SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-2
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of Report (Date of earliest event reported) May 23, 1996
(Exact Name of Company as Specified in its Charter)Manhattan Bagel Company, Inc.
New Jersey 0-24388 22-2981539
---------- ------- ----------
(State or other jurisdiction of (Commission File Number) (IRS Employer Iden-
incorporation or organization) tification Number)
246 Industrial Way West, Eatontown, New Jersey 07724
- ---------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Company's telephone number, including area code (908) 544-0155
- -----------------------------------------------
N/A
----------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Audited Consolidated Financial Statements of Business as set forth on
the Index to Financial Statements at F-1.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Manhattan Bagel Company, Inc.
-----------------------------
Registrant
Date: October 31, 1996
By: /s/ Jack Grumet
------------------------------------
Jack Grumet
Chairman and Chief Executive Officer
<PAGE>
MANHATTAN BAGEL COMPANY, INC.
Index to Financial Statements
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheet as of December 31, 1995....................... F-6
Consolidated Statements of Income for the Years Ended December 31,
1994 and 1995............................................................ F-7
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994 and 1995............................................... F-8
Consolidated Statements of Cash Flows for the Years Ended December
31, 1994 and 1995........................................................ F-9
Notes to Consolidated Financial Statements............................... F-10
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Manhattan Bagel Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Manhattan
Bagel Company, Inc. and Subsidiaries as of December 31, 1995, and the related
statements of income, stockholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards requires 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 audit provides 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 Manhattan Bagel Company,
Inc. and Subsidiaries as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
We previously audited and reported on the consolidated balance sheet and
the related statements of income, shareholders' equity, and cash flows of
Manhattan Bagel Company, Inc. and Subsidiaries for the year then ended December
31, 1995, prior to their restatement for the 1996 pooling of interests as
described in Note 1. The contribution of Specialty Bakeries, Inc. to total
assets and revenues represented 1% and 14% of the respective restated totals.
Financial statements of the other pooled company included in the 1995 restated
consolidated statements were audited and reported on separately by other
auditors. We also have audited, as to combination only, the accompanying
consolidated balance sheet and the related consolidated statements of income,
shareholders' equity, and cash flows for the year ended December 31, 1995, after
restatement for the 1996 pooling of interests; in our opinion, such consolidated
financial statements have been properly combined on the basis described in Note
1 to the consolidated financial statements.
/s/ Ernest & Young LLP
Princeton, New Jersey
October 30, 1996
F-2
<PAGE>
Independent Auditors' Report
Board of Directors
Manhattan Bagel Company, Inc.
and Subsidiaries
We have audited the consolidated balance sheet of Manhattan Bagel Company,
Inc. and Subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, retained earnings and cash flows for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of DAB Industries, Inc., and Subsidiary, a wholly owned
subsidiary, which statements reflect total assets and revenues constituting 16
percent and 36 percent, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for DAB
Industries, Inc., and Subsidiary, is based solely on the report of the other
auditors.
We conducted our audit 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Manhattan Bagel Company, Inc. and
Subsidiaries as of December 31, 1994, and the results of their operations and
their cash flows for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
AMTER, POLITZINER & MATTIA
September 8, 1995
Edison, New Jersey
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
DAB Industries, Inc. and Subsidiary
We have audited the consolidated balance sheet of DAB Industries, Inc. and
Subsidiary as of January 31, 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DAB Industries,
Inc. and Subsidiary as of January 31, 1995, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
SINGER, LEWEK, GREENBAUM & GOLDSTEIN, L.L.P.
Los Angeles, California
June 16, 1995
F-4
<PAGE>
RAINER & COMPANY
A PROFESSIONAL CORPORATION
Certified Public Accountants
NEWTOWN SQUARE CORPORATE CAMPUS
2 CAMPUS BOULEVARD
SUITE 220
NEWTOWN SQUARE, PENNSYLVANIA
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Specialty Bakeries, Inc.
