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 26, 1999
[ ] 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. $39,925,398
The aggregate market value of the voting stock held by non-affiliates per
the closing stock price as of March 10, 2000 is $38,536,914.
As of March 10, 2000, 11,418,345 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.
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ITEM 1. BUSINESS
General
New World Coffee - Manhattan Bagel, Inc. is the largest franchisor of bagel
bakeries and coffee bars in the United States. It operates and franchises bagel
bakeries and coffee bars in 26 states throughout the United States and the
District of Columbia. The first Company-owned New World Coffee store opened in
1993 and the first franchised New World Coffee store opened in 1997. On November
24, 1998, the Company acquired the stock of Manhattan Bagel, Company, Inc.
("MBC") resulting in the addition of 6 Company-owned and 285 franchised and
licensed Manhattan Bagel stores. On August 31, 1999, the Company acquired the
assets of Chesapeake Bagel Bakery ("CBB") resulting in the addition of 80
franchised and licensed Chesapeake Bagel Bakery stores. At December 26, 1999,
the Company's retail system consisted of approximately 377 stores, including 15
Company-owned and 362 franchised and licensed 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 1999 National Coffee Drinking
Trends report, approximately 62% of all consumers (age 10+) drink coffee on a
weekly basis, they drink an average of 3.5 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. From 1997 to 1999 the percentage of the U.S. population that drank a
gourmet coffee beverage increased 40%.
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, a market research
firm, household expenditures in the bagel bakery category increased by 40% from
1996 through 1999. 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.
Business Strategy
The Company's objective is to be a leading bagel bakery and coffee cafe
franchisor 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:
Industry Consolidation. The Company's strategy is to be the consolidator of
the bagel bakery industry. The industry is currently fragmented with many small
to medium-sized chains operating unprofitably or at marginally profitable
levels. The Company believes that the current industry environment will allow it
to acquire additional stores through acquisition of its weaker competitors.
These acquisitions, with subsequent conversion to one of the Company's core
brands will create financial synergies as current plant capacity is utilized to
supply new product sales to acquired units. In addition, the Company will be
able to leverage its investment in administrative infrastructure realizing
additional profits from these acquisitions.
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
Company's Manhattan Bagel and Chesapeake Bagel Bakery brands are positioned as
purveyors 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. The
New World Coffee brand is differentiated from competitors by the Company's
roasting style, which management believes delivers a
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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.
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. The Company has recently made improvements in its coffee
packaging system and continues to evaluate it's production process to take
advantage of additional production efficiencies.
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.
During 1999, the Company completed a redesign of its Manhattan Bagel Store
design. The new design, to be utilized in stores opening in the year 2000, will
more effectively promote the Company's product offerings and will allow more
prominent display of seasonal product selections.
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. During
1999, the Company established a wholesale sales department and added significant
new business in the convenience store and supermarket areas.
Expansion
A total of 14 franchised stores were opened during 1999. The Company plans
to open approximately 40 franchised stores in 2000, 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.
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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.
The Company has received interest from the international business community
for foreign franchising opportunities with both the Manhattan Bagel and New
World Coffee Brands. During 1999, the Company licensed its first franchisee in
Iceland. The Company believes that the international market presents an
opportunity to expand its brands. During the year 2000, the Company intends to
utilize its franchise development department to expand the international market.
Retail Stores
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. During 1999,
the Company redesigned its prototype store to emphasize its lunch offerings,
specialty coffee drinks and cool blended 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 Company expects to continue to
emphasize its lunch business going forward. In 1999, the Company continued to
expand its product offerings to include cool blended drinks.
Chesapeake Bagel Bakery. Chesapeake Bagel Bakery stores offer a variety of
freshly-baked bagels as well as other baked goods and dessert items. The bagels
are "authentic" New York style bagels prepared fresh each day in the stores. The
Chesapeake stores also offer an extensive variety of breakfast and lunch
sandwiches, coffee, salads and soups.
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; 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.
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<PAGE>
Sourcing, Manufacturing & Distribution
The Company believes that controlling the manufacture and distribution of
coffee, bagels and cream cheeses are important elements to ensuring both product
quality and 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 currently produces cream cheese in its Eatontown, NJ and Los
Angeles, CA manufacturing facilities.
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 currently
roasts and packages its coffee in its Branford, CT manufacturing facility.
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.
Marketing
The Company's store level marketing programs target the trade area of each
store, making extensive use of direct mail and couponing. In areas of dominant
influence, local marketing efforts may include radio and television advertising.
Company-owned and franchised stores are generally required to contribute up
to 2.5% of sales to the respective brand's marketing fund, which provides the
stores with marketing support including in-store point of purchase and
promotional materials. Print and other mass media advertising is utilized to
increase consumer interest and build sales.
Franchise Program
General. The Company considers franchising to be a key element in its
continued growth. As of December 26. 1999, there were 362 franchised stores
operating in 26 states and the District of Columbia. Additionally, the Company
had franchise agreements signed for approximately 8 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 franchise fee ranging from $7,500 for a kiosk-type store
to $25,000 for a fully-functional store, a 5% royalty, a marketing fund
contribution of 2.5% which includes a required local advertising and promotion
expenditure of 1.5%, and a $5,000 minimum grand opening expenditure.
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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. Since the acquisition of MBC, the Company terminated
four Manhattan Bagel master franchise agreements and recovered the following
territories: Florida; Maryland, Virginia and the District of Columbia; Western
New York, Erie, Pennsylvania and Northeastern Ohio; North Carolina, South
Carolina and Georgia. The Company currently has a single Manhattan Bagel master
franchise agreement in operation in Northern California. This master franchisee
is in default of its exclusive rights to its territory. The Company is currently
involved in discussions with this master franchisee to reacquire its territory.
Franchise Store Development. The Company furnishes each franchisee with
assistance in selecting sites and developing stores and provides prototypical
store design plans to the franchisee. 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 synergistic retailers
and competition
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 its bagel brands that consists of franchisee representatives. The
Advisory Councils hold regular meetings with the Company 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 ("Marks") are a
significant part of its business. The Company and its subsidiaries are the
owners of the federal registration of the Marks: "Manhattan Bagel", "New World
Coffee", "New World Coffee & Bagels", and "Chesapeake Bagel Bakery". Some of the
Company's and its subsidiaries' 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" and/or "Bagel", 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 Marks. The Company is also aware of a number of companies
which use various combinations of the words "New World" and/or "Coffee", 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 Marks, including but not limited to, the use of the
name "New World Coffee" by another entity in California. It is the Company's
policy to defend its Marks and the goodwill associated therewith from
encroachment by others. The Marks set forth herein represent the brands of the
retail outlets owned by the Company but the Company owns numerous other Marks
related to its businesses.
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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.
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, Manhattan Bagel and Chesapeake Bagel Bakery 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.
