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FILE PURSUANT TO RULE 424(b)1
REGISTRATION NO. 333-05785
2,000,000 SHARES
[LOGO]
NEW YORK BAGEL ENTERPRISES, INC.
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby, 1,800,000 shares are
being sold by New York Bagel Enterprises, Inc. (the "Company") and 200,000
shares are being sold by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of Common Stock by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common
Stock. For information relating to the factors considered in determining the
initial public offering price, see "Underwriting." The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "NYBS."
SEE "RISK FACTORS" APPEARING ON PAGES 7 TO 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE UNDERWRITING PROCEEDS TO SELLING
TO PUBLIC DISCOUNT COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share.................... $9.00 $0.63 $8.37 $8.37
Total (2).................... $18,000,000 $1,260,000 $15,066,000 $1,674,000
</TABLE>
(1) Before deducting estimated expenses of this offering of $700,000, payable by
the Company.
(2) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 300,000 shares of Common
Stock, solely to cover over-allotments, if any. See "Principal and Selling
Stockholders" and "Underwriting." If the Underwriters exercise this option
in full, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Stockholders will be $20,700,000,
$1,449,000, $17,325,900 and $1,925,100, respectively.
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that certificates
representing the shares will be ready for delivery at the offices of Rauscher
Pierce Refsnes, Inc., Dallas, Texas, on or about August 30, 1996.
RAUSCHER PIERCE REFSNES, INC. J.C. BRADFORD & CO.
------------------
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THE DATE OF THIS PROSPECTUS IS AUGUST 27, 1996
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[Photograph depicting front facade and side of building, and outside seating of
a Company restaurant.]
[Photograph depicting a selection of the Company's bagel delicatessen
sandwiches, drinks and other food items.]
[Photograph depicting the interior with table and booth seating of a Company
restaurant.]
[Photograph depicting products with Company logo.]
[United States map designating cities with Company-owned restaurants, franchised
restaurants, Company-owned restaurants under development and franchised
restaurants under development.]
[Photograph depicting product sack with Company logo and a selection of bagels
and cream cheeses.]
[Photograph depicting the interior front order counter with menu board and bagel
display case of a Company restaurant.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND COMBINED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
INFORMATION CONTAINED IN THIS PROSPECTUS (I) REFLECTS A 1.4-FOR-1 STOCK SPLIT
EFFECTED ON JUNE 4, 1996, (II) REFLECTS THE REORGANIZATION AND ACQUISITIONS AS
DESCRIBED HEREIN, (III) REFLECTS THE CONVERSION ON A ONE-FOR-ONE BASIS OF THE
CLASS B COMMON STOCK INTO CLASS A COMMON STOCK AND THE RECLASSIFICATION OF THE
CLASS A COMMON STOCK INTO COMMON STOCK, (IV) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, AND (V) REFLECTS NUMBER OF RESTAURANTS AS
OF JULY 31, 1996.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
THE COMPANY
The Company owns and franchises 50 quick-service New York Bagel restaurants
in 16 states that serve generous portions of fresh, high quality food with fast,
friendly service at an attractive price-value relationship. New York Bagel
restaurants provide a selection of up to 20 varieties of bagels that are made
from scratch, boiled and baked throughout the day in the traditional "New York
style." Breakfast menu items include a variety of bagels and custom-blended
cream cheeses, breakfast bagel sandwiches, gourmet coffees, muffins and
croissants. Lunch and dinner items include an assortment of bagel delicatessen
sandwiches, prepared salads, cookies and soft drinks. The restaurants are
generally open Monday through Saturday from 6:30 a.m. to 8:00 p.m. and on Sunday
from 8:00 a.m. to 5:00 p.m. Management believes that Company-owned restaurants
typically generate approximately 40% of their sales before 11:00 a.m., with an
average ticket of approximately $3.00 during such period and $4.00 thereafter.
Time studies performed on a periodic basis by the Company show that, on average,
breakfast customers are served within three minutes of placing their order and
lunch and dinner customers are served within five minutes.
The Company opened its first restaurant in 1986 and has grown by expanding
its base of Company-owned restaurants and selectively adding franchisees. The
Company has developed 18 of its 20 Company-owned restaurants in Oklahoma,
Kansas, Tennessee and Texas. In addition to developing new restaurants, the
Company acquired two bagel restaurants in December 1995, one of which was a
franchised New York Bagel restaurant. The Company commenced franchising the New
York Bagel concept in 1993 and has 20 franchisees operating 30 restaurants in 15
states. The Company intends to continue expanding its concept and contemplates
having 28 to 30 Company-owned and 45 to 50 franchised restaurants in operation
by the end of 1996 and 45 to 50 Company-owned and 70 to 80 franchised
restaurants by the end of 1997.
The Company believes that consumption of bagels has increased in recent
years as consumers have discovered that bagels are a healthier, lower fat
alternative to other quick-service foods and are a suitable substitute for
sandwich breads. Management believes that the market for retail bagel
restaurants is fragmented and underserved, and that the Company can capitalize
on the demand for fresh bagels by expanding the New York Bagel concept in
targeted markets.
The Company presently targets mid-sized and smaller metropolitan markets, as
management believes these markets typically contain fewer competing bagel
restaurants and more favorable lease and labor environments than larger
metropolitan markets. In each of its targeted markets, the Company seeks to
establish a strong market presence by employing a multiple store strategy
involving a bakery restaurant which produces bagels for itself and for one or
more nearby satellite restaurants. In addition to opening new restaurants, the
Company intends to pursue selective acquisitions of local and regional bagel
operations with an established market presence. By entering underserved markets
and opening multiple restaurants, the Company hopes to maximize market share and
establish brand awareness. The Company and its franchisees have implemented this
bakery/satellite restaurant combination 15 times.
3
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By employing a multiple store strategy, the Company focuses not only on
generating attractive unit level economics, but also on the economic returns of
each target market. The Company's approach to opening new restaurants has been
to minimize its required investment by leasing substantially all of its
locations. The Company believes that bakery restaurants can be opened for an
initial investment, including leasehold improvements, furniture, fixtures,
equipment, initial working capital and pre-opening expenses, of approximately
$250,000, with satellite restaurants requiring approximately $150,000. By
averaging these initial investment amounts within markets, the Company believes
it achieves attractive returns on investment. During 1995 and the period ended
June 30, 1996, average sales per Company-owned restaurant opened throughout each
period were $559,000 and $293,000, respectively. During 1995 and the period
ended June 30, 1996, the Company's restaurant level margin (defined as sales
from Company-owned restaurants less cost of sales and restaurant operating
expenses as a percentage of sales from Company-owned restaurants) was 17.1% and
18.9%, respectively.
The Company believes that the location, layout and design of its restaurants
contribute to the success of its operations. The Company's restaurants are
typically located in strip shopping centers, free-standing buildings and
downtown business districts that provide visibility, curb appeal and
accessibility. A variety of factors are considered in selecting sites for the
Company's restaurants, including population density, traffic patterns, area
demographics and competition. The Company's restaurants are configured to
facilitate a smooth flow of dine-in and carry-out traffic while retaining a
casual cafe atmosphere. The Company's prototypical unit is decorated in rich
colors and dark woods and contains a mixture of booth, table and barstool
seating and, where available, outdoor seating. Exposed ceilings with drop
lighting and a combination of tile and carpeted flooring are used to enhance its
comfortable ambiance. Walls are covered with black and white photographs
depicting classic New York scenes. The flexibility of its restaurant design and
layout allow its restaurants to be configured to fit a wide variety of
locations, thereby increasing the number of suitable sites.
Management believes that comprehensive training is essential to the
efficiency and consistency of its operations. Accordingly, the Company conducts
an extensive 90-day training program for its restaurant managers and franchisees
that is comprised of approximately ten days of classroom instruction on
administration, record keeping and inventory control and approximately 80 days
of on-site instruction on baking and food preparation at the Company's training
facility in Oklahoma City, Oklahoma. In addition, the Company provides a team
for on-site assistance during the initial ten days of operation at each
Company-owned restaurant and at a franchisee's initial franchised restaurant.
The Company's executive offices are located at 300 I.M.A. Plaza, 250 North
Water Street, Wichita, Kansas 67202-1213, and its telephone number is (316)
267-7373.
THE OFFERING
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<S> <C>
Common Stock offered by the Company.............. 1,800,000 shares
Common Stock offered by the Selling
Stockholders.................................... 200,000 shares
Common Stock to be outstanding after this
offering (1).................................... 4,600,000 shares
Use of Proceeds.................................. To repay bank indebtedness, finance the
development of Company-owned restaurants,
for possible acquisitions of bagel
restaurants, and for working capital and
general corporate purposes.
Nasdaq National Market Symbol.................... NYBS
</TABLE>
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(1) Excludes (i) 400,000 shares of Common Stock reserved for issuance under the
Company's 1996 Incentive Plan, of which options to acquire 271,000 shares
are outstanding as of the date of this Prospectus and (ii) 19,320 shares of
Common Stock issuable upon conversion of the Convertible Debenture, as
defined herein. See "Management -- 1996 Incentive Plan" and "Description of
Capital Stock -- Convertible Debenture."
4
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SUMMARY FINANCIAL AND RESTAURANT DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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TWENTY-SIX
YEAR ENDED DECEMBER 31, SIX MONTHS WEEKS ENDED
------------------------------- ENDED JUNE JUNE 30,
1993 1994 1995 (1) 30, 1995 1996 (2)
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................................... $ 3,561 $ 5,822 $ 7,359 $ 3,539 $ 5,190
Operating income........................................ 99 647 666 394 676
Earnings before income taxes............................ 85 594 626 374 512
Net earnings............................................ 76 597 619 374 512
Pro forma to reflect income taxes (3):
Net earnings.......................................... $ 380 $ 311
Net earnings per share................................ $ 0.13 $ 0.10
Pro forma weighted average shares outstanding (in
thousands) (4)......................................... 3,019 3,019
RESTAURANT DATA:
System-wide sales (5)................................... $ 3,581 $ 7,260 $ 13,232 $ 5,623 $ 10,544
Company-owned restaurants (6):
Average period sales per restaurant................... 470 524 559 279 293
Average period sales per restaurant (excluding limited
hour restaurants) (7)................................ 513 604 635 316 322
Same restaurant sales increase........................ 21.0% 19.0% 9.8% 13.9% 5.1%
Number of restaurants open at end of period:
Company-owned......................................... 9 12 15 12 20
Franchised............................................ 2 9 25 16 30
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Total............................................... 11 21 40 28 50
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<CAPTION>
JUNE 30, 1996
-------------------------------
AS
PRO FORMA ADJUSTED
ACTUAL (8) (9)
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................................. $ (872) $ (1,124) $ 10,411
Total assets........................................................... 4,002 4,002 14,369
Total debt............................................................. 3,930 3,930 115
Stockholders' equity (deficit)......................................... (1,066) (1,341) 13,025
</TABLE>
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(1) The Company acquired two restaurants in December 1995. If such transactions
had occurred on January 1, 1995, "Total revenues," "Net earnings" and "Net
earnings per share" would have been approximately $8,761,000, $224,000 and
$0.07, respectively, for the year ended December 31, 1995, on a pro forma
basis. The pro forma results do not necessarily reflect what would have
occurred if the acquisitions had been made at the beginning of the
respective periods or the results that may occur in the future. See "Pro
Forma Condensed Combined Statement of Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
(2) Effective January 1, 1996, the Company elected to change its fiscal year end
from a calendar year end to a 52/53 week fiscal year, ending on the last
Sunday of the year, which consists of four 13-week periods.
(3) Reflects a pro forma adjustment assuming the Company had been treated as a C
corporation rather than as an S corporation for income tax purposes for the
periods presented. See "S Corporation Distributions" and Note 2(i) of Notes
to Combined Financial Statements.
5
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(4) See Note 2(i) of Notes to Combined Financial Statements.
(5) Reflects total sales of Company-owned restaurants and sales of franchised
restaurants as reported by franchisees or derived by the Company from other
data reported by franchisees.
(6) Reflects restaurants open throughout the entire period indicated. Same
restaurant sales reflects restaurants that were open during the entire
period indicated and the entire corresponding prior period.
(7) Limited hour restaurants are typically open Monday through Friday during
business hours. As of June 30, 1996, there were five Company-owned limited
hour restaurants and three franchised limited hour restaurants.
(8) Gives effect to (i) an accrual for the distribution of $184,000 to
stockholders as if the Company had terminated its S corporation status at
June 30, 1996 and made a distribution to the stockholders in connection with
their estimated federal and state income tax obligations, and (ii) the
establishment of a deferred tax liability in the estimated amount of $91,000
arising from the termination of the Company's S corporation status.
(9) As adjusted to reflect the sale of 1,800,000 shares of Common Stock offered
by the Company hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
6
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK
OFFERED HEREBY.
EXPANSION. As of June 30, 1996, there were 50 New York Bagel restaurants in
operation, consisting of 20 Company-owned and 30 franchised restaurants. In
addition, there were four Company-owned restaurants and four franchised
restaurants in various stages of development. By the end of 1996, the Company
contemplates having approximately 28 to 30 Company-owned and 45 to 50 franchised
restaurants in operation. The Company expects to have approximately 45 to 50
Company-owned and 70 to 80 franchised restaurants in operation by the end of
1997. The Company intends to use a significant portion of the net proceeds of
this offering to develop additional Company-owned restaurants. There can be no
assurance that the Company will be able to open all of its planned restaurants
or that, if opened, such restaurants can operate profitably. The opening and
success of New York Bagel restaurants will depend on various factors, not all of
which are within the control of the Company, including customer acceptance of
the Company's concept in new markets, the availability of suitable sites, the
negotiation of acceptable lease or purchase terms for new locations, permit and
regulatory compliance, the ability to meet construction schedules, the financial
and other capabilities of the Company and its franchisees, the ability of the
Company to successfully manage this anticipated expansion and to hire and train
personnel, and general economic and business conditions. Furthermore, because of
the Company's relatively small restaurant base, an unsuccessful restaurant could
have a more significant adverse effect on the Company's results of operations
than would be the case for a company with a larger restaurant base.
The Company's expansion will also require the implementation and integration
of enhanced operational and financial systems and additional management,
operational and financial resources. Failure to implement and integrate these
systems and add these resources could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth. The
Company experienced growth in revenues and net income in 1995 and in the period
ended June 30, 1996. There can be no assurance that the Company will continue to
experience growth in, or maintain its present level of, revenues or net
earnings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Expansion Strategy."
DEPENDENCE ON FRANCHISEES. The Company realizes a portion of its revenues
from initial franchise fees and continuing royalty payments from its
franchisees. If the Company's franchisees encounter business or operational
difficulties, the Company's revenues from royalties will be adversely affected.
Such difficulties may also negatively impact the Company's ability to sell new
franchises. Consequently, the Company's financial prospects are significantly
related to the success of its franchised restaurants, over which the Company has
limited direct operational control. There can be no assurance that the Company
will be able to successfully attract new franchisees or that the Company's
franchisees will be able to successfully operate existing or develop and operate
additional New York Bagel restaurants. See "Business -- Expansion Strategy" and
"Business -- Franchise Program."
COMPETITION. The quick-service restaurant industry is intensely competitive
and characterized by relatively low barriers to entry. New York Bagel
restaurants compete against many well established, quick-service restaurants,
local food establishments, supermarkets and convenience stores, many of which
have greater product and name recognition and larger financial and other
resources than the Company. An increase in the number of competitors,
particularly bagel restaurants or delicatessens, in the Company's territories
could have an adverse impact on the Company's results of operations and
expansion plans. See "Business -- Competition."
7
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LIMITED COMBINED OPERATING HISTORY. Although the business of the Company
began in 1986, the Company commenced operations as a combined entity in December
1995 and, as a result, has a limited combined operating history upon which
investors may base their evaluation of the Company's performance. As a result of
the Company's limited combined operating history, period-to-period comparisons
of operating results may not be meaningful and results of operations from prior
periods may not be indicative of future results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RESTAURANT INDUSTRY. The Company and the restaurant industry are
significantly affected by factors such as changes in local, regional or national
economic conditions, changes in consumer tastes and concerns about the
nutritional quality of quick-service foods. Multi-unit food service chains such
as the Company can also be substantially adversely affected by publicity
resulting from food quality, illness, injury or other health concerns or
operating issues stemming from one restaurant or a limited number of
restaurants. In addition, factors such as increases in food, labor and energy
costs, the availability and cost of suitable restaurant sites, fluctuating
insurance rates, state and local regulations and the availability of an adequate
number of hourly-paid employees can also adversely affect the restaurant
industry.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the continued efforts of senior management. The Company does not
have employment agreements with any of its senior management or employees. The
loss of the services of one or more of such key personnel could have a material
adverse effect upon the Company's results of operations. The Company's success
is also dependent upon its ability to attract and retain skilled restaurant
managers and employees and the ability of its key personnel to manage the
Company's growth and integrate its operations. There can be no assurance that
the Company will be successful in attracting and retaining such personnel. See
"Management."
INCREASES IN OPERATING COSTS; INTERRUPTIONS IN SUPPLIES. An increase in
operating costs could adversely affect the profitability of the Company. Factors
such as inflation, increased food and labor costs, including the pending
increase in the minimum hourly wage requirement, and employee benefit costs and
the availability of qualified management and other personnel may adversely
affect the profitability of the Company. The cost and availability of many
restaurant commodities are subject to fluctuations due to seasonality, weather,
demand and other factors. The Company's restaurants are dependent on frequent
deliveries of food supplies and any shortages or interruptions could have a
material adverse effect on the Company. See "Business -- Purchasing and
Distribution."
GEOGRAPHIC CONCENTRATION. All but one of the Company-owned restaurants are
located in Oklahoma, Kansas and Tennessee. As a result, the Company's results of
operations may be materially affected by adverse business, economic or weather
conditions in these states. Although the Company plans to open additional
restaurants in new geographic areas, there can be no assurance that the current
geographic concentration of the Company's business will not have an adverse
effect on its results of operations or financial condition in the future.
POSSIBLE ACQUISITIONS. The Company's growth strategy includes possible
acquisitions of bagel restaurants. However, no assurance can be given that the
Company will be able to find attractive acquisition candidates, consummate
additional acquisitions or that it will successfully integrate, convert or
operate any acquired business. In the event that the Company makes acquisitions,
there can be no assurance that any such acquisition and resulting conversion
expenses, including loss of restaurant sales during the remodel period, will not
have a material adverse effect upon the Company's operating results,
particularly during the period in which such operations are being integrated
into the Company. Furthermore, the Company's ability to make acquisitions may
depend upon its ability to obtain financing. There can be no assurance that the
Company will be able to obtain financing on acceptable terms. See "Business --
Expansion Strategy."
FLUCTUATIONS IN QUARTERLY RESULTS. The timing of restaurant openings or
acquisitions, recognition of franchise fee income and seasonal factors may
result in fluctuations in quarterly operating results
8
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of the Company. In accordance with generally accepted accounting principles,
franchise and development fees and the corresponding deferred charges with
respect to each franchise or development agreement are not recognized as income
until a restaurant commences operations. There can be no assurance that
quarterly fluctuations will not continue and, accordingly, the Company's
financial results for a particular quarter may not be indicative of results for
an entire year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quarterly Financial Data."
CONTROL OF COMPANY. Following completion of this offering, the directors
and executive officers of the Company will beneficially own approximately 45.0%
of the outstanding Common Stock of the Company (approximately 42.0% if the
Underwriters' over-allotment option is exercised in full). In addition, the
existing stockholders and the Company are parties to a certain stockholders'
agreement (the "Stockholders' Agreement"), which, among other things, sets forth
certain agreements regarding the designation and election of directors of the
Company. These stockholders will own approximately 56.5% of the outstanding
Common Stock following completion of this offering (approximately 52.8% if the
Underwriters' over-allotment option is exercised in full). Due to their
ownership position and the Stockholders' Agreement, such stockholders will
retain the power to direct the Company's business and affairs through their
ability to control the outcome of elections of the Company's Board of Directors
and to take other actions that require the vote or approval of the stockholders
of the Company. See "Management -- Stockholders' Agreement" and "Principal and
Selling Stockholders."
BENEFITS OF OFFERING TO CERTAIN STOCKHOLDERS. The Company's existing
stockholders are hereby offering an aggregate of 200,000 shares of Common Stock
(230,000 shares if the Underwriters' over-allotment option is exercised in
full). The Company will not receive any proceeds from the sale of shares by the
Selling Stockholders. In addition, the Company intends to use approximately $4.5
million of the proceeds of this offering to retire bank indebtedness of the
Company which certain stockholders have guaranteed either jointly and severally
or severally on either a limited or unlimited basis. A portion of such
indebtedness was used to fund prior distributions to stockholders. The Company
also intends to use a portion of the net proceeds of this offering to fund a
distribution to existing stockholders in connection with their estimated federal
and state income tax obligations attributable to the Company's 1996 earnings. If
the Company had terminated its S corporation status as of June 30, 1996, the
Company's S corporation taxable income for 1996 would have been approximately
$409,000 and the resulting distribution would have been approximately $184,000.
There can be no assurance as to the actual amount of the Company's S corporation
taxable income for 1996 up to the date the Company terminates its S corporation
status or the amount of the related distribution. See "S Corporation
Distributions," "Use of Proceeds," "Certain Transactions -- Stockholder
Guarantees" and "Principal and Selling Stockholders."
GOVERNMENT REGULATION. The Company is subject to numerous federal, state
and local government regulations, including those relating to the preparation
and sale of food, the sale of alcoholic beverages, public health and building
and zoning requirements. Also, the Company and its franchisees are subject to
laws governing their relationship with employees, including minimum wage
requirements, overtime, working conditions and citizenship requirements. The
Company is also subject to federal regulation and certain state laws which
govern the offer and sale of franchises. Many state franchise laws impose
substantive requirements on franchise agreements, including limitations on
non-competition provisions and termination or non-renewal of a franchise. Some
states require that certain franchise offering materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain
food licenses, alcoholic beverage licenses or approvals to sell franchises could
adversely affect the Company's and its franchisees' results of operations. The
future enactment, adoption or amendment of laws or regulations, such as
establishing basic franchisee rights, increasing the minimum wage or other costs
associated with employees, could adversely affect the Company's results of
operations. See "Business -- Franchise Program" and "Business -- Government
Regulation."
9
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TRADEMARKS AND SERVICE MARKS. The Company is aware of the use by other
persons and entities in certain geographic areas of names and marks that are the
same as or similar to the Company's marks. Some of these persons or entities may
have prior rights to those names or marks in their respective localities.
Negative publicity surrounding such businesses may adversely affect the
Company's operations in those markets. In addition, the Company's marks contain
common descriptive words and thus may be subject to challenge by users of these
words, alone or in combination with other words, which describe other services
or products. Accordingly, there is no assurance that the Company's marks will be
available in all locations or that a challenge to the Company's use of such
marks will not result in adverse consequences, including a judgment that would
entail damages and/or the discontinuation of the Company's use of its marks. It
is the Company's policy to utilize other compatible marks in areas where there
are preexisting competing marks. See "Business -- Trademarks and Service Marks."