Moorestown, New Jersey
We have audited the accompanying balance sheets of Specialty Bakeries, Inc.
as of December 31, 1995 and 1994, and the related statements of operations and
retained earnings (deficit), and cash flows for the years then ended. 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 audits 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 the
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 Specialty Bakeries, Inc. as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Rainer & Company
Rainer & Company
February 2, 1996
F-5
<PAGE>
MANHATTAN BAGEL COMPANY, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,1995
ASSETS
Current Assets
Cash and cash equivalents $ 8,014,519
Marketable securities 22,625,000
Accounts receivable, net of allowance for
doubtful accounts of $10,000 4,439,065
Inventories 810,238
Current maturities of notes receivable 67,008
Due from officer / stockholder 296,164
Prepaid expenses and other current assets 1,058,007
-----------
Total current assets 37,310,001
-----------
Property and equipment, net of accumulated depreciation 9,735,865
-----------
Other assets
Notes receivable, net of current maturities 221,905
Notes receivable-related parties 111,400
Goodwill, net of accumulated amortization of $30,919 482,013
Security deposits 530,639
Other assets 974,897
-----------
Total Assets $49,366,720
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,411,058
Current maturities of capital lease obligations 137,929
Accounts payable and accrued expenses 3,715,295
Unearned franchise fee income 332,000
Franchise deposits 411,667
Loans payable officer / stockholder 189,000
Income taxes payable 666,058
Deferred income taxes 7,700
Other current liabilities 61,189
-----------
Total current liabilities 6,931,896
-----------
Other liabilities
Long-term debt, net of current maturities 3,902,446
Capital lease obligations, net of current maturities 526,005
Security deposits 349,047
Deferred income taxes and other liabilities 241,000
-----------
Total liabilities 5,018,498
-----------
Stockholders' equity
Preferred stock, 2,000,000 shares authorized,
no shares issued or outstanding --
Common stock, no par value, 25,000,000 shares
authorized, 7,085,742 issued
and outstanding 34,980,522
Retained earnings 2,435,804
-----------
Total stockholders' equity 37,416,326
-----------
Total liabilities and stockholders' equity $49,366,720
===========
See accompanying notes.
F-6
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1994 and 1995
December 31,
---------------------------
1994 1995
------------ ------------
Revenues
Product sales $ 9,230,899 $ 16,747,070
Franchise & license related revenue 3,289,997 5,229,619
Other income 258,859 189,917
------------ ------------
Total revenue 12,779,755 22,166,606
------------ ------------
Operating expenses
Cost of goods sold 4,686,483 9,223,823
Selling, general & administrative expenses 6,647,506 10,065,761
Interest expense (income), net 95,215 (28,187)
------------ ------------
Total operating expenses 11,429,204 19,261,397
------------ ------------
Earnings before provision for income taxes 1,350,551 2,905,209
Provision for income taxes 506,363 1,284,213
------------ ------------
Net income $ 844,188 $ 1,620,996
============ ============
Net income per share $ 0.17 $ 0.28
============ ============
Weighted average number of common &
common equivalent shares outstanding 5,059,297 5,692,311
============ ============
See accompanying notes.
F-7
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY For the Year Ended
December 31, 1994 and 1995
<TABLE>
<CAPTION>
Common Stock Total
---------------------------- Retained Stockholder's
Shares Amount Earnings Equity
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance-January 1, 1994 4,743,075 $ 502,211 $ 9,689 $ 511,900
Issuance of promotional common stock 2,900 11,600 -- 11,600
Issuance of common stock for services 10,000 50,000 -- 50,000
Issuance of common stock for services 5,000 25,000 -- 25,000
Contribution of capital -- 161,000 -- 161,000
Contribution of shares by stockholders (450,000) -- -- --
Issuance of common stock through a public
offering net of expenses 1,025,000 4,010,110 -- 4,010,110
Issuance of underwriters common stock
purchase warrants -- 90 -- 90
Issuance of common stock to purchase stores 16,000 80,000 -- 80,000
Net income -- -- 844,188 844,188
------------ ------------ ------------ ------------
Balance-December 31, 1994 5,351,975 4,840,011 853,877 5,693,888
Adjustment to conform fiscal year-end of
DAB Industries, Inc. -- -- (39,069) (39,069)
