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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER
NEW WORLD COFFEE, INC.
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(NAME OF SMALL BUSINESS ISSUER IN IT'S CHARTER)
DELAWARE 13-3690261
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
379 WEST BROADWAY 4TH FLOOR
NEW YORK, NY 10012
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 343-0552
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(ISSUER'S TELEPHONE NUMBER)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------------ ----------------
COMMON STOCK, $ .001 PAR VALUE NASDAQ
- ------------------------------ ------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE EXCHANGE ACT: NONE
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 12 MONTHS (OR
FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILES IN RESPONSE TO ITEM 405 OF
REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE
CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENTS OF THIS FORM 10-KSB. [X]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR. $9,572,019
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THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES PER THE
CLOSING STOCK PRICE OF APRIL 30, 1996 IS $17,119,038.
------------
AS OF MAY 8, 1996, 4,501,979 SHARE OF COMMON STOCK OF THE ISSUER WERE
OUTSTANDING.
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ITEM 1. DESCRIPTION OF BUSINESS
New World Coffee owns and operates 27 espresso bars, including 20 in New York
City, 2 in New Jersey and 5 in Pennsylvania, making the Company one of the
largest specialty coffee retailers based in the northeastern United States. New
World Coffee's objective is to become a leading high quality specialty coffee
retailer in each market in which it operates.
The Company seeks to differentiate its concept and build strong brand
recognition by creating what it believes are sophisticated and inviting espresso
bars that serve as neighborhood gathering places, offering high quality freshly
roasted coffee beans, coffee beverages and a select assortment of light food
items. The Company believes that this strategy along with enthusiastic and
friendly customer service creates a loyal customer base. New World Coffee
stores are in high traffic locations, consistent with the Company's strategy of
developing a substantial repeat client base. The Company's stores vary in size
from 125 to 1,325 retail square feet, and the Company anticipates that future
stores will average from 1,200 to 2,000 retail square feet.
New World Coffee opened its first espresso bar in February 1993. The Company's
expansion strategy is to open new stores or acquire existing specialty coffee
retailers in geographic regions where it has existing stores, and to expand into
new geographic regions (through new store openings or acquisitions) where it
believes it can become one of the dominant specialty coffee retailers. Under an
agreement with Saks signed in November 1994, the Company has an exclusive right
of first refusal to open espresso bars throughout the Saks Fifth Avenue
department store chain and currently has espresso bars located in two Saks Fifth
Avenue stores.
The Company has a supply agreement with a specialty coffee roaster located in
Connecticut which has sourced, roasted and blended the Company's coffee since
the opening of the first New World Coffee espresso bar. Green coffee beans for
New World Coffee's more than 20 varietals and blends are purchased from coffee
producing regions throughout the world and roasted in small batches according to
the Company's standards. All green coffee purchased for the Company is of
various arabica species, which is of a higher quality than the robusta species
of coffee beans typically found in supermarket coffees.
New World Coffee is a Delaware corporation and was organized in November 1992.
INDUSTRY OVERVIEW
The U.S. coffee market has broad and deep demographics. The U.S. coffee market
consists of two distinct product categories: (i) commercial ground roast, mass-
merchandised coffee, which includes brands such as Folgers and Maxwell House and
(ii) specialty coffees, which include gourmet coffees (arabica coffees sold in
whole bean and ground form) and premium coffees (upscale coffees mass marketed
by the leading coffee companies).
The Company believes that the market for specialty coffee is large, growing
and fragmented. The gourmet coffee segment of the industry has experienced
strong growth over the past decade.
The Company believes that several factors have contributed to the increase in
demand for gourmet coffee including:
. greater consumer awareness of gourmet coffee as a result of its increasing
availability
. increasing demand for all premium food products, including gourmet coffee,
where the differential in price from the commercial brands is small compared
to the improvement in product quality and taste
. increased shelf life due to improvements in packaging techniques such as the
one-way valve bag and brick pack
. ease of preparation of gourmet coffees resulting from the increased use of
automatic drip coffee makers and home espresso machines
. the decline in alcoholic beverage consumption
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BUSINESS STRATEGY
The goal of New World Coffee is to become a leading high quality specialty
coffee retailer in each market in which it operates. Each element of the
Company's strategy is designed to differentiate and reinforce New World Coffee's
brand identity, to engender a high degree of customer loyalty and to position
the Company as a leading specialty coffee retailer. The key elements of this
strategy include:
Sophisticated and Inviting Environment. New World Coffee's espresso bars are
designed to be more sophisticated than those of its competitors while creating
an inviting atmosphere through the use of natural wood, earth tones, bronze
accents and warm lighting. The Company believes these elements help create its
brand image and establish it as a desirable high quality tenant. New World
Coffee's espresso bar design has won five design awards and, management
believes, in conjunction with the Company's quality brand image, provides a
significant advantage in competing both for the repeat coffee consumer and for
prime retail space.
High Quality, Guaranteed Fresh Roasted Coffee. The Company pursues a strategy
of delivering high quality, guaranteed freshly roasted coffee to its customers.
New World Coffee, through its supplier, selects high quality arabica beans from
throughout the world which are then roasted by hand in small batches to ensure a
peak roasted product. Coffee is delivered to each New World Coffee location
generally within 24 hours of roasting, enabling the Company to guarantee the
freshness of coffee sold in its stores. Any coffee not sold within ten days of
roasting is donated to charity. The Company believes this guaranteed freshness
strategy distinguishes New World Coffee from its competitors, many of whom rely
on valve-packing or vacuum-packing to preserve freshness.
Superior Customer Service. The friendliness, speed and consistency of the
service and the coffee knowledge of New World Coffee's employees is critical to
developing the Company's quality brand identity and to building a loyal customer
base. To this end, the Company places strong emphasis on identifying, hiring and
retaining employees, invests substantial resources in training them in customer
service, sales skills, the knowledge of coffee and coffee beverage preparation.
Branded Marketing. The Company's marketing strategy is to differentiate its
concept based upon its high quality and inviting image to establish its espresso
bars as neighborhood gathering places. The Company implements this strategy by
promoting the distinctive qualities of New World Coffee products, educating
consumers about New World Coffee's offering of various coffees and roasts,
seeking to deliver enthusiastic customer service and sponsoring local and
regional marketing events. New World Coffee believes that these activities
generate trial and repeat purchases by reinforcing positive experiences with the
Company's products.
Rapid Expansion. The Company's retail growth strategy is to rapidly expand its
retail store base in both existing and new markets in order to secure a leading
presence in each of its markets and to enhance its brand awareness. The Company
intends to open additional stores in the greater New York metropolitan area and
expand into other northeastern markets. The Company plans to implement its
growth strategy by opening new stores or acquiring existing specialty coffee
chains in geographic regions where it has existing stores and by expanding into
targeted new geographic regions, through acquisitions or new store openings,
where it believes it can quickly become one of the dominant specialty coffee
retailers.
Complementary Retail Alliances. New World Coffee has entered into an agreement
with Saks & Company ("Saks") the operators of the Saks Fifth Avenue department
store chain, that provides the Company with the exclusive right of first refusal
to develop espresso bars throughout the Saks chain. The Company's strategy is to
pursue other such alliances with complementary multi-site retailers to enable it
to accelerate its site and brand development.
COFFEE
New World Coffee is committed to producing only the finest freshly roasted
coffees. To achieve this goal, the Company purchases its coffee through an
agreement with Willoughby's Coffee and Tea, ("Willoughby's"), a specialty coffee
roaster located in Connecticut. New World Coffee offers, over the course of any
given year, a revolving selection of coffees that can include any of its more
than 20 types of regular and decaffeinated whole bean coffees, including blends
and varietals. Rotating its coffee selection allows the Company to provide its
customers with a wider variety of coffees and with certain coffees which are
available only on a seasonal basis. The Company typically offers up to 16
varietals and 2 blends at any one time.
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Sourcing. The Company, through Willoughby's purchases more than 20 varieties
of high quality coffees on the basis of quality, taste and price. In any given
month, the Company may purchase up to 16 different types of coffee.
Willoughby's, which was founded in 1985, has long-standing relationships with
coffee brokers, importers and growers worldwide, providing the Company with
access to the highest quality beans available. New World Coffee purchases only
arabica coffees, and believes that the arabica beans it purchases are the best
available from each producing region. Willoughby's contracts for future delivery
of green coffees for the Company's account to help ensure adequacy of supply,
and typically maintains a minimum 18-20 week supply of each variety of whole
beans then available.
The Company's contract with Willoughby's is of indefinite duration and is
cancelable by either party with nine months prior written notice. Willoughby's
has agreed to ship roasted coffee to the Company within 24 hours of roasting.
Under the terms of the contract, Willoughby's is prohibited from selling its
coffee to any other specialty coffee firm in New York City, and the Company is
obligated to purchase all of the coffee for its New York City stores from
Willoughby's. The price New World Coffee pays for roasted coffee varies based on
Willoughby's cost to purchase green coffee.
Roasting, Packaging, and Distribution. New World Coffee combines its purchase
of high-quality beans with its exacting roasting methods to produce what the
Company believes are rich, flavorful coffees at their peak of flavor. Master
roasters roast each coffee in small batches, adjusting the roast for the
coffee's type and growing conditions. These roasting methods are costlier than
most other methods because the longer roasting process results in a higher level
of moisture loss and lower coffee yield.
New World Coffee is committed to serving its customers coffees that are
freshly roasted, because roasted coffee is a highly perishable product that
grows stale and loses flavor rapidly. The Company believes that its freshly
roasted product is superior to product offerings which use valve-lock packaging
to preserve freshness. The Company's coffee is delivered to its espresso bars
generally within 24 hours of roasting to enable the Company to guarantee the
freshness of every coffee sold in its stores. All coffees are currently
distributed from roasting facilities in Branford, Connecticut to each store via
common carrier.
