<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 29, 1997
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-21205
NEW YORK BAGEL ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Kansas 73-1369185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 I.M.A. Plaza
250 North Water Street
Wichita, Kansas 67202-1213
(Address of principal executive offices and zip code)
(316) 267-7373
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
As of August 9, 1997, there were 4,667,500 shares of the Registrant's Common
Stock outstanding.
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NEW YORK BAGEL ENTERPRISES, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets at June 29, 1997
and December 29, 1996 3
Unaudited Consolidated Statements of Operations for the
Twenty-Six Weeks and Thirteen Weeks Ended
June 29, 1997 and June 30, 1996 4
Unaudited Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended June 29, 1997
and June 30, 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibit 27 - Financial Data Schedule
(b) Report on Form 8-K/A. An amendment to the current
report filed with respect to the acquisition of
Lots A' Bagels, Inc. was filed on July 31, 1997
SIGNATURES 17
2
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 29, 1997 AND DECEMBER 29, 1996
June 29, December 29,
Assets 1997 1996(a)
------ ----------- -----------
(Unaudited)
Cash and cash equivalents $ 111,646 $ 1,305,130
Investment securities available for sale 1,244,140 4,265,862
Accounts receivable 431,448 315,293
Note receivable 253,388 --
Inventories, raw materials 301,809 272,261
Deferred costs 209,152 239,269
Income tax receivable 150,991 87,783
Prepaid expenses 142,914 120,145
----------- -----------
Total current assets 2,845,488 6,605,743
Property, plant and equipment, net 10,970,515 7,616,344
Goodwill, net of accumulated amortization of
$48,748 and $26,341 at June 29, 1997 and
December 29, 1996, respectively 1,236,404 806,016
Other assets 265,186 145,118
----------- -----------
$15,317,593 $15,173,221
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current installments of long-term debt $ 28,750 $ 28,750
Accounts payable 307,523 515,206
Accrued payroll and benefits 256,979 220,182
Accrued liabilities 252,482 262,113
Deferred income taxes 74,320 56,808
Current portion of deferred franchise fees 41,000 61,000
Distributions payable -- 164,194
----------- -----------
Total current liabilities 961,054 1,308,253
Long-term debt, less current installments 57,500 57,500
Deferred franchise fees 15,000 34,000
Deferred rents payable 81,638 72,035
Deferred income taxes 58,000 26,600
----------- -----------
Total liabilities 1,173,192 1,498,388
----------- -----------
Stockholders' equity:
Class A common stock, $.01 par value.
Authorized 30,000,000 shares; issued
and outstanding 4,667,500 shares. 46,675 46,675
Additional paid in capital 13,390,769 13,390,769
Retained earnings 706,957 237,389
----------- -----------
Total stockholders' equity 14,144,401 13,674,833
----------- -----------
$15,317,593 $15,173,221
=========== ===========
(a) The balance sheet at December 29, 1996 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to unaudited consolidated financial statements.
3
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NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-SIX WEEKS AND THIRTEEN WEEKS ENDED
JUNE 29, 1997 AND JUNE 30, 1996
(Unaudited)
<TABLE>
Twenty-Six Thirteen Weeks
Weeks Ended Ended
----------------------- ------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants $9,004,747 $4,849,860 $4,715,145 $2,630,445
Franchise revenues 289,070 339,733 104,023 170,423
---------- ---------- ---------- ----------
Total revenues 9,293,817 5,189,593 4,819,168 2,800,868
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 2,870,752 1,733,312 1,506,978 920,082
Restaurant operating expenses 4,461,306 2,201,632 2,360,233 1,241,948
General and administrative expenses 713,883 401,883 344,124 194,558
Depreciation and amortization 580,872 177,213 300,923 106,250
---------- ---------- ---------- ----------
Total costs and expenses 8,626,813 4,514,040 4,512,258 2,462,838
---------- ---------- ---------- ----------
Operating income 667,004 675,553 306,910 338,030
Interest income (expense), net 95,285 (163,064) 34,643 (85,939)
---------- ---------- ---------- ----------
Earnings before income taxes 762,289 512,489 341,553 252,091
Income tax expense (Note 3) 292,721 -- 131,040 --
---------- ---------- ---------- ----------
Net earnings $ 469,568 $ 512,489 $ 210,513 $ 252,091
========== ========== ========== ==========
Earnings per share (Note 4) $ 0.10 $ 0.10 $ 0.05 $ 0.05
Weighted average number of shares
outstanding (Note 4) 4,667,500 3,018,538 4,667,500 3,018,538
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
(Unaudited)
Twenty-Six Weeks Ended
------------------------
June 29, June 30,
1997 1996
----------- -----------
Cash flows from operating activities:
Net earnings $ 469,568 $ 512,489
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 580,872 177,213
Increase (decrease) in cash resulting from