CLASSIFIED BOARD OF DIRECTORS. Concurrent with the completion of this
offering, the Company's Restated and Amended Articles of Incorporation and
Restated and Amended Bylaws will provide for a classified Board of Directors.
The terms of each class expire in consecutive years so that only one class is
elected in any given year. Such provisions could delay, deter or prevent a
merger, consolidation, tender offer, or other business combination or change of
control involving the Company that some or a majority of the Company's
stockholders might consider to be in their best interests, including offers or
attempted takeovers that might otherwise result in such stockholders receiving a
premium over the market price for the Common Stock. See "Management -- Term of
Office" and "Description of Capital Stock -- Certain Anti-Takeover Matters."
PREFERRED STOCK. Concurrent with the completion of this offering, the
Company's Restated and Amended Articles of Incorporation and Restated and
Amended Bylaws will authorize shares of Preferred Stock with respect to which
the Board of Directors of the Company will have the power to fix the rights,
preferences, privileges and restrictions without any further vote or action by
the stockholders. Depending upon the rights of such Preferred Stock, the
issuance of Preferred Stock could have an adverse effect on holders of Common
Stock by delaying or preventing a change in control of the Company, diluting the
voting rights of holders of Common Stock, making removal of the present
managment of the Company more difficult or reducing or restricting the payment
of dividends and other distributions to the holders of Common Stock, including,
without limitation, any liquidation preferences which may relate to such
Preferred Stock. Such provisions could delay, deter or prevent a merger,
consolidation, tender offer, or other business combination or change of control
involving the Company that some or a majority of the Company's stockholders
might consider to be in their best interests, including offers or attempted
takeovers that might otherwise result in such stockholders receiving a premium
over the market price for the Common Stock. See "Description of Capital Stock --
Preferred Stock."
SUPERMAJORITY STOCKHOLDER VOTES. Concurrent with the completion of this
offering, the Company's Restated and Amended Articles of Incorporation and
Restated and Amended Bylaws will require the affirmative vote of the holders of
at least two-thirds of the outstanding capital stock in order to remove
directors for cause, amend the Bylaws and approve certain business combinations
with respect to a "related person." Such provisions could delay, deter or
prevent a merger, consolidation, tender offer, or other business combination or
change of control involving the Company that some or a majority of the Company's
stockholders might consider to be in their best interests, including offers or
attempted takeovers that might otherwise result in such stockholders receiving a
premium over the market price for the Common Stock. See "Description of Capital
Stock -- Certain Anti-Takeover Matters."
DILUTION; ABSENCE OF PRIOR PUBLIC MARKET AND VOLATILITY OF STOCK
PRICE. This offering will result in immediate substantial dilution of net
tangible book value of $6.27 per share to new investors, which amount represents
the difference between the pro forma net tangible book value per share after the
offering and the initial public offering price of $9.00 per share. Prior to this
offering, there has been no public market for the Common Stock. Although the
Company's Common Stock has been approved for listing on the Nasdaq National
Market, there can be no assurance that an active market will develop
10
<PAGE>
or be sustained following this offering; therefore, a purchaser of the Common
Stock may not be able to readily liquidate its investment in the Common Stock.
The initial public offering price for the shares of Common Stock sold in this
offering was determined through negotiations between the Company and the
representatives of the underwriters and does not necessarily reflect the market
prices for the Common Stock following this offering.
Market prices for the Common Stock following this offering will be
influenced by a number of factors, including the Company's operating results and
other factors affecting the Company specifically and the restaurant industry and
the financial markets generally, as well as the liquidity of the market for the
Common Stock. The Company believes that the market price of its Common Stock
will reflect expectations that the Company will be able to continue to operate
its restaurants profitably and to develop new restaurants at a significant rate
and operate them profitably. If the Company is unable to operate its restaurants
as profitably and develop restaurants at a pace that reflects the expectations
of the market, investors could sell shares of the Common Stock at or after the
time that it becomes apparent that such expectations may not be realized,
resulting in a decrease in the market price of the Common Stock. In recent years
the stock market has experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
See "Dilution" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, the
Company will have outstanding 4,600,000 shares of Common Stock (4,870,000 shares
of Common Stock if the Underwriters' over-allotment option is exercised in
full). Of these shares, the shares sold in this offering will be tradeable
without restriction unless they are purchased by affiliates of the Company.
Shares of Common Stock outstanding prior to completion of this offering will be
"restricted securities" as that term is defined in Rule 144 ("Rule 144")
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
These "restricted securities," and any shares purchased by affiliates of the
Company in this offering may be publicly sold only if registered under the
Securities Act or if sold in accordance with an available exemption from
registration, such as those provided by Rule 144. The holders of 2,600,000
shares of such "restricted securities" have agreed that they will not, directly
or indirectly, sell or otherwise dispose of any of such shares for a period of
180 days after the date of this Prospectus, without the prior written consent of
Rauscher Pierce Refsnes, Inc., on behalf of the representatives of the
underwriters. No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sales, will have on
the market price of the Common Stock. The sale of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market price for the Common Stock. See "Shares Eligible For Future
Sale."
11
<PAGE>
S CORPORATION DISTRIBUTIONS
Since January 1, 1994, the Company and certain of the Prior Entities (as
defined herein) have been treated for federal and state income tax purposes as S
corporations under Subchapter S of the Internal Revenue Code of 1986, as amended
(the "Code"). Since such date, the Company's earnings have been and will be
taxed for federal and most state income tax purposes directly to the Company's
stockholders, rather than to the Company, through the date immediately prior to
the date of termination of the Company's S corporation status (the "Termination
Date"). The Termination Date will occur on the day immediately prior to the
completion of this offering. The Company will be responsible for the payment of
all federal and state income taxes on earnings beginning on the Termination Date
and continuing thereafter. See Notes 2 and 9 of Notes to Combined Financial
Statements and Pro Forma Balance Sheet as of June 30, 1996.
Certain Prior Entities paid cash distributions to their stockholders in the
aggregate amounts of approximately $394,000 and $2.5 million during 1994 and
1995, respectively. See "Certain Transactions -- Distributions." The
distributions made in 1995 were in excess of the earnings of such Prior Entities
and were partially funded by borrowings of such Prior Entities which were
assumed by the Company in connection with the Reorganization, as defined herein.
The Company intends to repay all of its bank borrowings with a portion of the
net proceeds of this offering. The Company also intends to use a portion of the
net proceeds of this offering to fund a distribution to the existing
stockholders in connection with their estimated federal and state income tax
obligations attributable to the Company's 1996 earnings prior to the Termination
Date. If the Company had terminated its S corporation status as of June 30,
1996, the Companys' S corporation taxable income for 1996 would have been
approximately $409,000 and the resulting distribution would have been
approximately $184,000. There can be no assurance as to the actual amount of the
Company's S corporation taxable income for 1996 up to the date the Company
terminates its S corporation status or the amount of the related distribution.
Under federal tax laws, if the Company fails to distribute its undistributed S
corporation earnings within a limited period of time following the Termination
Date, a later distribution could be taxed as a dividend to the stockholders. No
S corporation distributions will be made to the stockholders in connection with
the Company's earnings for any period beginning on or after the Termination
Date.
Had the Company's S corporation election terminated effective June 30, 1996,
the Company would have recognized a deferred tax liability of approximately
$91,000 at the current corporation tax rate pursuant to Statement of Financial
Accounting Standards No. 109, which represents the cumulative amount of
temporary differences that have been deducted by the Company for income tax
purposes but have not yet been expensed for financial accounting purposes. See
"Selected Combined Financial Data" and Notes 2, 9 and 15 of Notes to Combined
Financial Statements.
DIVIDEND POLICY
The Company currently intends to retain all earnings to provide funds for
its operations and expansion, and therefore does not anticipate paying cash
dividends or making any other distributions on its shares of Common Stock in the
foreseeable future. The Company's future dividend policy will be determined by
its Board of Directors based on various factors, including the Company's results
of operations, financial condition, business opportunities, capital
requirements, credit restrictions and such other factors as the Board of
Directors may deem relevant.
The Company and certain Prior Entities have been treated for federal and
state income tax purposes as S corporations under the Code since January 1,
1994. As a result, earnings of the Company were subject to taxation at the
stockholder level rather than the corporate level for federal and certain state
income tax purposes. Certain of the Prior Entities have previously made
distributions to their stockholders in connection with the Reorganization and
the Company intends to make distributions to its stockholders in connection with
its status as an S corporation. However, no S corporation distributions will be
made to the existing stockholders in connection with the Company's earnings for
any period beginning on or after the Termination Date. See "S Corporation
Distributions."
12
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered by the
Company are estimated to be approximately $14.4 million (approximately $16.6
million if the Underwriter's over-allotment option is exercised in full), after
deducting the underwriting discount and other estimated offering expenses. The
Company will not receive any proceeds from the sale of the shares of Common
Stock by the Selling Stockholders.
The Company intends to use approximately $4.5 million of the net proceeds
for repayment of indebtedness, as discussed below, and an amount sufficient to
fund a distribution to the existing stockholders in connection with their
estimated federal and state income tax obligations attributable to the Company's
1996 earnings prior to the Termination Date. If the Company had terminated its S
corporation status as of June 30, 1996, the Company's S corporation taxable
income for 1996 would have been approximately $409,000 and the resulting
distribution would have been approximately $184,000. See "S Corporation
Distributions." The balance of the net proceeds, together with cash flows from
operations, will be used to finance future development of Company-owned
restaurants, possible acquisitions, working capital requirements and for general
corporate purposes. The Company presently does not have any specific plans,
arrangements, understandings or agreements regarding any material acquisitions;
however, the Company will continue to evaluate suitable acquisitions of bagel
restaurant businesses as they are identified.
The Company intends to use approximately $4.5 million of the net proceeds to
repay all indebtedness outstanding under its bank financing, approximately $3.8
million of which was outstanding as of June 30, 1996 and up to $747,500 of which
has been, or is anticipated to be, incurred subsequent to June 30, 1996. This
bank debt consists of the following:
- A loan agreement (the "Loan Agreement"), the proceeds of which were used
to fund stockholder distributions and for working capital purposes. The
Loan Agreement bears interest at the prime rate plus 1.0% (9.25% at June
30, 1996), has a maturity date of December 28, 2000 and had an outstanding
balance of approximately $2.5 million as of June 30, 1996.
- Six term notes (the "Term Notes"), the proceeds of which are being used to
fund the current development of Company-owned restaurants. The Term Notes
bear interest at the prime rate plus 0.5% (8.75% at June 30, 1996), have a
maturity date of June 15, 2003 and had an aggregate outstanding balance of
approximately $800,000 as of June 30, 1996.
- A term loan (the "Nashville Note") incurred in connection with the
acquisition of Nashville Bagel Co., Inc. The Nashville Note bears interest
at the prime rate plus 0.5% (8.75% at June 30, 1996), has a maturity date
of March 26, 2003 and had an outstanding balance of approximately $487,000
as of June 30, 1996.
- A term loan (the "Stillwater Note") dated July 10, 1996 for $300,000 used
to purchase land and building for an additional restaurant location in
Stillwater, Oklahoma. The Stillwater Note bears interest at the prime rate
plus 0.5% (8.75% at July 10, 1996), and has a maturity date of January 10,
2007.
- A term loan (the "Springfield Note") dated July 8, 1996 for $125,000 used
to fund the development of a Company-owned restaurant in Springfield,
Missouri. The Springfield Note bears interest at the prime rate plus 0.5%
(8.75% at July 8, 1996), and has a maturity date of October 8, 2001.
- A term loan (the "Remodel Note") dated July 8, 1996 for $172,500 used for
funding of the remodeling of three existing Company-owned restaurants in
Oklahoma. The Remodel Note bears interest at the prime rate plus 0.5%
(8.75% at July 8, 1996) and has a maturity date of July 8, 2001.
- A term loan (the "Lubbock Note") dated July 15, 1996 for $150,000 used to
fund the development of a Company-owned restaurant in Lubbock, Texas. The
Lubbock Note bears interest at the prime rate plus 0.5% (8.75% at July 15,
1996), and has a maturity date of October 15, 2003.
See Note 7 of the Notes to Combined Financial Statements and "Certain
Transactions."
Pending use of the proceeds as set forth above, the Company intends to
invest the net proceeds in interest-bearing, short-term, investment-grade
securities.
13
<PAGE>
DILUTION
At June 30, 1996, the Company had a pro forma net tangible book value
(deficit) of approximately $(2.2 million), or $(0.78) per share of Common Stock.
Net tangible book value per share of Common Stock is defined as total tangible
assets of the Company less total liabilities, divided by the total number of
shares of Common Stock outstanding, without giving effect to the possible
exercise of outstanding stock options or other convertible securities. After
giving effect to the sale of the shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company at June 30, 1996 would have been approximately $12.6
million, or $2.73 per share. This represents an immediate increase in pro forma
net tangible book value of approximately $3.51 per share to existing
stockholders, and an immediate dilution of $6.27 per share to new investors
purchasing shares of Common Stock in this offering. The following table
illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share................................ $ 9.00
Pro forma net tangible book value (deficit) per share..... $ (0.78)
Increase in net tangible book value per share attributable
to payments by investors of Common Stock in this
offering................................................. 3.51
---------
Pro forma net tangible book value per share after this offering........ 2.73
---------
Dilution per share to new investors.................................... $ 6.27
---------
---------
</TABLE>
The following table summarizes the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price paid per share by existing stockholders and new investors
purchasing shares in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2)
TOTAL CONSIDERATION
------------------------ --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 2,800,000 60.9% $ 185,650 1.1% $ 0.07
New investors............................... 1,800,000 39.1 16,200,000 98.9 9.00
----------- ----- -------------- -----
Total..................................... 4,600,000 100.0% $ 16,385,650 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
- ------------------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 2,600,000, or 56.5% of the total
number of shares of Common Stock to be outstanding after this offering, and
will increase the number of shares held by new investors to 2,000,000
shares, or 43.5% of the total shares of Common Stock to be outstanding after
this offering. See "Principal and Selling Stockholders" and "Underwriting."
(2) Excludes (i) 400,000 shares of Common Stock reserved for issuance under the
Company's 1996 Incentive Plan, of which options to acquire 271,000 shares
are outstanding as of the date of this Prospectus and (ii) 19,320 shares of
Common Stock issuable upon conversion of the Convertible Debenture, as
defined herein. See "Management -- 1996 Incentive Plan" and "Description of
Capital Stock -- Convertible Debenture."
14
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at June 30, 1996 (i) on an actual basis, (ii) on a pro forma basis as if
the Company had terminated its S corporation status as of June 30, 1996 and made
a distribution to the stockholders in connection with their estimated federal
and state income tax obligations, and (iii) as adjusted to give effect to the
sale of 1,800,000 shares of Common Stock offered by the Company hereby and the
application of the estimated net proceeds therefrom. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Combined Financial
Statements and the Notes thereto included elsewhere in this Prospectus. See "Use
of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt.............................................................. $ 649 $ 649 $ 29
--------- ----------- -----------
--------- ----------- -----------
Distributions payable........................................................ 49 233 49
--------- ----------- -----------
--------- ----------- -----------
Long-term debt, less current portion......................................... $ 3,281 $ 3,281 $ 86
Stockholders' equity (deficit):
Preferred stock, 5,000,000 shares authorized, no par value, none issued or
outstanding (1)........................................................... -- -- --
Common stock, $0.01 par value, 30,000,000 shares authorized; 2,800,000
shares issued and outstanding, actual; 4,600,000 shares issued and
outstanding, as adjusted (2).............................................. 28 28 46
Additional paid-in capital (deficit)....................................... 158 (1,369) 12,979
Accumulated deficit........................................................ (1,252) -- --
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (1,066) (1,341) 13,025
--------- ----------- -----------
Total capitalization......................................................... $ 2,215 $ 1,940 $ 13,111
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Concurrent with the completion of this offering, the Company's Restated and
Amended Articles of Incorporation will authorize the issuance of preferred
stock. See "Description of Capital Stock."
(2) Excludes (i) 400,000 shares of Common Stock reserved for issuance under the
Company's 1996 Incentive Plan, of which options to acquire 271,000 shares
are outstanding as of the date of this Prospectus and (ii) 19,320 shares of
Common Stock issuable upon conversion of the Convertible Debenture, as
defined herein. See "Management -- 1996 Incentive Plan" and "Description of
Capital Stock -- Convertible Debenture."
15
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected combined financial data for the
Company at the dates and for the periods indicated. The selected combined
financial data at December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995 have been derived from the Combined
Financial Statements of the Company which have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, and which are included elsewhere
in this Prospectus. The selected combined financial data at December 31, 1991,
1992 and 1993 and June 30, 1996, and for each of the years in the two-year
period ended December 31, 1992, and for the six months ended June 30, 1995 and
the twenty-six weeks ended June 30, 1996, have been prepared on the same basis
as the audited financial statements, have been derived from the unaudited
Combined Financial Statements of the Company for such periods and include, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for the fair presentation of the financial position and
combined results of operations at and for such periods. The Company's combined
results of operations for the twenty-six weeks ended June 30, 1996 may not be
indicative of its combined results of operations for the full year. Selected
combined financial data should be read in conjunction with, and is qualified in
its entirety by, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Combined Financial Statements of the Company
and the Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995(1)
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales from Company-owned restaurants........................... $ 1,596 $ 2,438 $ 3,539 $ 5,653 $ 6,875
Franchise revenues............................................. -- -- 22 169 484
--------- --------- --------- --------- ---------
Total revenues............................................... 1,596 2,438 3,561 5,822 7,359
Costs and expenses:
Cost of sales.................................................. 789 1,192 1,527 2,280 2,612
Restaurant operating expenses.................................. 594 985 1,386 2,326 3,084
General and administrative expenses............................ 152 203 469 452 838
Depreciation and amortization.................................. 43 57 80 117 159
--------- --------- --------- --------- ---------
Total costs and expenses..................................... 1,578 2,437 3,462 5,175 6,693
Operating income............................................. 18 1 99 647 666
Interest expense, net............................................ 20 18 14 53 40
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes............................ (2) (17) 85 594 626
Income tax expense (benefit)..................................... 2 (1) 9 (3) 7
--------- --------- --------- --------- ---------
Net earnings (loss).......................................... $ (4) $ (16) $ 76 $ 597 $ 619
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma to reflect income taxes (3):
Net earnings................................................... $ 380
Net earnings per share......................................... $ 0.13
Pro forma weighted average shares outstanding (4)................ 3,019
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficit.......................................... $ (4) $ (67) $ (171) $ (120) $ (368)
Total assets..................................................... 294 347 819 872 2,295
Total debt....................................................... 234 230 560 359 3,365
Stockholders' equity (deficit)................................... 16 51 126 159 (1,578)
<CAPTION>
TWENTY-SIX
SIX MONTHS WEEKS ENDED
ENDED JUNE JUNE 30,
30, 1995 1996(2)
----------- -----------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales from Company-owned restaurants........................... $ 3,345 $ 4,850
Franchise revenues............................................. 194 340
----------- -----------
Total revenues............................................... 3,539 5,190
Costs and expenses:
Cost of sales.................................................. 1,273 1,733
Restaurant operating expenses.................................. 1,433 2,202
General and administrative expenses............................ 375 402
Depreciation and amortization.................................. 64 177
----------- -----------
Total costs and expenses..................................... 3,145 4,514
Operating income............................................. 394 676
Interest expense, net............................................ 20 164
----------- -----------
Earnings (loss) before income taxes............................ 374 512
Income tax expense (benefit)..................................... -- --
----------- -----------
Net earnings (loss).......................................... $ 374 $ 512
----------- -----------
----------- -----------
Pro forma to reflect income taxes (3):
Net earnings................................................... $ 311
Net earnings per share......................................... $ 0.10
Pro forma weighted average shares outstanding (4)................ 3,019
JUNE 30, 1996
------------------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital deficit.......................................... $ (872)
Total assets..................................................... 4,002
Total debt....................................................... 3,930
Stockholders' equity (deficit)................................... (1,066)
</TABLE>
- ------------------------------
(1) The Company acquired two restaurants in December 1995. If such transactions
had occurred on January 1, 1995, "Total revenues," "Net earnings" and "Net
earnings per share" would have been approximately $8,761,000, $224,000 and
$0.07, respectively, for the year ended December 31, 1995, on a pro forma
basis. The pro forma results do not necessarily reflect what would have
occurred if the acquisitions had been made at the beginning of the
respective periods or the results that may occur in the future. See "Pro
Forma Condensed Combined Statement of Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
(2) Effective January 1, 1996, the Company elected to change its fiscal year end
from a calendar year end to a 52/53-week fiscal year, ending on the last
Sunday of the year, which consists of four 13-week periods.
(3) Reflects a pro forma adjustment assuming the Company had been treated as a C
corporation rather than as an S corporation for income tax purposes for the
periods presented. See "S Corporation Distributions" and Note 2(i) of Notes
to Combined Financial Statements.
(4) See Note 2(i) of Notes to Combined Financial Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company opened its first restaurant in 1986, and has developed 18 of its
20 Company-owned restaurants in Oklahoma, Kansas, Tennessee and Texas. In
addition to developing new restaurants, the Company acquired two bagel
restaurants in December 1995, one of which was a franchised New York Bagel
restaurant. The Company commenced franchising the New York Bagel concept in 1993
and has 20 franchisees operating 30 restaurants.
The Company's business was previously operated through six separate
entities, each of which was owned by one or more existing stockholders
(collectively, the "Prior Entities"). The Company was incorporated in December
1995 under the laws of Kansas, and on December 31, 1995, the Prior Entities were
merged into the Company (the "Reorganization"). The financial statements herein
include the results of operations of the Prior Entities on a combined basis for
all periods. See "Certain Transactions -- Reorganization" and Note 1 of the
Notes to Combined Financial Statements.
The Company completed the acquisition of two bagel restaurants in December
1995 (the "Acquisitions"). The Company acquired the outstanding stock of
Nashville Bagel Co., Inc. ("Nashville Bagel"), which operated a bagel restaurant
in Nashville, Tennessee, and acquired a franchised New York Bagel restaurant
located in Wichita, Kansas. Each Acquisition was accounted for under the
purchase method, and accordingly, the operations of Nashville Bagel and the
acquired franchised restaurant have been included in the Company's combined
results of operations after December 14, 1995 and December 31, 1995,
respectively. Pro Forma Condensed Combined Statement of Operations included
herein presents the results of operations of the Company as if the Acquisitions
had occurred at January 1, 1995. See "Certain Transactions -- Franchise
Acquisitions" and Note 12 of the Notes to Combined Financial Statements.
The Company's revenues are derived from sales from Company-owned restaurants
and franchise revenues, which consist of royalties from franchised restaurant
sales as well as franchise and development fees. Franchise and development fees
are initially recorded as deferred revenue until each franchised restaurant
opens, at which time these fees are recorded as revenue.