New World Coffee believes that its roaster's current facility has sufficient
capacity for the Company's planned expansion within the next 12 months. The
Company will continue to assess its roasting and distribution capacity in light
of its planned expansion and its commitment to provide guaranteed fresh roasted
product to all its locations, which it believes is an effective competitive
advantage.
ESPRESSO BARS
The Company operates 27 espresso bars, including 20 in New York City, two in
New Jersey and five in Pennsylvania. New World Coffee stores feature an award-
winning decor and are designed to have a sophisticated and inviting appearance
through the use of natural wood, earth tone coloring, bronze accents and warm
lighting. All stores are configured to accommodate a high volume of traffic and
also offer seating. Stores vary in size from approximately 125 to 1,325 retail
square feet. The Company expects that future stores will average from 1,200 to
2,000 retail square feet.
New World Coffee offers a wide variety of high quality beverages to appeal to
all types of consumers. The customer has the option to order coffee and espresso
beverages hot or on ice. New World Coffee's beverages include the following:
Coffees. New World Coffee offers, over the course of any given year, more
than 20 varietals and blends of fresh roasted coffee from coffee producing
countries around the world. Regular and decaffeinated "Coffees of the Day" are
fresh brewed daily with strict brewing and freshness standards. New World Coffee
has developed blends that include New World Blend, New World Decaf Blend,
Holiday Blend and Summertime Blend. Each blend has been developed to fit a
particular consumer need: New World Blend to drink any time of the day; Holiday
Blend to complement richer wintery foods; and Summertime Blend to be consumed
either iced or hot to complement lighter, warm weather foods.
Specialty Coffee and Espresso Drinks. New World Coffee offers a broad range
of Italian-style beverages such as espresso, cappuccino, caffe latte, caffe
mocha and espresso machiato. All espresso based drinks are prepared to order
which the Company believes ensures quality and consistency. New World Coffee
uses high quality ingredients and
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condiments such as Ghirardelli chocolate and all natural Torani syrups. In June
1995, the Company introduced the New World Freezer, an iced coffee and milk
"slush" drink as a seasonal offering.
Freshly Squeezed Juices and Teas. New World Coffee offers freshly squeezed
orange and grapefruit juices and lemonade. The tea menu includes a selection of
black, herbal and fruit teas, with one selection offered as the fresh brewed
"Iced Tea of the Day."
New World Coffee espresso bars also serve a select offering of light food
items for breakfast (bagels, croissants, pastries), lunch (light sandwiches and
fresh salads) and dessert items (pastries and cakes). Management is consistently
working with its suppliers to develop a selection of food items which will
complement beverage sales.
New World Coffee stores also sell, over the course of any given year, more
than 20 different selections of varietals and blends of roasted whole bean
coffee. Although a negligible part of sales, the Company's espresso bars also
carry selected coffee related merchandise items. For the 12-month period ended
December 31, 1995, the Company's retail sales mix was 62% beverages, 33% food
items and 5% whole beans.
New World Coffee prices its coffees competitively with the prevailing high-end
coffee prices in each of its markets which the Company believes reflects the
high quality of the Company's coffees and its high level of customer service.
Prices range from $0.80 for regular brewed tea to $4.48 for the most expensive
espresso beverages. Whole bean coffee prices range from $8.40 to $11.95 per
pound.
For the fiscal year ended December 31, 1995, the Company's average cost to
open a store was approximately $250,000, including all leasehold improvements,
equipment and beginning inventory, as well as all expenses for the store design,
site selection, lease negotiation, construction supervision and permitting. The
Company's stores open for the fiscal year ended December 31, 1995 achieved
average sales per store during the period of approximately $401,000.
SITE SELECTION AND ESPRESSO BAR LOCATIONS
New World Coffee's site selection strategy is to open espresso bars in high-
traffic, high-visibility locations in each of its target markets, primarily in
residential and shopping areas. The Company's experience has been that espresso
bars in residential and shopping areas generally offer more attractive economics
as they typically are open up to 14 hours a day, seven days a week and attract
customers throughout the day, including commuters, families and an evening
dessert crowd. Residential sites are evaluated based upon the demographics of
the neighborhood, existing traffic patterns and the proximity of other
destination retailers and potential competitors.
The Company currently has two espresso bars in Saks Fifth Avenue department
stores. Under terms of its agreement with Saks, the Company pays a variable
license fee based upon the level of sales of each espresso bar. This agreement
extends until November 1997 but may be canceled by either party with 60 days
prior written notice. During the term of the agreement, the Company has an
exclusive right of first refusal to open espresso bars throughout the Saks
chain. The Company's strategy is to pursue other such alliances with
complementary multi-site retailers which the Company believes will enable it to
accelerate its site development.
The Company believes that the training and knowledge of its employees and the
consistency and quality of the service they deliver are central to the Company's
success. Management believes that an employee oriented culture creates a sense
of personal responsibility among all employees, and pride in the Company's
products, resulting in a higher level of customer service.
Once hired, espresso bar employees undergo training in coffee knowledge,
beverage preparation and customer service and sales skills. This training
includes written training materials, lectures, observation and simulation
exercises. The final stage of training is in-store training where employees work
for a one week period implementing their newly learned skills. Retail store
managers receive additional training in advanced coffee knowledge, communication
skills and performance appraisal techniques. The Company encourages its
management and employees to educate customers about the qualitative aspects of
coffee and the differences among each of the Company's blends, as well as the
differences between the Company's coffees and those offered by others.
New World Coffee seeks to attract and retain qualified personnel by offering
an attractive package of compensation, benefits and career growth potential. The
Company's incentive compensation system rewards
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employees for high quality service and productivity from a store-level bonus
pool. The Company's benefits package includes medical coverage for full-time and
qualifying part-time workers. In addition, as a rapidly growing business, New
World Coffee is able to offer career advancement opportunities and incentive
stock options to all management personnel. The Company has not experienced any
material difficulties in retaining qualified personnel.
STORE OPERATIONS
The typical New World Coffee store is staffed with one manager, two assistant
managers and between 10-15 hourly employees, many of whom work part-time. The
hours for each store are established based on location and customer demand, but
typically are from 7:00 a.m. to 9:00 p.m. or later in residential locations and
from 7:00 am. to 6:00 p.m. in commercial locations. The store managers are
overseen by a district manager, who is responsible for supervising the
operations of up to 15 stores and who reports to a regional manager.
COMPETITION
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. 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. Both the Company's whole bean
coffees and its 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.
The Company competes for beverages and whole bean coffee sales with franchise
operators and locally owned specialty coffee stores in the United States. There
are a number of competing specialty coffee retailers, such as: Starbucks
Corporation, a Seattle-based operator of gourmet coffee stores, with more than
800 locations; Timothy's Coffees of the World, Inc., a Toronto-based franchiser,
with approximately 70 locations; and Pasqua's, Inc., a San Francisco-based
operator, with approximately 50 locations. In addition, in virtually every major
metropolitan area in which New World Coffee operates or expects to enter, local
or regional competitors already exist.
ITEM 2. DESCRIPTION OF PROPERTIES
FACILITIES
New World Coffee leases approximately 5,650 square feet for administrative
offices and training facilities in New York, New York. As of the date of this
10-KSB filing, New World Coffee operates a total of 27 retail stores all of
which are located in leased premises and has executed four leases for future
espresso bars.
NEW WORLD COFFEE STORE LOCATIONS AND SIGNED LEASES
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APPROXIMATE RETAIL
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STORE LOCATION DATE OPENED SQUARE FOOTAGE
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Sixth Avenue at 10th Street New York, NY 02/93 275
Third Avenue at 67th Street New York, NY 07/93 450
Madison Avenue at 47th Street New York, NY 09/93 650
Broad Street at Stone Street New York, NY 02/94 925
West Broadway at Spring Street New York, NY 03/94 750
Bell Atlantic Tower Philadelphia, PA 04/94 1,150
Trump Plaza at 62nd Street New York, NY 05/94 475
Columbus Avenue at 80th Street New York, NY 06/94 500
Wall Street at Water Street New York, NY 08/94 450
Rittenhouse Square Philadelphia, PA 08/94 1,025
Seventh Avenue at 38th Street New York, NY 09/94 1,325
Third Avenue at 45th Street New York, NY 10/94 450
57th Street at Lexington New York, NY 10/94 550
Saks Fifth Avenue at The Mall at Short
Hills Short Hills, NJ 11/94 400
Olympic Tower New York, NY 11/94 250
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<S> <C> <C> <C>
Third Avenue at 50th Street New York, NY 12/94 625
One New York Plaza New York, NY 12/94 875
Market Street at 20th Street Philadelphia, PA 12/94 475
One Broadway at Battery Place New York, NY 12/94 225
Lexington Avenue at 53rd Street New York, NY 01/95 625
Columbus Avenue at 72nd Street New York, NY 01/95 525
Lexington at 84th Street New York, NY 02/95 450
The Shops at Liberty Place Philadelphia, PA 02/95 275
Riverside Square Mall Bergen County, NJ 04/95 900
Broadway at 40th Street New York, NY 06/95 800
Saks Fifth Avenue at Franklin Mills Mall Philadelphia, PA 06/95 125
Sixth Avenue at 12th Street New York, NY 06/95 450
Madison Avenue at 43rd Street New York, NY 2nd quarter 1996 (est.) 975
125 Seventh Avenue Brooklyn, NY 2nd quarter 1996 (est.) 1,900
Third Avenue at 90th Street New York, NY 3rd quarter 1996 (est.) 1,500
400 Washington Street Hoboken, NJ 3rd quarter 1996 (est.) 1,900
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ITEM 3. LEGAL PROCEEDINGS
The company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the NASDAQ National Market
under the trading symbol "NWCI" since the Company commenced public trading on
February 1, 1996. Prior to that date, there was no public market for the
Company's Common Stock.
