major restaurant chains and
other food service related franchisors for franchisees of its cafes, carts and
kiosks. Many franchisors have greater market recognition and greater financial,
marketing and human resources than the Company.
The Company also expects that competition for suitable sites for new stores
to support the Company's planned growth will be significant. The Company
competes against both other specialty retailers and restaurants for these sites,
and there can be no assurance that management will be able to continue to secure
adequate sites at acceptable rent levels.
Competition for the Paradise Bakery comes from a variety of concepts. The
direct competition for Paradise Bakery varies depending on the location of the
stores in shopping malls. Some competition comes from similar concepts, such
as, Au Bon Pain, which is a bakery/cafe concept, or sandwich/salad concepts,
such as Wall Street Deli, located within the area or located close to a Paradise
Bakery. Other types of competitors are strictly
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bakery product driven, such as, Cinnabon and Mrs. Fields. What sets Paradise
apart from most competitors is menu mix, positioning, and pricing.
GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission ("FTC") regulation and
state laws which regulate the offer and sale of franchises. The Company is also
subject to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires the Company to furnish to prospective
franchisees a franchise offering circular containing information prescribed in
the FTC Rule.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship presently exist in a substantial number of
states. Such laws generally require registration of the franchise offering with
state authorities and regulate the franchise relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith, prohibiting
interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisees and regulating
discrimination against franchisees in charges, royalties or fees. Although such
laws may restrict a franchisor in the termination of a franchise agreement by,
for example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination provides an opportunity to
cure a default and a repurchase of inventory or other compensation, these
provisions have not had, and are not expected to have, a material effect on the
Company's franchise operations. The Company is not aware of any pending
franchise legislation which, in its view, is likely to significantly affect the
operations of the Company. The Company believes that its operations comply in
all material respects with the FTC Rule and the applicable state franchise laws.
Each Company-owned and franchised cafe and kiosk is subject to licensing
and regulation by a number of governmental authorities, which may include
health, sanitation, safety, fire building and other agencies in the state and
municipality in which the cafe or kiosk is located. Additionally, the food
service industry in general is subject to extensive federal, state and local
government regulations relating to the development and operation of food service
outlets, including laws and regulations relating to building and seating
requirements, the preparation and sale of food, cleanliness, safety in the work
place and accommodations for the disabled. The Company-owned and franchised
cafes which are currently operating are subject to various federal, state and
local laws and regulations, including, without limitation, the Fair Labor
Standards Act, the Americans With Disabilities Act, the Department of
Agriculture, the Food & Drug Administration, and various state agencies.
Difficulties in obtaining or failure to obtain the required licenses or
approvals could adversely affect currently operating cafes and could delay or
prevent the development of a new cafe or kiosk in a particular area or location.
The Company is also subject to federal and state environmental regulations,
but, to date, these regulations have not had and are not expected to have in the
future, any material effect on the Company's operations. More stringent or
varied requirements of local governmental authorities with respect to zoning,
land use and environmental matters could delay or prevent the development of a
new cafe or kiosk in a particular area or location.
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The Company is also subject to state and federal labor laws that govern its
relationship with its employees, such as minimum wage requirements, overtime
and working conditions, citizenship requirements and prohibitions against
discrimination. Significant numbers of the Company's food service and
preparation personnel are paid at rates governed by the federal minimum wage
laws. Accordingly, further increases in the minimum wage will increase the
Company's labor costs.
TRADEMARKS
The Company has registered the Java Centrale name and the Paradise Bakery
name and their logos with the United States Department of Commerce Patent and
Trademark Office. The Company currently uses a variety of other trademarks
which it expects to file applications for registration beginning in December of
1996. These trademarks are "Centrale Royale", "The Daily Brews", "For the
Luv-a-Java", "Java Jive", "Oh-La-La!", "Nice 'n Iced", "Splendid Blended" ,
"Cookie Munchers Paradise", "Paradise Bakery", "Paradise Bakery Unique Quality",
"Cookie Muncher's Paradise A Unique Bakery", "Paradise Bakery & Cafe", and "Chip
Munchers".
EMPLOYEES
As of March 31, 1996, the Company had 22 full time salaried employees and
10 hourly employees at its headquarters location in Sacramento, California. As
of such date, the Company also employed an additional 64 salaried employees and
400 hourly employees in its operations. None of the Company's employees is
represented by a labor union and the Company considers relations with its
employees to be generally good.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
On December 11, 1995, Coffee Centrale, Inc., a franchisee of the Company in
Dallas, Texas, and its owners Diana and Iosif Etinger (together, the
"plaintiffs") sued the Company in the 44th Judicial District Court of Dallas
County, Texas. The Plaintiffs allege that the Company committed fraud and
violated the Texas Business Opportunity Act by knowingly misrepresenting
material facts concerning the Plaintiff's franchisee and committing other
misleading or deceptive acts, breached its fiduciary duty in connection with the
Plaintiffs' entry into a lease agreement for the premises committed
discriminatory pricing by paying a lower price and/or receiving rebates for
brand name products not available to the Plaintiffs, causing the Plaintiffs to
receive a different price than similarly situated Company franchisees for a like
kind or quality of goods. Relief sought in this suit includes unspecified actual
damages and punitive damages in excess of $2,000,000. The Company, which has
denied the allegations, has filed a related action against Coffee Centrale, Inc.
in the Federal District Court in Sacramento, California, alleging breach of the
franchise agreement. Although the proceedings are still at an early stage, no
depositions have yet been taken in the Texas case, and therefore no prediction
may be made as to its outcome, the
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Company's management believes that the Plaintiff's claims are without
substantial merit, and on that basis believes that the ultimate disposition of
this litigation will not have a material adverse effect on the Company's
financial condition or operating results.
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PART II
ITEM 7. 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 completed 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.
As of March 31, 1996, the Company had operating 40 company-owned locations
and 63 franchisee-owned locations, as compared to 17 company-owned locations,
and 22 franchisee-owned locations as of March 31, 1995, and three company-owned
locations and six franchisee-owned locations as of March 31, 1994.
The Company entered into agreements with franchisees to open 33 cafes
during the year ended March 31, 1996, as compared to entering into agreements
with franchisees to open 22 cafes and six carts during the year ended March 31,
1995. The Company entered into agreements to open 55 cafes (including a
franchise agreement for 46 cafes with one franchise under an Area Development
Agreement) and 18 carts during the year ended March 31, 1994.
The Company actually opened 15 franchisee-owned cafes, and three
Company-owned cafes, as compared to opening 11 franchisee-owned cafes and eight
franchisee-owned carts during the year ended March 31, 1995. The Company opened
four franchisee-owned cafes, two franchisee-owned carts, and no Company-owned
cafes or carts during the year ended March 31, 1994.
The Company had one franchisee-owned cafe close in the fiscal years 1996
and 1995.
The Company acquired five cafes from franchisees and operated the cafes as
Company-owned after the purchase during the year ended March 31, 1996, as
compared to none for the year ended March 31, 1995, and March 31, 1994. As part
of these cafe acquisitions the Company also re-acquired the rights to open 58
cafes in California, Nevada, Illinois, and other eastern states. The Company
acquired the cafes for sale and re-franchise to new franchisees. The cafes were
experiencing financial and operational difficulties under the franchisee
management. As part of the acquisition the Company canceled receivables from
the franchisees related to equipment purchased by the two of the franchisees to
open the cafes.
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On November 14, 1994 the Company entered into a Joint Venture Formation
Agreement with Banyan Capital, Limited Partnership for the development of fifty
cafes in the State of Florida over a five-year period, and for rights to other
markets on the Eastern Seaboard. The Joint Venture Formation Agreement and
related transactions was completed in July, 1995 and as of March 31, 1996, there
were three cafes operating under this agreement.
On March 30, 1995, with bankruptcy court approval, the Company acquired
substantially all the operating assets of Oh-La-La!, Inc. held at the locations
being purchased and certain other operating assets. The tangible assets and
liabilities acquired consist mainly of tenant improvements, equipment, and loans
payable. The purchased locations represent a significant portion of the
Company's revenues and operations.
On December 31, 1995, the Company acquired 100% of the outstanding stock of
Paradise Bakery, Inc. At the time of the acquisition, Paradise Bakery had 7
Company-owned and 44 franchisee-owned bakery/cafes operating in nine states. On
January 1, 1996, the Company acquired through a merger with Founders Venture,
Inc., seven franchisee-owned bakery/cafes operating in Texas. On January 1,
1996, the Company acquired through an asset purchase agreement three
franchisee-owned bakery/cafes operating in Northern California. Immediately
following these three acquisitions, the Company was operating 17 Company-owned
and 34 franchisee-owned bakery/cafes. The Company opened one Company-owned
bakery/cafe in the year ended March 31, 1996. These acquisitions of Paradise
bakery/cafe locations will represent a significant portion of the Company's
revenues and operations.
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 $25,000 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.
FISCAL 1996 AS COMPARED TO FISCAL 1995
Total Company revenues for the fiscal year ended March 31, 1996 totaled
$9,555,000, as compared to $1,776,000 for the year ended March 31, 1995, an
increase of $7,779,000, or 438%. The principal components of this increase were
increased revenues amounting to $6,249,000 from Oh La La! purchased locations
and the acquisition of the Paradise Bakery operations as of December 31, 1995.