Employees
At December 26, 1999, the Company had 390 employees, of whom 138 were store
personnel, 170 were plant and support services personnel, and 82 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.
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ITEM 2. PROPERTIES
As of December 26, 1999 the Company and its franchisees and licensees
operated 377 stores, consisting of 38 New World Coffee stores, 259 Manhattan
Bagel stores and 80 Chesapeake Bagel Bakery stores as follows.
STORE LOCATIONS
<TABLE>
<CAPTION>
State Company Franchised Total
- - ----------------------- ------------ -------------- -------------
<S> <C> <C> <C>
Alabama 0 3 3
California 1 27 28
Colorado 0 5 5
Connecticut 6 5 11
Delaware 0 5 5
District of Columbia 0 3 3
Florida 0 28 28
Georgia 0 14 14
Illinois 0 1 1
Kansas 0 1 1
Louisiana 0 1 1
Maryland 0 17 17
Massachusetts 0 2 2
Michigan 0 4 4
Minnesota 0 1 1
Missouri 0 1 1
Nevada 0 2 2
New Jersey 0 63 63
New York 8 43 51
North Carolina 0 16 16
Ohio 0 6 6
Pennsylvania 0 63 63
South Carolina 0 4 4
Texas 0 8 8
Utah 0 1 1
Virginia 0 37 37
West Virginia 0 1 1
------------ -------------- -------------
TOTAL 15 362 377
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</TABLE>
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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 24,000 sqft
Bagel/Cream Cheese Manufacturing
Distribution
Greenville, SC (c) Bagel/Cream Cheese Manufacturing 12,500 sqft
Branford, CT (d) Office/Training Facilities 5,400 sqft
Coffee Roasting Plant
<FN>
- - ----------------------
(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, with an initial lease term through June 1, 2007 and two 5 year options.
(c) This facility is located on a 1.45 acre parcel of land owned by the Company. This facility is not currently in operation.
(d) This facility is leased through October 31, 2000. </FN>
</TABLE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 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.
On August 17, 1999, the annual 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 July 12, 1999. At the meeting, the stockholders approved a
restated certificate of incorporation which provided for a one for two stock
combination. Pursuant to this restatement, each holder of one share of the
Company's stock became a holder of one-half share of the Company's stock. The
stockholders, among other matters, approved a staggered Board of Directors
whereby not more than two-fifths of the Board of Directors will be elected
during any one year.
-9-
<PAGE>
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. All values have been adjusted to reflect the 1 for 2 stock split
which was effective August 24, 1999. <TABLE> <CAPTION>
Fiscal 1998 High Low
---- ---
<S> <C> <C>
First Quarter (From December 29, 1997 to March 29, 1998) $4.00 $2.56
Second Quarter (From March 30, 1998 to June 28, 1998) $3.82 $3.00
Third Quarter (From June 29, 1998 to September 27, 1998) $3.50 $1.62
Fourth Quarter (From September 28, 1998 to December 27, 1998) $3.00 $1.50
Fiscal 1999 High Low
---- ---
First Quarter (From December 28, 1998 to March 28, 1999) $2.76 $1.50
Second Quarter (From March 29, 1999 to June 27, 1999) $2.06 $1.50
Third Quarter (From June 28, 1999 to September 26, 1999) $1.94 $1.38
Fourth Quarter (From September 27, 1999 to December 26, 1999) $2.64 $1.63
</TABLE>
On March 10, 2000 the closing price for the Company's Common Stock as
reported by NASDAQ was $3.375 per share.
As of March 10, 2000, there were approximately 156 holders of record of the
Common Stock. This number does not include individual stockholders who own
Common Stock registered in the name 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 and is precluded from paying dividends under its bank agreements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
New World Coffee - Manhattan Bagel, Inc. is the largest franchisor of bagel
bakeries and coffee bars in the United States. It operates and franchises bagel
bakeries and coffee bars in 26 states throughout the United States and the
District of Columbia. The first Company-owned New World Coffee store opened in
1993 and the first franchised New World Coffee store opened in 1997. On November
24, 1998, the Company acquired the stock of Manhattan Bagel, Company, Inc.
resulting in the addition of 6 Company-owned and 285 franchised and licensed
Manhattan Bagel stores. On August 31, 1999, the Company acquired the assets of
Chesapeake Bagel Bakery resulting in the addition of 80 franchised and licensed
Chesapeake Bagel Bakery stores. At December 26, 1999, the Company's retail
system consisted of approximately 377 stores, including 15 Company-owned and 362
franchised and licensed 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.
-10-
<PAGE>
Results of Operations
Year Ended December 26, 1999 Compared To Year Ended December 27, 1998
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 131.0% to $39,925,398 for fiscal 1999
from $17,282,524 for fiscal 1998. Manufacturing revenues increased to
$25,104,635 or 62.9% of revenues. The increase was primarily attributable to
manufacturing revenues associated with MBC being included in the Company's
results for fiscal 1999. Royalties and franchise related revenues increased to
$6,171,413 or 15.5% of total revenues from $2,728,137 or 15.8% of total revenues
for the comparable 1998 period. The increase was primarily attributable to
royalties and franchise revenues associated with MBC being included in the
Company's results for fiscal 1999 and additional revenues attributable to the
acquisition of the assets of CBB during fiscal 1999. Retail sales decreased
30.0% to $8,649,350 for fiscal 1999 from $12,361,242 for the comparable 1998
period, primarily due to the sale of Company-owed stores to franchisees.
Costs and Expenses. Cost of Sales as a percentage of related manufacturing
and retail sales improved to 82.8% in fiscal 1999 from 85.6% in fiscal 1998. The
reduction in costs was attributable to a more profitable product mix as the
Company shifted from a predominantly retail sales mix in fiscal 1998 to a
predominantly manufactured goods sales mix in fiscal 1999.
General and administrative expenses as a percentage of total revenues
decreased to 15.4% in fiscal 1999 from 20.0% in fiscal 1998. The decline in
general and administrative expenses as a percentage of total revenues reflects
the elimination of duplicative expenses after the acquisition of MBC, the
Company's efforts to streamline certain administrative functions and the higher
revenue base available in fiscal 1999.
Depreciation and amortization expenses as a percentage of total revenues
decreased to 5.6% for fiscal 1999 from 8.5% for fiscal 1998 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.
In fiscal 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. No similar charges where recorded in fiscal 1999.
Income from Operations. Income from operations increased to $ 3,591,093 for
fiscal 1999 from a loss from operations of ($6,566,143) in fiscal 1998. The
increase in income from operations in 1999 reflects the Company's increased
revenue base coupled with post-acquisition cost savings attributable to the
acquisition of MBC and the elimination of non-cash charges pursuant to FASB 121
and store closing costs.
Interest expense, net for fiscal 1999 increased to $1,407,018 or 3.5% of
revenues from $925,467 or 5.4% of revenues for fiscal 1998. The increase in
interest expense is attributable to debt incurred in connection with the
acquisitions of MBC and CBB.
