UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-27148
----------------
NEW WORLD COFFEE - MANHATTAN BAGEL, 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.)
246 INDUSTRIAL WAY WEST, EATONTOWN, NJ 07724
(Address of Principal Executive Offices)
(732) 544-0155
(Issuer's Telephone Number)
Securities registered under Section 12(B) of the Exchange Act:
NAME OF EACH EXCHANGE ON
Title of Each Class WHICH REGISTERED:
Common Stock, $.001 par value NASDAQ
Securities registered under 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. $17,282,524
The aggregate market value of the voting stock held by non-affiliates per
the closing stock price as of April 7, 1999 is $18,054,348.
As of April 7, 1999, 20,185,831 shares of common stock of the issuer were
outstanding.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-KSB constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The words "forecast",
"estimate", "project", "intent", "expect", "should", and similar expressions are
intended to identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance, or achievements of New World Coffee - Manhattan
Bagel, Inc. ("New World" or "the Company") to be materially different from any
future results, performance or achievements, expressed or implied by such
forward-looking statements.
The Company is dependent upon the success of existing and new franchised
and Company-owned stores and alternative distribution outlets; the success of
the Company and its master franchisees in getting new stores or other retail
locations opened; the ability of the Company and its master franchisees to
attract new qualified franchisees; of which there can be no assurance, and such
other factors as competition, commodity pricing and economic conditions.
The opening and success of stores will depend on various factors, including
the availability of suitable store sites and the negotiation of acceptable lease
terms for new locations, the ability of the Company or its franchisees to obtain
construction and other necessary permits in a timely manner, the ability to meet
construction schedules, the financial and other capabilities of the Company's
franchisees and master franchisees, competition and general economic and
business conditions.
The Company's business is subject to changes in consumer taste, national,
regional and local economic conditions, demographic trends and the type, number
and location of competing businesses. Competition is increasing significantly
with an increasing number of national, regional and local stores competing for
franchisees and store locations as well as customers.
The Company's future results may also be negatively impacted by future
pricing of the key ingredients for its frozen bagel dough, cream cheeses and
coffee beverages.
The success of sales units in alternative distribution locations, including
convenience stores, supermarkets, military bases and other non-traditional
locations, will depend, in addition to the factors affecting traditional
franchisee and Company-owned stores, on the consumer traffic at the locations in
which they are located.
The opening and remodeling of stores, as well as opening of sales units
within alternative locations, may be subject to potential delays caused by,
among other things, permits, weather, the delivery of equipment and materials,
and the availability of labor.
<PAGE>
TEM 1. BUSINESS
General
New World Coffee - Manhattan Bagel, Inc. is the one of the largest
franchisors of coffee bars and bagel bakeries in the United States. It operates
and franchises coffee bars, bagel bakeries and integrated coffee bar/bagel
bakeries in 18 states in the Northeastern, Southeastern and Southwestern United
States, the District of Columbia, and internationally. The first Company-owned
New World Coffee store opened in 1993 and the first franchised New World Coffee
store opened in 1997. At December 27, 1998, the Company's retail system
consisted of approximately 335 stores, including 27 Company-owned and 308
franchised and licensed stores. The Company acquired the stock of Manhattan
Bagel Company, Inc. - Debtor in Possession on November 24, 1998, resulting in
the addition of 6 Company-owned and 285 franchised and licensed Manhattan Bagel
stores.
The Company is vertically integrated with bagel dough and cream cheese
manufacturing plants in Eatontown, NJ and Los Angeles, CA, and a coffee roasting
plant in Branford, CT. The Company's products are sold to franchised, licensed
and Company-owned stores as well as to wholesale, supermarket and
non-traditional outlets.
The Company is a Delaware corporation and was organized in November 1992.
Industry Overview
The US market for specialty coffee is large, fragmented and growing.
According to the National Coffee Association's 1998 National Coffee Drinking
Trends report, approximately 65% of all consumers (age 10+) drink coffee on a
weekly basis, they drink an average of 3.0 cups per day, and the overall number
of coffee drinkers has grown from approximately 140 million in 1990 to
approximately 168 million in 1999. 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. Research from CREST, a market research
firm, indicates specialty shop category traffic growth increased by 49%, 11%,
19% and 16%, annually, from 1995 through 1998.
The US market for bagels is also large, fragmented and growing. According
to the American Bagel Association sale of bagels has grown rapidly, from $429
million in 1993 to $2.3 billion in 1996. According to CREST, bagel shop category
traffic increased by 10%, 29%, 29% and 18%, annually, from 1995 through 1998.
Management believes this growth has been driven by (i) greater consumer
awareness and appreciation of gourmet coffee, specialty drinks and fresh baked
bagels as a result of their increasing availability, (ii) increasing demand for
all fresh premium food products where the differential in price from the
commercial brands is small compared to the improvement in product quality and
taste, (iii) a switch by consumers to low fat baked items such as bagels from
high fat fried alternatives, and (iv) the popularity of coffee bars and bagel
stores as gathering places.
<PAGE>
Business Strategy
The Company's objective is to be a leading coffee cafe chain and bagel
bakery chain in each market in which it operates, and to support and extend its
consumer brands and leverage its manufacturing infrastructure through alternate
distribution channels. The key elements of this strategy include:
Differentiated Retail Brands. The Company's strategy is to differentiate
and reinforce its retail brands in a way that will engender customer loyalty and
position the Company as a leading specialty retailer in each of its markets. The
New World Coffee brand is differentiated from competitors by the Company's
roasting style, which management believes delivers a more full flavored, less
bitter coffee. In addition, as a coffee cafe (versus a coffee bar) the stores
offer a broader and deeper selection of high quality food items throughout the
day. The Company's Manhattan Bagel brand is positioned as a purveyor of
authentic "New York style" boiled and baked bagels, and of breakfast and lunch
sandwiches. The Company is expanding this positioning to include a selection of
specialty coffees, and a menu of cool blended drinks.
Quality Products. The Company's strategy is to provide the consumer with
superior quality products, primarily coffee, bagels and cream cheeses which it
believes is a primary factor in a consumer's decision to patronize its stores,
and enables it to build a high quality brand identity. The Company's vertically
integrated strategy enables it to supply its stores with high quality specialty
coffees, frozen bagel dough and cream cheeses, and to control the quality of
product sold in the stores. The Company's coffee and bagel products have won a
number of quality and "Best of" awards, which assists the Company in developing
its high quality brand identity.
Growth Through Franchising. The Company's strategy is to grow through
franchising to secure a leading position in its markets. The Company believes
that it can grow more rapidly through franchising than through Company-owned
operations due to lower financial and human resource constraints. The Company is
committed to maintaining a strong franchise system by attracting qualified
operators, expanding in a controlled manner and ensuring that franchisees adhere
to the Company's high standards. The Company's franchising efforts are focused
on attracting new franchisees, adding additional locations with existing
franchisees, and developing co-branding opportunities with other complementary
retailers. The Company devotes significant resources to provide franchisees with
assistance in site selection, store design, training and store marketing.
Efficient Production System. The Company's strategy is to leverage its
manufacturing and distribution systems to deliver lower operating costs and
improved product quality. The Company believes that its centralized production
of bagel, cream cheese, and coffee products allows for more consistent, superior
products, better quality control and more rapid development, production and
deployment of new products into stores systemwide. In addition, the system
significantly simplifies store level operations, and eliminates the need for
franchisees to commit substantial capital and labor to raw material procurement
or production.
Inviting Stores. The Company's strategy is to deliver a store environment
for each concept which is conducive to capturing important day parts. The
Company's objective is a comfortable and inviting store with layouts designed to
process a large volume of transactions during the time critical day parts. The
Company is making an investment in upgrading the design of both its Manhattan
Bagel and New World Coffee stores in 1999.
<PAGE>
Training and Development. The Company's strategy is to place strong
emphasis on identifying and retaining qualified franchisees and employees, and
invest substantial resources in training them in customer service, beverage and
food preparation, and sales skills. The Company believes that the friendliness,
speed and consistency of service and the product knowledge of the Company's
franchisees and employees are critical factors in developing the Company's
quality brand identity and to building a loyal customer base
Wholesale Sales. The Company's strategy is to leverage its efficient
manufacturing systems, quality products and brand names in developing a
significant wholesale business. The Company believes that food distributors,
chain grocery stores, food service outlets and similar customers offer the
Company opportunity to maximize its production capacity and distribute product
through many more outlets than its franchised and Company-owned stores.
Expansion
A total of 18 franchised stores were opened during 1998. The Company plans
to open approximately 20 franchised stores in 1999, primarily in existing
markets. The Company has adopted a policy of not developing stores for its own
operation and is in the process of franchising all stores currently operated by
the Company.
The ability of the Company's franchisees to open new stores is affected by
a number of factors. These factors include, among other things, selection and
availability of suitable store locations, negotiation of suitable lease or
financing terms, constraints on permitting and construction of stores and the
hiring, training and retention of management and other personnel. Accordingly,
there can be no assurance that the Company's franchisees will be able to meet
planned growth targets.
The Company's expansion strategy is to cluster stores in targeted markets,
thereby increasing consumer awareness and enabling the Company to take advantage
of operational, distribution and advertising efficiencies. The Company believes
that market penetration through the opening of multiple stores within a
particular market should result in increased average store sales in that market.
In determining which new markets to develop, the Company considers many factors,
including its existing store base, the size of the market, demographic and
population trends, competition, availability and cost of real estate, and the
ability to supply product efficiently.
Retail Stores
New World Coffee. New World Coffee stores are designed to be conducive to
capturing all three dayparts. In addition, the store atmosphere is designed to
be a comfortable and inviting cafe setting through the use of natural materials,
warm lighting, appropriate music and a comfortable seating area to promote the
stores use as neighborhood gathering places. The Company's prototype store
averages 1,400 - 1,800 square feet.
New World Coffee stores offer, over the course of any given year, up to 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. New
World Coffee stores offer a selection of black, herbal and fruit teas, with one
selection offered as the fresh brewed "Iced Tea of the Day," and also offer
freshly squeezed orange and grapefruit juice. 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.
<PAGE>
Manhattan Bagel. Manhattan Bagel stores are designed to combine the
authentic tastes of a bagel bakery with the comfortable setting of a
neighborhood meeting place. Manhattan Bagel's prototypical store blends
function, style and customer comfort with the Company's traditional red and blue
color scheme and simple furnishings in a relaxed social atmosphere. Walls are
covered with murals designed to relate to the Manhattan Bagel brand. Manhattan
Bagel stores are typically in leased locations of approximately 1,500 square
feet with ample parking and indoor seating for 30 - 40 customers. The Company is
in the process of redesigning its prototype store to emphasize its lunch
offerings, specialty coffee drinks and cool blends drinks menu.
Manhattan Bagel stores offer, over the course of any given year, more than
23 varieties of fresh baked bagels, as well as bagel sticks and bialys.