Issuance of common stock through a
secondary offering net of expenses 1,618,000 29,260,949 -- 29,260,949
Exercise of stock options and warrants 113,267 753,335 -- 753,335
Issuance of common stock for trademark
suit settlement 2,500 49,688 -- 49,688
Tax benefit from exercise of employee stock
options -- 76,539 -- 76,539
Net income -- -- 1,620,996 1,620,996
------------ ------------ ------------ ------------
Balance-December 31, 1995 7,085,742 $ 34,980,522 $ 2,435,804 $ 37,416,326
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-8
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 844,188 $ 1,620,996
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities
Adjustment to conform fiscal year-end -- (39,069)
Bad debt expense 5,375 --
Noncash expenses 51,253 71,675
Depreciation 376,319 576,255
Amortization 16,594 60,417
Gain on sale of assets (62,170) --
(Increase) decrease in:
Accounts receivable (1,364,545) (2,873,844)
Inventory (149,102) (520,109)
Intangible assets-covenant not to compete (50,000) --
Prepaid expenses and other current assets (326,518) (600,500)
Security deposits (210,489) (168,970)
Other assets (29,135) (378,566)
Increase (decrease) in:
Accounts payable and accrued expenses 818,877 2,124,991
Unearned franchise fee income (56,667) 283,667
Deposits on franchise 315,000 96,667
Other current liabilities 98,831 (108,187)
Security deposits 133,932 120,784
Other liabilities 89,957 --
Income taxes 20,000 823,797
------------ ------------
Total adjustments (322,488) (530,992)
------------ ------------
Net cash provided by operating activities 521,700 1,090,004
------------ ------------
Cash flows from investing activities:
Decrease in due from affiliates 14,292 --
Decrease in due from officers 38,746 --
Decrease (increase) in notes receivable (427,113) 38,262
Principal payments from notes receivable 165,568 --
Decrease (increase) in note receivable-related party (1,740) 8,200
Increase in intangible assets-trademark costs (69,529) --
Payments for purchase of property and equipment (1,669,794) (6,663,784)
Payments for purchase of stores field for resale (382,122) --
Purchase of marketable securities -- (22,625,000)
Proceeds from sale of investment 25,000 --
Proceeds from sale of assets 29,500 --
Increase in investment (5,523) --
Increase in due from officer / stockholder (111,000) (185,164)
Purchase of interest in subsidiary (350,000) --
------------ ------------
Net cash used by investing activities (2,743,715) (29,427,486)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 150,000 4,773,742
Principal payments on long-term debt (398,023) (435,612)
Principal payments on capital lease obligations (66,176) (124,894)
Proceeds from notes payable-related parties 15,025 --
Proceeds from notes receivable franchisee 7,785 52,715
Increase in loan payable officer / stockholder 189,000 --
Issuance / exercise of underwriters common stock
purchase warrants 90 540,000
Proceeds from issuance of common stock 4,010,110 29,474,284
Capital contribution 161,000 --
------------ ------------
Net cash provided by financing activities 4,068,811 34,280,235
------------ ------------
Net increase in cash and cash equivalents 1,846,796 5,942,753
Cash and cash equivalents-beginning 224,970 2,071,766
------------ ------------
Cash and cash equivalents-ending $ 2,071,766 $ 8,014,519
============ ============
Supplemental disclosure of cash paid
Interest $ 99,820 $ 248,395
Income taxes 337,554 365,552
Schedule of non-cash financing activities
The company financed a note receivable from a
franchisee for the purchase of equipment in the amount of $ 60,500 --
</TABLE>
See accompanying notes.
F-9
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Manhattan
Bagel Company, Inc. and its subsidiaries Broadway Chicken, Inc., Manhattan Bagel
Construction Corp., Specialty Bakeries, Inc. and DAB, including DAB's wholly-
owned subsidiary I & J, collectively known as the "Company," after elimination
of all significant intercompany balances and transactions.
The Company manufactures bagel dough and blends a wide variety of cream
cheese spreads that are distributed to its franchised, licensed and
Company-owned stores throughout the United States under the names Manhattan
Bagel Company and I & J Bagels.
Under a definitive Agreement and Plan of Merger ("Agreement") signed on May
10, 1995 Manhattan Bagel Company, Inc. acquired I & J Bagel, Inc. ("I & J"). I &
J was a private company which owned and licensed a total of 17 bagel bakery
stores in the Los Angeles area operating under the name I & Joy Bagels.