Cost of sales includes food, paper and beverage costs associated with
Company-owned restaurants. Restaurant operating expenses consist primarily of
labor costs, rent, advertising, utilities, maintenance and insurance associated
with Company-owned restaurants. General and administrative expenses include
corporate and administrative salaries, accounting, legal and direct costs
associated with franchise operations.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
operating statement data to total revenues, except as otherwise indicated:
<TABLE>
<CAPTION>
SIX MONTHS TWENTY-SIX
YEAR ENDED DECEMBER 31, ENDED JUNE WEEKS ENDED
------------------------------- 30, JUNE 30,
1993 1994 1995 1995 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants.......................... 99.4% 97.1% 93.4% 94.5% 93.5%
Franchise revenues............................................ 0.6 2.9 6.6 5.5 6.5
--------- --------- --------- ----- -----
Total revenues.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales (1)............................................. 43.2% 40.3% 38.0% 38.0% 35.7%
Restaurant operating expenses (1)............................. 39.2 41.1 44.9 42.8 45.4
General and administrative expenses........................... 13.2 7.8 11.4 10.6 7.7
Depreciation and amortization................................. 2.3 2.0 2.2 1.8 3.4
Operating income................................................ 2.8 11.1 9.0 11.1 13.0
Interest expense, net........................................... 0.4 0.9 0.5 0.6 3.1
Net earnings.................................................. 2.1 10.3 8.4 10.6 9.9
</TABLE>
- ------------------------
(1) As a percentage of sales from Company-owned restaurants.
TWENTY-SIX WEEKS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenues increased by $1.7 million, or 46.6%, to $5.2 million for the
period ended June 30, 1996 compared to $3.5 million for the period ended June
30, 1995, primarily due to an increase in the number of Company-owned and
franchised restaurants open.
Sales from Company-owned restaurants increased $1.5 million, or 45.0%, to
$4.8 million for the period ended June 30, 1996 compared to $3.3 million for the
period ended June 30, 1995. This increase is largely the result of the
acquisitions of Nashville Bagel and a franchised restaurant in December 1995,
the opening of a Company-owned restaurant in October 1995, and the opening of
five additional Company-owned restaurants during the first half of 1996. In
addition, the Company experienced a 5.1% increase in same restaurant sales
during the period. At June 30, 1996, the Company had 20 Company-owned
restaurants compared to 12 restaurants at June 30, 1995.
Franchise revenues increased by $146,000, or 75.7%, to $340,000 for the
period ended June 30, 1996 compared to $193,000 for the period ended June 30,
1995. This increase is primarily due to an increase in royalty revenue of
$136,000, or 156.3%, to $223,000 for the period ended June 30, 1996 from $87,000
during the period ended June 30, 1995. This is attributable to the significant
growth in the number of franchised restaurants opened during the last half of
1995 and continuing into the first half of 1996. At June 30, 1996, there were 30
franchised restaurants compared to 16 restaurants at June 30, 1995.
Cost of sales increased by $461,000, or 36.2%, to $1.7 million for the
period ended June 30, 1996 compared to $1.3 million for the period ended June
30, 1995, primarily due to the increase in Company-owned restaurant sales
discussed above. As a percentage of Company-owned restaurant sales, cost of
sales decreased to 35.7% for the period ended June 30, 1996 from 38.0% for the
period ended June 30, 1995, as a result of purchasing and operating efficiencies
experienced in 1996. Prices of the Company's commodities (meat and cheese, flour
and other bakery ingredients) have generally remained stable during the
comparable periods.
Restaurant operating expenses increased by $769,000, or 53.7%, to $2.2
million for the period ended June 30, 1996 compared to $1.4 million for the
period ended June 30, 1995, primarily due to the
18
<PAGE>
increase in restaurant sales discussed above. As a percentage of Company-owned
restaurant sales, restaurant operating expenses increased to 45.4% for the
period ended June 30, 1996 from 42.8% for the period ended June 30, 1995. This
increase is primarily due to increased labor costs associated with the Company's
acquisition of Nashville Bagel in December 1995, and the opening of three
Company-owned restaurants in Nashville, Tennessee during the first half of 1996.
General and administrative expenses increased by $27,000, or 7.2%, to
$402,000 for the period ended June 30, 1996 compared to $375,000 for the period
ended June 30, 1995. This increase is primarily attributable to the increase in
franchise activity. As a percentage of total revenues, general and
administrative expenses decreased to 7.7% for the period ended June 30, 1996
from 10.6% for the period ended June 30, 1995. The decrease as a percentage of
total revenues was primarily due to increased economies of scale resulting from
franchise infrastructure implemented in 1995.
Depreciation and amortization increased by $112,000, or 174.4%, to $177,000
for the period ended June 30, 1996 compared to $65,000 for the period ended June
30, 1995. As a percentage of total revenues, depreciation and amortization
increased to 3.4% for the period ended June 30, 1996 from 1.8% for the period
ended June 30, 1995. This increase is primarily the result of higher
depreciation and amortization associated with the Acquisitions, and the opening
of five additional Company-owned restaurants during the first half of 1996.
Interest expense increased by $143,000 to $163,000 for the period ended June
30, 1996 compared to the period ended June 30, 1995. This increase in interest
expense is primarily the result of increased borrowings during the period ended
June 30, 1996.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Total revenues increased by $1.5 million, or 26.4%, to $7.4 million for 1995
compared to $5.8 million for 1994, primarily due to an increase in the number of
Company-owned and franchised restaurants open.
Sales from Company-owned restaurants increased $1.2 million, or 21.6%, to
$6.9 million for 1995 compared to $5.7 million for 1994. This is primarily the
result of the opening of one additional Company-owned restaurant in October 1995
and two additional Company-owned restaurants in late 1994. In addition, the
Company experienced an 9.8% increase in same restaurant sales during 1995. At
December 31, 1995, the Company had 15 Company-owned restaurants compared to 12
restaurants at December 31, 1994.
Franchise revenues increased by $315,000, or 187.1%, to $484,000 for 1995
compared to $169,000 for 1994. This increase is primarily due to the opening of
franchised restaurants in 1995. There were 25 franchised restaurants at the end
of 1995 and nine franchised restaurants at the end of 1994, which impacted both
franchise fees and royalty revenue. Franchise and development fees increased
$143,000, or 132.4%, to $251,000 for 1995 compared to $108,000 for 1994.
Franchise royalty revenue increased by $173,000, or 283.6%, to $234,000 for 1995
compared to $61,000 for 1994.
Cost of sales increased by $333,000, or 14.6%, to $2.6 million for 1995
compared to $2.3 million for 1994. This increase is primarily attributable to
the increase in sales from Company-owned restaurants. As a percentage of sales
from Company-owned restaurants, cost of sales decreased to 38.0% in 1995 from
40.3% in 1994 as a result of purchasing and operating efficiencies and
portioning refinements achieved in 1995. Prices of the Company's commodities
(meat and cheese, flour and other bakery ingredients) have generally remained
stable during the comparable periods.
Restaurant operating expenses increased by $758,000, or 32.6%, to $3.1
million for 1995 compared to $2.3 million for 1994. This increase is primarily
due to the increase in sales from Company-owned restaurants discussed above and
to approximately two weeks of operating expenses attributable to Nashville Bagel
subsequent to its acquisition by the Company on December 14, 1995. As a
percentage of sales from Company-owned restaurants, restaurant operating
expenses increased to
19
<PAGE>
44.9% for 1995 from 41.1% for 1994. This increase is primarily the result of
higher operating expenses attributable to a restaurant which opened in October
1995, the acquisition of Nashville Bagel and two restaurants which were closed
for remodeling during a portion of the fourth quarter of 1995.
General and administrative expenses increased by $386,000, or 85.5%, to
$838,000 for 1995 compared to $452,000 for 1994. This increase is primarily
attributable to the increase in franchise activity and to merger-related
expenses related to the Reorganization in 1995. As a percentage of total
revenues, general and administrative expenses increased to 11.4% in 1995 from
7.8% in 1994, primarily as a result of the further development of the franchise
program.
Depreciation and amortization increased by $42,000, or 35.9%, to $159,000
for 1995 compared to $117,000 for 1994. As a percentage of total revenues,
depreciation and amortization increased to 2.2% for 1995 from 2.0% in 1994. This
increase is primarily attributable to the opening of the additional restaurants
discussed above.
Interest expense decreased by $12,000 to $40,000 for 1995 compared to 52,000
for 1994. This decrease in interest expense is primarily the result of lower
bank borrowings during 1995.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
Total revenues increased by $2.2 million, or 63.5%, to $5.8 million for 1994
compared to $3.6 million for 1993, primarily due to an increase in the number of
Company-owned and franchised restaurants open.
Sales from Company-owned restaurants increased $2.1 million, or 59.8%, to
$5.7 million for 1994 compared to $3.5 million for 1993. This is primarily the
result of the opening of three additional Company-owned restaurants in 1994. In
addition, the Company experienced a 19.0% increase in same restaurant sales
during 1994. At December 31, 1994, the Company had 12 Company-owned restaurants
compared to nine restaurants at December 31, 1993.
Franchise revenues increased by $146,000 to $169,000 for 1994 compared to
$23,000 for 1993. This increase is primarily due to the opening of franchised
restaurants in 1994. There were nine franchised restaurants open at the end of
1994 versus two franchised restaurants at the end of 1993.
Cost of sales increased by $753,000, or 49.3%, to $2.3 million for 1994
compared to $1.5 million for 1993. This increase is primarily attributable to
the opening of three additional Company-owned restaurants in 1994. As a
percentage of Company-owned restaurant sales, cost of sales decreased to 40.3%
in 1994 from 43.2% in 1993 primarily as a result of purchasing and operating
efficiencies. Prices of the Company's commodities (meat and cheese, flour and
other bakery ingredients) have generally remained stable during the comparable
periods.
Restaurant operating expenses increased by $940,000, or 67.8%, to $2.3
million for 1994 compared to $1.4 million for 1993. This increase is primarily
due to the additional restaurant openings discussed above. As a percentage of
Company-owned restaurant sales, restaurant operating expenses increased to 41.1%
for 1994 from 39.2% for 1993.
General and administrative expenses decreased by $17,000, or 3.6%, to
$452,000 for 1994 compared to $469,000 for 1993. This decrease is primarily the
result of a reduction in management compensation in 1994. This decrease was
offset slightly by an increase in general and administrative expenses related to
the increase in franchise activity. As a percentage of total revenue, general
and administrative expenses decreased to 7.8% in 1994 from 13.2% in 1993.
Depreciation and amortization increased by $37,000, or 45.9%, to $117,000
for 1994 compared to $80,000 for 1993. This increase is primarily attributable
to the opening of the additional restaurants discussed above. As a percentage of
total revenues, depreciation and amortization decreased to 2.0% in 1994 from
2.3% in 1993.
20
<PAGE>
Interest expense increased by $39,000 to $52,000 for 1994 compared to 1993.
This increase in interest expense is primarily the result of increased bank
borrowings in order to expand the Company's restaurant base.
QUARTERLY FINANCIAL DATA
The following sets forth selected quarterly results from operations. This
information is derived from unaudited financial statements of the Company and
includes in the opinion of management, all normal and recurring adjustments that
management considers necessary for a fair statement of the results for such
periods. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED ENDED ENDED
3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants............. $ 1,649 $ 1,696 $ 1,652 $ 1,878 $ 2,219 $ 2,631
Franchise revenues............................... 59 135 145 145 170 170
--------- --------- --------- --------- --------- ---------
Total revenues................................. 1,708 1,831 1,797 2,023 2,389 2,801
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales.................................... 636 637 649 690 813 920
Restaurant operating expenses.................... 705 727 759 893 960 1,242
General and administrative expenses.............. 159 216 192 271 207 195
Depreciation and amortization.................... 31 34 41 53 71 106
--------- --------- --------- --------- --------- ---------
Total costs and expenses....................... 1,531 1,614 1,641 1,907 2,051 2,463
--------- --------- --------- --------- --------- ---------
Operating income............................... 177 217 156 116 338 338
Interest expense, net.............................. 7 13 8 12 78 86
--------- --------- --------- --------- --------- ---------
Earnings before income taxes................... 170 204 148 104 260 252
Income tax expense................................. -- -- 2 5 -- --
--------- --------- --------- --------- --------- ---------
Net earnings..................................... $ 170 $ 204 $ 146 $ 99 $ 260 $ 252
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma to reflect income taxes:
Income tax expense............................... $ 67 $ 80 $ 58 $ 41 $ 104 $ 97
Net earnings..................................... $ 103 $ 124 $ 90 $ 63 $ 156 $ 155
Net earnings per share........................... $ 0.03 $ 0.04 $ 0.03 $ 0.02 $ 0.05 $ 0.05
</TABLE>
Although the Company's historical and anticipated growth makes predicting
future trends difficult, the Company-owned restaurants have generally
experienced slightly lower restaurant sales in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new
restaurants, possible acquisitions and the remodeling of existing Company-owned
restaurants. Capital expenditures totaled $584,000, $285,000 and $475,000 for
1993, 1994 and 1995, respectively, and $1.2 million for the period ended June
30, 1996. The Company has historically funded its capital expenditures with cash
provided by operations and bank borrowings. Net cash provided by operating
activities was $192,000, $696,000 and $777,000 for 1993, 1994 and 1995,
respectively, and $1.0 million for the period ended June 30, 1996.
At June 30, 1996, the Company had outstanding bank borrowings of $3.8
million consisting of (i) $2.5 million under the Loan Agreement which bears
interest at the prime rate plus 1.0% and matures on December 28, 2000, (ii)
aggregate outstanding borrowings under the Term Notes of $800,000, each of which
bear interest at the prime rate plus 0.5% and have a maturity date of June 15,
2003 and (iii) $487,000 under the Nashville Note which bears interest at the
prime rate plus 0.5% and matures
21
<PAGE>
on March 26, 2003. Subsequent to June 30, 1996, the Company has incurred, or
anticipates incurring, additional bank borrowings to finance capital
expenditures of up to $747,500, consisting of (i) $300,000 under the Stillwater
Note which bears interest at the prime rate plus 0.5% and matures on January 10,
2007, (ii) $125,000 under the Springfield Note which bears interest at the prime
rate plus 0.5% and matures on October 8, 2001, (iii) $172,500 under the Remodel
Note which bears interest at the prime rate plus 0.5% and matures on July 8,
2001, and (iv) $150,000 under the Lubbock Note which bears interest at the prime
rate plus 0.5% and matures on October 15, 2003. The outstanding indebtedness
under these bank financings, which is secured by substantially all of the assets
of the Company, will be repaid from the proceeds of this offering. See "Use of
Proceeds."
Certain Prior Entities paid cash distributions to their stockholders in the
aggregate amounts of approximately $394,000 and $2.5 million during 1994 and
1995, respectively. The distributions made in 1995 were in excess of the
earnings of such Prior Entities and were partially funded by borrowings under
the Loan Agreement. The Company also intends to use a portion of the net
proceeds of this offering to fund a distribution to the existing stockholders in
connection with their estimated federal and state income tax obligations
attributable to the Company's 1996 earnings prior to the Termination Date. See
"S Corporation Distributions."
Based on its contemplated expansion plans, the Company estimates that its
total capital expenditures will be approximately $3.0 million in 1996 and $3.3
million in 1997. These estimates include the estimated costs of developing new
restaurants and renovating Company-owned restaurants. The Company expects that
the net proceeds of this offering and cash provided by operating activities will
provide sufficient funds to finance its capital expenditures through 1997.
INFLATION
The Company believes that the relatively moderate rates of inflation over
the past few years have not had a significant impact on its results of
operations.
22
<PAGE>
BUSINESS
GENERAL
The Company owns and franchises 50 quick-service New York Bagel restaurants
in 16 states that serve generous portions of fresh, high quality food with fast,
friendly service at an attractive price-value relationship. The Company has
grown by developing Company-owned restaurants and by selectively adding
franchisees. As of June 30, 1996, there were 20 Company-owned restaurants
located in Oklahoma, Kansas, Tennessee and Texas and 30 franchised restaurants
located in 15 states operated by 20 franchisees.
The Company believes that consumption of bagels has increased in recent
years, as consumers have discovered that bagels are a healthier, lower fat
alternative to other quick-service foods and are a suitable substitute for
sandwich breads. Management believes that the market for retail bagel
restaurants is fragmented and underserved, and that the Company can capitalize
on the demand for fresh bagels by expanding the New York Bagel concept in
targeted markets.
THE NEW YORK BAGEL CONCEPT
PREPARE FRESH, HIGH QUALITY PRODUCTS. New York Bagel restaurants serve up
to 20 varieties of bagels that are made from scratch, boiled and baked
throughout the day in the traditional "New York style." The Company believes its
five-ounce bagel is larger than those served by many of its competitors. Menu
items are prepared in accordance with the Company's specifications using high
quality ingredients such as Philadelphia-Registered Trademark- Brand cream
cheese, Kraft-Registered Trademark- cheeses and premium deli meats. Generous
portions of cream cheese are applied on its breakfast bagel and four ounces of
meat are served on each of its deli sandwiches. The Company believes that the
quality and portion size of its menu items generally equals or exceeds those of
its competitors. Because its menu pricing is competitive, the Company believes
that it offers customers an attractive price-value relationship.
MAXIMIZE TRAFFIC THROUGHOUT THE DAY. Management has recognized the
versatility of the bagel and has developed a menu to attract customers
throughout the day. The breakfast menu at New York Bagel restaurants includes a
variety of bagels and custom-blended cream cheeses, breakfast sandwiches on
bagels, gourmet coffees, muffins and croissants. Lunch and dinner items include
a wide range of delicatessen sandwiches made on bagels or other breads, salads,
cookies and soft drinks. Management believes that Company-owned restaurants
typically generate approximately 40% of their sales before 11:00 a.m., with an
average ticket of approximately $3.00 during such period and $4.00 thereafter.
COMMITMENT TO TIMELY SERVICE. The Company believes that timely service is
essential in the quick-service restaurant business. Service time is minimized
through the division of employee functions, efficient store layout and design
and queuing mechanisms. The Company conducts time studies of its restaurants on
a periodic basis and believes that on average, breakfast customers are served
within three minutes of placing their order and lunch and dinner customers are
served within five minutes. As a result, the Company also has been able to
successfully operate drive-through windows at certain New York Bagel
restaurants.
FOCUS ON TRAINING. The Company believes that comprehensive training is
essential to the efficiency and consistency of its operations. Accordingly, the
Company conducts an extensive 90-day training program for its restaurant
managers and franchisees that is composed of approximately ten days of classroom
instruction and approximately 80 days of on-site instruction. In addition, the
Company's training team provides on-site assistance during the initial ten days
of operation at each Company-owned restaurant and at a franchisee's initial
franchised restaurant.
23
<PAGE>
EXPANSION STRATEGY
EMPHASIZE MID-SIZED AND SMALLER METROPOLITAN MARKETS. The Company presently
targets its expansion efforts in mid-sized and smaller metropolitan markets.
Management believes that these markets are attractive because they typically
have fewer competing bagel restaurants and more favorable lease and labor
environments than larger metropolitan markets.
ESTABLISH STRONG MARKET PRESENCE. Since the bagel industry is highly
fragmented and increasingly competitive, the Company seeks to establish a strong
market presence in its targeted markets. To develop a strong market presence
rapidly and efficiently, the Company employs a multiple store strategy involving
a bakery restaurant which produces bagels for itself and one or more nearby
satellite restaurants. By entering underserved markets and opening multiple
restaurants, the Company seeks to maximize market share and establish brand
awareness. The Company and its franchisees have implemented this
bakery/satellite restaurant combination 15 times.
FOCUS ON UNIT AND MARKET ECONOMICS. Consistent with its market share
objective, the Company focuses not only on generating attractive unit level
economics, but also on the economic returns of a particular target market. The
Company believes that bakery restaurants can be opened for an initial
investment, including leasehold improvements, furniture, fixtures, equipment,
initial working capital and pre-opening expenses, of approximately $250,000,
with satellite restaurants requiring approximately $150,000. By averaging these
initial investment amounts within markets, the Company believes it achieves
attractive returns on investment.
MAINTAIN BALANCED RESTAURANT DEVELOPMENT. The Company intends to expand
through a balanced development of Company-owned and franchised New York Bagel
restaurants. While Company-owned restaurants provide the Company with greater
revenues and profits than franchised restaurants, franchising allows the Company
to accelerate its expansion and name recognition with less investment of the
Company's capital or human resources.
MAKE SELECTIVE ACQUISITIONS. The Company has acquired two bagel restaurants
to date, including an unaffiliated restaurant in Nashville, Tennessee, a new
market, and a franchised restaurant in an existing market. Since acquiring the
Nashville restaurant, a bakery restaurant, the Company has added three satellite
restaurants in that market. The Company intends to pursue other acquisitions of
local and regional bagel operations with an established market presence.
RESTAURANT DESIGN AND SITE SELECTION
The Company's prototypical restaurant is decorated in rich colors and dark
woods and contains a mixture of booth, table and barstool seating and, where
available, outdoor seating. Exposed ceilings with drop lighting and a
combination of tile and carpeted flooring are used to enhance its comfortable
ambiance. Walls are covered with black and white photographs depicting classic
New York scenes. The Company's restaurants are configured to facilitate a smooth
flow of dine-in and carry-out traffic while retaining a casual, cafe atmosphere.
Bagels and other baked products are displayed prominently behind a glass counter
while other items such as salads, packaged cream cheese for take-out and
specialty sodas and drinks are located in an open, self-serve refrigerated area
next to the cash register. Restaurant staff prepare sandwich and other menu
items behind the counter for dine-in and take-out customers. Dine-in customers'
food is delivered directly to the table. The restaurants serve cappuccino and
espresso, and a fountain drink and gourmet coffee station are placed in the
dining area for customer convenience. Retail merchandise, including New York
Bagel logo clothing, coffee mugs and gift items, are displayed throughout the
restaurant.
The Company believes that the layout and design of each restaurant
contributes to the success of its operations. The Company continually reviews
the restaurant design package for its restaurants and remodels as required.
Pursuant to the franchise agreement, franchised restaurants' decor must
24
<PAGE>
be updated every five years or upon renewal of each particular franchise
agreement. Remodeling typically requires closing the restaurant for one to four
weeks. Although restaurants may vary in size, layout and design are generally
consistent.
The Company considers the location of a restaurant to be important, and,
therefore, devotes significant resources to the investigation and evaluation of
potential sites. The site selection process focuses on area demographics,
including population density, traffic patterns, income levels and competitive
factors. The Company generally targets locations that possess a population
density of at least 50,000 residents within a three mile radius and are situated
on the morning side of commuter traffic. The Company's restaurants are typically
located in strip shopping centers or free-standing buildings that provide
visibility, curb appeal and accessibility. Certain limited hour satellite
restaurants are located in office buildings and are open during business hours
Monday through Friday. The Company's restaurant design may be configured to fit
a wide variety of building shapes and sizes, thereby increasing the number of
suitable sites for new locations.