The following table sets forth the high and low selling price for the
Company's Common Stock for the fiscal quarter ended March 31, 1996 based on
transaction data as reported by the NASDAQ National Market.
Quarter Ended March 31, 1996 High Low
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First Fiscal Quarter Commencing $ 6.00 $ 3.00
February 1, 1996
On May 8, 1996 the closing price for the Company's Common Stock as reported
by the NASDAQ National Market was $ 4.375 a share.
As of May 8, 1996 there were approximately 144 holders of record on the Common
Stock. This number excludes individual stockholders holding stock under nominee
security position listings.
The Company has not declared or paid any dividends since its inception, and
does not intend to pay any cash dividends in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company opened its first espresso bar in February 1993 in New York and has
grown to 27 espresso bars in New York, New Jersey and Pennsylvania since that
date.
The Company's experience has been that espresso bars in residential and
shopping areas generally offer more attractive economics than central business
district sites as they typically are open up to 14 hours a day, seven days a
week and attract customers throughout the day, resulting in more cost-effective
staffing and operations. Based on this experience, the Company's site selection
strategy has shifted to opening more espresso bars in residential and shopping
areas.
The Company has incurred losses in each fiscal year from inception primarily
due to the cost of retail store expansion and developing an infrastructure to
support future growth. The Company's fiscal year ends on the Sunday closest to
December 31. Prior to fiscal 1995 the Company was on a calendar year basis.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Revenues. Revenues increased 112.2% to $9,572,019 for the fiscal year ended
December 31, 1995 from $4,510,488 for the comparable 1994 period. Comparable
store sales for the three stores opened for both periods decreased 16.6%.
Management believes this decrease is not meaningful due to the small number of
stores in the comparable store base. Incremental sales for the 19 stores which
were opened at December 31, 1994 contributed 69.0 % of the percentage increase
in revenues. Sales for the 8 stores opened since December 31, 1994 contributed
43.2% of the percentage increase in revenues.
Costs and Expenses. Cost of sales and related occupancy costs as a percentage
of revenues for the fiscal year ended December 31, 1995 increased to 62.6% from
59.1% for the comparable 1994 period. The primary components were a decrease of
2.4% in cost of goods due to the Company's ability to negotiate improved vendor
pricing as a result of increased purchasing power which was offset by an
increase in occupancy costs of 5.9% primarily due to a large number of new store
openings which carry higher occupancy expense as a percentage of revenues during
their rampup period.
Store operating expenses as a percentage of revenues for the fiscal year ended
December 31, 1995 increased to 35.1% from 34.5% for the comparable 1994 period.
The primary components were 0.3% increases in both personnel costs and
miscellaneous store expenses due to the increase in the number of new store
openings which carry higher other operating expense as a percentage of revenues
during their rampup period.
Depreciation and amortization expenses as a percentage of revenues for the
fiscal year ended December 31, 1995 increased to 10.8% from 6.6% for the
comparable 1994 period primarily due to an increase in the number of new store
openings which carry higher depreciation expense as a percentage of revenues
during their rampup period.
General and administrative expenses increased to $1,784,257, or 18.6% of
revenues, for the fiscal year ended December 31, 1995 compared to $745,543 or
16.5% of revenues, for the comparable 1994 period. General and administrative
expenses included a non-recurring charge of $137,000 taken as a reserve for non-
operating leases as well as $80,000 of costs related to special marketing
projects (which represent expenditures in connection with certain specific
promotions, which were not continued) incurred in the first quarter of 1995,
without which general and administrative expenses as a percentage of revenues
would have remained constant at 16.5% of revenues. The increase also reflects
the addition of key personnel such as a Chief Operating Officer, Vice
Presidents of Real Estate, Operations and Finance, as well as their support
teams.
Interest expense, net for the fiscal year ended December 31, 1995 increased to
$297,587 or 3.1% of revenues, from $1,140 for the comparable 1994 period. This
increase in interest expense resulted from bank borrowings for the construction
of new stores.
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Net Loss. Net loss for the fiscal year ended December 31, 1995 increased to
$2,901,557 from $755,106 for the comparable 1994 period. Operating margins
decreased to a loss of 30.3% from a loss of 16.7% in the comparable 1994 period,
primarily due to increased occupancy costs of 5.9% as a percentage of revenues,
increased depreciation and amortization expenses of 4.2% as a percentage of
revenues due to the large number of new store openings which carry higher
expenses as a percentage of revenues during their rampup period and interest
expense which increased to 3.1% as a percentage of revenues.
INCOME TAXES
Net operating losses generated in fiscal 1995 and prior years will be carried
forward and utilized to offset future income tax expense. The Company has a net
operating loss carryforward of approximately $2,879,000 for federal income tax
purposes at December 31, 1995. These net operating loss carryforwards expire on
various dates through 2010. The Company's ability to utilize its net operating
loss carryforwards may be subject to annual limitations in future periods
pursuant to the "change in ownership rules" under Section 382 of the Internal
Revenue Code of 1986, as amended.
LIQUIDITY AND CAPITAL RESOURCES
The Company successfully completed its initial public offering on February 1,
1996. The Company realized approximately $11,400,000 in net proceeds. The
Company repaid its bank line of $3,500,000 and repurchased from an existing
shareholder approximately $2,000,000 of the Company's common stock. The
Company's primary capital requirement is for expansion of its retail operations.
Currently, all of the Company's stores are in leased facilities. For the fiscal
year ended December 31, 1995, the cost for new stores, including leasehold
improvements, equipment and inventory, averaged approximately $250,000 per
store. The Company currently estimates that capital expenditures through fiscal
1996 will be approximately $10,000,000.
Working capital requirements, in addition to those related to store
expansion, include an increase related to build-up of inventory for the December
holiday season. At December 31, 1995 the Company had a working capital deficit
of $823,030 which was primarily caused by net losses and capital expenditures.
The Company had net cash used in operating activities of $552,983 for fiscal
1994, and $1,027,981 for fiscal 1995. Increases in accounts payable to suppliers
and deferred rent partially offset the net loss from operations.
The Company had net cash used for investing activities of $4,007,506 for
fiscal 1994, and $3,241,876 for fiscal 1995. The primary use of cash for
investing activities was for capital expenditures related to the Company's
retail store expansion.
The Company had net cash provided by financing activities of $4,589,017 for
fiscal 1994, and $5,020,411 for fiscal 1995. The Company had funded its
growth to date, prior to the Company's initial public offering from the sale
of preferred equity securities, the issuance of notes payable and periodic use
of bank debt.
In December 1995 and January 1996, the Company obtained a bridge loan totaling
$1,000,000 from certain individuals and financial institutions. The loan carried
an interest rate of 10% and was repaid within ten days after the closing of the
public offering. In connection with the loan, the Company issued to the lenders
warrants to purchase 181,818 shares of its Common Stock at a price of $0.01 per
share. The warrants are exercisable immediately, but the shares issued pursuant
to the warrants are subject to a six month lock-up agreement.
The Company is negotiating a commitment letter from its lender to extend its
line of credit of $2,500,000 for an additional one year period.
SEASONALITY AND GENERAL ECONOMIC TRENDS
The Company anticipates that its business will be affected by general economic
trends that affect retailers in general. While the Company has not operated
during a period of high inflation, it believes based on industry experience that
it would generally be able to pass on increased costs resulting from inflation
to its customers. The
<PAGE>
Company's business may be affected by other factors, including increases in the
commodity prices of green coffee, acquisitions by the Company of existing
espresso bars, existing and additional competition, marketing programs, weather,
special or unusual events, and variations in the number of store openings. The
Company has few, if any, employees at the minimum wage level and therefore
believes that an increase in the minimum wage would have minimal impact on its
operations and financial condition.
ITEM 7. FINANCIAL STATEMENTS
Information in response to this item is set forth in the Financial Statements
beginning on page F-1 of this filing.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, nominees, and executive officers of the Company, and their ages
as of this date of this 10-KSB, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Gwenn M. Cagann 37 Co-President and Co-Chief Executive
Officer and Director
R. Ramin Kamfar 32 Co-President and Co-Chief Executive
Officer and Director
Sidney Laytin 44 Executive Vice President and Chief
Operating Officer
Jerold E. Novack 40 Vice President-Finance
Bruce L. Morningstar 53 Vice President-Development
Richard J. Windisch 35 Vice President-Operations
Keith F. Barket (1)(2) 34 Director
Colleen Kramer (1)(2) 40 Director
Jack Bush 61 Director
Steven A. Rothstein 45 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
Ms. Cagann co-founded the Company in October 1992 and has been Co-President
and Co-Chief Executive Officer since August 1994. Between October 1993 and
August 1994, Ms. Cagann served as President of the Company, and between June
1993 and October 1993, she served as President and Chief Executive Officer. Ms.
Cagann has been a director since the founding of the Company. Between 1990 and
1992, she was Senior Product Manager at Colgate-Palmolive Company in charge of
launching the Fab Ultra Laundry Detergent line for Colgate-Palmolive. Ms. Cagann
has a B.S. degree in Finance and Marketing from the University of Illinois and
an M.M. degree from the Kellogg Graduate School of Management at Northwestern
University.
Mr. Kamfar co-founded the Company in October 1992 and has been Co-President
and Co-Chief Executive Officer since August 1994. Between October 1993 and
August 1994, Mr. Kamfar served as Chief Executive Officer and Chief Financial
Officer of the Company. Mr. Kamfar has been a director since the founding of the
Company. Between 1988 and 1993, he worked in the Investment Banking Division of
Lehman Brothers Inc., most recently as a Vice President in the firm's Private
Placement Group. Prior to Lehman Brothers, Mr. Kamfar worked at First Growth
(U.K.) Ltd. where he gained experience in real estate finance and development.