Manhattan's bagels are baked fresh throughout the day using a traditional boil
and bake process to create a light, "crunchy on the outside, chewy on the
inside" bagel. Manhattan Bagel stores also offer 18 flavors of cream cheese, and
an extensive variety of breakfast and lunch sandwiches, coffee, soft drinks,
salads, muffins and soups. In 1998, the Company introduced a program, "Bagel,
Wrapp or Roll," under which it now offers all sandwiches, previously only
available on bagels, on alternative carriers, such as french rolls or wrapps, in
order to enhance its lunch business. The program has met with strong consumer
acceptance and the Company expects to continue to emphasize its lunch business
going forward. In 1999, the Company expects to undertake major product
initiatives to introduce a selection of specialty coffee drinks and a menu of
iced, cool and blended drinks to its stores.
Sourcing, Manufacturing & Distribution
The Company believes that controlling the manufacture and distribution of
coffee, bagels and cream cheeses is key to ensuring both product quality and
enhancing profitability. To support this strategy, the Company has made
significant investments in processing technology, formulations and manufacturing
capacity.
Bagel Production. The Company has significant know-how and technical
expertise for manufacturing and freezing mass quantities of raw bagels to
produce a high-quality product more commonly associated with smaller bakeries.
The Company believes this system enables stores to provide customers with
consistent, superior products. The Company currently operates bagel
manufacturing facilities in Eatontown, NJ, and Los Angeles, CA.
Cream Cheese Production. The Company blends and supplies a wide variety of
cream cheeses, including low fat and no fat cream cheeses to substantially all
of the Manhattan Bagel stores. The Company purchases plain cream cheese from
independent suppliers and mixes in ingredients at its manufacturing facilities.
The Company produces cream cheeses in various size containers.
Coffee Sourcing. The Company purchases only the highest grades of Arabica
coffee available from the best crops by Coffee Sourcing. The Company purchases
only the highest grades of Arabica coffee available from the best crops by
evaluating crop samples on an ongoing basis and making 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. The Company has long-standing relationships with coffee brokers,
allowing it access to the world's best green coffees.
Coffee Roasting. The Company's roasting process 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. The Company has several
roastmasters who are directly responsible for overseeing the roasting process.
Distribution. The Company's products are typically delivered to the stores
by truck either directly from the manufacturing facility or through third party
distributors. The Company's coffee is delivered to each New World Coffee store
at least twice a week, generally within 24 hours of roasting. This enables the
Company to control the freshness of the coffee sold in its stores.
<PAGE>
Marketing
The Company's store level marketing programs target the trade area of each
store, making extensive use of distinctive print material in direct mail and
couponing. In markets in which franchisees have a significant presence, local
marketing efforts are supplemented with radio advertising.
In addition to local store marketing, Company-owned and franchised stores
are generally required to contribute 2.5% of sales to the respective brand's
marketing fund, which provides the stores with marketing support including
in-store point of purchase, sales promotions, new product introductions and
seasonal specials, along with possible print and other mass media advertising,
in order to increase consumer interest and build sales.
The Company also provides stores with catalogs for uniforms and promotional
items and pre-approved, print marketing materials.
Franchise Program
General. The Company considers franchising to be the key to its continued
growth. As of December 27. 1998, there were 308 franchised stores operating in
18 states, the District of Columbia and internationally. Additionally,the
Company had franchise agreements signed for approximately 12 additional
franchised stores. There can be no assurance that all of these stores will be
opened.
Approval. Franchisees are approved on the basis of business background,
operating experience and financial resources.
Franchise Agreements. The Company's franchise agreements typically provide
for a ten year term, a non-refundable franchise fee of $30,000 for the initial
store and $25,000 for each additional store, a 5% royalty, a marketing fund
contribution of 2.5%, a required local advertising and promotion expenditure of
1.5%, and a $5,000 minimum grand opening expenditure.
The Company has the right to terminate any franchise agreement for a
variety of reasons, including a franchisee's failure to make payments when due
or failure to adhere to the Company's policies and standards. Many state
franchise laws limit the ability of a franchisor to terminate or refuse to renew
a franchise. See "Business-Government Regulation".
The unit franchise agreements generally preclude the Company from operating
or franchising stores within an exclusive territory, except that the Company
reserves the right to engage in certain special distribution arrangements within
the specified territory.
Master Franchises. Prior to its acquisition, Manhattan Bagel Company, Inc.
pursued a strategy of developing new territories through the sale of master
franchises. A master franchisee is responsible for selling franchises,
negotiating leases, supervising the design and building of new stores, training
franchisees and supervising them after the locations are opened, and collecting
the initial franchise fee and royalties, all in accordance with the Company's
quality control guidelines. In return, the master franchisee retains two-thirds
of the initial franchise fee and royalties payable by the individual franchisees
in the master franchisees territory, and remits to the Company one third of such
amounts. Master franchisees have minimum sales requirements to maintain their
exclusive rights in their respective territories.
In 1998, the Company terminated three master franchise agreements and
recovered the following territories: Florida; Maryland, Virginia and the
District of Columbia; Western New York, Erie, Pennsylvania, and northeastern,
Ohio. The Company currently has two master franchise agreements in operation in
North Carolina, South Carolina and Georgia; and in Northern California. Both
master franchisees are in default of their exclusive rights to their
territories.
<PAGE>
Franchise Store Development. The Company furnishes each franchisee with
assistance in selecting sites and developing stores and the physical
specifications for typical stores. Each franchisee is responsible for selecting
the location for its stores, with the Company's assistance, based on
accessibility and visibility of the site, targeted demographic factors, existing
traffic patterns, availability of parking and proximity of compatible retailers
and competition. The Company provides prototypical store design plans to the
franchisees.
Franchise Training and Support. Every franchisee is required to have a
principal operator or manager approved by the Company who satisfactorily
completes the Company's two-week training program and who devotes his or her
full business time and efforts to the operation of the franchisee's stores. In
addition to this program, the Company provides on-site training for up to seven
days during the opening of franchisee's stores and ongoing support thereafter.
The Company's franchise consultants, reporting to the Vice President - Franchise
Operations, maintain open communication with the franchise community, relaying
operating and marketing information and new ideas between the Company and its
franchisees.
Franchise Operations. All franchisees are required to operate their stores
in compliance with the Company's policies, standards and specifications,
including matters such as menu items, ingredients, materials, supplies,
services, fixtures, furnishings, decor and signs. Each franchisee has full
discretion to determine the prices to be charged to its customers.
Franchise Advisory Council. The Company has a Franchise Advisory Council
for each of New World Coffee and Manhattan Bagel that consists of franchisee
representatives. The Advisory Councils hold quarterly meetings to discuss new
product development, new marketing ideas, operations, growth and other relevant
issues.
Reporting. The Company collects weekly and monthly sales and other
operating information from its franchisees. The Company's agreements generally
permit the Company to electronically debit the franchisees' bank accounts for
the payment of royalties, marketing fund contributions and purchases of products
from the Company.
Trademarks and Service Marks
The Company's rights in its trademarks and service marks are a significant
part of its business. The Company is the owner of the federal registration of
the trademarks "Manhattan Bagel(R)", "New World Coffee(R)" (trademark and
servicemark), "New World Coffee & Bagels(R)", "Summertime Blend(R)", and
"Serious Coffee(R)". The Company also has applied for the registration of the
federal servicemark "Willoughby's Coffee & Tea(R)" (With Design). Some of the
Company's marks are also registered in several foreign countries. The Company is
aware of a number of companies which use various combinations of the words
"Manhattan" or "Bagel" in their names, some of which may have senior rights to
the Company for such use, but none of which, either individually or in the
aggregate, are considered to materially impair the use by the Company of its
mark. The Company is aware of the use of the name "New World Coffee" by another
person in California. It is the Company's policy to vigorously oppose any
infringement of its trademarks.
Competition
The coffee and bagel industries are intensely competitive and there are
many well established competitors with substantially greater financial and other
resources than the Company. 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. Although
competition in the bagel market is fragmented, the Company competes and, in the
future will increasingly compete with Dunkin Donuts, Einstein/Noah Bagel Corp.,
and Bruegger's Bagels. In addition to current competitors, one or more new major
competitors with substantially greater financial, marketing, and operating
resources than the Company could enter the market at any time and compete
directly against the Company. In addition, in virtually every major metropolitan
area in which the Company operates or expects to enter, local or regional
competitors already exist.
The Company's coffee beverages compete directly with all restaurant and
beverage outlets that serve coffee and a growing number of espresso stands,
carts and stores. The Company's whole bean coffees compete directly against
specialty coffees sold at retail through supermarkets, specialty retailers, and
a growing number of specialty coffee stores. The Company's bagel products
compete directly against all restaurant and bakery outlets that serve bagels,
including the bakery section of supermarkets, and a growing number of bagel
bakeries. The Company believes that its customers choose among retailers
primarily on the basis of product quality, service and convenience and, to a
lesser extent, on price. 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. The Company also competes with many franchisors of
restaurants and other business concepts with respect to the sale of franchises.
<PAGE>
Government Regulation
The Company and its franchisees are subject to various federal, state and
local laws affecting the operation of their respective businesses. Each New
World Coffee store and Manhattan Bagel store is subject to licensing and
regulation by a number of governmental authorities, which include health,
safety, sanitation, building and fire agencies in the state or municipality in
which the store is located. Difficulties in obtaining or failures to obtain
required licenses or approvals could delay or prevent the opening of a new store
in a particular area. The Company's manufacturing, commissary and distribution
facilities are licensed and subject to regulation by state and local health and
fire codes, and the operation of its trucks is subject to Department of
Transportation regulations. The Company is also subject to federal and state
environmental regulations.
The Company is subject to Federal Trade Commission ("FTC") regulation and
various state laws which regulate the offer and sale of franchises. Several
state laws also regulate substantive aspects of the franchisor-franchisee
relationship. The FTC requires the Company to furnish to prospective franchisees
a franchise offering circular containing prescribed information. A number of
states in which the Company might consider franchising also regulate the sale of
franchises and require registration of the franchise offering circular with
state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time (some of
which are now pending) which would provide for federal regulation of the
franchisor-franchisee relationship in certain respects. The state laws often
limit, among other things, the duration and scope of non-competition provisions
and the ability of a franchisor to terminate or refuse to renew a franchise.
<PAGE>
Employees
At December 27, 1998, the Company had 532 employees, of whom 258 were store
personnel, 197 were plant and support services personnel, and 77 were corporate
personnel. Most store personnel work part time and are paid on an hourly basis.
The Company has never experienced a work stoppage and its employees are not
represented by a labor organization. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
As of December 27, 1998 the Company and its franchisees and licensees
operated 335 stores, consisting of 47 New World Coffee and 288 Manhattan Bagel
stores as follows.
STORE LOCATIONS
- -------------------------------------------------------------------------------
STATE Company Franchised Total
- -------------- ------- ---------- -----
Alabama 0 1 1
California 2 27 29
Connecticut 6 7 13
Delaware 0 5 5
Florida 0 23 23
Georgia 0 14 14
Germany 0 1 1
Israel 0 1 1
Maryland/DC 0 5 5
Massachusetts 0 2 2
Michigan 0 8 8
Nevada 0 3 3
New Jersey 0 65 65
New York 18 45 63
North Carolina 0 15 15
Ohio 0 6 6
Pennsylvania 1 54 55
South Carolina 0 3 3
Texas 0 5 5
Virginia 0 18 18
TOTAL
- -------------- -------- -------- ------
27 308 335
<PAGE>
Information with respect to the Company's headquarters, training,
manufacturing and distribution facilities is presented below.
