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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A (Amendment No. 1)
[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 29, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER
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NEW WORLD COFFEE, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 13-3690261
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
379 WEST BROADWAY, 4TH FLOOR 10012
NEW YORK, NY (Zip Code)
(Address of Principal Executive Offices)
(212) 343-0552
(Issuer's Telephone Number)
Securities registered under
Section 12(B) of the Exchange Act:
NAME OF EACH EXCHANGE ON
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of 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. $11,340,199
-----------
The aggregate market value of the voting stock held by non-affiliates
per the closing stock price as of March 14, 1997 is $13,927,461.
----------
As of March 14, 1997, 6,245,498 shares of common stock of the issuer
were outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL
New World Coffee, Inc. ("New World Coffee" or the "Company") currently owns
and operates 40 specialty coffee cafes, consisting of 28 in New York, seven in
Connecticut, three in Pennsylvania and two in New Jersey, making the Company the
second largest specialty coffee retail chain in the northeastern United States.
With its recent acquisition of Willoughby's Incorporated ("Willoughby's"), the
Company's coffee purveyor and roaster since its inception, the Company has
become vertically integrated in its operations, reduced its coffee costs,
improved its quality control, and entered into the mail order and wholesale
businesses. The Company seeks to differentiate itself from other specialty
coffee retailers by serving high quality, freshly roasted coffee (generally
delivered to its stores within 24 hours of roasting) and a variety of fresh,
high quality gourmet foods in a sophisticated, award-winning cafe design
environment.
In recent years, the specialty coffee retail business has grown rapidly.
Industry sources estimate that total retail sales of specialty coffee through
all distribution channels will grow to $5.0 billion by 1999 from an estimated
$1.5 billion in 1989 and that coffee stores, including espresso carts and
kiosks, will be the fastest growing distribution channel. The consumption of
specialty coffee drinks is also growing rapidly, with the percent of U.S.
population drinking cappuccino increasing 42% from 1995 to 1996. Management
believes this growth has been driven by (i) the increasing demand for premium
food and drink items, (ii) the popularity of coffee bars as gathering places,
and (iii) greater awareness and appreciation of gourmet coffee drinks.
In 1996, the Company restructured its operations and added senior
management personnel with significant experience in retailing and food service
as well as real estate development. Most importantly, the Company hired Bruce
Morningstar, previously the Director-Northeast Development of Starbucks
Corporation ("Starbucks"), as Vice President-Real Estate, and John DeNapoli,
previously Chief Operating Officer of Atlantic Foods Corporate, a Boston Market
franchisee, as Vice President-Operations. In addition, the Company deployed a
state-of-the-art, personal computer-based point-of-sale management information
system (the "POS System") which significantly enhanced its ability to track and
improve its store profitability. The Company also refocused its site selection
strategy to solely target high-traffic, high-visibility residential and shopping
locations. Such locations typically generate higher revenue since they are open
seven days per week and attract breakfast, lunch and afternoon and evening
traffic as compared to business district sites which are open five days per week
and do not attract afternoon and evening traffic. In order to better serve this
market, the Company developed a larger, more comfortable store concept designed
to create a neighborhood gathering place environment. In addition, the larger
store concept offers expanded retailing space to enable the Company to better
capture whole bean and merchandise sales. The Company's existing stores vary in
size from 225 to 2,670 retail square feet, with newer stores averaging
approximately 1,800 retail square feet.
New World Coffee is a Delaware corporation and was organized in November
1992.
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INDUSTRY OVERVIEW
The U.S. coffee market has broad and deep demographics. Fifty-six percent
of American adults drink coffee and on average they drink an average of 3.5 cups
per day, according to the National Coffee Association of U.S.A., Inc.'s 1996
Winter Coffee Study. 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 and is expected to continue to grow through
the end of the century. According to Avenues For Growth: A 20-Year Review of
the U.S. Specialty Coffee Market, January 1993, a report published by the
Specialty Coffee Association of America ("SCAA"), the market for gourmet coffee
nearly doubled during the 1980s, as retail sales grew from approximately $763
million in 1979 to $1.5 billion in 1989. The report predicts that the gourmet
coffee industry will approach $5.0 billion in retail sales by the year 2000. A
National Association of Specialty Food Trade survey in 1992 confirms the upward
trends in gourmet coffee consumption and notes that the percentage of coffee
consumers purchasing gourmet coffee increased from 22.1% in 1990 to 31.1% in
1992. The Company believes these are the most up to date reports available on
the specialty coffee industry.
BUSINESS STRATEGY
The goal of New World Coffee is to become the premier high quality
specialty coffee cafe 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 cafe retailer. The key
elements of this strategy include:
Sophisticated, Comfortable and Inviting Environment. New World Coffee's
specialty coffee cafes are designed to be more sophisticated and comfortable
than those of its competitors while creating an inviting atmosphere through the
use of natural materials and warm lighting. The Company's newer format stores
average approximately 1,800 square feet (compared to approximately 600 square
feet previously) and offer an expanded, more comfortable seating area which
enhances the stores use as neighborhood gathering places, along with expanded
retailing sections to enable the Company to capture additional whole bean and
merchandise sales. The Company's sales mix for the quarter ended December 29,
1996 was 62% beverages, 23% food, 12% beans and 3% merchandise, compared to 63%,
32%, 5% and 0%, respectively, for the comparable 1995 quarter. New World
Coffee's store design has won six design awards and, Management believes, in
conjunction with the Company's
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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 selects high quality arabica beans from throughout
the world which are then roasted by its roastmasters 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, most of whom
deliver vacuum- or valve-packed coffee to their stores.
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 (i) promoting the Company's status as a roaster to establish
the Company's legitimacy as a high quality purveyor of award-winning fresh
roasted coffees, (ii) offering a broad and deep selection of food items to
establish the stores as specialty coffee cafes compared to espresso bars which
have a limited food selection, (iii) offering larger stores with comfortable
seating, and a warm environment to establish them as neighborhood gathering
places compared to espresso bars which have limited seating, and (iv) promoting
the distinctive qualities of the Company's new products such as the New World
Freezer and seasonal blends to position the Company as a unique and innovative
retailer. The Company also sponsors local and regional marketing events. New
World Coffee believes that these activities generate awareness and trial and
repeat purchases by reinforcing positive experiences with the Company's
products.
Site Selection and Regional Expansion. New World Coffee's site selection
strategy is to open stores in residential and shopping areas with strong
demographics, high traffic, high visibility, easy accessibility and parking,
with strong compatible retailers. The Company's expansion strategy is to
rapidly expand its retail store base in both existing and new markets, through
new store openings or acquisitions, in order to secure a leading presence in
each of its markets and to enhance its brand awareness. Along with expansion in
its existing markets, the Company plans to enter other markets along the
Atlantic seaboard, and has identified the Washington, D.C. and Boston
metropolitan markets as its next expansion markets.
COFFEE
New World Coffee is committed to roasting and marketing only the finest and
freshest coffee. New World Coffee offers a revolving selection that includes
over 30 whole bean blended, unblended and decaffeinated coffees. Rotating its
coffee selection allows the Company to provide its customers with a wider
variety including certain coffees which have limited availability. The Company
typically offers up to 12 unblended and 8 blended coffees at any given time.
Sourcing. The Company focuses on purchasing only the highest grades of
coffee available from the best crops. Barry Levine and Bob Williams, the
Company's Vice Presidents-Coffee, evaluate crop samples on an ongoing basis and
make purchase commitments on the basis of quality, taste and availability. The
Company makes forward commitments for the purchase of all of its coffee to help
ensure adequate supply. Since one pound of coffee is brewed to produce
approximately 40 cups of coffee, increases in the cost of green coffee
historically have not had a material adverse impact on the Company's per cup
cost of coffee. The Company has long-standing relationships with coffee brokers,
growers and exporters, allowing the Company access to the world's best green
coffee.
New World Coffee purchases only the highest grades of arabica coffee as
these grades are the best available from each producing region. These highest
grade arabica coffees are of superior quality to lower grade arabica varieties
or coffee beans of the robusta species. Lower quality beans are typically found
in non-specialty or mass-merchandised coffees and even in many specialty coffee
outlets.
Roasting. The roasting of commercial coffee is often accomplished through
a uniform roasting process that does not differentiate between the types of
coffee. Some specialty roasters also employ this commercial method.
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New World Coffee's roasting process, however, varies based upon the variety,
origin and physical characteristics of the coffee and is designed to develop the
optimal flavor and aromatics of each coffee. New World Coffee has several
roastmasters who are directly responsible for overseeing the roasting process.
The roastmasters learn the Company's unique roasting methods during an
apprenticeship with the Company's Vice Presidents-Coffee.
New World Coffee believes that its roasting 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 of its locations which it believes is an effective competitive
advantage.
Freshness. New World Coffee is committed to providing its customers with
freshly roasted whole bean coffee and beverages. Freshness is important because
once coffee is roasted it becomes a highly perishable product, and within 2
weeks, loses a significant amount of flavor. The Company's coffee is delivered
to each store at least twice a week, generally within 24 hours of roasting.
This enables the Company to guarantee the freshness of the coffee sold in its
stores. The Company believes that its freshly roasted coffee is superior to its
competitors who deliver vacuum- or valve-packed coffee to their stores.
RETAIL STORES
The Company operates 40 specialty coffee cafes, including 28 in New York,
seven in Connecticut, three in Pennsylvania, and two in New Jersey. New World
Coffee stores feature an award-winning decor and are designed to have a
sophisticated, comfortable and inviting appearance through the use of natural
materials and warm lighting. The Company's newer format stores average
approximately 1,800 square feet (compared to approximately 600 square feet
previously) and offer an expanded, more comfortable seating area which enhances
the stores use as neighborhood gathering places, along with expanded retailing
sections to enable the Company to capture additional whole bean and merchandise
sales.
New World Coffee stores offer, over the course of any given year, more than
30 varieties and blends of fresh roasted coffee, in brewed and whole bean
format, from coffee producing countries around the world. Regular and
decaffeinated "Coffees of the Day" are fresh brewed daily with strict brewing
and freshness standards. The stores also offer 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 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 stores also offer a broad and deep variety of fresh, high
quality food items. Breakfast offerings include bagels, croissants, muffins,
danishes and scones, lunch offerings include Italian panini sandwiches and soups
and dessert items include various cakes and cookies, dessert muffins, brownies
and biscotti. Management is consistently working with its suppliers to develop
a selection of quality food items which will complement beverage sales.
Some of the Company's stores also carry selected coffee related merchandise
items including coffee making equipment, french presses, grinders and other
small equipment. The Company's newer, larger format stores include expanded
retailing sections to enable the Company to better capture whole bean and
merchandise sales. For the quarter ended December 29, 1996, the Company's sales
mix was 62% beverages, 23% food, 12% whole beans and 3% merchandise,
compared to 63%, 32%, 5% and 0%, respectively, for the comparable 1995 quarter.
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.
SITE SELECTION AND STORE LOCATIONS
New World Coffee's site selection strategy is to open specialty coffee
cafes in high-traffic, high-visibility residential and shopping locations in
each of its target markets. The Company's real estate selection process
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evaluates sites based on a variety of factors including neighborhood
demographics, existing traffic patterns, site visibility, site accessibility,
availability of parking, proximity of compatible retailers and potential
competitors. Following this analysis, each site must be approved by senior
management in each of the real estate, operations and finance areas. In 1996,
the Company recruited Bruce Morningstar, previously Starbucks' Director-
Northeast Development, to oversee its development process as its Vice President-
Real Estate.
In 1996, the Company focused its site selection strategy to solely target
residential and shopping area sites. The Company's experience indicates that
residential and shopping area sites generally offer more attractive economics as
they typically are open seven days a week and capture breakfast, lunch and
afternoon and evening traffic, compared to business district sites which are
open five days and capture breakfast and lunch traffic only. The residential
and shopping area units can also be staffed and operated more cost effectively
than business district sites due to lower peak traffic constraints.
During fiscal 1996, the Company's average cost to open a store was
approximately $300,000, including all leasehold improvements, equipment,
beginning inventory, as well as all expenses for the store design, site
selection, lease negotiation, construction supervision and permitting. The
eighteen residential and shopping area stores open for the entire period
achieved average sales per store of approximately $505,000 and average sales per
square foot of $710. For the quarter ended December 29, 1996, the Company
achieved a chainwide store operating margin of 20.6%.
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CUSTOMER SERVICE AND TRAINING
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, store 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 two 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 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 and 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 and shopping area locations and from 7:00 a.m. to 6:00 p.m. in
business district locations. The store managers are overseen by a district
manager, who is responsible for supervising the operations of up to 10 stores
and who reports to a regional manager.
The Company maintains financial accounting controls for each of its stores
through the use of centralized accounting and management information systems to
track store-by-store performance, produce required management reports, and track
and manage consolidated inventory and purchasing requirements. The Company's
information system currently uses a central computer and state-of-the-art POS
System. At present the POS System is polled nightly via an interface to the
central computer, which then creates daily, weekly and monthly management
reports. Sales information is collected daily from each store and store managers
are provided with operating statements for their locations.
MARKETING
The Company's marketing strategy is to differentiate its concept and build
a brand identity based upon (i) promoting the Company's status as a roaster to
establish the Company's legitimacy as a high quality purveyor of award-winning
fresh roasted coffees, (ii) offering a broad and deep selection of food items to
distinguish its specialty coffee cafes from espresso bars which have a limited
food selection, (iii) offering larger stores with comfortable seating, and a
warm environment to establish them as neighborhood gathering places compared to
espresso bars which have limited seating, and (iv) promoting the distinctive
qualities of the Company's new products such as the New World Freezer and
seasonal blends to position the Company as a unique and innovative retailer.
New World Coffee believes that its ability to source and roast only the
highest quality beans and provide only fresh roasted coffee delivers a
distinguishable advantage in coffee flavor to the consumer. The Company's
marketing materials and in-store decor package emphasize the Company's status as
a roaster and retailer and highlight the Company's efforts to source, roast and
sell only the finest, freshest coffees. These materials also educate consumers
about New World Coffee's fresh roasted coffees as compared to vacuum- or valve-
packed coffee from other retailers. The Company also promotes the fact that
its coffees have garnered numerous awards over the years.
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To date, the Company has relied primarily on the high visibility of its
real estate locations, word of mouth, public relations, and the inviting
atmosphere of its stores to attract first time customers. The Company's focus
on larger, higher-visibility residential and shopping area sites enhances its
ability to develop a brand identity as they tend to be more visible, higher
traffic residential and shopping sites and also serve as neighborhood gathering
places. In addition, the Company's strategy to offer breadth and depth of high
quality food items serves to distinguish it from other espresso bar competitors.
The Company seeks to further develop its brand identity through
participation in targeted local events to enhance brand awareness. For example,
in New York, New World Coffee served as the exclusive coffee provider to the
1993 and 1994 New York City Marathons, the 1995 Seventh on Sixth Fashion Week
shows, and Celebrate 125!, The Museum of Natural History's 125th Anniversary
Celebration, the 1996 Village Jazz Festival and the 1996 Race for the Arts. The
Company also conducts local coffee tastings, samplings at neighborhood events
and frequent purchaser promotions, such as discounts on its "Coffee of the
Month" to generate trial purchases of its products. The costs of these
promotions do not have a material impact on the Company's operating results.
A steady introduction of new coffee, drink and food products is key to the
Company's marketing strategy to establish the Company as an innovative retailer,
keep the concept fresh and drive incremental sales volume. For example, in
1995, the Company introduced the New World Freezer, an iced coffee and milk
"slush" drink as a seasonal offering. The Company also develops seasonal blends
such as Summertime Blend, designed to be consumed iced or hot to complement
lighter, warm weather foods and Holiday Blend to complement richer wintery
foods. In addition, "coffees of the day" are designed to encourage tasting
experimentation and enhance customer knowledge of unusual blends and varieties.
As the Company attempts to enter new markets, it plans to tailor its
marketing strategy to the overall level of awareness and availability of
specialty coffee in that market. In markets which have a less developed
specialty coffee presence, the emphasis of the Company's promotions will
initially be on the fundamental distinctions between New World Coffee and
prepackaged ground coffee. In markets which are more knowledgeable about
specialty coffees, the Company's advertising will focus on the superiority of
New World Coffee's guaranteed freshly roasted products versus competitive
specialty brands. The Company plans to use direct mail, print and other mass
media advertising to expand brand awareness when the Company has achieved a
market penetration which, in the Company's judgment, would make such efforts
cost-effective. There can be no assurance that the Company will achieve such a
level of market penetration.
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, shoppers' clubs,
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, a Seattle-based operator of gourmet coffee stores, with more than
1,100 locations; Timothy's Coffees of the World, Inc., a Toronto-based
franchisor, with approximately 75 locations; Caribou Coffee Inc., a Minneapolis-
based operator, with approximately 75 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.
Although competition in the specialty coffee market is currently
fragmented, the Company competes and, in the future will increasingly compete
with Starbucks, the market's leading retailer. Starbucks, and others, have
significantly greater financial, marketing and other resources than the Company.
In addition to Starbucks and other current competitors, the attractiveness of
the gourmet specialty coffee store market could draw one or more new major
competitors with substantially greater financial, marketing, and operating
resources than the Company at any time.
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The Company also expects that competition for suitable sites for new stores
will be intense. The Company competes against other specialty retailers and
restaurants for these sites, and there can be no assurance that management will
be able to continue to secure adequate sites at acceptable rent levels.
Management believes that supermarkets pose the greatest competitive
challenge in the whole bean coffee market, in part because supermarkets offer
customers the convenience of not having to make a separate trip to the Company's
stores. A number of nationwide coffee manufacturers, such as Kraft General
Foods, Inc., Proctor & Gamble Co., and Nestle S.A., are distributing premium
coffee products in supermarkets, which products may serve as substitutes for the
Company's coffees. Regional specialty coffee companies, such as Millstone
Coffee, Inc., also sell whole bean coffees in supermarkets.
ITEM 2. PROPERTIES
FACILITIES
New World Coffee leases approximately 7,550 square feet in New York, New
York, approximately 1,600 square feet in Branford, Connecticut for
administrative offices and training facilities and 3,800 square feet for a
roasting plant. As of the date of this 10-KSB filing, New World Coffee operates
a total of 40 retail stores all of which are located in leased premises.