Mr. Kamfar has a B.A. degree in
<PAGE>
Finance from the University of Maryland and an M.B.A. degree in Finance from the
Wharton School of the University of Pennsylvania.
Mr. Laytin joined the Company as Executive Vice President and Chief Operating
Officer in October 1995. From 1994 to 1995, he served as President and Chief
Operating Officer of Best Health Care, Inc., a Medicaid managed care company.
From 1992 to 1994, Mr. Laytin served as Vice President of Operations, and later
as Senior Vice President, Orthotics and Prosthetics Division of NovaCare, Inc.
Between 1989 to 1992, Mr. Laytin served as Executive Vice President and Chief
Operating Officer of Moto Photo, Inc., a publicly held chain of photo processing
stores. From 1985 to 1989, Mr. Laytin was employed by Pizza Hut, a division of
PepsiCo Inc., most recently as Division Vice President. Prior to 1985, Mr.
Laytin held various positions with Marriott Corporation and served as a
management consultant with Booz, Allen & Hamilton, Inc. Mr. Laytin received a
B.S. degree from the University of Maryland and an M.B.A. degree in finance from
Columbia University. Mr. Laytin is a certified public accountant.
Mr. Novack joined the Company as Vice President--Finance in June 1994. From
1991 to 1994, he served as Vice President/Controller of The Outdoor Furniture
Store, Inc., a specialty retail chain. From 1988 to 1991 he served as Controller
for Richmond Ceramic Tile, Inc., a retailer and distributor of ceramic tile.
From 1985 to 1988, Mr. Novack served as Assistant Controller for Brooks Fashion
Stores, Inc., a specialty retail chain. Prior to 1985, Mr. Novack served as
Import Division Controller for Mercantile Stores Company, Inc., a department
store chain. Mr. Novack has a B.S. degree in Accounting from Brooklyn College,
City University of New York.
Mr. Morningstar joined the company as Vice President-Development in March
1996. From 1994 to 1996, he served as Director of Development Northeast for
Starbucks Coffee Company where he planned, developed and opened new markets in
Atlanta, Richmond, Baltimore, Philadelphia, New Jersey and Boston, opening over
100 stores. From 1992 to 1994 he served as the Director of Real Estate for the
Clothestime Corporation. From 1987 to 1992, Mr. Morningstar served as Director
of Real Estate for Woman's World Shops. Prior to that time, Mr. Morningstar
held various real estate positions with Winchells Donuts, Payless Shoes and
See's Candies.. Mr. Morningstar received a B.A. from Wesleyan University and
J.D. from South Bay University of Law.
Mr. Windisch joined the Company as Vice President--Operations in September
1994. From 1983 to 1994, he worked at the KFC (previously Kentucky Fried
Chicken) unit of PepsiCo Inc., first as Area Manager, later as Division
Operations Manager, and most recently as Director of Operations--New England
Division. From 1982 to 1983, Mr. Windisch worked in Operations for Citibank N.A.
Mr. Windisch has a B.B.A. degree in Marketing from the New York Institute of
Technology and an M.B.A. degree in finance from Iona College.
Mr. Barket has served as a director of the Company since June 1995. Mr. Barket
is a Managing Director of Amerimar Enterprises, a real estate investment and
development company based in Philadelphia. Mr. Barket has been with Amerimar
since 1988 and has been involved in a variety of office, retail, residential and
hotel projects. Mr. Barket received his B.A. degree from Georgetown University
and received his M.B.A. degree from The Wharton School at the University of
Pennsylvania. From 1984 to 1986, he worked as a senior tax accountant with
Arthur Andersen & Co. in New York City.
Ms. Kramer has served as a director of the Company since June 1995. Presently,
she is a Managing Director in the Loan Syndications and Trading Group at BA
Securities, Inc., where she has been employed since October 1995. From 1981 to
October 1995 she served as a Managing Director in the Syndications and
Placements Group at The First National Bank of Chicago. Ms. Kramer received a
B.S. degree in Civil Engineering from Tufts University and an M.M. degree in
Management from the Kellogg Graduate School of Management at Northwestern
University.
Mr. Bush was appointed to the Board of Directors effective upon the closing of
the Company's public offering. Mr. Bush served as President and Chief Operating
Officer of Michaels Stores, Inc., a retailer of crafts, from 1991 to September
1995. From 1990 to 1991, Mr. Bush served as Executive Vice President, Director
of Stores of Ames Discount Department Stores, Inc. From 1985 to 1990, Mr. Bush
worked for Rose's Stores, Inc., first as Senior Vice President of Operations and
Stores and most recently as President and Chief Operating Officer. Prior to
1985, Mr. Bush served as Vice President Southern Zone Manager with Zayre
Corporation, an operator of discount stores, and served in various positions
with J.C. Penney, Inc. Mr. Bush received a B.S. degree in Business and Public
Administration from the University of Missouri.
Mr. Rothstein was appointed to the Board of Directors effective upon the
closing of the Company's public offering. Mr. Rothstein has been Chairman of the
Board of National Securities Corporation, a securities broker-dealer
<PAGE>
since 1995. From 1994 to 1995, Mr. Rothstein served as a Managing Director of H.
J. Meyers & Co., a securities broker-dealer. From 1992 to 1994, he served as a
Managing Director of Rodman and Renshaw, a securities broker-dealer. From 1989
to 1992, he served as a Managing Director of Oppenheimer & Co., a securities
broker-dealer. From 1979 to 1989, Mr. Rothstein was a limited partner of Bear
Stearns & Co., a securities broker-dealer. Mr. Rothstein received an A.B. degree
from Brown University, Providence, Rhode Island. Mr. Rothstein is currently a
director of SigmaTron International, Inc.
All directors currently serve for one-year terms and until their successors
have been elected and qualified. Officers are elected annually and serve at the
discretion of the Board. There are no family relationships between any of the
directors, nominees, or executive officers of the Company.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table provides certain information concerning the compensation
earned by the two individuals who served as the Company's Chief Executive
Officer for services rendered in all capacities to the Company during 1994 and
1995, and any executive officers of the Company who received compensation in
excess of $100,000 during 1994 or 1995 ("Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
---------
Compensation
------------
Annual Compensation Awards
-------------------- ------
---------------------------------------------------- ---------------------------------
Name and Principal Position Other Annual Compensation Options All Other Compensation
- --------------------------------- Salary Bonus -------------------------- -------- -----------------------
-------- -------- ($) (#) (#)
Year ($) ($) --- --- ---
---- ---
<S> <C> <C> <C> <C> <C> <C>
Gwenn M. Cagann 1995 $80,000 --- --- --- ---
Co-President, Co-Chief 1994 $60,000 --- --- 43,734 ---
Executive Officer and Director
R. Ramin Kamfar 1995 $80,000 --- --- --- ---
Co-President, Co-Chief 1994 $60,000 --- --- 43,734 ---
Executive Officer and Director
Jerold E. Novack 1995 $82,500 $36,000 $3,000 23,323 ---
Vice-President - Finance
Rich Windisch 1995 $92,500 $27,000 $6,000 11,661 ---
Vice-President - Operations
</TABLE>
Fiscal Year-End Option Values
The following table sets forth certain information with respect to stock
options held by each of the Company's Named Executive Officers. There were no
options exercised during 1995 by any of the Named Executive Officers.
<PAGE>
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END (#): FISCAL YEAR-END ($)(1):
------------------------------ ----------------------
NAMES EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gwenn M. Cagann 21,867 21,867 $101,682 $101,682
R. Ramin Kamfar 21,867 21,867 $101,682 $101,682
Jerold E. Novack 39,983 15,000 $ 92,406 --
Richard Windisch 23,322 -- $ 55,972 --
</TABLE>
(1) On December 31, 1995, the fair market value of the Common Stock underlying
the options, as determined by the Board of Directors, was $5.50 per share.
The value of unexercised in-the-money options represents the difference
between $5.50 and the exercise price of the options multiplied by the number
of options.
EMPLOYMENT CONTRACTS
In September 1995, the Company entered into employment agreements with Mr.
Kamfar and Ms. Cagann, the Company's Co-Presidents and Co-Chief Executive
Officers. The agreements expire on December 31, 1996 but are automatically
renewed for an additional one year period unless either party provides notice of
termination to the other party before September 30, 1996. The agreements provide
for a compensation package of $112,000 per year and an annual performance bonus
of 10% to 50% of the $100,000 per year base salary based on the attainment of
certain corporate and individual goals. Under the terms of the agreements, Mr.
Kamfar and Ms. Cagann may participate in the Company's various health,
retirement and stock option plans. Pursuant to the agreements, Mr. Kamfar and
Ms. Cagann have agreed to maintain the confidentiality of any confidential or
proprietary information of the Company. In the event that (i) the Company
terminates Mr. Kamfar's or Ms. Cagann's employment (or forces either of them to
resign) without cause or (ii) Mr. Kamfar's or Ms. Cagann's employment is
terminated as a result of a change in control of the Company, he or she will be
paid severance compensation equal to his or her base salary from the date of
termination through December 31, 1996 (or through December 31, 1997 if the
employment agreement has been automatically renewed). If Mr. Kamfar or Ms.
Cagann is terminated as a result of disabilities which prevent him or her from
performing his or her duties, he or she shall be paid an amount equal to 75% of
his or her base salary through December 31, 1996 (or December 31, 1997 if the
employment agreement has been automatically renewed). Such salary will be
reduced by any amounts Mr. Kamfar or Ms. Cagann receive under insurance policies
carried by the Company. In the event of a termination other than for cause, a
termination caused by disability or a termination as a result of a change of
control, all stock options held by Mr. Kamfar or Ms. Cagann as of the date of
the employment agreements will become immediately exercisable. In addition, the
Company may not terminate the employment of Mr. Kamfar or Ms. Cagann unless it
has relieved him or her of the obligation to guarantee the Company's
indebtedness under its line of credit. For a period of one year following his or
her termination, Mr. Kamfar and Ms. Cagann cannot perform services for or have
an equity interest (except for an interest of less than 5% in an entity whose
securities are listed on a national securities exchange) in any business (other
than the Company) that engages in the retailing of specialty coffee as its
principal business.