UNIT ECONOMICS
In targeted markets, the Company employs a multiple store strategy involving
a bakery restaurant which produces bagels for itself and one or more nearby
satellite restaurants. The Company's approach to opening new restaurants has
been to minimize its required investment by leasing substantially all of its
locations. The Company believes that bakery restaurants can be opened for an
initial investment, including leasehold improvements, furniture, fixtures,
equipment, initial working capital and pre-opening expenses, of approximately
$250,000, with satellite restaurants requiring approximately $150,000. By
averaging these initial investment amounts within a particular market, the
Company believes it achieves attractive returns on investment within markets.
During 1995 and the period ended June 30, 1996, average sales per
Company-owned restaurant opened throughout each period were $559,000 and
$293,000, respectively. During 1995 and the period ended June 30, 1996, the
Company's restaurant level margin (defined as sales from Company-owned
restaurants less cost of sales and restaurant operating expenses as a percentage
of sales from Company-owned restaurants) was 17.1% and 18.9%, respectively.
RESTAURANT LOCATIONS
The average bakery restaurant contains approximately 2,750 square feet, and
the average satellite restaurant contains approximately 2,000 square feet.
Approximately 1,200 square feet of a bakery restaurant is used for dough
production, baking and food preparation while approximately 500 square feet of a
satellite restaurant is used for food preparation. Restaurants have an average
seating capacity of approximately 60 persons. The Company leases approximately
1,200 to 4,000 square feet of space for each of its 20 Company-owned restaurant
sites. As of June 30, 1996, the Company has entered into an agreement to
purchase land and a building under development as a restaurant and leases for
three restaurants under development. Although the terms of its leases for
Company-owned restaurants vary, the Company typically seeks to obtain an initial
five-year term lease with two or three five-year option terms. The following
table sets forth certain information as of June 30, 1996 with respect to
Company-owned and franchised New York Bagel restaurants currently in operation
or under development. Restaurants under development include locations for which
leases have been signed, a real estate purchase agreement has been executed, or
construction has commenced, but are not currently in operation.
25
<PAGE>
COMPANY-OWNED RESTAURANTS
<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED RESTAURANT
- ------------------------------------------------------------ ------------------------ -----------
<S> <C> <C> <C>
Stillwater, OK Elm Street January 1986 Bakery
Stillwater, OK Downtown August 1986 Satellite
Oklahoma City, OK Casady Square August 1988 Bakery
Oklahoma City, OK Leadership Square October 1989 Satellite
Tulsa, OK Yale and 71st Street January 1990 Bakery
Edmond, OK Broadway Extension September 1991 Satellite
Wichita, KS East Central Avenue July 1992 Bakery
Wichita, KS Downtown April 1993 Satellite
Oklahoma City, OK Brixton Square July 1993 Satellite
Tulsa, OK Cherry Street January 1994 Satellite
Norman, OK Lindsey Avenue August 1994 Bakery
Norman, OK Campus September 1994 Satellite
Wichita, KS Rock Road July 1995 Satellite
Tulsa, OK Peoria Avenue September 1995 Bakery
Nashville, TN West End Avenue December 1995 Bakery
Nashville, TN Hillsboro Village March 1996 Satellite
Tulsa, OK Downtown March 1996 Satellite
Waco, TX West Waco Drive April 1996 Bakery
Nashville, TN White Bridge Road April 1996 Satellite
Nashville, TN L&C Tower June 1996 Satellite
Springfield, MO Campbell Avenue Under Development Bakery
Tulsa, OK 51st Street Under Development Satellite
Stillwater, OK Perkins Road Under Development Satellite
Lubbock, TX Quaker Avenue Under Development Bakery
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C>
FRANCHISED RESTAURANTS
<CAPTION>
DATE TYPE OF
LOCATION OPENED RESTAURANT
- ------------------------------------------------------------ ------------------------ -----------
<S> <C> <C> <C>
Omaha, NE South 106th December 1993 Bakery
Knoxville, TN Kingston Pike March 1994 Bakery
Olathe, KS Mur-len Avenue July 1994 Bakery
Dallas, TX Lemmon Avenue July 1994 Bakery
Kansas City, MO Downtown September 1994 Satellite
Austin, TX Research Boulevard October 1994 Bakery
Little Rock, AR Markham Avenue November 1994 Bakery
Tucson, AZ East Broadway February 1995 Bakery
Omaha, NE Farnam Street February 1995 Satellite
Santa Fe, NM St. Michaels Boulevard March 1995 Bakery
Littleton, CO West Bowles Avenue April 1995 Bakery
Plano, TX Legacy Drive April 1995 Bakery
Dallas, TX Preston Royal Centre May 1995 Satellite
Amarillo, TX Soncy Road June 1995 Bakery
Knoxville, TN Gay Street July 1995 Satellite
Longview, WA Ocean Beach Highway July 1995 Bakery
Columbia, SC Harden Street September 1995 Bakery
Tampa, FL North Dale Mabry Highway September 1995 Bakery
Hurst, TX Grapevine Highway September 1995 Bakery
Bismarck, ND East Bismark Expressway October 1995 Bakery
San Antonio, TX Embassy Oaks November 1995 Bakery
Austin, TX Research Boulevard November 1995 Satellite
Amarillo, TX West Georgia Street December 1995 Satellite
Omaha, NE Pacific Street January 1996 Satellite
Irving, TX North MacArthur Boulevard March 1996 Satellite
New Orleans, LA Veteran's Boulevard March 1996 Bakery
Tucson, AZ North Oracle Avenue March 1996 Satellite
San Antonio, TX Broadway Avenue May 1996 Satellite
Englewood, CO Holly Street June 1996 Bakery
Birmingham, AL 20th Street South June 1996 Bakery
Little Rock, AR Center Street Under Development Satellite
Littleton, CO Wadsworth Avenue Under Development Satellite
Aurora, CO East Mississippi Street Under Development Satellite
Columbia, SC Palmetto Plaza Under Development Satellite
</TABLE>
PLANNED EXPANSION
The Company intends to expand through the balanced development of
Company-owned and franchised restaurants. Since January 1, 1996, the Company has
opened five Company-owned restaurants and plans to open eight to ten additional
Company-owned restaurants during the remainder of 1996 and approximately 17 to
20 in 1997. Since January 1, 1996, franchisees have opened eight franchised
restaurants and the Company has 20 franchisees operating 30 restaurants in 15
states. The Company considers franchisees to be an integral component of its
continued growth. The Company expects franchisees to open an additional 15 to 20
restaurants during the remainder of 1996 and approximately 25 to 30 franchised
restaurants during 1997, although there can be no assurance that all of these
restaurants will be opened.
27
<PAGE>
OPERATIONS
RESTAURANT PERSONNEL. A typical New York Bagel restaurant employs a
restaurant manager, an assistant manager and approximately 25 to 30 hourly
employees for a bakery restaurant and 15 to 20 hourly employees for a satellite
restaurant, most of whom work part-time. The restaurant manager is responsible
for the day-to-day operation of the restaurant and for compliance with
Company-established operating standards. The Company also employs five area
managers, each of whom has responsibility for overseeing three to six
Company-owned restaurants. The Company seeks to hire experienced restaurant
managers and staff, and to motivate and retain them by providing opportunities
for advancement and performance-based, financial incentives. Training and
compensation programs are intended to instill restaurant managers and area
managers with a sense of ownership in their restaurants. The Company believes
the issuance of stock awards under its 1996 Incentive Plan and the restaurant
management bonus program will enhance its ability to attract and retain
restaurant and area managers. To date, the Company has experienced a low
managerial turnover rate which it believes results in decreased training costs
and higher productivity. See "Management -- 1996 Incentive Plan."
REPORTING. The Company's restaurant managers prepare daily and weekly
reports of sales, cash deposits and operating costs. Physical inventories of all
food and beverage items are taken monthly. The Company conducts monthly meetings
with area managers to discuss restaurant sales, profitability and operations,
personnel needs and product quality.
HOURS OF OPERATIONS. The restaurants are generally open Monday through
Saturday from 6:30 a.m. to 8:00 p.m. and on Sunday from 8:00 a.m. to 5:00 p.m.
Management believes that Company-owned restaurants typically generate
approximately 40% of their sales before 11:00 a.m. Although the majority of New
York Bagel restaurants are open seven days a week, certain satellite restaurants
are located in downtown business districts and are open during business hours
Monday through Friday.
TRAINING
The Company believes that comprehensive training is essential to the
efficiency and consistency of its restaurants. Accordingly, the Company conducts
an extensive 90-day training program for its restaurant managers and franchisees
that is composed of approximately ten days of classroom instruction on
administration, record keeping and inventory control and approximately 80 days
of on-site instruction on baking and food preparation at the Company's training
facility in Oklahoma City, Oklahoma. The Company has a team of five employees
dedicated to training and new restaurant openings, including a full-time
coordinator. In addition, the team provides on-site assistance during the
initial ten days of operation at each Company-owned restaurant and at a
franchisee's initial franchised restaurant. Management believes that its
emphasis on training currently exceeds that of many of its competitors.
PURCHASING AND DISTRIBUTION
The Company establishes quality standards and specifications for food
products and equipment used in New York Bagel restaurants and designates primary
and secondary suppliers for all food items and restaurant supplies. In order to
ensure product quality and consistency, franchisees purchase certain products
from the Company's approved distributors. To obtain competitive prices, the
Company contracts centrally for certain food products and supplies and
negotiates volume discounts for the benefit of Company-owned and franchised
restaurants. Most Company-owned and franchised restaurants purchase the majority
of their food and non-food items from one nationally recognized distributor. The
Company believes that the loss of this distributor would not materially affect
the Company's results of operations.
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MARKETING AND ADVERTISING
The Company and its franchisees advertise through newspapers, direct mail
and radio. All advertising materials must be produced or pre-approved by the
Company. The Company provides restaurants with pre-opening, grand opening and
ongoing advertising and in-store promotional materials. In April 1996, the
Company and its franchisees commenced payments of 0.5% of gross sales to the
Company's advertising fund. The advertising fund is governed by a six-member
board comprised of three Company representatives and three franchisee
representatives who oversee the development of advertising materials. Prior to
April 1996, the Company funded the development of advertising materials and
furnished such materials to all restaurants for their use. Franchisees maintain
sole discretion over the placement of advertisements in their market.
FRANCHISE PROGRAM
The Company commenced franchising its restaurant concept in 1993 and has 20
franchisees operating 30 New York Bagel restaurants in 15 states. The Company
expects that 45 to 50 franchised restaurants will be open by the end of 1996 and
70 to 80 by the end of 1997. However, there can be no assurance that all of
these restaurants will be open or that the development schedule set forth in
each development agreement will be achieved. During April 1996, a franchisee in
the Houston, Texas market closed two restaurants. The Company anticipates
refranchising the Houston, Texas market in the future. During July 1996, the
Company agreed to purchase certain restaurant operating equipment of its
existing Kansas City area franchisee. The Company anticipates refranchising the
Kansas City market in the future.
The Company primarily seeks franchisees that have restaurant experience and
that will enter into development agreements for multiple restaurants.
Franchisees are approved on the basis of operational experience and financial
resources. If the franchisee is not an owner-operator, the Company encourages
the franchisee to provide the full-time operator an equity interest in the
franchise operation.
DEVELOPMENT AGREEMENT. The Company enters into a development agreement with
each franchisee (a "Development Agreement") for the exclusive development of a
predetermined number of New York Bagel restaurants within a designated market
area (the "Area of Exclusivity"). The Area of Exclusivity is negotiated prior to
the signing of a Development Agreement and varies by agreement as to size,
number of New York Bagel restaurants required and the schedule for restaurant
development and opening. A Development Agreement generally requires a franchisee
to develop the first restaurant within 12 months of signing the Development
Agreement and the second restaurant within 18 months. Subsequent restaurants are
generally required to be opened in six-month intervals thereafter. Development
schedules vary based upon the size of the territory and the number of
restaurants to be developed. Development Agreements contain cross-default
provisions, and failure to develop the restaurants on schedule may result in a
loss of exclusivity within the Area of Exclusivity. Under the Company's
Development Agreement, the franchisee is required to pay, at the time of
signing, a non-refundable fee equal to one-third of the initial franchise fee
per restaurant covered by the Development Agreement. The amount is credited
against the Company's standard franchisee fee, the remainder of which is payable
to the Company upon signing the franchise agreement for a specific location.
FRANCHISE AGREEMENT. After signing a Development Agreement, the Company
enters into a franchise agreement (a "Franchise Agreement") generally when a
franchisee secures a location. The Franchisee Agreement provides for a term of
ten years with one ten-year renewal option and contains cross-default
provisions. The Company has the right to terminate any Franchise Agreement under
certain specified circumstances, including a franchisee's failure to make
payments when due or failure to adhere to the Company's standards or procedures.
Many state franchise laws limit the ability of a franchisor to terminate or
refuse to renew a franchise. The current Franchise Agreement contains a right of
first refusal for the Company to purchase an interest in the franchise and the
franchisee. The
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current Franchise Agreement provides for an initial franchise fee of $21,000 for
each bakery restaurant and $12,000 for each satellite restaurant. During 1995,
the initial franchisee fees for a bakery restaurant and a satellite restaurant
were $18,000 and $9,000, respectively. Under the current Franchise Agreement,
the franchisee pays the Company a monthly royalty fee of 4% of gross sales. Upon
renewal of the Franchisee Agreement, the monthly royalty fee cannot be increased
to an amount greater than the monthly royalty fee then in effect for new
franchisees. See "Business -- Government Regulation."
SERVICES. The Company assists each franchisee in the site selection and
development of restaurants and provides the physical specifications and plans
for each franchised location. Each franchisee is responsible for recommending
the location for its restaurants, but must obtain Company approval of each
restaurant design and each location based on Company requirements. Company
personnel also visit each site in connection with the site approval process. The
Company provides standard design plans and equipment layout and specifications
for most franchisees. In addition, Company personnel provide telephone support
with respect to operations issues, as well as ongoing assistance with
advertising and promotion.
QUALITY CONTROL. All franchisees are required to operate their New York
Bagel restaurants in compliance with the Company's policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, fixtures, furnishings, decor and signage. Each franchisee has full
discretion, however, to determine the prices to charge its customers. The
Company collects sales and other operating information from its franchisees on a
monthly, quarterly and annual basis. The Company monitors each franchisee's
operations and product quality through review of monthly paperwork, review of
quarterly financial statements and quarterly field visits. These overview
mechanisms allow the Company to quickly identify potential problems and provide
operational, marketing or accounting assistance.
FRANCHISE TRAINING AND SUPPORT. Each franchisee is required to have a
restaurant manager, approved by the Company, who satisfactorily completes the
Company's training program and who devotes his or her full business time and
efforts to the operation of the franchisee's restaurant. In addition to this
program, the Company also provides an on-site training crew for ten days during
the opening of the franchisee's initial restaurant and ongoing supervision
thereafter. Multi-unit franchisees are encouraged to hire a full-time training
coordinator to train new employees for their restaurants. The Company regularly
communicates with its franchisees, and encourages active communication among its
franchisees, through franchise newsletters, special bulletins and periodic
meetings.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants 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 restaurant is located. Difficulties in obtaining or failures to obtain
required licenses or approvals could delay or prevent the opening of a new
restaurant in a particular area.
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. The Company is
currently required to register as a franchisor in two states. A number of states
in which the Company may 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 many states, and bills
have been introduced in Congress from time-to-
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time which would provide for Federal registration 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.
The Company's operations are also subject to federal and state laws
governing such matters as wages, working conditions, citizenship requirements
and overtime. The Company is also subject to the Americans with Disabilities Act
of 1990, which, among other things, could require certain renovations to its
restaurants to meet federal mandates. If such renovations are required, the
Company believes the cost thereof will not materially affect the Company's
results of operations. The Company believes it is in substantial compliance with
all material laws.
COMPETITION
The quick-service restaurant industry is intensely competitive and generally
characterized by low barriers to entry. There are a growing number of
significant national, regional and local bagel restaurant chains, operating both
owned and franchised bagel restaurants including Quality Dining, Inc. (Brueggers
Bagel Bakery), Einstein/Noah Bagel Corp., Manhattan Bagel Company, Inc. and BAB
Holdings, Inc., many of which have greater financial resources than the Company.
New York Bagel restaurants also compete with other well established
quick-service restaurants that have greater product and name recognition, larger
financial and other resources than the Company and longer operating histories,
as well as numerous local food establishments, supermarkets and convenience
stores that offer similar products. The Company believes that New York Bagel
restaurants compete favorably in terms of taste, food quality, portions,
service, convenience and value, which the Company believes are important factors
to its targeted customers.
The Company competes for qualified franchisees with a wide variety of
investment opportunities both in the restaurant business and in other
industries. The Company's continued success is dependent to a substantial extent
on its reputation for providing high quality and value with respect to its
service, products and franchises, and this reputation may be affected not only
by the performance of Company-owned restaurants, but also by the performance of
its franchised restaurants over which the Company has limited operational
control.
TRADEMARKS AND SERVICE MARKS
The Company operates and franchises bagel restaurants under the names "New
York Bagel Shop & Delicatessen," "New York Bagel Shop & Deli," "NY Bagel Cafe,"
"New York Bagel Cafe & Deli," "NYB New York Bagel," "the New York Bagel Shop"
and "Nashville Bagel Co." The Company's trademark "New York Bagel Shop &
Delicatessen" and service mark "Like Bread With An Attitude" are registered
under applicable federal trademark law. Under federal trademark law, the Company
is required to renew these marks every 20 years. The Company claims common-law
rights to the marks "New York Bagel Shop & Delicatessen," "NYB," "The City's
Best Bagel," and "Where Yeast Meets West," but there have been no judicial
determinations of the existence, validity, or extent of the Company's rights.
Certain of the marks are licensed by the Company to franchisees pursuant to
franchise agreements.
The Company is aware of the use by other persons and entities in certain
geographic areas of names and marks which are the same or similar to the
Company's marks. Some of these persons or entities may have prior rights to
those names or marks in their respective localities. Therefore, there is no
assurance that the "New York Bagel Shop & Delicatessen" mark or any other marks
are available in all locations.
PROPERTIES
The Company's principal executive offices are located at 300 I.M.A. Plaza,
250 North Water Street, Wichita, Kansas 67202-1213, where the Company subleases
approximately 1,200 square feet of office space pursuant to a sublease agreement
with Murfin Drilling Company, Inc., a wholly owned subsidiary of Murfin, Inc.,
that expires during March 1997. The Company has the option to terminate
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such sublease upon 30 days' notice. Mr. David L. Murfin, a Director of the
Company, is a 7.1% stockholder of Murfin, Inc. The Company believes that
alternative office space is available at comparable rates from third parties.
The Company's operational offices are located at 110 West Third Street,
Stillwater, Oklahoma 74074, where the Company leases approximately 900 square
feet of office space pursuant to a lease agreement that expires during December
1997. The Company conducts its management and franchisee training at its Casady
Square, Oklahoma City, Oklahoma facility in an approximately 3,400 square foot
space contiguous to the restaurant. Such facility is subject to a lease that
expires during July 2003. The Company believes that its current executive
offices and training facilities are adequate for the near future and does not
anticipate the need for significant expansion of these facilities in the
foreseeable future. See "Certain Transactions -- Leases."
EMPLOYEES
As of June 30, 1996, the Company employed 362 persons, 202 of which are
employed part-time. None of the Company's employees is subject to any collective
bargaining agreements, and management considers its relations with its employees
to be good.
LEGAL PROCEEDINGS
The Company is involved from time-to-time in various legal proceedings and
claims incident to the normal conduct of its business. The Company believes that
such legal proceedings and claims, individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition or results
of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names of the directors, executive officers and key employees of the
Company and their respective ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Robert J. Geresi (1)......................... 34 Chairman of the Board, Chief Executive Officer and
President
Paul T. Sorrentino (2)....................... 34 Vice President -- New Store Development and
Director
Paul R. Hoover (1)........................... 35 Vice President -- Strategic Planning and Director
J. Chris Dennis.............................. 32 Chief Financial Officer, Secretary and Treasurer
Vincent J. Vrana............................. 33 Vice President -- Training
Markus K. Scholler........................... 41 Director of Franchise Operations
William S. Atherton (3)(4)................... 63 Director
David L. Murfin (2)(4)....................... 44 Director
</TABLE>
- ------------------------
(1) Class III Director.
(2) Class II Director.
(3) Class I Director.
(4) Member of the Audit Committee and the Compensation Committee.
ROBERT J. GERESI has served as Chairman of the Board, Chief Executive
Officer and President of the Company since December 1995. Mr. Geresi served as
an executive officer of each Prior Entity since their respective inceptions
beginning in 1986. From 1984 through 1986, Mr. Geresi served as a Senior
Financial Analyst of Grumman Aerospace Corp., Bethpage, New York. Since 1995,
Mr. Geresi has served as a director of Cowboy Land Development, Inc., a real
estate subsidiary of Karsten Creek Golf Course, Oklahoma State University
Foundation. Mr. Geresi received a Bachelor of Arts degree in economics from
Binghamton University, Binghamton, New York in 1984.
PAUL T. SORRENTINO has served as Vice President -- New Store Development and
as a Director of the Company since December 1995. Mr. Sorrentino served as an
executive officer of each Prior Entity since their respective inceptions
beginning in 1986. From 1985 to 1986, Mr. Sorrentino was a telecommunications
consultant for Cameron Communications, Oklahoma City, Oklahoma. Mr. Sorrentino
received a Bachelor of Arts degree in advertising from Oklahoma State
University, Stillwater, Oklahoma in 1985.
PAUL R. HOOVER has served as Vice President -- Strategic Planning and as a
Director of the Company since December 1995. From June 1994 until December 1995,
Mr. Hoover served as Vice President and as a Director of New York Bagel
Enterprises, Inc., the franchisor entity of the Prior Entities. Since 1984, Mr.
Hoover has been a Director and stockholder of West-Kan Foods, Inc., a Wendy's
restaurant franchisee. From 1986 to 1990, Mr. Hoover was President of Midco
Foods, Inc., a multi-concept restaurant franchisee. Mr. Hoover is the owner of
and has served as the President of Paul R. Hoover Real Estate Company since
1990. Mr. Hoover received a Bachelor of Arts degree in geology from Wichita
State University, Wichita, Kansas in 1983.
J. CHRIS DENNIS has served as Chief Financial Officer, Secretary and
Treasurer of the Company since April 1996. From 1991 to 1996, Mr. Dennis was
Vice President and Controller of Railroad Savings Bank fsb in Wichita, Kansas
and its parent company, Railroad Financial Corporation, a
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publicly-held financial institution. From 1986 to 1991, Mr. Dennis was an audit
supervisor with Grant Thornton LLP, certified public accountants. Mr. Dennis is
a member of the American Institute of Certified Public Accountants and Kansas
Society of Certified Public Accountants, and currently serves on the Planning
Committee of the Annual Wichita State University Accounting and Auditing
Conference. Mr. Dennis received a Bachelor of Business Administration degree in
accounting from Wichita State University, Wichita, Kansas in 1985. Mr. Dennis is
a Certified Public Accountant.