Manhattan Bagel Company, Inc. completed the acquisition contemplated under the
Agreement on June 29, 1995, through the merger of a newly created, wholly-owned
subsidiary of Manhattan Bagel Company, Inc. with and into DAB Industries, Inc.,
a California corporation ("DAB") whose assets consisted primarily of all of the
stock of I & J, in exchange for 1.5 million shares of Common Stock of Manhattan
Bagel Company, Inc.
The financial statements for the periods prior to the merger have been
restated to reflect the acquisition of DAB, which is being accounted for as a
pooling of interests. Prior to the merger, DAB's fiscal year ended on January
31. Accordingly, the restated financial statements for 1994 include Manhattan
Bagel Company, Inc. and Subsidiary for the year ended December 31, 1994, and DAB
for the year ended January 31, 1995. There were no intervening events which
materially affected the financial position and results of operations of DAB from
December 31, 1994 to January 31, 1995. DAB's fiscal year has been changed to
December 31 to conform to the Company's year end. The results of operations for
the one month ended January 31, 1995 are included in both the December 31, 1994
and 1995 financial statements. DAB's fiscal year has been changed to December 31
to conform to the Company's year end. The results of operations for the one
month ended January 31, 1995 are included in both the December 31, 1994 and 1995
financial statements. DAB's results of operations for the one month ended
January 31, 1995 and 1994 are summarized as follows:
One Month
Ended
January 31,
------------
1994 1995
---- ----
(in thousands)
Net revenues........................................ $196 $289
Net income.......................................... $15 $39
On May 22, 1996, the Company completed the acquisition of Specialty
Bakeries, Inc. ("SBI") a private company which owned and franchised a total of
23 bagel bakery stores in the Southern New Jersey and Philadelphia areas
operating under the name Bagel Builders. The Company completed the acquisition
through the merging of a newly created, wholly owned subsidiary of the Company
with and into SBI and 132,500 shares of common stock of the Company were issued
to the shareholders of SBI. The financial statements for the periods prior to
the merger have been restated to reflect the acquisition of SBI, which is being
accounted for as a pooling of interests.
F-10
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Net revenues and net income included in the Company's consolidated
statements of income are as follows:
Year Ended
December 31,
-----------------
1994 1995
------- -------
(in thousands)
Net revenues:
Manhattan Bagel Company $ 6,208 $13,296
DAB ................... 3,517 5,858
SBI ................... 3,055 3,013
------- -------
$12,780 $22,167
======= =======
Net income (Loss):
Manhattan Bagel Company $ 507 $ 712
DAB ................... 236 1,336
SBI ................... 101 (427)
------- -------
$ 844 $ 1.621
======= =======
Acquisition
As of January 31, 1994, DAB owned 75% of the common stock of I & J. In
August 1994, DAB purchased the remaining 25% of the common stock of I & J, under
a pre-existing option agreement, for a purchase price of $350,000. The excess of
the purchase price over the fair value of the assets acquired ("Goodwill") is
being amortized on the straight-line basis over thirty years. This transaction
was accounted for as a purchase.
The consolidated results of operations include the operations of I & J.
Concentration of Credit Risk
The Company grants credit to substantially all of its franchisees. The
Company generally does not require collateral, however, by virtue of the
franchise agreements, the Company believes it maintains sufficient security
interests in the franchises and the amount of credit risk is minimal.
The Company maintains bank balances which at times may be in excess of the
FDIC insurance limit.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.
F-11
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Marketable Securities
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investment in Debt and Equity
Securities," which had no effect on its financial condition or results of
operations.
Marketable securities consist of fixed income investments (preferred stock
and short-term commercial paper) which can be readily purchased or sold using
established markets. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Such securities are classified as available-for-sale
and accordingly, are carried at fair value which approximates cost at December
31, 1995.
Single Unit Franchise Agreements
Single unit franchise agreements provide for payment of a franchise fee, a
weekly royalty on gross sales, and a monthly cooperative advertising fund
contribution. The Company's material obligations under the terms of all single
unit franchise agreements are assisting in the site selection and training of
the franchisee. Initial franchise fees from these agreements are recognized as
revenue when all material obligations have been provided. As of December 31,
1995, material obligations had yet to be completed for 48 franchises.
Master Franchise Agreements
Master franchise agreements provide for a payment by the master franchisee
which is based on the population of the territory covered by such master
franchise. Franchise fees from master franchise agreements are recognized as
revenue by the Company when all material obligations required of the Company
have been performed. As of December 31, 1995, all material obligations under
then outstanding master franchise agreements had been performed.