<TABLE>
<CAPTION>
- ------------------ ------------------------------------- -----------------
Location Facility Size
- ------------------ ------------------------------------- -----------------
<S> <C> <C>
Eatontown, NJ (a) Corporate Headquarters 101,000 sqft
Bagel University/Coffee University
Bagel/Cream Cheese Manufacturing
Distribution
Los Angeles, CA (b) Regional Offices 8,500 sqft
Bagel/Cream Cheese Manufacturing
Distribution
Los Angeles, CA (c) Regional Offices 24,000 sqft
Bagel/Cream Cheese Manufacturing
Distribution
Greenville, SC (d) Bagel/Cream Cheese Manufacturing 12,500 sqft
Branford, CT (e) Office/Training Facilities 3,800 sqft
Coffee Roasting Plant 1,600 sqft
- ------------------ ------------------------------------- -----------------
</TABLE>
(a) This facility is leased. Lease term ends January 31, 2005 and is
subject to two 5 year extension options.
(b) This facility is leased through June 30, 1999. The Company is planning
to close this facility upon the completion of its new Los Angeles, CA facility.
(c) This facility is under construction and is expected to be operational
May 1999. This facility is leased, with an initial lease term through June 1,
2007 and two 5 year options.
(d) This facility is located on a 1.45 acre parcel of land owned by the
Company. This facility is currently closed.
(e) This facility is leased through October 31, 2000.
The Company believes that its current facilities are adequate for its
present and contemplated operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and legal actions in the ordinary course
of its business. The Company believes that all such claims and actions currently
pending against it are either adequately covered by insurance or would not have
a material adverse effect on the Company if decided in a manner unfavorable to
the Company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF A SECURITY HOLDERS
On March 24, 1999, a special meeting of the stockholders of the Company was
held at the offices of the company pursuant to a Notice of Meeting and Proxy
Statement dated February 18, 1999. At the special meeting, the stockholders
approved a change of the name of the Company to New World Coffee-Manhattan
Bagel, Inc. and an increase in the authorized common stock from 20,000,000
shares, par value $.001 per share to 50,000,000 shares of common stock, par
value $.001 per share.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market
("Nasdaq") under the symbol "NWCI". The following table sets forth the range of
high and low closing sale prices (based on transaction data as reported by
NASDAQ) for the Common Stock for each fiscal quarter during the periods
indicated.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
<S> <C> <C>
First Quarter (From December 30, 1996 to March 30, 1997) $2.88 $1.75
Second Quarter (From March 31, 1997 to June 29, 1997) $2.13 $1.19
Third Quarter (From June 30, 1997 to September 28, 1997) $2.13 $0.94
Fourth Quarter (From September 29, 1997 to December 28, 1997) $2.62 $1.50
Fiscal 1998 High Low
First Quarter (From December 29, 1997 to March 29, 1998) $2.00 $1.28
Second Quarter (From March 30, 1998 to June 28, 1998) $1.91 $1.50
Third Quarter (From June 29, 1998 to September 27, 1998) $1.75 $0.81
Fourth Quarter (From September 28, 1998 to December 27, 1998) $1.50 $0.75
Fiscal 1999 High Low
First Quarter (From December 28, 1998 to March 28, 1999) $1.38 $0.75
</TABLE>
On April 7, 1999, the closing price for the Company's Common Stock as
reported by NASDAQ was $1.00 a share.
As of April 7, 1999, there were approximately 329 holders of record of the
Common Stock. This number does not include individual stockholders who own
Common Stock registered in the names of a nominee 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is the one of the largest franchisors of coffee bars and bagel
bakeries in the United States. It operates and franchises coffee bars, bagel
bakeries and integrated coffee bar/bagel bakeries in 18 states in the
Northeastern, Southeastern and Southwestern United States, the District of
Columbia, and internationally. The first Company-owned New World Coffee store
opened in 1993 and the first franchised New World Coffee store opened in 1997.
At December 27, 1998, the Company's retail system consisted of approximately 335
stores, including 27 Company-owned and 308 franchised and licensed stores. The
Company acquired the stock of Manhattan Bagel Company, Inc. - Debtor in
Possession on November 24, 1998, resulting in the addition of 6 Company-owned
and 285 franchised and licensed Manhattan Bagel stores.
The Company is vertically integrated with bagel dough and cream cheese
manufacturing plants in Eatontown, NJ and Los Angeles, CA, and a coffee roasting
plant in Branford, CT. The Company's products are sold to franchised, licensed
and Company-owned stores as well as to wholesale, supermarket and
non-traditional outlets.
The Company is a Delaware corporation and was organized in November 1992.
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.
Results of Operations
Year Ended December 27, 1998 Compared To Year Ended December 28, 1997
All revenue and expense figures below reflect the results of the
acquisition of Manhattan Bagel Company, Inc. on November 24, 1998.
Revenues. Total revenues increased 8.9% to $17,282,524 for fiscal 1998 from
$15,867,868 for fiscal 1997. Manufacturing revenues increased to $2,193,145 or
12.7% of revenues. There were no such comparable revenues in 1997. Royalties and
franchise related revenues increased to $2,728,137 or 15.8% of total revenues
from $820,515 or 5.2% of total revenues for the comparable 1997 period. Retail
sales decreased 17.9% to $12,361,242 for fiscal 1998 from $15,047,353 for the
comparable 1997 period, primarily due to the sale of Company-owed stores to
franchisees. Comparable store sales for the 23 Company-owned and 3 franchised
stores open for both periods increased by (6.7%) and 5.8% for fiscal 1998,
respectively.
Costs and Expenses. Retail costs as a percentage of retail sales for fiscal
1998 increased to 87.8% from 87.3% for fiscal 1997 primarily due to a 1.1%
increase in miscellaneous store expenses, and a 0.5% increase in personnel
costs, which were partially offset by a 1.0% decrease in cost of goods due to
more efficient purchasing. Manufacturing costs of sales and related overhead
expenses were 73.3% of manufacturing revenues in 1998.
<PAGE>
Depreciation and amortization expenses as a percentage of total revenues
for fiscal 1998 decreased to 8.5% from 14.4% for fiscal 1997 primarily due to an
increase in the Company's revenue base, the sale of Company-owned stores to
franchisees and the Company's compliance with FASB 121
General and administrative expenses as a percentage of total revenues for
fiscal 1998 increased to 20.0% from 18.8% for fiscal 1997 primarily due to the
acquisition of Manhattan Bagel and additional training costs incurred from the
sale of Company-owned stores to franchisees.
In 1998 the Company recorded the following charges: a $4,235,266 non-cash
charge in compliance with FASB 121; a $1,874,212 restructuring charge relating
to the closing of its New York office and costs associated with the elimination
of duplicate corporate functions; and a $350,000 provision for store closings.
In 1997, in compliance with FASB 121, the Company recorded a non-cash charge of
$3,480,977. See Note 4 Impairment of "Long-Lived Assets" on page F-10 and Note
10 "Store Provisions for Store Closings and Reorganization Costs" on page F-12.
Interest expense, net for fiscal 1998 increased to $925,467 or 5.4% of
revenues from $424,533 or 2.7% of revenues for fiscal 1997. Approximately
$624,000 of the 1998 expense is attributable to interest and financing costs
relating to the Manhattan Bagel Company, Inc. acquisition.
Net Loss. Net loss for fiscal 1998 increased to $7,491,610 or 43.3% as a
percentage of revenues, from $6,736,157 or 42.5% of revenues for fiscal 1997.
The primary components of this increase were an increase of 13.5% in one-time
provisions and non-cash charges and an increase of 2.8% in interest expense,
which were partially offset by improvements in income from operations of 14.0%.
Net loss before one-time charges for fiscal 1998 was $1,032,132 or 6.0% of
revenues compared to $2,955,180 or 18.6% of revenues for fiscal 1997.
Year Ended December 28, 1997 Compared To Year Ended December 29, 1996
Revenues. Total revenues increased 39.9% to $15,867,868 for fiscal 1997
from $11,340,199 for fiscal 1996. Company owned store revenues increased 32.7%
to $15,047,353 for fiscal 1997 from $11,340,199 for the comparable 1996 period.
Royalties and franchise related revenues were $820,515 or 5.2% of total revenues
for fiscal 1997. There were no such revenues for fiscal 1996. Comparable store
sales for the 17 New World stores open for both periods increased 4.6%.
Comparable store sales for the Company's converted coffee bar/bagel bakery store
increased 32.6% for fiscal 1997.
Costs and Expenses. Cost of sales and related occupancy costs as a
percentage of store revenues for fiscal 1997 decreased to 54.4% from 57.1% for
fiscal 1996. The primary components were a decrease of 0.3% in cost of goods due
to better purchasing and waste control through implementation of the POS System,
improved coffee pricing due to vertical integration, improved vendor pricing due
to greater economies of scale, and a 2.4% decrease in related occupancy expense
as a percentage of store revenues due to the Company's focus on seven day and
residential/shopping area stores.
Store operating expenses as a percentage of store revenues for fiscal 1997
increased to 32.9% from 31.1% for fiscal 1996. The primary components were a
1.1% increase in personnel costs and a 0.7% increase in miscellaneous store
expenses.
Depreciation and amortization expenses as a percentage of total revenues
for fiscal 1997 increased to 14.4% from 11.9% for fiscal 1996 primarily due to
increased amortization resulting from the acquisition of Willoughby's, the
Company's coffee roaster since inception.
<PAGE>
General and administrative expenses as a percentage of total revenues for
fiscal 1997 decreased to 18.8% compared to 24.2% of revenues for fiscal 1996.
In 1997, in accordance with FASB 121, the Company recorded a non-cash
charge of $3,480,977. In 1996, the Company recorded a provision for store
closings and reorganization costs 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.
Interest expense, net for fiscal 1997 increased to $424,533 or 2.7% of
revenues, from $74,349 or 0.7% of revenues for fiscal 1996. This increase
resulted primarily from the interest paid for 1996 acquisitions.
Net Loss. Net loss of $6,736,157 decreased as a percentage of revenues to
42.5% from 50.0% or $5,670,951 for fiscal 1996. The primary components of this
decrease were improvements in general and administrative, cost of goods sold,
and occupancy expenses of 5.4%, 2.1%, and 3.4%, respectively. Net loss before
one-time charges for fiscal 1997 was $2,955,180 or 18.6% of revenues. Net loss
before one-time charges for fiscal 1996 was $2,820,951 or 24.9% of revenues.
<PAGE>
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 27, 1998 and December 28, 1997. At December 27, 1998,
the Company had net operating loss carryforwards of approximately $11,600,000
available to offset future taxable income. This does not include any benefit for
net operating loss carryforwards resulting from the purchase of The Manhattan
Bagel Company, Inc. which is still being evaluated by the Company. These amounts
expire at various times through 2012. As a result of ownership changes resulting
from recent sales of equity securities and recent acquisitions 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
On or about May 24, 1998, July 2, 1998 and November 20, 1998 the Company
completed private placements of 1,454,120, 862,068 and 555,000 shares of Common
Stock, respectively, realizing approximately $1,576,000, $1,000,000 and $500,000
in net proceeds after commissions and costs.
On November 19, 1998 the Company completed a $5 million debt transaction
with BET Associates, L.P. The funds were used for the acquisition of The
Manhattan Bagel Company, Inc. The note has a 3-year maturity with a base
interest rate of 12%. Additional fees may be incurred relative to the timing of
the refinancing of this debt.