The Company's revenues from Company-owned retail operations increased by
$7,108,000, to $7,585,000 for the fiscal year ended March 31, 1996, from
$477,000 for the fiscal year ended March 31, 1995. This increase resulted
primarily from $3,424,000 in revenues recognized with the acquisition of the Oh
La La! locations and $2,826,000 in revenues recognized with the acquisition of
the Paradise Bakery locations, additionally an
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increase of $858,000, or 180%, in revenues at the Company-owned Java Centrale
locations from the addition of five Company-owned cafes during the 1996 fiscal
year.
Revenues from the Company's franchising operations slightly decreased
$3,000, or 1% to $395,000 for the fiscal year ended March 31, 1996, from
$398,000 for the fiscal year ended March 31, 1995, resulting from a decrease in
forfeited franchise fees recognized by the Company during the 1996 fiscal year
of $49,000, as compared to $79,000 received during the 1995 fiscal year.
Revenues from the Company's royalties increased $327,000, or 165%, to
$525,000 for the fiscal year ended March 31, 1996, from $198,000 for the fiscal
year ended March 31, 1995. This increase resulted primarily from the royalties
associated with the acquisition of Paradise Bakery amounting to $196,000 and the
opening of 15 new franchisee-owned locations during the 1996 fiscal year.
Revenues from the Company's equipment sales increased $348,000, or 50%, to
$1,050,000 for the fiscal year ended March 31, 1996 from $702,000 for the fiscal
year ended March 31, 1995. This increase resulted primarily from an increase of
15 franchisee-owned cafe locations opened during the 1996 fiscal year, as
compared to the 11 franchisee-owned cafe locations opened during fiscal 1995.
The Company sells the equipment required to substantially all of its
franchisee-owned locations.
Total expenses for the year ended March 31, 1996 were $13,593,000, an
increase of $9,782,000, or 257%, over expenses of $3,811,000 for the year ended
March 31, 1995. The principal components of the increase in expenses resulted
from $7,126,000 in operating expenses associated with the acquisition of the Oh
La La! locations and the acquisition of Paradise Bakery. Additionally, the
increase resulted from the Company recognizing during the fiscal year end 1996,
a one-time non-recurring expense of $453,000 relating to the issuance of shares
below market pursuant to a consulting agreement to develop acquisitions,
franchising opportunities and consult regarding investment relation matters for
the Company. Additionally, there was an increase in the cost of equipment,
selling, general and administrative expenses, depreciation and amortization and
other operating costs from the addition of Oh La La! and Paradise Bakery.
The cost of food and beverage, labor, and operating costs for the Company's
retail operations increased $6,862,000, for the year ended March 31, 1996, to
$7,503,000, as compared to $641,000, for the year ended March 31, 1995. The
increase resulted primarily from $5,197,000 in operating costs associated with
the acquisition of the Oh La La! locations and the acquisition of the Paradise
Bakery locations. Additionally, an increase of $1,288,000 in operating costs
associated with the addition of six Company-owned Java Centrale cafes during the
1996 fiscal year as compared to the 1995 fiscal year.
The Company's cost of equipment increased by $263,000, or 34%, in the year
ended March 31, 1996, to $1,038,000, as compared to $775,000 for the year ended
March 31, 1995. This increase resulted primarily from the growth in the
Company's opening seven additional franchisee-owned locations during the year.
Selling, general, and administrative expenses increased $1,910,000, or 81%,
during the year ended March 31, 1996, to $4,261,000 from $2,351,000 during the
1995 fiscal year,
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primarily because of higher expenses associated with legal, accounting,
consulting, investor relations, and higher expense relating to franchise
recruitment, training, and support, and overall administration salaries relating
to the acquisition of Oh La La! and Paradise Bakery. Additionally, the increase
resulted from the Company recognizing during the fiscal year end 1996, a
one-time non-recurring expense of $453,000 relating to the issuance of shares
below market pursuant to a consulting agreement to develop acquisitions,
franchising opportunities and consult regarding investment relation matters for
the Company.
For the year ended March 31, 1996, the Company had an operating loss of
$4,038,000, a net loss of $3,966,000, and a loss per share of $.61, as compared
to an operating loss of $2,035,000, a net loss of $1,894,000, and a loss per
share of $.42 for the fiscal year ended March 31, 1995. The increased operating
loss and net loss primarily resulted from higher expenses associated with the
Java Centrale system, increased administrative salaries, legal, accounting,
consulting and investor relations, depreciation and amortization, and increased
expenses associated with franchisee recruitment, support and training and the
recognition of $410,000 in losses associated with cafe and cart closures.
Additionally, the increase resulted from the Company recognizing during the
fiscal year end 1996, a one-time non-recurring expense of $453,000 relating to
the issuance of shares below market pursuant to a consulting agreement to
develop acquisitions, franchising opportunities and consult regarding investment
relation matters for the Company.
FISCAL 1995 AS COMPARED TO FISCAL 1994
Total company revenues for the fiscal year ended March 31, 1995, totaled
$1,776,000, as compared to $894,000 for the year ended March 31, 1994, an
increase of $882,000, or 99%. The principal components of this increase were
increased revenues from franchising activities, equipment sales, and Company
retail operations.
The Company's revenues from Company-owned retail operations increased by
$49,000, or 11%, to $477,000 for the fiscal year ended March 31, 1995, from
$428,000 for the fiscal year ended March 31, 1994. This increase resulted
primarily from an increase in revenues at the Company-owned training location
and the addition of three Company-owned coffee carts.
Revenues from the Company's franchising operations increased $292,000, or
275%, to $398,000 for the fiscal year ended March 31, 1995, from $106,000 for
the fiscal year ended March 31, 1994. This increase resulted primarily from the
opening of eight new franchisee-owned locations during the 1995 fiscal year,
raising the total number of franchisee-owned locations open at March 31, 1995,
to 12, as compared to six such locations at March 31, 1994. In addition, the
amount of forfeiting franchisee fees received by the Company during the 1995
fiscal year was $79,000, as compared to none received during the 1994 fiscal
year.
Revenues from the Company's royalties increased $118,000, or 148%, to
$198,000 for the fiscal year ended March 31, 1995, from $80,000 for the fiscal
year ended March 31, 1994. This increase resulted primarily from an increase of
22 franchisee-owned locations operating during the 1995 fiscal year, as compared
to the six franchisee-owned locations operating during the 1994 fiscal year.
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Revenues from the Company's equipment sales increased $422,000, or 151%, to
$702,000 for the fiscal year ended March 31, 1995, from $280,000 for the fiscal
year ended March 31, 1994. This increased resulted primarily from an increase
of eight in franchisee-owned locations opened during the 1995 fiscal year, as
compared to the four new locations opened during fiscal 1994. The Company sells
the equipment required to substantially all of its franchisee-owned locations.
Total expenses for the year ended March 31, 1995, were $3,811,000, an
increase of $1,677,000, or 79%, over expenses of $2,134,000 for the year ended
March 31, 1994. The principal components of the increase in expenses were cost
of equipment, selling, general and administrative expenses, and other operating
costs.
The cost of food and beverage, labor, and operating costs for the Company's
retail operations increased $158,000, or 33%, for the year ended March 31, 1995,
to $641,000 as compared to $483,000 for the year ended March 31, 1994. The
increase resulted primarily from the costs associated with the Company's three
additional coffee carts and increased costs at the Company's training facility
in Folsom, California.
The Company's costs of equipment increased by $445,000, or 135%, in the
year ended March 31, 1995, to $775,000, as compared to $330,000 for the year
ended March 31, 1994. this increase resulted primarily from the growth in the
Company's operating franchisee-owned locations during the year. Additionally,
the Company experienced higher than anticipated costs associated with the
construction of the four new franchisee-owned locations opened during the year.
Selling, general, and administrative expenses increased $1,103,000, or 88%,
during the year ended March 31, 1995, to $2,351,000 from $1,248,000 during the
1994 fiscal year, primarily because of higher expenses associated with legal,
accounting, consulting, and investor relations as a result of being a public
company and higher expense relating to franchise recruitment, training, and
support and overall administration salaries.
For the year ended March 31, 1995, the Company had an operating loss of
$2,035,000, a net loss of $1,894,000, and a loss per share of $0.42, as compared
to an operating loss of $1,240,000, a net loss of $1,241,000, and a loss per
share of $0.53 for the fiscal year ended March 31, 1994. The increased
operating loss and net loss primarily resulted from higher expenses associated
with being a public company, including increased administrative salaries, legal,
accounting, consulting and investor relations, and increased expenses associated
with franchisee recruitment, support, and training.
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
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<PAGE>
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 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. See Item 12 "Security Ownership of Certain Beneficial Owners and
Management -- Escrow Agreement," below.
The Company used a portion of the proceeds from the initial public offering
to repay long term debt, purchase equipment and furniture, support the operating
losses in developing the Company's operating system, and pay $500,000 as part of
the purchase price to acquire the operating assets of Oh-La-La!, Inc.
On July 15, 1994, the Company paid a 25% stock dividend on its Common Stock
to shareholders of records on June 30, 1994. Prior to the issuance of the
dividend, employees and officers of the Company holding securities, including
warrants and options, waived their rights to receive the stock dividend and also
waived the impact such stock dividend would have on any options or warrants held
by the security holders, including, but not limited to, any anti-dilution
provisions relating to such options and warrants.
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, 1996, none of the convertible debt has been
converted into the Company's common stock.