The master franchisee is responsible for collecting the initial franchise
fee, royalty and advertising contribution from each franchisee in its territory
as well as training the franchisee and providing all ongoing support. As part of
the master franchise agreement, the Company receives one-third (33%) of fees
collected by the master franchisee. The Company's portion of the single unit
franchise fee sold by the master franchisee is recognized as revenue when a
location has been found for the franchise, and the Company has no further
obligations.
License Agreements
License agreements provide for the Company to receive a payment of an
initial license fee and thereafter continuing license fees. The granting of a
license gives the licensee the right to use the name I & Joy Bagels for a
specific number of stores. Initial license fees are recognized at the time the
license agreement is entered into since there are no continuing obligations of
the Company.
Royalty Revenue
Franchise royalty revenues for the Company are recognized when earned.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or
market.
Construction Operations
The Company offers a franchisee the option of contracting with the Company
to have its bagel store constructed by the Company. These contracts are
generally fixed price contracts, upon which the
F-12
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Company has not historically recognized significant profits or losses. Any
amounts due under these contracts for costs already expended that have yet to be
reimbursed are reflected as "construction costs receivable."
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets as follows:
Asset Category Estimated Useful Life
-------------- ---------------------
Factory equipment.........................................5-10 years
Office furniture and equipment............................5-7 years
Leasehold improvements....................................Shorter of useful life
or term of lease
Transportation equipment..................................5 years
Intangible Assets
Intangible assets, net of accumulated amortization of $34,658, are included
in other long-term assets and consist of trademark costs and covenants not to
compete. Trademark costs are being amortized on a straight-line basis over
twenty years. Covenants not to compete are being amortized on a straight-line
basis over 36 months or the life of the covenant. Goodwill is being amortized on
a straight-line basis over thirty years.
Investment in Stores
The Company has an equity of interest in four franchises ("joint-ventured
stores"). These investments are accounted for under the equity method. The
carrying amount of these investments reflects the Company's share of the
underlying equity in net assets, and is included in other long-term assets.
Stores Held for Resale
The Company, from time to time, repurchases stores from franchisees with
the intent of upgrading and remodeling and then reselling the stores to new
franchisees. Unless a determination is made that the Company intends to operate
a store and not to seek to sell such store, repurchased stores are recorded on
the balance sheet at the lower of cost or net realizable value and results of
operations of these stores are included in the Company's consolidated statement
of income from acquisition to disposition. At December 31, 1994, there were
three stores held for resale, two of which were resold in 1995 and one which is
a Company-owned store. At December 31, 1995 there are no stores held for resale.
Net Income per Share
Net income per share is computed on the basis of the weighted average
number of common shares outstanding during each period. Common stock options and
warrants were not included in the computation of net income per share prior to
1995 as the dilutive effect was less than 3%.
Income Taxes
Deferred income taxes reflect temporary differences in reporting assets and
liabilities for income tax and financial accounting purposes. These temporary
differences arise principally from the use of different methods of franchise fee
revenue recognition and depreciation and amortization for income tax and
financial accounting purposes.
F-13
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEEMENTS - (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Long-Lived Assets
On January 1, 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The Company records impairment losses on long-lived assets used in operations,
including goodwill and intangible assets, when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
The adoption of SFAS 121 had no material impact on the Company's financial
condition or results of operations.
Stock Based Compensation
The Company grants stock options to employees with an exercise price not
less than the fair market value per share of common stock on the date the option
is granted. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly,
recognizes no compensation expense for the stock option grants.
NOTE 2 - INVENTORY
December 31, 1995
-----------------
Raw materials...................................................$638,954
Finished goods.................................................. 171,284
--------
$810,238
========
NOTE 3 - PROPERTY AND EQUIPMENT
December 31, 1995
-----------------
Factory equipment...............................................$5,266,519
Office furniture and equipment.................................. 400,256
Leasehold improvements.......................................... 2,106,486
Transportation equipment........................................ 729,271
Construction in progress........................................ 3,393,365
----------
11,895,897
Accumulated depreciation and amortization.......................(2,160,032)
----------
Property and equipment - net................................... $9,735,865
==========
Property and equipment includes assets recorded under capital leases of
$833,835 as of December 31, 1995. Accumulated depreciation and amortization
includes accumulated amortization of assets recorded under capital leases of
$126,268 as of December 31, 1995. Assets recorded under capital leases consist
primarily of factory equipment.