NEW WORLD COFFEE STORE LOCATIONS AND SIGNED LEASES
<TABLE>
<CAPTION>
Approximate Retail
Store Location Date Opened/Acquired Square Footage
- ------------------------------------------------- ------------------- ------------------------- -------------------
<S> <C> <C> <C>
Sixth Avenue at 10th Street*..................... New York, NY 02/93 270
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
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
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 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
Sixth Avenue at 12th Street*..................... New York, NY 06/95 450
Madison Avenue at 43rd Street.................... New York, NY 08/96 975
125 Seventh Avenue*.............................. Brooklyn, NY 06/96 1,925
Broadway at 75th Street*......................... New York, NY 06/96 500
Columbus at 67th Street*......................... New York, NY 06/96 860
Broadway at 114th Street*........................ New York, NY 06/96 1,120
</TABLE>
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<TABLE>
<S> <C> <C> <C>
419 Main Street*................................. Ridgefield, CT 09/96 1,600
1006 Chapel Street*.............................. New Haven, CT 10/96 780
258 Church Street*............................... New Haven,CT 10/96 790
276 York Street*................................. New Haven, CT 10/96 1,125
550 East Main Street*............................ Branford, CT 10/96 900
752 Boston Post Road*............................ Madison, CT 10/96 830
60 Temple Street................................. New Haven, CT 11/96 1,450
Route 59/Middletown*............................. Nanuet, NY 11/96 1,600
Third Avenue at 90th Street*..................... New York, NY 12/96 1,500
107-24 Continental*.............................. Forest Hills, NY 12/96 2,670
1034 Willis Avenue*.............................. Albertson, NY 12/96 1,350
Cross Roads Shopping Center*..................... Greenburgh, NY 1/97 1,980
400 Washington Street*........................... Hoboken, NJ Second Qtr. 1997 (est.) 1,900
102 Westwood Avenue*............................. Westwood, NJ Second Qtr. 1997 (est.) 1,750
162 Spring Street*............................... New York, NY Second Qtr. 1997 (est.) 1,800
132 Seventh Avenue*.............................. New York, NY Second Qtr. 1997 (est.) 1,630
* Specialty coffee stores located in residential or shopping areas. Other stores listed are in business districts.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the Nasdaq National Market
("Nasdaq") under the trading symbol "NWCI" since the Company commenced public
trading on February 1, 1996. Prior to such date there was no public market for
the Common Stock. The following table sets forth the range of high and low
closing sale prices (based on transaction data as reported by the Nasdaq) for
the Common Stock for each fiscal quarter during the periods indicated.
<TABLE>
<CAPTION>
1996-1997 HIGH LOW
- --------------------------------------------------------------- ----- -----
<S> <C> <C>
First Quarter (From February 1, 1996 to March 31, 1996) $6.00 $3.00
Second Quarter (From April 1, 1996 to June 30, 1996) $5.13 $3.38
Third Quarter (From August 1, 1996 to September 29, 1996) $4.13 $2.50
Fourth Quarter (From September 30, 1996 to December 29, 1996) $3.88 $1.75
First Quarter (From December 30, 1996 to March 14, 1997) $3.13 $1.94
- -----------------------------------------------------------------------------
</TABLE>
On March 14, 1997, the closing price for the Company's Common Stock as
reported by Nasdaq was $2.23 a share.
As of March 14, 1997, there were approximately 189 holders of record of the
Common Stock. This number excludes individual stockholders holding stock under
nominee security listings.
The Company has not declared or paid any cash dividends since its
inception, and does not intend to pay any cash dividends in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company opened its first specialty coffee cafe in February 1993 in New
York and has grown to 40 specialty coffee cafes in New York, Connecticut,
Pennsylvania and New Jersey since that date.
In June 1996, the Company consummated the acquisition of Cooper's Coffee
stores, purchasing three residential and shopping area stores in Manhattan. In
August 1996, the Company consummated the acquisition of Ridgefield Coffee
Company, entering the Connecticut market with one residential and shopping area
store. In October 1996, the Company consummated the acquisition of Willoughby's,
its coffee purveyor and roaster since its inception, which consolidated its
presence in Connecticut with six additional stores, five of which are in
residential and shopping areas, and vertically integrated the Company with the
purchase of a roasting plant. The purchase price for Willoughby's was $3,100,000
(net of $700,000 of acquired debt immediately paid following the closing date of
the purchase). This amount consisted of $600,000 cash, $600,000 cash payable on
July 1, 1997, $1,700,000 in seller financing and $200,000 in restricted Common
Stock. The Willoughby's acquisition has enabled the Company to lower its cost of
coffee significantly, improve its quality control, and enter the mail order and
wholesale businesses.
In 1996, the Company focused its site selection strategy to target
residential and shopping area sites which, based on the Company's experience,
generally offer more attractive economics. In addition, the Company developed a
new, larger, more comfortable format (approximately 1,800 square feet compared
to 600 previously) designed to create a neighborhood gathering place environment
and better capture whole bean and merchandise sales. In the fourth quarter of
fiscal 1996, the Company's sales mix was 62% beverages, 23% food, 12% whole
beans and 3% merchandise, compared to 63%, 32%, 5% and 0%, respectively, for the
comparable 1995 quarter.
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 recent operating
performance has improved. Several factors underlie this improved performance:
(a) The Company's cost of sales as a percentage of revenues for the fourth
quarter of 1996 versus the comparable 1995 period has declined by 8.1%
due to (i) improved coffee costs from the Willoughby's acquisition,
(ii) improvement in the Company's ability to manage waste, resulting
from the implementation of the POS System, and (iii) improved vendor
pricing resulting from greater scale economies.
(b) The Company's occupancy expense as a percentage of revenues for the
fourth quarter of 1996 versus the comparable 1995 period has declined
by 3.3% due to (i) the strategic refocusing of site selection towards
residential and shopping area sites which carry lower occupancy costs
as a percentage of revenues, (ii) expansion beyond New York City where
sites carry lower occupancy costs as a percentage of revenues and
(iii) the closing of five stores which were primarily business
district stores. The Company expects that its cost of occupancy should
continue to decline as it continues to expand beyond its New York City
base.
(c) The Company's personnel expense as a percentage of revenues for the
fourth quarter of 1996 versus the comparable 1995 period has declined
by 2.0% due to (i) improved labor scheduling resulting from the
implementation of the POS System, and (ii) the increase in residential
and shopping area sites which can be staffed more efficiently due to
lower peak staffing demands and therefore generally lower store
personnel expense ratios.
(d) The Company's general and administrative expense as a percentage of
revenues for the fourth quarter of 1996 versus the comparable 1995
period has declined by 4.0% as (i) its investment in building a senior
management team is substantially complete and (ii) further growth will
enable it to leverage its management and achieve greater scale
economies. The Company expects that this decline should continue.
II-1
<PAGE>
RESULTS OF OPERATIONS
Year Ended December 29, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased 18.5% to $11,340,199 for fiscal 1996 from
$9,572,019 for fiscal 1995. Comparable store sales for the 18 stores open for
both periods decreased 8.5%. Management attributes this decrease to the opening
of additional stores in Manhattan to solidify the Company's market presence, and
the capacity constraints experienced in certain of the Company's primarily
residential stores which average approximately 615 square feet in size and are
achieving approximately $945 in average sales per square foot. The Company has,
in response, expanded both its geographic focus (to four states: New York,
Connecticut, Pennsylvania and New Jersey) and its average store size (to
approximately 1,800 square feet for its newer stores) and expects that its
comparable store sales should improve as its newer format stores enter the
comparable base.
Costs and Expenses. Cost of sales and related occupancy costs as a
percentage of revenues for fiscal 1996 decreased to 57.1% from 62.6% for fiscal
1995. The primary components were a decrease of 5.3% in cost of goods due to
the Company's implementation of the POS System which has allowed the Company to
better control store purchasing and waste as well as improved coffee pricing due
to vertical integration from the acquisition of Willoughby's and improved vendor
pricing due to greater economies of scale. Occupancy expense as a percentage of
revenues decreased 0.2%. The Company expects that its cost of occupancy as a
percentage of revenues will decline significantly as it continues to expand
beyond its New York City base.
Store operating expenses as a percentage of revenues for fiscal 1996
decreased to 31.1% from 35.1% for fiscal 1995. The primary components were a
3.5% decrease in personnel costs due to improved labor scheduling as a result of
the Company's implementation of the POS System and a 0.6% reduction in
miscellaneous store expenses due to increased cash controls and reduced store
supplies costs.
Depreciation and amortization expenses as a percentage of revenues for
fiscal 1996 increased to 11.9% from 10.8% for fiscal 1995 primarily due to
increased amortization resulting from the acquisitions and costs associated with
the implementation of the POS System.
General and administrative expenses increased to $2,738,975 or 24.2% of
revenues for fiscal 1996 compared to $1,784,257 or 18.6% of revenues, for fiscal
1995. Corporate payroll and recruiting expense increased by $691,683
II-2
<PAGE>
due to the addition of a Chief Operating Officer, a Vice President-Real Estate,
and Directors of Construction, Human Resources, and Training as the Company
added to its infrastructure to support its planned expansion. General and
administrative expenses also included $149,519 relating to investor relations
and financial printing which were minimal in fiscal 1995. The Company expects
that its general and administrative expenses as a percentage of revenues should
continue to decline significantly as (i) its investment in building a senior
management team is generally complete and (ii) further growth will enable it to
leverage its management and achieve further economies of scale.
In accordance with the Company's strategy of focusing on residential and
shopping area stores, the Company recorded a provision for store closings and
reorganization costs in the second quarter of fiscal 1996 of $1,800,000, of
which $1,014,888 was a non-cash writedown of the fixed assets in five
unprofitable stores, four of which were not in residential areas. The Company
has additionally developed a more rigorous site selection process and recruited
Bruce Morningstar, previously Starbucks' Director - Northeast Development, as
its Vice President-Real Estate.
Interest expense, net for fiscal 1996 decreased to $74,348 or 0.7% of
revenues, from $297,587 or 3.1% of revenues for fiscal 1995. This decrease
resulted primarily from the paydown of debt after the Company's initial public
offering.
The Company recorded a write-off of debt issuance costs related to the
Company's bridge financing prior to its initial public offering of $1,050,000 in
the first quarter of fiscal 1996. Of the charge $1,000,000 was a non-cash charge
related to the issuance of warrants in connection with the financing.
Net Loss. Net loss for fiscal 1996 increased to $5,670,951 or 50.0% of
revenues from $2,901,557 or 30.3% of revenues for fiscal 1995. The primary
components of this increase were one-time charges totaling 25.1% of revenues and
an increase in general and administrative expenses as percentage of revenues of
5.6%, which more than offset improvements in store operating margins of 9.7%,
primarily from decreases in cost of sales and personnel expenses, and a
reduction in interest expense as a percentage of revenues of 2.4%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased 112.2% to $9,572,019 for fiscal 1995 from
$4,510,488 for fiscal 1994. Comparable store sales for the three stores opened
for both periods decreased 16.6%. Management believes this decrease was 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 fiscal 1995 increased to 62.6% from 59.0% for fiscal
1994. 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 ramp-up period.
Store operating expenses as a percentage of revenues for fiscal 1995
increased to 35.1% from 34.5% for fiscal 1994. The primary components were 0.3%
increases in personnel costs and miscellaneous store expenses each due to the
increase in the number of new store openings which carry higher other operating
expenses as a percentage of revenues during their ramp-up period.
Depreciation and amortization expenses as a percentage of revenues for
fiscal 1995 increased to 10.8% from 6.6% for fiscal 1994 primarily due to an
increase in the number of new store openings which carry higher depreciation
expense as a percentage of revenues during their ramp-up period.
General and administrative expenses increased to $1,784,257 or 18.6% of
revenues for fiscal 1995 compared to $745,543 or 16.5% of revenues, for fiscal
1994. 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 reflected 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.
II-3
<PAGE>
Interest expense, net for fiscal 1995 increased to $297,587 or 3.1% of
revenues, from $1,140 for fiscal 1994. This increase in interest expense
resulted from bank borrowings for the construction of new stores.
Net Loss. Net loss for fiscal 1995 increased to $2,901,557 from $755,106
for fiscal 1994. Operating margins decreased to a loss of 30.3% from a loss of
16.7% in fiscal 1994, 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 ramp-up period
and interest expense which increased to 3.1% as a percentage of revenues.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109). Realization of deferred taxes is
dependent on future events and earnings, if any, the timing and extent of which
are uncertain. Accordingly, the benefit of deferred tax assets has been fully
reserved as of December 29, 1996 and December 31, 1995. At December 29, 1996,
the Company had net operating loss carryforwards of approximately $7,500,000
available to offset future taxable income. These amounts expire at various times
through 2011. As a result of ownership changes resulting from recent sales of
equity securities, the Company's ability to use the loss carryforwards is
subject to limitations as defined in Sections 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 in which the Company realized approximately $11,100,000 in net proceeds.
The Company repaid its then existing bank line of $3,500,000 and repurchased
from an existing shareholder approximately $2,000,000 of the Company's then
outstanding Series C Preferred Stock. On June 28, 1996, the Company completed
the sale of 375 shares of Series A Preferred Stock realizing approximately
$3,320,000 in net proceeds. On February 26, 1997, the Company completed a
private placement of 1,000,000 shares of Common Stock (the "Private Placement")
realizing approximately $1,345,000 in net proceeds. The Company anticipates
using proceeds of the Private Placement for general corporate purposes. In
February 1997, the Company exchanged 175 shares of Series A Preferred Stock for
an aggregate of 137.5 shares of a new Series B Preferred Stock and 194,440
shares of unregistered Common Stock. The Company is negotiating with the holders
of the outstanding shares of Series A Preferred Stock to exchange such shares
for Series B Preferred Stock and/or unregistered shares of Common Stock. The
Company is pursuing a possible offering of shares of its Common Stock resulting
in gross proceeds of between $4,000,000 and $6,000,000 through a registered
broker-dealer. However, there can be no assurance that the Company will be
successful in completing such an offering.
The Company's capital requirement is primarily for expansion of its retail
operations. Currently, all of the Company's stores are in leased facilities.
During fiscal 1996, the Company's average cost to open a store was approximately
$300,000, including all leasehold improvements, equipment, beginning inventory,
as well as all expenses for the store design, site selection, lease negotiation,
construction supervision and permitting. The Company currently estimates that
capital expenditures through fiscal 1997 will be approximately $6,000,000.
At December 29, 1996, the Company had a working capital deficit of
$1,086,824 compared to a working capital deficit of $823,030 at December 31,
1995.
The Company had net cash used in operating activities of $1,973,609 for
fiscal 1996 and net cash used in operating activities of $1,027,981 for fiscal
1995.
The Company had net cash used for investing activities of $5,023,416 for
fiscal 1996 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 $7,465,456 for
fiscal 1996 and $5,020,411 for fiscal 1995. The Company funded its growth
through its initial public offering and the sale of Series A Convertible
Preferred Stock raising approximately $11,100,000 and $3,320,000 in net
proceeds, respectively.
The Company is currently negotiating to obtain a debt facility with a bank
or other financial institution although there can be no assurance that the
Company will obtain a debt facility in an amount or on such terms as will be
acceptable to the Company.
II-4
<PAGE>
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 with proceeds from the
initial 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.
As a result of the Willoughby's transaction, the Company has scheduled debt
payments of $600,000 due on July 1, 1997, $600,000 due on January 5, 1998 and
$1,100,000 due on January 5, 1999.
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 Company's business may be affected by
other factors, including increases in the commodity prices of green coffee,
acquisitions by the Company of existing specialty coffee stores, existing and
additional competition, marketing programs, weather, 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.
II-5
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors, nominees, key employee and executive officers of the Company
and their ages as of the date of this 10-KSB are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ------------------------- --- --------------------------------------------------
<S> <C> <C>
R. Ramin Kamfar 33 President and Chief Executive Officer and Director
Bruce Morningstar 51 Vice President-Real Estate
Jerold E. Novack 41 Vice President-Finance
John DeNapoli 37 Vice President-Operations
Barry Levine 47 Vice President-Coffee
Robert Williams 48 Vice President-Coffee
Julie Calise 35 Director of Marketing
Keith F. Barket/(1)/ 35 Director
Jack Bush/(2)/ 61 Director
Gwenn M. Cagann 37 Director
Kevin R. Greene/(1)(2)/ 38 Director
Ronald S. Hari 55 Director
Edward McCabe 59 Director
Steven A. Rothstein 45 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
- -------------------------------------------------------------------------------
Mr. Kamfar has served as a director since the founding of the Company. Mr.
Kamfar has served as President and Chief Executive Officer since May 1996.
Between August 1994 and May 1996, Mr. Kamfar served as Co-President and Co-Chief
Executive Officer of the Company. Between October 1993 and August 1994, Mr.
Kamfar served as Chief Executive Officer and Chief Financial Officer 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.S. degree in Finance from the University of Maryland and an
M.B.A. degree in Finance from The Wharton School at the University of
Pennsylvania.
Mr. Morningstar joined the Company as Vice President-Real Estate in March
1996. From 1994 to 1996, he served as the Director of Development, Northeast
for Starbucks Corporation, where he planned, developed and opened new markets in
Atlanta, Richmond, Baltimore, Philadelphia, Pittsburgh, New Jersey and Boston,
opening over 100 stores. From 1992 to 1994, he served as Director of Real Estate
for Clothestime Stores, Inc. From 1987 to 1992, he served as Director of Real
Estate for Woman's World Shops, Inc. Prior to that time, Mr. Morningstar held
various real estate positions with Winchells Donuts, Inc., Payless Shoes, Inc.
and See's Candies. Mr. Morningstar has a B.A. degree in Government from Wesleyan
University and a J.D. degree from South Bay University School of Law.
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. DeNapoli joined the Company as Vice President-Operations in August
1996. From 1992 to 1996, Mr. DeNapoli served as Regional Director of Operations
for Atlantic Foods Corporation, where he was responsible for the development and
operation of 46 Boston Market restaurants. From 1987 to 1992, he served as Vice
President of Operations for The American Cafe. Prior to that time, Mr. DeNapoli
held various operations positions with W.R. Grace Restaurant Group, Marriott
International, Corp., and Host International, Inc. Mr. DeNapoli graduated from
the Florida International University with a B.S. in Restaurant and Hotel
Management.
Mr. Levine joined the Company as Vice President-Coffee in October 1996.
