cafe

2008 Annual Report

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2 Financial Highlights

3 Profit Breakdown

4 Letter to our Shareholders

6 Local Grown Menu

8 Music and Media

10 Art and Community

12 Commitment to the Environment

13 Employee Related Costs

14 Advertising and Promotional Costs

15 Capital Expenditures and Debt

16 Who We Are

2007 2006

(In thousands,except per share data)

THE FISCAL YEAR Net sales $ 1,047,930 $ 1,053,192 Net income (loss) $ (11,501) $ 70,638 Basic earnings (loss) per share $ (0.57) $ 3.53 Diluted earnings (loss) per share $ (0.57) $ 3.51 Dividends per share $ 0.48 $ 0.42 Weighted average shares outstanding Basic 20,070 20,014 Diluted 20,070 20,137

AT FISCAL YEAR-END Working capital $ 112,883 $ 107,631 Total assets $ 485,067 $ 445,791 Long-term debt, less current maturities $ 77,078 $ 6,511 Stockholders’ equity $ 328,340 $ 345,653

Financial Highlights

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Bakery25%

Barista30%

Food-entree45%

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Food/Beverage55%

Live entertainment20%

Art25%

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Food/Beverage85%

Live entertainment10%

Art5%

2007

Bakery15% Barista

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Food-entree65%

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Sales Distribution by Genre

Menu Sales by Type

Letter to our Shareholders

In last year’s letter to our shareholders, we noted that 2007 brought many challenges that would require aggressive actions to restore positive momentum. I am pleased to report that 2008 was a year of solid growth in volume and revenue expansion of the company’s high-end portfolio and a 9 percent increase in earnings per share.

With The Shady Tree Cafe still fairly new, it has been a process of continuous growth and development within the different facets of our family. The three main entrepreunrial areas that have been in the process of development and enhancement are the menu/restaurant portion, live music, and art.

The menu and restaurant portion of The Shady Tree Cafe has been a monumental component of our family since first opening. Diversity and utilization of local crops and businesses has guaranteed freshness in style and exceptional

flavor. Much pride in experimentation of new dishes created by our staff are seemingly exponentially better with time.

In addition to our extensive food menu, the barista and bakery menus continue to expand and explode with new flavors. New equipment has allowed for more diversity and generated ineterst. Fresh bakery smells continue to be an enticing draw for those coming in to enjoy the holistic and warm environment whether conversing with friends, or working on computers using our wireless internet.

The entertainment hosted by the Shady Tree Cafe involves much more than the wireless internet access available to patrons (of which some use for business and personal). We continue to host live music from local bands or solo artists to perform Thursday through Saturday. Updated schedules are available at both the restaurant as

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well as online through the website. We feel that this component diversifies the customer base by providing not only extensive options for food, entertainment, and art, but also within each facet. The diversity among all of the different artists surely caters to the most extensive network of people available.

The Shady Tree Cafe not only supports local farmers and food providors, but artists as well. Each year, there are more showings with pieces on display for purchase and enjoyment that provide a unique setting for those thriving on diversity and variance. The setting sets the stage for decoration in the most unique form available. Formerly a smaller part of income and profits, supporting ideas and skills of these artists is a growing trend that we shall continue to see develop and thrive. All updated information regarding exhibits can be found on our website, which is updated weekly.

We are very fortunate to have some of the best staff employed, many of whom who have become a familiar face to our regular customers. This loyalty and feeling of job security is so important to us as job knowledge and personal relationships escalate into superior service.

Thank you for being a part of this growing cultural establishment in Lansing, Michigan. Without our shareholders and neighbors the Shady Tree Cafe would not continue to grow profitably and artistically. We look forward to sharing more economical growth next year!

Wesley and Diane KrasyniakOwnersMarch 31, 2008

Local Grown Menu

With agriculture as one of Michigan’s largest sources of economy, it is an obvious benefit to the menu of the Shady Tree Cafe. Not only are the products used in each menu item fresh and healthy, the local economy is sustained. Being a grass roots restaurant, the Shady Tree Cafe relates to the dependability of those interested in breaking away from the monotony of big box developments.