In October 1995, the Company entered into an employment agreement with Mr.
Laytin, the Company's Chief Operating Officer. The agreement expires on March
31, 1997 but is automatically renewed for an additional one year period unless
either party provides notice of termination to the other party before December
31, 1996. The agreements provide for a compensation package of $155,000 per year
and an annual performance bonus of 10% to 40% of the base salary based on the
attainment of certain corporate and individual goals. In addition, the agreement
notes that upon completion of the Company's public offering, Mr. Laytin will be
granted an option, which vests over 3 years, and upon meeting certain other
criteria, to purchase 87,464 shares of the Company's Common Stock at the initial
public offering price. Under the terms of the agreement, Mr. Laytin may
participate in the Company's various health, retirement and stock option plans.
Pursuant to the agreements, Mr. Laytin has agreed to maintain the
confidentiality of any confidential or proprietary information of the Company.
In the event that (i) the Company terminates Mr. Laytin's employment (or
forces him to resign) without cause, he will be paid severance compensation
equal to 3 months of his base salary. For a period of one year following his
termination, Mr. Laytin cannot perform services for or have an equity interest
(except for an interest of less than 5% in an entity whose securities are listed
on a national securities exchange) in any business (other than the Company) that
engages in the retailing of specialty coffee as its principal business.
<PAGE>
In June 1995, the Company entered into an employment agreement with Mr.
Novack, the Company's Vice President of Finance. The agreement expires on June
30, 1996. The agreement provides for a compensation package of $90,000 per year
and an annual performance bonus of 40%. Mr. Novack may participate in the
Company's various health, retirement and stock option plans.
In June 1995, the Company entered into an employment agreement with Mr.
Windisch, the Company's Vice President of Operations. The agreement expires on
June 30, 1996. The agreement provides for a compensation package of $95,000 per
year and an annual performance bonus of 20-40% based on the attainment of
certain corporate and individual goals. Mr. Windisch may participate in the
Company's various health, retirement and stock option plans.
The foregoing employment agreements define a "change of control" as: 1) the
acquisition of more than 40% of the voting stock of the Company by a single
person or group; 2) a change in the majority of the Board of Directors as a
result of a cash tender offer, merger, sale of assets or contested election; 3)
the approval by stockholders of the Company of a merger or sale of all or
substantially all of the Company's assets; 4) the closing of a transaction in
which more than 50% of the Company's voting power is transferred and 5) a tender
offer which results in a person or a group acquiring more than 40% of the
Company. The employment agreements define a termination "for cause" as a
termination based on the employee's willful dishonesty towards, fraud upon or
deliberate injury to the Company and termination based upon willful material
breach of the employment agreement by the employee.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware General Corporation Law, the personal liability of
directors and officers for monetary damages for breach of their fiduciary duties
as directors and officers (other than liabilities arising from acts or omissions
which involve intentional misconduct, fraud or knowing violations of law or the
payment of distributions in violation of Delaware General Corporation Law). The
Certificate of Incorporation provides further that the Company shall indemnify
to the fullest extent permitted by Delaware General Corporation Law any person
made a party to an action or proceeding by reason of the fact that such person
was director, officer, employee or agent or the Company. Subject to the
Company's Certificate of Incorporation, the Bylaws provide that the Company
shall indemnify directors and officers for all costs reasonably incurred in
connection with any action, suit or proceeding in which such director or officer
is made a party by virtue of his being an officer or director of the Company
except where such director or officer is finally adjudged to have been derelict
in the performance of his duties as such director or officer.
The Company has not entered into indemnification agreements with any of its
directors. The Company expects to enter into separate indemnification agreements
with its officers and directors containing provisions which are in some respects
broader than the specific indemnification provisions contained in the Company's
Certificate of Incorporation and Bylaws. The indemnification agreements may
require the Company, among other things, to indemnify such directors and
officers against certain liabilities that may arise by reason of their status as
directors and officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company believes these agreements are necessary to attract and retain qualified
persons as directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996, (I) by each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than five percent of the Company's Common Stock, (ii) by each of the Named
Executive Officers, (iii) by each of the Company's directors and nominees, and
(iv) by all directors and executive officers as a group. The Company believes
that the persons and entities named in the table have sole voting and investment
power with respect
<PAGE>
to all shares of Common Stock shown as beneficially owned by them, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
SHARES
------------ -----------
BENEFICIALLY PERCENTAGE
------------ -----------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED
- ------------------------------------ -----
<S> <C> <C>
R. Ramin Kamfar(1) 418,391 9.2%
c/o New World Coffee, Inc.
379 West Broadway
New York, NY 10012
Gwenn M. Cagann(1)(2) 313,429 6.9
c/o New World Coffee, Inc.
379 West Broadway
New York, NY 10012
Ross A. MacIntyre(2) 291,562 6.5
164 Clinton Street
Brooklyn Heights, NY 11201
Lutheran Brotherhood 257,300 5.7
625 Fourth Avenue 5th Floor
Minneapolis, MN 55415
Jerold E. Novack(3) 39,983 *
c/o New World Coffee, Inc.
379 West Broadway
New York, NY 10012
Richard Windisch(4) 23,322 *
c/o New World Coffee, Inc.
379 West Broadway
New York, NY 10012
Keith F. Barket(5) 31,261 *
c/o Amerimar Enterprises
210 West Rittenhouse Square Suite 1900
Philadelphia, PA 19103
Colleen Kramer 19,624 *
c/o BA Securities, Inc.
231 South La Salle 7th Floor
Chicago, IL 60697
Jack Bush --- ---
6222 Raintree Court
Dallas, TX 75240
Steven A. Rothstein 80,000 1.8
c/o National Securities Corporation
30 North LaSalle Suite 2601
Chicago, IL 60602
All director and executive officers as 926,010 20.2
a group(10) persons)(6)
</TABLE>
- --------------------------------------------------------------------------------
* LESS THAN 1%
(1) INCLUDES 21,867 SHARES ISSUABLE UPON EXERCISE OF OPTIONS THAT ARE CURRENTLY
EXERCISABLE OR EXERCISABLE WITHIN 60 DAYS.
(2) MR. MACINTYRE AND MS. CAGANN ARE MARRIED. EACH HOLDS HIS OR HER SHARES
PURSUANT TO A SEPARATE PROPERTY AGREEMENT. ACCORDINGLY, EACH DISCLAIMS
BENEFICIAL OWNERSHIP OF EACH OTHER'S SHARES.
(3) INCLUDES 39,983 SHARES ISSUABLE UPON EXERCISE OF OPTIONS THAT ARE CURRENTLY
EXERCISABLE OR EXERCISABLE WITHIN 60 DAYS.
(4) INCLUDES 23,322 SHARES ISSUABLE UPON EXERCISE OF OPTIONS THAT ARE CURRENTLY
EXERCISABLE OR EXERCISABLE WITHIN 60 DAYS.
(5) INCLUDES 10,000 SHARES ISSUABLE UPON EXERCISE OF WARRANTS THAT ARE
CURRENTLY EXERCISABLE OR EXERCISABLE WITHIN 60 DAYS.
(6) INCLUDES 117,039 SHARES ISSUABLE UPON OPTIONS OR WARRANTS THAT ARE
CURRENTLY EXERCISABLE OR EXERCISABLE WITHIN 60 DAYS.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1993, in connection with the formation of the Company, Mr. Kamfar and
Ms. Cagann, directors, Co-Presidents and Co-Chief Executive Officers of the
Company, purchased 396,524 and 291,562 shares of the Company's Common Stock,
respectively, at a purchase price of $0.214 per share. In addition, Ross
MacIntyre, who is married to Ms. Cagann, purchased 291,562 shares of Common
Stock at a purchase price of $0.214 per share. Such shares are restricted from
sale for a period of thirteen months folloing the Company's initial public
offering.
In October 1994, the Company sold 29,213 shares of Series A Preferred Stock to
Jerold Novack, the Company's Vice President-Finance, as Custodian for his minor
children, at a purchase price of $4.45 per share. Mr. Novack purchased 11,236 of
such shares for cash and 17,977 of such shares in exchange for Mr. Novack's
$80,000 promissory note bearing interest at the rate of 4.5% per annum.
In November 1994, Ms. Cagann and Mr. Kamfar executed personal guaranties of
the Company's indebtedness under its line of credit with Banco Popular de Puerto
Rico. These guaranties cover the entire amount outstanding under the line for
the entire term of the line and are absolute and unconditional. To secure these
guaranties, Ms. Cagann and Mr. Kamfar pledged all of their shares of the
Company's Common Stock.
In April and June 1995, the Company sold 631,579 shares of its Series C
Preferred Stock to certain investors, including 421,052 to Maritime Capital
Partners, at a purchase price of $4.75 per share. Andrew Evans, who was then a
director of the Company, is a general partner of Maritime Capital Partners.
Smith Barney Inc. acted as placement agent for the private placement of certain
of the shares of Series C Preferred Stock and earned an aggregate of $166,500 in
commissions and expenses. Cary Sucoff, then a director of the Company, is a
Senior Vice President of Smith Barney Inc.
