<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1996
REGISTRATION NO. 333-05785
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NEW YORK BAGEL ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
KANSAS 5812 73-1369185
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
300 I.M.A. PLAZA
250 NORTH WATER STREET
WICHITA, KANSAS 67202-1213
316-267-7373
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
ROBERT J. GERESI
CHIEF EXECUTIVE OFFICER
NEW YORK BAGEL ENTERPRISES, INC.
300 I.M.A. PLAZA
250 NORTH WATER STREET
WICHITA, KANSAS 67202-1213
316-267-7373
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES OF COMMUNICATION TO:
<TABLE>
<S> <C>
GREGORY B. KLENDA, ESQ. RICHARD F. DAHLSON, ESQ.
KLENDA, MITCHELL, AUSTERMAN & ZUERCHER, L.L.C. JACKSON & WALKER, L.L.P.
1600 EPIC CENTER 901 MAIN STREET, SUITE 6000
301 NORTH MAIN STREET DALLAS, TEXAS 75202-3797
WICHITA, KANSAS 67202-4888 214-953-6000
316-267-0331
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER OF FORM S-1 AND TITLE OF ITEM PROSPECTUS CAPTION
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Additional Information;
Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Risk Factors; S Corporation
Distributions; Use of Proceeds; Management's
Discussion and Analysis of Financial Condition and
Results of Operation
5. Determination of Offering Price...................... Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. Outside Front Cover Page; Prospectus Summary; Risk
Factors; Principal and Selling Stockholders;
Underwriting
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to Be Registered........... Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; S Corporation
Distributions; Dividend Policy; Use of Proceeds;
Dilution; Capitalization; Selected Combined
Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Management; Principal and Selling
Stockholders; Certain Transactions; Description of
Capital Stock; Shares Eligible for Future Sale;
Combined Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
</TABLE>
- ------------------------
* Item is inapplicable or the answer thereto is in the negative and is omitted
from the Prospectus.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 2, 1996
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. It is currently anticipated that the initial public offering price will
be between $9.00 and $11.00 per share. For information relating to the factors
to be 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 "NYBE," subject to notice of issuance.
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.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE UNDERWRITING PROCEEDS TO SELLING
TO PUBLIC DISCOUNT COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
Total (2).................... $ $ $ $
</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 $ , $ ,
$ and $ , 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 , 1996.
RAUSCHER PIERCE REFSNES, INC. J.C. BRADFORD & CO.
------------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[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, AND (IV) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
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 currently 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
<PAGE>
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
<TABLE>
<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.................... NYBE
</TABLE>
- ------------------------
(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
<PAGE>
SUMMARY FINANCIAL AND RESTAURANT DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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)......................................... 2,996 2,996
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
--------- --------- --------- ----------- -----------
Total............................................... 11 21 40 28 50
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
<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) $ 12,085
Total assets........................................................... 4,002 4,002 16,043
Total debt............................................................. 3,930 3,930 115
Stockholders' equity (deficit)......................................... (1,066) (1,341) 14,699
</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.
5
<PAGE>
(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
<PAGE>
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
<PAGE>
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 proposed
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
<PAGE>
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 45.3%
of the outstanding Common Stock of the Company (approximately 42.3% 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
<PAGE>
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 $6.91 per share to new investors, which amount represents
the difference between the pro forma net tangible book value per share after the
offering and an assumed initial public offering price of $10.00 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, subject to notice of issuance, there can be no
10
<PAGE>
assurance that an active market will develop 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 will be determined through
negotiations between the Company and the representatives of the underwriters and
will 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 $16.0 million (approximately $18.6
million if the Underwriter's over-allotment option is exercised in full),
assuming an initial public offering price of $10.00 per share and 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 at an
assumed initial public offering price of $10.00 per share 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 $14.2 million, or
$3.09 per share. This represents an immediate increase in pro forma net tangible
book value of approximately $3.87 per share to existing stockholders, and an
immediate dilution of $6.91 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>
Assumed initial public offering price per share....................... $ 10.00
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........................................... 3.87
---------
Pro forma net tangible book value per share after this offering....... 3.09
---------
Dilution per share to new investors................................... $ 6.91
---------
---------
</TABLE>
The following table summarizes, at June 30, 1996, 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 at an assumed initial public
offering price of $10.00 per share:
<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 1.0% $ 0.07
New investors............................... 1,800,000 39.1 18,000,000 99.0 10.00
----------- ----- -------------- -----
Total..................................... 4,600,000 100.0% $ 18,185,650 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</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 at an
assumed initial public offering price of $10.00 per share 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) 14,653
Accumulated deficit........................................................ (1,252) -- --
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (1,066) (1,341) 14,699
--------- ----------- -----------
Total capitalization......................................................... $ 2,215 $ 1,940 $ 14,785
--------- ----------- -----------
--------- ----------- -----------
</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)................ 2,996
<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)................ 2,996
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 currently 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 currently 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 currently 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.
28
<PAGE>
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
currently 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
29
<PAGE>
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-
30
<PAGE>
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 Din-
ing, 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
31
<PAGE>
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.
32
<PAGE>
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
33
<PAGE>
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 Arts degree 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 Bachelors 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 Bachelors 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.
34
<PAGE>
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 and
Sorrentino 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 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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<PAGE>
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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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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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."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents certain information as of July 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(6)
-------------------------- SHARES --------------------------
NAME NUMBER PERCENTAGE OFFERED(5) 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)............................... 438,246 15.7 33,000 405,246 8.8
Directors and executive officers as a group (seven
persons)......................................... 2,262,044 80.8% 178,000 2,084,044 45.3%
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............ 70,850 2.5 2,500 68,350 1.5
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) 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.
(6) 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%), 399,746 (8.2%) and 2,057,544 shares
(42.3%), respectively, following this offering.
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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.
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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.
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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 24 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
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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
Upon completion of this offering, the transfer agent and registrar for the
Common Stock will be American Stock Transfer & Trust Company located in New
York, New York.
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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...............................................................
J.C. Bradford & Co.........................................................................
-----------
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 $ per share, and the Underwriters may allow, and such
dealers may reallow, to members of the NASD a concession not in excess of
$ 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 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 will be
determined by negotiations between the Company and the Representatives. The
primary factors considered in determining such offering price will include the
history of and
45
<PAGE>
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.