Extraordinary item. The extraordinary item in fiscal 1999 resulted from the
early extinguishment of debt at a discount from its face value. During 1999, the
Company settled its liability with the Manhattan Bagel Unsecured Creditors'
Trust for an amount less than its carrying value. The discount, net of related
costs incurred to extinguish the debt is reflected as an extraordinary item in
fiscal 1999. There were no comparable items in fiscal 1998.
Net Income. Net income for fiscal 1999 increased to $2,424,098 or 6.1% of
revenues from a loss of ($7,491,610) or (43.4%) of revenues in fiscal 1998. The
primary reasons for the increase in net income were the increased revenue base
for fiscal 1999, elimination of non-cash charges in connection with realization
of assets, elimination of provision for store closing costs and cost savings
associated with the integration of New World Coffee and MBC administrative
functions.
-11-
<PAGE>
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.
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.
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 3 Impairment of "Long-Lived Assets" on page F-10 and Note 9
"Store Provisions for Store Closings and Reorganization Costs" on page F-13.
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.
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. During 1999, MBC contributed substantially all of the
profitablility of the Company and accordingly, the valuation allowance relating
to such deferred tax assets has been reversed. The offsetting benefit has been
reflected as a reduction of the goodwill recorded in connection with the
acquisition of MBC. At December 26, 1999, the Company had net operating loss
carryforwards of approximately $25,000,000 available to offset future taxable
income. These amounts expire at various times through 2019. As a result of
ownership changes resulting from sales of equity securities and the acquistion
of MBC 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.
-12-
<PAGE>
Liquidity and Capital Resources
On November 4, 1999, the Company completed a private placement of 481,738
shares realizing approximately $650,000 net of offering expenses.
On August 31, 1999, the Company completed a $15,000,000 debt transaction
with a Bank consisting of a term loan in the amount of $12,000,000 and a
revolving credit facility of $ 3,000,000 of which the Company had drawn $
1,500,000 as of the date of the transaction. Proceeds from the debt transaction
were used to extinguish the Company's debt to BET Associates, L.P. and the
Manhattan Bagel Unsecured Creditors' Trust and for the acquisition of the assets
of Chesapeake Bagel Bakery as well for general corporate purposes.
On August 31, 1999, the Company completed a $1,500,000 debt transaction
with the seller of the assets of Chesapeake Bagel Bakery pursuant to the
acquisition of such assets. The note provides for quarterly payments of interest
only at 10%, with principal payments totaling $675,000 and $825,000 in fiscal
2003 and 2004, respectively.
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 Company plans to satisfy any of its capital requirements in 2000
through cash flow from operations and the sale of Company-owned stores to
franchisees which should generate additional cash. The Company may also raise
capital through additional equity offerings.
At December 26, 1999, the Company had working capital of $1,444,202
compared to working capital of $469,490 at December 27, 1998.
The Company had net cash provided by operating activities of $1,734,674 for
fiscal 1999 and net cash used in operating activities of $4,018,232 for fiscal
1998. The primary reasons for the improvement in cash provided by operations was
the increase in net income for fiscal 1999.
The Company had net cash used in investing activities of $ 2,864,229 for
fiscal 1999 and $2,253,082 for fiscal 1998.The primary use of cash for investing
activities was the acquisition of the assets of Chesapeake Bagel Bakery and
capital expenditures for improvements to the Company's infrastructure.
The Company had net cash used by financing activities of $1,259,730 for
fiscal 1999 and net cash provided by financing activities of $10,391,928 for
fiscal 1998. The primary use of cash for financing activities relates to the
repayment of debt and additional costs the Company has agreed to absorb
subsequent to the reorganization of the Manhattan Bagel Company, Inc. During
fiscal 1999, the Company paid approximately $3,666,000 of costs attributable to
the acquisition of MBC.
Hardware and Software System, Year 2000 Compliance
During 1999, the Company performed a comprehensive review of all hardware
and related software for year 2000 compliance. Upgrades were made to both
hardware and software at the Company's headquarters and in Company-owned stores.
All hardware and software installed was certified as year 2000 compliant. All
systems were tested prior to the close of the 1999 calendar year.
The Company has experienced no incidences of non-compliant software or
hardware during the year 2000 to date.
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.
-13-
<PAGE>
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.
-14-
<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 36 Chairman and Chief Executive Officer and Director
Sanford Nacht 67 President and Chief Operating Officer
Jerold E. Novack 44 Chief Financial Officer, Treasurer and Secretary
Michael Konig 39 General Counsel
Michael Lubitz 43 Corporate Controller
Michael Ryan 44 Vice President - Franchise Services
Rocco Fiorentino 44 Vice President - Business Development
Keith F. Barket/(1)/(2) 38 Director
Karen Hogan/(1) 38 Director
Edward McCabe/(2) 61 Director
Leonard Tannenbaum 28 Director
<FN>
(1) Member of Audit Committee
(2) Member of Compensation Committee
</FN>
</TABLE>
Mr. Kamfar has served as a Director since founding the Company and as
Chairman and Chief Executive Officer 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, NY.
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.
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. Konig joined the Company in January 1999 and serves as General Counsel.
From March 1998 to December 1998, Mr. Konig served as a consultant to the
Company regarding its acquisition of MBC, and maintained a separate client base.
From March 1997 to March 1998, Mr. Konig served as Chief Operating Officer and
General Counsel to Anthony L., L.L.C. and J.S.P. Footwear, Inc., manufacturers
and distributors of branded footwear and clothing lines generating $60 million
of annual revenues. From September 1989 to March 1997, Mr.
-15-
<PAGE>
Konig was an attorney in private practice with Greenbaum Rowe Smith Ravin Davis
& Himmel, LLP of Woodbridge, NJ, concentrating in Commercial Litigation,
Bankruptcy Law and Corporate Transactions. From September 1987 to September
1989, Mr. Konig was an attorney in private practice with Ravin Sarasohn Cook
Baumgarten Fisch & Baime of Roseland, NJ, concentrating in Bankruptcy Law. Mr.
Konig received a J.D. (cum laude) from California Western School of Law and an
M.B.A. in Finance with high honors from San Diego State University.
Mr. Lubitz, C.P.A joined the Company in February 1999 and serves as
Corporate Controller. From 1996 through January of 1999, Mr. Lubitz served as
Corporate Controller of The Princeton Review, New York, NY a leading test
preparation company. From 1986 to 1995, Mr. Lubitz was a Certified Public
Accountant in Public Practice with the firm of Becker, Sarran & Lubitz,
Chartered of Bethesda, MD. From 1982 to 1985. Mr. Lubitz served as Vice
President - Finance of Resource Ventures, Inc., Alexandria, VA, an international
trading and transportation company. Prior to 1982, Mr. Lubitz was an Auditor
with Arthur Andersen & Co., New York, NY. Mr. Lubitz holds B.S. degrees in
Accounting and Industrial Relations from Rider University. Mr. Lubitz received
his CPA certification from the state of Pennsylvania in 1980.