From the cherries in the salad to the chicken in pesto grilled panini, the Shady Tree Cafe maintains a quality standard to provide nothing but the healthiest and freshest ingredients. Our talented chefs, led by Head Chef Charles Jarvis, create masterpieces of flavor and simplicity that can only be savored by our guests.

Menu food sales make up the majority of the sales, costs, and profits of the Shady Tree Cafe. Research and taste quality is constantly being

reassessed to ensure satisfaction. Many menu items are seasonal, as ingredients are puchased locally and subside during certain months. We feel that patrons enjoy the diversification of options and anticipate upcoming menu item availability. We find that there is an equal dispersion of patrons coming into dine with family and friends as well as those coming into enjoy the multi-facet media platforms while enjoying a fresh, healthy meal.

Aside from the obvious health benefits from buying through local farmers, cost is also an important factor to consider. Tending to be higher because we store less and do not buy in bulk, we still save than from buying from corporate retailers whose mark up is additional to that of the wholesaler. However, sacrificing a little bit of extra time needing to buy more regularly, we salvage our patron’s bodies from unnecessary preservatives and additives found in packaged

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food options. Over time, costs are kept lower by feeding into the local economy thereby eliminating automobile transit-an important factor with rising gas costs. Local farmers come from Michigan and surrounding areas with the freshest produce, vegetables, and dairy products. The bakery had a very successful year, increasing sales by 1.25%, the highest out of the three restaurant categories. Introducing new pastries and scones became an increasingly popular choice complimenting the extensive coffee menu. Cheesecakes and mousse still continue to be a popular post-dinner option for those desiring to linger on to good company and conversation for a little while longer.

The talented restaurant staff continue to constantly improve menu choices and flavors to maintain the ongoing successes. We look forward to the new recipes that Head Chef Jarvis will implement in upcoming months.

2007 2006 % Change

Food $ 140,000 $ 125,000 1.12%

Barista $ 20,000 $ 19,000 1.05%

Bakery $ 15,000 $ 12,000 1.25%Ja

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Music & Media

Thursday through Saturday evenings, live music is performed at the Shady Tree Cafe. Local aritsts with variety of genres and experiences, continuously provide an exciting ambiance for a variety of people visiting the Shady Tree Cafe. We have found that this helps diversify the clientele targeted for our business. It opens the business up to more evening visitors who may not want to have a full meal, but still enjoy the entertainment.

We are proud to house many Lansing-born artists as well as others from throughout Michigan, Indiana, Ohio, and Pennsylvania. Though there is not a cover charge for these events, we have learned that evening sales have increased with this availability compared to 2006 (and prior) when this was not offered.

Featured musician this year is Spencer Young, a young guartarist with a mellow methodological technique. He frequents the Shady Tree Cafe and

has attracted a large recurring audience, many of which participate in The Shady Tree Cafe’s many other services. Exactly what the marketing techniques aimed for establishing live music as a viable economic partner. Although musicians such as Spencer do not bring in large amounts of money through ticket sales, these loyal fans who are eager for more of his original tunes continue to frequent the Cafe and have dinner, beverages, and/or desert while visiting or listening.

Wireless internet is also an available resource that has helped to increase sales. Though these sales are more in the bakery and barista aspects of the provided menu, we have found that more people are drawn to the cafe and stay for a longer duration. This also helps generate a sense of community as many local groups, students, and business groups collaborate together in our facility. We find many people collaboarting a visit into their daily routine.

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These amenities combined help make the Shady Tree Cafe have the feel of a home grown hang out, a comfortable restaurant, and a productive medium that is soon an indespensible asset to the Lansing area. The Shady Tree Cafe is proud to house these young talents and hope to continue to make people feel as if this is their neighborhood establishment that is a second home.

In the future, we would like to keep these ammenities and draws available to customers. Consideration to adding an occasional Wednesday performance of something of a more low key nature is not out of the question. In the event that this would take place it would do so on a trial basis, so as to not discern away from those wishing to dine mid-week without distraction. This would be determined after questionaires involving various employees and patrons. More information can be reached on the website which is updated on a weekly basis.