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,
46
<PAGE>
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 estimated net initial public offering price) to
replace the excess of distributions to stockholders over net
earnings for the year ended December 31, 1995.................. 195,728 195,728
------------ -------------
Pro forma weighted average common shares outstanding............ 2,995,728 2,995,728
------------ -------------
------------ -------------
</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................... 2,995,728 2,995,728
------------- -------------
------------- -------------
</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 estimated 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......................... 46
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 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.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the estimated expenses to be
incurred in connection with the registration, issuance and distribution of the
Common Stock covered by this Registration Statement, all of which will be paid
by New York Bagel Enterprises, Inc. (the "Registrant"), none of which will be
paid by the Selling Stockholders:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee...................... $ 9,518
National Association of Securities Dealers, Inc. Filing Fee.............. 3,260
Nasdaq National Market Application Fee................................... 28,000
Accounting Fees and Expenses............................................. 200,000
Legal Fees and Expenses.................................................. 225,000
Blue Sky Fees and Expenses............................................... 7,500
Transfer Agent/Registrar Fees and Expenses............................... 10,000
Printing Expenses........................................................ 150,000
Miscellaneous Expenses................................................... 66,722
---------
Total.................................................................. $ 700,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is incorporated in Kansas. Under Section 17-6305 of the
Kansas general corporation code, a Kansas corporation has the power, under
specified circumstances, to indemnify its directors, officers, employees and
agents in connection with actions, suits or proceedings brought against them by
a third party, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred in any action, suit or
proceeding, including attorney fees, if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation; and with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The same test applies to actions brought by or in the right of the
corporation with the additional requirement that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Article X of the
Articles of Incorporation, Article VII of the Restated and Amended Articles of
Incorporation to be effective upon the completion of this offering, Sec. 33 of
the Bylaws and Section 60 of the Restated and Amended Bylaws of the Registrant
to be effective upon the completion of this offering, provide for
indemnification of directors and officers to the fullest extent permitted by the
Kansas general corporation code. Reference is made to the Articles of
Incorporation, Restated and Amended Articles of Incorporation, Bylaws and
Restated and Amended Bylaws of the Registrant, filed as Exhibits 3.1, 3.3, 3.2
and 3.4, respectively, hereto.
The Registrant currently does not have directors' and officers' liability
insurance covering certain liabilities incurred by the Registrant's directors
and officers in connection with the performance of their duties.
The Underwriting Agreement contains provisions by which each Underwriter
severally agrees to indemnify the Registrant, any person controlling the
Registrant within the meaning of Section 15 of the Securities Act of 1933, as
amended (the "Act") or Section 20 of the Securities Exchange Act of 1934, each
director of the Registrant, and each officer of the Registrant who signs this
Registration Statement with respect to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter expressly for use in
the Registration Statement.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The securities sold by the Registrant within the past three years have not
been registered under the Act. Exemption from registration is claimed under
Section 4(2) of the Act in reference to all of such sales of securities. All
securities sold within the past three years were shares of common stock, with
the exception of the Convertible Debenture described below. There were no
underwriting discounts or commissions on the sale of these securities. The
holders of the securities referred to below agreed to take their securities for
investment and not with a view to the distribution thereof. The certificates
representing the securities contained legends identifying certain restrictions
on the transferability thereof.
The following sets forth information pertaining to sales of Common Stock by
the Registrant within the past three years which gives effect to the 1.4-for-1
stock split effected as a stock dividend on June 4, 1996 and the conversion on a
share-for-share basis of Class B Common Stock into Class A Common Stock and the
reclassification of the Class A Common Stock into Common Stock:
<TABLE>
<CAPTION>
PURCHASER DATE (1) SHARES CONSIDERATION
- ---------------------------- ---------------------------- ----------- --------------
<S> <C> <C> <C>
Robert J. Geresi December 31, 1995 627,343 $ 38,885
Paul R. Hoover December 31, 1995 141,698 70,000(2)
Vincent J. Vrana December 31, 1995 584,564 12,880
Paul T. Sorrentino December 31, 1995 627,343 38,885
David L. Murfin December 31, 1995 354,246 175,000(2)
Nancy Murfin Moxley and Mark
A. Moxley December 31, 1995 70,850 35,000(2)
Barbara Murfin Murphy December 31, 1995 70,850 35,000(2)
V. Richard Hoover December 31, 1995 70,850 35,000(2)
Rodney Joe Trizza December 31, 1995 161,951 1,000
Brent E. Durham December 31, 1995 24,217 250
John R. Geresi December 31, 1995 21,389 13,000
Chad E. Watkins December 31, 1995 30,391 25,000
Markus K. Scholler January 1, 1996 14,308 6,500
-----------
2,800,000
-----------
-----------
</TABLE>
- ------------------------
(1) Shares issued on December 31, 1995 were issued in connection with the merger
of New York Bagel Enterprises, Inc., an Oklahoma corporation, into the
Registrant. Shares issued on January 1, 1996 were issued as employee
compensation to the named individual.
(2) An aggregate of $350,000 in consideration was paid for shares in the Prior
Entities, of which $300,000 was paid to Messrs. Geresi, Vrana and Sorrentino
and $50,000 was contributed to the capital of one of the Prior Entities.
On December 14, 1995, the Company issued a 4.0% contingently convertible
subordinated debenture in the amount of $115,000 to The Estate of Stephen Z.
Plotkin, a Tennessee probate estate, in connection with the acquisition of
Nashville Bagel Co., Inc. (the "Convertible Debenture"). The Convertible
Debenture may be converted at the option of the debenture holder into 19,320
shares of Common Stock, in the event the entire debenture is converted.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.
2.1 Plan and Agreement of Merger dated December 27, 1995, by and between New York Bagel
Enterprises, Inc., a Kansas corporation, and New York Bagel Enterprises, Inc., an
Oklahoma corporation.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
<C> <S>
2.2 Plan and Agreement of Merger dated December 27, 1995, by and among New York Bagel
Enterprises, Inc., VPR Incorporated, New York Bagel Shop, Inc., Bagel Boss, Inc., Bagels
of Norman, Inc., New York Bagel Shop & Delicatessen, Inc.*
2.3 Certificate of Ownership and Merger (Articles of Merger) Merging Nashville Bagel Co. (a
Tennessee corporation) into New York Bagel Enterprises, Inc. (an Oklahoma corporation).*
2.4 Asset Sale and Purchase Agreement dated December 27, 1995, by and among New York Bagel
Enterprises, Inc., Central & Ridge Yogurt, Inc. and Paul R. Hoover.*
3.1 Articles of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
3.3 Form of Restated and Amended Articles of Incorporation of the Registrant.*
3.4 Form of Restated and Amended Bylaws of the Registrant.*
4.1 Specimen of Common Stock Certificate.*
4.2 Form of New York Bagel Enterprises, Inc. Grant of Incentive Stock Option.*
4.3 Form of New York Bagel Enterprises, Inc. Grant of Nonqualified Stock Option.*
4.4 New York Bagel Enterprises, Inc. 4% Convertible and Subordinated Debenture due December
14, 1999.*
5 Opinion of Klenda, Mitchell, Austerman & Zuercher, L.L.C., counsel for the Registrant.*
9.1 Contract for Sale of Stock dated June 21, 1994, by and between Robert Geresi, Paul
Sorrentino and Vince Vrana and David L. Murfin and Paul R. Hoover.*
9.2 Stockholders' Agreement dated January 1, 1996, by and among Robert J. Geresi, Vincent J.
Vrana, Paul T. Sorrentino, Paul R. Hoover, David L. Murfin, Nancy Murfin Moxley, Mark A.