VINCENT J. VRANA has served as Vice President -- Training of the Company
since December 1995. Mr. Vrana served as an executive officer of each Prior
Entity since their respective inceptions beginning in 1986. Mr. Vrana received a
Bachelor of Science degree in business administration from Oklahoma State
University, Stillwater, Oklahoma in 1986.
MARKUS K. SCHOLLER has served as Director of Franchise Operations of the
Company since October 1994. From 1990 to 1994, Mr. Scholler was Training General
Manager for J.S. Ventures, Inc., a multi-unit Applebee's Neighborhood Grill &
Bar franchisee. From 1986 to 1990, Mr. Scholler was General Manager of Midco
Foods, Inc., a multi-concept restaurant franchisee. Mr. Scholler is a Director
of the Kansas Restaurant and Hospitality Association.
WILLIAM S. ATHERTON has served as a Director of the Company since January
1996. Mr. Atherton is a partner of Atherton & Murphy Investment Company, an
investment partnership, and serves as Chairman of the Board of Atherton
Restaurant Services, Inc. Mr. Atherton also serves as a Director of Wall Street
Deli, Inc., a publicly-traded restaurant company, Chimis, Inc., a full-service
casual dining concept, Oklahoma State University Foundation Board of Governors
and the National Cowboy Hall of Fame. From 1964 until 1986, Mr. Atherton served
as Chairman of the Board and Chief Executive Officer of A & M Food Service,
Inc., a Pizza Hut franchisee. He received a Bachelor of Science degree in
petroleum engineering from Oklahoma State University, Stillwater, Oklahoma in
1956.
DAVID L. MURFIN has served as a Director of the Company since July 1994.
Since 1978, Mr. Murfin has served in various capacities with, and since 1992 as
President of, Murfin Drilling Company, an oil and gas production, exploration
and drilling company. From 1975 to 1978, Mr. Murfin was a Production and
Reservoir Engineer with Amoco Production Company. Mr. Murfin also serves as
National Chairman of the Liaison Committee of Cooperating Oil and Gas
Associations, President of the Kansas Independent Oil and Gas Association, a
director of the International Association of Drilling Contractors, director of
the Quivira Council of the Boy Scouts of America, a member of the Economic
Analysis Panel of the Wichita Chamber of Commerce, and a director of
Heartspring. Mr. Murfin received Bachelor of Science degrees in business
administration and in mechanical engineering from the University of Kansas in
1975.
TERM OF OFFICE
Upon completion of this offering, the Company's Board of Directors will be
divided into three classes (Class I, Class II and Class III) of as equal size as
possible, with the terms of each class expiring in consecutive years so that
only one class is elected in any given year. Directors for each class will be
elected at the annual meeting of stockholders held in the year in which the term
for such class expires and will serve thereafter for a term of three years until
their successors are elected and qualified or their earlier resignation or
removal, except for the initial Class I and Class II directors whose terms
expire in 1997 and 1998, respectively. Vacancies in unexpired terms and any
additional positions created are filled by action of the Board of Directors. The
Board of Directors intends to appoint one additional independent Class I
Director to the Company's Board of Directors during 1996 in order to fill a
current vacancy on the Board of Directors. The executive officers of the Company
are elected annually by the Board of Directors and serve at the discretion of
the Board of Directors until their successors are elected and qualified or their
earlier resignation or removal.
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STOCKHOLDERS' AGREEMENTS
In June 1994, Mr. Geresi, the Company's Chairman of the Board and Chief
Executive Officer, Mr. Sorrentino, a Director and Vice President -- New Store
Development, Mr. Vrana, Vice President -- Training, Mr. Hoover, a Director and
Vice President -- Strategic Planning, and Mr. Murfin, a Director of the Company,
entered into a Contract for Sale of Stock which contained agreements among such
stockholders pertaining to the approval of certain actions, management of
NYBE-OK, as defined herein, election of directors, restrictions on the transfer
of stock and preemptive rights. The current directors of the Company were
designated and elected pursuant to this agreement. During January 1996, this
agreement was terminated and the Stockholders' Agreement became effective.
The existing stockholders and the Company are parties to the Stockholders'
Agreement which sets forth certain agreements regarding the management of the
Company. The Stockholders' Agreement provides that Messrs. Geresi, Vrana,
Sorrentino and Rodney Joe Trizza and certain other stockholders shall designate
three persons to stand for election as directors of the Company and that Ms.
Nancy Murfin, Ms. Barbara Murfin Murphy and Messrs. Hoover, Murfin, Mark A.
Moxley, V. Richard Hoover and Philip Faubert and certain other stockholders
shall designate three persons to stand for election as directors of the Company.
All stockholders who are parties to the Stockholders' Agreement have agreed to
vote their shares in favor of the election of such designees. The Stockholders'
Agreement will automatically terminate three years after the completion of this
offering. Following this offering, the existing stockholders will have voting
control over more than 56.5% of the outstanding Common Stock (approximately
52.8% if the Underwriters' over-allotment option is exercised in full).
Accordingly, the existing stockholders will be able to elect the entire Board of
Directors and otherwise direct the affairs of the Company.
COMMITTEES
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee, both of which are solely comprised of Independent
Directors, as defined herein. The functions of the Audit Committee are to make
recommendations to the Board of Directors regarding the engagement of the
Company's independent accountants and to review with management and the
independent accountants the Company's financial statements, basic accounting and
financial policies and practices, audit scope and competency of accounting
personnel. The functions of the Compensation Committee are to review and
recommend to the Board of Directors the compensation, stock options and
employment benefits of all officers of the Company, to administer the Incentive
Plan, as defined herein, to fix the terms of other employee benefit arrangements
and to make awards under such arrangements. Members of the committees are
appointed annually by the Board of Directors and serve at the discretion of the
Board of Directors until their successors are appointed or their earlier
resignation or removal.
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EXECUTIVE COMPENSATION
The following table sets forth the salary and other annual compensation paid
by the Prior Entities during 1995 to the Company's Chief Executive Officer and
each of the other most highly compensated executive officers of the Company
whose annual salary and other annual compensation during such period exceeded
$100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY(1) COMPENSATION(2)
- --------------------------------------------------------------------------- --------- ----------------
<S> <C> <C>
Robert J. Geresi........................................................... $ 76,750 $ 90,781
Chairman of the Board, Chief Executive Officer and President
Paul T. Sorrentino......................................................... $ 79,750 $ 90,699
Vice President -- New Store Development and Director
Vincent J. Vrana........................................................... $ 46,763 $ 80,846
Vice President -- Training
</TABLE>
- ------------------------
(1) Effective April 1, 1996, these employees' annual salaries are $65,000,
$62,500 and $48,000, respectively.
(2) Consists of (i) amounts reimbursed during 1995 for the payment of taxes of
$74,643, $74,643 and $74,655 for Messrs. Geresi, Sorrentino and Vrana,
respectively, (ii) health and life insurance premium payments on behalf of
such individuals, and (iii) directors' fees paid by certain Prior Entities.
COMPENSATION OF DIRECTORS
Directors who are not also employees of the Company ("Independent
Directors") receive $250 per board meeting attended and $125 per board committee
meeting attended and are reimbursed for out-of-pocket expenses incurred for
attendance at meetings. The Company granted on June 4, 1996, nonqualified stock
options under the Company's 1996 Incentive Plan to purchase 17,500 shares of
Common Stock to each of Messrs. Murfin and Atherton, who are Independent
Directors, at an exercise price equal to 110% and 100%, respectively, of the
price to public set forth on the cover page of this Prospectus. The nonqualified
stock options vest over a period of four years with the initial 20% becoming
exercisable on the six-month anniversary of the grant date and an additional 20%
becoming exercisable on each of the first four anniversaries of the grant date.
While the Company does not have a formal policy concerning the granting of
nonqualified stock options to Independent Directors, the Company may grant such
options to Independent Directors in the future.
1996 INCENTIVE PLAN
SCOPE. The Board of Directors and stockholders of the Company have approved
the New York Bagel Enterprises, Inc. 1996 Incentive Plan (the "Incentive Plan").
The Incentive Plan authorizes the Company to award incentive stock options and
nonqualified stock options to purchase Common Stock and restricted stock to
officers, employees and directors of, and consultants and advisors to, the
Company. The purpose of the Incentive Plan is to attract, retain and motivate
such persons.
The Incentive Plan authorizes the award of 400,000 shares of Common Stock to
be used for incentive stock options, nonqualified stock options or restricted
stock grants, of which options to purchase 271,000 shares of Common Stock have
been granted as of the date of this Prospectus. If an
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<PAGE>
award made under the Incentive Plan expires, is canceled or is otherwise
terminated, those shares will be available for future awards under the Incentive
Plan. The Incentive Plan will terminate during January 2006.
ADMINISTRATION. The Incentive Plan will be administered by a committee (the
"Committee") which is comprised of directors who are disinterested within the
meaning of Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Subject to the provisions of the
Incentive Plan, the Committee will have authority to select those officers,
employees, advisors and consultants of the Company to receive awards, to
determine the time or times of receipt, to determine the types of awards and the
number of shares covered by the awards, and to establish the terms, conditions
and provisions of such awards. In making such award determinations, the
Committee may take into account the nature of services rendered by the
recipient, his or her present and potential contribution to the Company's growth
and success, and such other factors as the Committee deems relevant. The
Committee is authorized to interpret the Incentive Plan, to establish, amend and
revoke any rules and regulations relating to the Incentive Plan, to determine
the terms and provisions of any agreements made pursuant to the Incentive Plan
and to make all other determinations that may be necessary or advisable for the
administration of the Incentive Plan.
STOCK OPTIONS. Both incentive stock options and nonqualified stock options
(collectively referred to as "Stock Options") may be granted pursuant to the
Incentive Plan. All Stock Options granted under the Incentive Plan will have an
exercise price per share to be determined by the Committee; provided that the
exercise price per share under each Stock Option shall not be less than the fair
market value of a share of Common Stock at the time the Stock Option is granted
(110% of such fair market value in the case of incentive stock options granted
to a stockholder who owns 10% or more of the Company's outstanding Common
Stock). The maximum term for all Stock Options granted under the Incentive Plan
is ten years (five years in the case of an incentive stock option granted to a
stockholder who owns 10% or more of the Company's outstanding Common Stock).
Moreover, no Stock Options may be granted under the Incentive Plan more than ten
years after the date of its adoption. All Stock Options are nontransferable
other than by will or the laws of descent and distribution or a qualified
domestic relations order, and during an optionee's lifetime may be exercised
only by the optionee or the optionee's guardian or legal representative. Stock
Options are exercisable at such time and in such installments as the Committee
may provide at the time the Stock Option is granted. The Committee may
accelerate the exercisability of any Stock Option at any time. The purchase
price for shares acquired pursuant to the exercise of a Stock Option must be
paid in the manner determined by the Committee. The terms and conditions of
Stock Options relating to their treatment upon termination of the optionee's
employment or association with the Company will be determined at the time the
Stock Options are granted. An optionee is not deemed to be the owner of any
shares of Common Stock subject to any Stock Option until the Stock Option has
been exercised, the Company has issued and delivered the shares to the optionee
and the optionee's name has been entered as a stockholder of record on the books
of the Company. The stock options vest over a period of four years with the
initial 20% becoming exercisable on the six-month anniversary of the grant date
and an additional 20% becoming exercisable on each of the first four
anniversaries of the grant date. In the event of a change in control of the
Company, as defined, awards under the Incentive Plan become exercisable within
60 days of the change in control.
RESTRICTED STOCK. Restricted stock awards are grants of Common Stock made
to officers and employees, subject to conditions established by the Committee.
The terms of a restricted stock award, including the restrictions placed on such
shares and the time or times at which such restrictions will lapse, shall be
determined by the Committee at the time the award is made. Unless the Committee
determines otherwise, holders of restricted stock shall have the right to vote
the shares of restricted stock and to receive all dividends thereon. The
Committee may determine at the time of an award of restricted stock that
dividends paid on such shares may be paid to the grantee or deferred. Deferred
dividends (together with any interest accrued thereon) will be paid upon the
lapsing of the restrictions
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<PAGE>
on the shares of restricted stock or forfeited upon the forfeiture of the shares
of restricted stock. The agreements evidencing awards of restricted stock shall
set forth the terms and conditions of such awards and the effect of a grantee's
termination of employment.
ADJUSTMENTS. In the event of any change in the outstanding shares of Common
Stock by reason of any reclassification, recapitalization, merger,
consolidation, reorganization, spin-off, split-up, issuance of warrants or
rights or debentures, stock dividend, stock split or reverse stock split, cash
dividend, property dividend or similar change in the corporate structure, the
aggregate number of shares of Common Stock with respect to which awards may be
made under the Incentive Plan, and the terms and the number of shares of
restricted stock, or the number of shares of Common Stock underlying any
outstanding Stock Options may be equitably adjusted by the Committee in its sole
discretion.
TERMINATION AND AMENDMENT. The Incentive Plan may be terminated or amended
by the Board of Directors, provided that, in the absence of stockholder
approval, no amendment of the Incentive Plan may materially increase the total
number of shares of Common Stock with respect to which awards may be made under
the Incentive Plan (except as discussed in "-- Adjustments" above), change the
exercise price of a Stock Option, materially modify the requirements as to
eligibility for participation in the Incentive Plan or materially increase the
benefits accruing to participants under the Incentive Plan. No amendment of the
Incentive Plan may adversely alter or impair any Stock Option or share of
restricted stock awarded under the Incentive Plan prior to such amendment
without the consent of the holder thereof.
INDEMNIFICATION ARRANGEMENTS
The Company's Restated and Amended Articles of Incorporation and Restated
and Amended Bylaws will provide that the Company shall indemnify all directors
and officers of the Company to the fullest extent permitted by the Kansas
general corporation code. Under such provisions, any director or officer, who in
his capacity as such, is made or threatened to be made, a party to any suit or
proceeding, shall be indemnified if it is determined that such director or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, all compensation decisions concerning executive officers were
made by the Company's Board of Directors and the respective boards of directors
of the Prior Entities, which included Messrs. Geresi, Sorrentino, Hoover,
Murfin, Vrana, Trizza, Robert D. Young, Brent E. Durham, John R. Geresi and Chad
E. Watkins. The Compensation Committee currently makes recommendations to the
Board of Directors regarding compensation to the executive officers. See
"Certain Transactions."
38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents certain information as of August 26, 1996, and
after giving effect to this offering, regarding the beneficial ownership of
Common Stock of (i) each director of the Company, (ii) each Named Executive
Officer, (iii) all persons known by the Company to be beneficial owners of five
percent or more of the Common Stock, and (iv) all directors and executive
officers of the Company as a group. Additionally, the table reflects each
Selling Stockholder and the number of shares of Common Stock to be sold by each
in this offering. The persons listed below have sole voting and investment power
and record and beneficial ownership with respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING(7)
-------------------------- SHARES --------------------------
NAME NUMBER PERCENTAGE OFFERED(6) SHARES PERCENTAGE
- -------------------------------------------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Robert J. Geresi (1)(2)........................... 599,343 21.4% 48,000 551,343 12.0%
Paul T. Sorrentino (1)............................ 598,543 21.4 48,000 550,543 12.0
Paul R. Hoover (3)(4)............................. 69,348 2.4 5,000 64,348 1.4
Vincent J. Vrana (1).............................. 556,564 19.9 44,000 512,564 11.1
David L. Murfin (3)(5)............................ 426,246 15.2 33,000 393,246 8.5
Directors and executive officers as a group (seven
persons)......................................... 2,250,044 80.3% 178,000 2,072,044 45.0%
5% STOCKHOLDER
Rodney Joe Trizza (1)............................. 161,951 5.8% 10,750 151,201 3.3%
OTHER SELLING STOCKHOLDERS
Brent E. Durham................................... 24,217 * 1,750 22,467 *
John R. Geresi.................................... 21,389 * 500 20,889 *
V. Richard Hoover................................. 69,350 2.5% 2,500 66,850 1.5%
Nancy Murfin Moxley and Mark A. Moxley............ 82,850 3.0 2,500 80,350 1.7
Barbara Murfin Murphy............................. 70,850 2.5 2,500 68,350 1.5
Chad E. Watkins................................... 25,833 * 1,500 24,333 *
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%
(1) The address for Messrs. Geresi, Sorrentino, Vrana and Trizza is 110 West
Third Street, Stillwater, Oklahoma 74074-3504.
(2) Includes 5,000 shares owned by Mr. Geresi's minor children.
(3) The address for Messrs. Hoover and Murfin is 300 I.M.A. Plaza, 250 North
Water Street, Wichita, Kansas 67202-1213.
(4) Includes 5,000 shares owned by Mr. Hoover's minor children.
(5) Includes 45,000 shares owned by Mr. Murfin's minor children.
(6) In the event that the Underwriters' over-allotment option is exercised in
full, Messrs. Geresi, Sorrentino, Hoover, Vrana, Murfin and Trizza will sell
an aggregate of 54,500, 54,500, 6,500, 50,500, 38,500 and 13,250 shares,
respectively, in this offering.
(7) In the event that the Underwriters' over-allotment option is exercised in
full, Messrs. Geresi, Sorrentino, Hoover, Vrana, Murfin and directors and
executive officers as a group will beneficially own 544,843 (11.2%), 544,043
(11.2%), 62,848 (1.3%), 506,064 (10.4%), 387,746 (7.9%) and 2,045,544 shares
(42.0%), respectively, following this offering.
39
<PAGE>
CERTAIN TRANSACTIONS
REORGANIZATION
On December 31, 1995, the Company effected the Reorganization whereby,
through a series of transactions, the Company succeeded to the businesses of the
Prior Entities. First, New York Bagel Shop & Delicatessen, Inc., a Kansas
corporation, and VPR, Inc., New York Bagel Shop, Inc., Bagel Boss, Inc. and
Bagels of Norman, Inc., all Oklahoma corporations, were merged into New York
Bagel Enterprises, Inc., an Oklahoma corporation ("NYBE-OK") by issuance of
1,368,704 shares of the Company's Class B Common Stock. Second, Nashville Bagel,
a wholly owned subsidiary of NYBE-OK, was merged into NYBE-OK. Finally, NYBE-OK
was merged into the Company for the purpose of changing the corporate domicile
from Oklahoma to Kansas by issuance of 1,416,988 shares of the Company's Class A
Common Stock to the pre-reorganization stockholders of NYBE-OK. As a result of
the Reorganization, Messrs. Geresi, Sorrentino, Hoover, Vrana, Murfin and Trizza
received 627,343, 627,343, 141,698, 584,564, 354,246 and 161,951 shares of
Common Stock, respectively. In addition, Mr. Geresi's father, John R. Geresi,
received 21,389 shares; Mr. Hoover's father, V. Richard Hoover, received 70,850
shares; Mr. Murfin's sister, Barbara Murfin Murphy, received 70,850 shares; Mr.
Murfin's sister and brother-in-law, Nancy Murfin Moxley and Mark A. Moxley,
received 70,850 shares; and 54,608 shares were issued to others.
FRANCHISE ACQUISITION
On December 31, 1995, the Company acquired the assets of Central & Ridge
Yogurt, Inc. ("C&R"), a franchisee of the Company, in consideration of the
assumption by the Company of $225,000 of liabilities of C&R. The assets, which
had been acquired by C&R over time at a cost of approximately $195,000, were
valued by the Company without benefit of an independent appraisal at $225,000.
At the time of the acquisition, Mr. Hoover was the President of C&R and owned
10% of the stock of C&R. The terms of the transaction were negotiated by Mr.
Hoover on behalf of C&R and Mr. Geresi on behalf of the Company and approved by
the Board of Directors of the Company, with the purchase price being determined
by arm's-length negotiation between C&R and the Company.
LEASES
The Company currently leases space for a Company-owned New York Bagel
restaurant located in Norman, Oklahoma from Bagel Land, Inc. ("Bagel Land"), an
Oklahoma corporation, owned one-third each by Messrs. Geresi, Sorrentino and
Vrana. The Company made aggregate rent payments under such lease of $14,100,
$28,200 and $14,100 during 1994, 1995 and the period ended June 30, 1996,
respectively. The lease is for a term of five years commencing June 1994 at a
rent of $2,350 per month for 30 months and $2,500 per month for the remaining 30
months with an option to renew for five years at $2,650 for the first 30 months
and $2,800 per month for the last 30 months. The Company also leases space for a
Company-owned New York Bagel restaurant located in Tulsa, Oklahoma from Cherry
Street Land, Inc., an Oklahoma corporation, owned one-fourth each by Messrs.
Geresi, Sorrentino, Vrana and Trizza. The Company made aggregate rent payments
under such lease of $27,600 and $13,800 during 1995 and the period ended June
30, 1996, respectively. The lease is for a term of five years beginning January
1995 with an option to renew for five years and rent for the first 24 months of
$2,300 per month, $2,500 per month for the next 36 months, $2,700 per month for
the next 30 months and $2,900 per month for the last 30 months. Bagel Land is
anticipated to lease space to the Company for a New York Bagel restaurant to be
opened in Lubbock, Texas. Bagel Land is anticipated to be paid rent of $3,500
per month commencing during the later part of 1996.
The Company subleases space for its corporate offices located in Wichita,
Kansas from Murfin Drilling Company, Inc., a wholly owned subsidiary of Murfin,
Inc. which is owned 7.1% by Mr. Murfin. The Company made aggregate rent payments
under such sublease of $7,449 and $6,572 during 1995 and the twenty-six week
period ended June 30, 1996, respectively. The current sublease is for a term of
12 months commencing April 1, 1996, and is terminable on 30 days' notice by the
Company.
40
<PAGE>
STOCKHOLDER GUARANTEES
The Loan Agreement is guaranteed in an amount up to $1.0 million by each of
Messrs. Geresi, Sorrentino and Vrana. The Nashville Note is guaranteed by
Messrs. Geresi, Sorrentino and Vrana each up to $83,250 and Messrs. Murfin, up
to $175,000, and Hoover, up to $75,000. The Term Notes, the Stillwater Note, the
Springfield Note, the Remodel Note and the Lubbock Note are guaranteed in an
unlimited amount by Messrs. Geresi, Sorrentino and Vrana and in various limited
amounts by Messrs. Murfin, Hoover and Trizza. The Company intends to use
approximately $4.5 million of the net proceeds of this offering to repay all
outstanding indebtedness under the Loan Agreement, the Nashville Note and the
Term Notes. See "Risk Factors -- Benefits of Offering to Certain Stockholders"
and "Use of Proceeds."