2007 2006 % Change

Income $ 800 $ 200 400%

Individual 16 8 200%Performers

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piece within this showing. “Majestic Beauty” (shown left) is such a representation of around North America. It was sold for $295. The gallery kept a 25% comission.

“Streamlined Lights” (shown right) is a similar concept, with expressions based in the United States’ West Coast focusing on water features. This piece sold within the first month of the six month showing for $325. The gallery, acting as exhibitor, kept 25% as an exhibitors’ fee.

The artist’s most personal piece “Self Expression” (left) is a self potrait. Textures and colors are the two most important elements in Lisa’s work

Art and Community

The Shady Tree Cafe is proud to house various local artists on display and for purchase. Growth and development of this aspect of the overall economy of the cafe has steadily increased since first opening doors in 2003, with highest percentage growth during the fiscal year 2007. The art gallery uses little to produce a show and event. Displays are rotated every 3-6 months varying with the local events and the artist.

Lisa Benck is the featured artist for 2007. Her multi-media work is digitally crafted predominately using photography. She enjoys

taking regular scenes and compositing them to create abstract representations of events, locations, and expressions. Textures and colors are the primary focus of each

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and it is exhibited through each piece, with this one not be be discluded. This piece sold for $350 of which Shady Tree Cafe retained the standard 25% gratuity.

The Shady Tree Cafe has participated in numerous community events and festivals. This year was our third year involved in the First Sunday Gallery Walk, with Old Town Main Steet. On this first Sunday of each month, the gallery portion is open to those on a tour through the area’s art community, participating in showings, discussions, and purchases.

Organizations-both private and school related-have housed events at the Cafe. These various groups utilize the comfortable setting, with sofas and large tables, extensive menu options, and evening hours to casually discuss important issues or events. These groups also are welcome to put up flyers in the advertisement section.

2007 2006 % Change

Income $ 500 $ 200 1.12%

Individual 3 1 300%Showings

Gallery 6 3 200% Walk Inclusions

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Our Commitment to the Environment

The Shady Tree Cafe is committed to conserving and protecting the environment for future generations. This commitment holds true today. Our facility recycles more than 80 percent of all the waste they generate, and we continue to research and implement technologies that increase efficiencies while reducing environmental impacts. Within our printed advertisements and/or flyers, we try to use recycled paper products.

We pride ourselves on using reusable flatware, mugs, plates, and cloth napkins in our restaurant. When only necessary, we do have transportable biodegradable disposable containers. However, we prefer these not to be used and reward reusable containers by offering a 10 cent discount to those who bring in their own travel mugs for to-go use.

In addition, ‘green’ cleaning products are used when possible, elminating sulfur and other various

toxins to be overused. Extensive research proved in our favor when finding a new eco-friendly company that provides these products at a very reasonable cost. In fact, over time, these costs have proved to be beneficial for the environment, and our budget.

The Shady Tree Cafe also partners with neighborhood organizations striving for similar goals including green parks, recycling, and resuable goods drives. Posted flyers asking and offering assistance have their place within the facility. Curb-side pick up by the City of Lansing’s recycling program helps to keep updated as to the various products willing to be recycled.

The Cafe has been the setting for various official city discussions pertaining to making Lansing a more green city. The compliance of the restaurant is invigorating to the officials who feel strongly in favor of these necessary steps.

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Those that do receive benefits are covered under the company-wide Blue Cross Blue Shielf of America plan. A co-pay is involved, therefore creating less cost for the Cafe. Perscription medicine is also covered, but generic is regarded as less expensive, and therefore is encouraged. The Cafe provides for 80% of these medical costs, with the employee paying the remaining through a standard paycheck deduction.

Employee-Related Costs

The annual employee cost for the Shady Tree Cafe in 2007 was $195,000. This is a very slight increase from 2006, which was 187,000. Though always trying to keep costs down, the majority of the employees are part-time baristas and kitchen help, with very few full time receiving salaries.