changes in listed items, net of effects from
acquisitions:
Deferred income taxes 48,912 --
Inventory (18,470) 4,816
Income taxes receivable (63,208) --
Prepaid expenses (18,876) (53,361)
Accounts receivable (116,155) (53,740)
Deferred costs (117,443) (166,281)
Other assets (106,690) (6,443)
Accounts payable (207,683) 305,725
Accrued liabilities, accrued payroll and benefits,
and deferred rents payable 36,065 413,695
Deferred franchise fees (39,000) (89,500)
----------- -----------
Net cash provided by operating activities 447,892 1,044,613
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (3,427,372) (1,179,839)
Acquisitions, net of cash acquired (818,144) --
Purchase of investment securities available
for sale (7,244,552) --
Proceeds from sales and maturities of investment
securities available for sale 10,266,274 --
Note receivable (253,388) --
----------- -----------
Net cash used in investing activities (1,477,182) (1,179,839)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 800,000
Principal payments on long-term debt -- (235,253)
Decrease in distributions payable (164,194) --
Deferred offering costs -- (355,492)
----------- -----------
Net cash provided by (used in) financing
activities (164,194) 209,255
----------- -----------
Net increase (decrease) in cash (1,193,484) 74,029
Cash at beginning of period 1,305,130 133,425
----------- -----------
Cash at end of period $ 111,646 $ 207,454
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
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NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
The Company owns and franchises New York Bagel and Lots A' Bagels
restaurants that provide a wide variety of bagels that are made from scratch,
boiled and baked in the traditional New York style. Breakfast menu items
include a wide variety of bagels and custom-blended cream cheeses, gourmet
coffees, muffins and croissants. Lunch and dinner items include an assortment
of bagel delicatessen sandwiches, prepared salads, cookies and soft drinks. As
of June 29, 1997, the Company has 39 Company-owned restaurants primarily located
in Oklahoma, Kansas, Colorado and Tennessee and 31 franchised restaurants
located throughout the United States. As of June 30, 1996, the Company had 20
Company-owned and 30 franchised restaurants.
Effective January 1, 1996, the Company elected to change its fiscal year
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. Effective August 27, 1996
the Company completed an initial public offering in which it sold 1,867,500
shares of its Class A common stock and realized net proceeds of $14,679,032.
(2) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are for
interim periods and consequently, do not include all disclosures required by
generally accepted accounting principles for annual financial statements. It is
suggested that the accompanying consolidated financial statements be read in
conjunction with the annual financial statements included in the Company's 1996
Form 10-K. In the opinion of management of the Company, the financial
statements reflect all adjustments (all of which were of a normal recurring
nature) necessary to present fairly the financial position of the Company and
the results of operations and cash flows for the interim periods.
(3) NOTE RECEIVABLE
Effective June 6, 1997, the Company acquired substantially all of the
assets and business operations of Rocky Mountain Bagel Company, Inc.,
principally a retail bagel restaurant located in Aurora, Colorado, for $387,500.
The acquisition was made in anticipation of selling such business operations to
an existing franchisee of the Company. On June 27, 1997, the Company sold such
assets and business operations to a franchisee. No gain or loss was recorded on
the sale. Proceeds from the sale included a 30-day promissory note receivable
from the franchisee. The note receivable balance, plus accrued interest, was
paid on July 31, 1997.
6
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NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) INCOME TAXES
Prior to the Company's initial public offering, the Company operated as an
S corporation, and accordingly, income tax expense or benefit was not recorded
in the accompanying financial statements for the twenty-six weeks and thirteen-
weeks ended June 30, 1996 as the Company's results of operations were reported
to the Company's stockholders for inclusion in their individual income tax
returns. Effective August 26, 1996 (Termination Date) and in connection with
the initial public offering, the Company terminated it's S corporation status.
Income tax expense has been provided for all periods subsequent to August 26,
1996.
(5) EARNINGS PER SHARE
Earnings per share for the twenty-six weeks and thirteen weeks ended June
30, 1996 is calculated based on net earnings less pro forma income tax expense.
Pro forma income tax expense ($201,112 and $96,953 for the twenty-six weeks and
thirteen-weeks ended June 30, 1996, respectively) reflects what income tax
expense would have been if the Company had not operated as an S corporation
during such periods.