From 1985 to 1996, he served as co-founder and co-Chief Executive Officer of
Willoughby's, where he jointly directed coffee sourcing and roasting, site
selection, store design, operations, strategic planning and development. From
1980 to 1987 he co-founded and operated New York Bread Express, a wholesale
baked goods distributor. Prior to that time, Mr. Levine held various positions
in the publishing industry.
Mr. Williams joined the Company as Vice President-Coffee in October 1996.
From 1985 to 1996, he served as co-founder and co-Chief Executive Officer of
Willoughby's, where he jointly directed coffee sourcing and roasting, site
selection, store design, operations, strategic planning and development. From
1980 to 1987 he co-founded and operated New York Bread Express, a wholesale
baked goods distributor. Prior to that time Mr. Williams held various positions
in the publishing industry.
Ms. Calise joined the Company as Director of Marketing in June 1996 and is
the key employee set forth in the table. From 1995 to 1996, she served as
Creative Director-Marketing/Visual Merchandising for The Coffee Plantation, Inc.
where she was responsible for developing in-store marketing, merchandising and
retail programs. From 1991 to 1994, she was Director of Purchasing/Visual at
Hayday, a subsidiary of Sutton Place Gourmet. From 1988 to 1991, she founded and
operated Baskets From the Heart, a gift basket business. Ms. Calise has a B.A.
degree in Communications from Curry College.
III-1
<PAGE>
Mr. Barket has served as a director of the Company since June 1995. Mr.
Barket is the Managing Director of Amerimar Enterprises Inc., 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. From 1984 to 1986, he worked as a senior tax
accountant with Arthur Andersen & Co. in New York City. 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.
Mr. Bush has served as a director of the Company since February 1996. Mr.
Bush has served as a Managing Director of Raintree Partners, Inc. since
September 1995. 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
subsequently 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.
Ms. Cagann has served as a director since the founding of the Company. Ms.
Cagann has served as a consultant since May 1996. Between August 1994 and May
1996, Ms. Cagann served as Co-President and Co-Chief Executive of the Company.
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. Between 1990 and 1992, she was a Senior Product
Manager at Colgate-Palmolive Company. 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. Greene has served as a director of the Company since May 1996. Mr.
Greene has served as Chairman and Chief Executive Officer of Value Investing
Partners, Inc. since 1992. Between 1986 and 1991, Mr. Greene served as a Senior
Manager at McKinsey & Company, an international management consulting firm. Mr.
Greene has a B.A. in Economics from Georgetown University, an M.P.P. in
International Trade and Finance from Harvard University, and an M.B.A. in
Finance from New York University. Mr. Greene is currently a director of
Specialty Retail Group, Inc.
Mr. Hari has served as a director of the Company since February 1997. Mr.
Hari has served as the President and Chief Executive Officer of Capico
International, a marketing, investment and consulting firm focusing in the
bakery and food industries since 1985. Mr. Hari has served as Executive Vice
President of Manhattan Bagel Company from 1994 to August 1996. Mr. Hari has a
B.S. in Business Administration from the University of Vermont and an M.B.A. in
Marketing from the University of California, Los Angeles.
Mr. McCabe has served as director of the Company since February 1997. Mr.
McCabe is Chief Executive Officer of McCabe & Company, an advertising and
communications company he founded in 1991. From 1967 to 1986 he served in
various capacities, most recently as President and Worldwide Creative Director
at Scali, McCabe, Sloves, Inc. an advertising agency he co-founded and built
into the tenth largest agency in the world.
Mr. Rothstein has served as a director of the Company since February 1996.
Mr. Rothstein has been Chairman of the Board of National Securities Corporation,
a securities broker-dealer ("National"), since 1995. Since February 1996, Mr.
Rothstein has been Chairman of the Board of Directors of Olympic Cascade
Financial Corporation, the parent of National. 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, Inc.,
a securities broker-dealer. From 1989 to 1992, he served as a Managing Director
of Oppenheimer & Co. From 1979 to 1989, Mr. Rothstein was a limited partner of
Bear Stearns & Co. Mr. Rothstein received an A.B. degree from Brown University.
Mr. Rothstein is currently a director of SigmaTron International, Inc. and
Gateway Data Science Corporation.
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 or executive officers of the Company.
III-2
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table provides certain information concerning the
compensation earned by the Company's Chief Executive Officer for services
rendered in all capacities to the Company during 1995 and 1996, and any
executive officers of the Company who received compensation in excess of
$100,000 during 1995 and 1996 ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
---------------------------------------------- ------------
Other
Annual
Compen- Securities All Other
Name and Principal Salary Bonus sation Underlying Compensation
Position ($) ($) ($) Options ($)
-------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
R. Ramin Kamfar $118,750 $ 10,000 $ 9,000(1) 125,000 -
Chief Executive Officer and
President
Jerold E. Novack 100,000 30,000 6,000(1) 75,000 -
Vice President-Finance
Sidney Laytin(2) 134,467 3,247 19,947(1) - -
Executive Vice President and
Chief Operating Officer
- ------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
(1) Represents car and commuting allowances for the respective individuals.
(2) Mr. Laytin was no longer employed by the Company in October 1996.
III-3
<PAGE>
STOCK OPTION GRANTS
Set forth below is information on grants of stock options for the Named
Executive Officers for the period January 1, 1996 to December 29, 1996.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Potential Realizable Value
Number of Percent of At Assumed Annual Rates
Securities Total Options Exercise of Stock Price Appreciation
Underlying Granted to Price for Option Term(1)
Option Employees in ($ per Expiration -----------------------------
Name Granted Fiscal Year share) Date 5% 10%
- ------------------ ------------ ------------- -------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
R. Ramin Kamfar... 115,000/(2)/ 34.8% $2.31 8/13/06 $167,246 $423,835
10,000/(3)/ 3.0 5.50 8/13/06 - 4,980
Jerold E. Novack.. 65,000/(4)/ 19.7 3.87 7/2/06 - 137,996
10,000/(5)/ 3.0 5.50 7/2/06 - 4,980
- --------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------
(1) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years). Assumed stock price appreciation of 5%
and 10% is based on the fair value at the time of grant.
(2) Options were granted on August 13, 1996 and are exercisable with respect to
83,334 shares in two equal annual installments commencing on August 13, 1997
and the remainder of such options, 31,666 shares are exercisable on August
13, 1999. The exercise price of the options is equal to the closing price
on the Nasdaq of the Common Stock on October 1, 1996.
(3) Options were granted on August 13, 1996 at the same exercise price as the
options listed in footnote 2. On October 30, 1996, Mr. Kamfar voluntarily
repriced such options to $5.50, the initial public offering price of the
Common Stock. Such options are exercisable on August 13, 1999.
(4) Options were granted on July 2, 1996. Options relating to 15,000 shares
were exercisable immediately and the remainder of such options relating to
25,000 shares are exercisable in three equal annual installments commencing
July 2, 1997. The exercise price of the options is equal to the closing
price on the Nasdaq of the Common Stock on July 2, 1996.
(5) On October 30, 1996, Mr. Novack voluntarily repriced certain options to
$5.50 the initial public offering price of the Common Stock. Such options
are exercisable on July 2, 1999.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
stock options held at December 29, 1996 by the Company's executive officers.
III-4
<PAGE>
1996 OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Year End at Year End($)(1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
R. Ramin Kamfar... 29,156 139,578 $47,491 $48,657
Jerold E. Novack.. 51,987 75,000 __ __
- ----------
</TABLE>
(1) Calculated based on an assumed share price of $2.50 per share, less the
exercise price payable for such shares.
EMPLOYMENT CONTRACTS
As of July 1996, the Company entered into a new employment agreement with
Mr. Kamfar, the Company's President and Chief Executive Officer. The agreement
expires on December 31, 1997 but is automatically renewed for additional one-
year periods commencing each January 1 unless either party gives written notice
to the other of its desire not to renew such term, which notice must be given no
later than ninety (90) days prior to the end of each term on any such renewal.
The agreement provides for a compensation package of $137,500 per year, an
annual performance bonus of between 10% and 50% of the base salary for calendar
year 1996, and an annual performance bonus of between 0% and 50% of the base
salary for calendar year 1997. Each bonus is based on the attainment of certain
corporate and individual goals. In addition, pursuant to the agreement, Mr.
Kamfar was granted options on 125,000 shares of the Company's Common Stock. The
options were classified as incentive stock options under the 1994 Plan. Pursuant
to the agreement, Mr. Kamfar has agreed to maintain the confidentiality of any
confidential or proprietary information of the Company.
In the event that the Company terminates Mr. Kamfar's employment upon a
change in control or terminates Mr. Kamfar's employment other than for cause, he
will be paid severance compensation equal to two times his annual base salary
(at the rate payable at the time of such termination) plus an amount equal to
the greater of two times the amount of his bonus for the calendar year preceding
such termination or 25% of his base salary. For a period of one year following
Mr. Kamfar's voluntary termination or termination for cause, Mr. Kamfar cannot
perform services for, have an equity interest (except for an interest of 10% or
less in an entity whose securities are listed on a national securities exchange)
in any business (other than the Company) or participate in the financing,
operation, management or control of, any firm, corporation or business (other
than the Company) that engages in the marketing or sale of specialty coffee as
its principal business.
Mr. Kamfar's employment agreement defines 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 shareholders 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.
As of July 1996, the Company entered into an employment agreement with Mr.
Novack, the Company's Chief Financial Officer. The agreement expires on June
30, 1997. The agreement provides for a compensation package of $110,000 per
year and an annual performance bonus of 20% to 50% of the base salary based on
the attainment of certain corporate and individual goals. In addition, pursuant
to the agreement, Mr. Novack was granted options on 75,000 shares of the
Company's Common Stock. The options were classified as incentive stock options
under the 1994 Plan. Pursuant to the agreement, Mr. Novack has agreed to
maintain the confidentiality of any confidential or proprietary information of
the Company.
In the event that the Company terminates Mr. Novack's employment other than
for cause, he will be paid severance compensation equal to his base salary (at
the rate payable at the time of such termination) for a period of six months.
In the event of Mr. Novack's voluntary termination, as defined in the agreement,
subsequent to December 31, 1996, he will be paid severance compensation equal to
his base salary (at the rate payable at the time of such termination) for a
period of three months. For a period of one year following Mr. Novack's
voluntary termination or
III-5
<PAGE>
termination for cause, Mr. Novack cannot perform services for, have an equity
interest (except for an interest of 5% or less in an entity whose securities are
listed on a national securities exchange) in any business (other than the
Company) or participate in the financing, operation, management or control of,
any firm, corporation or business that engages in the marketing or sale of
specialty coffee as its principal business.
In January 1997, the Company entered into an employment agreement with Mr.
Morningstar, the Company's Vice President-Real Estate. The agreement expires on
June 30, 1998. The agreement provides for a compensation package of $112,500
per year and an annual performance bonus of an amount not exceeding 30% of the
base salary based on the attainment of certain corporate and individual goals.
Pursuant to the terms of the agreement, Mr. Morningstar has agreed to maintain
the confidentiality of any proprietary information of the Company.
In the event that the Company terminates Mr. Morningstar's employment other
than for cause, he will be paid severance compensation equal to his base salary
(at the rate payable at the time of such termination) for a period of up to six
months. For a period of one year following Mr. Morningstar's voluntary
termination or termination for cause, Mr. Morningstar cannot perform services
for, have an equity interest (except for an interest of 5% or less in an entity
whose securities are listed on a national securities exchange) in any business
(other than the Company) or participate in the financing, operation, management
or control of, any firm, corporation or business that engages in the marketing
or sale of specialty coffee as its principal business.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the General Corporation Law of the State of Delaware ("Delaware
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 Law). The Certificate of Incorporation provides further that the
Company shall indemnify to the fullest extent permitted by Delaware Law any
person made a party to an action or proceeding by reason of the fact that such
person was a director, officer, employee or agent of 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.
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 February 28, 1997, (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 to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
Shares
Name and Address of Beneficially
Beneficial Owner Owned Percentage
- ----------------------------------------- --------------- -----------
<S> <C> <C>
Lutheran Brotherhood
625 Fourth Avenue
5th Floor
Minneapolis, MN 55415 602,900 9.6 %
</TABLE>
III-6
<PAGE>
<TABLE>
<S> <C> <C>
Robertson Stephens Global
Low-Priced Stock Fund
555 California Street
San Francisco, CA 94104 432,000 6.9%
R. Ramin Kamfar
Chief Executive Officer
and President and Director 426,120/(1)/ 6.8%
Gwenn M. Cagann
Director 345,296/(2)(3)/ 5.5%
Kevin R. Greene
Director 144,159/(4)/ 2.3%
Jerold E. Novack
Vice President-Finance 103,315/(5)/ 1.6%
Steven A. Rothstein
Director 94,100/(6)/ 1.5%
Keith F. Barket
Director 37,837/(7)/ *
Jack Bush
Director 14,000/(7)/ *
Ronald S. Hari
Director 11,000/(8)/ *
Edward McCabe
Director 10,000/(8)/ *
All directors and executive officers as
a group (9 persons) 1,185,827 17.7%
- -------------------------------------------------------------------------
</TABLE>
III-7
<PAGE>
____________________
* Less than one percent (1%).
(1) Includes 29,156 shares which may be acquired upon the exercise of options
which will be exercisable within 60 days. Does not include 139,578 shares
underlying stock options which are not exercisable within 60 days.
(2) Includes 53,734 shares which may be acquired upon the exercise of options
which will be exercisable within 60 days.
(3) Ms. Cagann is married to Ross A. MacIntyre who is also a shareholder. Each
holds his or her shares pursuant to a separate property agreement.
Accordingly, each disclaims beneficial ownership of the other's shares.
(4) Includes 141,159 shares which may be acquired upon the exercise of presently
exercisable options and warrants.
(5) Includes 103,315 shares which may be acquired upon the exercise of presently
exercisable options. Does not include 65,000 shares underlying stock
options which are not exercisable within 60 days.
(6) Includes 94,000 shares which may be acquired upon the exercise of presently
exercisable common stock purchase warrants and 100 shares which are owned by
one of Mr. Rothstein's children.
(7) Includes 14,000 shares which may be acquired upon the exercise of presently
exercisable options.
(8) Includes 10,000 shares which may be acquired upon the exercise of presently
exercisable options.
III-8
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, was a
Senior Vice President of Smith Barney Inc. at the time.
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 $0.01 per share and a
warrant to purchase 25,000 shares of Common Stock at $0.01 per share. The
Company repurchased these shares of Series C Preferred Stock at the closing of
the Company's initial public offering, with a portion of the net proceeds from
such offering.
In December 1995 and January 1996, the Company entered into a bridge loan
transaction with a 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 $5.50 (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.
On May 30, 1996, the Company entered into a one year consulting agreement
with Gwenn M. Cagann whereby the Company was obligated to pay Ms. Cagann $88,784
upon execution of such consulting agreement and $25,000 in twelve (12) equal
monthly installments. Pursuant to such consulting agreement Ms. Cagann may not
directly or indirectly, without the prior written consent of the Company,
compete with the Company until June 1, 1997. In addition, Ms. Cagann has agreed
that all confidential information relating to the business or operations of the
Company shall be treated as confidential for a period terminating five (5) years
after the end of the consulting period thereafter except (a) as may be permitted
in writing by the Company's Board of Directors, or (b) as required by judicial
or administrative process.
Value Investing Partners, Inc. was paid a commission for selling certain
shares of the Series A Preferred Stock which was completed on June 28, 1996.
Kevin R. Greene, a director of the Company, is the Chairman and Chief Executive
Officer of Value Investing Partners, Inc.
The Company's initial public offering, which became effective on February
1, 1996, was co-managed by National Securities Corporation and Value Investing
Partners, Inc. Steven A. Rothstein and Kevin R. Greene, who are directors of the
Company, are the Chairman and Chief Executive Officer of National Securities
Corporation and Value Investing Partners, Inc., respectively. Mr. Rothstein and
Mr. Greene were not directors of the Company at the time of the Company's
initial public offering. The Company has agreed that, for
III-9
<PAGE>
three years following its initial public offering, it will use its best efforts
to cause one individual designated by the Representatives, if any, to be elected
to the Company's Board of Directors.
All future transactions, including loans, between the Company and its
officers, directors, principal shareholders 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.
III-10
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of incorporation(1)
3.2 By-laws(2)
4.1 Specimen Common Stock Certificate of Registrant(2)
4.2 Form of Representatives' Warrant Agreement, including Form of
Representatives Warrant(2)
4.3 Certificate of Designation of Series A Preferred Stock(3)
4.4 Certificate of Designation of Series B Preferred Stock
4.5 Registration Rights Agreement with respect to Series A Preferred
Stock(3)
4.6 Registration Rights Agreement by and among the Registrant and
Barry H. Levine and Robert B. Williams(4)
4.7 Promissory Note by and between the Registrant and Robert B.
Williams(4)
4.8 Promissory Note by and between the Registrant and Barry H.
Levine(4)
10.1 1994 Stock Plan(2)
10.2 Employment Agreement by and between the Registrant and Barry H.
Levine(4)
10.3 Employment Agreement by and between the Registrant and Robert B.
Williams(4)
10.4 Employment Agreement with R. Ramin Kamfar
10.5 Employment Agreement with Jerold Novack
10.6 Stock Purchase Agreement by and among Barry H. Levine, Robert B.
Williams and Willoughby's Incorporated and the Registrant(4)
10.7 Series A Preferred Stock Purchase Agreement(2)
10.8 Series B Preferred Stock Purchase Agreement(2)
10.9 Series C Preferred Stock Purchase Agreement(2)
10.10 Line of Credit Agreement with Banco Popular de Puerto Rico(2)
10.11 Agreement with Willougby's Incorporated(2)
10.12 Investor Rights Agreement(2)
10.13 Stock Repurchase Agreement with Maritime Capital Partners, as
amended(2)
10.14 Directors' Option Plan(2)
10.15 Agreement with Saks & Company(2)
10.16 Employment Agreement with Gwenn M. Cagann(2)
10.17 Employment Agreement with Sidney Laytin(2)
10.18 Loan Agreement dated December 21, 1995 between the Registrant and
certain lenders(2)
10.19 Employment Agreement with Bruce Morningstar
11.1 Statement re computation of per share earnings (included in the
Financial Statements forming a part of this 10-KSB)
21.1 List of Subsidiaries
(b) Reports on Form 8-K
During the fourth quarter of 1996, the Company filed a Report on
Form 8-K with respect to the acquisition of Willoughby's.