On November 24, 1998 the Company completed a $5.5 million debt transaction
with The Manhattan Bagel Creditors Trust pursuant to the acquisition of
Manhattan Bagel Company, Inc. The note has a 3-year maturity with an interest
rate of 9%.
On December 23, 1998, the Company, through its wholly owned subsidiary
Manhattan Bagel Company, Inc. completed a $2.8 million refinancing of its
Economic Development Agency bonds. These bonds have a 10-year maturity with an
interest rate of 9%.
The above indebtedness, totaling $13.3 million is secured by first, second
and third security interests on the assets of the Company and its subsidiaries.
The Company may refinance some or all of this indebtedness and incur an increase
in the amount of funded debt, in 1999, to better leverage its asset base and
reduce borrowing costs. There can be no assurance that such refinancing will be
accomplished, or as to the amount refinanced or the cost of such refinancing.
<PAGE>
The Company plans to satisfy any of its capital requirements in 1999
through cash flow from operations and the sale of Company-owned stores to
franchisees which should generate additional cash.
At December 27, 1998, the Company had working capital of $469,490 compared
to a working capital deficit of $97,705 at December 28, 1997.
The Company had net cash used in operating activities of $2,662,022 for
fiscal 1998 and net cash used in operating activities of $1,392,487 for fiscal
1997. The primary use of cash in operating activities relates to additional
costs the Company has agreed to absorb subsequent to the reorganization of the
Mahattan Bagel Company, Inc. Additionally the Company has determined that
approximately $4,100,000 of additional costs relating to the acquisition will
not become due during the current year. Should some or all of these costs become
due during the current year, this would have an adverse effect on operating
cash.
The Company had net cash used in investing activities of $2,253,082 for
fiscal 1998 and $1,714,840 for fiscal 1997. The primary use of cash for
investing activities was for the acquisition of Manhattan Bagel Company, Inc.
The Company had net cash provided by financing activities of $9,035,718 for
fiscal 1998 and $2,836,554 for fiscal 1997. The primary use of cash in operating
activities relates to additional costs the Company has agreed to absorb
subsequent to the reorganization of the Manhattan Bagel Company, Inc.
Additionally, the Company has determined that approximately $4,100,000 of
additional costs relating to the acquisition will not become due during the
current year. Should some or all of the costs become due during the current year
thes would have an adverse effect on operating cash.
Hardware and Software System, Year 2000 Compliance
Headquarters computer systems are presently believed to be year 2000
compliant. As a consequence of the Manhattan Bagel Company, Inc. acquisition,
the accounting systems of the combined entity are being upgraded with completion
anticipated by August, 1999. Such upgraded software has been certified to be
year 2000 compliant. Conversion of accounting data to the new accounting systems
presents problems which are customary to any data conversion and the Company
anticipates running its accounting systems in parallel until it is confident
that the new systems are operating properly. The Company believes that the full
conversion will take place by October 1999.
The Company is also planning to implement a manufacturing management
information system. This software has been certified by the vendors as year 2000
compliant. Manufacturing controls are presently being carried out on systems
which are believed to be year 2000 compliant. With respect to manufacturing data
from locations outside of the Company's headquarters in Eatontown, NJ, that data
will continue to be transmitted to headquarters and will not add an additional
level of year 2000 risk.
The Company maintains communication with point-of-sale terminals in its New
World Coffee stores (Company-owned and franchised). The computer systems and
software utilized for this purpose are not year 2000 compliant. In order to
become year 2000 compliant, it will be necessary to effect the purchase of new
hardware and the installation of upgrades to the existing software. The software
vendor has certified that its upgrade will render the software year 2000
compliant. The Company anticipates implementing the upgrades in its stores
during the period ending December 31, 1999. It is possible that these upgrades
will not be completed by such date. In that event, the automated feature of
information retrieval may be adversely affected and the Company will have to
revert to a manual version of reporting until the upgrades can be completed. The
Company does not anticipate that this will have a material adverse effect on its
operations.
It is the Company's intention to eventually effect automated data transfer
between Manhattan Bagel franchisees and the Company's headquarters. At the
present time data collection from the franchisees is carried out on a manual
basis and will continue until hardware and software systems can be installed.
<PAGE>
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 and/or
flour, acquisitions by the Company of existing 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.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, KEY EMPLOYEES, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors, key employees 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 35 Chairman and Chief Executive Officer and Director
Sanford Nacht 66 President and Chief Operating Officer
Jerold E. Novack 43 Chief Financial Officer, Treasurer and Secretary
Jason Gennusa 40 Vice President - Manufacturing
Andrew Gennusa 33 Vice President - Construction
Michael Ryan 43 Vice President - Franchise Services
Rocco Fiorentino 43 Vice President - Business Development
Barry Levine 49 Vice President - Coffee
Robert Williams 49 Vice President - Coffee
Keith F. Barket/(1)/(2) 37 Director
Karen Hogan/(1) 37 Director
Edward McCabe/(2) 60 Director
Leonard Tannenbaum 27 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
- -------------------------------------
Mr. Kamfar has served as a Director since founding the Company and as
Chairman and Chief Executive Office since December 1998. From May 1996 to
December 1998, he served as President and Chief Executive Officer of the
Company. Between October 1993 and May 1996, Mr. Kamfar served in a number of
functions, including Co-President and Co-Chief Executive Officer of the Company.
Between 1988 and 1993, he worked in the Investment Banking Division of Lehman
Brothers Inc., New York, NY, 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 with distinction in Finance from the
University of Maryland and an M.B.A. degree with distinction in Finance from The
Wharton School at the University of Pennsylvania.
Mr. Nacht has served as President and Chief Operating Officer of the
Company since December 1998. From September 1997 to December 1998, Mr. Nacht, as
President of Sterling Management Group, LLC, Princeton, NJ, served Manhattan
Bagel Company, Inc. as a management and operations consultant. From 1995 to
1997, Mr. Nacht was employed by York Management Services, Inc., a private
investment and turnaround management company located in Somerset, NJ, in various
positions including President and Chief Executive Officer. From 1990 to 1994,
Mr. Nacht was Chief Executive Officer for Gordon Construction, New York, New
York. From 1974 to 1985, Mr. Nacht served as a regional Master Franchisor for
ERA Real Estate, where he developed the New Jersey and Pennsylvania markets for
ERA. Mr. Nacht has an undergraduate degree from the Wharton School at the
University of Pennsylvania and an M.B.A. degree from Pace University.
<PAGE>
Mr. Novack joined the Company as Vice President-Finance in June 1994 and
has served as Chief Financial Officer since January 1999. From 1991 to 1994, he
served as Vice President/Controller of The Outdoor Furniture Store, Inc.,
Woodridge, NJ a specialty retail chain. From 1988 to 1991, he served as
Controller for Richmond Ceramic Tile, Inc., New York, NY a retailer and
distributor of ceramic tile. From 1985 to 1988, Mr. Novack served as Assistant
Controller for Brooks Fashion Stores, Inc., New York, NY a specialty retail
chain. Prior to 1985, Mr. Novack served as Import Division Controller for
Mercantile Stores Company, Inc., New York, NY a department store chain. Mr.
Novack has a B.S. degree in Accounting from Brooklyn College, City University of
New York.
Mr. Jason Gennusa has served as Vice President - Manufacturing since
November 1998. Mr. Gennusa is a co-founder of Manhattan Bagel Company, Inc. and
served as President of that company since 1987.
Mr. Andrew Gennusa has served as Vice President - Construction since
November 1998. Mr. Gennusa is a co-founder of Manhattan Bagel Company, Inc. and
served as a Vice President of that company since 1987.
Mr. Ryan has served as Vice President - Franchise Services of the Company
since November 1998. From 1995 to November 1998, Mr. Ryan served initially as
Director of Operations, and subsequently as Vice President - Franchise Services
of Manhattan Bagel Company, Inc. From 1994 to 1995, he served as Director of
Operations for T.J. Cinnamons, Secaucus, New Jersey. From 1973 to 1994, he
served in various capacities at Dunkin Donuts, most recently as Development
Manager.
Mr. Fiorentino has served as Vice President - Development since November
1998. From May 1996 to November 1998, Mr. Fiorentino served as Director of
Business Development of Manhattan Bagel Company, Inc. From 1985 to 1996, he
served as President of Specialty Bakeries, Inc., Moorestown, NJ, a franchisor of
Bagel Builders, a company which he co-founded and sold to Manhattan Bagel
Company, Inc. in 1996.
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, Branford, CT 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, New York, NY 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, Branford, CT 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, New York, NY a wholesale baked goods distributor. Prior to that time
Mr. Williams held various positions in the publishing industry.
Mr. Barket has served as a director of the Company since June 1995. Mr.
Barket is the Managing Director - Real Estate for Angelo, Gordon & Co., New
York, NY. From 1988 to 1997, Mr. Barket was a Managing Director of Amerimar
Enterprises Inc., New York, NY, a real estate investment and development company
during which time he was 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., New York, NY. Mr. Barket has B.A. degree from Georgetown
University and an M.B.A. degree from The Wharton School at the University of
Pennsylvania.
<PAGE>
Mr. McCabe has served as Director of the Company since February 1997. Mr.
McCabe is Chief Executive Officer of Powerhouse Partnership, Inc., New York, NY,
an advertising and communications company. From 1991 to 1998, Mr. McCabe was
Chief Executive Officer of McCabe & Company, New York, NY, an advertising and
communications company. From 1967 to 1986 he served in various capacities, most
recently as President and Worldwide Creative Director at Scali, McCabe, Sloves,
Inc. New York, NY, an advertising agency he co-founded.
Ms. Hogan has served as a director of the Company since December 1997. From
1992 to 1997, Ms. Hogan served as Senior Vice President, Preferred Stock Product
Management at Lehman Brothers, Inc., New York, NY. From 1985 to 1992, Ms. Hogan
served as Vice President, New Product Development Group at Lehman Brothers, Inc.
Ms Hogan has a B.S. degree from the State University of New York at Albany and
an M.B.A. degree in Finance and Economics from Princeton University.
Mr. Tannenbaum, C.F.A., 27, has served as a director of the Company since
March 1999. Mr. Tannenbaum is currently a managing partner at NYFM Capital, LLC
which he founded in 1999. From April 1997 to 1999, he was a principal with LAR
Management, Inc., which manages a $50,000,000 hedge fund. From June 1996 to
April 1997, he was an associate with Pilgrim Baxter, a mutual fund manager. From
1994 to 1996, he was an Assistant Vice President and analyst in the Small
Company Group at Merrill Lynch. Mr. Tannenbaum is also a director of Westower,
Inc. and General Devices, Inc., each a publicly traded company. Mr. Tannenbaum
is the designee of BET Associates, L.P. Mr. Tannenbaum is a graduate of The
Wharton School of The University of Pennsylvania, where he received a BS in
Strategic Management and an MBA in Finance.
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 except that Jason Gennusa and
Andrew Gennusa are brothers.