This year, we have retained a large majority of our staff, thus requiring pay raises. In spite of this, with longevity of personnel goes hand in hand with experience, trust, and knowledge of both our employees and shareholders as well as with the customers. This is important as a community based restaurant to retain loyal customers who trust our service.

There are not significant benefits costs as most employees part-time hourly workers in the kitchen and counter area. Only 5% of the personnel is working full-time and collecting health and 401K retirement benefits.

2007 2006 % Change

Salary Gross $ 195,000 $ 187,000 1.04%

Salary $ 100,000 $ 93,500 1.06% Barista $ 40,000 $ 39,500 1.01% Kitchen $ 55,000 $ 54,000 1.01%

Benefits $ 15,800 $ 12,500 1.26% Health $ 9,950 $ 6,890 1.44% 401K $ 5,850 $ 5,610 1.04%

Advertising and Promotional Costs

Advertising and promotional activities are a key element of the company’s strategy, and represent significant annual costs incurred by the company. As a small community based restaurant, The Shady Tree Cafe bases most advertising dollars in two key areas: print and radio. These costs were analyzed last year and have gone down per rational necessity.

Print is the largest source of annual advertisements. There is representation in three local print media services including the City Pulse, the Lansing State Journal (LSJ), and the State News. These alone provide reviews essential weekly updates for entertainment, specials, and artists that the Shady Tree Cafe has to offer.

In addition, our in-house graphic designer, Jeffery Johnson, produces various posters, corporate identity, and the revolving advertisements for each artist and musician that the cafe welcomes.

In-house is always desirable to contracting for personability and cost.

Radio is also a source of advertising and promotional mediums. However, more emphasis is placed on the music performances and art showings that are regularly updated. These costs are considerably lower as there is less manpower on the facility’s end to produce the brief ad, as well as the lack of print costs.

2007 2006 Change

Print $ 11,000 $ 13,000 $ 2,000

LSJ $ 1,000 $ 1,500 $ 500 City Pulse $ 2,000 $ 2,500 $ 500 State News $ 2,000 $ 2,000 $ 0 Other Print $ 6,000 $ 7,000 $ 1,000

Radio $ 500 $ 600 $ 100

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Capital Expenditures and Debt

As a fairly new business, the Cafe is still materializing on some of the original expenses required to create a business. Original and new investments were made on kitchen equipment, restaurant necessities, and musical equipment. These continue to be paid in regular installments throughout the 2007 fiscal year.

The property where the Cafe is housed is in the crest of Old Town, a very wise capital investment in terms of purchasing property. The Shady Tree Cafe purchased the building on a land grant with an interest rate of 5.01% and was under a provision for local business tax breaks. The duration for this was the first 5 years of operation, which ends this fiscal year. A new interest rate of 6.5% will be paid for the 2008 Fiscal Year.

The building originally needed some updates to electrical and plumbing internally as well as some facade work completed. This was obtained

through an additional improvement loan, also subject to tax breaks.

In addition, a stove was purchased at a discounted rate with our MRA membership. It cost $12,000 adding to the original debt of $38,00 still owed on the original kitchen start-up investment.

Amount Interest Rate

Debt Total $ 175,000 8.04%

Equipment

Kitchen $ 40,000 5.06% Restaurant $ 9,000 5.06% Music $ 3,000 10.50% Building $ 103,000 5.01%

Improvement $ 20,000 5.25%Loan

Who We Are

Wesley & Diane KrasyniakOwnersEstablished 2003

David HolzheuzerDirector

Christine Gaffney, C.P.A.Accountant

Denise RodriguezPromotional Marketer

Adele MerakoviczPromotional Marketer

Charles JarvisHead Chef

Abigail DavidsonMenu Developer

Joseph WinghauserWebmaster

Sally EspinosaWeb Assitant

Jeffery JohnsonGraphic Designer

Curtis StaffordsonBarista Supervisor

Curtis StaffordsonKitchen Supervisor

©2008 Shady Tree Cafe**Some content was taken with thanks from

the 2006 Anheuser Busch Annual Report and will be used for educational purposes only.

Photograph of owners curteosy of IPhoto Stock Photography services.