- ----------
(1) Incorporated by reference to Exhibit 3.2 from Registrant's registration
statement on Form SB-2 (33-95764).
(2) Incorporated by reference from Registrant's registration statement on
Form SB-2 (33-95764).
(3) Incorporated by reference from Registrant's Current Report on Form 8-K dated
July 12, 1996.
(4) Incorporated by reference from Registrant's Current Report on Form 8-K dated
November 12, 1996.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEW WORLD COFFEE, INC.
By: /S/ R. RAMIN KAMFAR
--------------------------------------
R. Ramin Kamfar
Chief Executive Officer, President and
Director
By: /S/ JEROLD E. NOVACK
-------------------------------------
Jerold E. Novack
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE Date
--------- ----- ----
/S/ R. RAMIN KAMFAR President, Chief March 31, 1997
- ------------------------ Executive Officer and
R. Ramin Kamfar Director (Principal
Executive Officer)
/S/ JEROLD E. NOVACK Vice President--Finance March 31, 1997
- ------------------------ (Principal Financial and
Jerold E. Novack Principal Accounting Officer)
/S/ KEITH F. BARKET Director March 31, 1997
- ------------------------
Keith F. Barket
/S/ Director March 31, 1997
- ------------------------
Gwenn M. Cagann
/S/ JACK E. BUSH Director March 31, 1997
- ------------------------
Jack B. Bush
/S/ STEVEN A. ROTHSTEIN Director March 31, 1997
- ------------------------
Steven A. Rothstein
/S/ Director March 31, 1997
- ------------------------
Kevin R. Greene
/S/ EDWARD MCCABE Director March 31, 1997
- ------------------------
Edward Mccabe
/S/ RONALD S. HARI Director March 31, 1997
- ------------------------
Ronald S. Hari
ii5
<PAGE>
NEW WORLD COFFEE, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New World Coffee, Inc.:
We have audited the accompanying consolidated balance sheet of New World
Coffee, Inc. (a Delaware corporation) and subsidiary as of December 29, 1996,
and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1995 and
December 29, 1996. 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. and
subsidiary as of December 29, 1996 and the results of their operations and
their cash flows for the years ended December 31, 1995 and December 29, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen, LLP
New York, New York
March 6, 1997
F-2
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 29, 1996
<TABLE>
<S> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents...................................... $ 1,419,786
Receivables.................................................... 288,329
Inventories.................................................... 450,722
Prepaid expenses............................................... 116,533
-------------
Total current assets......................................... 2,275,370
Property and equipment, net...................................... 10,208,339
Goodwill, net of accumulated amortization of $69,851............. 3,567,721
Other assets, net................................................ 904,757
-------------
Total assets................................................. $ 16,956,187
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable............................................... $ 866,098
Accrued expenses............................................... 1,100,942
Accrued compensation........................................... 318,487
Current portion of notes payable............................... 846,645
Current portion of obligations under capital leases............ 230,022
-------------
Total current liabilities.................................... 3,362,194
-------------
Deferred rent.................................................... 614,285
-------------
Notes payable.................................................... 2,200,269
-------------
Obligations under capital leases................................. 496,961
-------------
Commitments (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized.. --
Series A Convertible Preferred Stock, $.001 par value; 400
shares authorized, 375 issued, 320 outstanding................ --
Common Stock, $.001 par value; 20,000,000 shares authorized;
5,034,812 shares issued and outstanding....................... 5,035
Additional paid-in capital..................................... 20,820,172
Accumulated deficit............................................ (10,542,729)
-------------
Total stockholders' equity................................... 10,282,478
-------------
Total liabilities and stockholders' equity................... $ 16,956,187
=============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenues............................................. $ 9,572,019 $11,340,199
Cost of sales and related occupancy costs............ 5,995,396 6,473,515
Store operating expenses............................. 3,362,490 3,521,350
------------ ------------
Store operating income............................. 214,133 1,345,334
Depreciation and amortization........................ 1,033,846 1,352,961
General and administrative expenses.................. 1,784,257 2,738,975
Provision for store closings and reorganization
costs............................................... -- 1,800,000
------------ ------------
Operating loss..................................... (2,603,970) (4,546,602)
Interest expense, net of interest income of $17,000
and $76,036 in 1995 and 1996, respectively.......... 297,587 74,349
Write-off of debt issuance costs..................... -- 1,050,000
------------ ------------
Net loss........................................... $(2,901,557) $(5,670,951)
============ ============
Net loss per common shares........................... $ (2.71) $ (1.26)
------------ ------------
Pro forma loss per common shares..................... $ (1.73) $ --
------------ ------------
Weighted average number of common shares outstanding:
Historical......................................... 1,398,912 4,517,801
------------ ------------
Pro forma.......................................... 2,187,166 --
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------- ------------------ PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- ------- ---------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Issue of warrants in
connection with bridge
financing............. -- -- -- -- 246,373 -- 246,373
Common Stock shares
issued in connection
with the Initial
Public Offering, net
of offering expenses.. -- -- 2,500,000 2,500 10,884,920 -- 10,887,420
Common Stock shares
issued in connection
with the conversion of
Series A, B, and C
convertible,
redeemable, preferred
stock and preferred
stock warrants, net of
offering expenses..... -- -- 900,723 901 4,218,120 -- 4,219,021
Shares issued in
connection with the
exercise of stock
options and bridge
financing warrants.... -- -- 176,356 176 61,070 -- 61,246
Issuance of Series A
convertible preferred
stock, net of offering
expenses.............. 375 -- -- -- 3,320,189 -- 3,320,189
Common Stock shares
issued in connection
with the conversion of
Series A convertible
preferred stock....... (55) -- 221,022 221 (221) -- --
Common Stock shares
issued in connection
with the acquisition
(Note 7).............. -- -- 22,986 23 199,977 -- 200,000
Net loss............... -- -- -- -- -- (5,670,951) (5,670,951)
Dividends paid on
Series A preferred
stock................. -- -- -- -- -- (14,880) (14,880)
------- ------- ---------- ------- ------------ ------------- ------------
Balance, December 29,
1996................... 320 $ -- 5,034,812 $5,035 $20,820,172 $(10,542,729) $10,282,478
======= ======= ========== ======= ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss............................................ $(2,901,557) $(5,670,951)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization....................... 1,033,846 1,352,961
Write-off of non-cash debt issuance costs........... -- 1,000,000
Accrued interest on notes payable................... -- 34,881
Increase (decrease) in cash resulting from changes
in operating assets and liabilities--
Receivables........................................ 11,213 380,720
Inventories........................................ (69,492) (38,950)
Prepaid expenses................................... 136,210 9,692
Deposits and other assets.......................... (185,324) (263,264)
Accounts payable................................... 245,242 (379,672)
Accrued expenses................................... 286,932 294,627
Accrued compensation............................... 123,443 1,709
Deferred rent...................................... 291,506 106,853
Charges due to restructuring and store closing
activities:
Provision for store closing costs and
restructuring charges............................. -- 785,112
Payment of store closing costs and restructuring
charges........................................... -- (602,215)
Write-off of fixed assets.......................... -- 1,014,888
------------ ------------
Net cash used in operating activities............. (1,027,981) (1,973,609)
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures................................ (3,241,876) (3,604,514)
Acquisitions (Note 7)............................... -- (1,418,902)
------------ ------------
Net cash used in investing activities............. (3,241,876) (5,023,416)
------------ ------------
Cash Flows From Financing Activities:
Issuance of Series A Convertible Preferred Stock,
net of issuance costs of approximately $430,000.... -- 3,320,189
Issuance of common stock shares in connection with
the initial public offering, net of offering
expenses........................................... -- 11,074,159
Redemption of Series C Convertible Redeemable
Preferred Stock ................................... -- (1,999,997)
Issuance of Series A, B, 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............. 2,250,000 --
Expenses paid in relation to Series A, B and C
Convertible Preferred Stock to Common Stock........ -- (11,033)
Shares issued in connection with the exercise of
stock options and bridge financing warrants........ -- 61,246
Proceeds from bridge financing...................... 755,000 245,000
Repayments of bridge financing...................... -- (1,000,000)
Repayments of capital leases........................ (52,118) (155,415)
Repayments of notes payable......................... (500,000) (4,053,813)
Dividends paid on Series A Convertible Preferred
Stock.............................................. -- (14,880)
------------ ------------
Net cash provided by financing activities......... 5,020,411 7,465,456
------------ ------------
Net increase in cash.............................. 750,554 468,431
Cash, beginning of year.............................. 200,801 951,355
------------ ------------
Cash, end of year.................................... 951,355 1,419,786
------------ ------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest, net of
amount capitalized................................. 314,600 76,483
Noncash investing and financing activities--
Equipment acquired under capital leases............. 156,527 712,535
Conversion of Series A, B and C Convertible
Preferred Stock to Common Stock.................... -- 4,230,054
Conversion of Series A Convertible Redeemable
Preferred Stock to Common Stock.................... -- 550,000
Issuance of warrants in connection with bridge
financing.......................................... 753,627 246,373
Issuance of warrants to Series C preferred
stockholder........................................ 887,250 --
Issuance of notes related to the acquisitions (Note
7)................................................. -- 3,012,033
Issuance of Common Stock related to the acquisition
(Note 7)........................................... -- 200,000
Details of acquisitions (Note 7)
Fair value of assets acquired....................... -- (1,662,672)
Goodwill............................................ -- (3,637,572)
Liabilities assumed................................. -- 669,309
Notes issued........................................ -- 3,012,033
Common Stock issued................................. -- 200,000
------------ ------------
Net cash paid for acquisitions.................... -- (1,418,902)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 29, 1996
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 its 40 specialty coffee cafes located in New York,
New Jersey, Pennsylvania and Connecticut.
Commencing October 25, 1996, the Company began operating a roasting facility
in connection with the acquisition of Willoughby's, Incorporated, a
Connecticut corporation ("Willoughby's") (see Note 7).
The consolidated financial statements herein include the accounts of the
Company and its wholly owned subsidiary, Willoughby's. All material
intercompany balances and transactions have been eliminated.
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.
Cash and Cash Equivalents
Cash and cash equivalents included cash and other liquid short-term
instruments with original maturities of less than ninety days.
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>
<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>
Goodwill
Goodwill is amortized using the straight-line method over a period ranging
between 10 to 20 years.
Capitalized Interest
Interest on borrowed funds during the construction of new stores is
capitalized.
F-7
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-lived Assets
The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful life of the related assets. In accordance
with Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of," these assets are reviewed on a periodic basis for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be realizable. Furthermore, the assets
are evaluated for continuing value and proper useful lives by comparison to
expected future cash flows. Initial adoption of SFAS 121 during the year did
not have a material effect on the Company.
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 commencing on the store opening date, on a straight-
line basis over a twelve-month period.
Store Operating Costs
Store operating costs primarily consist of salaries, wages and benefits of
store personnel, utilities and supplies.
Deferred Rent
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.
Net Loss Per Share
Historical Net Loss Per Share
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
the Redeemed Series C Preferred Stock (see note 6) by the weighted average
number of shares of common stock outstanding during the period. The weighted
average shares outstanding is based on (i) the provisions of Staff Accounting
Bulletin No. 83 whereby stock options and warrants issued during the twelve
months preceding the initial filing of the offering at prices below the
expected initial public offering price have been included, even though anti-
dilutive, to calculate historical net loss per share for the year ended
December 31, 1995 for the period from January 1, 1995 to October 1, 1995 and
(ii) Accounting Principles Board Opinion No. 15, "Earnings per share," (APB
15) for the period after October 1, 1995, which excludes options and warrants
as they are antidilutive.
Year ended December 29, 1996--Net loss per share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the period. The weighted average shares outstanding is calculated in
accordance with the provisions of APB 15 and such calculation excludes options
and warrants as they are antidilutive.
F-8
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 income taxes using the liability method in
accordance with the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"). SFAS No. 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.
Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation ("SFAS No. 123"). This statement establishes financial accounting
and reporting standards for stock-based employee compensation plans. SFAS No.
123 encourages entities to adopt a fair value based method of accounting for
stock compensation plans. However, SFAS No. 123 also permits entities to
continue to measure compensation costs under pre-existng accounting
pronouncements with the requirement that pro forma disclosures of net income
and earnings per share be included in the notes to financial statements. The
Company has elected to adopt the disclosure requirements of SFAS No. 123
during 1996 and show pro forma results of net loss and earnings per share data
for the years ended December 29, 1996 and December 31, 1995.
Use 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.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 29, 1996:
<TABLE>
<S> <C>
Leasehold improvements......................................... $ 7,441,156
Store equipment................................................ 3,039,564
Furniture and fixtures......................................... 902,797
Office equipment............................................... 814,834
------------
12,198,351
Less--Accumulated depreciation and amortization................ (1,990,012)
------------
$10,208,339
============
</TABLE>
Approximately $159,000 of capitalized interest is included in property and
equipment at December 29, 1996.
3. OTHER ASSETS
Other assets consist of the following as of December 29, 1996:
<TABLE>
<S> <C>
Security deposits................................................. $574,640
Store preopening costs, net of accumulated amortization of
$117,133......................................................... 140,816
Long-term receivable.............................................. 145,835
Other............................................................. 43,466
---------
$904,757
=========
</TABLE>
F-9
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses at December 29, 1996 consist of the following:
<TABLE>
<S> <C>
Store closing costs (see Note 5)................................. $ 182,897
Negative book cash balance....................................... 407,949
Other............................................................ 510,096
----------
$1,100,942
==========
</TABLE>
5. PROVISION FOR STORE CLOSINGS AND REORGANIZATION COSTS
During 1996, the Company recorded a provision for store closings and
reorganization costs of $1,500,000 to provide for the closing of five
unprofitable stores. This represents a provision for writedowns of property
and equipment of approximately $1,000,000 for closed stores and provides for
an additional accrual of approximately $500,000 for other closure costs, which
include losses for continuing lease payments on closed stores, severance for
store employees, and other related costs. In addition, the Company provided
for a reorganization charge of approximately $300,000 which primarily
consisted of severance and related benefits. As of December 29, 1996, the
reserve balance related to non fixed asset costs is approximately $183,000 for
the remaining three stores to be closed of which one closed on January 10,
1997.
6. STOCKHOLDERS' EQUITY
Initial Public Offering
In February 1996, the Company completed its Initial Public Offering ("IPO")
of 2,500,000 shares of common stock (par value $.001) at a purchase price of
$5.50 per share, for aggregate net proceeds of approximately $11.1 million. A
portion of the proceeds was used to repay the outstanding balance under the
Company's then existing 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 Convertible Redeemable
Preferred Stock Series A, B, and C was converted into common stock of the
Company.
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 repaid from the
proceeds of the IPO. In conjunction with this bridge financing, the Company
issued warrants to purchase 181,818 at an exercise price of $.01 per share of
these 147,200 warrants were exercised in 1996. The Company recorded a write-
off of debt issuance costs related to the repayment of the bridge financing of
$1,050,000, which has been reflected in the consolidated statement of
operations for the year ended December 29, 1996.
Convertible Redeemable Preferred Stock
The number of common shares which were issued upon conversion of all the
Convertible Redeemable Preferred Stock, excluding Redeemable Preferred Stock
(see below), were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SHARES
1995 CONVERTED TO
OUTSTANDING COMMON STOCK
------------ ------------
<S> <C> <C>
Series A........................................... 282,539 169,795
Series B........................................... 678,655 464,618
Series C........................................... 210,519 153,841
</TABLE>
F-10
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 converted 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 converted into common stock at such time as less than 30% of the
issued shares of Preferred Stock remain outstanding.
Stock Subscription Note Receivable
In October 1994, an officer of the Company purchased 29,213 shares of
Redeemable Convertible Series A stock for cash and a promissory note totaling
$80,000. Such shares were converted to 17,035 shares of common stock by the
officer. The promissory note, which bears interest at 4.5% per annum,
originally matured on October 15, 1997, but has been extended to March 15,
1998. The shares of common stock issued have been pledged as collateral.
Preferred Stock Redeemed
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. 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 $.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. 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' equity as an increase in
additional paid-in capital and accumulated deficit and is included in the
calculation of net loss per share as of December 31, 1995. All warrants issued
in connection with this Redeemable Preferred Stock were exercised upon
completion of the Company's IPO.
Series A Convertible Preferred Stock
The Company completed the sale of 375 shares of Series A Convertible
Preferred Stock on June 28, 1996 realizing approximately $3,320,000 in net
proceeds after commissions and costs of approximately $430,000. During 1996,
certain individuals exercised their rights and converted 55 shares of Series A
Convertible Preferred Stock into 221,022 shares of Common Stock.
In the event of a transaction or series of transactions by the Company in
which more than 50% of the voting power is transferred, the holders of the
Series A Convertible Preferred Stock have the option of redeeming their shares
at a redemption price equal to the original price of the stock purchased plus
an amount equal to eight percent per annum of the original price from the date
of original purchase through the date of redemption. In addition, the holders
have certain liquidation preferences, and dividend or voting rights and they
may convert into common shares at a conversion price calculation as set forth
in the Certificate of Designation of Series A Convertible Preferred Stock
Agreement. All outstanding shares on June 27, 1999 will automatically convert
into common stock.
Warrants
As of December 29, 1996, the Company has 662,398 warrants outstanding. These
warrants have exercise prices ranging from $.01-$9.08 per share and have a
term ranging from 5 to 7 years. Such warrants were issued in connection with
the bridge loan financing and certain other services.
F-11
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Options generally become exercisable in ratable installments over a four-
year period. A total of 750,000 shares of common stock is currently reserved
for issuance pursuant to the 1994 Plan. There were 221,968 and 177,124 shares
available for grant under the 1994 Plan at December 29, 1996 and December 31,
1995, respectively.
The Company's 1995 Directors' Stock Option Plan (the "Directors' Option
Plan") was adopted by the Board of Directors and approved by the Company's
shareholders in August 1995. Unless terminated sooner, the Director's Option
Plan will terminate automatically in August, 2005. The Board of Directors may
amend or terminate the Directors' Option Plan at any time; provided, however,
that no such action may adversely affect any outstanding option without the
optionee's consent and the provisions affecting the grant and terms of options
may not be amended more than once during any six-month period. A total of
200,000 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. A
total of 66,000 options were granted under the Directors' Option Plan as of
December 29, 1996. A total of 134,000 shares were available for grant under
the Director's Option Plan as of December 29, 1996.