<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 1998, and any executive
officers of the Company who received compensation in excess of $100,000 during
1997 and 1998 ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
Securities
Underlying All Other
Other Annual Options/ Compensation ($)
Name and Principal Position Salary ($) Bonus ($) Compensation ($) SARs (#)
<S> <C> <C> <C> <C> <C>
R. Ramin Kamfar................. $137,500 $68,750 $24,000(1) - -
Chairman and Chief Executive
Officer
Sanford Nacht................... $236,666(2) $200,000 - 250,000 -
President and Chief Operating
Officer
Jerold E. Novack................ $118,462 $100,000 $12,000(1) - -
Chief Financial Officer
Barry Levine.................... $107,885 - $6,000(1) 40,000 -
Vice President - Coffee
Robert Williams................. $107,885 - $6,000(1) 40,000 -
Vice President - Coffee
- -----------------
</TABLE>
(1) Represents car and commuting allowances for the respective individuals.
(2) Includes $220,000 paid by Manhattan Bagel Company, Inc. prior to its
acquisition by the Company on November 24, 1998.
<PAGE>
Stock Option Grants
Set forth below is information on grants of stock options for the Named
Executive Officers for the period December 28, 1997 to December 27, 1998.
OPTION GRANTS IN 1998
Individual Grants
<TABLE>
<CAPTION>
Potential Realizable
Number of Percentage of Value At Assumed
Securities Total Options Exercise Annual Rates of
Underlying Granted to Price Stock Price
Option Employees in ($ per Expiration Appreciation
Granted Fiscal Year share) Date for Option Term (1)
5% 10%
<S> <C> <C> <C> <C> <C> <C>
Sanford Nacht........... 250,000 30.1% $1.00 11/24/08 $157,224 $398,435
Barry Levine............ 40,000 4.8% $1.00 10/20/08 $25,156 $63,750
Robert Williams......... 40,000 4.8% $1.00 10/20/08 $25,156 $63,750
</TABLE>
- ----------------------
(1) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years). Assumed stock price appreciation of 5%
and 10% is based on the fair value at the time of grant.
Fiscal Year-End Option Values
The following table sets forth certain information with respect to the
stock options held at December 27, 1998 by the Company's Named Executive
Officers.
1998 OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At Year End at Year End ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
R. Ramin Kamfar....... 193,735 174,999 $12,027 -
Jerold E. Novack...... 173,324 20,000 - -
Sanford Nacht......... - 250,000 - $31,250
Barry Levine.......... 120,000 - $5,000 -
Robert Williams....... 120,000 - $5,000 -
</TABLE>
- -------------------------
(1)......Calculated based on an assumed share price of $1.125 per share,
less the exercise price payable for such shares.
<PAGE>
Employment Contracts
As of February 1999, the Company approved a new employment agreement with
Mr. Kamfar, the Company's Chairman and Chief Executive Officer. The agreement
expires on December 31, 2000 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 $175,000 per year,
and an annual performance bonus of up to 50% of the base salary for calendar
year 1999 and any subsequent calendar year. Each bonus is based on the
attainment of certain corporate and individual goals. 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 February 1999, the Company approved a new employment agreement with
Mr. Novack, the Company's Chief Financial Officer. The agreement expires on June
30, 2000. The agreement provides for a compensation package of $130,000 per
year, increasing to $150,000 per year on July 1, 1999, and an annual performance
bonus of 25% to 50% of the base salary based on the attainment of certain
corporate, departmental and individual goals. 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 nine months.
In the event Mr. Novack terminates his employment voluntarily, 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. For a period of one year
following Mr. Novack's voluntary termination or 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 or bagels as
its principal business.
<PAGE>
As of November 24, 1998, the Company entered into an employment agreement
with Mr. Nacht, the Company's President. The agreement expires on December 1,
2000, but is automatically renewed for additional one-year periods unless either
party gives 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 commencement of
any such renewal. The agreement provides for a compensation package of $160,000
per year, an annual service bonus equal to twenty-five (25%) percent of the base
salary payable during each fiscal year, and an annual performance bonus of up to
twenty-five (25%) percent of the base salary payable during each fiscal year. In
lieu of any of the foregoing bonus provisions for the year ending December 31,
1998, Mr. Nacht is entitled to a guaranteed bonus of (i) $100,000 payable within
ten days after the effective date of the plan of reorganization of Manhattan
Bagel Company, Inc. and (ii) $100,000 payable during calendar year 1999, at the
same time as 1998 bonuses are paid to other executive employees of the Company
but in no event later than March 31, 1999. Pursuant to the agreement, Mr. Nacht
has agreed to maintain the confidentiality of any confidential or proprietary
information of the Company.
In the event that the Company terminates Mr. Nacht's employment other than
for cause, he will be paid severance compensation equal to his annual base
salary (at the rate payable at the time of such termination) for a period of
nine months. In the event the Company elects not to automatically extend Mr.
Nacht's employment for one year at the end of each term of his employment, Mr.
Nacht will be paid severance compensation equal to his annual base salary (at
the rate payable at the time of such termination) for a period of six months.
For a period of two years following Mr. Nacht's termination for any reason other
than an unremedied material default by the Company, Mr. Nacht cannot, directly
or indirectly, within 50 miles of any location operated by the Company or a
franchisee, conduct or have an interest in, or consult for or have any
relationship with any business 25% or more of the sales of which are represented
by sales of coffee and bagels.
As of November 24, 1998, the Company entered into an employment agreement
with Mr. J. Gennusa, the Company's Vice President - Manufacturing. The agreement
expires on November 23, 2000, but is automatically renewed for additional
one-year periods unless either party gives 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 commencement of any such renewal. The agreement provides for a
compensation package of $132,500 per year, an annual performance bonus of up to
twenty-five (25%) percent of the base salary payable during each fiscal year if
the annual operating budget of the Company for such fiscal year has been
achieved, and an annual performance bonus of up to twenty-five (25%) percent of
the base salary payable during each fiscal year if the operating budget for
which Mr. J. Gennusa is responsible is achieved. In addition, Mr. J. Gennusa has
been granted options to purchase up to 250,000 shares of the Company's common
stock at an exercise price of $1.656, which options expire ten years from the
date of grant. Pursuant to the agreement, Mr. J. Gennusa has agreed to maintain
the confidentiality of any confidential or proprietary information of the
Company. In the event that Mr. J. Gennusa's employment agreement is terminated
for any reason other than the expiration of its term, the Company shall not be
obligated to pay any compensation or expenses or provide other benefits other
than those accrued to the date of termination.
As of November 24, 1998, the Company entered into an employment agreement
with Mr. A. Gennusa, the Company's Vice President - Construction. The agreement
expires on November 23, 2000, but is automatically renewed for additional
one-year periods unless either party gives 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 commencement of any such renewal. The agreement provides for a
compensation package of $132,500 per year, an annual performance bonus of up to
twenty-five (25%) percent of the base salary payable during each fiscal year if
the annual operating budget of the Company for such fiscal year has been
achieved, and an annual performance bonus of up to twenty-five (25%) percent of
the base salary payable during each fiscal year if the operating budget for
which Mr. A. Gennusa is responsible is achieved. In addition, Mr. A. Gennusa has
been granted options to purchase up to 250,000 shares of the Company's common
stock at an exercise price of $1.656, which options expire ten years from the
date of grant. Pursuant to the agreement, Mr. A. Gennusa has agreed to maintain
the confidentiality of any confidential or proprietary information of the
Company. In the event that Mr. A. Gennusa's employment agreement is terminated
for any reason other than the expiration of its term, the Company shall not be
obligated to pay any compensation or expenses or provide other benefits other
than those accrued to the date of termination.
<PAGE>
Directors' Compensation
Each non-employee director of the Company is paid $1,000 for each of the
quarterly Board meetings of each calendar year, $500 for each additional Board
meeting held in the same calendar year and $250 for each committee meeting. Such
payments are made in Common Stock of the Company. Employee directors are not
compensated for service provided as directors. Additionally, each non-employee
director receives stock options to purchase 10,000 shares of Common Stock on the
date on which such person first becomes a director, and on October 1 of each
year if, on such date, he or she shall have served on the Company's Board of
Directors for at least six months. The exercise price of such options shall be
equal to the market value of the shares of Common Stock on the date of grant.
All directors are reimbursed for out-of-pocket expenses incurred by them in
connection with attendance of Board meetings and committee meetings.
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.
<PAGE>
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 April 7, 1999 (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
Beneficially
Name and Address of Beneficial Owner Owned Percentage
<S> <C> <C>
Fidelity Management & Research........................................... 1,459,600 7.5%
82 Devonshire Street
Boston, MA 02109
R. Ramin Kamfar.......................................................... 724,762(1) 3.6%
Chairman and Chief Executive Officer
And Director
Sanford Nacht - (2) *
President and Chief Operating Officer
Jerold E. Novack ........................................................ 517,407(3) 2.5%
Vice President - Finance
Barry Levine ............................................................ 184,656(4) *
Vice President - Coffee
Robert Williams ......................................................... 184,656(4) *
Vice President - Coffee
Keith F. Barket ......................................................... 60,212(5) *
Director
Edward McCabe ........................................................... 32,185(6) *
Director
Karen Hogan ............................................................. 46,037(7) *
Director
Leonard Tannenbaum ...................................................... 7,500 *
Director
All directors and executive officers
As a group (11 persons)............................................... 2,817,415 13.2%
</TABLE>
____________________
*Less than one percent (1%).
<PAGE>
(1) Includes 193,735 shares which may be acquired upon the exercise of
options which will be exercisable within 60 days. Does not include 141,666
shares underlying stock options which are not exercisable within 60 days.
(2) Does not include 250,000 shares underlying stock options which are not
exercisable within 60 days.
(3) Includes 298,324 shares which may be acquired upon the exercise of
options which will be exercisable within 60 days. Does not include 145,000
shares underlying stock options which are not exercisable within 60 days.
(4) Includes 120,000 shares which may be acquired upon the exercise of
presently exercisable options.
(5) Includes 40,000 shares which may be acquired upon the exercise of
presently exercisable options.
(6) Includes 30,000 shares which may be acquired upon the exercise of
presently exercisable options.
(7) Includes 20,000 shares which may be acquired upon the exercise of
presently exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 29, 1997, the Company sold two stores to 723 Food Corp., a
corporation owned by Jerold E. Novack and Richard Windisch. Mr. Novack is Chief
Financial Officer of the Company. Mr. Windisch served as the Company's Vice
President - Operations from January 1998 to February 1999, and, from September
1994 to July 1996. The stores included an existing operation and another store
which was partially constructed. The purchase price was $575,000, which was part
in cash and notes. This transaction was approved by the Board of Directors of
the Company. The Company believes that the terms of this transaction are as
favorable to the Company as those which could have been obtained from
unaffiliated third parties.
In fiscal year ended December 28, 1997, Capico International, a corporation
for which Ronald Hari, a former director of the Company, serves as President and
Chief Executive Officer, was paid a consulting fee of $70,000 by the Company
with respect to assistance in developing international and multi-unit
franchising.
On or about March 25, 1998, the officers of the Company, R. Ramin Kamfar
and Jerold E. Novack, signed an agreement to purchase four stores from the
Company. Mr. Kamfar is Chief Executive Officer of the Company and Mr. Novack is
Chief Financial Officer. The purchase price was $1,250,000. This transaction was
approved by the Board of Directors of the Company. The Company believes that the
terms of this transaction are as favorable to the Company a those which could
have been obtained from unaffiliated third parties.