In July 1995, the Company entered into an agreement with Maritime Capital
Partners giving the Company the right, until January 1996, to repurchase such
421,052 shares of Series C Preferred Stock (or the Common Stock into which such
shares are convertible) from Maritime Capital Partners for consideration of
approximately $2,000,000. In December 1995, this agreement was amended to extend
the Company's repurchase right until March 31, 1996. In connection with the
agreement and the amendment, the Company issued Maritime Capital Partners a
warrant to purchase 87,469 shares of Common Stock at $0.017 per share and a
warrant to purchase 25,000 shares of Common Stock at $0.01 per share. The
Company was obligated to effect such repurchase upon the closing of an initial
public offering resulting in gross proceeds to the Company (before deducting
underwriting commissions and expenses) of at least $13,000,000. Accordingly, the
Company repurchased these shares of Series C Preferred Stock, upon the closing
of its public offering.
In December 1995 and January 1996, the Company entered into a bridge loan
transaction with group of institutional and individual lenders including several
affiliates of the Company. Of the total loan amount of $1,000,000, the Company
borrowed $30,000 from Keith Barket (a director of the Company), $25,000 from
KFB, Inc. (a company affiliated with Keith Barket), $25,000 from Jerold Novack
and $45,000 from Jerold Novack as custodian for his minor children. The loan
carried an interest rate of 10% and matured on the earlier of 10 days after the
closing of a public offering or June 30, 1996. In connection with the loan, the
Company issued to each lender a warrant exercisable until December 31, 1998 to
purchase, for $0.01 per share, a number of shares of Common Stock determined by
dividing such lender's loan amount by the price per share to the public in the
Company's initial public offering (5,455 for Keith Barket, 4,545 for KFB, Inc.,
4,545 for Jerold Novack and 8,182 for Jerold Novack as custodian for his minor
children). The warrants were exercisable immediately, but the shares issued
pursuant to the warrants were subject to a six month lock-up agreement.
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
3.1 Articles of incorporation*
3.2 By-laws*
4.1 Warrant Agreement*
10 Material contracts*
11 Statement re:computation of per share earnings
* Incorporated by reference into a registration statement on Form SB-2
effective January 31, 1996
<PAGE>
NEW WORLD COFFEE, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE>
NEW WORLD COFFEE, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Consolidated Balance Sheet as of December 31, 1995 F-2
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995 F-3
Consolidated Statements of Changes in the Stockholders' Deficit for the years
ended December 31, 1994 and 1995. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995 F-5
Notes to Consolidated Financial Statements F-6 - F-14
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New World Coffee, Inc.:
We have audited the accompanying balance sheet of New World Coffee, Inc. (a
Delaware corporation) as of December 31, 1995, and the related statements of
operations, changes in stockholders' deficit and cash flows for the years ended
December 31, 1994 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New World Coffee, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
years ended December 31, 1994 and 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
April 2, 1996
F-1
<PAGE>
NEW WORLD COFFEE, INC.
----------------------
BALANCE SHEET
-------------
DECEMBER 31, 1995
-----------------
<TABLE>
<CAPTION>
ASSETS Historical 1995 Proforma 1995
------ --------------- -------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 951,355 $ 6,273,358
Receivables 66,570 66,570
Inventories 217,439 217,439
Prepaid expenses 70,000 70,000
----------- -----------
Total current assets 1,305,364 6,627,367
PROPERTY AND EQUIPMENT, net 7,076,083 7,076,083
DEBT ISSUANCE COSTS 753,627 -
DEFERRED OFFERING COSTS 608,000 -
DEPOSITS AND OTHER ASSETS, net 523,802 523,802
----------- -----------
Total assets $10,266,876 $14,227,252
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,158,835 $ 727,835
Accrued expenses 612,348 612,348
Accrued compensation 299,287 299,287
Current portion of obligations under
capital leases 57,924 57,924
----------- -----------
Total current liabilities 2,128,394 1,697,394
----------- -----------
DEFERRED RENT 507,432 507,432
----------- -----------
NOTES PAYABLE 3,500,000 -
----------- -----------
OBLIGATIONS UNDER CAPITAL LEASES 111,939 111,939
----------- -----------
BRIDGE FINANCING 755,000 -
----------- -----------
COMMITMENTS (Note 6)
REDEEMABLE SERIES C PREFERRED STOCK 1,999,997 -
CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Series A Convertible Preferred Stock,
$.001 par value ($706,348 liquidation
and redemption value); 300,000 shares
authorized; 282,539 shares issued and
outstanding (net of subscription
receivable, Note 10) 696,586 -
Series B Convertible Preferred Stock;
$.001 par value ($3,020,015
liquidation and redemption value);
1,000,000 shares authorized; 678,655
shares issued and outstanding 2,788,936 -
Series C Convertible Preferred Stock;
$.001 par value ($999,965 liquidation
and redemption value); 1,000,000
shares authorized; 210,519 shares
issued and outstanding 744,532 -
----------- -----------
Total convertible redeemable
preferred stock 4,230,054 -
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value;
10,000,000 shares authorized;
1,213,725 shares issued and
outstanding 1,214 4,502
Additional paid-in capital 1,889,744 17,516,510
Accumulated deficit (4,856,898) (5,610,525)
----------- -----------
Total stockholders' deficit (2,965,940) 11,910,487
----------- -----------
Total liabilities and
stockholders' deficit $10,266,876 $14,227,252
=========== ===========
</TABLE>
F-2
<PAGE>
NEW WORLD COFFEE, INC.
----------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
----------------------------------------------
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
REVENUES $4,510,488 $ 9,572,019
COST OF SALES AND RELATED OCCUPANCY
COSTS 2,662,447 5,995,396
STORE OPERATING EXPENSES 1,557,767 3,362,490
---------- -----------
Store operating income 290,274 214,133
DEPRECIATION AND AMORTIZATION 298,697 1,033,846
GENERAL AND ADMINISTRATIVE EXPENSES 745,543 1,784,257
---------- -----------
Operating loss (753,966) (2,603,970)
INTEREST EXPENSE, net of interest 1,140 297,587
income of $17,000 in 1995 ---------- -----------
Net loss $ (755,106) $(2,901,557)
========== ===========
NET LOSS PER COMMON SHARE (.53) (2.71)
========== ===========
PRO FORMA NET LOSS PER COMMON SHARE $ (1.73)
===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Historical 1,432,946 1,398,912
========== ===========
Pro forma 2,187,166
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
NEW WORLD COFFEE, INC.
----------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
----------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
----------------
Shares Amount Capital Deficit Deficit
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 1,166,247 $1,166 $ 248,834 $ (312,985) $ (62,985)
Issuance of common stock 47,478 48 33 - 81
Net loss - - - (755,106) (755,106)
--------- ------- ---------- ----------- -----------
BALANCE, December 31, 1994 1,213,725 1,214 248,867 (1,068,091) (818,010)
Warrants issued to Series C preferred
stockholder - - 887,250 (887,250) -
Warrants issued in connection with
bridge financing - - 753,627 - 753,627
Net loss - - - (2,901,557) (2,901,557)
--------- ------- ---------- ----------- -----------
BALANCE, December 31, 1995 1,213,725 $1,214 $1,889,744 $(4,856,898) $(2,965,940)
========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
NEW WORLD COFFEE, INC.
----------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
----------------------------------------------
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (755,106) $(2,901,557)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 298,697 1,033,846
Increase (decrease) in cash
resulting from changes in
operating assets and liabilities-
Receivables (77,783) 11,213
Inventories (111,886) (69,492)
Prepaid expenses (196,210) 136,210
Deposits and other assets (516,251) (185,324)
Accounts payable 250,329 245,242
Accrued expenses 235,015 286,932
Accrued compensation 122,391 123,443
Deferred rent 197,821 291,506
----------- -----------
Net cash used in operating
activities (552,983) (1,027,981)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,007,506) (3,241,876)
----------- -----------
Net cash used in investing
activities (4,007,506) (3,241,876)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Series A Convertible
Preferred Stock, net of issuance
costs of approximately $23,000 50,000 -
Issuance of Series B Convertible
Preferred Stock, net of issuance
costs of approximately $225,000 2,789,017 -
Issuance of Series C Convertible
Preferred Stock and Redeemable
Preferred Stock, net of issuance
costs of approximately $250,000 - 2,744,529
Payments of deferred offering costs - (177,000)
Proceeds from issuance of notes payable 1,750,000 2,250,000
Proceeds from bridge financing - 755,000
Repayments of capital leases - (52,118)
Repayment of notes payable - (500,000)
----------- -----------
Net cash provided by
financing activities 4,589,017 5,020,411
----------- -----------
Net increase in cash 28,528 750,554
CASH, beginning of year 172,273 200,801
----------- -----------
CASH, end of year $ 200,801 $ 951,355
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest, net of amount capitalized $ 1,140 $ 314,600
Noncash investing and financing
activities-
Equipment acquired under capital
leases 65,454 156,527
Issuance of Series A Convertible
Preferred Stock in exchange for a
promissory note 80,000 -
Issuance of warrants in connection
with bridge financing - 753,627
Issuance of warrants to Series C
preferred stockholder - 887,250
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
NEW WORLD COFFEE, INC.
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1994 AND 1995
--------------------------
1. NATURE OF BUSINESS, ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------
Nature of Business and Organization
- -----------------------------------
New World Coffee, Inc. (the "Company") is incorporated in Delaware and sells
freshly brewed gourmet coffees, coffee-based beverages and an assortment of
light food products through retail outlets in the northeastern United States
with the majority of stores located in New York City.
Change in Fiscal Year
- ---------------------
In 1995, the Company changed its year-end from a calendar year to a fiscal year
ending on the Sunday nearest December 31.
Inventories
- -----------
Inventories are stated at the lower of cost or market with cost being determined
by the first-in, first-out method.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost and include direct and incremental
costs incurred in the development and construction of new stores. Indirect
costs in connection with leasing new store locations are expensed as incurred.