A summary of the status of the Company's two stock option plans at December
31, 1995 and December 29, 1996 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
1995 1996
---------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 112,739 $0.83 202,750 $1.99
Grant.................................. 90,011 3.43 439,300 3.52
Exercised.............................. -- -- (29,156) 2.37
Forfeited.............................. -- -- (48,018) 3.74
------- ----- ------- -----
Outstanding at end of year............... 202,750 1.99 564,876 3.09
------- ----- ------- -----
Exercisable at end of year............... 56,854 205,943
======= =======
Weighted average fair value of options
granted................................. $ 1.66 $ 1.70
======= =======
</TABLE>
A total of 101,077 of the 564,876 options outstanding at December 29, 1996
have exercise prices between $0.77 and $0.85, with a weighted average exercise
price of $0.84 and a weighted average remaining contractual life of 7.75
years, 85,526 of these options are exercisable; their weighted average
exercise price is $0.84; 220,000 options have exercise prices between $2.00
and $3.00, with a weighted average exercise price of $2.34 and a weighted
average remaining contractual life of 9.7 years. None of
F-12
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these options are exercisable. A total of 106,699 options have exercise prices
between $3.00 and $4.00, with a weighted average exercise price of $3.65;
100,418 of these options are exercisable; their weighted average exercise
price is $3.43 with a weighted average remaining contractual life of 9.1
years. 137,100 options have exercise price of $5.50, with a weighted average
remaining contractual life of 9.1 years. 20,000 of these options are
exercisable, their weighted average exercise price is $5.50.
SFAS No. 123
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net loss:
As reported..................................... $(2,901,557) $(5,670,951)
Pro forma....................................... (2,938,743) (5,798,364)
Net loss per common share:
As reported..................................... (2.71) (1.26)
Pro forma....................................... (2.74) (1.28)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 7.0 % and 6.1%; expected dividend yields of 0%; expected lives of 4.2
and 5 years; expected stock price volatility of 54% and 51%.
7. ACQUISITIONS
On October 25, 1996, the Company purchased five Willoughby's locations (plus
one under construction) and its roasting facility by acquiring the common
stock of Willoughby's for total consideration of $3,100,000 (net of acquired
debt of $700,000 paid at closing). This amount consisted of $600,000 cash paid
at the closing with an additional $600,000 due on July 1, 1997, $200,000 worth
of restricted shares of the Company's common stock, and two promissory notes
in the aggregate principal amount of $1,700,000 with $600,000 due on January
5, 1998 and $1,100,000 payable due on January 5, 1999 bearing interest at 6%
per annum. The purchase price was allocated to the assets acquired and
liabilities assumed based on their fair market value at the date of
acquisition and the difference between the cost of acquiring the assets (which
included the effect of discounting the promissory notes using an interest rate
of 10%) and the underlying fair market value of the net assets acquired was
treated as goodwill, which is being amortized over 20 years. In connection
with the acquisition, the former shareholders of Willoughby's signed
employment agreements with the Company which terminate in October, 1998.
On June 13, 1996, the Company purchased three Coopers Coffee Bar ("Coopers")
locations for $242,500 cash and a $770,000 note payable over 4 years which
bears interest at 6%. The purchase price has been allocated to the assets
acquired based on their fair value at the date of acquisition and the
difference between the cost of acquiring the locations (which included the
effect of discounting the promissory notes using an interest rate of 10%) and
the fair value of the net assets acquired was allocated to goodwill, which is
being amortized over 10 years.
F-13
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 26, 1996 the Company purchased the Ridgefield Coffee Company store
("Ridgefield") for $150,000 cash and a $175,000 note payable over two years
bearing interest at 6%. The purchase price has been allocated to the assets
acquired based on their fair value at the date of acquisition and the
difference between the cost of acquiring the location (which included the
effect of discounting the promissory notes using an interest rate of 10%) and
the fair value of the net assets acquired was allocated to goodwill, which is
being amortized over 10 years.
Interest expense of approximately $74,000 was recorded in 1996 for the notes
payable related to the acquisitions of Willoughby's, Coopers and Ridgefield.
The consolidated statements of operations of the Company include the results
of Willoughby's, Ridgefield and Coopers since the date of acquisition.
Following is the unaudited pro forma presentation as if the purchase of the
three Coopers locations, the acquisition of the stock of Willoughby's, and the
one Ridgefield location had occurred on January 1, 1995:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenue............................................ $12,993,000 $14,149,000
Store operating income............................. 1,282,000 2,127,000
Operating loss..................................... (2,012,000) (2,399,000)
Net loss........................................... (2,387,009) (5,430,000)
Net loss per share................................. (2.34) (1.20)
Pro forma net loss per share....................... (1.50)
</TABLE>
The unaudited pro forma financial statements for 1996 includes accrued store
closing and restructuring costs of $1,800,000, the write-off of debt issuance
costs related to the bridge financing of $1,050,000. The statements do not
reflect the operating and net income benefit of $513,000 if the store closings
(see Note 5) had occurred as of January 1, 1995. The unaudited pro forma
financial statements for 1995 do not reflect the operating and net income
benefit of $368,000 if the store closings (see Note 5) had occurred as of
January 1, 1995.
The pro forma information presented above does not purport to be indicative
of the results that actually would have been obtained if the combined
operations had been conducted during the periods presented, nor does it
purport to be indicative of future periods of the combined operations.
8. INCOME TAXES
A summary of the significant components of deferred tax liabilities (assets)
as of December 29, 1996 is as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Provisions for store closing................................... $ (388,000)
Fixed assets................................................... (240,000)
Store preopening costs......................................... 62,000
Deferred rent.................................................. (270,000)
Operating loss carryforwards................................... (3,324,000)
-----------
Gross deferred tax assets.................................... (4,160,000)
Valuation allowance............................................ 4,160,000
-----------
Net deferred taxes........................................... $ --
===========
</TABLE>
F-14
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1996 was an increase of approximately $2,453,000.
At December 29, 1996, the Company had net operating loss carryforwards of
approximately $7.5 million. These net operating loss carryforwards expire on
various dates through 2011. 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.
9. COMMITMENTS
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.
As of December 29, 1996, approximate future minimum rental payments under
noncancelable operating leases for the next five years and the period
thereafter are as follows:
<TABLE>
<S> <C>
Year ending:
1997........................................................... $ 3,379,680
1998........................................................... 3,895,484
1999........................................................... 3,331,045
2000........................................................... 3,384,835
2001........................................................... 3,414,816
Thereafter..................................................... 17,101,975
-----------
$34,507,835
===========
</TABLE>
Rent expenses under operating leases were approximately $2,128,000 and
$2,650,000 for the years ended December 31, 1995 and December 29, 1996,
respectively.
The Company has capital leases for computer equipment used in its stores and
offices. As of December 29, 1996, approximate future minimum lease payments
for the next four years are as follows:
<TABLE>
<S> <C>
Year ending:
1997............................................................ $ 330,022
1998............................................................ 315,822
1999............................................................ 209,813
2000............................................................ 71,326
---------
926,983
Less-Imputed interest........................................... (200,000)
---------
$ 726,983
=========
</TABLE>
Employment Agreements
The Company has entered into employment agreements with six officers of the
Company expiring in various years through October 30, 1998. Minimum base
salaries and bonuses for the term of these
F-15
<PAGE>
NEW WORLD COFFEE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employment agreements total approximately $1,116,000 of which the Company is
committed to pay $791,100 after December 29, 1996.
10. KEY PERSON LIFE INSURANCE
The Company maintains life insurance totaling $1,500,000 for its chief
executive officer, in which it is the beneficiary.
11. SUBSEQUENT EVENT
On February 27, 1997, the Company completed a private placement of 1,000,000
unregistered shares of common stock, par value $.001 per share, and realized
net proceeds of $1,345,000.
In 1997, the Company repurchased 175 shares of the Series A Convertible
Preferred Stock and in exchange issued 137.5 shares of Series B Convertible
Preferred Stock, $.001 par value, and issued 194,440 shares of unregistered
common stock, par value $.001 per share. The Series B Convertible Preferred
Stock bears no dividend and has limited voting rights except as provided under
the General Corporation Law of the State of Delaware. The stock is convertible
into shares of common stock in accordance with the Certificate of Designation
of Series B Convertible Preferred Stock.
F-16
<PAGE>
EXHIBIT INDEX
27. Financial Data Schedule.
<PAGE>
EXHIBIT 4.4
CERTIFICATE OF DESIGNATION OF
SERIES B PREFERRED STOCK
OF
NEW WORLD COFFEE, INC.
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is
New World Coffee, Inc., a Delaware corporation.
2. The certificate of incorporation of the Company authorizes the
issuance of Two Million (2,000,000) shares of preferred stock, $.001 par value
per share, and expressly vests in the Board of Directors of the Company the
authority provided therein to issue any or all of said shares in one (1) or more
series and by resolution or resolutions to establish the designation and number
and to fix the relative rights and preferences of each series to be issued.
3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has previously created a Series A Preferred
Stock, $.001 par value per share, with 400 authorized shares and 315 shares
outstanding and has adopted the resolutions set forth below creating a Series B
issue of Preferred Stock:
RESOLVED, that Two Hundred Twenty Five (225) of the Two Million
(2,000,000) authorized shares of Preferred Stock of the Company shall be
designated Series B Preferred Stock, $.001 par value per share, and shall
possess the rights and preferences set forth below:
<PAGE>
Section 1. Designation and Amount. The shares of such series shall
--------- ----------------------
have a par value of $.001 per share and shall be designated as Series B
Preferred Stock (the "Series B Preferred Stock") and the number of shares
constituting the Series B Preferred Stock shall be Two Hundred Twenty Five
(225). The Series B Preferred Stock shall be issued in exchange for outstanding
Series A Preferred Stock and shall be deemed to have an original issue price per
share equal to Eleven Thousand Eight Hundred Dollars ($11,800) per share (the
"Original Series B Issue Price"), with an eight percent (8%) per annum accretion
rate as set forth herein commencing January 1, 1997.
Section 2. Rank. The Series B Preferred Stock shall rank: (i)
--------- ----
junior to any other class or series of capital stock of the Company hereafter
created specifically ranking by its terms senior to the Series B Preferred Stock
(the "Senior Securities"); (ii) prior to all of the Company's Common Stock,
$.001 par value per share (the "Common Stock"); (iii) prior to any class or
series of capital stock of the Company hereafter created not specifically
ranking by its terms senior to or on parity with any Series B Preferred Stock of
whatever subdivision (collectively, with the Common Stock, "Junior Securities);
and (iv) on parity with the Series A Preferred Stock and any class or series of
capital stock of the Company hereafter created specifically ranking by its terms
on parity with the Series B Preferred Stock ("Parity Securities") in each case
as to distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such distributions being referred
to collectively as "Distributions").
Section 3. Dividends. The Series B Preferred Stock will bear no
--------- ---------
dividends, and the holders of the Series B Preferred Stock (the "Holders") shall
not be entitled to receive dividends on the Series B Preferred Stock.
Section 4. Liquidation Preference.
--------- ----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the Holders of shares of Series B
Preferred Stock shall be entitled to receive, immediately after any
distributions to Senior Securities required by the Company's Certificate of
Incorporation or any certificate of designation, and prior in preference to any
distribution to Junior Securities but in parity with any distribution to Parity
Securities, an amount per share equal to the sum of (i) the Original Series B
Issue Price and (ii) an amount equal to eight percent (8%) of the Original
Series B Issue Price per annum for the period that has passed since the date of
issuance (the "Issue Date") of such Series B Preferred Stock by the Company
(such amount being referred to herein as the "Premium"). If upon the occurrence
of such event, and after payment in full of the preferential amounts with
respect to the Senior Securities, the assets and funds available to be
distributed among the Holders of the Series B Preferred Stock and Parity
Securities shall be insufficient to permit the payment to such Holders of the
full preferential amounts due to the Holders of the Series B Preferred Stock and
the Parity Securities, respectively, then the entire assets and funds of the
Company legally
-2-
<PAGE>
available for distribution shall be distributed among the Holders of the Series
B Preferred Stock and the Parity Securities, pro rata, based on the respective
liquidation amounts to which each such series of stock is entitled by the
Company's Certificate of Incorporation and any certificate(s) of designation
relating thereto.
(b) Upon the completion of the distribution required by Section 4(a),
if assets remain in this Company, they shall be distributed to holders of Junior
Securities in accordance with the Company's Certificate of Incorporation
including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or disposition of all
or substantially all the assets of the Company to a private entity, the common
stock of which is not publicly traded, shall be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 4; provided,
however, that an event described in the prior clause that the Holder does not
elect to treat as a liquidation and a consolidation, merger, acquisition, or
other business combination of the Company with or into any other company or
companies shall not be treated as a liquidation, dissolution or winding up
within the meaning of this Section 4, but instead shall be treated pursuant to
Section 5(e) hereof (a Holder who elects to have the transaction treated as a
liquidation is herein referred to as a "Liquidating Holder").
(d) Prior to the closing of a transaction described in Section 4(c)
which would constitute a liquidation event, the Company shall either (i) make
all cash distributions it is required to make to the Liquidating Holders
pursuant to the first sentence of Section 4(a), (ii) set aside sufficient funds
from which the cash distributions required to be made to the Liquidating Holders
can be made, or (iii) establish an escrow or other similar arrangement with a
third party pursuant to which the proceeds payable to the Company from a sale of
all or substantially all the assets of the Company will be used to make the
liquidating payments to the Liquidating Holders immediately after the
consummation of such sale. In the event that the Company has not fully complied
with either of the foregoing alternatives, the Company shall either: (x) cause
such closing to be postponed until such cash distributions have been made, or
(y) cancel such transaction, in which event the rights of the Holders or other
arrangements shall be the same as existing immediately prior to such proposed
transaction.
Section 5. Conversion. The record Holders of this Series B Preferred
--------- ----------
Stock shall have conversion rights as follows (the "Conversion Rights") :
(a) Right to Convert. Each record Holder of Series B Preferred Stock
shall be entitled (at the times and in the amounts set forth below) and subject
to the Company's right of redemption set forth in Section 6(a), to convert whole
or (if necessary to convert the maximum amount allowable) fractional shares of
Series B Preferred Stock for the Common Stock issuable upon conversion of the
Series B Preferred Stock, for resale either pursuant to an effective shelf
registration statement under the Securities Act of 1933, as amended (the
-3-
<PAGE>
"Registration Statement") or, if the Registration Statement is not effective,
then pursuant to any applicable exemption, as follows:
Lock Up Period: The Series B Preferred Stock shall not be convertible
into Common Stock until six (6) months following December 1, 1996 (the "Lock-up
Period").
Conversion Quota: Beginning on the first day following the termination
of the Lock-up Period (the "Initial Conversion Gate"), each Holder shall accrue
the right to convert into Common Stock up to 20% of the aggregate number of
shares of Series B Preferred Stock issued to such Holder, and for each month
that expires thereafter, Holder shall accrue (the "Accrual Rate") the right to
convert an additional 20% of the shares of the Series B Preferred Stock issued
to such Holder into Common Stock (the number of shares that may be converted at
any time, in the aggregate, is herein referred to as the Conversion Quota), all
at the Conversion Rate (as defined below). In the event that Holder elects not
to convert its full Conversion Quota during any month, the unconverted amount
shall be carried forward and added to the Conversion Quota. Each Holder may,
from time to time, convert any portion of the Conversion Quota; provided,
however, that in no event shall Holder convert during any month more than 25% of
the shares of Series B Preferred Stock issued to Holder.
Conversion Acceleration: If the Closing Bid Price of the Common Stock
is $3.40 or greater for twenty consecutive trading days at any time before the
end of the Lock-up Period, notwithstanding the Lock-up Period, each Holder's
Accrual Rate for each month during which the twentieth day of such trading days
falls shall equal 25% of the shares of Series B Preferred Stock issued to such
Holder.
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price on the Nasdaq National Market System published by The Nasdaq
Stock Market, or if no longer traded on the Nasdaq National Market, the closing
bid price on the Nasdaq Small Cap Market, the over-the-counter market or the
principal national securities exchange on which the Common Stock is so traded
and if such closing bid prices are not available, the mean of the high and low
prices on the principal national securities exchange, the over-the-counter
market or the Nasdaq Stock Market on which the Common Stock is so traded.
The Initial Conversion Gate and each subsequent one month period
referenced above are hereinafter referred to singularly as a Conversion Gate and
collectively as Conversion Gates. At the applicable Conversion Gate and at any
time thereafter, the percentage of Series B Preferred Stock issued to such
Holder which is available for conversion as set forth above is convertible into
that number of fully-paid and non-assessable shares of Common Stock of the
Company calculated in accordance with the following formula (the "Conversion
Rate"):
-4-
<PAGE>
Number of shares of Common Stock to be issued upon conversion
("Conversion") of one (1) share of Series B Preferred Stock =
(.08) (N/365)(11,800) + 11,800
--------------------------------
Fixed Conversion Price
where,
- - N= the number of days between (i) the Issue Date and (ii) the applicable Date
of Conversion (as defined in Section 5(b) (iv) below) for the shares of Series B
Preferred Stock for which conversion is being elected, and
- - Fixed Conversion Price = $3.40.