Leonard Tannenbaum, a new director of the Company, is a limited partner and
ten (10%) owner in BET Associates, L.P. ("BET"). On November 24, 1998, the
Company completed a $5 million dollar debt transaction with BET, which funds
were used for the acquisition of Manhattan Bagel. See "Management's Discussion
and Analysis - Liquidity and Capital Resources." Mr. Tannenbaum serves on the
Company's Board of Directors as the designee of BET pursuant to the terms of the
foregoing transaction.
<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 B Preferred Stock (5)
4.4 Registration Rights Agreement by and among the Registrant and Barry H.
Levine and Robert B. Williams (4)
4.5 Promissory Note by and between the Registrant and Robert B. Williams(4)
4.6 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 1999 Employment Agreement with R. Ramin Kamfar (to be filed)
10.5 1999 Employment Agreement with Jerold Novack (to be filed)
10.6 Stock Purchase Agreement by and among Barry H. Levine, Robert B.
Williams and Willoughby's Incorporated and the Registrant (4)
10.7 Agreement with Willoughby's Incorporated (2)
10.8 Investor Rights Agreement (2)
10.9 Directors' Option Plan (2)
10.10 Form of Franchise Agreement (6)
10.11 Form of Store Franchise Sale Agreement (6)
10.12 Manhattan Bagel Company, Inc. - Debtor in Possession Amended
Acquisition Agreement and Exhibits (7)
10.13 Manhattan Bagel Company, Inc. - Debtor in Possession First Amended
Joint Plan of Reorganization (7)
10.14 Manhattan Bagel Company, Inc. - Debtor in Possession Confirmation
Order (7)
10.15 1999 Employment Agreement with Sanford Nacht (to be filed)
11.1 Statement re computation of per share earnings (included in the
Financial Statements forming a part of this 10-KSB)
<PAGE>
21.1 List of Subsidiaries
27.1 Financial Data Schedule
- ------------
(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.
(5) Incorporated by reference from Registrant's Report on Form 10-KSB, for
the Fiscal Year Ended December 29, 1996.
(6) Incorporated by reference from Registrant's Report on Form 10-KSB, for
the Fiscal Year Ended December 28, 1997.
(7) Incorporated by reference from Registrant's Current Report on Form 8-K
dated November 24, 1998.
(b) Reports on Form 8-K
During the fourth quarter of 1998, the Company filed a Report on Form 8-K
with respect to the acquisition of Manhattan Bagel Company, Inc., Debtor In
Possession.
<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-Manhattan Bagel, Inc.
By: /s/Ramin Kamfar
-------------------------------
Ramin Kamfar
Chief Executive Officer
Dated: April 12, 1999
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 dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Ramin R. Kamfar Chairman of the Board of Directors; Chief
- ---------------------- Executive Officer April 12, 1999
Ramin R. Kamfar
/s/Jerold E. Novack Chief Financial Officer April 12, 1999
- ----------------------
Jerold E. Novack
/s/Ed McCabe Director April 12, 1999
- ----------------------
Ed McCabe
/s/Keith Barket Director April 12, 1999
- ----------------------
Keith Barket
/s/Leonard Tannenbaum Director April 12, 1999
- ----------------------
Leonard Tannenbaum
/s/Karen Hogan Director April 12, 1999
- ----------------------
Karen Hogan
</TABLE>
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 27, 1998 F-2
Consolidated Statements of Operations for the Years Ended December 27, 1998 and December 28,
1997 F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 27,
1998 and December 28, 1997 F-4
Consolidated Statements of Cash Flows for the Years Ended December 27, 1998 and December 28,
1997 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-19
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New World Coffee - Manhattan Bagel, Inc.:
We have audited the accompanying consolidated balance sheet of New World
Coffee - Manhattan Bagel, Inc. (a Delaware corporation) and subsidiaries as of
December 27, 1998, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended December 27,
1998 and December 28, 1997. 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 - Manhattan
Bagel, Inc. and subsidiaries as of December 27, 1998 and the results of their
operations and their cash flows for the years ended December 27, 1998 and
December 28, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
April 12, 1999
F-1
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 27, 1998
Assets
<TABLE>
<CAPTION>
<S> ` <C>
Current Assets:
Cash and cash equivalents $5,269,627
Franchise and other receivables, net 964,609
Current maturities of notes receivable 2,103,079
Inventories 1,355,730
Prepaid expenses and other current assets 206,073
Assets held for resale 1,633,053
---------
Total current assets 11,532,171
Property, plant and equipment, net 6,889,876
Notes and other receivables, net 1,391,929
Trademarks, net 9,966,667
Goodwill, net 7,097,670
Deposits and other assets 1,215,124
---------
Total Assets $38,093,437
==========
Liabilities And Stockholders' Equity
Current Liabilities:
Accounts payable $1,750,647
Accrued expenses 7,279,646
Current portion of long-term debt 1,633,624
Current portion of obligations under capital leases 398,764
---------
Total current liabilities 11,062,681
Long-term debt 13,530,749
Obligations under capital leases 115,591
Deferred rent 261,638
Other liabilities 4,179,636
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; 0 shares issued and -
outstanding
Series A convertible preferred stock, $.001 par value; 400 shares authorized, 0 shares
issued and outstanding -
Series B convertible preferred stock, $.001 par value; 225 shares authorized, 58.5
shares issued and outstanding
Common stock, $.001 par value; 20,000,000 shares authorized; 19,442,644 shares issued
and outstanding 19,443
Additional paid-in capital 33,694,196
Accumulated deficit (24,770,496)
----------
Total stockholders' equity 8,943,143
----------
Total liabilities and stockholders' equity $38,093,437
==========
</TABLE>
The accompanying notes are an integral part of this consolidated balance
sheet.
F-2
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenues:
Retail sales $12,361,242 $15,047,353
Manufacturing revenues 2,193,145 -
Franchise-related revenues 2,728,137 820,515
--------- ---------
17,282,524 15,867,868
Retail costs 10,857,259 13,138,623
Manufacturing costs 1,606,635 -
General and administrative expenses 3,461,839 2,978,532
Depreciation and amortization 1,463,456 2,281,360
--------- ----------
Loss before provision for store closing, reorganization and noncash charges (106,665) (2,530,647)
Provision for store closings and reorganization costs 2,224,212 300,000
Noncash charge in connection with the realization of assets 4,235,266 3,480,977
--------- ----------
Operating loss (6,566,143) (6,311,624)
Interest expense, net 925,467 424,533
--------- ----------
Net loss ($7,491,610) ($6,736,157)
Basic and diluted net loss per common share $(0.55) $(0.80)
Weighted average number of common shares outstanding:
Basic and diluted 13,715,692 8,442,198
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-3
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>
Series A Series B Additional Total
Preferred Stock Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
--------------- --------------- -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 29, 1996 320 $ - - $ - 5,070,597 $5,071 $20,820,136 $(10,542,729) $10,282,478
Shares issued in connection
with the exercise of stock options
and bridge financing warrants - - - - 88,875 89 9,735 - 9,824
Issuance of Series B convertible
preferred stock and common stock
issued in connection with the
conversion of Series A convertible
preferred stock (175) - 137.50 - 194,440 194 (194) - -
Issuance of common stock, net of
offering expenses - - - - 4,620,670 4,621 4,345,424 - 4,350,045
Common stock issued in connection with
the conversion of Series B convertible
preferred stock - - (27.75) - 213,425 213 (213) - -
Common stock issued in connection with
the conversion of Series A
convertible preferred stock (145) - - - 1,411,654 1,412 (1,412) - -
Common stock issued in connection with
the acquisition (Note 10) - - - - 34,482 34 (34) - -
Net loss - - - (6,736,157) (6,736,157)
----- ----- ----- ----- --------- ----- ------- ----------- ----------
BALANCE, December 28, 1997 - - 109.75 - 11,634,143 11,634 25,173,442 (17,278,886) 7,906,190
Issuance of common stock, net of
offering expenses - - - - 4,353,477 4,354 4,374,209 - 4,378,563
Common stock issued in connection
with the conversion of Series B
convertible preferred stock - - (51.25) - 481,111 481 (481) - -
Common stock issued in connection with
the acquisition (Note 10) - - - - 2,973,913 2,974 4,147,026 - 4,150,000
Net loss - - - (7,491,610) (7,491,610)
----- ----- ----- ----- ---------- ------- ---------- ----------- ----------
BALANCE, December 27, 1998 - $ - 58.5 $ - 19,442,644 $19,443 $33,694,196 $(24,770,496) $8,943,143
===== ===== ===== ===== ========== ======= ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-4
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($7,491,610) ($6,736,157)
Adjustments to reconcile net loss to net cash used in operating activities
Changes due to restructuring and store closing activities:
Non-cash charge in connection with the realization of assets 4,235,266 3,480,977
Provision for store closing costs and restructuring charges 2,224,212 300,000
Write-off of fixed assets - 778,139
Depreciation and amortization 1,463,456 2,281,360
Employee compensation expense paid in common stock - 98,158
Imputed interest on notes payable - 121,039
Gain on sales of fixed assets (1,623,442) (444,018)
Provision for uncollectable notes receivable 198,331 -
Changes in operating assets and liabilities-
Receivables 54,708 198,661
Inventories 22,111 (181,884)
Prepaid expenses (54,366) 82,619
Deposits and other assets 564,041 (593,935)
Accounts payable 163,956 55,478
Accrued expenses (2,235,537) (890,738)
Deferred rent (183,148) (169,500)
Other Liabilities -- 227,314
--------- ---------
Net cash used in operating activities (2,662,022) (1,392,487)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (835,771) (2,140,200)
Proceeds from sales of fixed assets 3,485,676 466,648
Net cash paid for acquisitions (4,902,987) (41,288)
---------- ----------
Net cash used in investing activities (2,253,082) (1,714,840)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to notes receivable (1,902,409) -
Receipt of payments on notes receivable 546,199 -
Shares issued in connection with the exercise of stock options and
bridge financing warrants - 9,735
Issuance of common stock, net of offering expenses 4,203,570 3,247,265
Proceeds from notes payable 7,860,612 -
Proceeds from capital leases 43,915 -
Repayments of capital leases (386,963) (171,696)
Repayments of notes payable (1,329,207) (248,750)
--------- --------
Net cash provided by financing activities 9,035,718 2,836,554
--------- ---------
Net increase (decrease) in cash 4,120,614 (270,773)
CASH, beginning of year 1,149,013 1,419,786
--------- ---------
CASH, end of year $5,269,627 $1,149,013
========= =========
</TABLE>
F-5
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest,
net of amount capitalized $1,036,176 $362,815
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment disposed under capital leases -- 161,341
Equipment acquired under capital leases 33,169 227,310
Notes received from sale of fixed assets 1,781,000 846,374
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 -- 1,450,000
Conversion of Series B Convertible
Preferred Stock to Common Stock 512,500 1,750,000
Issuance of Series B Convertible
Preferred Stock and Common Stock issued
in connection with the conversion of
Series A Convertible Preferred Stock -- 275,000
Issuance of notes related to acquisitions 10,500,000 --
Issuance of Common Stock related to acquisition 4,150,000 --
Issance of Common Stock as payment of promissory note 1,392,500 231,250
Issuance of Common Stock to vendors as payment
for property, equipment and services rendered 485,000 768,750
DETAILS OF ACQUISITION
Assets acquired 13,062,037 --
Liabilities assumed (8,322,528) --
Notes issued (5,500,000) --
Estimated accruals at time of acquisition (3,600,000) --
Value of equity issued (4,825,000) --
Intangible assets acquired 17,114,336 --
----------
Cash paid for acquisition 7,928,845 --
----------
Cash acquired 3,025,858 --
----------
Net Cash Paid for Acquisition 5,430,815 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1998 AND DECEMBER 28, 1997
1. Nature of Business, Organization and Significant Accounting Policies
Nature of Business and Organization
New World Coffee - Manhattan Bagel, Inc. operates and franchises coffee
bars, bagel bakeries and integrated coffee bar/bagel bakeries in 18 states in
the Northeastern, Southeastern and Southwestern United States, the District of
Columbia, and internationally. The first Company-owned New World Coffee store
opened in 1993 and the first franchised New World Coffee store opened in 1997.