Moxley, Barbara Murfin Murphy, V. Richard Hoover, Philip Faubert, Rodney Joe Trizza,
Brent Durham, John R. Geresi, Chad E. Watkins, Markus K. Scholler and the Company.*
10.1 New York Bagel Enterprises, Inc. 1996 Incentive Plan.*
10.2 Loan Agreement dated December 26, 1995, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $500,000.*
10.3 Loan Agreement dated December 29, 1995, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $2,750,000.*
10.4 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $136,800.*
10.5 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $136,800.*
10.6 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $136,800.*
10.7 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $180,800.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------
<C> <S>
10.8 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $101,600.*
10.9 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $107,200.*
10.10 Representative Uniform Franchise Offering Circular, including form of Franchise
Agreement and form of Development Agreement.*
10.11 Lease Agreement dated June 1, 1994, by and between Bagel Land, Inc. and Bagels of
Norman, Inc.*
10.12 Lease Agreement dated December 1, 1993, by and between Cherry Street Land and Bagel
Boss, Inc.*
10.13 Sublease dated April 1, 1996, by and between Murfin Drilling Company and New York Bagel
Enterprises, Inc.*
10.14 Loan Agreement dated July 8, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $125,000.*
10.15 Loan Agreement dated July 8, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $172,500.*
10.16 Loan Agreement dated July 10, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $300,000.*
10.17 Loan Agreement dated July 15, 1996, by and between New York Bagel Enterprises, Inc. and
Stillwater National Bank and Trust Company in the amount of $150,000.*
23.1 Consent of Klenda, Mitchell, Austerman & Zuercher, L.L.C.
23.2 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney.*
</TABLE>
- ------------------------
*Previously filed.
(b) Financial Statement Schedules
Financial statement schedules are not applicable or required.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Wichita, State of Kansas, on this 2nd day of August, 1996.
NEW YORK BAGEL ENTERPRISES, INC.
By /s/ ROBERT J. GERESI
-----------------------------------
Robert J. Geresi,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ ROBERT J. GERESI Chairman of the Board, August 2, 1996
- ----------------------------------- Chief Executive Officer
Robert J. Geresi and President (Principal
Executive Officer)
/s/ J. CHRIS DENNIS Chief Financial Officer, August 2, 1996
- ----------------------------------- Secretary and Treasurer
J. Chris Dennis (Principal Financial and
Accounting Officer)
* Vice President -- New August 2, 1996
- ----------------------------------- Store Development and
Paul T. Sorrentino Director
* Vice President -- August 2, 1996
- ----------------------------------- Strategic Planning and
Paul R. Hoover Director
* Director August 2, 1996
- -----------------------------------
William S. Atherton
* Director August 2, 1996
- -----------------------------------
David L. Murfin
*By /s/ ROBERT J.
GERESI
- -----------------------------------
Robert J. Geresi
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S> <C>
1 Form of Underwriting Agreement.
2.1 Plan and Agreement of Merger dated December 27, 1995, by and between New York Bagel
Enterprises, Inc., a Kansas corporation, and New York Bagel Enterprises, Inc., an
Oklahoma corporation.*
2.2 Plan and Agreement of Merger dated December 27, 1995, by and among New York Bagel
Enterprises, Inc., VPR Incorporated, New York Bagel Shop, Inc., Bagel Boss, Inc.,
Bagels of Norman, Inc., New York Bagel Shop & Delicatessen, Inc.*
2.3 Certificate of Ownership and Merger (Articles of Merger) Merging Nashville Bagel Co.
(a Tennessee corporation) into New York Bagel Enterprises, Inc. (an Oklahoma
corporation).*
2.4 Asset Sale and Purchase Agreement dated December 27, 1995, by and among New York
Bagel Enterprises, Inc., Central & Ridge Yogurt, Inc. and Paul R. Hoover.*
3.1 Articles of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
3.3 Form of Restated and Amended Articles of Incorporation of the Registrant.*
3.4 Form of Restated and Amended Bylaws of the Registrant.*
4.1 Specimen of Common Stock Certificate.*
4.2 Form of New York Bagel Enterprises, Inc. Grant of Incentive Stock Option.*
4.3 Form of New York Bagel Enterprises, Inc. Grant of Nonqualified Stock Option.*
4.4 New York Bagel Enterprises, Inc. 4% Convertible and Subordinated Debenture due
December 14, 1999.*
5 Opinion of Klenda, Mitchell, Austerman & Zuercher, L.L.C., counsel for the
Registrant.*
9.1 Contract for Sale of Stock dated June 21, 1994, by and between Robert Geresi, Paul
Sorrentino and Vince Vrana and David L. Murfin and Paul R. Hoover.*
9.2 Stockholders' Agreement dated January 1, 1996, by and among Robert J. Geresi,
Vincent J. Vrana, Paul T. Sorrentino, Paul R. Hoover, David L. Murfin, Nancy Murfin
Moxley, Mark A. Moxley, Barbara Murfin Murphy, V. Richard Hoover, Philip Faubert,
Rodney Joe Trizza, Brent Durham, John R. Geresi, Chad E. Watkins, Markus K. Scholler
and the Company.*
10.1 New York Bagel Enterprises, Inc. 1996 Incentive Plan.*
10.2 Loan Agreement dated December 26, 1995, by and between New York Bagel Enterprises,
Inc. and Stillwater National Bank and Trust Company in the amount of $500,000.*
10.3 Loan Agreement dated December 29, 1995, by and between New York Bagel Enterprises,
Inc. and Stillwater National Bank and Trust Company in the amount of $2,750,000.*
10.4 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $136,800.*
10.5 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $136,800.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
10.6 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $136,800.*
<C> <S> <C>
10.7 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $180,800.*
10.8 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $101,600.*
10.9 Loan Agreement dated March 15, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $107,200.*
10.10 Representative Uniform Franchise Offering Circular, including form of Franchise
Agreement and form of Development Agreement.*
10.11 Lease Agreement dated June 1, 1994, by and between Bagel Land, Inc. and Bagels of
Norman, Inc.*
10.12 Lease Agreement dated December 1, 1993, by and between Cherry Street Land and Bagel
Boss, Inc.*
10.13 Sublease dated April 1, 1996, by and between Murfin Drilling Company and New York
Bagel Enterprises, Inc.*
10.14 Loan Agreement dated July 8, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $125,000.*
10.15 Loan Agreement dated July 8, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $172,500.*
10.16 Loan Agreement dated July 10, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $300,000.*
10.17 Loan Agreement dated July 15, 1996, by and between New York Bagel Enterprises, Inc.
and Stillwater National Bank and Trust Company in the amount of $150,000.*
23.1 Consent of Klenda, Mitchell, Austerman & Zuercher, L.L.C.
23.2 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney.*
</TABLE>
- ------------------------
*Previously filed.