At the Company's option, upon Conversion, it may elect to pay the
Premium in cash, in which case the number of shares issued upon conversion of
one (1) share of Series B Preferred Stock =
11,800
--------------------------------
Fixed Conversion Price
(b) Mechanics of Conversion. In order to convert Series B Preferred
Stock into full shares of Common Stock, the Holder shall (i) fax, on or prior to
6:00 p.m., New York City time on the Date of Conversion, a copy of a fully
executed notice of conversion ("Notice of Conversion") to the Company at the
office of the Company or to the Company's designated transfer agent (the
"Transfer Agent") for the Series B Preferred Stock stating that the Holder
elects to convert, which notice shall specify the date of conversion, the number
of shares of Series B Preferred Stock to be converted, the Conversion Rate and a
calculation of the number of shares of Common Stock issuable upon such
conversion (together with a copy of the front page of each certificate to be
converted) and (ii) surrender to a common courier for either overnight or two
(2) day delivery to the office of the Company or the Transfer Agent, the
original certificates representing the Series B Preferred Stock being converted
(the "Preferred Stock Certificates"), duly endorsed for transfer; provided,
however, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless
either the Preferred Stock Certificates are delivered to the Company or the
Transfer Agent as provided above, or the Holder notifies the Company or its
Transfer Agent that such certificates have been lost, stolen or destroyed
(subject to the requirements of subparagraph (i) below). In the case of a
reasonable dispute as to the calculation of the Conversion Rate, the Company
shall promptly issue to the Holder the number of shares of Common Stock that are
not disputed and shall submit the disputed calculations to the Company's outside
accountant via
-5-
<PAGE>
facsimile within three (3) business days of receipt of the Holder's Notice of
Conversion. The Company shall cause the accountant to perform the calculations
and notify the Company and the Holder of the results no later than two (2)
business days from the time it receives the disputed calculations. Accountant's
calculation shall be deemed conclusive absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the Company of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series B Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Company, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Company shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date.
However, the Company shall not be obligated to re-issue such lost or
stolen Preferred Stock Certificates if Holder contemporaneously requests the
Company to convert such Series B Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The Company no later
than 6:00 p.m. (New York City time) on the third (3rd) business day after
receipt by the Company or its Transfer Agent of all necessary documentation duly
executed and in proper form required for Conversion, including the original
Preferred Stock Certificates to be converted (or after provision for security or
indemnification in the case of lost, stolen or destroyed certificates, if
required), shall issue and surrender to a common courier for either overnight or
(if delivery is outside the United States) two (2) day delivery to the Holder as
shown on the stock records of the Company a certificate for the number of shares
of Common Stock to which the Holder shall be entitled as aforesaid.
(iii) No Fractional Shares. If any conversion of the Series B
Preferred Stock would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
in the aggregate, shall be the next higher number of shares.
(iv) Date of Conversion. The date on which conversion occurs (the
"Date of Conversion") shall be deemed to be the date such Notice of Conversion
is faxed to the Company or the Transfer Agent, as the case may be, provided that
the advance copy of the Notice of Conversion is faxed to the Company on or prior
to 6:00 p.m., New York City time, on the Date of Conversion. The original
Preferred Stock Certificates representing the shares of Series B Preferred Stock
to be converted shall be surrendered by depositing such certificates with a
common courier for either overnight or two (2) day delivery, as soon as
practicable following the Date of Conversion. The person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record Holder or Holders of such shares of
Common Stock on the Date of Conversion.
-6-
<PAGE>
(c) Deposit with Escrow Agent of Number of Shares Issuable Upon
Conversion. The Company shall deposit with a third party escrow agent a number
of shares of Common Stock sufficient to convert to Common Stock all outstanding
shares of Series B Preferred Stock issued in connection with the exchange of the
Series A Preferred Stock.
(d) Automatic Conversion. Each share of Series B Preferred Stock
outstanding on the date which is three (3) years after the date on which the
consummation of all exchanges by the Company of its Series A Preferred Stock for
Series B Preferred Stock have occurred (the "Automatic Conversion Date")
automatically shall be converted into Common Stock on such date at the
Conversion Rate then in effect (calculated in accordance with the formula in
Section 5(a) above), and the Automatic Conversion Date shall be deemed the Date
of Conversion with respect to such conversion.
(e) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock Split, Stock
Dividend, Etc. If, prior to the conversion of all the Series B Preferred Stock,
the number of outstanding shares of Common Stock is increased by a stock split,
stock dividend, or other similar event, the Fixed Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a combination or reclassification of shares, or other similar
event, the Fixed Conversion Price shall be proportionately increased.
(ii) Adjustment Due to Merger, Consolidation, Etc. If, prior to the
conversion of all the Series B Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities of the Company or another entity or
there is a sale of all or substantially the Company's assets that is not deemed
to be a liquidation pursuant to Section 4(c), then the Holders of Series B
Preferred Stock shall thereafter have the right to receive upon conversion of
Series B Preferred Stock, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such stock, securities and/or other assets
which the Holder would have been entitled to receive in such transaction had the
Series B Preferred Stock been converted immediately prior to such transaction,
and in any such case appropriate provisions shall be made with respect to the
rights and interests of the Holders of the Series B Preferred Stock to the end
that the provisions hereof (including, without limitation, provisions for the
adjustment of the Fixed Conversion Price and of the number of shares issuable
upon conversion of the Series B Preferred Stock) shall thereafter be applicable,
as nearly as may be practicable in relation to any securities thereafter
deliverable upon the exercise hereof. The Company shall not effect any
transaction described in this subsection 5(e) (ii) unless (a) it first gives
thirty (30) calendar days prior notice of such merger, consolidation, exchange
of shares, recapitalization, reorganization, or other similar event (during
which time the Holder shall be
-7-
<PAGE>
entitled to convert its shares of Series B Preferred Stock into Common Stock to
the extent permitted hereby) and (b) the resulting successor or acquiring entity
(if not the Company) assumes by written instrument the obligation of the Company
under this Certificate of Designation, including the obligation of this
subsection 5(e) (ii).
(iii) No Fractional Shares. If any adjustment under this Section
5(e) would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion shall be the next
higher number of shares.
Section 6. Redemption by Company.
--------- ---------------------
(a) Company's Right to Redeem at its Election. At any time,
commencing on the Issue Date, the Company shall have the right, in its sole
discretion, to redeem ("Redemption at Company's Election"), from time to time,
in whole or in part, a number of shares of Series B Preferred Stock of each
Holder equal to the greater of the number of shares of Series B Preferred Stock
that such Holder is entitled to convert pursuant to Section 5 and the number of
shares of Series B Preferred Stock that such Holder has the right to require the
Company to redeem pursuant to Section 6(b).
(i) Redemption Price At Company's Election. The "Redemption Price At
Company's Election" shall be the sum of one hundred twenty percent (120%) of the
Original Series B Issue Price and the accrued but unpaid Premium for such
shares.
(ii) Mechanics of Redemption at Company's Election. The Company
shall effect each such Redemption at Company's Election by giving at least ten
(10) business days prior written notice ("Notice of Redemption At Company's
Election") to (A) the Holders of the Series B Preferred Stock selected for
redemption, at the address and facsimile number of such Holder appearing in the
Company's Series B Preferred Stock register and (B) the Transfer Agent, which
Notice of Redemption At Company's Election shall be deemed to have been
delivered two (2) business days after the Company's mailing (by overnight or two
(2) day courier, with a copy by facsimile) of such Notice of Redemption At
Company's Election. Such Notice of Redemption At Company's Election shall
indicate (i) the number of shares of Series B Preferred Stock that have been
selected for redemption, (ii) the date upon which such redemption is to become
effective (the "Date of Redemption At Company's Election"), (iii) the applicable
Redemption Price At Company's Election and (iv) detailed instructions as to the
redemption procedure, including but not limited to instructions regarding the
time and place for delivery of the Series B Preferred Stock being redeemed.
(iii) Holder's Right to Convert in lieu of Redemption at Company's
Election. Notwithstanding the Company's right to redeem shares of Series B
Preferred Stock, upon receipt of a Notice of Redemption At Company's Election,
each Holder of Series B
-8-
<PAGE>
Preferred Stock may elect to exercise the Conversion Rights set forth in Section
5(a) with respect to such shares provided that the Holder faxes to the Company
the Notice of Conversion and takes the other actions set forth in Section 5(b)
prior to the Date of Redemption At Company's Election.
(b) Holder's Right to Require Company to Redeem. Beginning on the
date eight months after the Issue Date and continuing thereafter, each Holder
shall have the right to require the Company to redeem (a "Requested Redemption")
up to fifteen percent (15%) per calendar month, of the Series B Preferred Stock
issued to such Holder, at a redemption price of 115% of the Original Series B
Issue Price plus the accrued but unpaid Premium for such shares. The foregoing
rights are non-cumulative and therefore any 15% portion not redeemed during any
calendar month shall not be available for Requested Redemptions pursuant to this
Section 6(b) in subsequent calendar months. The Company may either pay the
redemption price in cash or may alternatively convert (an "Alternate
Conversion") such amount into Common Stock. In the event that the Company
elects to convert such amount into Common Stock, the number of shares of Common
Stock to be issued is calculated as follows (the "Alternate Conversion Rate"):
115% of the Original Series B Issue Price plus the accrued
but unpaid Premium with respect to such shares
----------------------------------------------------------------
5 Day Average Closing Bid Price,
where, the 5 Day Average Closing Bid Price equals the average Closing Bid Price
of the Common Stock for the five (5) trading days immediately preceding the date
of such Requested Redemption.
(i) Mechanics of Requested Redemption or Alternate Conversion. The
Holder shall effect a Requested Redemption by giving notice ("Notice of
Requested Redemption") to the Company and the Transfer Agent on the date that
such redemption is desired (the "Requested Redemption Date"). The Holder shall
surrender to a common courier, by no later than 5:00 p.m. New York City time on
the third business day following the Requested Redemption Date, for either
overnight or two (2) day delivery to the office of the Company or its Transfer
Agent, the original Preferred Stock Certificates being tendered for Requested
Redemption. The Company shall give notice (a "Requested Redemption
Confirmation") to the Holder and to the Transfer Agent, by facsimile, within one
(1) business day of receipt of a Notice of Requested Redemption, verifying that
the Company intends to redeem in cash. If the Transfer Agent does not receive a
Requested Redemption Confirmation by the next business day, the Transfer Agent
shall effect an Alternate Conversion, and issue the appropriate number of shares
of Common Stock to the Holder within three (3) business days after the later of
(i) the Requested Redemption Date, or (ii) the date the original Preferred Stock
Certificates being converted are received.
-9-
<PAGE>
(c) Payment of Redemption Price. Each Holder submitting Preferred
Stock being redeemed under Section 6(a) shall send their Preferred Stock
Certificates so redeemed to the Company or the Transfer Agent no later than the
Date of Redemption at Company's Election, and the Company shall pay the
applicable redemption price to that Holder within five (5) business days of the
Date of Redemption at Company's Election. The redemption shall be deemed to
have been made on the Date of Redemption at Company's Election, and, if the
Company pays the applicable redemption price to the Holder within the allotted
time, all rights of the Holders shall cease as of the Date of Redemption at
Company's Election with respect to such redeemed shares of Series B Preferred
Stock except for the right thereafter to receive the redemption price in
accordance herewith. Where a Holder has requested redemption under Section 6(b)
and the Company has elected to pay the redemption in cash, the Company shall pay
the applicable redemption price to such Holder within five (5) business days of
the Requested Redemption Date. The Company shall not be obligated to deliver
the redemption price unless the Preferred Stock Certificates so redeemed are
delivered to the Company or the Transfer Agent, or, in the event one or more
certificates have been lost, stolen, mutilated or destroyed, the Holder has
complied with Section 5(b)(i).
(d) Blackout Period. Notwithstanding the foregoing, the Company may
not either send out a redemption notice or effect a redemption pursuant to
Section 6(a) above during a Blackout Period (defined as a period during which
the Company's officers or directors would not be entitled to buy or sell stock
because of their holding of material non-public information), unless the Company
shall first disclose the non-public information that resulted in the Blackout
Period, provided, however, that no redemption shall be effected until at least
ten (10) days after the Company shall have given the Holder written notice that
the Blackout Period has been lifted.
Section 7. Voting Rights. The Holders of the Series B Preferred Stock
--------- -------------
shall have no voting power whatsoever, except as otherwise provided by the
General Corporation Law of the State of Delaware ("Delaware Law"), and no Holder
of Series B Preferred Stock shall vote or otherwise participate in any
proceeding in which actions shall be taken by the Company or the shareholders
thereof or be entitled to notification as to any meeting of the shareholders.
Notwithstanding the above, the Company shall provide the Holders with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any share of any class or any other
securities or property (including by way of merger, consolidation or
reorganization), or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all the assets of the
Company, or any proposed liquidation, dissolution or winding up of the Company,
the Company shall mail a notice to Holder, at least ten (10) days prior to
-10-
<PAGE>
the record date specified therein, of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under Delaware Law the vote of the Holders of the
Series B Preferred Stock, voting separately as a class, is required to authorize
a given action of the Company, the affirmative vote or consent of the Holders of
at least a majority of the shares of the Series B Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent of a
majority of the shares of Series B Preferred Stock (except as otherwise may be
required under Delaware Law) shall constitute the approval of such action by the
class. To the extent that under Delaware Law the Holders of the Series B
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one (1) class, each share of Series B Preferred Stock shall
be entitled to a number of votes equal to the number of shares of Common Stock
into which it is then convertible using the record date for the taking of such
vote of stockholders as the date as of which the Conversion Rate is calculated.
Holders of the Series B Preferred Stock also shall be entitled to notice of all
shareholder meetings or written consents with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Company's by-
laws and applicable statutes.
Section 8. Protective Provision. So long as shares of Series B
--------- --------------------
Preferred Stock are outstanding, the Company shall not without first obtaining
the approval (by vote or written consent, as provided by Delaware Law) of the
Holders of at least sixty-six and two-thirds percent (66 2/3%) of the then
outstanding shares of Series B Preferred Stock, and at least sixty-six and two-
thirds percent (66 2/3%) of the then outstanding Holders:
(a) alter or change the rights, preferences or privileges of the
Series B Preferred Stock or any Senior Securities so as to affect adversely the
Series B Preferred Stock;
(b) create any new class or series of stock having a preference over
or on parity with the Series B Preferred Stock or increase the size of the
authorized number of Series B Preferred Stock; or
(c) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series B Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event Holders of at least sixty-six and two-thirds percent (66
2/3%) of the then outstanding shares of Series B Preferred Stock agree to allow
the Company to alter or change the rights, preferences or privileges of the
shares of Series B Preferred Stock, pursuant to subsection (a) above, so as to
affect the Series B Preferred Stock, then the Company will
-11-
<PAGE>
deliver notice of such approved change to the Holders of the Series B Preferred
Stock that did not agree to such alteration or change (the "Dissenting Holders")
and the Dissenting Holders shall have the right for a period of thirty (30) days
to convert pursuant to the terms of this Certificate of Designation as they
exist prior to such alteration or change; notwithstanding the otherwise
applicable Conversion Quota, or continue to hold their shares of Series B
Preferred Stock.
Section 9. Status of Redeemed or Converted Stock. In the event any
--------- -------------------------------------
shares of Series B Preferred Stock shall be redeemed or converted pursuant to
Section 5 or Section 6 hereof, the shares so converted or redeemed shall be
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be issuable by the Company as Series B
Preferred Stock.
Section 10. Preference Rights. Nothing contained herein shall be
---------- -----------------
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Series B Preferred
Stock.
Signed on January 21, 1997
/s/ R. Ramin Kamfar
-----------------------------------
President
Attest:
/s/ Alan I. Annex
- ----------------------------------
Alan I. Annex, Secretary
-12-
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of August 13, 1996 by and between NEW WORLD COFFEE, INC., a Delaware
corporation ("Corporation"), and R. RAMIN KAMFAR ("Officer").
RECITALS
Corporation desires to continue to employ Officer as its President and
Chief Executive Officer, and Officer is willing to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
AGREEMENT
1. Duties. During the term of this Agreement, Officer agrees to be
------
employed by and to serve Corporation as its President and Chief Executive
Officer and Corporation agrees to employ and retain Officer in such capacities.
Officer shall devote such of his business time, energy, and skill to the affairs
of the Corporation as shall be necessary to perform the duties of such
positions.
2. Term of Employment.
------------------
2.1 Definitions. For purposes of this Agreement the following
-----------
terms shall have the following meanings:
(a) "Change in Control" shall mean any of the following
events:
(i) Corporation is provided a copy of a Schedule 13D filed pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") indicating
that any person or group (as such terms are defined in Section 13(d)(3) of the
Exchange Act) that does not on the date hereof hold more than five percent of
the outstanding shares of Corporation entitled to vote for the election of
directors has become the holder of more than 40 percent of the outstanding
shares of Corporation entitled to vote for the election of directors;
<PAGE>
(ii) as a result of or in connection with any cash tender offer,
merger, or other business combination, sale of assets or contested election, or
combination of the foregoing, the persons who were directors of Corporation just
prior to such event shall cease to constitute a majority of the Board;
(iii) the stockholders of Corporation approve a definitive agreement
(i) to merge or consolidate Corporation with or into another corporation in
which the holders of Corporation's Common Stock immediately before such merger
or reorganization will not, immediately following such merger or reorganization,
hold as a group on a fully-diluted basis both the ability to elect at least a
majority of the board of directors of the surviving corporation and at least a
majority in value of the surviving corporation's outstanding equity securities,
or (ii) to sell or otherwise dispose of all or substantially all of the assets
of Corporation;
(iv) the closing of a transaction or series of transactions in which
more than 50% of the voting power of Corporation is transferred; or
(v) an Offer is made.
(b) "Offer" shall mean a tender offer or exchange offer for shares of
Corporation's Common Stock other than one made by Corporation or by a person or
group, as such terms are defined in Section 13(d)(3) of the Exchange Act, that
on the date hereof holds more than five percent of the outstanding shares of
Corporation entitled to vote for the election of directors where the offeror
acquires more than 40 percent of the outstanding shares of Corporation's Common
Stock.
(c) "Termination For Cause" shall mean termination by Corporation of
Officer's employment by Corporation by reason of Officer's willful dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Corporation or
by reason of Officer's willful material breach of this Agreement; provided,
however, that Officer's employment shall not be deemed to have been terminated
in a Termination For Cause if such termination took place as a result of any act
or omission (i) believed by Officer in good faith to have been in the best
interests of Corporation or (ii) that did not result in material injury to
Corporation.
(d) "Termination Other Than for Cause" shall mean termination by
Corporation of Officer's employment by Corporation (other than in a Termination
For Cause) and shall include constructive termination of Officer's employment
<PAGE>
by reason of material breach of this Agreement by Corporation, such constructive
termination to be effective upon notice from Officer to Corporation of such
constructive termination.
(e) "Voluntary Termination" shall mean termination by Officer of
Officer's employment by Corporation other than (i) constructive termination as
described in subsection 2.1(d), and (ii) termination by reason of Officer's
death or disability as described in Sections 2.5 and 2.6.