At December 27, 1998, the Company's retail system consisted of approximately 335
stores, including 27 Company-owned and 308 franchised and licensed stores. The
Company acquired the stock of Manhattan Bagel Company, Inc. - Debtor in
Possession ("MBC") on November 24, 1998, resulting in the addition of 6
Company-owned and 285 franchised and licensed Manhattan Bagel stores.
The Company is vertically integrated with bagel dough and cream cheese
manufacturing plants in Eatontown, NJ and Los Angeles, CA, and a coffee roasting
plant in Branford, CT. The Company's products are sold to franchised, licensed
and Company-owned stores as well as to wholesale, supermarket and
non-traditional outlets.
The Company is a Delaware corporation and was organized in November 1992.
Principles of Consolidation
The consolidated financial statements herein include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
Fiscal Year
The Company's annual accounting period ends on the last Sunday in December.
The fiscal year-end dates for 1998 and 1997 are December 27, 1998 and December
28, 1997, resulting in years containing 52 weeks.
Cash and Cash Equivalents
The Company considers securities with maturities of three months or less
when purchased to be cash equivalents. The Company had cash equivalents totaling
$624,000 at December 27, 1998 which were comprised of money market accounts
which costs approximate market value.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
F-7
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for
maintenance and repairs 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 is provided
using the straight-line method over the following estimate useful lives:
Leasehold improvements 5 to 15 years
Store equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Office equipment 5 years
Trademarks
Trademarks resulting from the acquisition of MBC are being amortized on a
straight-line basis over a period of 25 years.
Goodwill
Goodwill resulting from the acquisition of MBC is being amortized on a
straight-line basis over a period of 25 years.
Long-Lived Assets
The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful lives of the related assets. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 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. See Note 4 for detail of impairments identified by the Company in
performing this evaluation.
F-8
<PAGE>
Franchise Fee Revenue Recognition
Pursuant to the franchise agreements, franchisees are generally required to
pay an initial franchise fee and a monthly royalty payment equal to 5% of the
franchisee's gross sales. Initial franchise fees are recognized as revenue when
the Company performs substantially all of its initial services as required by
the franchise agreement. Royalty fees from franchisees are accrued as earned.
Royalty income, initial franchise fees and gains on sales of Company-owned
stores to franchisees are included in franchise revenues.
Advertising Costs
The Company expenses advertising costs as incurred.
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.
Fair Value of Financial Instruments
Franchise notes receivable (Note 6) are estimated by discounting future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. The fair value of notes payable
outstanding is estimated by discounting the future cash flows using the current
rates offered by lenders for similar borrowings with similar credit ratings. The
carrying amounts of franchise and other receivables and notes payable
approximate their fair value.
Reporting Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or shareholders' equity.
Effective December 28, 1997, the Company, as required, adopted SFAS No.
128, "Earnings Per Share." In accordance with SFAS No. 128, net earnings/(loss)
per common share amounts ("basic EPS") are computed by dividing net
earnings/(loss) by the weighted average number of common shares outstanding and
exclude any potential dilution. Net earnings/(loss) per common share amounts
assuming dilution ("diluted EPS") are computed by reflecting potential dilution
of the Company's securities. Basic and diluted EPS are the same for the years
ended December 27, 1998 and December 28, 1997, respectively, since all
securities are considered antidilutive.
Segment Disclosure
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS 131, applicable to public
companies, established new standards for reporting information about operating
segments in annual financial statements. The disclosure prescribed by SFAS 131
is effective beginning with the year ended December 31, 1998. The Company does
not believe that it operates in more than one segment. Net Earnings/(Loss) Per
Common Share
Income Taxes
The Company provides for federal and state income taxes using the liability
method in accordance with the Financial Accounting Standards Board ("FASB") 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
SFAS No. 123 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-existing accounting pronouncements with the requirement that pro
forma disclosures of net income and earnings per share be included in the notes
to financial statements. In 1997, the Company elected to adopt the disclosure
requirements of SFAS No. 123 and show pro forma results of net loss and earnings
per share data.
F-9
<PAGE>
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.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
2. Acquisition Of Manahattan Bagel Company, Inc.
On November 24, 1998, the Company acquired Manhattan Bagel Company, Inc.
("MBC") under a plan of reorganization. The purchase price totaled approximately
$21,853,000, consisting of $7,300,000 of cash paid to MBC creditors; $5,500,000
in notes payable to MBC creditors; $4,150,000 of equity issued in the form of
shares of the Company's common stock and the accrual of certain post acquisition
expenses of $4,903,000, including indemnifications of up to $1,500,000,
guarantees of certain liabilities of up to $1,500,000 and certain post closing
reorganization costs of up to $1,903,000.
The purchase price was allocated to the assets acquired and liabilities
assumed based on management's estimate of their fair market value at the date of
acquisition and the difference between the cost of acquiring the assets and the
underlying fair market value of the net assets acquired, including identified
intangibles, was treated as goodwill, which is being amortized over 25 years.
The allocation of purchase price was done based on the information available to
management at that time. Should additional information come to the attention of
management, such amounts may be revised accordingly. In connection with the
acquisition, two former principals of MBC signed employment agreements and one
former principal signed a consulting agreement with the Company which terminate
November 23, 2000.
The consolidated statements of operations of the Company include the
results of MBC and its wholly owned subsidiary, I&Joy, Inc., since the date of
acquisition.
Following is the unaudited pro forma presentation as if the purchase of the
had occurred on December 30, 1996 (Unaudited):
Year Ended Year Ended
December 27, 1998 December 28, 1997
Revenue $46,003,000 $55,438,000
Operating loss ($10,645,000) ($31,637,000)
Net loss ($13,575,000) ($32,598,000)
Net loss per share ($0.99) ($2.79)
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.
F-10
<PAGE>
3. Other 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
totaling $1,700,000 (Note 8). 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 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 were initially scheduled to terminate in January 1999 but have
since been extended through January 2000.
On June 13, 1996, the Company purchased three Coopers Coffee Bar
("Coopers") locations for $242,500 cash and a $770,000 note payable (Note 5).
The purchase price was 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, and the fair value of the net assets acquired was
allocated to goodwill and is being amortized over 10 years.
4. Impairment Of Long Lived Assets
During 1997, the Company recorded a noncash charge to earnings of
approximately $3.5 million based on their evaluation of long lived assets in
accordance with SFAS 121 and in line with the Company's strategy to expand the
franchising program through the opening of additional new locations as well as
franchising Company-owned stores. This charge includes approximately $2.6
million in writedowns of the book value of the fixed assets of certain stores
and $121,000 writedown of net goodwill related to an acquisition. The carrying
values of the stores were written down to estimated future discounted cash
flows. An additional $750,000 of expense was recorded to reflect, among other
things, prepaid rent and other store costs estimated by management to be
incurred in connection with underperforming locations.
In the fourth quarter of 1998 the Company recorded a noncash charge to
earnings of approximately $4.2 million based on its evaluation of the
realizability of certain long-lived assets. This charge includes approximately
$3.0 million in writedowns of the book value of certain stores and $1.2 million
in writedowns of goodwill related to the Willoughby's and Coopers acquisitions.
For assets to be held and used, realizability was evaluated based on the
estimated undiscounted future cash flows attributable to such assets as compared
to the book values of such assets. When an impairment existed, such assets were
written down to their estimated discounted cash flows. For assets to be disposed
of, realizability was evaluated based on the fair value of the assets to be
disposed of, which was determined based upon estimated selling prices of the
locations.
5. Property and Equipment
Property and equipment consist of the following as of December 27, 1998:
Leasehold improvements $6,399,676
Store/factory equipment 2,742,201
Furniture and fixtures 1,188,401
Office equipment 1,924,800
----------
12,255,078
Less-
Accumulated depreciation and amortization (1,349,936)
Allowance for impairment of fixed assets (4,015,266)
----------
$6,889,876
==========
Depreciation expense totaled approximately $1,212,300 and $2,067,000 for
the years ended December 27,1998 and December 28, 1997, respectively.
F-11
<PAGE>
6. Notes Receivable
During 1998, the Company issued promissory notes to franchisees to
facilitate their construction of stores and provide other initial operating cash
flows, including franchise fees. The notes are payable with interest thereon at
rates ranging from 6-10% per annum and are generally to be paid in full
simultaneously upon the closing of a subsequent financing by the franchisee. The
notes have terms expiring from November 1999 to November 2004. Substantially all
of the assets of the franchisee's store are pledged as collateral for the notes.
Included in notes receivable is approximately $1,190,000 due from officers
of the Company related to the purchase of Company-owned stores.
7. Other Assets
Other assets consist of the following as of December 27, 1998:
Security deposits $562,515
Other 652,609
---------
$1,215,124
=========
8. Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 27, 1998:
<S> <C>
Notes payable to the Manhattan Bagel unsecured creditors' trust (a) $ 5,500,000
Note payable to financing company (b) 5,000,000
Note payable to New Jersey Economic Development Authority (c) 2,800,000
Promissory notes payable in connection with Willoughby's and
Cooper's acquisitions (d) 1,485,000
Mortgage payable (e) 277,468
Other 101,905
----------
15,164,373
Less- Current portion 1,633,624
----------
$13,530,749
==========
</TABLE>
(a) In connection with the acquisition of MBC, the Company entered into a
note payable of $5,500,000 with the Manhattan Bagel Unsecured Creditor Trust at
an interest rate of 9% per annum. Principal is payable quarterly in equal
installments commencing February 2000. Interest is payable quarterly in arrears
commencing February 1999. The note has a 3-year maturity.
(b) In connection with the acquisition of MBC, the Company entered into a
note payable of $5,000,000 with a financing company, at an interest rate of 12%
per annum, to provide a portion of the funds necessary to complete the
acquisition. The note has a 3-year maturity. Principal is payable in equal
quarterly installments of $250,000 commencing February 2000. Interest is payable
quarterly commencing February 1999. Additionally, for as long as the debt is
outstanding, the Company is obligated to issue to the finance company 250,000
shares of common stock each quarter. The first issuance of such common stock
took place in December of 1998.
(c) In December 1998, the Company entered into a note payable of $2,800,000
with the New Jersey Economic Development Authority at an interest rate of 9% per
annum. The note has a 10-year maturity. Principal is paid annually commencing
November 1999 and interest is paid quarterly beginning March, 1999.