F-14
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4 - LONG TERM DEBT
December 31, 1995
-----------------
Lines of Credit:
Payable to New Jersey Economic Development Authority,
bearing interest at an adjustable rate determined by the
remarketing agent, payable in monthly interest only
payments, with a maturity of October 1, 2005. The line is
collateralized by a blanket security interest in all of the
assets of the Company not previously pledged elsewhere.
Available borrowings under this line are $256,030.................. $ 3,243,970
Payable to a bank bearing interest at the bank's Prime Rate,
currently 9.25% and payable in monthly interest only
installments with a maturity of April 30, 1996 The line
collateralized by the Company's construction receivables.
Available borrowings under this line are $1.5 million.............. 750,000
Payable to a bank bearing interest at 2% over the bank's
Prime Rate, currently 9.25% and payable in monthly interest
only installments, with a maturity of March 16, 1996. This
line is unsecured. Available borrowings under this line are
$220,000........................................................... 80,000
Mortgage payable on South Caroline facility, bearing
interest at prime plus 1.25%, payable in monthly
installments of $3,889 through March 2010.......................... 328,590
Various notes payable to credit companies, collateralized
by equipment, maturing through 1999................................ 469,149
Unsecured note payable to relatives of one of the Company's
officers is payable at $1,000 per month, including interest
at 17.3% through January 1997 ..................................... 12,932
Note payable to an individual due in monthly installments of
$2,500 including interest at 10%................................... 106,750
Note payable - Bank - Term loan in the amount of $330,000
payable in equal installments of $6,600 including interest
at 9.25%. The note is collateralized by substantially all
the assets of Specialty Bakeries, Inc.............................. 322,113
-----------
Total ............................................................. 5,313,504
Less current maturities ........................................... (1,411,058)
-----------
Long-term debt, net of current maturities ......................... $ 3,902,446
===========
The approximate aggregate amount of all long-term debt maturities for the
years ending December 31 is as follows:
1996............................................................... $ 1,411,058
1997............................................................... 574,645
1998............................................................... 565,602
1999............................................................... 533,302
2000............................................................... 497,078
Thereafter......................................................... 1,731,819
NOTE 5 - CAPITAL LEASE OBLIGATIONS
The Company has capital leases for equipment, expiring at various dates
through October 2000, with aggregate monthly payments of approximately $17,080.
F-15
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - CAPITAL LEASE OBLIGATIONS - (Continued)
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
at December 31, 1995:
For the Years Ending
December 31
--------------------
1996 .................................................. $ 204,961
1997 .................................................. 204,961
1998 .................................................. 201,688
1999 .................................................. 178,481
2000 .................................................. 39,696
---------
Total minimum lease payments .......................... 829,787
Less: amount representing interest .................... (165,853)
---------
Present value of net minimum lease payments ........... 663,934
Less: current maturities .............................. (137,929)
---------
Long-term maturities .................................. $ 526,005
=========
The present values of minimum future obligations shown above are calculated
based on fixed interest rates determined at the inception of the respective
leases, ranging from 10% to 12%.
NOTE 6 - COMMON STOCK
Initial Public Offering
On June 16, 1994, the Company completed a public offering of 900,000 shares
of the Company's common stock for a public offering price of $5.00 per share or
an aggregate of $4,500,000. In August 1994, the Company sold an additional
125,000 shares on the same terms upon exercise of the underwriter's
overallotment option, for an aggregate of $625,000. Costs associated with this
offering totaled $1,114,890.
The Company also sold to the Underwriter, for nominal consideration,
warrants to purchase 90,000 shares of the Company's common stock. These warrants
were exercised in November 1995 at $6.00 per share.
Secondary Offering
On November 14, 1995, the Company completed a public offering of 1,500,000
shares of the Company's common stock at a price of $19.625 per share yielding
net proceeds of $27,084,440. In December 1995, the Company sold an additional
118,000 shares on the same terms upon exercise of the underwriter's
overallotment option, yielding net proceeds of $2,176,509.