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. 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 a B.A. degree from
Georgetown University and an M.B.A. degree from The Wharton School at the
University of Pennsylvania.
Mr. McCabe has served as director of the Company since February 1997. Mr.
McCabe has served as a marketing and investment banking consultant since 1998.
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., New york, NY. 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., has served as a director of the Company since March
1999. Mr. Tannenbaum is currently a managing partner at MYFM Capital, LLC which
he founded in 1999. He is also President of CollectingNation.com, a leading
online auction site. From April 1997 to 1999, he was a principal with LAR
Management, Inc., a hedge fund manager. 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 a director of Contech, Inc., a publicly traded company.
Mr. Tannenbaum is a graduate of The Wharton School of The University of
Pennsylvania, where he received a B.S. in Strategic Management and an M.B.A. in
Finance.
All directors currently serve for one to three-year terms and until their
successors have been elected and qualified. Beginning with the election of
directors in the year 2000, all directors will be elected to terms of three
-16-
<PAGE>
years on a staggered basis. 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.
-17-
<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 1999, and any executive
officers of the Company who received compensation in excess of $100,000 during
1998 and 1999 ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Securities
Underlying
Other Annual Options/
Name and Principal Position Salary ($) Bonus ($) Compensation ($) SARs (#)
--------------------------- ---------- --------- ---------------- --------
<S> <C> <C> <C> <C>
R. Ramin Kamfar................. $175,000 $87,500 $24,000(1) -
Chairman and Chief Executive
Officer
Sanford Nacht................... $160,000 $40,000 $4,800(1) -
President and Chief Operating
Officer
Jerold E. Novack................ $150,000 $37,500 $12,000(1) 125,000
Chief Financial Officer
Barry Levine $120,000 - $6,000(1) -
Vice President - Coffee
Robert Williams $120,000 - $6,000(1) -
Vice President - Coffee
<FN>
(1) Represents car and commuting allowances for the respective individuals.
</FN>
</TABLE>
-18-
<PAGE>
Stock Option Grants
Set forth below is information on grants of stock options for the Named
Executive Officers for the period December 27, 1998 to December 26, 1999.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
Individual Grants
Potential Realizable
Number of Percentage of Value At Assumed
Securities Total Options Exercise Annual Rates of
Underlying Granted to Price Stock Price
Option Employees in ($ per Expiration Appreciation
Granted Fiscal Year share) Date for Option Term (1)
------- ----------- ------ ---- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jerold Novack............ 125,000 100% $2.00 12/01/09 $87,181 $286,905
<FN>
(1) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years). Assumed stock price
appreciation of 5% and 10% is based on the fair value at the time of
grant.
</FN>
</TABLE>
Fiscal Year-End Option Values
The following table sets forth certain information with respect to the
stock options held at December 27, 1998 by the Company's Named Executive
Officers.
1999 OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At Year End at Year End ($) (1)
----------- -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
R. Ramin Kamfar....... 184,367 - $74,127 -
Jerold E. Novack...... 221,662 - $208,123 -
Sanford Nacht......... 62,500 62,500 $85,938 $85,938
<FN>
(1) Calculated based on an assumed share price of $3.375 per share, less the exercise price payable for such shares.
</FN>
</TABLE>
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,
-19-
<PAGE>
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.
As of November 1998, the Company entered into an employment agreement with
Mr. Nacht, the Company's President which was amended as of March 2000. 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 Mr. Nacht terminates his employment voluntarily, Mr.
Nacht will be paid severance compensation equal to his annual base salary plus
annual service bonus (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 125,000 shares of the Company's common
stock at an exercise price of $3.31, 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 125,000 shares of the Company's common
stock at an exercise price of $3.31, 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.
Directors' Compensation
Each non-employee director of the Company is paid $2,000 for each of the
quarterly Board meetings of each calendar year, $1,000 for each additional Board
meeting held in the same calendar year and $500 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 pending litigation involving certain officers of the
Company where indemnification may be required. These involve routine litigations
in respect to which the officers were believed to be acting solely in their
corporate capacity.
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 March 10, 2000 (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>
Manhattan Bagel Unsecured Creditors' Trust 1,086,957 9.52%
R. Ramin Kamfar.................................................... 447,317(1) 3.92%
Chairman and Chief Executive Officer
And Director
Sanford Nacht ...................................................... 62,500(2) *
President and Chief Operating Officer
Jerold E. Novack .................................................. 392,862(3) 3.44%
Vice President - Finance
Keith F. Barket ................................................... 42,361(4) *
Director
Edward McCabe ...................................................... 28,348(5) *
Director
Karen Hogan ........................................................ 35,274(6) *
Director
Leonard Tannenbaum ................................................. 26,005(6) *
Director
All directors and executive officers
As a group (11 persons)............................................ 1,679,322 14.71%
- - --------------------
*Less than one percent (1%).
-22-
<PAGE>
<FN>
(1) Includes 184,367 shares which may be acquired upon the exercise of
presently exercisable options.
(2) Includes 62,500 shares which may be acquired upon the exercise of
presently exercisable options. Does not include 62,500 shares
underlying stock options which are not exercisable within 60 days.
(3) Includes 221,662 shares which may be acquired upon the exercise of
presently exercisable options.
(4) Includes 27,000 shares which may be acquired upon the exercise of
presently exercisable options.
(5) Includes 25,000 shares which may be acquired upon the exercise of
presently exercisable options.
(6) Includes 20,000 shares which may be acquired upon the exercise of
presently exercisable options.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. During 1999, these stores
were resold.
Leonard Tannenbaum, a 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. In 1999, the obligation to BET
was repaid pursuant to the refinancing of the Company's debt. In connection with
the refinance of the Company's debt, a Company controlled by Mr. Tannenbaum was
paid $150,000 in advisory fees for services provided.
-23-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
3.1 Articles of incorporation (1)
3.1.1 Restated Certificate of Incorporation (8)
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)
10.1 1994 Stock Plan (2)
10.2 1999 Employment Agreement with R. Ramin Kamfar (to be filed)
10.3 1999 Employment Agreement with Jerold Novack (to be filed)
10.4 Investor Rights Agreement (2)
10.5 Directors' Option Plan (2)
10.6 Form of Franchise Agreement (6)
10.7 Form of Store Franchise Sale Agreement (6)
10.8 Manhattan Bagel Company, Inc. - Debtor in Possession Amended Acquisition Agreement and Exhibits
(7)
10.9 Manhattan Bagel Company, Inc. - Debtor in Possession First Amended Joint Plan of Reorganization
(7)
10.10 Manhattan Bagel Company, Inc. - Debtor in Possession Confirmation Order (7)
10.11 1999 Employment Agreement with Sanford Nacht, as amended (to be filed)
10.12 Credit Agreement dated August 31, 1999 by and among the Company, its active subsidiaries and BankBoston,
N.A.(8)
10.13 Rights Agreement between New World Coffee-Manhattan Bagel, Inc. and American Stock Transfer & Trust
Company, as Rights Agent, dated as of June 7, 1999(9)
11.1 Statement re computation of per share earnings (included in the
Financial Statements forming a part of this 10-KSB)
21.1 List of Subsidiaries (10)
27.1 Financial Data Schedule
- - -----------------
<FN>
(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.