The Company used $5,375,000 of the cash raised through the private
transactions to acquire 100% of the common stock in Paradise Bakery, Inc., on
December 31, 1995. Additionally, as part of the acquisition of Paradise Bakery,
Inc., the Company issued notes to the seller in the amount of $1,350,000. The
Company also issued notes in the amount of $46,071 to the sellers and assumed
$97,950 in debt obligation associated with the asset purchase of the three
Paradise Bakery locations. The Company assumed bank debt in the amount of
$1,085,000 and $24,535 in lease obligations associated with the merger of
Founders Venture, Inc., into Paradise Bakery, Inc.
As of March 31, 1996, the Company had received $144,839 in partial funding
of a lease commitment amounting to $240,000. The Company has received the
remaining portion of this commitment by June 30, 1996.
As part of the purchase price for the assets of Oh La La! acquired by the
Company on March 31, 1995, the Company issued to Oh La La!, Inc. a note payable
of $745,874, and assumed liabilities for tenant improvement loans related to the
properties acquired of $113,306. In January of 1996, the Company converted a
note payable of $745,874 into 234,000 shares of common stock pursuant to the
terms of the note associated with the acquisition of Oh La La!.
As of March 31, 1996, the Company had no line of credit available to it.
The Company incurred a net loss of $3,966,000 and used net cash of
$2,391,000 in operating activities for the year ended March 31, 1996. The
Company has developed a
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<PAGE>
specific operating plan to meet the ongoing liquidity needs of the Company's
operations both for the year ended March 31, 1997, and thereafter.
During the quarter ended June 30, 1996, the Company reduced administrative
salaries, certain employee benefit costs and marketing expenses. The Company
has sold two Company-owned cafes and is actively pursuing the sale of assets
associated with the Company's cafe operations. The Company intends to operate
Company-owned locations. In February of 1996, the Company completed the
expansion and remodeling of key Oh La La! locations which management believes
will increase the operating margins of this division. As of July 11, 1996, the
Company has obtained three separate lines of credit amounting to $925,000, of
which senior management has committed to $175,000. These lines will secure all
the Company's assets. In addition to the operating plan, the Company will
benefit from 12 months of Paradise Bakery operating income during the year ended
March 31, 1997, as compared to three months in the year ended March 31, 1996.
Management believes that this plan, which is currently being implemented,
is sufficient to meet the Company's liquidity needs for the year ended March 31,
1997, and thereafter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following 26 pages contain the Company's audited balance sheets as of
March 31, 1996 and 1995, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the years ended March 31, 1996, 1995, and
1994. No supplementary data is required to be filed by the Company by Section
302 of Regulation S-K.
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<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
JAVA CENTRALE, INC.,
AND SUBSIDIARY
March 31, 1996, 1995 and 1994
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<PAGE>
C O N T E N T S
Page
Report of Independent Certified Public Accountants 30
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 31
Consolidated Statements of Operations 32
Consolidated Statement of Stockholders'
Equity (Deficit) 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 36
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<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
JAVA CENTRALE, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of JAVA CENTRALE,
INC. (A CALIFORNIA CORPORATION) AND SUBSIDIARY as of March 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended March 31, 1996 and 1995 and 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Java Centrale,
Inc. and Subsidiary as of March 31, 1996 and 1995, and the consolidated results
of their operations and their consolidated cash flows for the years ended March
31, 1996, 1995 and 1994 in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Sacramento, California
June 18, 1996
(except for note W, as to which the
date is July 11, 1996)
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31,
<TABLE>
<CAPTION>
ASSETS
1996 1995
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,182,078 $ 3,764,278
Notes receivable - current 485,751 193,129
Accounts receivable (net of $58,000
allowance in 1996 and none in 1995) 405,574 25,234
Inventories 417,780 176,980
Notes receivable-officer 235,201 -
Prepaid expenses and other 595,285 252,026
--------- ---------
Total current assets 3,321,669 4,411,647
NOTES RECEIVABLE 1,298,574 406,276
PROPERTY AND EQUIPMENT, NET 5,737,980 1,341,108
INTANGIBLE ASSETS 5,526,203 1,234,893
DEFERRED CHARGES AND OTHER 670,658 126,290
INVESTMENT IN JOINT VENTURE 176,983 43,413
--------- ---------
$ 16,732,067 $ 7,563,627
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,807,136 $458,206
Accrued liabilities 726,244 133,328
Due to related parties 22,637 9,104
Current maturities of long-term debt 746,785 23,200
Current capital lease obligations 96,267 -
--------- -------
Total current liabilities 3,399,069 623,838
DEFERRED REVENUES 1,003,500 689,000
LONG-TERM DEBT 1,171,161 809,733
CONVERTIBLE DEBT 3,500,000 -
CAPITAL LEASES 129,054 -
OTHER LIABILITIES 148,376 10,000
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; 8,533,587 - 1996
and 5,316,820 - 1995 15,493,137 9,576,860
Accumulated deficit (8,112,230) (4,145,804)
------------ ------------
7,380,907 5,431,056
------------ ------------
$ 16,732,067 $ 7,563,627
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue:
Company cafe sales $7,585,190 $476,859 $428,438
Franchise operations 394,788 398,000 106,000
Royalties 524,635 198,413 79,570
Sales of equipment and supplies 1,050,187 702,398 280,390
----------- ----------- -----------
Total revenue 9,554,800 1,775,670 894,398
Cost of company sales:
Food and beverage 2,597,238 222,857 169,903
Labor 2,714,067 265,075 171,493
Direct and occupancy 1,742,044 72,999 116,263
Cost of equipment and supplies 1,038,497 774,984 329,986
Depreciation 227,631 34,865 22,775
Other 222,000 45,256 2,179
----------- ----------- -----------
Total cost of company sales 8,541,477 1,416,036 812,599
----------- ----------- -----------
General and administrative expenses 4,261,049 2,351,025 1,248,318
Depreciation and amortization 380,159 43,746 73,026
Loss associated with cart and cafe closures 410,200 -- --
----------- ----------- -----------
Operating loss (4,038,085) (2,035,137) (1,239,545)
----------- ----------- -----------
Other income (expense):
Interest expense (117,284) (7,247) (31,803)
Interest income 98,295 216,842 6,444
Debt conversion expense - (118,953) -
Other income 90,648 50,312 24,298
----------- ----------- -----------
Net Loss $(3,966,426) $(1,894,183) $(1,240,606)
----------- ----------- -----------
----------- ----------- -----------
Net loss per weighted average equivalent
common share outstanding $(.61) $(.42) $(.53)
----- ----- -----
----- ----- -----
Equivalent common shares outstanding 6,526,377 4,488,532 2,507,652
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Three years ended March 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Accummulated
--------------------- ------------ ------------
Shares Amount Shares Amount (Deficit) Total
-------- -------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1993 7,950,000 $1,590,000 2,925,000 $10,000 $(930,029) $669,971
Dividends on Series A preferred
stock - - - - (30,712) (30,712)
Dividends on Series B preferred
stock - - - - (50,274) (50,274)
Conversion of Series A preferred
stock to common stock (2,950,000) (590,000) 91,820 590,000 - -
Net loss - - - - (1,240,606) (1,240,606)
--------- --------- --------- --------- --------- ---------
Balances, March 31, 1994 5,000,000 1,000,000 3,016,820 600,000 (2,251,621) (651,621)
Initial public offering of common
stock, net of expenses - - 1,500,000 7,288,407 - 7,288,407
Conversion of Series B preferred
stock to common stock (5,000,000) (1,000,000) 200,000 1,000,000 - -
Debt conversion expense - - - 118,953 - 118,953
Shares issued for acquisition - - 600,000 569,500 - 569,500
Net loss - - - - (1,894,183) (1,894,183)
--------- --------- --------- --------- --------- ---------
Balances, March 31, 1995 - - 5,316,820 9,576,860 (4,145,804) 5,431,056
Shares issued for cafe purchases - - 279,721 466,168 - 466,168
Warrants converted to common
stock - - 300,000 120,000 - 120,000
Note payable converted to
common stock - - 234,000 748,800 - 748,800
Shares issued for acquisitions - - 505,926 467,477 - 467,477
Shares issued for private offerings,
net of expenses - - 1,604,692 3,540,722 - 3,540,722
Shares issued for joint venture
investment - - 89,428 120,166 - 120,166
Shares issued for consulting
expenses - - 203,000 452,944 - 452,944
Net loss - - - - (3,966,426) (3,966,426)
--------- --------- --------- --------- --------- ---------
Balances, March 31, 1996 - $ 8,533,587 $15,493,137 $(8,112,230) $7,380,907
--------- ---------- --------- ----------- ----------- ----------
--------- ---------- --------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,966,426) $ (1,894,183) $ (1,240,606)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 607,790 78,293 56,894
Debt conversion expense - 118,953 -
Loss associated with cart and cafe closures 410,200 - -
Stock issued for consulting expenses 452,944 - -
Changes in operating assets and liabilities:
Inventories (20,410) (61,722) (18,606)
Deposits and prepaid expenses (318,478) (217,457) 25,908
Accounts payable and accrued liabilities 512,923 288,704 79,021
Payable to related parties (221,668) (8,492) 7,417
Deferred revenue 314,500 18,000 351,000
Accounts receivable 21,768 (111,283) (122,081)
Notes receivable 200,718 (228,776) (169,500)
Deferred charges and other assets (523,570) 143,936 -
Other liabilities 138,376 - -
------- ------- -------
Net cash used in operating activities (2,391,333) (1,874,027) (1,030,553)
Cash flows from investing activities:
Purchase of furniture and equipment (1,432,166) (333,074) (32,138)
Increase in intangible assets (2,225) - (402)
Investment in joint venture (13,404) - -
Cash paid for net assets acquired and other
acquisition expenses (5,554,427) (676,170) -
--------- ------- -------
Net cash used in investing activities (7,002,222) (1,009,244) (32,540)
Cash flows from financing activities:
Proceeds from issuing convertible debt 3,500,000 - -
Proceeds from issuing common stock, net 3,540,722 7,288,407 -
Proceeds from (payment) of notes payable (494,206) (678,000) 478,000
Dividends paid on preferred stock - - (80,986)
Expenditures for initial public offering - - (131,343)
Proceeds from capital lease obligations 144,839 - -
Proceeds from warrant conversions 120,000 - -
------- ------- -------
Net cash provided by financing activities 6,811,355 6,610,407 265,671
--------- --------- -------
Net (decrease) increase in cash (2,582,200) 3,727,136 (797,422)
Cash and cash equivalents, beginning of period 3,764,278 37,142 834,564
--------- --------- -------
Cash and cash equivalents, end of period $ 1,182,078 $ 3,764,278 $ 37,142
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended March 31,
---------------------------------------
1996 1995 1994
---- ---- ----
Cash paid for:
Income taxes $ - $ - $ -
Interest 55,006 7,247 22,243
NON-CASH TRANSACTIONS:
During the year ended March 31, 1996, the Company issued 203,000 shares of
common stock valued at $452,944 pursuant to a consulting agreement. The Company
recognized a one-time nonrecurring expense of $452,944 as a result of issuance
of these shares.