DISTRIBUTIONS
During 1994, the Prior Entities declared distributions in the aggregate of
$614,260 to their stockholders, of which Messrs. Geresi, Sorrentino, Vrana,
Murfin and Hoover received $184,254, $184,254, $184,254, $7,800 and $1,200,
respectively. Mr. Trizza, a 5.8% stockholder of the Company, received $49,498,
$2,400 was received by members of Mr. Murfin's family, and $600 was received by
V. Richard Hoover, the father of Mr. Hoover. During 1995, the Prior Entities
declared distributions in the aggregate of $2,363,030 to their stockholders of
which Messrs. Geresi, Sorrentino, Vrana, Murfin and Hoover received $571,740,
$571,738, $544,838, $225,000 and $90,000, respectively. Mr. Trizza received
$177,252, John R. Geresi, the father of Mr. Geresi, received $13,447, V. Richard
Hoover, the father of Mr. Hoover, received $45,000, $90,000 was received by
members of Mr. Murfin's family, and the balance ($34,015) was paid to other
stockholders of the Prior Entities. The Company intends to make a distribution
to the stockholders in connection with their estimated federal and state income
tax obligations attributable to the Company's 1996 earnings. If the Company had
terminated its S corporation status as of June 30, 1996, the Company's
distribution would have been approximately $184,000. See "S Corporation
Distributions."
FRANCHISEE
During August 1995, the Company entered into a Development Agreement with
Mr. Vrana's brother and his partner concerning the development of three New York
Bagel restaurants in Columbia, South Carolina on terms and conditions comparable
to all other franchisees of the Company as discussed herein. Pursuant thereto,
Mr. Vrana's brother and his partner have developed one restaurant and entered
into a franchise agreement with the Company in connection therewith.
FUTURE TRANSACTIONS
Although each of the foregoing transactions were among affiliated parties
and necessarily involved conflicts of interest, the Company believes that they
were on terms that were no less favorable than reasonably available from
unaffiliated third parties. It is the Company's policy that all transactions
between the Company and its affiliated entities, executive officers or directors
will be subject to the review and approval of the majority of the Company's
directors that do not have an interest in the transaction and will be on terms
which will be no less favorable to the Company than the Company could obtain
from non-affiliated parties.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 25,000,000
shares of Class A Common Stock, par value $0.01 per share, and (ii) 5,000,000
shares of Class B Common Stock, par value $0.01 per share. As of June 30, 1996,
there were 1,416,988 shares of Class A Common Stock outstanding held by nine
record holders and 1,383,012 shares of Class B Common Stock outstanding held by
eight record holders.
41
<PAGE>
Concurrently with the completion of this offering, (i) the number of
authorized shares of Class A Common Stock will be increased to 30,000,000, (ii)
each share of outstanding Class B Common Stock will be converted into one share
of Class A Common Stock resulting in the 27 stockholders prior to this offering
holding 2,800,000 shares of Common Stock, (iii) the Class B Common Stock will
cease to exist and the Class A Common Stock will be reclassified as Common
Stock, and (iv) the Company will be authorized to issue 5,000,000 shares of
Preferred Stock, no par value per share.
COMMON STOCK
Holders of Common Stock will be entitled to one vote for each share held in
the election of directors and on all other matters submitted to a vote of
stockholders. Cumulative voting of shares of Common Stock will be prohibited in
the Company's Restated and Amended Articles of Incorporation. Subject to the
preferential rights of the holders of Preferred Stock, holders of Common Stock
will be entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock will be entitled to receive ratably the net assets of the Company
available after payment of all debts and other liabilities and payment in full
to holders of shares of Preferred Stock then outstanding, if any, of any amount
required to be paid under the terms of such Preferred Stock. Holders of Common
Stock will have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of Common Stock will be
subject to, and may be adversely affected by, the rights of any series of
Preferred Stock that the Company may issue in the future. See "Dividend Policy."
PREFERRED STOCK
Upon completion of this offering, the Board of Directors will be authorized
to issue, from time-to-time without further action by the Company's
stockholders, shares of Preferred Stock, in one or more series, and fix the
dividend rights, dividend rates, any conversion rights or right of exchange, any
voting right, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, the liquidation preferences and any
other rights, preferences, privileges and restrictions of any series of
Preferred Stock and the number of shares constituting such series and the
designation thereof. Depending upon the rights of such Preferred Stock, the
issuance of Preferred Stock could have an adverse effect on holders of Common
Stock by delaying or preventing a change in control of the Company, diluting the
voting rights of holders of Common Stock, making removal of the present
management of the Company more difficult or resulting in the reduction of or
restrictions upon the payment of dividends and other distributions to the
holders of Common Stock, including, without limitation, any liquidation
preferences which may relate to such Preferred Stock.
CLASS B COMMON STOCK
Holders of Class B Common Stock have no voting rights, but otherwise have
the same rights as holders of Common Stock. Concurrently with the completion of
this offering, the outstanding shares of Class B Common Stock will be converted
into shares of Class A Common Stock, which will be reclassified as Common Stock,
and the Class B Common Stock will cease to exist.
CONVERTIBLE DEBENTURE
In connection with the acquisition of Nashville Bagel, the Company issued a
4.0% contingently convertible subordinated debenture in the amount of $115,000
payable in annual installments of $28,750 plus interest beginning December 14,
1996 (the "Convertible Debenture"). The Convertible Debenture is convertible
into a maximum of 19,320 shares of Common Stock, at the option of the holder
thereof, during the period commencing ten days after the completion of this
offering and ending 270 days later. The number of shares of Common Stock
issuable upon conversion are subject to adjustment from time to time in the
event the Company (i) pays a dividend or makes a distribution on the outstanding
Common Stock payable in Common Stock, (ii) subdivides the outstanding Common
42
<PAGE>
Stock into a greater number of shares, (iii) combines the outstanding Common
Stock into a lesser number of shares, or (iv) issues by reclassification of the
Common Stock any Common Stock of the Company. The Convertible Debenture is
subordinate to the liabilities of the Company.
CERTAIN ANTI-TAKEOVER MATTERS
The provisions of the Company's Restated and Amended Articles of
Incorporation and Amended and Restated Bylaws summarized below may be deemed to
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider to be in the best interest of
the Company or its stockholders, including those attempts that might result in a
premium over the market price for the Common Stock.
Upon completion of this offering, the Company's Restated and Amended
Articles of Incorporation will provide for the Board of Directors to be divided
into three classes as of equal size as possible, with the term of each class
expiring in consecutive years. As a result, approximately one-third of the Board
of Directors will be elected each year. The Company's Restated and Amended
Articles of Incorporation will also provide that directors may be removed from
office only for cause. Directors may be removed for cause by the affirmative
vote of the holders of at least two-thirds of the outstanding shares of stock of
the Company, or by a majority if such removal is recommended by the Board of
Directors by the affirmative vote of at least two-thirds of the directors. The
Company's Bylaws may be adopted, amended or repealed (i) by the holders of at
least a majority of the outstanding shares of stock of the Company or (ii) by at
least a two-thirds vote of the full Board of Directors. The calling of a special
meeting of the stockholders requires the written request of holders of more than
two-thirds of all the outstanding shares of the stock of the Company, unless
called by the Board of Directors or the Chairman of the Board of Directors.
The Company's Articles of Incorporation require the affirmative vote of the
holders of at least two-thirds of either the outstanding voting stock (excluding
voting stock held by the "related person") or the directors in order to approve
any "business combination" with a "related person." A "business combination"
includes (i) any merger of the Company with a "related person," (ii) any
transfer of a substantial part of the assets of the Company to a "related
person," (iii) any transfer of a substantial part of the assets of a "related
person" to the Company, (iv) the issuance of any securities of the Company to a
"related person" and (v) certain reclassifications and recapitalizations which
have the effect of increasing the power of a "related person." A "related
person" includes any person that is the beneficial owner of five percent or more
of the outstanding shares of the Company's voting stock.
LIMITATION ON LIABILITY
As authorized by the Kansas general corporation code, the Company's Articles
of Incorporation provide that to the fullest extent permitted by Kansas law, as
the same exists or may hereafter be amended, directors and former directors of
the Company will not be liable to the Company or its stockholders for monetary
damages for an act or omission occurring in their capacity as a director. Kansas
law does not currently authorize the elimination or limitation of the liability
of a director to the extent the director is found liable (i) for any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith that constitute a breach of duty of the director
of the Company or that involve intentional misconduct or a knowing violation of
law, (iii) for transactions from which the director received an improper
benefit, whether or not the benefit resulted from action taken within the scope
of the director's office, or (iv) for acts or omissions for which the liability
of a director is expressly provided by law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company located in New York, New York.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 4,600,000 shares of
Common Stock outstanding (4,870,000 shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, the shares sold in this offering
will be freely tradeable in the public market without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" (as defined in the rules and regulations under the Securities Act)
of the Company. The remaining shares (the "Restricted Shares") are deemed to be
"restricted securities" within the meaning of Rule 144 and may be publicly sold
only if registered under the Securities Act or sold in accordance with an
available exemption from registration, such as those provided by Rule 144. The
beneficial owners of 2,600,000 of the Restricted Shares have agreed with the
Underwriters not to offer, sell or otherwise dispose of any shares of Common
Stock beneficially owned or controlled by them (including subsequently acquired
shares) for a period of 180 days after the date of this Prospectus without the
prior written consent of Rauscher Pierce Refsnes, Inc., on behalf of the
representatives of the Underwriters. See "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) is entitled to sell Restricted Shares if at least
two years have passed since the later of the time such shares were acquired from
the Company or an affiliate of the Company. Rule 144 provides, however, that
within any three-month period such person may only sell up to the greater of (i)
1% of the then outstanding shares of Common Stock (46,000 shares upon completion
of this offering) or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission (the
"Commission"). Under Rule 144(k), any person who has not been an affiliate of
the Company for a period of 90 days preceding a sale of Restricted Shares is
entitled to sell such shares without regard to such volume limitations if at
least three years have passed since the later of the time such shares were
acquired from the Company or an affiliate of the Company. Shares held by persons
who are deemed to be affiliates of the Company are subject to such volume
limitations regardless of how long they have been owned or how they were
acquired. The Company is unable to estimate the number of Restricted Shares that
may be sold from time to time under Rule 144, since such number will depend on
the market price and trading volume for the Common Stock, the personal
circumstances of the sellers and other factors.
An aggregate of 400,000 shares of Common Stock have been reserved for
issuance to employees, officers, consultants and advisors of the Company
pursuant to the Incentive Plan. As of the date of this Prospectus, options to
purchase 271,000 shares of Common Stock have been granted under the Incentive
Plan. The Company anticipates filing registration statements on Form S-8 under
the Securities Act to register all of the shares of Common Stock currently
issuable or reserved for future issuance under the Incentive Plan. Shares
purchased upon exercise of the options granted pursuant to the Incentive Plan
generally are available for resale in the public market to the extent the stock
transfer restriction agreements with the Underwriters have expired, except that
any such shares issued to affiliates are subject to the volume limitations and
certain other restrictions of Rule 144, unless appropriately registered under
the Securities Act. See "Management -- 1996 Incentive Plan."
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. Prior to this offering, there has been
no established public trading market for the Common Stock. The Company
anticipates that the trading market in the Common Stock, if any, will be limited
based upon the number of shares currently outstanding and anticipated to be sold
in this offering. See "Risk Factors -- Shares Eligible for Future Sale."
44
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Rauscher Pierce Refsnes, Inc.
and J.C. Bradford & Co. (the "Representatives"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement to purchase from the
Company the number of shares of Common Stock set forth opposite their respective
names below. The nature of the obligations of the Underwriters is such that if
any of such shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Rauscher Pierce Refsnes, Inc............................................................... 625,000
J.C. Bradford & Co......................................................................... 625,000
Adams, Harkness & Hill, Inc................................................................ 30,000
Advest, Inc................................................................................ 30,000
Allen & Company Incorporated............................................................... 30,000
Robert W. Baird & Co. Incorporated......................................................... 30,000
Crowell, Weedon & Co....................................................................... 30,000
Dain Bosworth Incorporated................................................................. 30,000
Equitable Securities Corporation........................................................... 30,000
Gerard Klauer Mattison & Co., L.L.C........................................................ 30,000
Janney Montgomery Scott Inc................................................................ 30,000
Jefferies & Company, Inc................................................................... 30,000
Ladenburg, Thalmann & Co. Inc.............................................................. 30,000
McDonald & Company Securities, Inc......................................................... 30,000
Morgan Keegan & Company, Inc............................................................... 30,000
Piper Jaffray Inc.......................................................................... 30,000
Principal Financial Securities, Inc........................................................ 30,000
The Robinson-Humphrey Company, Inc......................................................... 30,000
Rodman & Renshaw, Inc...................................................................... 30,000
Stephens Inc............................................................................... 30,000
Sutro & Co. Incorporated................................................................... 30,000
Unterberg Harris........................................................................... 30,000
Vector Securities International, Inc....................................................... 30,000
Wheat, First Securities, Inc............................................................... 30,000
George K. Baum & Company................................................................... 15,000
Hanifen, Imhoff Inc........................................................................ 15,000
Southwest Securities, Inc.................................................................. 15,000
Starr Securities, Inc...................................................................... 15,000
Stifel, Nicolaus & Company, Incorporated................................................... 15,000
Van Kasper & Company....................................................................... 15,000
-----------
Total.................................................................................... 2,000,000
-----------
-----------
</TABLE>
The Underwriters propose initially to offer the shares of Common Stock
offered hereby to the public at the price to public set forth on the cover page
of this Prospectus. The Underwriters may allow a concession to selected dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
not in excess of $0.37 per share, and the Underwriters may allow, and such
dealers may reallow, to members of the NASD a concession not in excess of $0.10
per share. After the public offering, the price to public, the concession and
the reallowance may be changed by the Representatives.
The Company and Selling Stockholders have granted an option to the
Underwriters, exercisable within 30 days after the date of this Prospectus, to
purchase up to an aggregate of 270,000 and 30,000 additional shares of Common
Stock, respectively, at the initial price to public, less the underwriting
discount, set forth on the cover page of this Prospectus. The Underwriters may
exercise the option
45
<PAGE>
only for the purpose of covering over-allotments. To the extent that the
Underwriters exercise such option, each Underwriter will be committed, subject
to certain conditions, to purchase from the Company and Selling Stockholders on
a pro rata basis that number of additional shares of Common Stock which is
proportionate to such Underwriter's initial commitment.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company, its executive officers and directors, and all of its
stockholders have agreed that for a period of 180 days after the date of this
Prospectus, they will not offer, sell or otherwise dispose of any shares of
Common Stock beneficially owned or controlled by them (including subsequently
acquired shares) without the prior written consent of Rauscher Pierce Refsnes,
Inc. on behalf of the Representatives.
Prior to this offering, there has been no market for the Common Stock and
there can be no assurance that a regular trading market will develop upon the
completion of this offering. The initial public offering price was determined by
negotiations between the Company and the Representatives. The primary factors
considered in determining such offering price included the history of and
prospects for the industry in which the Company competes, market valuation of
comparable companies, market conditions for public offerings, the history of and
prospects for the Company's business, the Company's past and present operations
and earnings and the trend of such earnings, the prospects for future earnings
of the Company, the Company's current financial position, an assessment of the
Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors.
The Representatives have advised the Company that they do not expect any
sales by the Underwriters to accounts over which they exercise discretionary
authority.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Klenda, Mitchell, Austerman & Zuercher,
L.L.C., Wichita, Kansas. Certain legal matters in connection with the issuance
of the shares of Common Stock offered hereby will be passed upon for the
Underwriters by Jackson & Walker, L.L.P., Dallas, Texas.
EXPERTS
The combined balance sheets of the Company as of December 31, 1994 and 1995,
and the combined statements of operations, stockholders' equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1995, have been included herein in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The statements of operations, stockholder's equity, and cash flows of
Nashville Bagel Co., Inc. for each of the years in the three-year period ended
June 30, 1995 and for the period from July 1, 1995 through December 14, 1995,
have been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP covering the June 30, 1994 financial statements of
Nashville Bagel Co., Inc. refers to a change in the method of accounting for
income taxes.
The statements of operations, stockholders' deficit, and cash flows of
Central & Ridge Yogurt, Inc. for the year ended December 31, 1995, have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
46
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (as amended and together with all exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the shares of Common Stock
offered hereby. This Prospectus constitutes a part of the Registration Statement
and does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted from this Prospectus as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract, agreement or other document
referred to herein are not necessarily complete and, where such agreement or
other document is an exhibit to the Registration Statement, each such statement
is qualified in all respects by the provisions of such exhibit, to which
reference is hereby made for a full statement of the provisions thereof. For
further information with respect to the Company and the Common Stock, reference
is hereby made to the Registration Statement and to the exhibits thereto.
The Registration Statement may be inspected, without charge, and copies may
be obtained, at prescribed rates, at the public reference facilities of the
Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, copies of the Registration Statement
may be obtained by mail at prescribed rates, from the Public Reference Branch of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
As a result of this offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act, and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and regional offices referred to above. The Company intends
to furnish its stockholders with annual reports containing financial statements
certified by its independent auditors and with quarterly reports for each of the
first three quarters of each fiscal year containing unaudited financial
information.