(8) Incorporated by reference from Registrant's Current Report on Form 8-K
dated September 7, 1999.
(9) Incorporated by reference from Registrant's Current Report on Form 8-K
dated October 13, 1999.
(10) Incorporated by reference from Registrant's Report on Form 10-KSB, for
the Fiscal Year Ended December 27, 1998.
</FN>
</TABLE>
(b) Reports on Form 8-K
During the fourth quarter of 1999, the Company filed a Report on Form 8-K with
respect to a letter of intent to acquire New York Bagel Enterprises, Inc.
-24-
<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: March 27, 2000
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 March 27, 2000
Ramin R. Kamfar
/s/Jerold E. Novack Chief Financial Officer March 27, 2000
- - ----------------------
Jerold E. Novack
/s/Ed McCabe Director March 27, 2000
- - ----------------------
Ed McCabe
/s/Keith Barket Director March 27, 2000
- - ----------------------
Keith Barket
/s/Leonard Tannenbaum Director March 27, 2000
- - ----------------------
Leonard Tannenbaum
/s/Karen Hogan Director March 27, 2000
- - ----------------------
Karen Hogan
</TABLE>
-25-
<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 26, 1999 F-2
Consolidated Statements of Operations for the Years Ended December 26, 1999 and December 27, 1998 F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 26, 1999 and December 27, 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended December 26, 1999
and December 27, 1998 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-18
</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 26, 1999, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended December 26,
1999 and December 27, 1998. 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 26, 1999 and the results of their
operations and their cash flows for the years ended December 26, 1999 and
December 27, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
March 24, 2000
F-1
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 26, 1999
<TABLE>
<CAPTION>
Assets
<S> <C>
Current Assets:
Cash and cash equivalents $2,880,342
Franchise and other receivables, net 2,011,398
Current maturities of notes receivable 1,959,454
Inventories 1,845,354
Prepaid expenses and other current assets 275,694
Deferred income taxes - current portion 500,000
Assets held for resale 1,595,036
----------------
Total current assets 11,067,278
Property, plant and equipment, net 7,017,513
Notes and other receivables, net 1,143,073
Trademarks, net 15,988,993
Goodwill, net 2,312,645
Deferred income taxes 6,000,000
Deposits and other assets 495,296
----------------
Total Assets $44,024,798
================
Liabilities And Stockholders' Equity
Current Liabilities:
Accounts payable $2,014,703
Accrued expenses 4,554,880
Current portion of long-term debt 2,840,492
Current portion of obligations under capital leases 163,359
Other current liabilities 49,642
----------------
Total current liabilities 9,623,076
Long-term debt 15,557,416
Obligations under capital leases 230,692
Deferred rent 227,065
Other long term liabilities 6,014,784
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, 0 shares
issued and outstanding -
Common stock, $.001 par value; 50,000,000 shares authorized; 11,313,508 shares issued
and outstanding 11,314
Additional paid-in capital 34,706,849
Accumulated deficit (22,346,398)
----------------
Total stockholders' equity 12,371,765
----------------
Total liabilities and stockholders' equity $44,024,798
================
The accompanying notes are an integral part of this consolidated balance
sheet.
</TABLE>
F-2
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
------------------- ----------------
<S> <C> <C>
Revenues:
Manufacturing revenues $25,104,635 $2,193,145
Franchise-related revenues 6,171,413 2,728,137
Retail sales 8,649,350 12,361,242
------------------- ----------------
Total Revenues 39,925,398 17,282,524
Cost of Sales 27,948,455 12,463894
General and administrative expenses 6,136,510 3,461,839
Depreciation and amortization 2,249,340 1,463,456
Provision for store closings and reorganization costs - 2,224,212
Non-cash charge in connection with the realization of assets - 4,235,266
------------------- ----------------
Income (loss) from Operations 3,591,093 (6,566,143)
Interest expense, net 1,407,018 925,467
------------------- ----------------
Income before extraordinary item 2,184,075 (7,491,610)
Extraordinary item
Net gain from early extinquishment of debt 240,023 -
------------------- ----------------
Net Income (loss) $2,424,098 ($7,491,610)
=================== ================
Net income (loss) per common share - Basic
Income (loss) before extraordinary item $.22 $(1.09)
=================== ================
Extraordinary item $.02 -
=================== ================
Net income(loss) $.24 $(1.09)
=================== ================
Net income (loss) per common share - Diluted
Income (loss) before extraordinary item $.21 $(1.09)
=================== ================
Extraordinary item $.02 -
=================== ================
Net income(loss) $.23 $(1.09)
=================== ================
Weighted average number of common shares outstanding:
Basic 10,317,490 6,857,846
=================== ================
Diluted 10,692,613 6,857,846
=================== ================
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
F-3
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
Series A Preferred Series B Preferred
Stock Stock Common Stock
Shares Amount Shares Amount Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 28, 1997 ........................... -- $-- 109.75 $-- $5,817,072
Issuance of common stock, net of offering expenses -- -- -- -- 2,176,738
Common stock issued in connection with the
conversion of Series B convertible preferred
stock ......................................... -- -- (51.25) -- 240,555
Common stock issued in connection with the
acquisition (Note 10) ......................... -- -- -- -- 1,486,957
Net loss
-- -- -- -- --
------ ------ ------ ------ ----------
BALANCE, December 27, 1998 ........................... -- -- 58.5 -- 9,721,322
Issuance of common stock, net of offering expenses 1,167,171
Common stock issued in connection with the
conversion of Series B convertible preferred
stock ......................................... -- -- (58.5) -- 425,015
Net Income ....................................... -- -- -- -- --
------ ------ ------ ------ ----------
BALANCE, December 26, 1999 ........................... -- $-- -- $-- 11,313,508
====== ====== ====== ====== ==========
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Amount Capital Deficit Equity
------ ------- ------- ------
BALANCE, December 28, 1997 ........................... $ 5,817 $ 25,179,258 ($17,278,886) $ 7,906,189
Issuance of common stock, net of offering expenses 2,177 4,376,386 -- 4,378,563
Common stock issued in connection with the
conversion of Series B convertible preferred
stock ......................................... 241 (241) -- --
Common stock issued in connection with the
acquisition (Note 10) ......................... 1,487 4,148,513 -- 4,150,000
Net loss -- -- (7,491,610) (7,491,610)
----------- ------------ ---------- ----------
BALANCE, December 27, 1998 ........................... 9,722 33,703,916 (24,770,496) 8,943,142
Issuance of common stock, net of offering expenses 1,167 1,003,358 -- 1,004,525
Common stock issued in connection with the
conversion of Series B convertible preferred
stock ......................................... 425 (425) -- -