During the year ended March 31, 1996, the Company converted its note payable
relating to the acquisition of Oh La La!, Inc., of $745,874 (face value
$932,342) plus accrued interest into 234,000 shares of common stock.
During the year ended March 31, 1996, the Company completed the initial phase of
a joint venture agreement for the development of the Florida market and issued
89,428 shares of common stock in exchange for 18.3% of the joint venture's
outstanding shares.
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Acquisition of Paradise Bakery, Inc., Founders Venture, Inc. and Venture 88,
Inc., during the year ended March 31, 1996 and acquisition of Oh La La!, Inc.
during the year ended March 31, 1995.
Year ended March 31
--------------------------
1996 1995
---------- ----------
Cash paid $5,375,000 $500,000
Note payable 1,350,000 745,874
Common stock issued 467,477 569,500
Liabilities assumed 1,960,251 113,306
Costs associated with acquisitions 250,185 176,170
---------- ----------
9,402,913 2,104,850
Fair valur of assets required (4,994,719) (885,067)
License rights - (100,000)
Goodwill resulting from acquisitions $4,408,194 $1,119,783
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996, 1995 and 1994
NOTE A - ORGANIZATION AND NATURE OF BUSINESS
Java Centrale, Inc. (the Company) operates under the brand names of Java
Centrale, Oh La La!, a division of the Company, (acquired in March 1995) and
Paradise Bakery, a wholly owned subsidiary of the Company, (acquired in December
1995). Java Centrale and Oh La La! are primarily in the business of selling
gourmet coffee products along with breakfast and lunch items. Paradise is
primarily in the business of selling freshly baked cookies, muffins, croissants
and provides a full lunch menu. Java Centrale and Paradise operate both company
and franchisee owned locations. Oh La La! operates both company owned and
licensed locations.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements of the Company follows.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions are
eliminated.
2. REVENUE FROM FRANCHISE SALES
REVENUE FROM AREA FRANCHISE SALES - Franchise fee revenue and costs are
recognized on a pro rata basis as each unit is opened and all material services
or conditions relating to those units have been substantially performed or
satisfied by the Company.
REVENUE FROM INDIVIDUAL FRANCHISE SALES - Franchise fee revenue and costs
from individual franchise sales is recognized when all material services or
conditions relating to the sale have been substantially performed or satisfied
by the Company and the store is opened.
REVENUE FROM EQUIPMENT SALES - Revenue from equipment sales is recognized
when the equipment is delivered to the franchisee.
ROYALTY REVENUE- Royalty revenue is recorded as earned in accordance with
specific terms of each franchisee agreement.
3. INVENTORIES
Inventories, consisting principally of franchise related supplies and
equipment, are stated at the lower of cost (first-in, first-out method) or
market.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using the straight-line method over the estimated useful life of the
asset or the lease term, where applicable, whichever is less.
The estimated lives used in determining depreciation and amortization are:
Tenant improvements 6.5 - 10 years
Machinery and equipment 6 - 10 years
Furniture and fixtures 3 - 10 years
5. INTANGIBLE ASSETS
Intangible assets consist of goodwill, organizational costs and license
name. All intangible assets are amortized on a straight line basis over the
following classifications and years:
Goodwill 15 years
Organizational costs 5 years
License rights 10 years
The Company will evaluate its goodwill annually to determine potential
impairment by comparing the carrying value to the undiscounted future cash flows
of the related assets.
6. INCOME TAXES
The Company utilizes an asset and liability approach in accounting for
income taxes. This approach requires the recognition of the deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and tax basis of
assets and liabilities. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
7. CASH AND CASH EQUIVALENTS
For purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three months or less
to be cash equivalents.
8. RECLASSIFICATIONS
Certain reclassifications were made to the 1995 and 1994 financial
statements in order to be in conformity with the 1996 presentation.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash, accounts
receivable, accounts payable and short-term debt approximated fair value as of
March 31, 1996 because of the relatively short maturity of these instruments.
The carrying value of long-term debt approximated fair value as of March 31,
1996 based upon current market rates for the same or similar debt issues. As of
March 31, 1996, notes receivable with a carrying value of $2,019,526 had an
estimated fair value of $1,897,000 based upon current market rates for notes
with similar terms and credit quality.
10. ESTIMATES USED IN FINANCIAL REPORTING
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
11. STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. That opinion requires that compensation cost related to fixed stock
option plans be recognized only to the extent that the fair value of the shares
at the grant date exceeds the exercise price. Accordingly, the Company
recognizes no compensation expense for its stock option grants.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
12. FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows (undiscounted and
without interest) is less than the carrying amount of the asset, an impairment
loss is recognized. Measurement of that loss would be based on the fair value
of the assets. SFAS 121 also generally requires long-lived assets and certain
identifiable intangibles to be disposed of, to be reported at the lower of the
carrying amount or the fair value less cost to sell. SFAS 121 is effective for
the Company's 1997 fiscal year end. The Company has made no assessment of the
potential impact of adopting SFAS 121 at this time.
13. LOSS PER SHARE
Loss per common share is based upon the weighted average number of common
and common equivalent shares outstanding. The computations of loss per common
share have been adjusted for dividend requirements on the preferred stock of
$77,237 ($.03 per common share equivalent).
For all periods presented, the options, warrants and Series B preferred
stock are anti-dilutive. Accordingly, only the common shares outstanding are
included in the computation of weighted average shares outstanding, and no fully
diluted loss per share is presented.
14. ADVERTISING
All costs related to marketing and advertising are charged to operations in
the year incurred and totalled $420,000, $423,000 and $190,000 for the years
ended March 31, 1996, 1995, and 1994, respectively.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE C - FRANCHISE OPERATIONS
At March 31, 1996, the Company has commitments from franchisees for 109
franchisee owned cafes and carts which are not yet operational. Under these
commitments, the Company has received $717,500 in nonrefundable deposits, and
notes receivable of $286,000. No revenues have been recognized in the financial
statements related to the cafes and carts not yet operational. The notes
receivable do not bear interest, and are due within twenty-four months of the
note date.
Related to these commitments, the Company has deferred revenues of
$1,003,500 at March 31, 1996, which will be recognized when the Company
completes its initial commitments to the franchisees and the franchisee owned
store is open for business.
Under the franchise agreement, the Company receives an override on sales of
various coffee products to its franchisees. The Company, under a producer
agreement, currently purchases all of its coffee products from one vendor.
However, management believes that other sources of coffee products are readily
available and that no economic dependency on one vendor exists.
During the year ended March 31, 1996 the Company completed the first phase
of an agreement with another entity to eventually develop cafes in the State of
Florida. The Company contributed restricted common stock to the joint venture
and the joint venture then transferred a minority equity interest to the
Company. The Company does not have significant influence over the joint
venture, therefore, the interest is recorded under the cost method of
accounting.
NOTE D - ACQUISITION OF OH LA LA!, INC.
On March 30, 1995, with bankruptcy court approval, the Company acquired
substantially all the operating assets (excluding cash) of Oh La La!, Inc. (Oh
La La!) held at the locations (leases) being purchased and certain other
operating assets. In connection with this purchase, the Company issued 600,000
shares of common stock. The tangible assets and liabilities acquired consist
mainly of tenant improvements, equipment, and loans payable.
The purchase price approximated $2,100,000 consisting of $500,000 cash;
$745,874 note payable (fair value), $569,500 of restricted common stock;
liabilities assumed of $113,306 and $176,000 of acquisition costs.