47
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
New York Bagel Enterprises, Inc.:
Independent Auditors' Report............................................................................. F-2
Combined Balance Sheets at December 31, 1994 and 1995 and June 30, 1996 (unaudited)...................... F-3
Combined Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months
Ended June 30, 1995 (unaudited) and the Twenty-Six Weeks Ended June 30, 1996 (unaudited)................ F-4
Combined Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1993, 1994 and
1995 and the Twenty-Six Weeks Ended June 30, 1996 (unaudited)........................................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months
Ended June 30, 1995 (unaudited) and the Twenty-Six Weeks Ended June 30, 1996 (unaudited)................ F-6
Notes to Combined Financial Statements................................................................... F-7
New York Bagel Enterprises, Inc. (Unaudited):
Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1995................ F-18
Notes to Pro Forma Condensed Combined Statement of Operations............................................ F-19
Nashville Bagel Co., Inc.:
Independent Auditors' Report............................................................................. F-20
Statements of Operations for the Years Ended June 30, 1993, 1994 and 1995 and for the Period from July 1,
1995 through December 14, 1995.......................................................................... F-21
Statements of Stockholder's Equity for the Years Ended June 30, 1993, 1994 and 1995 and for the Period
from July 1, 1995 through December 14, 1995............................................................. F-22
Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and 1995 and for the Period from July 1,
1995 through December 14, 1995.......................................................................... F-23
Notes to Financial Statements............................................................................ F-24
Central & Ridge Yogurt, Inc.:
Independent Auditors' Report............................................................................. F-26
Statement of Operations for the Year Ended December 31, 1995............................................. F-27
Statement of Stockholders' Deficit for the Year Ended December 31, 1995.................................. F-28
Statement of Cash Flows for the Year Ended December 31, 1995............................................. F-29
Notes to Financial Statements............................................................................ F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New York Bagel Enterprises, Inc.:
We have audited the accompanying combined balance sheets of New York Bagel
Enterprises, Inc. as of December 31, 1994 and 1995, and the related combined
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of New York
Bagel Enterprises, Inc. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Wichita, Kansas
February 21, 1996, except
note 14 which is as of
June 4, 1996
F-2
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ------------ JUNE 30, PRO FORMA
1996 JUNE 30,
------------ 1996 (NOTE
15)
(UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS (NOTE 7)
Current assets:
Cash................................................................... $ 46,200 $ 133,425 $ 207,454 $ 207,454
Accounts receivable (note 3)........................................... 114,492 137,853 191,593 191,593
Inventory.............................................................. 81,913 143,964 139,148 139,148
Deferred costs, net of accumulated amortization of $43,340 at June 30,
1996 (note 4)......................................................... 6,428 77,100 200,041 200,041
Other current assets (note 9).......................................... 8,598 24,018 77,379 77,379
---------- ------------ ------------ ------------
Total current assets................................................. 257,631 516,360 815,615 815,615
Property, plant and equipment, net (note 5).............................. 554,340 1,256,154 2,318,973 2,318,973
Other assets, net of accumulated amortization of $4,063, $12,433 and
$17,367 at December 31, 1994 and 1995 and June 30, 1996, respectively... 60,027 55,658 56,726 56,726
Deferred offering costs.................................................. -- 8,474 363,966 363,966
Goodwill, net of accumulated amortization of $999 and $12,475 at December
31, 1995 and June 30, 1996 (note 12).................................... -- 458,052 446,574 446,574
---------- ------------ ------------ ------------
$ 871,998 $ 2,294,698 $ 4,001,854 $ 4,001,854
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt (note 7)........................ $ 58,700 $ 519,936 $ 649,017 $ 649,017
Accounts payable....................................................... 58,640 163,172 468,897 468,897
Accrued liabilities.................................................... 99,062 83,761 485,184 485,184
Current portion of deferred franchise fees............................. 119,500 69,000 36,000 36,000
Deferred income taxes.................................................. -- -- -- 68,000
Distributions payable (note 10)........................................ 42,000 48,693 48,693 232,693
---------- ------------ ------------ ------------
Total current liabilities............................................ 377,902 884,562 1,687,791 1,939,791
Due to stockholders (note 8)............................................. 67,341 -- -- --
Long-term debt, less current portion (note 7)............................ 232,942 2,845,064 3,280,730 3,280,730
Deferred franchise fees.................................................. -- 98,000 41,500 41,500
Deferred credits......................................................... 30,059 45,537 57,809 57,809
Deferred income taxes (note 9)........................................... 4,786 -- -- 23,000
---------- ------------ ------------ ------------
Total liabilities.................................................... 713,030 3,873,163 5,067,830 5,342,830
---------- ------------ ------------ ------------
Stockholders' equity (deficit) (notes 10 and 14):
Class A common stock, $.01 par value. Authorized 25,000,000 shares;
issued and outstanding 1,416,988 shares............................... 14,170 14,170 14,170 14,170
Class B common stock, $.01 par value. Authorized 5,000,000 shares;
issued and outstanding 1,368,704, 1,368,704 and 1,383,012 shares at
December 31, 1994 and 1995 and June 30, 1996, respectively............ 13,687 13,687 13,830 13,830
Additional paid-in capital (deficit)................................... 151,293 157,793 157,650 (1,368,976)
Accumulated deficit.................................................... (20,182) (1,764,115) (1,251,626) --
---------- ------------ ------------ ------------
Total stockholders' equity (deficit)................................. 158,968 (1,578,465) (1,065,976) (1,340,976)
Commitments and contingencies (notes 6 and 13)
---------- ------------ ------------ ------------
$ 871,998 $ 2,294,698 $ 4,001,854 $ 4,001,854
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE SIX MONTHS ENDED JUNE 30, 1995 AND
THE TWENTY-SIX WEEKS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS TWENTY-SIX
YEARS ENDED DECEMBER 31, ENDED WEEKS ENDED
------------------------------------------- JUNE 30, JUNE 30,
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales from Company-owned
restaurants........................ $ 3,538,612 $ 5,653,177 $ 6,875,146 $ 3,345,422 $ 4,849,860
Franchise revenues (note 3)......... 22,677 168,704 484,300 193,413 339,733
------------- ------------- ------------- ------------- -------------
Total revenues.................... 3,561,289 5,821,881 7,359,446 3,538,835 5,189,593
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales....................... 1,527,246 2,280,012 2,612,772 1,272,689 1,733,312
Restaurant operating expenses (note
6)................................. 1,386,676 2,326,178 3,083,902 1,432,657 2,201,632
General and administrative
expenses........................... 468,691 451,900 838,190 374,972 401,883
Depreciation and amortization....... 80,145 116,960 158,996 64,579 177,213
------------- ------------- ------------- ------------- -------------
Total costs and expenses.......... 3,462,758 5,175,050 6,693,860 3,144,897 4,514,040
------------- ------------- ------------- ------------- -------------
Operating income.................. 98,531 646,831 665,586 393,938 675,553
Interest expense...................... 13,745 52,383 39,800 19,621 163,064
------------- ------------- ------------- ------------- -------------
Earnings before income taxes...... 84,786 594,448 625,786 374,317 512,489
Income tax expense (benefit) (note
9)................................... 9,280 (2,498) 6,689 -- --
------------- ------------- ------------- ------------- -------------
Net earnings...................... $ 75,506 $ 596,946 $ 619,097 $ 374,317 $ 512,489
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Pro forma to reflect income taxes
(note 2(i)):
Income tax expense.................. $ 245,628 $ 201,112
Net earnings........................ $ 380,158 $ 311,377
Net earnings per share.............. $ .13 $ .10
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE TWENTY-SIX WEEKS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
CLASS A CLASS B CAPITAL DEFICIT TOTAL
--------- --------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992................... $ 14,170 $ 13,687 $ 101,043 $ (78,374) $ 50,526
Net earnings................................. -- -- -- 75,506 75,506
--------- --------- ----------- -------------- --------------
Balance, December 31, 1993................... 14,170 13,687 101,043 (2,868) 126,032
Contributed capital (note 10)................ -- -- 50,250 -- 50,250
Net earnings................................. -- -- -- 596,946 596,946
Distributions to stockholders (note 10)...... -- -- -- (614,260) (614,260)
--------- --------- ----------- -------------- --------------
Balance, December 31, 1994................... 14,170 13,687 151,293 (20,182) 158,968
Net earnings................................. -- -- -- 619,097 619,097
Stock compensation........................... -- -- 6,500 -- 6,500
Distributions to stockholders (note 10)...... -- -- -- (2,363,030) (2,363,030)
--------- --------- ----------- -------------- --------------
Balance, December 31, 1995................... 14,170 13,687 157,793 (1,764,115) (1,578,465)
Issuance of 14,308 shares of common stock
(unaudited)................................. -- 143 (143) -- --
Net earnings (unaudited)..................... -- -- -- 512,489 512,489
--------- --------- ----------- -------------- --------------
Balance, June 30, 1996 (unaudited)........... $ 14,170 $ 13,830 $ 157,650 $ (1,251,626) $ (1,065,976)
--------- --------- ----------- -------------- --------------
--------- --------- ----------- -------------- --------------
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE SIX MONTHS ENDED JUNE 30, 1995 AND
THE TWENTY-SIX WEEKS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
TWENTY-SIX
YEARS ENDED DECEMBER 31, SIX MONTHS WEEKS ENDED
--------------------------------------- ENDED JUNE JUNE 30,
1993 1994 1995 30, 1995 1996
----------- ----------- ------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings......................................... $ 75,506 $ 596,946 $ 619,097 $ 374,317 $ 512,489
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization...................... 80,145 116,960 158,996 64,579 177,213
Noncash stock compensation expense................. -- -- 6,500 -- --
Increase (decrease) in cash resulting from changes
in listed items, net of effects from acquisitions:
Deferred income taxes............................ 5,614 (2,498) 1,302 -- --
Inventory........................................ (16,413) (28,451) (178,209) (14,389) 4,816
Income taxes receivable.......................... (1,300) -- 1,300 -- --
Other current assets............................. 1,296 (4,348) (1,588) 5,628 (53,361)
Accounts receivable.............................. (8,854) (105,638) (23,361) (13,877) (53,740)
Deferred costs................................... -- (6,428) (70,672) 4,019 (166,281)
Other assets..................................... (3,535) (52,318) (2,403) (3,258) (6,443)
Accounts payable................................. 10,330 30,882 140,253 42,881 305,725
Accrued liabilities and deferred credits......... 47,416 34,138 78,509 49,744 413,695
Income taxes payable............................. 1,364 (2,295) -- -- --
Deferred franchise fees.......................... -- 119,500 47,500 10,500 (89,500)
----------- ----------- ------------- ----------- -------------
Net cash provided by operating activities...... 191,569 696,450 777,224 520,144 1,044,613
----------- ----------- ------------- ----------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment........... (583,708) (285,080) (474,674) (147,373) (1,179,839)
Acquisitions, net of cash acquired................... -- -- (656,174) -- --
----------- ----------- ------------- ----------- -------------
Net cash used in investing activities.......... (583,708) (285,080) (1,130,848) (147,373) (1,179,839)
----------- ----------- ------------- ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............. 379,325 252,865 3,049,210 24,080 800,000
Principal payments on long-term debt................. (48,248) (128,309) (90,852) (40,384) (235,253)
Decrease in due to stockholders...................... (1,411) (40,274) (26,330) (25,318) --
Decrease in distributions payable.................... -- -- (8,807) (5,307) --
Proceeds from contributed capital.................... -- 50,250 -- -- --
Debt issuance costs.................................. -- -- (13,916) -- --
Deferred offering costs.............................. -- -- (8,474) -- (355,492)
Distributions to stockholders........................ -- (394,080) (2,459,982) (269,438) --
(Decrease) increase in excess of checks written over
funds on deposit.................................... 62,473 (105,622) -- -- --
----------- ----------- ------------- ----------- -------------
Net cash provided by (used in) financing
activities.................................... 392,139 (365,170) 440,849 (316,367) 209,255
----------- ----------- ------------- ----------- -------------
Net increase in cash........................... -- 46,200 87,225 56,404 74,029
Cash at beginning of period............................ -- -- 46,200 46,200 133,425
----------- ----------- ------------- ----------- -------------
Cash at end of period.................................. $ -- $ 46,200 $ 133,425 $ 102,604 $ 207,454
----------- ----------- ------------- ----------- -------------
----------- ----------- ------------- ----------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) REORGANIZATION AND OPERATIONS
REORGANIZATION
The Company was formed as a result of a merger (the Merger) between New York
Bagel Enterprises, Inc., which became the surviving corporation, and New York
Bagel Shop, Inc.; New York Bagel Shop & Delicatessen, Inc.; Bagels of Norman,
Inc.; Bagel Boss, Inc.; and VPR Incorporated (the five restaurant entities). The
Merger was effective on December 31, 1995 whereby each of the five restaurant
entities were merged into New York Bagel Enterprises, Inc. (collectively the
five restaurant entities and New York Bagel Enterprises, Inc. are referred to as
the Prior Entities). The term Company as used herein refers to New York Bagel
Enterprises, Inc. including the five restaurant entities unless the context
otherwise requires.
To effect the Merger, New York Bagel Enterprises, Inc. issued 1,368,704
shares of its Class B common stock in exchange for all the outstanding stock of
each of the five restaurant entities.
Since the primary stockholders of each of the five restaurant entities prior
to the Merger are also the primary stockholders of the Company subsequent to the
Merger, the Merger essentially represents a transfer to New York Bagel
Enterprises, Inc. of nonmonetary assets in exchange for stock prior to a
proposed public offering of the Company's common stock (the Offering). The
Merger has been accounted for at historical cost.
The accompanying financial statements are presented on a combined basis for
all periods presented due to the common management of the Prior Entities
throughout the period of the financial statements.
The Company converted shares of Class A common stock outstanding in
connection with the Merger (effectively a 3373.78:1 stock split). The
outstanding shares of common stock, as reflected in the accompanying financial
statements, include the effect of such stock conversion and the shares issued to
effect the Merger for all periods presented.
OPERATIONS
The Company operates Company-owned restaurants and sells franchise rights to
operate restaurants. In both instances, the restaurants operate under the New
York Bagel and Delicatessen concept which is a quick-service bakery featuring
freshly made bagels and deli-style sandwiches. As of December 31, 1995, the
Company had 15 Company-owned restaurants primarily located in Oklahoma and
Kansas and 25 franchised restaurants located throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) FRANCHISE REVENUES
Franchise agreements are executed for each franchised restaurant and provide
the terms of the franchise arrangement between the Company and the franchisee.
The franchise agreement requires the franchisee to pay an initial,
non-refundable franchise fee plus continuing royalties based upon a percentage
of restaurant sales. Additionally, the Company executes development agreements
with franchisees which stipulates the area, the number of restaurants, and the
timeframe for development in exchange for an initial, non-refundable development
fee based on a standard price per type of restaurant.
Initial franchise fees are recognized as revenue when the Company performs
substantially all initial services required by the franchise agreement, which
generally occurs shortly after restaurant opening. Continuing royalties are
recognized as earned with an appropriate provision for estimated
F-7
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
uncollectible amounts. Initial franchise fees received applicable to restaurants
for which substantially all initial services required by the franchise agreement
have not been performed are recorded as deferred franchise fees in the
accompanying balance sheets. Development fees are received upon signing the
agreement and are initially recorded as deferred franchise fees. Such fees are
applied to reduce the initial franchise fees paid for each store opened and are
accounted for as a component of the initial franchise fees.
Deferred initial franchise and development fees that are expected to be
recognized within 12 months of the balance sheet date are classified as current
portion of deferred franchise fees in the accompanying balance sheets.
(b) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(c) DEFERRED FRANCHISE COSTS
Direct, incremental costs incurred to secure franchise agreements are
charged to expense in the same period the related initial franchise fees are
recognized as revenue. Costs applicable to initial franchise fees not yet
recognized as revenue are recorded as deferred franchise costs.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the remaining lease term, including renewal periods when the Company intends to
exercise renewal options, or the estimated useful life of the asset.
(e) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over 20 years. The
Company periodically assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected future operating cash flows discounted at a rate commensurate with
the risks involved. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
(f) INCOME TAXES
Effective January 1, 1994, New York Bagel Enterprises, Inc. and certain of
the restaurant entities elected and received approval to become S corporations.
During the periods the entities operated as S corporations, income tax expense
or benefit was not recorded in the accompanying financial statements as the
entities' results of operations were reported to the entities' stockholders for
inclusion in their individual income tax returns.
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES
(Statement 109). Under the asset and liability method of Statement 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
F-8
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
settled. Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date. There was no cumulative effect of adoption of Statement 109 as
of January 1, 1993.
(g) STATEMENTS OF CASH FLOWS
Noncash investing and financing activities during 1994 and 1995 included:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Noncash distributions to stockholders:
Distributions payable (see note 10)............................. $ 42,000 $ 15,500
------------ ------------
Net asset (liability) distributions (see note 10):
Assets distributed............................................ 507,695 137,134
Liabilities distributed....................................... (329,515) (249,586)
------------ ------------
Net assets (liabilities) distributed........................ 178,180 (112,452)
------------ ------------
Total noncash distributions................................. $ 220,180 $ (96,952)
------------ ------------
------------ ------------
Property, plant and equipment acquired in exchange for increase in
due to stockholders (see note 8)................................. $ 44,250 $ --
------------ ------------
------------ ------------
Long-term debt issued to seller in connection with acquisition
(see note 7)..................................................... $ -- $ 115,000
------------ ------------
------------ ------------
</TABLE>
Cash paid during the years for interest and taxes is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest................................................... $ 13,745 $ 52,383 $ 36,676
Taxes...................................................... 1,300 3,660 --
</TABLE>
(h) PRE-OPENING COSTS
Direct, incremental restaurant pre-opening costs, comprised primarily of the
cost of hiring and training restaurant employees and rent, are amortized over
the initial 12 months of a restaurant's operations.
(i) PRO FORMA INCOME TAX EXPENSE AND PRO FORMA NET EARNINGS PER SHARE
PRO FORMA INCOME TAX EXPENSE
Subsequent to the proposed Offering, the Company will no longer operate as
an S corporation. Pro forma income tax expense, as set forth in the accompanying
statements of operations, reflects what the income tax expense of the Company
would have been for the year ended December 31, 1995, and the twenty-six weeks
ended June 30, 1996 if none of the entities included in the combined financial
statements had operated as S corporations during such periods.
PRO FORMA NET EARNINGS PER SHARE
Pro forma net earnings per share information, as set forth in the
accompanying statements of operations, is computed based on pro forma net
earnings of $380,158 and $311,377 which is based on reported earnings before
income taxes less pro forma income tax expense of $245,628 and $201,112 for the
year ended December 31, 1995 and the twenty-six weeks ended June 30, 1996,
respectively.
F-9
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro forma weighted average common shares outstanding have been determined as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------ TWENTY-SIX
WEEKS ENDED
JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C> <C>
Weighted average shares outstanding............................. 2,785,692 2,800,000
Shares issued during 12-month period prior to initial filing of
the registration statement at price per share below the initial
public offering price.......................................... 14,308 --
Pro forma number of shares whose proceeds would be sufficient
(based upon the net initial public offering price) to replace
the excess of distributions to stockholders over net earnings
for the year ended December 31, 1995........................... 218,538 218,538
------------ -------------
Pro forma weighted average common shares outstanding............ 3,018,538 3,018,538
------------ -------------
------------ -------------
</TABLE>
The 19,320 shares contingently issuable under the convertible subordinated
debenture (see note 7) have not been considered in the computation of pro forma
net earnings per share due to immateriality.
(j) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
(k) INTERIM FINANCIAL DATA (UNAUDITED)
The accompanying balance sheet as of June 30, 1996 and the accompanying
statements of operations, stockholders' equity (deficit) and cash flows for the
six months ended June 30, 1995 and the twenty-six weeks ended June 30, 1996 have
been prepared by the Company without an audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation for such periods have been made. Results for
interim periods should not be considered as indicative of results for a full
year.
Footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted herein with respect to the interim financial data. The interim
information herein should be read in conjunction with the annual financial
information presented herein.
(l) NEW ACCOUNTING STANDARD
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF as of January 1, 1996. There was no effect
at the date of adoption.
(m) FISCAL PERIODS
Prior to 1996, the Company's financial reporting was done on a calendar
basis. Effective January 1, 1996, the Company changed to a 52/53-week fiscal
year comprised of four thirteen-week periods.
F-10
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) FRANCHISE REVENUES
Franchise revenues for the years ended December 31, 1993, 1994 and 1995
consist of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
Initial franchise and development fees............................ $ 21,000 $ 108,000 $ 250,500
Royalty revenue................................................... 1,677 60,704 233,800
--------- ----------- -----------
Total........................................................... $ 22,677 $ 168,704 $ 484,300
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The associated franchise receivables included within accounts receivable in
the accompanying balance sheets at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Initial franchise and development fee receivables............................. $ 104,000 $ 106,416
Royalty receivables........................................................... 10,492 46,437
Less allowance for doubtful accounts.......................................... -- (15,000)
----------- -----------
$ 114,492 $ 137,853
----------- -----------
----------- -----------
</TABLE>
(4) DEFERRED COSTS
Deferred costs as of December 31, 1994 and 1995 include the following:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Pre-opening costs................................................................. $ -- $ 60,445
Deferred franchise costs.......................................................... 6,428 16,655
--------- ---------
Total deferred costs............................................................ $ 6,428 $ 77,100
--------- ---------
--------- ---------
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment and accumulated depreciation as
of December 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
------------ -------------
<S> <C> <C>
Buildings.................................................................. $ 30,292 $ 30,292
Equipment.................................................................. 781,741 1,354,649
Leasehold improvements..................................................... 173,824 453,863
------------ -------------
985,857 1,838,804
Less accumulated depreciation.............................................. (431,517) (582,650)
------------ -------------
Net property, plant and equipment........................................ $ 554,340 $ 1,256,154
------------ -------------
------------ -------------
</TABLE>
(6) LEASES
The Company leases several restaurant facilities under noncancelable
operating leases. These leases generally contain renewal options for periods
ranging from 3 to 15 years and require the Company to pay executory costs such
as maintenance and insurance. Rent expense for operating leases aggregated
$126,614, $193,418 and $296,950 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-11
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases with
initial or remaining lease terms in excess of one year as of December 31, 1995
are:
<TABLE>
<S> <C>
Year ending December 31:
1996................................................................. $ 305,200
1997................................................................. 255,875
1998................................................................. 222,447
1999................................................................. 201,662
2000................................................................. 100,592
Thereafter........................................................... 119,697
----------
Total minimum lease payments....................................... $1,205,473
----------
----------
</TABLE>
The Company is party to certain operating leases with companies that are
owned by certain stockholders of the Company. Rent expense paid to these related
companies pursuant to lease agreements aggregated $14,100 and $63,249 for the
years ended December 31, 1994 and 1995, respectively.
Deferred credits in the accompanying balance sheets represent accruals for
escalating rental payments on operating leases.
F-12
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(7) LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -------------
<S> <C> <C>
Prime rate plus 1.0% note payable to bank (9.5% at December 31, 1995) due in
monthly installments of $57,800 including interest with the remaining
balance due in December 2000. Secured by substantially all tangible and
intangible assets of the Company and guaranteed by certain Company
stockholders............................................................... $ -- $ 2,750,000
Prime rate plus 0.5% note payable to bank (9.0% at December 31, 1995) due in
monthly installments of $8,110 including interest beginning in April 1996
with the remaining balance due in March 2003. Secured by substantially all
tangible and intangible assets of the Company and guaranteed by certain
Company stockholders....................................................... -- 500,000
4.0% contingently convertible subordinated debenture payable in annual
installments of $28,750 plus interest beginning in December 1996. The
debenture may be converted at the option of the debenture holder into
shares of common stock equal to a maximum 0.69% of the Company's
outstanding common stock but the conversion privilege is only operative in
the event the Company has completed an initial public offering of its
common stock which meets certain specified criteria. The debenture is
subordinate to all other liabilities of the Company (note 12).............. -- 115,000
Various notes payable with a bank due in monthly installments through
October 2001 with interest rates ranging from 8.0% to 10.875%; secured by
equipment. Notes were refinanced as part of the $2,750,000 note payable to
bank discussed above....................................................... 264,527 --
8.0% note payable to a bank due in monthly installments through 2001;
secured by equipment. The note was fully paid-off in 1995.................. 27,115 --
----------- -------------
Total long-term debt...................................................... 291,642 3,365,000
Less current installments of long-term debt................................. (58,700) (519,936)
----------- -------------
Long-term debt, less current installments................................... $ 232,942 $ 2,845,064
----------- -------------
----------- -------------
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows: 1996 - $519,936; 1997 -
$582,364; 1998 - $637,154; 1999 - $697,365; 2000 - $731,357; and thereafter
$196,824.
(8) DUE TO STOCKHOLDERS
Amounts due to stockholders represent funds advanced to the Company from
stockholders of the five restaurant entities which were used primarily for
equipment additions. Such amounts were non-interest-bearing and were either
repaid in 1995 or included in the transfer to stockholders described in note 10.
F-13
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1993, 1994 and
1995 consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current................................................................ $ 3,666 $ -- $ 9,805
Deferred............................................................... 5,614 (2,498) (3,116)
--------- --------- ---------
Total................................................................ $ 9,280 $ (2,498) $ 6,689
--------- --------- ---------
--------- --------- ---------
</TABLE>
As described in note 2, certain entities included in the combined financial
statements elected S corporation status as of January 1, 1994, and as a result
no longer pay corporate income taxes. Additionally, as a result of the Merger
discussed in note 1, the Company is an S corporation effective December 31, 1995
and, accordingly, no deferred tax assets or liabilities are recorded in the
accompanying balance sheet as of December 31, 1995. Consequently, income tax
expense (benefit) for the years ended December 31, 1994 and 1995 include the
reversal of existing deferred tax assets and liabilities for those entities
which first became S corporations in each year.
Actual income tax expense (benefit) differs from the "expected" tax expense
(benefit) computed by applying the United States Federal corporate tax rate of
34% to earnings before income taxes for the years ended December 31, 1993, 1994
and 1995 as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ------------ ------------
<S> <C> <C> <C>
Computed expected tax expense.................................. $ 28,827 $ 202,112 $ 212,767
S corporation earnings allocated to stockholders............... -- (193,589) (195,515)
Surtax exemption............................................... (16,199) (6,488) (7,613)
Change in valuation allowance.................................. (6,596) (5,303) (9,736)
Other.......................................................... 3,248 770 6,786
---------- ------------ ------------
$ 9,280 $ (2,498) $ 6,689
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Income taxes receivable of $1,300 and $16,747 at December 31, 1994 and 1995,
respectively, are included in the accompanying balance sheets as a component of
other current assets. A net deferred tax asset of $1,670 was included in other
current assets at December 31, 1994.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1994 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward................................. $ 8,867
Accrued liabilities, due to accrual for financial reporting
purposes....................................................... 2,539
---------
Total gross deferred tax assets............................... 11,406
Less valuation allowance...................................... 9,736
---------
Net deferred tax asset........................................ 1,670
Deferred tax liabilities:
Property, plant and equipment, due to accelerated depreciation
for tax reporting purposes..................................... 4,786
---------
Net deferred tax liability.................................... $ (3,116)
---------
---------
</TABLE>
F-14
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
Differences between the tax bases and the amounts reported for financial
statement purposes for the Company's assets and liabilities at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
AMOUNTS
REPORTED FOR
FINANCIAL
TAX BASES STATEMENTS
------------- -------------
<S> <C> <C>
Assets.......................................................... $ 2,069,284 $ 2,294,698
Liabilities..................................................... $ 3,765,972 $ 3,873,163
</TABLE>
(10)STOCKHOLDERS' EQUITY
CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS TO STOCKHOLDERS
In July 1994, pursuant to a contract for sale of stock (the contract) of New
York Bagel Enterprises, Inc., an Oklahoma corporation (NYBE-OK), the then
existing stockholders (sellers) of NYBE-OK sold a 50% ownership interest in
NYBE-OK to certain individuals (buyers) in exchange for a cash payment from the
buyers directly to the sellers and a $50,000 contribution by the buyers to
NYBE-OK of which $49,250 has been recorded as contributed capital and $750 has
been applied as payment of amounts owed to NYBE-OK by the sellers. The remaining
$1,000 of capital contribution in 1994 was a cash contribution to one of the
five restaurant entities. Pursuant to the contract, NYBE-OK is obligated to pay
to the sellers (as distributions) collections of franchise fees NYBE-OK receives
subsequent to closing of the contract for certain specified locations. To the
extent such fees have been recognized as income but have not yet been
distributed to the sellers, such amounts are recorded as distributions payable
in the accompanying balance sheets.
Distributions to stockholders for the years ended December 31, 1994 and 1995
are comprised of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -------------
<S> <C> <C>
Distributions of NYBE-OK.......................................... $ 132,000 $ 963,923
Distributions of the five restaurant entities..................... 482,260 1,399,107
----------- -------------
Total distributions............................................... $ 614,260 $ 2,363,030
----------- -------------
----------- -------------
</TABLE>
As disclosed in note 2(g), distributions of the five restaurant entities
include two transfers to certain stockholders in 1994 of real estate net of
related indebtedness and the transfer in 1995, prior to the Merger, of certain
assets and liabilities (primarily restaurant related current assets and
liabilities) to the stockholders of the five restaurant entities.