(f) "Voluntary Termination With Notice" shall mean a Voluntary
Termination that has been preceded by written notice delivered by Officer to
Corporation no later than 60 days (or such shorter period as the parties may
agree) prior to such Voluntary Termination.
(g) "Termination Upon a Change in Control" shall mean a termination by
Officer, in his discretion, of Officer's employment with Corporation within 30
days following a Change in Control.
2.2 Basic Term. The term of employment of Officer by Corporation
----------
shall be from July 1, 1996 through December 31, 1997, unless terminated earlier
pursuant to this Section 2. Thereafter, the term of employment of Officer by
Corporation shall automatically renew for additional one-year periods, unless
terminated earlier pursuant to this Section 2, commencing each January 1st
unless Corporation or Officer, as the case may be, gives written notice to the
other of its desire not to renew such term, which notice must be given no later
than 90 days prior to the end of the initial term on any such renewal.
Notwithstanding any provision of this Agreement to the contrary, Corporation
shall not terminate Officer's employment unless Officer has been relieved of any
and all obligations to guarantee any indebtedness of Corporation.
2.3 Termination For Cause. Termination For Cause may be effected by
---------------------
Corporation at any time during the time of this Agreement and shall be effected
by written notification to Officer. Upon Termination For Cause, Officer
immediately shall be paid all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit sharing
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of Corporation in which Officer is a participant to the
full extent of Officer's rights under such plans, accrued vacation pay and any
appropriate business expenses incurred by Officer in connection with his duties
hereunder, all to the date of termination, but Officer shall not be paid any
other compensation or reimbursement of any kind, including without limitation,
severance compensation. Officer shall have the right to contest the right of
Corporation to effect a
<PAGE>
Termination For Cause upon written notice to Corporation. In such case, Officer
shall continue to receive all of his benefits under this Agreement (and Officer
shall continue to be treated as an employee for purposes of Corporation stock
option plans) until such time as there is a final determination as to whether
such Termination For Cause was proper.
2.4 Termination Other Than For Cause. Notwithstanding anything else
--------------------------------
in this Agreement, Corporation may effect a Termination Other Than For Cause at
any time upon giving notice to Officer of such termination. Upon any
Termination Other Than For Cause, Officer shall immediately be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of
Corporation in which Officer is a participant to the full extent of Officer's
rights under such plans, accrued vacation pay and any appropriate business
expenses incurred by Officer in connection with his duties hereunder, all to the
date of termination, and all severance compensation provided in Section 4.1, but
no other compensation or reimbursement of any kind.
2.5 Termination by Reason of Disability. If, during the term of this
-----------------------------------
Agreement, Officer, in the reasonable judgement of the Board of Directors of
Corporation, has failed to perform his duties under this Agreement on account of
illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than nine (9) months, Corporation shall have the
right to terminate Officer's employment hereunder by written notification to
Officer and payment to Officer of all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of Corporation in which Officer is a
participant to the full extent of Officer's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Officer in
connection with his duties hereunder, all to the date of termination. In such
event, Corporation shall pay Officer 75% of his Base Salary (less any amounts
received by Officer under insurance policies carried by Corporation) through
December 31, 1997 (or through the December 31st of the end of any renewal term
if this Agreement is automatically renewed pursuant to Section 2.2), on the
dates specified in Section 3.1. Officer shall be entitled to continued
participation in all of Corporation's benefit plans (to the extent permitted by
law or under the terms of such plans) until December 31, 1997 (or until the
December 31st of the end of any renewal term if this Agreement is automatically
renewed pursuant to Section 2.2).
2.6 Death. In the event of Officer's death during the term of this
-----
Agreement, Officer's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall pay to
his estate all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the
<PAGE>
applicable plan), any benefits under any plans of Corporation in which Officer
is a participant to the full extent of Officer's rights under such plans,
accrued vacation pay and any appropriate business expenses incurred by Officer
in connection with his duties hereunder, all to the date of termination.
2.7 Voluntary Termination. In the event of a Voluntary Termination,
---------------------
Corporation shall immediately pay all accrued salary, bonus compensation of the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of Corporation in which Officer is a
participant to the full extent of Officer's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Officer in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance pay.
2.8 Voluntary Termination With Notice. In the event of a Voluntary
---------------------------------
Termination With Notice, Corporation shall pay to Officer all amounts to which
Officer is entitled under Section 2.7, and shall continue to pay Officer his
Base Salary until the earlier of (i) 60 days following such Voluntary
Termination With Notice or (ii) the December 31, 1997 (or December 31, 1998 if
this Agreement has been automatically renewed pursuant to Section 2.2).
2.9 Termination Upon a Change in Control. In the event of a
------------------------------------
Termination Upon a Change in Control, Officer shall immediately be paid all
accrued salary, bonus compensation to the extent earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
Corporation in which Officer is a participant to the full extent of Officer's
rights under such plans, accrued vacation pay and any appropriate business
expenses incurred by Officer in connection with his duties hereunder, all to the
date of termination, and all severance compensation as provided in Section 4,
but no other compensation or reimbursement of any kind.
3. Salary, Benefits and Bonus Compensation.
---------------------------------------
3.1 Base Salary. As payment for the services to be rendered by
-----------
Officer as provided in Section 1 and subject to the terms and conditions of
Section 2, Corporation agrees to pay to Officer a "Base Salary" at the rate of
$137,500 per annum payable in equal bi-weekly installments. The Base Salary
shall be subject to review by the Board of Directors but shall in no event be
less than a rate of $137,500 per annum.
<PAGE>
3.2 Bonuses. Officer shall receive a bonus (a "Bonus") of between
-------
10% and 50% of Officer's Base Salary for calendar year 1996 and a bonus of
between 0% and 50% of Officer's Base Salary for calendar year 1997 and each
subsequent calendar year (or portion thereof) during the term of this Agreement.
The amount of the Bonus shall be determined by the Compensation Committee of the
Board of Directors upon consideration of Officer's and Corporation's performance
during such period.
3.3 Stock Options. Officer shall be issued options to acquire
-------------
125,000 shares of common stock at an exercise price equal to the closing price
of the common stock on October 1, 1996, which options shall vest equally on each
of the first three anniversaries of the date hereof. Officer shall be afforded
the opportunity to exercise each of the foregoing options by means of a cashless
exercise procedure.
3.4 Benefits. During the term of this Agreement, Officer shall be
--------
eligible to participate in such of Corporation's benefit and deferred
compensation plans as are now generally available or later made generally
available to executive officers of Corporation, including, without limitation,
profit sharing, stock option, medical, dental, health, annual physical
examination, life, disability insurance, financial planning plans, supplemental
retirement programs and vacation. The Company shall maintain and pay for a
disability insurance policy for Officer. In addition, Officer shall be entitled
to receive an automobile allowance of $12,000 per year payable in equal monthly
installments plus mileage reimbursement for business travel and reimbursement
for mobile phone expenses. Without limiting the foregoing, Officer shall be
entitled to four weeks' paid vacation per year. Officer may elect to receive an
amount equal to two weeks' additional salary in lieu of two weeks of such
vacation time.
4. Severance Compensation and Death Benefits
-----------------------------------------
4.1 Severance Compensation. In the event Officer's employment is
----------------------
terminated in a Termination Other Than For Cause or a Termination Upon a Change
in Control, Officer shall be paid as severance compensation an amount equal to
two times his annual Base Salary (at the rate payable at the time of such
termination) plus an amount equal to two times the greater of (a) the amount of
his Bonus for the calendar year preceding such termination or (b) 25% of his
Base Salary.
<PAGE>
4.2 No Severance Compensation Upon Other Termination. In the event
------------------------------------------------
of a Voluntary Termination or Termination For Cause, Officer or his estate shall
not be paid any severance compensation.
5.. Covenant Not to Compete or Solicit.
----------------------------------
5.1 Non-Competition. Until the first anniversary of Termination for
---------------
Cause or a Voluntary Termination, Officer shall not directly or indirectly,
without the prior written consent of the Corporation engage anywhere in the
northeastern United States in (whether as an employee, consultant, proprietor,
partner, director or otherwise), or have any ownership interest in (except for
ownership of ten percent (10%) or less of any outstanding entity whose
securities are listed on a national securities exchange), or participate in the
financing, operation, management or control of, any firm, corporation or
business (other than Corporation) that engages in the marketing or sale of
specialty coffee as its principal business.
5.2 Separate Covenants. The covenants contained in Section 5.1 above
------------------
shall be construed as a series of separate covenants, one for each county, city
and state of any geographic area where any business is presently carried on by
the Company. Except for geographic coverage, each such separate covenant shall
be identical in terms to the covenant contained in Section 5.1. If, in any
judicial proceeding, a court refuses to enforce any of such separate covenants
(or any part thereof), then such unenforceable covenant (or such part) shall be
eliminated from this Agreement to the extent necessary to permit the remaining
separate covenants (or portions thereof) to be enforced. In the event that the
provisions of this Section 5 are deemed to exceed the time, geographic or scope
limitations permitted by applicable law, then such provisions shall be reformed
to the maximum time, geographic or scope limitations, as the case may be,
permitted by applicable laws.
6. Miscellaneous.
-------------
6.1 Confidentiality. Officer agrees that all confidential and
---------------
proprietary information relating to the business or operations of Corporation
shall be kept and treated as confidential both during and after the term of this
Agreement, except as may be permitted in writing by Corporation's Board of
Directors or as such information is within the public domain or comes within the
public domain without any breach of this Agreement.
<PAGE>
6.2 Waiver. The waiver of the breach of any provision of this
------
Agreement shall not operate or be construed as a waiver of any subsequent breach
of the same or other provision hereof.
6.3 Entire Agreement; Modifications. Except as otherwise provided
-------------------------------
herein, this Agreement represents the entire understanding among the parties
with respect to the subject matter hereof, and this Agreement supersedes any and
all prior understandings, agreements, plans and negotiations, whether written or
oral, with respect to the subject matter hereof, including without limitation,
any understandings, agreements or obligations respecting any past or future
compensation, bonuses, reimbursements, or other payments to Officer from
Corporation. All modifications to the Agreement must be in writing and signed
by the party against whom enforcement of such modification is sought.
6.4 Notices. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by telegraph or first-class
mail, certified or registered with return receipt requested, and shall be deemed
to have been duly given three days after mailing or 12 hours after transmission
of a telegram to the respective persons named below:
If to Corporation:
New World Coffee, Inc.
379 W. Broadway, 4th Floor
New York, New York 10012
Attention: Chief Executive Officer
If to Officer:
R Ramin Kamfar
666 Greenwich Street, #710
New York, New York 10014
Any party may change such party's address for notices by notice duly given
pursuant to this Section 6.4.
6.5 Headings. The Section headings herein are intended for reference
--------
and shall not by themselves determine the construction or interpretation of this
Agreement.
<PAGE>
6.6 Governing Law; Arbitration. This Agreement shall be governed by
--------------------------
and construed in accordance with the laws of the State of New York applicable to
contracts entered into and wholly to be performed within the State of New York
by New York residents. All claims, disputes and other matters in question
between Corporation and Officer arising out of, or relating to this Agreement or
the breach thereof, shall, if requested by Officer, be decided by arbitration in
the City of New York in accordance with the rules of the American Arbitration
Association.
6.7 Severability. Should a court or other body of competent
------------
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum extent
possible, and all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
6.8 Survival of Corporation's Obligations. Corporation's obligations
-------------------------------------
hereunder shall not be terminated by reason of any liquidation, dissolution,
bankruptcy, cessation of business, or similar event relating to Corporation.
This Agreement shall not be terminated by any merger or consolidation or other
reorganization of Corporation. In the event any such merger, consolidation, or
reorganization shall be accomplished by transfer of stock or by transfer of
assets or otherwise, the provisions of this Agreement shall be binding upon the
surviving or resulting corporation or person. This Agreement shall be binding
upon and inure to the benefit of the executors, administrators, heirs,
successors and assigns of the parties; provided, however, that except as herein
expressly provided, this Agreement shall not be assignable either by Corporation
(except to an affiliate of Corporation) or by Officer.
6.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.10 Withholdings. All compensation and benefits to Officer
------------
hereunder shall be reduced by all federal, state, local and other withholdings
and similar taxes and payments required by applicable law.
6.11 Indemnification. In addition to any rights to indemnification
---------------
to which Officer is entitled to under the corporation's Certificate of
Incorporation and Bylaws, Corporation shall indemnify officer at all times
during and after the term of this Agreement to the maximum extent permitted
under Section 145 of the Delaware Corporations Code or any successor provision
thereof and any other applicable state law, and shall pay Officer's expenses in
defending any civil or criminal action, suit or proceeding, to the maximum
extent permitted under such applicable state law.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NEW WORLD COFFEE, INC.
By: /s/ Alan I. Annex
---------------------------------------
Title: Secretary
------------------------------------
OFFICER
/s/ Ramin Kamfar
-------------------------------------------
R. Ramin Kamfar
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of July 30, 1996 by and between NEW WORLD COFFEE, INC., a Delaware
corporation ("Corporation"), and JEROLD E. NOVACK ("Officer").
R E C I T A L S:
----------------
Corporation desires to continue to employ Officer as its Vice
President-Finance, and Officer is willing to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
AGREEMENT
1. DUTIES. During the term of this Agreement, Officer agrees to be
------
employed by and to serve Corporation as its Vice President - Finance, and
Corporation agrees to employ and retain Officer in such capacities. Officer
shall devote substantially all of his full working time, energy, and efforts to
the business of the Corporation.
2. TERM OF EMPLOYMENT.
------------------
2.1 Definitions. For purposes of this Agreement the following
-----------
terms shall have the following meanings:
(a) "Termination For Cause" shall mean termination by Corporation of
Officer's employment by Corporation by reason of Officer's willful dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Corporation or
by reason of Officer's willful material breach of this Agreement; provided,
however, that Officer's employment shall not be deemed to have been terminated
in a Termination For Cause if such termination took place as a result of any act
or omission (i) believed by Officer in good faith to have been in the best
interests of Corporation or (ii) that did not result in material injury to
Corporation.
(b) "Termination Other Than for Cause" shall mean termination by
Corporation of Officer's employment by Corporation (other than in a Termination
For Cause) and shall include constructive termination of Officer's employment by
reason of material breach
<PAGE>
of this Agreement by Corporation, such constructive termination to be effective
upon notice from Officer to Corporation of such constructive termination.
(c) "Voluntary Termination" shall mean termination by Officer of
Officer's employment by Corporation other than constructive termination as
described in subsection 2.1(b).
2.2 Basic Term.
----------
(a) The term of employment of Officer by Corporation shall be from the
date hereof through June 30, 1997, unless terminated earlier pursuant to this
Section 2.
(b) The Corporation and Officer agree that negotiations for any
renewal of this Agreement shall commence on or before March 31, 1997. Further,
such parties shall use their best efforts to conclude any such negotiations by
April 30, 1997.
2.3 Termination For Cause. Termination For Cause may be effected
---------------------
by the Corporation at any time during the time of this Agreement and shall be
effected by written notification to Officer. Upon Termination For Cause,
Officer immediately shall be paid all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of Corporation in which Officer is a
participant to the full extent of Officer's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Officer in
connection with his duties hereunder, all to the date of termination, but
Officer shall not be paid any other compensation or reimbursement of any kind,
including without limitation, severance compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything
--------------------------------
else in this Agreement, Corporation may effect a Termination Other Than For
Cause at any time upon giving notice to Officer of such termination. Upon any
Termination Other Than For Cause, Officer shall immediately be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of
Corporation in which Officer is a participant to the full extent of Officer's
rights under such plans, accrued vacation pay and any appropriate business
expenses incurred by Officer in connection with his duties hereunder, all to the
date of termination, and all severance compensation provided in Section 4.1(a),
but no other compensation or reimbursement of any kind.
2.5 Voluntary Termination. In the event of a Voluntary
---------------------
Termination, Corporation shall immediately pay all accrued salary, bonus
compensation of the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of Corporation in which
Officer is a participant to the full extent of Officer's rights under such
plans, accrued vacation pay and any appropriate business expenses incurred by
Officer in connection with his duties hereunder, all to the date of termination,
and all severance compensation, if any, provided in Section 4.1(b), but no other
compensation or reimbursement of any kind, including without
-2-
<PAGE>
limitation, severance pay. Officer covenants to give the Company 60 days written
notice of any Voluntary Termination and shall in good faith cooperate with the
Company in order to facilitate a smooth transition.
3. SALARY, BENEFITS AND BONUS COMPENSATION.
---------------------------------------
3.1 Base Salary. As payment for the services to be rendered by
-----------
Officer as provided in Section 1 and subject to the terms and conditions of
Section 2, Corporation agrees to pay to Officer a "Base Salary" at the rate of
$110,000 per annum payable in equal bi-weekly installments. The Base Salary
shall be subject to review by the Board of Directors but shall in no event be
less than a rate of $110,000 per annum.
3.2 Bonuses. Officer shall receive a bonus of between 20% and 50%
-------
of Officer's Base Salary for calendar year 1996 and each subsequent calendar
year (or portion thereof) during the term of this Agreement. The amount of such
bonus shall be determined by the Compensation Committee of the Board of
Directors upon consideration of Officer's and Corporation's performance during
such period. Bonuses shall be paid as soon as reasonably practicable after
completion of the audit for each fiscal year.
3.3 Stock Options. Officer shall be issued options to acquire
-------------
75,000 shares of common stock at an exercise price equal to the closing bid
price of the common stock on July 2, 1996. Such options shall vest as to 15,000
shares immediately; 20,000 shares on the first anniversary of the date of grant;
20,000 shares on the second anniversary of the date of grant; and the remaining
20,000 shares on the third anniversary of the date of grant. Officer shall be
afforded the opportunity to exercise each of the foregoing options by means of a
cashless exercise procedure.
3.4 Benefits. During the term of this Agreement, Officer shall be
--------
eligible to participate in such of Corporation's benefit and deferred
compensation plans as are now generally available or later made generally
available to executive officers of Corporation, including, without limitation,
profit sharing, stock option, medical, dental, health, annual physical
examination, life, disability insurance, financial planning plans, supplemental
retirement programs and vacation. In addition, Officer shall be entitled to
receive an automobile allowance of $6,000 per year payable in equal monthly
installments plus mileage reimbursement for business travel and reimbursement
for mobile phone expenses. Without limiting the foregoing, Officer shall be
entitled to three weeks' paid vacation per year.