-38-
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE D - ACQUISITION OF OH LA LA!, INC. - CONTINUED
This transaction was accounted for as a purchase. The purchase price was
allocated to the fair value of Oh La La! assets and liabilities and the excess
of $1,119,783 was allocated to goodwill. The goodwill will be amortized on the
straight-line method over a period of 15 years. The depreciable assets will be
depreciated over a period of 6 to 6.5 years. The Company also acquired certain
licensing agreements including the rights to use the licensed name of Oh La La!
and such rights will be amortized over a 10 year period.
NOTE E - ACQUISITION OF PARADISE BAKERY, INC.
On December 31, 1995, the Company acquired 100% of the outstanding shares
of Paradise Bakery, Inc., (Paradise), pursuant to the terms of a Stock Purchase
Agreement dated December 14, 1995 between the Company and Chart House
Enterprises, Inc. (Seller). Paradise's operations consist of seven bakery/cafe
operations located in California and 44 franchised bakery/cafe operations
located in California, Washington, Oregon, Arizona, Colorado, Oklahoma, Texas,
Hawaii and Ontario, Canada. The locations will continue to be operated under
the name of Paradise Bakery.
The purchase price approximated $6,725,000 consisting of $5,375,000 in cash
and $1,350,000 in a note payable.
The transaction was accounted for as a purchase. The purchase price was
allocated to the fair value of Paradise's assets and liabilities and the excess
of $3,691,649 was allocated to goodwill. The goodwill will be amortized on the
straight-line method over a period of 15 years. The depreciable assets will be
depreciated over the remaining useful life on a straight line basis. The assets
and liabilities will be held in Paradise Bakery, Inc., as a wholly-owned
subsidiary of the Company.
NOTE F - ACQUISITION OF FOUNDERS VENTURES, INC.
On January 17, 1996, the Company merged with Founders Ventures, Inc.
(Founders) pursuant to the terms of a merger agreement dated December 15, 1995.
The consideration paid by the Company consisted of 431,853 shares of the
Company.
The transaction was accounted for as a purchase. The purchase price was
allocated to the fair value of Founder's assets and liabilities and the excess
of $626,741 was allocated to goodwill. The goodwill will be amortized on the
straight-line method over a period of 15 years. The depreciable assets will be
depreciated over the remaining useful life on a straight line basis. The assets
and liabilities will be held in Paradise Bakery, Inc., a wholly-owned subsidiary
of the Company.
-39-
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE G - PROFORMA RESULTS OF OPERATIONS DUE TO SIGNIFICANT ACQUISITIONS
Following is unaudited proforma information which discloses the effect on
earnings of the acquisitions described in notes E and F. This information is
presented as if the acquisitions had occurred at the beginning of the periods
presented.
Because the companies have different year ends, the consolidated proforma
information shown below includes operations for the years ended December 31,
1995 and 1994 for both Paradise and Founders and March 31, 1996 and 1995 for the
Company.
Unaudited
ended March 31,
----------------------------
1996 1995
----------- -----------
Total revenues $16,693,385 $11,667,144
Net loss $(3,676,520) $(1,306,986)
Loss per share $(.53) $(.26)
Weighted average shares outstanding 6,929,731 4,994,458
NOTE H - PROPERTY AND EQUIPMENT
Property and equipment at March 31, consist of the following:
1996 1995
---------- ----------
Office furniture and equipment $ 361,873 $182,271
Tenant improvements 3,196,634 688,285
Cafe equipment 2,798,701 429,159
Cart equipment - 191,746
---------- ----------
6,357,208 1,491,461
Less accumulated depreciation and
amortization (619,228) (150,353)
---------- ----------
$5,737,980 $1,341,108
---------- ----------
---------- ----------
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE I - NOTES RECEIVABLE
Notes receivable at March 31, consist of the following:
1996 1995
---- ----
Equipment billings receivable $ 317,880 $ 329,405
Advertising fees receivable 60,000 -
Franchise fees receivable 286,000 270,000
Notes from franchisees 920,445 -
Note from joint venture 200,000 -
------- -------
1,784,325 599,405
Less current portion 485,751 193,129
------- -------
$ 1,298,574 $ 406,276
--------- -------
--------- -------
NOTE J - INTANGIBLE ASSETS
Intangible assets at March 31, 1996 consist of the following:
Accumulated
Cost Amortization Net
------------- ------------ -------------
Goodwill $ 5,575,006 $ 143,338 $ 5,431,668
Organizational cost 35,658 31,123 4,535
License rights 100,000 10,000 90,000
--------- ------- ---------
Total $ 5,710,664 $ 184,461 $ 5,526,203
--------- ------- ---------
--------- ------- ---------
Intangible assets at March 31, 1995 consist of the following:
Accumulated
Cost Amortization Net
------------- ------------ -------------
Goodwill $ 1,119,783 $ - $1,119,783
Organizational cost 32,733 17,623 15,110
License rights 100,000 - 100,000
--------- ------ -------
Total $ 1,252,516 $ 17,623 $1,234,893
--------- ------ ----------
--------- ------ ----------
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE K - ACCRUED LIABILITIES
Accrued liabilities at March 31, consist of the following:
1996 1995
---- ----
Accrued payroll $ 243,948 $ 35,192
Accrued payroll taxes 142,973 16,450
Other 339,323 81,686
------- ------
$ 726,244 $ 133,328
------- -------
------- -------
NOTE L - RELATED PARTIES
The Company paid to Baycor Ventures, Inc. (Baycor), a principal
shareholder, management fees of $6,000 per month for the period from April 1,
1993 through January 31, 1994. On January 15, 1994, one of the principal
shareholders of Baycor became Chairman of the Board of the Company. As part of
this individual's employment agreement, the monthly management fees to Baycor
were discontinued effective January 31, 1994. The employment agreement provides
for annual compensation of $75,000 during the year ended March 31, 1995.
Effective January 1, 1996 through March 31, 1996, annual compensation increased
to $138,000.
The Company reimburses Baycor for travel and entertainment expenses
incurred by officers of Baycor on behalf of the Company. Baycor is a wholly
owned subsidiary of Baycor Capital Inc., of Alberta, Canada which owns several
other Canadian corporations.
At March 31, 1996, the Company had notes outstanding of $185,000 and
$50,200 to the Chairman of the Board and a vice president of the Company,
respectively.
The following presents the related party activities described above:
1996 1995 1994
---- ---- ----
Compensation to chairman $ 94,328 $ 75,000 $ -
Management fees - - 60,000
Expense reimbursement 58,944 - -
Dividends - - 24,674
Bonus 35,000 - -
Interest (income) expense (4,401) 7,247 31,803
------ ----- ------
$ 183,871 $ 82,247 $ 116,477
------- ------ -------
------- ------ -------
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE M - LONG-TERM DEBT
Long-term debt at March 31, consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Note payable to Chart House Enterprises, Inc.
The note bears interest at ten percent per annum
and is payable interest only for the first twelve
months beginning February 1, 1996, and thereafter
principal payments shall be payable in eight equal
quarterly payments in amounts sufficient to fully
amortize the entire principal balance over a period
of eight quarters. The note is collateralized by
franchisee note receivables. $ 965,000 $ -
Note payable to Chart House Enterprises, Inc., due
April 30, 1997. The note bears interest at ten
percent per annum and is payable quarterly in
arrears. The note is collateralized by certain
Company owned stores. 385,000 -
Loan payable to Sanwa Bank, due March 31, 1996.
The loan bears interest at 9.3125% and is
collateralized by certain Company owned stores. 350,000 -
Tenant improvement loans with terms calling for
monthly principal and interest payments over a
period ranging from one to ten years with interest
rates ranging from 7.5 to 11 percent. 217,946 87,059
Note payable to Oh La La! in connection with the acquisi-
tion of Oh La La! The note (face value $932,342)
plus accrued interest at 6% per annum is due March
30, 1997. The amount due plus accrued interest may
be paid with Company common ST - 745,874
------- -------
1,917,946 832,933
Less current maturity 746,785 23,200
------- ------
$ 1,171,161 $ 809,733
--------- -------
--------- -------
</TABLE>
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE M - LONG-TERM DEBT - CONTINUED
Maturities of long-term debt as of March 31, 1996 are as follows:
Year ending March 31,
1997 $746,785
1998 828,595
1999 322,623
2000 15,173
2001 4,770
--------
$1,917,946
----------
----------
NOTE N - PREFERRED STOCK
On March 5, 1992, the Company authorized 5,000,000 shares of no par
cumulative preferred stock. During the period ended March 31, 1993, the Company
issued 2,950,000 shares for $590,000. On March 12, 1993, the articles of
incorporation were amended and restated to authorize 25,000,000 shares of no par
cumulative preferred stock, 10,000,000 shares of Series A and 15,000,000 shares
of Series B. The original 2,950,000 shares subscribed for March 5, 1992 were
exchanged on March 12, 1993 for 2,950,000 shares of the new Series A no par
cumulative preferred stock.
On March 30, 1993, 5,000,000 shares of Series B no par cumulative
convertible preferred stock were issued for $1,000,000.
On March 3, 1994, the Company's Board of Directors approved the conversion
of 2,950,000 Series A preferred shares into 91,820 shares of common stock, the
cancellation of all authorized and unissued Series A preferred shares, the
amendment of the conversion rate on the Series B preferred stock from 0.03425 to
.04, and authorized the Company to issue up to 25,000,000 shares of no par value
cumulative Preferred Stock. The Company's Board of Directors, without further
approval of the holders of Common Shares, may issue from time to time the
authorized and unissued shares of Preferred Stock in one or more series, and may
determine as to each series the dividend rights and terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, sinking
funds and any other rights, preferences, privileges and restrictions applicable
to each such series of Preferred Stock.