NOTE 7 - OPERATING LEASES
The Company has agreements to lease equipment, office facilities and
factory space. The leases expire at various dates through July 2005. Rent
expense on these leases for the years ended December 31, 1994 and 1995 was
approximately $851,932 and $1,161,065, respectively.
F-16
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 - OPERATING LEASES - (Continued)
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 1995:
For the Years Ending
December 31,
--------------------
1996........................................ $1,067,801
1997........................................ 1,055,809
1998........................................ 963,878
1999........................................ 898,371
2000........................................ 792,799
Thereafter.................................. 1,784,473
----------
Total minimum payments required............. $6,563,131
==========
The Company has also entered into agreements to lease locations for its
franchisees under various lease terms expiring through December 2007. The
Company is required to pay a share of property taxes and operating costs
relating to some of the leased facilities. The Company subleases these locations
to its franchisees. Net rental income under these agreements was approximately
$14,000 and $15,900 for the years ended December 31, 1994 and 1995,
respectively.
The following is a schedule by years of the approximate future minimum
lease payments and sublease income under franchisee operating leases that have
initial or remaining noncancelable lease terms in excess of one year at December
31, 1995:
For the Years Ending Sublease Lease Net Rental
December 31, Income Payments Income
------------ ------ -------- ------
1996.................... $ 2,610,200 $ 2,594,300 $15,900
1997.................... 2,632,800 2,617,900 14,900
1998.................... 2,641,800 2,632,000 9,800
1999.................... 2,596,900 2,591,200 5,700
2000.................... 2,595,800 2,595,800 --
Thereafter.............. 10,241,500 10,241,500 --
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company recognizes product sales and royalty income from joint-ventured
stores and other related parties under the same terms as all other franchised
stores. Royalties from related parties totaled approximately $74,900 and
$119,800 for the years ended December 31, 1994 and 1995, respectively. Product
sales to related parties totaled approximately $156,900 and $358,000 for the
years ended December 31, 1994 and 1995, respectively.
F-17
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 - FRANCHISE AND LICENSE RELATED REVENUE
Year Ended
December 31,
------------
1994 1995
---- ----
Franchise and license fee ...................... $1,175,193 $2,149,506
Master franchise fees .......................... 1,052,000 841,360
Royalties and continuing license fees .......... 925,214 1,626,968
Advertising .................................... 137,590 611,785
---------- ----------
$3,289,997 $5,229,619
========== ==========
NOTE 10 - INCOME TAXES
The Company has computed its tax provision in accordance with SFAS No. 109,
"Accounting for Income Taxes." In summary, SFAS 109 provides for the recognition
of deferred tax assets and liabilities for the tax effects of differences
between the financial accounting and tax basis of the Company's assets and
liabilities.
The provision for income taxes consists of the following:
Year Ended
December 31,
------------
1994 1995
---- ----
Current tax expense ............................ $ 384,500 $1,197,000
Deferred tax expense ........................... 121,900 87,000
---------- ----------
$ 506,400 $1,284,000
========== ==========
A reconciliation of the provision recorded by the Company to a provision
computed utilizing the enacted Federal statutory rate is as follows:
Year Ended
December 31,
------------
1994 1995
---- ----
(dollars in thousands)
Computed tax at Federal statutory rate ... $ 459 34.0% $ 1,131 34.0%
State income taxes, net of federal benefit 67 5.0% 199 5.9%
Other .................................... (20) (1.5)% (46) (1.4)%
----- ---- ------- ----
$ 506 37.5% $ 1,284 38.5%
===== ==== ======= ====
F-18
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10 - INCOME TAXES - (Continued)
The components of the Company's recorded deferred income tax assets and
liabilities are as follows:
December 31, 1995
-----------------
Current:
Deferred tax assets-other ...................................... $ 39,300
Deferred tax liabilities-other reserves ........................ (47,000)
---------
(7,700)
=========
Long-term:
Deferred tax assets-other ...................................... 18,000
Deferred tax liabilities - book over tax basis in fixed assets . (259,000)
---------
(241,000)
=========
Net deferred tax liabilities ................................... $(248,700)
=========
NOTE 11 - NONCASH INVESTING AND FINANCING ACTIVITIES
During 1994, the Company issued 2,900 shares of common stock as part of a
promotional contest and issued 15,000 shares of common stock in exchange for
legal and consulting services to be rendered. Additionally, the Company issued
16,000 share of common stock for the purchase of two existing franchises. During
1995, the Company issued 2,500 shares of common stock as part of a trademark
lawsuit settlement.