<PAGE>
EXHIBIT 1
NEW YORK BAGEL ENTERPRISES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
_______________
UNDERWRITING AGREEMENT
____________
, 1996
Rauscher Pierce Refsnes, Inc.,
J.C. Bradford & Co.
As Representatives of the several
Underwriters named in Schedule I hereto,
c/o Rauscher Pierce Refsnes, Inc.
Cityplace
2711 N. Haskell Avenue, Suite 2400
Dallas, Texas 75204-2936
Dear Sirs:
New York Bagel Enterprises, Inc., a Kansas corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 1,800,000 shares and, at the election of the Underwriters, up to 270,000
additional shares of Common Stock, par value $0.01 per share (the "Stock") of
the Company and the stockholders of the Company named in Schedule II hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated, in
this underwriting agreement (the "Agreement") to sell to the Underwriters an
aggregate of 200,000 shares and, at the election of the Underwriters, up to
30,000 additional shares of Stock. The aggregate of 2,000,000 shares to be sold
by the Company and the Selling Stockholders is herein called the "Firm Shares"
and the aggregate of 300,000 additional shares to be sold by the Company and the
Selling Stockholders is herein called the "Optional Shares." The Firm Shares
and the Optional Shares which the Underwriters elect to purchase pursuant to
Section 2 hereof are herein collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement in respect of the Firm Shares and
Optional Shares has been filed with the Securities and Exchange Commission
(the "Commission"); such
<PAGE>
registration statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits thereto, to
you for each of the other Underwriters, have been declared effective by
the Commission in such form; no other document with respect to such
registration statement has heretofore been filed with the Commission; and
to the best of the Company's knowledge, no stop order suspending the
effectiveness of such registration statement has been issued and no
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in such registration
statement or filed with the Commission pursuant to Rule 424(a) of the rules
and regulations of the Commission under the Securities Act of 1933, as
amended (the "Act"), being hereinafter called a "Preliminary Prospectus";
the various parts of such registration statement, including all exhibits
thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act
in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the registration statement at the time it was
declared effective, each as amended at the time such part of the
registration statement became effective, being hereinafter called the
"Registration Statement"; and such final prospectus, in the form first
filed pursuant to Rule 424(b) under the Act, being hereinafter called the
"Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by (a) an Underwriter
through you expressly for use therein or (b) a Selling Stockholder
expressly for use in the preparation of the information required to be
presented therein pursuant to Item 7 of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by (a) an
Underwriter through you expressly for use therein or (b) a Selling
Stockholder for use in the preparation of the information to be presented
therein pursuant to Item 7 of Form S-1;
(iv) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus any loss or
interference with its business from fire,
2
<PAGE>
explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or
decree, that is material to the general affairs, management, financial
position, stockholders' equity or results of operations of the Company
and, since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any change
in the capital stock, short-term debt or long-term debt of the Company or
any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus;
(v) The Company has good and marketable title, to all material real
property and good and marketable title to all material personal property
owned by it, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company; and any
material real property and buildings held under lease by the Company is
held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company;
(vi) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Kansas,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties, or conducts any business, so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction;
(vii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description thereof contained in the
Prospectus;
(viii) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and nonassessable and will conform
to the description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Firm Shares and Optional Shares by the
Company and the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, sale/leaseback agreement or other
agreement or instrument (collectively, the "Specified Documents") to which
the Company
3
<PAGE>
is a party or by which the Company is bound or to which any of the property
or assets of the Company is subject, nor will such action result in any
violation of the provisions of the Articles of Incorporation, as amended,
or the By-laws, as amended, of the Company or any statute or any order,
rule or regulation of any court or government agency or body having
jurisdiction over the Company or any of its properties; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of
the Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws
in connection with the purchase and distribution of the Shares by the
Underwriters;
(x) Other than as set forth or contemplated in the Prospectus, there
are no legal or governmental proceedings pending to which the Company is a
party or of which any property of the Company is the subject which, if
determined adversely to the Company, would individually or in the aggregate
have a material adverse effect on the combined financial position,
stockholders' equity or results of operations of the Company; and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xi) KPMG Peat Marwick LLP, who have certified financial statements
of the Company, are independent public accountants as required by the Act
and the rules and regulations of the Commission thereunder;
(xii) The Company has no subsidiaries;
(xiii) Except as set forth in either the Prospectus or the
Registration Statement, the Company owns, or possesses adequate rights to
use, all the patents, trademarks, service marks, trade names and copyrights
("Intellectual Property") necessary for the conduct of its business as
currently conducted by it. Except as set forth in either the Prospectus or
the Registration Statement, to the best knowledge of the Company, none of
the activities engaged in by the Company infringes or conflicts with
Intellectual Property rights of others; and
(xiv) No person has any right to require the Company to register any
securities under the Act.
(b) Each of the Selling Stockholders severally and not jointly represents
and warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement,
the Power of Attorney (the "Power of Attorney") and the Custody Agreement
(the "Custody Agreement") hereinafter referred to, and for the sale and
delivery of the Shares to be sold by such Selling Stockholder hereunder,
have been obtained; and such Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and the
Custody
4
<PAGE>
Agreement and to sell, assign, transfer and deliver the Shares to be sold
by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, any indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound or to which any of the
property or assets of such Selling Stockholder is subject, or any statute
or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over such Selling Stockholder or the property of
such Selling Stockholder;
(iii) Such Selling Stockholder has good and valid title to the Shares
to be sold at each Time of Delivery (as defined in Section 4 hereof) by
such Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities and claims, and immediately prior to each Time of
Delivery such Selling Stockholder will have good and valid title to the
Shares to be sold at such Time of Delivery by such Selling Stockholder
hereunder, free and clear of all liens, encumbrances, equities or claims;
and, upon delivery of such Shares and payment therefor pursuant hereto,
good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters;
(iv) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares; and
(v) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Stockholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus will, when
they become effective or are filed with the Commission, as the case may be,
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading.
In order to document the Underwriters' compliance with the reporting and
withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982
with respect to the transactions herein contemplated, each of the Selling
Stockholders agrees to deliver to you prior to or at the First Time of Delivery
(as hereinafter defined) a properly completed and executed United States
Treasury Department Form W-9 (or Form W-8 if applicable, or other applicable
form or statement specified by United States Treasury Department regulations in
lieu thereof).
5
<PAGE>
Each of the Selling Stockholders, severally and not jointly, represents
and warrants that certificates in negotiable form representing all of the
Shares to be sold by such Selling Stockholder hereunder have been placed in
custody under a Custody Agreement, in the form heretofore furnished to you,
duly executed and delivered by such Selling Stockholder to Robert J. Geresi,
Paul R. Hoover and J. Chris Dennis, and each of them, as custodian (the
"Custodian"), and that such Selling Stockholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you,
appointing the persons indicated in Schedule II hereto, and each of them, as
such Selling Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with
authority to execute and deliver this Agreement on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the Underwriters
to the Selling Stockholders as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Stockholder hereunder and
otherwise to act on behalf of such Selling Stockholder in connection with the
transactions contemplated by this Agreement and the Custody Agreement.