-44-
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE N - PREFERRED STOCK - CONTINUED
On May 19, 1994, immediately preceding the closing of the initial public
offering of 1,500,000 shares of Common Stock, 5,000,000 shares of the Company's
Series B Preferred Stock (all issued and outstanding shares) were converted into
200,000 shares of the Company's Common Stock, pursuant to the instructions of
the holders of the Preferred Stock. Since the conversion rate was amended, this
resulted in a debt conversion expense of $118,953.
RIGHTS OF THE HOLDERS
The holders of Preferred Stock shall be entitled to receive dividends and
any other distribution when and as declared by the Board of Directors of the
Company out of the assets of the Company that are legally available therefore,
at the rate of $0.01 per share per annum and no more, prior to the payment of
any distributions to holders of the Common Shares. Dividends on the Preferred
Stock shall be payable semi-annually on September 30 and March 31 of each year.
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntarily or involuntarily, the holders of Preferred Stock shall
receive an amount equal to $.20 per share and all accrued and unpaid dividends,
before any amount shall be paid to the holders of the Common Shares.
The holders of Preferred Stock shall be entitled to vote only upon failure
of the Company to pay dividends if the Company is legally entitled to make such
payment. The Preferred Stock shall be convertible and may also be redeemed at
any time after March 31, 1995, at the request of the holder or the Company, at
an amount equal to 110% of the contributed capital per share of Preferred Stock
plus all accrued and unpaid dividends. In addition, on or before March 31,
1995, the Company may redeem the Preferred Stock at an amount equal to 115% of
contributed capital per share plus all accrued and unpaid dividends in the event
of a change of control of the Company or a public offering of the Common Shares.
There was no Preferred Stock issued or outstanding at March 31, 1995 and 1996.
NOTE O - 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 on
December 15, 1997 with interest payable quarterly beginning on March 15, 1996 at
the rate of 8% per year. The note is convertible into common stock of the
Company after February 28, 1996 under certain terms and conditions. As of June
18, 1996, $1,010,000 had been converted into 1,192,844 common shares.
-45-
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE O - CONVERTIBLE DEBT - CONTINUED
The second series of notes in the amount of $1,500,000 are due on 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.
The investors have the option to convert any part of the outstanding and
unpaid principal amount of the notes at any time, or from time to time, at the
conversion price stipulated in the note agreement.
NOTE P - STOCKHOLDERS' EQUITY
1. COMMON STOCK
On March 5, 1992, the Company authorized 100,000,000 shares of no par
common stock. On March 3, 1994, the Board of Directors declared a 2.5 for 1
stock split of its issued common stock and approved the reduction of the
authorized common stock from 100,000,000 shares to 25,000,000 shares. All share
and per share data have been retroactively restated to reflect this stock split.
2. INITIAL PUBLIC OFFERING
On May 19, 1994 the Company completed an initial public offering of
1,500,000 shares of newly issued Common Stock for proceeds of $7,288,407, net
of expenses.
3. STOCK SPLIT
On June 8, 1994, the Company declared a five-for-one stock split effected
in the form of a 25% stock dividend on its Common Stock, without par value, to
be payable on July 15, 1994 to shareholders of record on June 30, 1994. On or
prior to June 10, 1994, employees and officers holding securities, including
warrants and options, waived their rights to receive the stock split and also
waived the impact such stock split would have on any options or warrants held by
the security holders, including, but not limited to, any anti-dilution
provisions relating to such options and warrants. All references in the
financial statements to number of shares and per share data of the Company's
common stock have been adjusted as appropriate to reflect this stock split.
-46-
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE P - STOCKHOLDERS' EQUITY - CONTINUED
On December 11, 1995, the Company declared a dividend in the form of a
Stock Purchase Warrant exercisable from January 17, 1996 to March 15, 1996. The
dividend provided one full warrant for each ten shares of the Company's common
stock outstanding as of December 31, 1995. Each warrant entitles the holder to
purchase from the Company one share of the Company's common stock at a purchase
price of $3.00 per share. The warrants, which are transferable, could be
exercised to purchase a total of 702,500 shares of common stock.
4. ISSUANCE OF ADDITIONAL COMMON SHARES
During the year ended March 31, 1996, the Company completed certain private
placements of common shares resulting in the issuance of 1,604,692 common shares
for net proceeds of $3,540,722.
During the year ended March 31, 1996, the Company issued 203,000 common
shares valued at $452,944 pursuant to a consulting agreement to develop
strategic acquisitions, identify Java Centrale franchise opportunities and
consult regarding investor relations matters for the Company.
5. JOINT VENTURE FORMATION AGREEMENT
On November 14, 1994 the Company entered into an agreement with Banyan
Capital, Limited Partnership, Java Southeast Partners, L.P., and Java Southeast,
Inc. to develop the Florida market. Pursuant to the terms of the agreement, the
Company issued 89,428 shares of common stock in exchange for 18.3% of the joint
venture's outstanding shares.
6. ACQUISITIONS OF JAVA CENTRALE FRANCHISES
During the year ended March 31, 1996, the Company completed the
acquisitions of five Java Centrale franchised cafes. The Company acquired all
of the operating assets (excluding cash) held at the various locations. In
connection with these purchases, the Company issued 279,721 shares of restricted
common stock valued at $466,168, assumed $133,968 in long-term debt and canceled
franchisee receivables of $106,303. The tangible assets acquired consists of
tenant improvements and equipment.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE P - STOCKHOLDERS' EQUITY - CONTINUED
7. CONVERSION OF NOTE PAYABLE
In March 1996 the Company issued 234,000 common shares by exercising its
right to convert a note payable of $745,874 (face value $932,342) related to the
acquisition of substantially all the assets of Oh La La!, Inc., into common
shares at a price of $4.00 per share.
8. CONVERSION OF WARRANTS
In November 1995, warrants were exercised for 300,000 shares of common
stock for proceeds of $120,000. The warrants were initially granted to Baycor
in connection with amounts loaned to the Company.
9. Escrow Agreement
Certain stockholders, directors, and officers of he Company (the "Security
Holders") placed an aggregate of 855,300 of their currently outstanding Company
shares in escrow (the "Escrowed Shares") in connection with the Company's public
offering of its Common Stock in May of 1994. The Escrow Agreement provides that
the Escrowed Shares be released to the Security Holders if the Company achieves
certain earnings requirements during the fiscal years ended March 31, 1995,
1996, 1997, and 1998. The Company has not achieved the requirements during its
1995 and 1996 fiscal years. In the event that the Company does not meet any of
the earnings requirements by March 1998 all of the escrowed shares shall be
released in March 1999. If any Security Holder exercises warrants or options to
acquir additional Common shares of the Company ("Additional Shares"), one-third
of such Additional Shares must be placed in escrow and will be released pursuant
to the Escrow Agreement as if they were Escrowed Shares.
-48-
<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE Q - STOCK OPTIONS AND WARRANTS
1. INCENTIVE STOCK OPTION PLAN
Effective November 1993, the Company adopted a stock option plan,
wherein options to purchase 500,000 shares of common stock may be granted to
officers, key employees and non-employee directors of the Company. The exercise
price of these options may not be less than 100% of the fair market value of the
common stock of the Company at the time of the grant.
Options granted under the plan become exercisable in whole or in part
from time to time as determined by the Board of Directors or the stock option
plan committee. In no event shall any option become exercisable earlier than
the date six months following the date on which the option is granted.
The Company granted options to purchase shares of its common stock as
follows:
Number
of Shares Option Prices
--------- -------------
Shares under option at March 31, 1994 198,750 $3.00
Granted 100,000 $2.12 - 3.00
Exercised -
Shares under option at March 31, 1995 298,750 $2.12 - 3.00
Granted 1,100,000 $1.75 - 2.00
Exercised -
Terminated (298,750) $2.12 - 3.00
---------
Outstanding at March 31, 1996 1,100,000 $1.75 - 2.00
Exercisable at March 31, 1996 87,000 $1.75 - 2.00
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
2. WARRANTS
In July 1993, the Company granted warrants to purchase 225,000 shares of
common stock at $1.60 per share to management consultants. The warrants expire
at the end of five years.
In May 1994, the Company granted warrants to purchase 150,000 shares of
common stock at $9.90 per share to the underwriter group involved with the
initial public offering.
In August 1994, the Company granted warrants to purchase 50,000 shares of
common stock at $3.50 per share to investor relations specialists. The warrants
expire August 1996.
In March 1995, in connection with the acquisition of Oh La La!, the Company
issued warrants to purchase 150,000 shares of common stock at $3.50 and 50,000
shares of common stock at $4.00 per share. The warrants expire March 30, 1997.
In July 1995, the Company granted warrants to purchase 682,000 shares of
common stock at $2.58 per share for consulting services. The warrants expire in
July 1997.
In August 1995, the Company granted warrants to purchase 150,000 shares of
common stock at $1.50 per share for consulting services. The warrants expire in
August 2002.
In January 1996, the Company granted warrants to purchase 100,000 shares of
common stock at $2.75 per share for consulting services. The warrants expire in
January 2001.