Expenditures for maintenance, repairs and renewals of minor items are generally
charged to expense as incurred. Leasehold improvements are amortized over the
shorter of their useful lives or the term of the related leases by use of the
straight-line method. Depreciation of property and equipment is provided using
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements 8 to 15 years
Store equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Office equipment 5 years
</TABLE>
F-6
<PAGE>
Capitalized Interest
- --------------------
Interest on borrowed funds during the construction of new stores is capitalized.
Store Preopening Costs
- ----------------------
Certain incremental costs and expenses incurred which are directly related to
new store openings (primarily payroll costs incurred prior to opening) are
deferred and amortized on a straight-line basis over a twelve-month period.
Reverse Stock Split
- -------------------
In August 1995, the board of directors authorized a one for 1.714902 reverse
stock split of all outstanding common stock to become effective prior to the
Company's initial public offering. All shares and per share amounts reflect the
effect of the reverse stock split.
Advertising, Marketing and Promotion
- ------------------------------------
Advertising, marketing and promotion expenses are charged to earnings in the
period in which they are incurred. Advertising, marketing and promotion
expenses were $117,503 and $209,157 for the years ended December 31, 1994 and
1995, respectively.
Store Operating Costs
- ---------------------
Store operating costs primarily consist of salaries, wages and benefits of store
personnel, utilities and supplies.
Rent Expense
- ------------
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease term or for rental payments commencing at a date other than
initial occupancy. Provision has been made for the excess of operating lease
rental expense, computed on a straight-line basis over the lease term, over cash
rentals paid. The deferred rent liability of approximately $507,000 as of
December 31, 1995, reflects such provision.
Net Loss Per Share
- ------------------
Historical Net Loss Per Share
-----------------------------
Year Ended December 31, 1994 -- Net loss per share is computed by dividing
----------------------------
net loss by the weighted average number of shares of common stock outstanding
during the periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, stock options and warrants
issued during the twelve months preceding the initial filing of this offering
at prices below the expected initial public offering price have been included
in the Company's loss per share computation for all periods presented even
though they were antidilutive. The Series A Preferred Stock, stock options
and warrants issued prior to the twelve months preceding the initial filing
of this offering or with exercise prices above the initial public offering
price as well as Series B Preferred Stock and Series C Preferred Stock are
excluded as they are antidilutive.
Year Ended December 31, 1995 -- Net loss per share is computed by dividing
----------------------------
net loss plus the excess fair value of consideration over the carrying amount
of Redeemable Series C Preferred Stock by the weighted average number of
shares of common stock outstanding during the period. The Weighted average
shares outstanding is based upon (i) the method similar to that used to
calculate historical net loss per share for the year ended December 31, 1994
discussed above for the period from January 1, 1995 to October 1, 1995 and
(ii) Accounting Principles Board Opinion No. 15, "Earnings per share," for
the period after October 1, 1995, which excludes Series A, B, and C
Convertible Redeemable Preferred Stock, options and warrants as they are
antidilutive.
F-7
<PAGE>
Proforma Net Loss Per Share - Proforma net loss per share is computed in a
---------------------------
manner similar to historical net loss per share for the year ended December
31, 1995, discussed above, except for the Series A, B, and C Convertible
Redeemable Preferred Stock being considered outstanding for the year.
Income Taxes
- ------------
The Company provides for federal and state income taxes using the liability
method in accordance with Financial Accounting Standards Board Statement No. 109
("SFAS 109"). SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
Utilization of Estimates
- ------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
- --------------------------------
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 121,
"Accounting for the Impairment of Long Lived Assets," which is effective for
fiscal years beginning after December 15, 1995. This statement requires that
long-lived assets and certain identifiable intangibles to be 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. The
Company does not expect the adoption of this standard to have a material effect
on its financial position or results of operations.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
F-8
<PAGE>
2. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following as of December 31, 1995:
<TABLE>
<S> <C>
Leasehold improvements $6,345,270
Store equipment 1,188,504
Furniture and fixtures 391,138
Office equipment 218,699
----------
8,143,611
Less- Accumulated depreciation and
amortization 1,067,528
----------
$7,076,083
==========
</TABLE>
Approximately $94,000 of capitalized interest is included in property and
equipment at December 31, 1995.
3. DEPOSITS AND OTHER ASSETS
-------------------------
Deposits and other assets consist of the following as of December 31, 1995:
Security deposits $ 383,278
Store preopening costs, net of
accumulated amortization of $266,000 74,349
Other 66,175
----------
$ 523,802
==========
4. PREFERRED STOCK, STOCK OPTIONS, AND WARRANTS
--------------------------------------------
Preferred Stock
- ---------------
During 1993, 1994 and 1995, the Company issued Series A Preferred Stock ("Series
A"), Series B Preferred Stock ("Series B") and Series C Preferred Stock ("Series
C," including the redeemable portion), at $2.50, $4.45, and $4.75 per share,
respectively (collectively referred to as "Preferred Stock"). All of these
shares were converted into common shares at the closing of the Company's initial
public offering or redeemed in February 1996 (Note 11). The principal terms of
the Preferred Stock were as follows:
Redemption - In the event of a transaction or series of transactions in
----------
which more than 50% of the voting power is transferred, the holders of the
Series A, Series B and Series C had the option of redeeming their shares
at a redemption price of $2.50, $4.45 and $4.75 per share, respectively.
Accordingly, all of these shares are classified outside stockholders'
equity. To differentiate between those shares which were automatically
converted into Common Stock and the Series C Preferred Stock which were
repurchased upon the consummation of the firm commitment underwritten
offering, the former is referred to as Convertible Redeemable Preferred
Stock and the latter as Redeemable Preferred Stock.
Liquidation Preference - In the event of a liquidation of the Company, the
----------------------
holders of the Series A, Series B and Series C were entitled to receive
$2.50, $4.45 and $4.75 per share, respectively, plus a further amount per
share equal to dividends, if any, then declared but unpaid.
Dividends
---------
The holders of the Series A, Series B and Series C were entitled to
receive annual dividends at the rate of $.25, $.44 and $.47 per share,
respectively, which were noncumulative. The Company would not have paid
dividends to the common stockholders unless a dividend had been declared
and paid for all shares of the
F-9
<PAGE>
Preferred Stock. No dividends have been declared on the Preferred Stock or
the common stock as of December 31, 1994 and 1995.
Voting Rights
-------------
The holders of the Preferred Stock and common stock vote together as a
single class on all matters to come before the shareholders for approval,
except for the authorization of a class of stock senior to the Preferred
Stock with respect to dividends or distribution of assets on liquidation,
which required the approval of a majority of the holders of the Preferred
Stock.
Other
-----
In connection with the offering of Series A and Series B shares, the
Company issued 47,478 shares of common stock and warrants to purchase
52,101 shares of common stock. In connection with the Series B offering,
23,739 shares of common stock and 23,739 warrants to purchase common stock
were issued to a member of the Company's board of directors.
Convertible Redeemable Preferred Stock
--------------------------------------
The number of common shares which were issued upon conversion, excluding
Redeemable Preferred Stock (see below), were as follows:
<TABLE>
<CAPTION>
Common Stock
Into Which
Outstanding Shares Convert
----------- --------------
<S> <C> <C>
Series A 282,539 169,795
Series B 678,655 464,618
Series C 210,519 153,841
</TABLE>
The holders of the Preferred Stock had the right, at any time, to convert
such shares into common stock. Under the terms of conversion, the Preferred
Stock shares automatically convert into common stock upon the consummation of
a firm commitment underwritten offering of the Company's common stock to the
public at an aggregate offering price of at least $7,500,000 and
automatically convert into common stock at such time as less than 30% of the
issued shares of Preferred Stock remain outstanding.
As of December 31, 1995, the Company had reserved 300,000, 1,000,000 and
1,000,000 shares of common stock for issuance upon the conversion of the
Series A, Series B and Series C, respectively.
F-10
<PAGE>
Redeemable Preferred Stock
--------------------------
On July 21, 1995, the Company entered into an agreement with a Series C
preferred stockholder to purchase all the Preferred Stock and common stock,
if such preferred stockholder exercised his conversion rights, for $1,999,997
in cash and a warrant to purchase 87,469 shares of common stock at an
exercise price of $.017 per share. Such warrant can either be exercised or
converted and terminates in July 2000. The terms of this agreement also
provided for the preferred stockholder to resign from the board of directors
of the Company, to eliminate the right of Series C preferred stockholders to
elect a member of the board of directors and not to acquire shares of common
stock during the term of the agreement other than through exercise of the
warrant discussed herein. The Company had the right to effect the repurchase
discussed herein at any time through January 4, 1996. On December 29, 1995,
the agreement was amended to extend the repurchase right until March 31,
1996. In connection with the amendment, the Company issued an additional
warrant to purchase 25,000 shares at an exercise price of $0.01 per share.
Under the terms of the agreement, as amended, the Company repurchased the
stock at the closing of the Company's initial public offering in February
1996 (Note 11). The fair market value of the warrants issued in connection
with the July 21, 1995 and December 29, 1995 agreements has been reflected in
stockholders' deficit as an increase in additional paid-in capital and
accumulated deficit and is included in the calculation of net loss per share.
Stock Options
- -------------
The Company's 1994 Stock Plan (the "1994 Plan") provides for the granting to
employees of incentive stock options and, for the granting to employees and
consultants of nonstatutory stock options and stock purchase rights. Unless
terminated sooner, the 1994 Plan will terminate automatically in August 2004.
The board of directors has the authority to amend, suspend or terminate the 1994
Plan, subject to any required stockholder approval under applicable law,
provided that no such action may affect any share of common stock previously
issued and sold or any option previously granted under the 1994 Plan.