Each of the Selling Stockholders specifically agrees, severally and not
jointly, that the Shares represented by the certificates held in custody for
such Selling Stockholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder and that the arrangements made by
such Selling Stockholder for such custody, and the appointment by such
Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to
that extent irrevocable. Each of the Selling Stockholders specifically
agrees, severally and not jointly, that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether
by the death or incapacity of any individual Selling Stockholder or, in the
case of an estate or trust, by the death or incapacity of any executor or
trustee or the termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event. If any individual
Selling Stockholder or any such executor or trustee should die or become
incapacitated, or if any such estate or trust should be terminated, or if any
such partnership or corporation should be dissolved, or if any other such
event should occur, before the delivery of the Shares hereunder, certificates
representing the Shares shall be delivered by or on behalf of the Selling
Stockholders in accordance with the terms and conditions of this Agreement
and of the Custody Agreement, and actions taken by the Attorneys-in-Fact
pursuant to the Powers of Attorney shall be as valid as if such death,
incapacity, termination, dissolution or other event had not occurred,
regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of
them, shall have received notice of such death, incapacity, termination,
dissolution or other event.
(c) Each Selling Stockholder specifically agrees, severally and not
jointly, that, during the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to, directly or indirectly, offer, sell, contract to sell or
otherwise dispose of any Stock (other than pursuant to this Agreement or bona
fide gifts to persons who agree in writing with you to be bound by the terms
of this Agreement).
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not
jointly, to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company and each of
the Selling Stockholders, at a purchase price per share of $_________, the
number of Firm Shares (to be adjusted by you so as to eliminate fractional
shares) determined by multiplying the aggregate number of Firm Shares to be
sold by the Company and each of the Selling
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Stockholders as set forth opposite their respective names in Schedule II
hereto by a fraction, the numerator of which is the aggregate number of Firm
Shares to be purchased by such Underwriter as set forth opposite the name of
such Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Firm Shares to be purchased by all the Underwriters from
the Company and all the Selling Stockholders hereunder and (b) in the event
and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company and each of the
Selling Stockholders agree, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly,
to purchase from the Company and each of the Selling Stockholders, at the
purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of the Optional Shares which all of the Underwriters are entitled to
purchase hereunder.
The Company and the Selling Stockholders hereby grant to the
Underwriters the right to purchase at their election up to 300,000 Optional
Shares, at the purchase price per share set forth in the paragraph above, for
the sole purpose of covering overallotments in the sale of the Firm Shares.
Any such election to purchase Optional Shares may be exercised only by
written notice from you to the Company and the Selling Stockholders, given
within a period of 30 calendar days after the date of this Agreement, setting
forth the aggregate number of Optional Shares to be purchased and the date on
which such Optional Shares are to be delivered, as determined by you but in
no event earlier than the First Time of Delivery or, unless you and the
Company otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. Certificates in definitive form for the Shares to be purchased by
each Underwriter hereunder, and in such denominations and registered in such
names as Rauscher Pierce Refsnes, Inc. may request upon at least 48 hours'
prior notice to the Company and the Selling Stockholders, shall be delivered
by or on behalf of the Company and the Selling Stockholders to you for the
account of such Underwriter, against payment by such Underwriter or on its
behalf of the purchase price therefor by certified or official bank check or
checks, payable to the order of the Company and the Selling Stockholders
(which shall be delivered in care of the Custodian), as their interests may
appear in same day funds, or by payment in such other manner as shall be
agreed to in writing by the Company and Rauscher Pierce Refsnes, Inc., all at
the offices of . The time and date of such delivery
and payment shall be, with respect to the Firm Shares, 9:00 a.m., Central
Daylight Savings time, on , 1996, or at such other time and
date as you, the Company and the Selling Stockholders may agree upon in
writing, and, with respect to the Optional Shares, 9:00 a.m., Central
Daylight Savings time, on the date specified by you in the written notice
given by you of the Underwriters' election to purchase such Optional Shares,
or at such other time and date as you, the Company and the Selling
Stockholders may agree upon in writing. Such time and date for delivery of
the Firm
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Shares is herein called the "First Time of Delivery," such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called the "Second Time of Delivery," and each such time and date for
delivery is herein called a "Time of Delivery."
If registration of any certificate shall be requested in a name other than
that of an Underwriter, there shall be delivered to a Transfer
Application with respect to the person in whose name registration of such
certificate is so requested. The certificates will be made available for
checking and packaging at least 24 hours prior to each Time of Delivery at such
place as is designated by Rauscher Pierce Refsnes, Inc.
If certificates in temporary form are issued, the Company agrees to cause
definitive certificates to be prepared as soon as practicable following the Time
of Delivery. After the preparation of definitive certificates, the temporary
certificates shall be exchangeable for definitive certificates upon surrender of
the temporary certificates, without charge to the holder thereof. Until so
exchanged, the Company agrees that the temporary certificates shall in all
respects be entitled to the same benefits as the definitive certificates.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when the Registration Statement, or any amendment thereto, has
been filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish you with copies thereof;
to advise you, promptly after it receives notice thereof, of the issuance
by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any
such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus or suspending any such qualification, to use promptly its best
efforts to obtain its withdrawal;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may reasonably request and
to comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;
(c) To furnish the Underwriters with copies of the Prospectus in such
quantities
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as you may from time to time reasonably request, and, if the
delivery of a prospectus is required at any time prior to the expiration of
nine months after the time of the issue of the Prospectus in connection
with the offering or sale of the Shares and if at such time any event shall
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made when
such Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary during such same period to amend or supplement the
Prospectus in the order to comply with the Act, to notify you and upon your
request to use the Company's reasonable best efforts to promptly prepare
and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request
of an amended Prospectus or a supplement to the Prospectus which will
correct such statement or omission or effect such compliance, and in case
any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time
of issue of the Prospectus, upon your reasonable request but at the expense
of such Underwriter, to promptly prepare and deliver to such Underwriter as
many copies as you may reasonably request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than 18 months after the effective
date of the Registration Statement (as defined in Rule 158(c)), an earnings
statement of the Company and its subsidiaries (which need not be audited)
complying with Section 11(a) of the Act and the rules and regulations
thereunder (including at the option of the Company Rule 158);
(e) (i) During the period beginning from the date hereof and
continuing to and including the date 180 days after the effective date of
the Prospectus, not to offer, sell, contract to sell or otherwise dispose
of Stock or other securities which are substantially similar to the Stock
or which are convertible or exchangeable into Stock or other securities
which are substantially similar to the Stock, without your prior written
consent (other than pursuant to stock option or purchase plans existing, or
on the exercise, conversion or exchange of convertible, exercisable or
exchangeable securities outstanding, on the date of this Agreement,
including, without limitation, the 4% Convertible Subordinated Debenture
as set forth in the Registration Statement); and (ii) that it will use its
reasonable efforts to cause each person who has entered into a Lock-up
Agreement to comply therewith, will not grant any waivers or consents to
non-compliance therewith and will otherwise enforce its rights under each
such agreement, in each case unless and to the extent that it shall have
obtained your prior written consent;
(f) As required under the Securities Exchange Act of 1934, as
amended, and within the time periods specified therein, to furnish to its
stockholders an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flow of the Company and its
consolidated subsidiaries, if any, certified by independent public
accountants) and after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), summary financial information of the
Company and its
9
<PAGE>
subsidiaries, if any, for each such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and deliver
to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries, if
any, are consolidated in reports furnished to its stockholders generally or
to the Commission); and
(h) To use its best efforts to have the Shares accepted for quotation
on the Nasdaq National Market.
