Member Document Archive

Informational Handout for Special Membership Meeting – DRAFT

Sunday, September 16, 2007
7:30 PM (sign-in at 6:30 PM)

Tracking the Cafe’s Financial Difficulties

During the 2003 – 2006 period, the cafe’s gross revenues increased 23% from $310,000 in ’03,
to $356,000 in ’04, to $371,000 in ’05, to $382,000 in ’06.

The cafe, like any restaurant, has a slim profit margin. For example, the cafe made an average of
$31,750 each month in gross revenues (based on 2006). The cafe spent about $32,144 on average each
month to make that revenue (based on 2006). This resulted in a slightly deficit annual income.

The cafe faced problems over th years including an initial undercapitalization, unreliable used
equipment, federal tax problems, and lack of funds. As a result, the cafe has put most of its net
income into infrastructure and expansion. The cafe has increasingly been hit with shortages during
the slow business cycles in late summer and late winter. Without a cushion of savings, cash flow
shortages create havoc with the cafe’s ability to pay bills and make payroll.

Loans were obtained over the last three years from Greenbelt Consumer Cooperative and Bank of
America in order to make improvements and cover shortages. With the increase in oil prices in 2006,
the cost of goods increased dramatically. Combined with the negative effect of higher gas prices on
patrons’ disposable income, the cafe was forced to use credit to make ends meet.

The cafe owes approximately $92,000 in loans, and must pay over $2,100 each month for these loans, as follows:

$64,000 Bank Loan #1
8,000 Bank Loan #2
11,000 City Kitchen Rent (No Interest Loan)
9,000 Greenbelt Consumer Cooperative Loan (Payments Temporarily Waived?)
$92,000 Total Loans

Gross revenue for 2007, extrapolated from year-to-date gross revenue, is forecast at $275,000,
down 28% from 2006 due to several debilitating situations. The cafe’s poor showing in late 2006 was
exacerbated in 2007 by a major management transition, payment of the final $4,500 owed to IRS, inefficiencies
created by staff changes, two thefts of over $7,500, monthly interest on loans of over $500, and
increased prices of goods.

According to the cafe Cafe Manager, the cafe needs an infusion of cash immediately or the cafe will be
forced to close. The summer of 2007 was particularly slow for the cafe, and the cafe has racked up
approximately $33,000 in overdue and impending bills:

$23,000 Miscellaneous Bills (Food, Rent, Utilities, Fees, Insurance, etc.)
5,000 Taxes (State Real Estate & State Sales Tax)
5,000 Payroll 9/10/07
$33,000 Total Bills

Business Plan

According to the Cafe Manager, the cafe is stuck at a growth plateau that requires new investment in order
to create new avenues of revenue, and to fully capitalize the underachieving operations of the the cafe.

The cafe needs an investment of $150,000 to upgrade the cafe and to allow it to be self-sufficient and
successful. Proper investment can significantly increase the cafe’s traditional gross income, and its net profits.

The case’s business plan calls for improvements to six separate operations in the cafe:

  • Coffee and tea house (6am)
  • Restaurant (all day)
  • Catering (by appointment)
  • Meeting and training space (by reservation)
  • Wine bar (expanded wine list from around the world)
  • Club/music (evening)

The cafe needs a new multi-port espresso machine, new stove, new refrigerator, new wine bar with storage,
new register system, new floor, new ceiling, renovation of bathrooms, new furniture, more experienced staff,
employee benefits, ice machine, signage, etc.

As per the 2003 Roosevelt Center Marketing Study, the cafe is planning to partner with the other entertainment
venues in RC, the Greenbelt Arts Center and the Greenbelt Movie Theater, to attract and cross-advertise those
events that draw patrons from inside and outside the city.

Immediate Problems and Objectives

If the cafe cannot pay its overdue and pending bills, it may have to close.

The overall objective is to retain the cafe as our community living room and a place for our community to
meet and experience the arts and music.

The board has called a membership meeting for September 16, 2007, 7:30pm to discuss five proposed motions
in order to find a solution to the cafe’s immediate problems.