NOTE R - LEASE COMMITMENTS, RENT EXPENSE, AND DEPOSIT
The Company has entered into a thirty-six month lease of office space for its
corporate headquarters commencing on January 1, 1994, and ending December 31,
1996. Monthly lease payments of $3,860 commenced on January 1, 1994 in
accordance with the lease terms. In October 1994, additional space was leased
which increased monthly lease payments to $5,994. The security deposits in the
amounts of $3,860 and $2,134 will apply to the last month's rent of the lease
term.
On June 29, 1992, the Company entered into a lease for their corporate
cafe/training facility for a term of ten years. Rent commenced January 26, 1993
and will end February 1, 2003.
In connection with the acquisitions of Oh La La! and Paradise, the Company
acquired operating leases to operate its stores and office facilities. The
leases expire from 1995 through 2005.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
Future minimum rents are as follows for each of the years ending March 31,:
Capital Lease Operating Lease
------------- ---------------
1997 $117,606 $1,253,490
1998 42,240 1,236,168
1999 42,240 1,090,232
2000 42,240 984,876
2001 38,720 720,676
Thereafter 6,514 906,806
-------- ----------
Future minimum lease payments 289,560 $6,192,248
----------
----------
Amounts representing interest 64,239
--------
Present value of minimum lease payments $225,321
--------
--------
NOTE R - LEASE COMMITMENTS, RENT EXPENSE, AND DEPOSIT - CONTINUED
All amounts due under capital lease obligations are for cafe equipment with
a net book value of approximately $226,075.
In addition to minimum rents, the Company is required to pay its share of
taxes, insurance, common area maintenance, and percentage rents of 1% to 2% of
sales.
Rent expense included in these financial statements for facilities leased
by the Company is $1,214,064, $114,090, and $79,911 for the applicable years
ended March 31, 1996, 1995 and 1994, respectively.
NOTE S - INCOME TAXES
As of March 31, 1996, the Company has accumulated net operating losses of
approximately $7,000,000. These losses can be carried forward and applied
against future income of the Company for federal and state income tax purposes.
The net operating losses will begin to expire in 2008. Under U.S. tax rules,
the Company, as a result of the Paradise acquisition is subject to certain
limitations as to the use of net operating losses in any one year. A valuation
allowance totally offsets the balance of the deferred tax asset related to these
net operating losses.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
1996 1995
---------- ----------
Deferred tax assets:
Net operating losses $2,800,000 1,500,000
Temporary differences:
Franchise fees collected 287,000 168,000
Depreciation and other 20,000 8,000
Valuation allowance (3,107,000) (1,676,000)
---------- ----------
$ - $ -
---------- ----------
---------- ----------
NOTE T - LOSS ON DISPOSAL OF CART PROGRAM
During the year ended March 31, 1996, the Company closed one company cafe
in Texas and sold 5 company carts to a single franchisee in California resulting
in a loss of $410,200.
NOTE U - COMMITMENTS
The Company has employment agreements with five key employees, with annual
salary requirements totaling $460,000. Annual increases are tied to economic
indicators, and include potential bonuses at the discretion of the Board of
Directors. The Company also maintains key man life insurance policies on the
chief executive officer and the senior vice-president-operations. The Company
is listed as the sole beneficiary of these policies, with total face value of
$1,600,000.
The Company is involved in litigation in the normal course of business.
Management believes that such litigation is without merit and the disposition of
such litigation would not have a material effect on the Company.
NOTE V - THE COMPANY'S OPERATING PLAN
The Company incurred a net loss of $3,966,426 and used cash of $2,391,333
in operating activities for the year ended March 31, 1996. The Company has
developed a specific operating plan to meet the ongoing liquidity needs of the
Company's operations both for the year ended March 31, 1997 and thereafter.
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<PAGE>
JAVA CENTRALE, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996, 1995 and 1994
NOTE V - THE COMPANY'S OPERATING PLAN - CONTINUED
During the quarter ended June 30, 1996, the Company reduced administrative
salaries, certain employee benefit costs and marketing expenses. The Company
has sold two Company owned cafes and is actively pursuing the sale of assets
associated with the Company's cafe operations. In February of 1996, the Company
completed the expansion and remodeling of key Oh La La! locations which
management believes will increase the operating margins of this division. In
addition to the operating plan, the Company will benefit from 12 months of
Paradise Bakery operating income during the year ended March 31, 1997 as
compared to 3 months in the year ended March 31, 1996.
Management believes that this plan, which is currently being implemented,
is sufficient to meet the Company's liquidity needs for the year ended March 31,
1997, and thereafter.
NOTE W - SUBSEQUENT EVENT
As of July 11, 1996, the Company has obtained three separate lines of
credit amounting to $925,000. The Company obtained a $350,000 line of credit
bearing interest at 15% due April 30, 1997. Senior management also provided a
line of credit in the amount of $175,000 bearing interest at prime plus 2% due
April 30, 1997. Additionally, the Company obtained a $400,000 separate line of
credit bearing interest at 15% due April 30, 1997 and requiring that the
$350,000 line of credit and the senior management line of credit for $175,000 be
fully drawn before the Company utilizes this line. All of the Company's assets
will be collateralized under the terms of these lines of credit.
-53-
<PAGE>
PART III
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company
to, as well as any other compensation paid to or earned by, the Company's Chief
Executive Officer and the four most highly compensated executive officers other
than the Chief Executive Officer during each of the fiscal years ended March 31,
1994, 1995 and 1996. The Company's President and Chief Executive Officer, Mr.
Gary C. Nelson, was the only officer of the Company whose total annual salary
and bonus exceeded $100,000 during the 1994 and 1995 fiscal years. The
Company's President and Chief Executive Officer, Mr. Gary C. Nelson, the
Company's Chief Financial Officer, Mr. Steven J. Orlando, and the Company's
Chairman of the Board, Mr. Richard Shannon, were the officers of the Company
whose total annual salary and bonus exceeded $100,000 during the 1996 fiscal
year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------- -----------------------
Awards
------
Securities
Name of Individual Other Restricted Underlying All
and Principal Fiscal Annual Stock Options/ Other
Position Year Salary Bonus Compensation Awards SARS(#) Compensation
- ------------------ ------ ---------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary C. Nelson 1996 $158,065 $35,000 $-0- None 167,000 $-0-
President/Chief 1995 $147,538 -0- -0- None -0- -0-
Executive Officer 1994 $111,250 -0- -0- None 87,500 -0-
Steven J. Orlando 1996 $ 97,050 $35,000 $-0- None 175,000 $-0-
Chief Financial 1995 78,431 -0- -0- None 100,000 -0-
Officer 1994 -0- -0- -0- None -0- -0-
Richard Shannon 1996 $ 94,328 $35,000 $-0- None 174,250 $-0-
Chairman of 1995 75,000 -0- -0- None -0- -0-
the Board 1994 60,000 -0- -0- None 18,750 -0-
</TABLE>
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLAN. Effective November 1993, the Board of Directors of the
Company (the "Board") adopted the Java Centrale, Inc. Stock Option Plan (the
"Stock Option Plan"). Under the terms of the Stock Option Plan, options to
purchase up to 500,000 Common Shares may be granted to officers, key employees
and non-employee directors of the Company. In September 1995, the Company
proposed to shareholders an amendment to increase the option plan to 1,250,000
common shares. The amendment was approved and the Company has amended the plan
to a total of 1,250,000 common shares. Under the Stock Option Plan, the Board,
or a committee appointed by the Board, is authorized to grant options which are
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<PAGE>
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code ("incentive stock options") to employees (including
employee-directors) of the Company, and to grant options not intended to qualify
as incentive stock options ("non-qualifying stock options") to employees and
non-employee directors of the Company, and to determine the participants, the
number of options to be granted and other terms and provisions of each option.
The exercise price of any incentive stock option granted under the Stock
Option Plan may not be less than 100 percent of the fair market value of the
Common Shares of the Company at the time of the grant. In the case of incentive
stock options granted to holders of more than ten percent of the voting power of
the Company, the exercise price may not be less than 110% of the fair market
value of the Common Shares, nor shall the option by its terms be exercisable
more than 5 years after the date the option is granted.
Under the terms of the Stock Option Plan, the aggregate fair market value
(determined at the time of grant) of shares issuable upon exercise of incentive
stock options exercisable for the first time during any one calendar year may
not exceed $100,000. Options granted under the Stock Option Plan become
exercisable in whole or in part from time to time as determined by the Board of
the committee; provided, however, that in no event may any option become
exercisable earlier than the date six months following the date on which the
option is granted. Options granted under the Stock Option Plan may have a
maximum term of ten years from the date of grant. The option price must be paid
in full on the date of exercise, and is payable in cash or in Common Shares of
the Company having a fair market value on the date the option is exercised equal
to the option price.
As of March 31, 1995, the Company had granted options to purchase 298,750
Common Shares, at prices ranging from $2.12 to $3.00 per share, to employees of
the Company in accordance with the Stock Option Plan.
As of March 31, 1996, the Company had granted options to purchase 1,100,000
common shares, at prices ranging from $1.75 to $2.00 per share, to employees of
the Company in accordance with the Stock Option Plan.