Net Income ....................................... -- -- 2,424,098 2,424,098
----------- ------------ ---------- ----------
BALANCE, December 26, 1999 ........................... $ 11,314 $ 34,706,849 ($22,346,398) $ 12,371,765
=========== ============ =========== ============
</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 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 2,424,098 ($7,491,610)
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
Provision for store closing costs and restructuring charges - 2,224,212
Write-off of fixed assets - -
Depreciation and amortization 2,249,545 1,463,456
Gain on sales of fixed assets (703,822) (1,623,442)
Extraordinary gain from the early extinguishment of debt (240,023)
Provision for uncollectable notes receivable - 198,331
Changes in operating assets and liabilities-
Receivables (1,046,789) 54,708
Inventories (489,624) 22,111
Prepaid expenses (69,621) (54,366)
Deposits and other assets 655,522 564,041
Receipts on notes receivable 994,881 (1,902,409)
Advances under notes receivable (602,400) 546,199
Accounts payable 264,056 163,956
Accrued expenses (1,058,549) (2,235,537)
Deferred rent (261,637) (183,148)
Other Liabilities (380,963) -
--------- ---------
Net cash provided by (used in) operating activities 1,734,674 (4,018,232)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,432,429) (835,771)
Proceeds from sales of fixed assets 951,636 3,485,676
Additions to assets held for resale 38,017 -
Net cash paid for acquisitions (2,421,453) (4,902,987)
----------- -----------
Net cash used in investing activities (2,864,229) (2,253,082)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering expenses 1,004,525 4,203,570
Proceeds from notes payable 13,787,620 7,860,612
Proceeds from capital leases 43,916
Payment of liabilities in connection with acquired assets (3,666,217)
Repayments of capital leases (571,598) (386,963)
Early retirement of debt (4,650,000)
Repayments of notes payable (7,164,060) (1,329,207)
----------- -----------
Net cash (used in) provided by financing activities (1,259,730) 10,391,928
----------- -----------
Net (decrease) increase in cash (2,389,285) 4,120,614
CASH, beginning of year 5,269,627 1,149,013
--------- ---------
CASH, end of year $2,880,342 $5,269,627
========== ===========
</TABLE>
F-5
<PAGE>
NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest,
net of amount capitalized $1,262,976 $1,036,176
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases 511,034 33,169
Notes received from sale of fixed assets 45,000 1,781,000
Conversion of Series A, B, and C
Convertible Preferred Stock to Common Stock - 4,230,054
Conversion of Series B Convertible
Preferred Stock to Common Stock (30,000) 512,500
Issuance of notes related to acquisitions 1,500,000 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
Issuance of Common Stock to vendors as payment
for property, equipment and services rendered 485,000
DETAILS OF ACQUISITION
Assets acquired - 13,062,037
Liabilities assumed - (8,322,528)
Notes issued (1,500,000) (5,500,000)
Estimated accruals at time of acquisition (2,500,000) (3,600,000)
Value of equity issued - (4,825,000)
Intangible assets acquired 6,421,453 17,114,336
--------- ----------
Cash paid for acquisition 2,421,453 7,928,845
--------- ---------
Cash acquired - 3,025,858
- ---------
Net Cash Paid for Acquisition $2,421,453 $4,902,987
</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 26, 1999 AND DECEMBER 27, 1998
1. Nature of Business, Organization and Significant Accounting Policies
Nature of Business and Organization
New World Coffee - Manhattan Bagel, Inc. operates and franchises bagel
bakeries and coffee bars in 26 states throughout the United States and the
District of Columbia. The first Company-owned New World Coffee store opened in
1993 and the first franchised New World Coffee store opened in 1997. The Company
acquired the stock of Manhattan Bagel Company, Inc.("MBC") on November 24, 1998,
resulting in the addition of 6 Company-owned and 285 franchised and licensed
Manhattan Bagel stores. On August 31, 1999, the Company acquired the assets of
Chesapeake Bagel Bakery ("CBB") resulting in the addition of 80 franchised and
licensed Chesapeake Bagel Bakery stores. At December 26, 1999, the Company's
retail system consisted of approximately 377 stores, including 15 Company-owned
and 362 franchised and licensed 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.
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 1999 and 1998 are December 26, 1999 and December
27, 1998, 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
$625,000 at December 26, 1999 which were comprised of money market accounts and
certificates of deposit which costs approximate market value. Included in cash
and cash equivalents is a certificate of deposit of $200,000 which secures a
note payable.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
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 estimated useful lives:
Leasehold improvements 5 to 15 years
Store equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Office equipment 3 to 5 years
F-7
<PAGE>
Trademarks
Trademarks resulting from the acquisition of MBC and CBB are being
amortized on a straight-line basis over a period of 30 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 3 for detail of impairments identified by the Company in
performing this evaluation during 1998. The Company does not believe that any
impairment occured in 1999.
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 a percentage
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 5) 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.
F-8
<PAGE>
Earnings Per Share
Effective December 28, 1997, the Company, as required, adopted SFAS No.
128, "Earnings Per Share." In accordance with SFAS No. 128, basic 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. Diluted earnings (loss) per common share amounts
assuming dilution ("diluted EPS") are computed by reflecting potential dilution
of the Company's common stock equivalents.
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.
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. The Company has elected to adopt the disclosure
requirements of SFAS No. 123 and show pro forma results of net loss and earnings
per share data.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. Acquisitions
On November 24, 1998, the Company acquired Manhattan Bagel Company, Inc.
under a plan of reorganization. The purchase price totaled approximately
$23,853,000, 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 $6,903,000, 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 $3,903,000.
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.
During 1999, the Company identified approximately $ 2,000,000 of additional
post acquisition expenses and reorganization costs that it expects to incur in
connection with the acquisition of MBC. This amount has been reflected as
additional goodwill and accrued liabilities consistent with the treatment
discussed above.
In connection with the acquisition, two former principals of MBC signed
employment agreements and one former principal signed a consulting agreement
with the Company, all of which will terminate November 23, 2000.
F-9
<PAGE>
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 had
occurred on December 28, 1997 (Unaudited):
Years Ended
December 27, 1998
-----------------
Revenue $46,003,000
Operating loss ($10,645,000)
Net loss ($13,575,000)
Net loss per share ($0.99)
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.