6. The Company and each of the Selling Stockholders covenant and agree
with one another and with the several Underwriters that, except as provided
below, the Company will pay or cause to be paid all costs and expenses incident
to the performance of the Company's and the Selling Stockholders' obligations
hereunder including: (i) except as provided in Subsection 5(c) above, the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or
reproducing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum and any other documents in connection with the offering, purchase,
sale and delivery of the Shares; (iii) all expenses in connection with the
qualification of the Shares for offering and sale under state securities laws as
provided in Section 5(b) hereof, including the fees and disbursements of Jackson
& Walker, L.L.P., counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey; (iv) the filing
fees and the fees and disbursements of counsel for the Underwriters incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of the sale of the Shares; (v) the cost of preparing stock
certificates; (vi) the cost and charges of any transfer agent or registrar;
(vii) any fees and expenses of counsel for the Selling Stockholders; (viii) each
Selling Stockholder's pro rata share of the fees and expenses of the Attorneys-
in-Fact and the Custodian; (ix) all expenses incurred by the Company with regard
to all due diligence and informational meetings; and (x) all expenses and stock
transfer taxes, if any, incident to the sale and delivery of the Shares to be
sold by each Selling Stockholder to the Underwriters hereunder; PROVIDED,
HOWEVER, that, notwithstanding the foregoing, all underwriters' discounts and
commissions in respect of the sale of the Shares by any Selling Stockholder
shall be paid by such Selling Stockholder. In connection with Clause (x) of the
preceding sentence, the Company agrees to reimburse Rauscher Pierce Refsnes,
Inc. for associated carrying costs if such tax payment is not rebated on the day
of payment and for any portion of such tax payment not rebated. It is
understood, however, that the Company shall bear, and the Selling Stockholders
shall not be required to pay or reimburse the Company for, the cost of any other
matters not directly relating to the sale and purchase of the Shares pursuant to
this Agreement and that, except as provided in this Section, Section 8 and
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<PAGE>
Section 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees and expenses of their counsel, stock transfer taxes
on resale of any of the Shares by them, any advertising expenses connected with
any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
no stop order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) Jackson & Walker, L.L.P., counsel for the Underwriters, shall have
furnished to you upon your request such written opinion or opinions, dated such
Time of Delivery, with respect to the incorporation of the Company, this
Agreement, the validity of the Shares being delivered at such Time of Delivery,
the Registration Statement, the Prospectus, and other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Klenda, Mitchell, Austerman & Zuercher, L.L.C., counsel for the
Company, shall have furnished to you their written opinion, dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Kansas, with
the requisite power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of Delivery, but with
respect to such Shares to be issued and delivered by the Company, when
issued and delivered by the Company pursuant to this Agreement against
payment therefor) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform to the description of
the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification, or is subject to no
material liability or disability by reason of failure to be
11
<PAGE>
so qualified in any such jurisdiction;
(iv) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company is a party or of which any property of the
Company is the subject which, if determined adversely to the Company, would
individually or in the aggregate have a material adverse effect on the
financial position, stockholders' equity or results of operations of the
Company; and, to the best of such counsel's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened by
others;
(v) This Agreement has been duly authorized, executed and delivered
by the Company;
(vi) The issue and sale to you of the Shares being delivered at such
Time of Delivery by the Company in accordance with and upon the terms and
conditions set forth herein and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any Specified Document known to such counsel (based solely on their
review of the documents on a list of all Specified Documents of the Company
as certified by the Chief Executive Officer and the Chief Financial Officer
of the Company and such other Specified Documents, if any, known to members
of such counsel devoting substantive attention to matters as to which such
counsel has been retained by the Company), nor will such action result in
any violation of the provisions of the Articles of Incorporation, as
amended, or By-laws, as amended, of the Company or any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its properties;
(vii) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(viii) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules, if
any, therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the requirements of the Act and the
rules and regulations thereunder; they have no reason to believe that, as
of its effective date, the Registration Statement or any further amendment
thereto made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules, if any, therein, as to which
such counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
12
<PAGE>
circumstances in which they were made, not misleading or that, as of its
date, the Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery (other than the financial
statements and related schedules, if any, therein, as to which such counsel
need express no opinion) contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the statements, if
any, therein, in light of the circumstances in which they were made, not
misleading or that, as of such Time of Delivery, either the Registration
Statement or the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading; and they do not know of any amendment to the Registration
Statement required to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the Registration Statement
or required to be described in the Registration Statement or the Prospectus
which are not filed or described as required; and
(ix) No dividend or distribution declared and/or paid by the Company
has violated any law, rule or regulation applicable to the Company or its
stockholders and directors;
In rendering such opinion, such counsel may (i) rely upon certificates
of Secretaries of State or other appropriate public officials and in
respect of matters of fact upon certificates of officers of the Company,
provided that such counsel shall state that they believe that both you and
they are justified in relying upon such officer's certificates; and (ii)
state that they express no opinion as to the laws of any jurisdiction other
than the laws of the State of Kansas (excluding conflict of law rules), the
Kansas general corporation code, the Oklahoma General Corporation Act and
the federal laws of the United States;
(d) Klenda, Mitchell, Austerman & Zuercher, L.L.C., counsel for the
Selling Stockholders, as indicated in Schedule II hereto, shall have furnished
to you their written opinion with respect to each of such Selling Stockholders,
dated such Time of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
authorized, executed and delivered by each such Selling Stockholder and
constitute valid and binding agreements of such Selling Stockholder in
accordance with their terms;
(ii) This Agreement has been duly authorized, executed and delivered
by or on behalf of each such Selling Stockholder; and the sale of the
Shares to be sold by such Selling Stockholder hereunder and the compliance
by such Selling Stockholder with all of the provisions of this Agreement,
the Power of Attorney and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not (a) conflict with the
laws of the State of Kansas or the federal laws of the United States by
which such Selling Stockholder is bound, or (b) result in a breach or
violation of any order, rule or regulation known to such counsel of any
court or governmental agency or
13
<PAGE>
body which, to such counsel's knowledge, has jurisdiction over such Selling
Stockholder or the Stock of such Selling Stockholder;
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the Shares
to be sold by such Selling Stockholder hereunder, except such as have been
obtained under the Act and such as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of such
Shares by the Underwriters; and
(iv) Title to such Shares, free of all adverse claims, has been
transferred to each of the several Underwriters who have purchased such
Shares in good faith and without notice of any such adverse claim within
the meaning of the Uniform Commercial Code;
In rendering such opinion, such counsel may rely upon certificates of
Secretaries of State or other appropriate public officials and in respect
of matters of fact upon certificates of officers of the Company, provided
that such counsel shall state that they believe that both you and they are
justified in relying upon such officer's certificates; and state that they
express no opinion as to the laws of any jurisdiction other than the laws
of the State of Kansas (excluding conflict of law rules), the Kansas
general corporation code, Oklahoma General Corporation Act and the federal
laws of the United States;
(e) At 9:00 a.m., Central Daylight Savings time, on the effective date of
the Registration Statement and the effective date of the most recently filed