-3-
<PAGE>
4. SEVERANCE COMPENSATION AND DEATH BENEFITS.
-----------------------------------------
4.1 Severance Compensation.
----------------------
(a) In the event Officer's employment is terminated in a Termination
Other Than For Cause, Officer shall be paid as severance compensation his Base
Salary (at the rate payable at the time of such termination) for a period of six
months on the dates specified in Section 3.1.
(b) In the event of a Voluntary Termination subsequent to December 31,
1996, the Officer shall be paid as severance compensation his Base Salary (at
the rate payable at the time of such termination) for a period of three months
on the dates specified in Section 3.1
4.2 No Severance Compensation Upon Other Termination. In the
------------------------------------------------
event of a Termination For Cause or a Voluntary Termination prior to December
31, 1996, Officer or his estate shall not be paid any severance compensation.
5. COVENANT NOT TO COMPETE OR SOLICIT.
----------------------------------
5.1 Non-Competition. Until the first anniversary of Termination
---------------
for Cause or a Voluntary Termination, Officer shall not directly or indirectly,
without the prior written consent of the Corporation engage anywhere in the
northeastern United States in (whether as an employee, consultant, proprietor,
partner, director or otherwise), or have any ownership interest in (except for
ownership of five percent (5%) or less of any outstanding entity whose
securities are listed on a national securities exchange), or participate in the
financing, operation, management or control of, any firm, corporation or
business that engages in the marketing or sale of specialty coffee as its
principal business.
5.2 Separate Covenants. The covenants contained in Section 5.1
------------------
above shall be construed as a series of separate covenants, one for each county,
city and state of any geographic area where any business is presently carried on
by the Company. Except for geographic coverage, each such separate covenant
shall be identical in terms to the covenant contained in Section 5.1. If, in
any judicial proceeding, a court refuses to enforce any of such separate
covenants (or any part thereof), then such unenforceable covenant (or such part)
shall be eliminated from this Agreement to the extent necessary to permit the
remaining separate covenants (or portions thereof) to be enforced. In the event
that the provisions of this Section 5 are deemed to exceed the time, geographic
or scope limitations permitted by applicable law, then such provisions shall be
reformed to the maximum time, geographic or scope limitations, as the case may
be, permitted by applicable laws.
-4-
<PAGE>
6. MISCELLANEOUS.
-------------
6.1 Confidentiality. Officer agrees that all confidential and
---------------
proprietary information relating to the business or operations of Corporation
shall be kept and treated as confidential both during and after the term of this
Agreement, except as may be permitted in writing by Corporation's Board of
Directors or as such information is within the public domain or comes within the
public domain without any breach of this Agreement.
6.2 Waiver. The waiver of the breach of any provision of this
------
Agreement shall not operate or be construed as a waiver of any subsequent breach
of the same or other provision hereof.
6.3 Entire Agreement; Modifications. Except as otherwise provided
-------------------------------
herein, this Agreement represents the entire understanding among the parties
with respect to the subject matter hereof, and this Agreement supersedes any and
all prior understandings, agreements, plans and negotiations, whether written or
oral, with respect to the subject matter hereof, including without limitation,
any understandings, agreements or obligations respecting any past or future
compensation, bonuses, reimbursements, or other payments to Officer from
Corporation. All modifications to the Agreement must be in writing and signed
by the party against whom enforcement of such modification is sought.
6.4 Notices. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by telegraph or first-class
mail, certified or registered with return receipt requested, and shall be deemed
to have been duly given three days after mailing or 12 hours after transmission
of a telegram to the respective persons named below:
If to Corporation:
New World Coffee, Inc.
379 W. Broadway, 4th Floor
New York, NY 10012
Attention: Chief Executive Officer
If to Officer:
Jerold E. Novack
1981 E. 26th Street
Brooklyn, NY 11229
Any party may change such party's address for notices by notice duly given
pursuant to this Section 6.4.
6.5 Headings. The Section headings herein are intended for
--------
reference and shall not by themselves determine the construction or
interpretation of this Agreement.
-5-
<PAGE>
6.6 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York applicable to
contracts entered into and wholly to be performed within the State of New York
by New York residents. The prevailing party in any action brought to enforce the
terms of this Agreement shall be entitled to recover its costs (including,
without limitation, attorneys fees).
6.7 Severability. Should a court or other body of competent
------------
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum extent
possible, and all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
6.8 Survival of Corporation's Obligations. Corporation's
-------------------------------------
obligations hereunder shall not be terminated by reason of any liquidation,
dissolution, bankruptcy, cessation of business, or similar event relating to
Corporation. This Agreement shall not be terminated by any merger or
consolidation or other reorganization of Corporation. In the event any such
merger, consolidation, or reorganization shall be accomplished by transfer of
stock or by transfer of assets or otherwise, the provisions of this Agreement
shall be binding upon the surviving or resulting corporation or person. This
Agreement shall be binding upon and inure to the benefit of the executors,
administrators, heirs, successors and assigns of the parties; provided, however,
that except as herein expressly provided, this Agreement shall not be assignable
either by Corporation (except to an affiliate of Corporation) or by Officer.
6.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.10 Withholdings. All compensation and benefits to Officer
------------
hereunder shall be reduced by all federal, state, local and other withholdings
and similar taxes and payments required by applicable law.
6.11 Indemnification. In addition to any rights to indemnification
---------------
to which Officer is entitled to under the corporation's Certificate of
Incorporation and Bylaws, Corporation shall indemnify officer at all times
during and after the term of this Agreement to the maximum extent permitted
under Section 145 of the Delaware Corporations Code or any successor provision
thereof and any other applicable state law, and shall pay Officer's expenses in
defending any civil or criminal action, suit or proceeding, to the maximum
extent permitted under such applicable state law.
6.12 Extension of Note. Reference is hereby made to that certain
-----------------
promissory note (the "Note"), dated October 15, 1994 from Officer to the Company
in the principal amount of $80,000.00. The Company hereby agrees that the due
date for payment of principal of and interest on said Note is hereby extended
until March 15, 1998.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NEW WORLD COFFEE, INC.
By:/s/ Ramin Kamfar
----------------
Name: Ramin Kamfar
Title: President
/s/ Jerold E. Novack
--------------------
Jerold E. Novack
-7-
<PAGE>
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of January 1, 1997 by and between NEW WORLD COFFEE, INC., a Delaware
corporation ("Corporation"), and BRUCE L. MORNINGSTAR ("Officer").
RECITALS
Corporation desires to continue its employment of Officer as its Vice
President of Real Estate and Officer desires to accept such renewed employment
by Corporation on the terms and subject to the conditions set forth in this
Agreement.
AGREEMENT
1. DUTIES. During the term of this Agreement, Officer agrees to be
------
employed by and to serve Corporation as its Vice President of Real Estate at the
Corporation's headquarters in New York, New York and Corporation agrees to
employ and retain Officer in such capacity. Officer shall be responsible to and
report to the Chief Executive Officer, and shall have such powers and duties as
may from time to time be prescribed by said officer or by the Board of Directors
of the Corporation. Officer shall devote such of his business time, energy, and
skill to the affairs of the Corporation as shall be necessary to perform the
duties of such position. Officer will not render services to others or engage
in any others business directly or indirectly.
2. TERM OF EMPLOYMENT.
------------------
2. 11 BASIC TERM. The term of employment of Officer by Corporation
----------
shall be from the date hereof through June 30, 1998 (the "Expiration Date")
unless terminated earlier pursuant to Section 4 hereof. At any time before June
30, 1998 Corporation and Officer may by mutual written agreement extend
Officer's employment under the terms of this Agreement for such additional
periods as they may agree upon.
3. SALARY, BENEFITS AND BONUS COMPENSATION.
---------------------------------------
3.1 As payment for the services to be rendered by Officer as
provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation agrees to pay to Officer a "Base Salary" at the rate of $112,500 per
annum, payable in equal bi-weekly installments pursuant to the possible increase
in the Corporation's sole discretion based on performance.
<PAGE>
3.2 BONUSES. Officer shall be eligible to receive a bonus of up to
-------
30k of Officer's Base Salary for each calendar year (or portion thereof) during
the operative term of this Agreement, based on the attainment of corporate and
individual goals to be established by the Corporation. Such bonus shall be paid
on or before March 31 of the following year.
3.3 STOCK OPTIONS. The Corporation will grant, in the sole
-------------
discretion of the Board of Directors based on the attainment of corporate and
individual goals to be established by the Corporation, to Officer options to
purchase shares of Common Stock pursuant to the Corporation's 1996 Stock Plan at
such market price and in such amount as will established by March 31, 1997.
Subject to Officer's continued employment by the Corporation, such option shall
vest in 25% annual installments over four years on the anniversary date of this
Agreement, and shall contain and be subject to the other terms and conditions of
the Corporation's standard incentive Stock option Agreement.
3.4 BENEFITS. During the term of this Agreement, Officer shall be
--------
eligible to participate in Corporation's medical plan and shall be entitled to
receive life insurance (200% of Base Salary) and disability insurance (60% of
Base Salary) coverage for which premiums will be fully paid by the Corporation.
In addition, Officer shall be entitled to receive an automobile allowance of
$600 per month and reimbursement for all reasonable business expense, including
mileage reimbursement for business travel, upon submission of appropriate
documentation therefor. Officer shall be entitled to three weeks paid vacation
per year, vesting one week for every four months of employment during such year.
4. Termination.
-----------
4.1 As set forth above in paragraph 2.1, this Agreement shall
terminate by its own terms on June 30, 1998 unless extended pursuant to
agreements between the parties. In addition, the term of this Agreement shall
terminate at Officer's death. The term may also be terminated at the
Corporation's option, by notice to you, as a result of your disability (defined
in paragraph 4.2), for cause (defined in paragraph 4.3), or without cause
(defined in paragraph 4.4).
4.2 "Disability" means illness or other physical or mental disability
or incapacity which, in the Corporation's judgment, has substantially prevented
officer from performing Officer's duties during any period of 90 consecutive
days or for 90 days during any period of 180 consecutive days. The Corporation
will have the right to terminate officer's employment as a result of Officer's
disability by giving written notice to Officer not later than 30 days after the
expiration of such 90 day period.
4.3 "For Cause", shall mean termination by Corporation of Officer's
employment by Corporation by reason of (i) Officer's fraud, embezzlement, or
other misappropriation,
<PAGE>
(ii) officer's material breach of any terms and conditions of this Agreement as
amended from time to time, (iii) Officer's failure to perform his duties, which
failure is not cured within ten (10) days after the date on which the
Corporation gives you notice of such failure, or (iv) Officer's default of any
obligations under this Agreement, which default is not cured within ten (10)
days after the date on which the Corporation gives you notice of such default.
4.4 "Termination Other Than For Cause" shall mean termination of
employment other than by reason of officer's death, Disability or Voluntary
Termination or For Cause.
4.5 "Voluntary Termination" shall mean termination by Officer of
Officer's employment by Corporation.
4.6 If Officer's employment is terminated due to officer's
death, Disability, Voluntary Termination or by the Corporation For Cause,
Officer shall be promptly paid all accrued salary, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of
Corporation in which officer is a participant to the full extent of Officer's
rights under such plans, accrued vacation pay and any appropriate and documented
business expenses incurred by Officer in connection with his duties hereunder,
all to the date of termination.
5. SEVERANCE COMPENSATION.
----------------------
5.1 SEVERANCE COMPENSATION/BENEFITS. In the event of Officer's
-------------------------------
Termination Other Than For Cause, Officer shall be paid as severance
compensation his Base Salary (at the rate payable at the time of such
termination) until Officer secures other employment, up to a maximum of six
months (the "Severance Period"), on the dates specified in Section 3.1. In
addition, Officer shall receive a continuation of his medical benefits, as set
forth in Section 3.4, during the Severance Period.
5.2 NO SEVERANCE COMPENSATION. In the event of Officer's death,
-------------------------
Disability, Voluntary Termination or the Corporation's termination of his
employment For Cause, Officer or his estate shall not be paid any severance
compensation.
6. COVENANT NOT TO COMPETE OR SOLICIT.
----------------------------------
6.1 NON-COMPETITION. For twelve (12) months after the termination of
---------------
officer's employment for any reason and by either party, Officer shall not
directly or indirectly, without the prior written consent of the Corporation,
engage anywhere within 50 miles of the location of any of the Corporation's
business operations, which are either in operation at that time or are being
considered as prospective sites for operation, in (whether as an employee,
consultant, proprietor, partner, director, officer or otherwise), or have any
ownership interest in (except for ownership of five percent (5%) or less of any
outstanding entity whose
<PAGE>
securities are listed on a national securities exchange), or participate in the
financing, operation, management or control of any business enterprise which is
substantially similar to or competes in any substantial respect with the coffee
or bagel business currently engaged in by the Corporation.
6.2 SEPARATE COVENANTS. The covenants contained in Section 6.1 above
------------------
shall be construed as a series of separate covenants, one for each county, city
and state of any geographic area where any business is presently carried on by
the Corporation. Except for geographic coverage, each such separate covenant
shall be identical in terms to the covenant contained in Section 6.1. If, in any
judicial proceeding, a court refuses to enforce any of such separate covenants
(or any part thereof) , then such unenforceable covenant (or such part) shall be
eliminated from this Agreement to the extent necessary to permit the remaining
separate covenants (or portions thereof) to be enforced. In the event that the
provisions of this Section 6 are deemed to exceed the time, geographic or scope
limitations permitted by applicable law, then such provisions shall be reformed
to the maximum time, geographic or scope limitations, as the case may be,
permitted by applicable laws.
6.3 NON-SOLICITATION. For twelve (12) months after the termination of
------------------
officer's employment for any reason and by either party, officer shall not
directly or indirectly employ, solicit for employment, or advise or recommend to
any other person that they employ or solicit for employment, any person whom he
knows to be an employee of the Corporation or any parent, subsidiary or
affiliate of the Corporation.
7. MISCELLANEOUS.
--------------
7.1 CONFIDENTIALITY. Officer agrees that all confidential and
---------------
proprietary information relating to the business, finances or operations of
Corporation shall be kept and treated as confidential both during and after the
term of this Agreement, except as may be permitted in writing by Corporation's
Board of Directors or as such information is within the public domain or comes
within the public domain without any breach of this Agreement.
7.2 WAIVER. The waiver of the breach of any provision of this
------
Agreement shall not operate or be construed as a waiver of any subsequent breach
of the same or other provision hereof.
7.3 ENTIRE AGREEMENT; MODIFICATIONS. Except as otherwise provided
-------------------------------
herein, this Agreement represents the entire understanding among the parties
with respect to the subject matter hereof, and this Agreement superseded any
and all prior understandings, agreements, plans and negotiations, including, but
not limited to, the Employment Agreement entered into by the Corporation and
officer dated March 7, 1996, whether written or oral, with respect to the
subject matter hereof, including without
<PAGE>
limitation, any understandings, agreements or obligations respecting any past or
future compensation, bonuses, reimbursements, or other payments to officer from
Corporation. All modifications to the Agreement must be in writing and signed by
the party against whom enforcement of such modification is sought.
7.4 NOTICES. All notices and other communications under this
-------
Agreement shall be in writing and shall be given by telegraph or first class
mail, certified or registered with return receipt requested, and shall be deemed
to have been duly given three days after mailing or 12 hours after transmission
of a telegram to the respective persons named below:
If to the Corporation:
New World Coffee, Inc.
379 W. Broadway
4th Floor
New York, New York 10012
Attention: Chief Executive officer
If to officer:
Bruce L. Morningstar
78 North Pocono Road
Mountain Lakes, NJ 07046
Any party may change such party's address for notices by notice duly given
pursuant to this Section 5.4.
7.5 HEADINGS. The Section headings herein are intended for reference
--------
and shall not by themselves determine the construction or interpretation of this
Agreement.
7.6 GOVERNING LAW. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of New York applicable to contracts
entered into and wholly to be performed within the State of New York by New York
residents.
7.7 SEVERABILITY. Should a court or other body of competent
------------
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum extent
possible, and all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
7.8 SURVIVAL OF OBLIGATIONS. Corporation's obligations hereunder
-------------------------
shall not be terminated by reason of any liquidation, dissolution, bankruptcy,
cessation of business, or similar event relating to Corporation. This Agreement
shall not be
<PAGE>
terminated by any merger or consolidation or other reorganization of
Corporation. In the event any such merger, consolidation, or reorganization
shall be accomplished by transfer of stock or by transfer of assets or
otherwise, the provisions of this Agreement shall be binding upon the surviving
or resulting corporation or person. This Agreement shall be binding upon and
inure to the benefit of the executors, administrators, heirs, successors and
assigns of the parties provided, however, that except as herein expressly
provided, this Agreement shall not be assignable either by Corporation (except
to an affiliate of Corporation) or by officer.
7.9 COUNTERPARTS. This Agreement may be executed in one or more
--------------
counterparts, all of which taken together shall constitute one and the same
Agreement.
7.10 WITHHOLDINGS. All compensation and benefits to Officer
------------
hereunder shall be reduced by all federal, state, local and other deductions,
withholdings and similar taxes and payments required by applicable law.
IN WITNESS OF, the parties hereto have executed this Agreement as of
the day and year first above written.
NEW WORLD COFFEE, INC.
By:/s/ R. Ramin Kamfar
----------------------------
Title: CEO
------------------
Officer
/s/ Bruce L. Morningstar
-------------------------
Bruce L. Morningstar
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
Willoughby's Incorporated
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 29, 1996
AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 29, 1996 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-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 1,419,786
<SECURITIES> 0
<RECEIVABLES> 288,329
<ALLOWANCES> 0
<INVENTORY> 450,722
<CURRENT-ASSETS> 2,275,370
<PP&E> 12,198,351
<DEPRECIATION> 1,990,012
<TOTAL-ASSETS> 16,956,187
<CURRENT-LIABILITIES> 3,362,194
<BONDS> 0
0
0
<COMMON> 5,035
<OTHER-SE> 10,282,478
<TOTAL-LIABILITY-AND-EQUITY> 16,956,187
<SALES> 11,340,199
<TOTAL-REVENUES> 11,340,199
<CGS> 6,473,515
<TOTAL-COSTS> 9,994,865
<OTHER-EXPENSES> 1,800,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,124,349
<INCOME-PRETAX> (5,670,951)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,670,951)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,670,951)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> 0
</TABLE>