This informational package is provided to explore the details of each motion and help the membership
understand and evaluate the alternatives.

Motion 1: Declare Bankruptcy

General Description

Bankruptcy is a legally declared inability or impairment of ability of an organization to pay their creditors.
Creditors may file a bankruptcy petition against a debtor (“involuntary bankruptcy”) in an effort to recoup a
portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (a
“voluntary bankruptcy” that is filed by the bankrupt individual or organization).

There appear to be two types of bankruptcy available to the cafe under the Bankruptcy Code, located at
Title 11 of the United States Code:

Chapter 7: Liquidation Bankruptcy
A debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the
property and distributes the proceeds to the debtor’s unsecured creditors. In exchange, the debtor is entitled
to a discharge of debt, except that the debtor will not be granted a discharge if he or she is guilty of certain
types of inappropriate behavior.
Chapter 11: Reorganization Bankruptcy
An attempt to stay in business while a bankruptcy court supervises the “reorganization” of the company’s
contractual and debt obligations. The court can grant complete or partial relief from most of the company’s
debts and its contracts, so that the company can make a fresh start. Often, if the company’s debts exceed its
assets, then at the completion of bankruptcy the company’s owners (stockholders) all end up with nothing; all
their rights and interests are terminated and the company’s creditors end up with ownership of the newly
reorganized company.

Pros and Cons

Pro: As a last resort, bankruptcy provides the corporation with what may be its only option.
Con: All loans obtained by the cafe have been guaranteed by individual board members, who will likely
be forced to pay off the loans if the cafe declares bankruptcy. Alternatively, the members of the boards of directors
over the years, or the members of the cooperative themselves may be held liable.
Con: Bankruptcy is costly and time consuming.

Motion #2: Create a Shareholder Form of Ownership

General Description

Revise the by-laws to allow the sale of shares (stocks) in the corporation.

Two classes of stocks can be sold. Those buying A-class stocks ($1,000) obtain more voting power than B-class
investors who purchase lower denomination shares ($100).

Alternatively, one class of shares ($1,000 or $100) can be created with each share conveying equal voting power.

Shareholders would meet and elect a board of directors to run the corporation.

Purchase of stock certificates and a corporate seal (to issue stocks) are easily obtained.

The cooperative would likely be a separate entity from the corporation, but have a close relationship with the
corporation. A cooperative member would not have to own corporate shares in order to retain membership in the cooperative.

Pros and Cons

Pro: The private sale of about $200,000 – 300,000 worth of shares could raise enough money to pay overdue and
pending bills ($33,000), consolidate loans ($92,000), and finance improvements ($150,000).
Pro: Investors would be supporting the continuation of the cafe and Roosevelt Center, and hope that a more profitable
cafe would yield dividends.
Pro: In a private sale of stock, the corporation can determine who can buy shares, thus preventing a takeover by a
chain restaurant or some similar outcome.
Con: At $1,000/share, 200 – 300 shares would have to be sold. At $100/share, 2,000 – 3,000 shares would have to be sold.
This effort to raise the money may be too time-consuming to raise enough money in time to address the cafe’s
financial needs.
Con: The cafe’s business plan and prospectus does not have complete enough financial information to convince investors
to buy shares. It maybe considered irresponsible to sell shares if the company does not have a clear idea of the
financial prospects of the corporation.
Con: Does not increase the accountability of the corporation substantially unless a group of shareholders purchase
significant amounts of shares.
Con: The ability of a corporation owned by a large number (200) of shareholders will still create unwieldy delays
making critical decisions.

Motion #3: Sell the Cafe to a Private Owner(s)

General Description

Revise the by-laws to allow the sale of the business to a private individual or partnership of private investors.

Negotiate to retain the community’s right to use the cafe as a venue for its participation in the arts and
music, as well as the community living room and meeting place aspects of the cafe.

The cafe must be careful not to place too many restrictions on a potential investor who is not only buying a
failing business, but must be concerned about his or her ability to resell the business someday.