CLASS B COMMON STOCK
The Class B common stock has no voting power. Class A common stock has full
voting power. The Class B common stock will be converted into Class A common
stock on a one-for-one basis upon completion of the Offering of the Class A
common stock.
(11)FINANCIAL INSTRUMENTS FAIR VALUE INFORMATION
The carrying values of the Company's long-term debt approximates their fair
values based on current interest rates of similar instruments. The carrying
values of the Company's other financial instruments at December 31, 1995,
including cash, accounts receivable, other current assets, accounts payable, and
accrued expenses approximate their fair values because of their short maturity.
F-15
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(12)ACQUISITIONS
Effective December 14, 1995, the Company purchased all the outstanding
common stock of Nashville Bagel Co., Inc. for $565,000. Acquisition expenses
amounted to $23,338. The acquisition has been accounted for by the purchase
method of accounting and, accordingly, the operations of Nashville Bagel Co.,
Inc. have been included in the accompanying statements of operations subsequent
to December 14, 1995. The purchase price has been allocated to the assets and
liabilities acquired based on their estimated fair values at date of
acquisition. Goodwill arising from the acquisition amounted to $434,451.
Effective December 31, 1995, the Company purchased certain assets of Central
& Ridge Yogurt, Inc. by assuming liabilities amounting to $225,000. The
acquisition has been accounted for by the purchase method of accounting. The
purchase price has been allocated to the net assets acquired based on their
estimated fair values at date of acquisition. Goodwill arising from the
acquisition amounted to $24,600. A Company officer was also an officer and
stockholder of Central & Ridge Yogurt, Inc.
The following table summarizes the pro forma results of operations for the
years ended December 31, 1994 and 1995 as if the acquisitions had been
consummated at the beginning of the respective periods. In presenting the pro
forma information, depreciation, amortization and interest expense have been
adjusted to reflect the purchase accounting recorded in the acquisitions and
income taxes have been recognized as if none of the entities included in the pro
forma results had operated as a S corporation. The pro forma results do not
necessarily reflect what would have occurred if the acquisitions had been made
at the beginning of the respective periods or the results that may occur in the
future.
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Revenues........................................................ $ 7,339,463 $ 8,761,108
Net earnings.................................................... 311,051 223,898
Net earnings per share.......................................... .07
</TABLE>
(13)COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of one operating lease, the Company has guaranteed the
performance under a lease agreement of an unrelated lessee. As of December 31,
1995, future lease payments guaranteed aggregated $54,000; however, the lessee
is current on lease payments and the Company does not currently expect to incur
any loss applicable to this guaranty.
As of December 31, 1995, the Company has issued a guaranty totaling $35,000
on a borrowing by a franchisee. The Company monitors the financial performance
of such franchisee and the Company does not believe an accrual is necessary for
the Company's obligation under this guaranty.
(14)SUBSEQUENT EVENTS
STOCK SPLIT
On June 4, 1996, the Company effected a 1.4 for 1 stock split. The stock
split has been reflected retroactively for all periods presented in the
accompanying financial statements and, accordingly, all applicable dollar, share
and per share amounts have been restated to reflect the stock split.
STOCK AWARDS
On January 16, 1996, the Company adopted the 1996 Incentive Plan (the Plan)
which authorizes the award of 400,000 shares of common stock pursuant to
incentive stock options, nonqualified stock options or restricted stock. As of
June 4, 1996, options to purchase 271,000 shares of common stock
F-16
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(14)SUBSEQUENT EVENTS (CONTINUED)
have been granted pursuant to the Plan. The exercise price per share is equal to
100% of the price per share of common stock to be issued pursuant to the
Offering for options pertaining to 193,500 shares and is equal to 110% of such
price per share for options pertaining to 77,500 shares. One-fifth of the
options will become exercisable six months after date of grant and one-fifth on
each of the first four anniversaries of the date of grant.
(15)PRO FORMA BALANCE SHEET (UNAUDITED)
The unaudited pro forma balance sheet at June 30, 1996 gives effect to the
following transactions as if such transaction occurred on that date:
(1) An accrual for the distribution of $184,000 to stockholders as if
the Company had terminated its S corporation status at June 30, 1996 and
made a distribution to the stockholders in connection with their estimated
federal and state income tax obligations.
(2) An estimated $91,000 of deferred tax liability which would be
recorded as a debit to accumulated deficit had the Company terminated its S
corporation status at June 30, 1996.
(3) Reclassification of accumulated deficit to additional paid-in
capital (deficit) as if the Company had terminated its S corporation status
at June 30, 1996.
F-17
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
The following pro forma condensed combined statement of operations presents
the results of operations of the Company for the year ended December 31, 1995 as
if the acquisitions of Nashville Bagel Co., Inc. and Central & Ridge Yogurt,
Inc. had each occurred as of January 1, 1995. The acquisitions have been
accounted for by the purchase method of accounting. The pro forma financial
information should be read in conjunction with the related historical financial
information of the Company, Nashville Bagel Co., Inc. and Central & Ridge
Yogurt, Inc. included elsewhere herein. The unaudited pro forma condensed
combined statement of operations does not purport to represent what the
Company's results of operations would actually have been had the transactions in
fact occurred on the aforementioned date, or to project the Company's results of
operations for any future periods. The pro forma adjustments are based upon
available information and upon certain assumptions that management believes are
reasonable. These adjustments are directly attributable to the transactions and
are expected to have a continuing impact on the results of operations of the
Company.
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------
NEW YORK CENTRAL &
BAGEL NASHVILLE RIDGE
ENTERPRISES, BAGEL CO., YOGURT,
INC. INC. INC. PRO FORMA
------------- ------------- ----------- PRO FORMA -------------
ADJUSTMENTS
------------
(NOTE A)
<S> <C> <C> <C> <C> <C>
Total revenues........................ $ 7,359,446 $ 1,074,719 $ 326,943 $ -- $ 8,761,108
------------- ------------- ----------- ------------ -------------
Costs and expenses:
Cost of sales....................... 2,612,772 363,972 162,836 -- 3,139,580
Restaurant operating expenses....... 3,083,902 677,200 186,696 -- 3,947,798
General and administrative
expenses........................... 838,190 79,378 27,861 -- 945,429
Depreciation and amortization....... 158,996 16,421 31,108(1) 4,852 234,329
(2) 22,952
------------- ------------- ----------- ------------ -------------
Total costs and expenses.......... 6,693,860 1,136,971 408,501 27,804 8,267,136
------------- ------------- ----------- ------------ -------------
Operating income (loss)........... 665,586 (62,252) (81,558) (27,804) 493,972
Interest expense (note B)............. 39,800 -- 16,893(3) 52,042 108,735
Gain on sale of business.............. -- -- (92,342 (4) 92,342 --
------------- ------------- ----------- ------------ -------------
Earnings (loss) before income
taxes............................ 625,786 (62,252) (6,109) (172,188) 385,237
Income tax expense (benefit).......... 6,689 (13,176) -- (5) 167,826 161,339
------------- ------------- ----------- ------------ -------------
Net earnings (loss)............... $ 619,097 $ (49,076) $ (6,109) $ (340,014) $ 223,898
------------- ------------- ----------- ------------ -------------
------------- ------------- ----------- ------------ -------------
Pro forma net earnings per share...... $ .13 $ .07
------------- -------------
------------- -------------
Pro forma weighted average common
shares outstanding................... 3,018,538 3,018,538
------------- -------------
------------- -------------
</TABLE>
F-18
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
DECEMBER 31, 1995
NOTE A:
The acquisition of Nashville Bagel Co., Inc. was effective as of December
14, 1995 and the acquisition of Central & Ridge Yogurt, Inc. was effective as of
December 31, 1995. The results of operations of such acquired businesses have
been included in the Company's historical statement of operations subsequent to
the respective dates of acquisition.
Prior to the acquisition, Nashville Bagel Co., Inc. had a fiscal year ended
June 30. For purposes of the accompanying unaudited pro forma condensed combined
statement of operations, the Nashville Bagel Co., Inc. historical statement of
operations has been updated to a December 31 year end basis by deducting
operations for the six-month period ended December 31, 1994 from the statement
of operations for the year ended June 30, 1995 and adding the operations for the
period from July 1, 1995 through December 14, 1995.
Pro forma adjustments are as follows:
(1) To reflect depreciation expense based upon the cost assigned to
acquired assets based upon applying the purchase method of accounting.
(2) To reflect the amortization of goodwill over 20 years using the
straight-line method.
(3) To reflect interest expense applicable to borrowings incurred to
effect the acquisitions.
(4) To eliminate nonrecurring gain on sale of business.
(5) To reflect the adjustment for income taxes. Such adjustment has been
derived by applying statutory rates to pro forma earnings before income
taxes adjusted for permanent differences.
NOTE B:
A pro forma adjustment has not been included to reflect interest expense
applicable to borrowings incurred by the Company in December 1995 to finance
distributions to stockholders because the Company intends to use the proceeds of
the Offering to repay such borrowings and the number of shares whose proceeds
would be sufficient (based upon the net offering price) to replace the excess of
distributions to stockholders over net earnings have been considered as
outstanding for purposes of computing pro forma net earnings per share.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Nashville Bagel Co., Inc. and
New York Bagel Enterprises, Inc.:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of Nashville Bagel Co., Inc. for each of the years in the
three-year period ended June 30, 1995 and for the period from July 1, 1995
through December 14, 1995. 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 results of operations and the cash flows of
Nashville Bagel Co., Inc. for each of the years in the three-year period ended
June 30, 1995 and for the period from July 1, 1995 through December 14, 1995, in
conformity with generally accepted accounting principles.
As discussed in note 2 to the financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, in 1994.
KPMG Peat Marwick LLP
Wichita, Kansas
February 12, 1996
F-20
<PAGE>
NASHVILLE BAGEL CO., INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995 AND
THE PERIOD FROM JULY 1, 1995 THROUGH DECEMBER 14, 1995
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1995
JUNE 30, THROUGH
------------------------------------------- DECEMBER 14,
1993 1994 1995 1995
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 1,137,246 $ 1,189,756 $ 1,243,796 $ 472,057
------------- ------------- ------------- ------------
Costs and expenses:
Cost of sales....................................... 382,512 390,289 403,966 167,414
Restaurant operating expenses....................... 613,563 637,770 721,689 318,305
General and administrative expenses................. 18,883 16,974 20,118 9,503
Officers' salaries.................................. 85,000 52,000 52,000 24,000
Depreciation........................................ 19,724 24,036 18,816 8,624
------------- ------------- ------------- ------------
Total costs and expenses.......................... 1,119,682 1,121,069 1,216,589 527,846
------------- ------------- ------------- ------------
Earnings (loss) before income taxes................... 17,564 68,687 27,207 (55,789)
Income tax expense (benefit).......................... 4,878 16,616 6,582 (11,808)
------------- ------------- ------------- ------------
Net earnings (loss)................................... $ 12,686 $ 52,071 $ 20,625 $ (43,981)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
NASHVILLE BAGEL CO., INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995 AND
THE PERIOD FROM JULY 1, 1995 THROUGH DECEMBER 14, 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, June 30, 1992........................................... $ 5,000 $ 30,000 $ 36,253 $ 71,253
Net earnings..................................................... -- -- 12,686 12,686
----------- ----------- ----------- -----------
Balance, June 30, 1993........................................... 5,000 30,000 48,939 83,939
Net earnings..................................................... -- -- 52,071 52,071
----------- ----------- ----------- -----------
Balance, June 30, 1994........................................... 5,000 30,000 101,010 136,010
Contribution of capital.......................................... -- 25,000 -- 25,000
Net earnings..................................................... -- -- 20,625 20,625
----------- ----------- ----------- -----------
Balance, June 30, 1995........................................... 5,000 55,000 121,635 181,635
Net loss......................................................... -- -- (43,981) (43,981)
----------- ----------- ----------- -----------
Balance, December 14, 1995....................................... $ 5,000 $ 55,000 $ 77,654 $ 137,654
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
NASHVILLE BAGEL CO., INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995 AND
THE PERIOD FROM JULY 1, 1995 THROUGH DECEMBER 14, 1995
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1995
JUNE 30, THROUGH
---------------------------------- DECEMBER 14,
1993 1994 1995 1995
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................ $ 12,686 $ 52,071 $ 20,625 $ (43,981)
Adjustments to reconcile net earnings (net loss) to net
cash provided by (used in) operating activities:
Depreciation............................................. 19,724 24,036 18,816 8,624
Deferred income taxes.................................... (1,549) 104 1,710 (1,124)
Increase in inventory.................................... (164) (283) (292) --
(Increase) decrease in income taxes receivable........... (897) 897 (6,063) (10,684)
(Increase) decrease in other assets...................... 232 (12) 54 140
Increase (decrease) in accounts payable.................. 11,700 (2,090) (684) 450
Increase (decrease) in income taxes payable.............. (799) 10,084 (13,368) --
Increase (decrease) in accrued liabilities............... 946 3,914 2,867 (3,714)
---------- ---------- ---------- ------------
Net cash provided by (used in) operating activities.... 41,879 88,721 23,665 (50,289)
---------- ---------- ---------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment................. (41,670) (9,723) (24,209) (4,771)
---------- ---------- ---------- ------------
Cash flows from financing activities:
Repayment of note payable to bank.......................... (34,496) (10,400) -- --
Repayment of debenture payable to stockholder.............. -- -- (25,000) --
---------- ---------- ---------- ------------
Net cash used in financing activities.................. (34,496) (10,400) (25,000) --
---------- ---------- ---------- ------------
Net increase (decrease) in cash........................ (34,287) 68,598 (25,544) (55,060)
Cash at beginning of period.................................. 64,720 30,433 99,031 73,487
---------- ---------- ---------- ------------
Cash at end of period........................................ $ 30,433 $ 99,031 $ 73,487 $ 18,427
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Cash paid for taxes.......................................... $ 4,040 $ 5,531 $ 25,298 $ --
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Significant noncash financing activities:
During the year ended June 30, 1995, $25,000 of a $50,000 debenture payable to the stockholder was
contributed to additional paid-in capital.
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
NASHVILLE BAGEL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995 AND
THE PERIOD FROM JULY 1, 1995 THROUGH DECEMBER 14, 1995
(1) OPERATIONS
Nashville Bagel Co., Inc. (the Company) operates a retail bagel restaurant
located in Nashville, Tennessee. The Company also wholesales bagels to grocery
stores and other food service entities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(b) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated
using the double declining balance method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the remaining lease term,
including renewal periods.
(c) INCOME TAXES
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (Statement
109). Under the asset and liability method of Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under Statement
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. There
was no cumulative effect of adoption of Statement 109 as of July 1, 1993.
(d) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
(3) INCOME TAXES
Income tax expense (benefit) for years ended June 30, 1993, 1994 and 1995
and the period from July 1, 1995 through December 14, 1995 consists of the
following:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1995
JUNE 30, THROUGH
------------------------------- DECEMBER 14,
1993 1994 1995 1995
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Current:
Federal..................................... $ 3,143 $ 10,586 $ 2,721 $ (11,706)
State....................................... 3,284 5,926 2,151 1,022
Deferred...................................... (1,549) 104 1,710 (1,124)
--------- --------- --------- ------------
Total..................................... $ 4,878 $ 16,616 $ 6,582 $ (11,808)
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
F-24
<PAGE>
NASHVILLE BAGEL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995 AND
THE PERIOD FROM JULY 1, 1995 THROUGH DECEMBER 14, 1995 (CONTINUED)
(3) INCOME TAXES (CONTINUED)
Actual income tax expense (benefit) differs from the "expected" income tax
expense (benefit) computed by applying the United States Federal corporate tax
rate of 34% to earnings (loss) before income taxes for the years ended June 30,
1993, 1994 and 1995 and for the period from July 1, 1995 through December 14,
1995 and the as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1995
JUNE 30, THROUGH
-------------------------------- DECEMBER 14,
1993 1994 1995 1995
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Tax at statutory rate....................... $ 5,972 $ 23,353 $ 9,250 $ (18,968)
State income taxes, net of federal
benefit.................................... 2,167 3,911 2,076 674
Effect of graduated rates................... (3,261) (10,648) (4,744) 6,486
--------- ---------- --------- ------------
$ 4,878 $ 16,616 $ 6,582 $ (11,808)
--------- ---------- --------- ------------
--------- ---------- --------- ------------
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities are due to liabilities accrued for financial reporting
purposes and property, plant and equipment which have different tax and
financial reporting bases. Net deferred tax assets amounted to $13,523; $13,419;
$11,709 and $12,833 at June 30, 1993, June 30, 1994, June 30, 1995 and December
14, 1995, respectively.
(4) LEASES
The Company leases its restaurant facility under a noncancelable operating
lease that expires in May 1996 and contains three remaining renewal options for
five years each. The lease requires the Company to pay executory costs such as
maintenance and insurance. Rent expense amounted to $77,651; $80,246; $83,456
and $43,110 for years ended June 30, 1993, 1994 and 1995 and the period from
July 1, 1995 through December 14, 1995, respectively.
(5) SALE OF BUSINESS
Effective December 14, 1995, the stockholder of the Company sold all of the
Company's outstanding common stock to New York Bagel Enterprises, Inc.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Central & Ridge Yogurt, Inc. and
New York Bagel Enterprises, Inc.:
We have audited the accompanying statements of operations, stockholders'
deficit, and cash flows of Central & Ridge Yogurt, Inc. for the year ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of
Central & Ridge Yogurt, Inc. for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Wichita, Kansas
March 26, 1996
F-26
<PAGE>
CENTRAL & RIDGE YOGURT, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues......................................................................... $ 326,943
---------
Costs and expenses:
Cost of sales.................................................................. 162,836
Restaurant operating expenses.................................................. 186,696
General and administrative expenses............................................ 27,861
Depreciation and amortization.................................................. 31,108
---------
Total costs and expenses..................................................... 408,501
---------
Operating loss............................................................... (81,558)
Other expense (income):
Interest expense............................................................... 16,893
Gain on sale of business (note 5).............................................. (92,342)
---------
Net loss..................................................................... $ (6,109)
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
CENTRAL & RIDGE YOGURT, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994............................. 1,000 $ 1,000 $ 109,000 $ (143,310) $ (33,310)
Net loss............................................... -- -- -- (6,109) (6,109)
Distributions to stockholders.......................... -- -- -- (7,164) (7,164)
--------- --------- ----------- ------------ ----------
Balance, December 31, 1995............................. 1,000 $ 1,000 $ 109,000 $ (156,583) $ (46,583)
--------- --------- ----------- ------------ ----------
--------- --------- ----------- ------------ ----------
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
CENTRAL & RIDGE YOGURT, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (6,109)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of business.................................................... (92,342)
Depreciation and amortization............................................... 31,108
Gain on sale of assets...................................................... (9,425)
Increase (decrease) in cash resulting from changes in listed items:
Inventory................................................................. (1,119)
Pre-opening costs......................................................... (6,653)
Accounts receivable....................................................... 5,028
Other assets.............................................................. (879)
Accounts payable.......................................................... 2,489
Accrued liabilities....................................................... 3,168
---------
Net cash used in operating activities................................... (74,734)
---------
Cash flows from investing activities:
Additions to property, plant and equipment.................................... (100,499)
Proceeds on sale of assets.................................................... 27,000
---------
Net cash used in investing activities................................... (73,499)
---------
Cash flows from financing activities:
Proceeds from notes payable................................................... 159,493
Principal payments on notes payable........................................... (12,493)
Increase in due to stockholders............................................... 8,020
Distributions to stockholders................................................. (7,164)
Excess of checks written over funds on deposit................................ 377
---------
Net cash provided by financing activities............................... 148,233
---------
Net increase in cash.................................................... --
Cash at beginning of year....................................................... 400
---------
Cash at end of year............................................................. $ 400
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
CENTRAL & RIDGE YOGURT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) OPERATIONS
Central & Ridge Yogurt, Inc. (the Company) operates a restaurant as a
franchisee of New York Bagel Enterprises, Inc. (Franchisor) under the New York
Bagel concept which is a quick-service bakery featuring freshly made bagels and
deli-style sandwiches. The Company's restaurant is located in Wichita, Kansas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) FRANCHISE FEES
A franchise agreement has been executed between the Company and the
Franchisor that provides the terms of the franchise arrangement. The initial
franchise fee is being amortized on a straight-line basis over the term of the
agreement.
(b) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(c) PRE-OPENING COSTS
Direct, incremental restaurant pre-opening costs, comprised primarily of the
cost of hiring and training restaurant employees and rent, are amortized over
the initial twelve months of the restaurant's operations.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the remaining lease term, including renewal periods when the Company intends to
exercise renewal options, or the estimated useful life of the asset.
(e) INCOME TAXES
The Company operates as an S corporation for income tax purposes. Income
taxes have not been provided because the Company's results of operations are
reported to its stockholders for inclusion in their individual tax returns.
(f) STATEMENT OF CASH FLOWS
Cash paid during the year for interest was $15,744.
(g) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
(3) PROPERTY, PLANT AND EQUIPMENT
Depreciation expense amounted to $26,882 for the year ended December 31,
1995.
(4) LEASES
The Company leases its present restaurant facility under a noncancelable
operating lease. The lease term expires in February 1998 and contains a renewal
option for an additional three-year period. Total rent expense for the year
ended December 31, 1995 was $23,629.
F-30
<PAGE>
CENTRAL & RIDGE YOGURT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(4) LEASES (CONTINUED)
Future minimum lease payments under the noncancelable operating lease as of
December 31, 1995 are:
<TABLE>
<S> <C>
Year ending December 31:
1996............................................................ $ 18,600
1997............................................................ 18,600
1998............................................................ 19,050
1999............................................................ 19,200
2000............................................................ 19,200
Thereafter...................................................... 4,800
---------
Total minimum lease payments.................................... $ 99,450
---------
---------
</TABLE>
(5) SALE OF BUSINESS
Effective after the close of business on December 31, 1995, the Company sold
substantially all of its assets to the Franchisor. One of the Company's owners
is also an officer and stockholder of the Franchisor. The gain amounting to
$92,342 arising from such sale has been reflected in the accompanying statement
of operations.
F-31
<PAGE>
[COMPANY LOGO ON MENU.]
[PHOTOGRAPH DEPICTING THE INTERIOR OF A COMPANY RESTAURANT AND VARIOUS COMPANY
PRODUCTS.]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
S Corporation Distributions.................... 12
Dividend Policy................................ 12
Use of Proceeds................................ 13
Dilution....................................... 14
Capitalization................................. 15
Selected Combined Financial Data............... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business....................................... 23
Management..................................... 33
Principal and Selling Stockholders............. 39
Certain Transactions........................... 40
Description of Capital Stock................... 41
Shares Eligible for Future Sale................ 44
Underwriting................................... 45
Legal Matters.................................. 46
Experts........................................ 46
Additional Information......................... 47
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL SEPTEMBER 21, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
NEW YORK BAGEL
ENTERPRISES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
RAUSCHER PIERCE REFSNES, INC.
J.C. BRADFORD & CO.
AUGUST 27, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
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