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<PAGE>
Option Grants During the Company's 1996 Fiscal Year
The following table sets forth certain information concerning all options
granted during fiscal 1996 to certain of the Company's most highly compensated
executive officers. The Company did not grant any stock appreciation rights
("SARs") during fiscal 1996.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
------------------------------------------------------------------------------------- -----------------------------
Number of Percent of total
securities options granted Exercise or
underlying to employees base price
Name options granted in fiscal year per share Expiration date 5% 10%
------------ --------------- ---------------- ----------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gary C. Nelson 27,000 3% $1.93 May 2000 $ 8,100 $ 24,030
140,000 17 2.20 October 2000 49,000 142,800
Richard D. Shannon 11,250 1 1.93 May 2000 3,375 10,013
163,000 20 2.20 October 2000 101,060 166,260
Steven J. Orlando 75,000 9 1.75 May 2000 36,000 80,250
100,000 12 2.00 October 2000 55,000 122,000
</TABLE>
Aggregated Option Exercises in Last Fiacal Year and Year-End Option Values
The following table sets forth certain information concerning all options
held by certain of the Company's most highly compensated executive officers at
the end of the Company's 1996 fiscal year (March 31, 1996). The Company has
never granted any stock appreciation rights ("SARs"). All of the options listed
in the table below are currently exercisable.
<TABLE>
<CAPTION>
Number of Securities Value of
underlying Unexercised
Number of Shares Value unexercised options in-the-Money
Name Acqired on Exercise Realized at March 31, 1996 Options
- ------------ ------------------- -------- -------------------- ------------
<S> <C> <C> <C> <C>
Gary C. Nelson None N/A 254,000 N/A
Richard D. Shannon (1) None N/A 193,000 N/A
Steven J. Orlando None N/A 275,000 N/A
</TABLE>
- --------------------
(1) On October 30, 1995, Baycor Ventures, Inc., a company of which Mr. Shannon
is a Director and 50% shareholder, exercised options to purchase 300,000
shares of the Company's Common Stock at a purchase price of $0.40 per
share. The value recognized on these shares was approximately $742,500.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into a three-year employment agreement in February 1994
with Richard D. Shannon. The Company amended this agreement effective January 1,
1996, increasing the base salary to $137,388 per year and extending the term two
years to January 31, 1999. The Company further amended this agreement in May of
1996 reducing the base salary to $96,172 as a result of the Company's financial
performance. Under certain conditions based on the Company's performance the
base salary will be reinstated upon either the Company achieving profitability
for one quarter or a significant improvement in the Company's working capital.
Pursuant to the employment agreement, Mr. Shannon will act as Chairman of the
company, will serve on the Board of Directors and will be entitled to receive,
among other things, (a) during the first year thereof, a base salary of $75,000,
(b) during the second and third years thereof, a base salary in an amount equal
to the amount of the previous year's salary plus the greater of (i) 7% of the
base salary in effect for the previous 12 month period and (ii) the percentage
increase in the Consumer Price Index for the prior 12-month period as reported
by the United States Department of Labor (the "Department of Labor"), (c) during
each year thereof, a bonus, equal to the amount determined by the Board of
Directors, under such incentive compensation plan as shall be adopted by the
Board of Directors of the Company, and (d) such options to purchase Common
Shares of the Company as may be granted pursuant to the terms of the Stock
Option Plan. The employment agreement between the Company and Mr. Shannon does
not require him to spend more than 80% of his time on Company business.
The Company entered into a three year employment agreement in February 1994
with Gary C. Nelson. The Company amended this agreement effective January 1,
1996, extending the term two years to January 31, 1999. The Company further
amended this agreement in May of 1996 reducing the base salary to $116,207 as a
result of the Company's financial performance. Under certain conditions based on
the Company's performance the base salary will be reinstated upon either the
Company achieving profitability for one quarter or a significant improvement in
the Company's working capital. Pursuant to the employment agreement, Mr. Nelson
will act as President and Chief Executive Officer of the Company, will serve on
the Board of Directors and will be entitled to receive, among other things, (a)
during the first year thereof, a base salary of $145,000, (b) during the second
and third years thereof, a base salary in an amount equal to the amount of the
previous year's salary plus the greater of (i) 7% of the base salary in effect
for the previous 12 month period and (ii) the percentage increase in the
Consumer Price Index for the prior 12-month period as reported by the Department
of Labor, (c) during each year thereof, a bonus, equal to the amount determined
by the Board of Directors of the Company under such incentive compensation plan
as shall be adopted by the Board of Directors of the Company, and (d) such
options to purchase Common shares of the Company as may be granted pursuant to
the terms of the Stock Option Plan.
The Company entered into a three-year employment agreement in February 1994
with Bradley B. Landin. The Company amended this agreement in May of 1996
reducing the base salary to $73,274 as a result of the Company's financial
performance. Under certain conditions based on the Company's performance the
base salary will be reinstated upon either the Company achieving profitability
for one quarter or a significant improvement in the Company's working capital.
Pursuant to the employment agreement, Mr. Landin will act as Senior Vice
President Operations of the Company, will serve on the Board of Directors and
will be entitled
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<PAGE>
to receive among other things, (a) during the first year thereof, a base salary
of $80,000, (b) during the second and third years thereof, a base salary in an
amount equal to the amount of the previous year's salary plus the greater of (i)
7% of the base salary in effect for the previous 12 month period and (ii) the
percentage increase in the Consumer Price Index for the prior 12-month period as
reported by the Department of Labor, (c) during each year thereof, a bonus,
equal to the amount determined by the Board of Directors of the Company under
such incentive compensation plan as shall be adopted by the Board of Directors
of the Company, and (d) such options to purchase Common Shares of the Company as
may be granted pursuant to the terms of the Stock Option Plan.
The Company entered into a three-year employment agreement in February 1994
with Thomas A. Craig. The Company amended this agreement in May of 1996 reducing
the base salary to $73,274 as a result of the Company's financial performance.
Under certain conditions based on the Company's performance the base salary will
be reinstated upon either the Company achieving profitability for one quarter or
a significant improvement in the Company's working capital. Pursuant to the
employment agreement, Mr. Craig will act as Vice President -- Marketing and Real
Estate of the Company, and will be entitled to receive, among other things, (a)
during the first year thereof, a base salary of $80,000, (b) during the second
and third years thereof, a base salary in an amount equal to the amount of the
previous year's salary plus the greater of (i) 7% of the base salary in effect
for the previous 12 month period and (ii) the percentage increase in the
Consumer Price Index for the prior 12-month period as reported by the Department
of Labor, (c) during each year thereof, a bonus, equal to the amount determined
by the Board of Directors of the Company under such incentive compensation plan
as shall be adopted by the Board of Directors of the Company, and (d) such
options to purchase Common Shares of the Company as may be granted pursuant to
the terms of the Stock Option Plan.
The Company entered into a three-year employment agreement in July of 1994
with Steven J. Orlando. The Company amended this agreement effective January 1,
1996, increasing the base salary to $117,000 per year and extending the term two
years to July 15, 1999. The Company further amended this agreement in May of
1996 reducing the base salary to $81,900 as a result of the Company's financial
performance. Under certain conditions based on the Company's performance the
base salary will be reinstated upon either the Company achieving profitability
for one quarter or a significant improvement in the Company's working capital.
Pursuant to the employment agreement, Mr. Orlando will act as Vice President --
Chief Financial Officer of the Company, and will be entitled to receive, among
other things, (a) during the first year thereof, a base salary of $80,000, (b)
during the second and third years thereof, a base salary in an amount equal to
the amount of the previous year's salary plus the greater of (i) 7% of the base
salary in effect for the previous 12 month period and (ii) the percentage
increase in the Consumer Price Index for the prior 12-month period as reported
by the Department of Labor, (c) during each year thereof, a bonus, equal to the
amount determined by the Board of Directors of the Company under such incentive
compensation plan as shall be adopted by the Board of Directors of the Company,
and (d) such options to purchase Common Shares of the Company as may be granted
pursuant to the terms of the Stock Option Plan.
COMPENSATION OF DIRECTORS
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<PAGE>
Directors of the Company do not currently receive any compensation for
serving as Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company does not maintain a Compensation Committee, as such. All
decisions relating to the compensation of its executive officers are made by the
Company's Board of Directors, which includes as Directors Richard D. Shannon,
the Company's Chairman of the Board, Gary C. Nelson, its President and Chief
Executive Officer, and Bradley B. Landin, its Senior Vice President --
Operations, all of whom are Company Employees. Mr. Shannon, along with Kevin R.
Baker, the fourth member of the Company's Board also serves as a Director and
executive officer of Baycor Capital, a private merchant bank based in Calgary,
Canada, which is the parent corporation of Baycor Ventures, the majority
shareholder of the Company. See Item 13, "Certain Relationships and Related
Transactions", below.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 5, 1997 JAVA CENTRALE, INC.
By: /S/ GARY C. NELSON
----------------------------------------
Gary C. Nelson
President and Chief Executive Officer
And By: /S/ STEVEN J. ORLANDO
-------------------------------------
Steven J. Orlando
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/S/ KEVIN R. BAKER March 5, 1997
- ----------------------------------------
Kevin R. Baker, Director
/S/ LYLE P. EDWARDS March 5, 1997
- ----------------------------------------
Lyle P. Edwards, Director
/S/ GARY C. NELSON March 5, 1997
- ----------------------------------------
Gary C. Nelson, President and Director
/S/ RICHARD D. SHANNON March 5, 1997
- ----------------------------------------
Richard D. Shannon, Director and
Chairman of the Board
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