Pros and Cons

Pro: The cafe could eliminate its debt, free the board members and the membership from financial obligation and the
recurring need for fundraising.
Pro: The community could retain the community living room and create a strong major anchor for Roosevelt Center.
Pro: The community, through FONDCA and the New Deal Cafe Cooperative, could achieve a win-win situation with a new owner,
wherein the new owner benefits from the volunteer interest in providing arts and music in the cafe (possibly under
more strict or juried criteria), and the community would retain a place for its interest in the arts and music,
as well as its community couch.
Pro: Increases the accountability of the ownership structure significantly.
Con: An investor may be unwilling to cede the community any rights other than generally given the tough business
decisions that will have to be made by those investing their money in our community.

Motion #4: Some Hybrid of Motions Two and Three

General Description

Revise the by-laws to allow the sale of a majority share of the business to a private individual or
partnership of private investors, with a minority share held by the cooperative.

Here too, negotiate to describe the community’s right to use the cafe as a venue for its participation in
the arts and music, as well as the community living room and meeting place aspects of the cafe.

The cafe must be even more careful under this option not to place too many restrictions on a potential
investor who is not only buying a failing business, but must be concerned about his or her ability to resell
the business someday.

Pros and Cons

Pro: The cafe could eliminate its debt, free the board members and the membership from financial obligation
and the recurring need for fundraising.
Pro: The community could retain the community living room and create a strong major anchor for Roosevelt Center.
Pro: The community, through FONDCA and the New Deal Cafe Cooperative, could achieve a win-win situation with a new
owner, wherein the new owner benefits from the volunteer interest in providing arts and music in the cafe
(possibly under more strict or juried criteria), and the community would retain a place for its interest in
the arts and music, as well as its community couch.
Con: An investor may be even more unwilling under this scenario than under motion #3 to cede the community any
rights other than generally given the tough business decisions that will have to be made by those investing
their money in our community.
Con: Does not increase the accountability of the corporation substantially unless a group of shareholders purchase
significant amounts of shares.

Motion #5: Other Possible Financing and Ownership Options

General Description/Pros and Cons

Raise member contributions – Members are tapped out with “investor fatigue.”

Sell to another cooperative – GCC and GHI have shown no interest to date in taking an increased role
in protecting the community’s center.

Obtain a loan from the National Consumer Cooperative Bank to bail out the cafe’s debts and allow it
to make needed improvements – Efforts to obtain a loan have been delayed by the board’s distraction
with one crisis after another, and such efforts may be too late to address the cafe’s needs.

Abandon the existing location in Roosevelt Center and return to an all-volunteer part-time/limited
community gathering place (in the community center or someone’s basement) featuring donated coffee,
pastries, and music – Would not retain the community living room as we know it and does not eliminate debts.

Reduce staff and use volunteers – Volunteers have not shown to be skilled or reliable over time.

Reduce the menu and hours of operation – Quick tabulations show that shortening business hours or
closing actually puts the cafe deeper in debt. Reducing the menu does not increase the ability to make
money either.

Hold fund raisers to help the cafe pay its overdue and pending bills – Members are tapped out with
“fundraiser fatigue.”

Increase employee and management accountability by providing employee benefits, higher salaries,
and stock options – Cafe cannot afford to pay for benefits or salaries at this time.

Offer incentives to customer – Coupons have not proven very effective.

Implement the marketing plan for the cafe – The cafe is limited by its ability to pay for ads, flyers, promotions, etc.

Implement a mass marketing drive to gain members in the cooperative – The board has not shown an
interest in this approach, and is limited by its ability to pay for such an effort.

Close the back room – The cafe has to abide by its lease through November, 2008 so this is not an
option really. Would possibly involve saving some utility costs. Would need to close the wall openings,
remove furniture and storage, reorganize kitchen, move stage and empty office.

City buy the cafe space from the owner – The city has not shown an interest in taking an increased role
in protecting more of the community’s center.

FONDCA buy the cafe – Would need to raise funds similar to sale of shares.