post-effective amendment to the Registration Statement and also at each Time of
Delivery, KPMG Peat Marwick LLP shall have furnished to you a letter or letters,
dated the respective date of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto;
(f) (i) The Company shall not have sustained since the date of the latest
audited financial statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock (other than
issuances of stock upon the exercise of stock options which were outstanding on
the date of the latest balance sheet included in the Prospectus), short-term or
long-term debt of the Company otherwise than as set forth or contemplated in the
Prospectus or any change, or any development involving a prospective change, in
or affecting the general affairs, management, financial position, stockholders'
equity or results of operations of the Company otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case described
in Clause (i) or (ii), is in your good faith judgment so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on the terms
and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market; (ii) a
general moratorium on commercial banking
14
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activities in New York declared by either Federal or New York authorities; or
(iii) the outbreak or escalation of hostilities involving the United States
or the declaration by the United States of a national emergency or war, if
the effect of any such event specified in this Clause (iii) in your good
faith judgment makes it impracticable or inadvisable to proceed with the
public offering or delivery of the Shares being delivered at such Time of
Delivery on the terms and in the manner contemplated by the Prospectus;
(h) The Shares to be sold by the Company and the Selling Stockholders at
such Time of Delivery shall have been duly accepted, subject to notice of
issuance, for quotation on the Nasdaq National Market;
(i) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Stockholders, respectively, satisfactory to
you as to the accuracy of the representations and warranties of the Company and
the Selling Stockholders, respectively, herein at and as of such Time of
Delivery, as to the performance by the Company and the Selling Stockholders of
all of their respective obligations hereunder to be performed at or prior to
such Time of Delivery, and as to such other matters as you may reasonably
request and the Company shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (f) of this
Section and as to such other matters as you may reasonably request; and
(j) On or prior to the First Time of Delivery, Robert J. Geresi, Paul T.
Sorrentino, Paul R. Hoover, David L. Murfin, Vincent J. Vrana, Rodney Joe
Trizza, Nancy Murfin Moxley and Mark A. Moxley, Barbara Murfin Murphy, V.
Richard Hoover, Brent E. Durham, John R. Geresi and Chad E. Watkins shall have
entered into a Lock-up Agreement with the Underwriters that, during the period
beginning from the date hereof and continuing to and including the date 180 days
after the date of the Prospectus, not to offer, sell, contract to sell or
otherwise dispose of any Stock (other than pursuant to bona fide gifts to
persons who agree in writing with you to be bound by the terms of such
agreement).
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company and such Selling Stockholders
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through you expressly for use
therein.
15
<PAGE>
(b) Each of the Selling Stockholders, severally and not jointly, will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that (i) the
Selling Stockholders shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you expressly
for use therein and (ii) in no event shall the liability of any Selling
Stockholder under this subsection (b) exceed the total gross proceeds from the
sale of Shares by such Selling Stockholder hereunder.
(c) Each Underwriter will indemnify and hold harmless the Company and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse the
Company and each Selling Stockholder for any legal or other expenses reasonably
incurred by the Company or such Selling Stockholder in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying
16
<PAGE>
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation incurred prior to such notification or, thereafter, if incurred
at the request of the indemnifying party.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a),
(b) or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters with respect to the Shares purchased under this Agreement,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Stockholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, each
of the Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purposes) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), (i) no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission and (ii) no Selling Stockholder shall be required to contribute any
amount in excess of the gross proceeds from the sale of Shares by such Selling
Stockholder hereunder. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be
17
<PAGE>
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint. The Selling Stockholders'
obligations in this subsection (e) to contribute are several and not joint.
(f) The obligations of the Company and the Selling Stockholders under this
Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company or any Selling Stockholder within the meaning of
the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at the Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within 36 hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company and the Selling Stockholders shall be entitled to a
further period of 36 hours within which to procure another party or other
parties reasonably satisfactory to you to purchase such Shares on such terms.
In the event that, within the respective prescribed periods, you notify the
Company and the Selling Stockholders that you have so arranged for the purchase
of such Shares, or the Company and the Selling Stockholders notify you that they
have so arranged for the purchase of such Shares, you or the Company and the
Selling Stockholders shall have the right to postpone such Time of Delivery for
a period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
reasonable opinion may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of Shares which remains unpurchased
18
<PAGE>
exceeds one-eleventh of the aggregate number of all the Shares to be
purchased at such Time of Delivery, or if the Company and the Selling
Stockholders shall not exercise the right described in subsection (b) above
to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the
Second Time of Delivery, the obligations of the Underwriters to purchase and
of the Company and the Selling Stockholders to sell the Optional Shares)
shall thereupon terminate, without liability on the part of any nondefaulting
Underwriter or the Company or the Selling Stockholders, except for the
expenses to be borne by the Company and the Selling Stockholders and the
Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve
a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders or any officer
or director or controlling person of the Company, or controlling person of any
Selling Stockholder, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall be under any liability to
any Underwriter except as provided in Section 6 and Section 8 hereof; but, if
for any other reason any Shares are not delivered by or on behalf of the Company
and the Selling Stockholders as provided herein, the Company and each of the
Selling Stockholders pro rata (based on the number of Shares to be sold by the
Company and such Selling Stockholder hereunder) will reimburse the Underwriters
through you for all out-of-pocket expenses approved in writing by you, including
fees and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company and the Selling Stockholders shall then be under no
further liability to any Underwriter in respect of the Shares not so delivered
except as provided in Section 6 and Section 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Rauscher Pierce Refsnes, Inc. on behalf of you as the
Representative, and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices, and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the Representative in care of Rauscher Pierce
Refsnes, Inc. at Cityplace, 2711 N. Haskell Avenue, Suite 2400, Dallas, Texas
75204-2936, Attention: Corporate Syndicate Department; if to any Selling
Stockholder shall be delivered or sent by mail, telex or facsimile transmission
to counsel for such Selling Stockholder at its address set forth in Schedule II
hereto; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company
19
<PAGE>
set forth in the Registration Statement, Attention: Chief Executive Officer;
provided, however, that any notice to an Underwriter pursuant to Section 8(d)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire
or telex constituting such Questionnaire, which address will be supplied to
the Company and the Attorneys-in-Fact of the Selling Stockholders as soon as
reasonably practicable. Any such statements, requests, notices or agreements
shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Section 8 and Section 10 hereof, the officers and directors
of the Company and each person who controls the Company, any Selling Stockholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right by
virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us seven counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and each of the Selling Stockholders. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in a form of Agreement Among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon its
reasonable availability, but without warranty on your part as to the authority
of the signers thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
20
<PAGE>
Very truly yours,
NEW YORK BAGEL ENTERPRISES, INC.