On August 31, 1999, the Company acquired the assets of Chesapeake Bagel
Bakery ("CBB"), a franchisor of bagel bakeries operating under the Chesapeake
Bagel Bakery brand name. The purchase price approximated $6,421,000 consisting
of $2,421,000 in cash paid to the seller, $1,500,000 in notes payable to the
seller and the accrual of $2,500,000 of post acquisition liabilities
representing unearned franchise fees and post closing store conversion costs.
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 which was determined by an independent appraisal. 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. The impact of the CBB acquisition was not
material to the financial statements.
3. Impairment Of Long Lived Assets
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 net realizable value. 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.
During 1999, the Company evaluated the realizability of long-lived assets
consistent with the methodology discussed above. No charge was made to earnings
during 1999 as value of the estimated discounted cash flows from such assets
exceeded the carrying value of the underlying assets.
4. Property and Equipment
Property and equipment consist of the following as of December 26, 1999:
Leasehold improvements $ 3,691,050
Store/factory equipment 3,686,497
Furniture and fixtures 196,665
Office equipment 1,627,985
----------------
9,202,197
F-10
<PAGE>
Less-
Accumulated depreciation and amortization (2,184,684)
----------------
$ 7,017,513
================
Depreciation and amortization expense totaled approximately $1,565,393 and
$1,212,300 for the years ended December 26, 1999 and December 27, 1998,
respectively.
5. 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.
6. Other Assets
Other assets consist of the following as of December 26, 1999:
Security Deposits $386,828
Other 108,468
-------------
$495,296
=============
F-11
<PAGE>
7. Long-term Debt
Long-term debt consists of the following at December 26, 1999:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank (a) $12,000,000
Revolving credit note payable to a bank (a) 1,500,000
Promissory note payable in connection with Chesapeake Bagel Bakery 1,500,000
acquisition (b)
Note payable to New Jersey Economic Development Authority (c) 2,520,000
Promissory notes payable in connection with Cooper's acqusition (d) 385,000
Mortgage payable (e) 255,669
Note payable to a bank (f) 136,779
Other 100,460
----------------
18,397,908
Less - Current portion 2,840,492
----------------
$15,557,416
================
<FN>
(a) As of August 31, 1999, the Company refinanced its senior debt through a
note payable to a bank. The note is payable as to interest only for the first
year of the Note Agreement with quarterly principal installments due thereafter.
The note carries a variable rate of interest, permitting the Company to select
an interest rate based upon either the prime rate or the Eurodollar rate,
adjusted by margin percentages defined in the credit agreement. The Note is due
in full on December 31, 2002. The note is secured by substantially all assets of
the Company. In addition, the credit agreement between the lender and the
Company requires the Company to maintain certain financial ratios and places
certain restrictions on the Company's ability to incur indebtedness, dispose of
assets or merge with another company without the consent of the lender.
As a part of the refinancing discussed above, the Company secured a
$3,000,000 revolving credit facility with a bank. At December 26, 1999,
$1,500,000 of borrowing was unused and available under the credit facility. The
credit facility is payable as interest only for its term, with all unpaid
principal due on December 31, 2002. The credit facility carries a variable rate
of interest, permitting the Company to select an interest rate based upon either
the prime rate or the Eurodollar rate, adjusted by margin percentages defined in
the credit agreement
(b) As a part of the acquisition of the assets of Chesapeake Bagel Bakery,
the Company entered into a note payable to the seller. The note provides for
quarterly payments of interest only at 10% with principal payments of $675,000
and $825,000 in 2003 and 2004, respectively. The note is due in full on August
31, 2004 and is secured by the related assets of Chesapeake Bagel Bakery
(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.
(d) In June 1997, a promissory note of $770,000 was issued by the Company
in connection with the Coopers acquisition. 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.
(f) In May 1999, the Company entered into a note payable to a bank of
$200,000. The note is payable in 23 monthly installments of $ 9,029 including
principal and interest at 7.82%. The note matures in April 2001. The note is
secured by a $200,000 certificate of deposit held by the bank which is
restricted and included in Cash and cash equivalents in
F-12
<PAGE>
the accompanying financial statements.
</FN>
</TABLE>
Scheduled maturities of the notes payable as of December 26, 1999 are as
follows:
2000 $2,840,492
2001 3,358,048
2002 5,822,679
2003 4,000,488
2004 1,144,001
Thereafter 1,232,200
---------------
$18,397,908
===============
Interest expense on long-term debt totaled approximately $ 1,482,765 and $
224,000 for the years ended December 26, 1999 and December 27, 1998,
respectively.
8. Accrued Expenses
Accrued expenses consist of the following at December 26, 1999:
<TABLE>
<CAPTION>
<S> <C>
Estimated future liabilities resulting from MBC acquisition $1,119,680
Accrued payroll and related (including bonuses and severance
payments) 1,020,917
Accrued professional fees 106,015
Accrued interest expense 391,303
Other 1,916,965
----------------
$4,554,880
================
</TABLE>
9. Provision For Store Closings and Reorganization Costs
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
expected to close. 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. During 1999 bonuses, severance,
relocation costs, and store closing costs mentioned above were paid.
10. Stockholders' Equity
Series A and Series B Convertible Preferred Stock
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. In
1998, 51.25 shares of the Series B Convertible Preferred Stock were converted
into 240,556 shares of Common Stock. In 1999, 58.5 shares of the Series B
Convertible Preferred Stock were converted into 425,015 shares of Common Stock
On June 7, 1999, the Company's Board of Directors authorized the issuance
of a Series A Junior Participating Preferred Stock in the amount of 700,000
shares. This issuance was made in accordance with the
F-13
<PAGE>
Stockholders' rights plan discussed below.
Common Stock
During 1999 the Company's stockholders approved an increase in the number
of common shares authorized for issuance to 50,000,000 shares.
On August 17, 1999, the Company's stockholders approved a restated
certificate of incorporation which provided for a one for two stock combination.
Pursuant to this restatement, each holder of one share of the Company's stock
became a holder of one-half share of the Company's stock. The accompanying
financial statements give retroactive effect to this stock split.
On November 4, 1999, the Company completed a private placement of 481,738
shares realizing approximately $650,000 net of offering expenses. On or about
May 24, 1998, July 2,1998 and November 20, 1998 the Company completed private
placements of 727,060, 431,034 and 277,500 shares of Common Stock, respectively,
realizing approximately $1,576,000, $1,000,000 and $500,000 in net proceeds
after commissions and costs. Additionally, 500,000 warrants to purchase the
Company's common stock at an exercise price of $2.00 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
1,486,957 shares of common stock to creditors and employees of MBC. During 1998,
568,534 and 24,667 shares of common stock were issued as payment for notes
payable and employee bonuses respectively.