Changes in options under this plan, expressed in number of shares, are as
follows:
<TABLE>
<CAPTION>
Number
of Option
Shares Price
------ ------
<S> <C> <C>
Options outstanding, December 31, 1993 - $ -
Granted 112,739 .77 - .84
-------
Options outstanding, December 31, 1994 112,739 .77 - .84
Granted 90,011 2.00 - 3.39
-------
Options outstanding, December 31, 1995 202,750 .77 - 3.39
=======
</TABLE>
Options generally become exercisable in ratable installments over a four-year
period. A total of 262,405 shares of common stock are currently reserved for
issuance pursuant to the 1994 Plan. There were 149,666 and 177,124 shares
available for grant under the 1994 Plan at December 31, 1994 and 1995,
respectively. Options exercisable as of December 31, 1994 and 1995 were 29,156
and 56,854, respectively.
F-11
<PAGE>
The Company's 1995 Directors' Stock Option Plan (the "Director's Option Plan")
was adopted by the Board of Directors and approved by the Company's shareholders
in August 1995. A total of 58,312 shares of common stock has been reserved for
issuance under the Directors' Option Plan. The Directors' Option Plan provides
for the automatic grant of nonstatutory stock options to nonemployee directors
of the Company. No options were granted under the Directors' Option Plan in
1995.
Warrants
- --------
In addition to the warrants discussed above and in Note 9, the Company has
95,142 warrants outstanding. These warrants have exercise prices ranging from
$.02 - $8.15 per share and have a term ranging from 5 to 7 years. Such warrants
were issued in connection with debt and equity financings and certain other
services.
5. INCOME TAXES
------------
A summary of the significant components of deferred tax liabilities (assets) is
as follows:
<TABLE>
<S> <C>
Fixed assets $ (137,000)
Store preopening costs 33,000
Accrued expenses (121,000)
Deferred rent (215,000)
Operating loss carryforwards (1,267,000)
-----------
Gross deferred tax assets (1,707,000)
Valuation allowance 1,707,000
-----------
Net deferred taxes $ -
===========
</TABLE>
The Company has recorded a full valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized. The change in the
valuation allowance during 1995 was an increase of approximately $1,343,000.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $2,879,000. These net operating loss carryforwards expire on
various dates through 2010. The Company's ability to utilize its net operating
loss carryforwards may be subject to annual limitations in future periods
pursuant to the "change in ownership rules" under Section 382 of the Internal
Revenue Code, as amended.
6. COMMITMENTS
-----------
Operating Leases
- ----------------
The Company leases office and retail space under various noncancelable operating
leases. Property leases normally require payment of a minimum annual rental
plus a pro rata share of certain landlord operating expenses.
F-12
<PAGE>
As of December 31, 1995, approximate future minimum rental payments under
noncancelable operating leases for the next five years and the period thereafter
are as follows:
<TABLE>
<CAPTION>
Year ending:
<S> <C>
1996 $ 2,196,130
1997 2,232,300
1998 2,258,233
1999 2,146,851
2000 2,221,381
Thereafter 12,687,525
-----------
$23,742,420
===========
</TABLE>
Rent expense under operating leases was approximately $816,000 and $2,128,000
for the years ended December 31, 1994 and 1995, respectively.
Supplier Agreement
- ------------------
The Company has an exclusive supply agreement with its sole supplier of green
coffee, whereby it enters into fixed price purchase commitments for a portion of
its green coffee requirements. At December 31, 1995, the Company was committed
to purchase approximately $100,000 of green coffee.
Employment Agreements
- ---------------------
The Company has entered into employment agreements with six officers of the
Company expiring in various years through 1997. Minimum base salaries and
bonuses for the term of these employment agreements total approximately
$920,000. Subsequent to year end, an officer of the Company received options to
purchase 87,464 shares of the Company's common stock, which vest over three
years and upon meeting certain other criteria.
7. LINE OF CREDIT
--------------
During 1995, the Company had a line of credit ("the Line") with a bank which
permitted the Company to borrow up to a maximum of $3,500,000. On October 3,
1995, the Company entered into a commitment letter to renew its existing $3.5
million revolving line of credit, which expires on January 31, 1996. Borrowings
under the line bear interest at prime (8.5% at December 31, 1995) plus 3.5% and
are secured by all the assets of the Company, including proceeds from the
Company's initial public offering, and is guaranteed by the Company's co-
presidents and the co-chief executive officers, who are also principal
shareholders of the Company. Amounts borrowed under the Line were payable upon
demand. The Company is subject to certain financial and other covenants
including interest coverage ratio, net worth levels and quarterly profitability.
The Company was in violation of certain of its financial covenants for the
twelve months ended December 31, 1995. The Company has received a waiver from
its bank through February 15, 1996 with respect to these covenant violations.
The amount outstanding on the Line as of December 31, 1995 was $3,500,000 and
was repaid with proceeds from the Company's initial public offering (Note 11) in
February 1996.
8. KEY PERSON LIFE INSURANCE
-------------------------
The Company maintains life insurance totaling $3,500,000 for its co-chief
executive officers and co-presidents in which it is the beneficiary.
F-13
<PAGE>
9. BRIDGE FINANCING
----------------
In December 1995 and January 1996, the Company received $1,000,000 in bridge
financing from a group of lenders, which included $200,000 from certain related
parties. This borrowing bore interest at 10% and was due on the earlier of ten
days following the Company's initial public offering or June 30, 1996. In
conjunction with this bridge financing, the Company issued warrants to purchase
181,818 shares of common stock at an exercise price of $.01 per warrant. As of
December 31, 1995, the Company has received $755,000 of this bridge financing
and has recorded approximately $754,000 as debt issuance costs, representing
the value of the warrants issued, valued at the per share initial public
offering price less the exercise price. Immediately following the Company's
initial public offering, in February 1996, the $1,000,000 in bridge financing
was repaid with the related proceeds and, accordingly, this has been classified
outside current liabilities.
10. STOCK SUBSCRIPTION NOTE RECEIVABLE
----------------------------------
In October 1994, an officer of the Company purchased 29,213 shares of Series A
for cash and a promissory note totaling $80,000. The promissory note matures on
October 15, 1996 and bears interest at 4.5% per annum. The shares of Series A
issued have been pledged as collateral.
11. SUBSEQUENT EVENTS
-----------------
In February 1996, the Company completed its Initial Public Offering ("IPO") of
2,500,000 shares of common stock (par value $.01) at a purchase price of $5.50
per share, for aggregate net proceeds of approximately $11.4 million. A portion
of the proceeds was used to repay the outstanding balance under the Company's
line of credit agreement ($3,500,000), the bridge financing ($1,000,000) and the
redeemable Series C Preferred Stock ($1,999,997). Also, in connection with the
IPO, the Preferred Stock was converted into common stock of the Company or
redeemed.
12. UNAUDITED PROFORMA INFORMATION
------------------------------
The pro forma balance sheet at December 31, 1995 reflects the Company's IPO
discussed above (Note 11).
F-14
<PAGE>
NEW WORLD COFFEE, INC.
----------------------
EXHIBIT 11
----------
STATEMENT OF COMPUTATION OF LOSS PER SHARE
------------------------------------------
<TABLE>
<CAPTION>
1994 1995
HISTORICAL LOSS PER SHARE:
<S> <C> <C>
Net loss................................................ $(755,106) $(2,901,557)
Excess fair value of consideration over carrying amount
of Redeemable Series C Preferred Stock.................. ---- (887,250)
----------- --------------
Net loss available to
common stockholders................................ (755,106) (3,788,807)
Weighted average shares outstanding:
Common stock........................................ 1,186,030 1,213,726
Stock options(1).................................... 117,329 87,996
Warrants(1)......................................... 129,587 97,190
----------- --------------
1,432,946 1,398,912
----------- --------------
Historical net loss
per share............................................... $(.53) $(2.71)
----------- --------------
PRO FORMA LOSS PER SHARE:
Net loss................................................ $(2,901,577)
--------------
Excess fair value of consideration over carrying amount
of Redeemable Series C Preferred Stock (887,250)
Net loss available to common stockholders........... (3,788,807)
--------------
Weighted average shares outstanding:
Common Stock........................................ 1,213,726
Convertible Preferred Stock
Series A............................................ 169,795
Series B............................................ 464,618
Series C............................................ 153,841
Stock options(1).................................... 87,996
Warrants(1)......................................... 2,187,166
--------------
Pro Forma net loss per share............................. $(1.73)
==============
</TABLE>
(1) Options and warrants for 172,750 and 130,058, respectively, were granted
at prices below the initial public offering price of $5.50. The dilutive
effect of these options have been included in the loss per share
calculation using the treasury stock method in accordance with SAB
No. 83.
OPTIONS WARRANTS
------------- ---------------------
Options issued within one
year of initial
registrations statement
filing 172,750 130,058
---------- -----------
Proceeds from exercise $ 304,816 $ 2,590
Expected initial
public offering price / 5.50 / 5.50
---------- -----------
Treasury stock 55,421 471
---------- -----------
Incremental shares 117,329 129,587
---------- -----------
For the year ended December 31, 1995, options and warrants have been included in
the earnings per share calculation for the period January 1, 1995 to October 1,
1995, pursuant to SAB No. 83. Thereafter they have been included in the
calculation pursuant to APB No. 15, and accordingly, are anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 951
<SECURITIES> 0
<RECEIVABLES> 66
<ALLOWANCES> 0
<INVENTORY> 217
<CURRENT-ASSETS> 1305
<PP&E> 8134
<DEPRECIATION> 1063
<TOTAL-ASSETS> 10267
<CURRENT-LIABILITIES> 2128
<BONDS> 0
0
4230
<COMMON> 1891
<OTHER-SE> (2965)
<TOTAL-LIABILITY-AND-EQUITY> 10267
<SALES> 9572
<TOTAL-REVENUES> 9572
<CGS> 5995
<TOTAL-COSTS> 9358
<OTHER-EXPENSES> 2818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 298
<INCOME-PRETAX> (2901)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2901)
<EPS-PRIMARY> (2.71)
<EPS-DILUTED> 0
</TABLE>