By:
------------------------------------------
Robert J. Geresi, Chief Executive Officer
SELLING STOCKHOLDERS:
ROBERT J. GERESI
PAUL T. SORRENTINO
PAUL R. HOOVER
DAVID L. MURFIN
VINCENT J. VRANA
RODNEY JOE TRIZZA
NANCY MURFIN MOXLEY and
MARK A. MOXLEY
BARBARA MURFIN MURPHY
V. RICHARD HOOVER
BRENT E. DURHAM
JOHN R. GERESI
CHAD E. WATKINS
By:
-----------------------------------------------
As Attorney-in-Fact acting on behalf of each of
the Selling Stockholders named in Schedule II
to this Agreement.
Accepted as of the date hereof:
RAUSCHER PIERCE REFSNES, INC.
J.C. BRADFORD & CO.
By:
-------------------------------------
Rauscher Pierce Refsnes, Inc.
On behalf of each of the Underwriters
21
<PAGE>
SCHEDULE I
NUMBER OF
OPTIONAL
TOTAL SHARES TO BE
NUMBER OF PURCHASED IF
FIRM MAXIMUM
SHARES TO BE OPTION
UNDERWRITER PURCHASED EXERCISED
- ----------- --------- ---------
Rauscher Pierce Refsnes, Inc.. . . . . . . . .
J.C. Bradford & Co.. . . . . . . . . . . . . .
[Names of other Underwriters]. . . . . . . . .
----------- -----------
Total . . . . . . . . . . . . . . . . . 2,000,000 300,000
----------- -----------
----------- -----------
<PAGE>
SCHEDULE II
NUMBER OF
OPTIONAL
TOTAL SHARES TO BE
NUMBER OF PURCHASED IF
FIRM MAXIMUM
SHARES TO BE OPTION
UNDERWRITER PURCHASED EXERCISED
- ----------- --------- ---------
The Company 1,800,000 270,000
The Selling Stockholders:. . . . . . . . . . .
Robert J. Geresi (a). . . . . . . 48,000 6,500
Paul T. Sorrentino (a). . . . . . 48,000 6,500
Paul R. Hoover (a). . . . . . . . 5,000 1,500
David L. Murfin (a) . . . . . . . 33,000 5,500
Vincent J. Vrana (a). . . . . . . 44,000 6,500
Rodney Joe Trizza (a) . . . . . . 10,750 2,500
Nancy Murfin Moxley and Mark A.
Moxley. . . . . . . . . . . . . 2,500 -0-
Barbara Murfin Murphy . . . . . . 2,500 -0-
V. Richard Hoover . . . . . . . . 2,500 -0-
Brent E. Durham . . . . . . . . . 1,750 1,000
John R. Geresi. . . . . . . . . . 500 -0-
Chad E. Watkins . . . . . . . . . 1,500 -0-
----------- -----------
Total . . . . . . . . . . . . . . . . . 2,000,000 300,000
----------- -----------
----------- -----------
- ------------
(a) This Selling Stockholder is represented by Klenda, Mitchell, Austerman
& Zuercher, L.L.C. and has appointed Robert J. Geresi, Paul R. Hoover
and J. Chris Dennis, and each of them, as Attorneys-in-Fact for such
Selling Stockholder.
<PAGE>
ANNEX I
Pursuant to Section 7(f) of the Underwriting Agreement, KPMG Peat Marwick,
LLP shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable published
rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules audited (and, if applicable,
prospective financial statements and/or pro forma financial information
examined) by them and included in the Prospectus or the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, prospective financial statements and/or condensed financial
statements derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports thereon,
copies of which have been furnished to the representatives of the
Underwriters (the "Representatives");
(iii) On the basis of limited procedures, not constituting an audit
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company, inspection of the minute books of the Company
since the date of the latest audited financial statements included in the
Prospectus, inquiries of officials of the Company responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) any unaudited combined statements of income, combined
balance sheets and combined statements of cash flows as of dates or
for periods beginning after January 1, 1991 included in the Prospectus
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder, or are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with the basis for the audited combined statements of
income, combined balance sheets and combined statements of cash flows
included in the Prospectus;
(B) any other unaudited income statement data and balance sheet
items for the periods or as of the dates referred to in Clause (A)
above included in the Prospectus do not agree with the corresponding
items in the unaudited combined financial statements from which such
data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited combined financial
statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the
<PAGE>
Prospectus but from which were derived any unaudited condensed
financial statements as of dates or for periods beginning after
January 1, 1991 and any unaudited income statement data and balance
sheet items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with the basis
for the audited combined financial statements included in the
Prospectus;
(D) any unaudited pro forma combined condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the combined
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the combined long-term
debt of the Company, or any decreases in consolidated net current
assets or net assets or other items specified by the Representatives
or any increases in any items specified by the Representatives, in
each case as compared with amounts shown in the latest balance sheet
included in the Prospectus; except in each case for changes, increases
or decreases which the Prospectus discloses have occurred or may occur
or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in combined net revenues or
operating profit or the total or per share amounts of combined net
income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(iv) In addition to the audit referred to in their report(s) included
in the Prospectus and the limited procedures, inspection of minute books,
inquiries and other procedures referred to in paragraph (iii) above, they
have carried out certain specified procedures, not constituting an audit in
accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records of
the Company, which appear in the Prospectus, or in Part II of, or in
exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and have
found them to be in agreement.
<PAGE>
EXHIBIT 23.1
CONSENT OF KLENDA, MITCHELL, AUSTERMAN & ZUERCHER, L.L.C.
The Board of Directors
New York Bagel Enterprises, Inc.
We hereby consent to the use in this Registration Statement on Form S-1 of
the references made to our firm herein, in particular to the section captioned
"Legal Matters."
/s/ Klenda, Mitchell, Austerman & Zuercher, L.L.C.
Wichita, Kansas
August 2, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
New York Bagel Enterprises, Inc.:
We consent to the use of our reports relating to the 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, 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,
and the statements of operations, stockholders' deficit, and cash flows of
Central & Ridge Yogurt, Inc. for the year ended December 31, 1995, included
herein and to the references to our firm under the headings "Selected Combined
Financial Data" and "Experts" in the prospectus.
Our report relating to our audits of Nashville Bagel Co., Inc. refers to a
change in the method of accounting for income taxes in 1994.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Wichita, Kansas
August 2, 1996