F-12
<PAGE>
(d) In connection with the acquisition of Willoughby's in October 1996
(Note 3), a total of $1,100,000 remained due by the Company, bearing interest at
8.5%, of which $400,000 is payable on April 5, 1999, and $700,000 is payable on
October 5, 1999. The notes were discounted using a 10% interest rate.
In June 1997, a promissory note of $770,000 was issued by the Company in
connection with the Coopers acquisition (Note 3). The note is payable over four
years in equal installments and bears interest at 6%. The note was discounted
using an interest rate of 10%.
(e) The Company is obligated under a mortgage payable on its plant in South
Carolina. The mortgage bears interest at prime plus 1.25% and matures in March
2010. The mortgage is secured by the associated real estate.
Scheduled maturities of the notes payable as of December 27, 1998 are as
follows:
1999 $1,633,624
2000 4,283,624
2001 4,091,125
2002 3,307,000
2003 and thereafter 1,849,000
---------
$ 15,164,373
=========
Interest expense on long-term debt totaled approximately $224,000 and
$315,000 for the years ended December 27, 1998 and December 27, 1997,
respectively.
9. Accrued Expenses
Accrued expenses consist of the following at December 27, 1998:
Estimated future liabilities resulting from MBC
acquisition $4,321,451
Accrued payroll and related (including bonuses and
severance payments) 779,000
Accrued professional fees 375,000
Accrued store closing costs 350,000
Other $1,454,195
---------
$7,279,646
=========
10. Provision For Store Closings and Reorganization Costs
During 1997, the Company provided a $300,000 provision relating to store
closings originally provided for in 1996. All stores provided for were closed as
of December 28, 1997, and no additional reserve was provided by the Company. As
of December 27, 1998, the Company has recorded a provision, and a corresponding
accrual, of $350,000 relating to five stores that the company expects to close
during 1999. Additionally, during 1998 the Company closed what had been the
corporate offices of New World prior to the acquisition of MBC, at which time
all operations and corporate offices were centralized. In connection with this
move, the Company has recorded a charge of $1,874,212 to the statement of
operations during the year ended December 27, 1998, primarily comprised of the
abandonment of assets at the previous location with a remaining book value of
approximately $1,000,000 and the accrual for certain bonuses, severance and
relocation costs relating to the move.
F-13
<PAGE>
11. Stockholders' Equity
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 March 15, 1998, but was extended to March 15, 2000. The shares of common
stock issued have been pledged as collateral.
Series A and Series B Convertible Preferred Stock
In 1996, the Company completed the sale of 375 shares of Series A
Convertible Preferred Stock, generating 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 1997, the Company repurchased 175 shares of the Series A Convertible
Preferred Stock from certain holders and in exchange issued 137.5 shares of
Series B Convertible Preferred Stock, $.001 par value, and issued 194,440 shares
of unregistered shares of 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.
Additionally, the remaining 145 shares of the Series A Convertible Preferred
Stock were converted into 1,411,654 shares of Common Stock, and 27.75 shares of
the Series B Convertible Preferred Stock were converted into 213,425 shares of
Common Stock.
In 1998, 51.25 shares of the Series B Convertible Preferred Stock were
converted into 481,111 shares of Common Stock.
Common Stock
Subsequent to year end, the Company approved for increase in common shares
authorized for issuance to 50,000,000 shares.
On February 27, 1997 and August 29, 1997, the Company completed private
placements of 1,142,857 and 1,142,851 unregistered shares of common stock,
respectively, realizing approximately $1,153,000 and $845,000.
On May 23, 1997, the Company completed a secondary public offering and a
subsequent filing to register and issue additional shares of common stock.
1,898,806 and 521,864 shares of common stock were issued, respectively, at a
purchase price of $1.25 per share, realizing approximately $2,347,000 in net
proceeds after expenses of approximately $679,000. 308,000 and 307,000 shares of
common stock, respectively, were issued to vendors as payment for the fair value
of property, equipment and other services received by the Company. In addition,
58,526 and 205,000 of shares of common stock were issued as payment for notes
payable and employee bonuses.
On or about May 24, 1998, July 2,1998 and November 20, 1998 the Company
completed private placements of, 1,454,120, 862,068 and 555,000 shares of Common
Stock, respectively, realizing approximately $1,576,000, $1,000,000 and $500,000
in net proceeds after commissions and costs. Additionally, 1,000,000 warrants to
purchase the Company's common stock at an exercise price of $1.00 per share were
issued to an entity for certain services provided in connection with the
acquisition. The value of such warrants is approximately $675,000 has been
included as a component of the total purchase price of the acquisition.
In connection with the acquisition of MBC (Note 2), the Company issued
2,973,913 shares of common stock to creditors and employees of MBC.
During 1998, 1,137,068 and 49,333 shares of common stock were issued as
payment for notes payable and employee bonuses respectively.
Warrants
As of December 27, 1998, the Company has 1,907,927 warrants outstanding.
These warrants have exercise prices ranging from $.01 - $9.08 per share and have
terms ranging from 5 to 10 years. Such warrants were issued in connection with
financings and certain other services.
F-14
<PAGE>
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 berminate 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 are currently
reserved for issuance pursuant to the 1994 Plan and all have been issued.
In 1998 the Company granted 80,000 board-approved options to three
employees outside of the 1994 Plan and the Directors' Option Plan.
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 have 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.
These options vest immediately upon grant. A total of 184,000 and 144,000
options were granted under the Directors' Option Plan as of December 27, 1998
and December 28, 1997, respectively. A total of 16,000 shares were available for
grant under the Directors' Option Plan as of December 27, 1998.
A summary of the status of the Company' two stock option plans at December
27, 1998 and December 29, 1997, and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 1,094,614 $2.48 564,876 $3.09
Grant 40,000 1.00 619,738 1.78
Exercised - - -
Forfeited (343,457) 1.93 (90,000) 2.46
Outstanding, end of year 791,157 2.54 1,094,614 2.48
Exercisable, end of year 525,508 1.93 476,960
Weighted average, fair value of options granted $.63 $.99
</TABLE>
F-15
<PAGE>
The following table summarizes information about stock options outstanding
at December 27, 1998.
<TABLE>
<CAPTION>
Number Outstanding Weighted Average Number
at December 27, Remaining Weighted Average Exercisable at Weighted Average
Exercise Prices 1998 Contractual Life Exercise Price December 27, 1998 Exercise Price
--------------- ----------------- ----------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$.77-$ .99 83,784 7.74 $ .96 83,734 $.96
$1.00-$2.00 506,373 7.32 $ .88 300,440 $1.59
$2.13-$5.50 201,000 7.69 $2.60 141,334 $2.72
-------- ------- -----
791,157 525,508
======== =======
</TABLE>
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:
1998 1997
---- ----
Net loss:
As reported ($7,491,610) ($6,736,157)
Pro forma ($8,010,540) (7,118,522)
Basic net loss per common share:
As reported (.55) (.80)
Pro forma (.58) (.84)
Diluted net loss per common share:
As reported (.55) (.80)
Pro forma (.58) (.84)
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 1998 and 1997, respectively: risk-free interest
rates of 6.2% and 6.1%; expected dividend yields of 0%; expected lives of 5
years; expected stock price volatility of 57% and 51%.
12. Income Taxes
A summary of the significant components of deferred assets as of December
27, 1998 is as follows:
Operating loss carryforwards ($4,640,000)
Non cash charges not yet realized for tax reporting
purposes (3,576,000)
Accrued liabilities (1,033,000)
Other (109,000)
Net deferred tax assets (9,358,000)
Valuation allowance ($9,358,000)
-----------
-
===========
F-16
<PAGE>
The Company has recorded a full valuation allowance against its deferred
tax assets due to the uncertainty as to their future realization. The change in
the valuation allowance during 1998 was an increase of approximately $2,422,000.
At December 27, 1998, the Company had net operating loss carryforwards of
approximately $11.6 million available to offset future taxable income for
federal income tax purposes. These net operating loss carryforwards expire on
various dates through 2018. 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. No value has been attributed to the net operating loss
carryforwards acquired by the Company in the acquisition of MBC management's
evaluation of such value has not been completed. To the extent the Company is
able to utilize such acquired net operating loss carryforwards, the tax benefits
will first be offset against the goodwill recorded in the acquisition.
F-17
<PAGE>
13. Commitments and Contingencies
Operating Leases
The Company lease's office and retail space under various noncancelable
operating leases. Property leases normally require payment of a minimum annual
rental plus a pro rate share of certain landlord operating expenses.
As of December 27, 1998, approximate future minimum rental payments under
noncancelable operating leases for the next five years and the period thereafter
are as follows:
Year ending:
1999 $3,995,170
2000 4,028,320
2001 3,988,878
2002 3,882,671
2003 3,795,264
Thereafter 13,125,692
----------
$32,815,995
==========
Rent expense under operating leases was approximately $2,617,000 and
$2,865,000 for the years ended December 27, 1998 and December 28, 1997,
respectively.
Capital Leases
The Company has capital leases for computer equipment used in its stores
and offices. As of December 27, 1998, payments under such capital leases are as
follows:
Year ending:
1999 $188,610
2000 67,589
2001 15,989
--------
272,188
Less- Amount representing interest 158,022
--------
$114,166
========
Employment Agreements
The Company has entered into employment agreements with six officers of the
Company expiring between July 1999 and December 2000. Minimum base salaries and
bonuses for the term of these employment agreement total approximately
$1,584,000, of which the Company is committed to pay $1,330,294 after December
27, 1998.
Contingencies
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management and
counsel, it is not anticipated that the settlement or resolution of any such
matters will have a material adverse impact in the Company's financial
condition, liquidity or results of operations.
F-18
<PAGE>
Related Party Transactions
During 1998, two officers of the Company signed and agreed to purchased
four stores from the Company for a total purchase price of $1,250,000, which
generated a gain to the Company of approximately $545,000. One of these stores
was sold to an unrelated party during 1998.
14. Assets Held For Resale
In 1998, the Company determined that it would seek to sell the assets
relating to stores it had previously acquired in accordance with Company's
strategy to sell its Company-owned stores to franchisees. The Company evaluated
the reliability of the carrying amount of such assets based on the estimated
fair value of such assets which was determined based on the stores estimated
selling prices. Based on this evaluation, the Company wrote off approximately
$1,439,000 of goodwill and fixed assets relating to six locations. This
write-off is part of the impairment of long-lived assets further discussed in
Note 4. The remaining value of such assets is being classified as held for sale
in the accompanying consolidated balance sheet, based on the Company's plan and
intent to dispose of such stores by the end of 1999.
15. Other Liabilities
Other liabilities represent certain costs, which the Company has accrued
and which are not expected to come due within the next fiscal year. The
liabilities consist of $2,700,000 of certain indemnifications and guarantees and
approximately $1,400,000 of other expenses relating to the acquisition (such as
trustee and other fees) not expected to come due within the next year.
F-19
List of Subsidiaries
1. Willoughby's, Inc.
2. Manhattan Bagel, Inc. (New Jersey)
a. I & J Bagel, Inc. (California)
b. Paragon Bakeries, Inc. (New Jersey)
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<NAME> New World Coffee-Manhattan Bagel, Inc.
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