Stockholders' Rights Plan
On June 7, 1999 the Board declared a dividend distribution of one Right on
each outstanding share of the Company's Common Stock, as well as on each share
later issued. Each Right will allow stockholders to buy one one-hundredth of a
share of Series A Junior Participating Preferred Stock at an exercise price of
$10.00. The Rights become exercisable if an individual or group acquires 15% or
more of the Company's Common Stock, or if an individual or group announces a
tender offer for 15% or more of the Company's Common Stock. The Company's Board
can redeem the Rights at $0.001 per Right at any time before any person acquires
15% or more of the outstanding Common Stock. In the event an individual ("the
Acquiring Person") acquires 15% or more of the outstanding Common Stock, each
Right will entitle its holder to purchase, at the Right's exercise price, one
one-hundredth of a share of Preferred Stock--which is convertible into Common
Stock at one-half of the then value of the Common Stock, or to purchase such
Common Stock directly if there are a sufficient number of shares of Common Stock
authorized. Rights held by the Acquiring Person are void and will not be
exercisable to purchase shares at the bargain purchase price. If the Company is
acquired in a merger or other business combination transaction, each Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of the acquiring company's common shares having a market value at that
time of twice the Right's exercise price.
Warrants
As of December 26, 1999, the Company has 1,907,927 warrants outstanding all
of which were exercisable at December 26, 1999. These warrants have exercise
prices ranging from $.02 - $18.16 per share and have terms ranging from 5 to 10
years. Such warrants were issued in connection with financings and certain other
services.
Stock Options
The Company's 1994 Stock Plan (the "1994 Plan") provides for the granting
to employees of incentive stock options and for the granting to employees and
consultants of nonstatutory stock options and stock purchase rights. Unless
terminated sooner, the 1994 Plan will terminate automatically in August 2004.
The Board of Directors has the authority to amend, suspend or terminate the 1994
Plan, subject to any required stockholder approval under applicable law,
provided that no such action may affect any share of common stock previously
issued and sold or any option previously granted under the 1994 Plan.
Options generally become exercisable in ratable installments over a
period of up to 4 years. A total of 375,000 shares
F-14
<PAGE>
of common stock are currently reserved for issuance pursuant to the 1994 Plan
and all have been issued.
In 1998 the Company granted 40,000 board-approved options to three
employees outside of the 1994 Plan and the Directors' Option Plan. In 1999 the
Company granted 125,000 board-approved options to one employee 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
100,000 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 142,000 and 92,000 options
were granted under the Directors' Option Plan as of December 26, 1999 and
December 27, 1998, respectively.
A summary of the status of the Company' two stock option plans at December
26, 1999 and December 27, 1998, and changes during the years then ended is
presented in the table and narrative below: <TABLE> <CAPTION>
1999 1998
---- ----
Weighted
Average Weighted
Exercise Average
Options Price Options Exercise Price
------- ----- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 365,578 $3.60 444,088 $4.96
Grant 50,000 1.74 20,000 2.00
Exercised - - - -
Forfeited (6,399) 4.78 (98,510) 3.86
Outstanding, end of year 409,179 3.35 365,578 3.60
Exercisable, end of year 405,179 3.38 251,779 3.86
Weighted average, fair value of options granted $ .56 $ .63
</TABLE>
The following table summarizes information about the Company's two stock
option plans at December 26, 1999:
F-15
<PAGE>
<TABLE>
<CAPTION>
Number Outstanding Weighted Average Number
at December 26, Remaining Weighted Average Exercisable at Weighted Average
Exercise Prices 1999 Contractual Life Exercise Price December 26, 1999 Exercise Price
--------------- ---- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$1.66 - $$2.00 61,867 7.92 $1.67 61,867 $1.67
$2.01 - $5.00 329,312 8.50 $3.32 325,562 $3.36
$5.01 - $11.00 18,000 6.00 $9.54 17,750 $9.68
------ ------
409,179 $3.35 405,179 $3.38
======= ===== ======= =====
</TABLE>
F-16
<PAGE>
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:
1999 1998
-----------------------------------
Net income (loss):
As reported $2,424,098 ($7,491,610)
Pro forma 1,972,286 (8,010,540)
Basic net income (loss) per common share:
As reported .24 (.55)
Pro forma .19 (.58)
Diluted net income (loss) per common share:
As reported .23 (.55)
Pro forma .18 (.58)
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 1999 and 1998, respectively: risk-free interest
rates of 5.5% and 6.2%; expected dividend yields of 0%; expected lives of 4
years; expected stock price volatility of 78% and 57%.
11. Income Taxes
A summary of the significant components of deferred assets as of December
26,1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Operating loss carryforwards ($10,000,000)
Non cash charges not yet realized for tax reporting
purposes (3,268,582)
Accrued liabilities (1,062,000)
Other 694,373
---------------
Net deferred tax assets (13,636,209)
Valuation allowance 7,136,209
---------------
$6,500,000
===============
</TABLE>
At December 26, 1999, the Company had net operating loss carryforwards of
approximately $25.0 million available to offset future taxable income for
federal income tax purposes. These net operating loss carryforwards expire on
various dates through 2019. The Company's ability to utilize its net operating
loss carryforwards will 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.
In 1999, MBC contributed substantially all the profitablility of the
Company and accordingly, the valuation allowance of $6,500,000 on its net
operating loss carryforwards has been reversed. The offsetting benefit has been
reflected as a reduction in the goodwill recorded in the acquisition of MBC.
12. Commitments and Contingencies
Operating Leases
The Company leases office and retail space under various non-cancelable
operating leases. Property leases normally require payment of a minimum annual
rental plus a pro rate share of certain landlord operating expenses.
F-17
<PAGE>
As of December 26, 1999, approximate future minimum rental payments under
non-cancelable operating leases for the next five years and the period
thereafter are as follows:
Year ending:
2000 $2,555,744
2001 2,511,170
2002 2,412,378
2003 2,393,409
2004 2,219,398
Thereafter 7,216,195
---------
$19,308,294
===========
Rent expense under operating leases was approximately $2,849,000 and
$2,617,000 for the years ended December 26, 1999 and December 27, 1998,
respectively.
Capital Leases
The Company has capital leases for computer equipment used in its stores
and offices. As of December 26, 1999, payments under such capital leases are as
follows:
Year ending:
2000 $285,086
2001 137,795
2002 67,072
2003 37,208
2004 24,567
---------
$551,728
Less- Amount representing interest 157,677
---------
$394,051
=========
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 $695,000 after December 26,
1999.
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.
Related Party Transactions
During 1998, two officers of the Company signed and agreed to purchase 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. In 1999, the remaining stores were
sold.
During 1999, a Company controlled by one of the Company's Directors was
paid a $150,000 advisory fee in connection with the refinancing of the Company's
debt.
F-18
<PAGE>
13. 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 the 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 3. 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 fiscal 2000.
14. Other long-term Liabilities
Other long-term 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 $2,500,000 of other expenses relating to acquisitions (such as
trustee and other fees) not expected to come due within the next year.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000949373
<NAME> NEW WORLD COFFEE - MANHATTAN BAGEL, INC.
<S> <C>
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<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
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0
0
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