During 1994, the Company acquired equipment with a total cost of $1,833,943
including assumed liabilities of $164,149.
During the years ended December 31, 1994 and 1995, capital lease
obligations of $301,835 and $505,000, respectively were incurred when the
Company entered into leases for new equipment.
The Company financed a note receivable from a franchisee for the purchase
of equipment in the amount of $60,500. During the year the Company refinanced
long-term debt into a term loan of $330,000.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company entered into various employment agreements effective January 1,
1994 through December 31, 1998, with officers and key employees, four of whom
are major stockholders. Each agreement provides for an annual base compensation
of $128,250, with annual increases based on increases in the Consumer Price
Index, capped at 10%. The agreements provide for aggregate bonuses equal to 10%
of the Company's consolidated earnings before taxes.
NOTE 13 - STOCK OPTIONS
The Company has adopted a stock option plan under which stock options to
purchase up to 300,000 shares of the Company's common stock may be granted to
employees of and consultants to the Company. Options granted under this plan
must be at an exercise price not less than the fair market value per share of
common stock on the date the option is granted. Options granted shall become
exercisable equally over three years upon each anniversary of the date of grant.
Generally, an option will become fully exercisable three years from the date of
grant. Options will be exercisable for a term not greater than ten years from
the date of grant.
F-19
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 - STOCK OPTIONS - (Continued)
The following summarizes the transactions under the Company's stock
option plan:
Option Price
Shares Per Share
------ ------------
Options outstanding - January 1, 1994 .......... None
Granted ..................................... 142,000 $5.00
Surrendered ................................. (18,400) $5.00
-------
Options outstanding - December 31, 1994 ........ 123,600 $5.00
Granted ..................................... 121,110 $7.00 to $12.75
Surrendered ................................. (18,549) $5.00 to $7.00
Exercised ................................... (23,267) $5.00
-------
Options outstanding - December 31, 1995 ........ 202,894 $5.00 to 12.75
=======
Options exercisable - December 31, 1995 ........ 45,944
=======
On February 1, 1994, the Company granted options to an officer to purchase
50,000 shares of common stock at $3.00 per share. The options are exercisable in
equal monthly amounts over a two year period beginning February 1, 1995. The
options expire on January 31, 1999.
In June 1995, the Company granted immediately exercisable options to
purchase 101,250 shares of common stock at $13.50 per share, in exchange for
consulting services.
In August 1995, the Company granted options to a key employee to purchase
90,000 shares of common stock at $12.00 per share. The options are exercisable
in equal annual amounts over a three year period beginning December 31, 1995.
NOTE 14 - FRANCHISE AND LICENSE TRANSACTIONS
Total Franchise and license locations opened during the years ended
December 31, 1994 and 1995, were 37 and 82, respectively.
Franchise locations in operation are as follows:
December 31, 1995
-----------------
Company-owned locations......................... 21
Franchisee and joint venture locations.......... 150
---
Total........................................... 171
===
During 1994, the Company repurchased four locations for resale, two of
which were sold in 1994 and two in 1995. Gains from these sales were not
material. During 1995, the Company repurchased three locations and are operating
these as company stores.
F-20
<PAGE>
MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 15 - SUBSEQUENT EVENTS
In January 1996, in two separate transactions, the Company completed the
acquisitions of Bay Area Bagels, Inc. and three bagel store businesses and
related license agreements in exchange for a combination of common stock and
cash.
On June 28, 1996, the Company completed a transaction under which it added
23 Bagel Brothers stores (including two under development) to its franchise
network. Under terms of the agreement, the Company purchased the Bagel Brothers
bagel dough factories in Cleveland and Buffalo for $2,000,000 and 50,000 shares
of the Company's common stock. This transaction was treated as a purchase for
accounting purposes. Additionally, the Company provided Bagel Brothers with
$6,000,000 in financing, which, among other things, provided funds to retire
existing loans, to pay franchise fees, and to remodel the 21 operating stores to
the Manhattan Bagel format. The Company has the right to convert the loan to
equity should certain profit targets be met.
F-21