Weighted average common shares outstanding have been determined as follows:
<TABLE>
Twenty-Six Weeks
and Thirteen Weeks
Ended
June 29, June 30,
1997 1996
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding 4,667,500 2,785,692
Shares issued during 12-month period prior to initial
filing of the registration statement at price per share
below initial public offering price -- 14,308
Pro forma number of shares which proceeds would be
sufficient (based upon the net initial public offering
price) to replace the excess of distributions to stockholders
over net earnings for the year ended December 31, 1995 -- 218,538
--------- ---------
4,667,500 3,018,538
========= =========
</TABLE>
7
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NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) ACQUISITIONS
Effective December 6, 1996, the Company purchased substantially all of the
operating assets and business operations and assumed certain liabilities of Lots
A' Bagels, Inc. for an initial cash payment of $2,100,000. In addition, certain
contingent consideration was to be paid as additional purchase price based on
Lots A' Bagels, Inc.'s earnings (as defined in the purchase agreement) for the
period July 1, 1996 through March 30, 1997. The acquisition was accounted for
by the purchase method of accounting in December 1996. On July 17, 1997, the
Company paid $515,000 as full payment of the contingent consideration, which was
recorded as additional goodwill at that time. Accordingly, such goodwill is not
reflected in the accompanying June 29, 1997 consolidated financial statements.
Effective February 28, 1997, the Company purchased substantially all of the
operating assets and business operations of Bagel Buds, Inc. for $415,000. The
acquisition has been accounted for by the purchase method of accounting and,
accordingly, the operations of Bagel Buds, Inc. have been included in the
accompanying statements of operations subsequent to February 28, 1997. The
initial purchase price has been allocated to the assets acquired based on their
estimated fair values at date of acquisition. Goodwill as of June 29, 1997
arising from the acquisition amounted to $250,000. The effect of the acquired
operations on revenues, net earnings and earnings per share for the twenty-six
weeks and thirteen weeks ended June 29, 1997 is not material. Pro forma
disclosures have been omitted due to immateriality.
Effective May 9, 1997, the Company purchased substantially all of the
operating assets and business operations of M.Y. Bagel Shop, Inc. for $323,000.
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the operations of M.Y. Bagel Shop, Inc. have been included in the
accompanying statements of operations subsequent to May 9, 1997. The initial
purchase price has been allocated to the assets acquired based on their
estimated fair values at date of acquisition. Goodwill as of June 29, 1997
arising from the acquisition amounted to $143,000. The effect of the acquired
operations on revenues, net earnings and earnings per share for the twenty-six
weeks and thirteen weeks ended June 29, 1997 is not material. Pro forma
disclosures have been omitted due to immateriality.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING,
WITHOUT LIMITATION, RISKS ASSOCIATED WITH THE COMPANY'S ABILITY TO SUCCESSFULLY
AND TIMELY INTEGRATE THE LOTS A' BAGELS RESTAURANTS AND BAGEL COMMISSARY AND
CERTAIN ACQUIRED FRANCHISED RESTAURANTS, THE COMPANY'S ABILITY TO DEVELOP,
CONSTRUCT, ACQUIRE OR FRANCHISE ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE
COMPANY'S DEVELOPMENT SCHEDULE, MANAGEMENT OF QUARTER TO QUARTER EARNINGS AND
INCREASES IN OPERATING COSTS. THESE RISKS ARE SET FORTH IN THE RISK FACTORS
SECTION OF THE COMPANY'S FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 29, 1996.
UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY
THE SECURITIES EXCHANGE ACT OF 1934.
OVERVIEW
The Company opened its first restaurant in 1986, and has developed, as of
June 29, 1997, 26 of its 39 Company-owned restaurants in Oklahoma, Kansas,
Tennessee, Texas, New Mexico and Missouri. In addition to developing new
restaurants, the Company has acquired one bagel restaurant in Tennessee, seven
Lots A' Bagels restaurants in Colorado and five franchised New York Bagel
restaurants in Kansas, New Mexico and Texas. The Company commenced franchising
the New York Bagel concept in 1993 and, at June 29, 1997 has 18 franchisees
operating 31 restaurants.
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.
Cost of sales include 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.
9
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RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
operating statement data to total revenues, except as otherwise indicated:
Twenty-Six Weeks Thirteen Weeks
Ended Ended
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------ ------ ----- ------
Revenues:
Sales from Company-owned restaurants 96.9% 93.5% 97.8% 93.9%
Franchise revenues 3.1 6.5 2.2 6.1
------ ------ ----- ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales (1) 31.9% 35.7% 32.0% 35.0%
Restaurant operating expenses (1) 49.5 45.4 50.0 47.2
General and administrative expenses 7.7 7.7 7.1 6.9
Depreciation and amortization 6.2 3.4 6.2 3.8
Operating income 7.2 13.0 6.4 12.1
Interest income (expense), net 1.0 (3.1) 0.7 (3.1)
Income tax expense 3.2 3.9 (2) 2.7 3.5 (2)
Net earnings 5.1 6.0 4.4 5.5
- ------------------------------------
(1) As a percentage of sales from Company-owned restaurants.
(2) Includes pro forma income tax expense.
THIRTEEN WEEKS ENDED JUNE 29, 1997
COMPARED TO THIRTEEN WEEKS ENDED JUNE 30, 1996
Total revenues increased by $2.0 million, or 72.1%, to $4.8 million for
the period ended June 29, 1997 compared to $2.8 million for the period ended
June 30, 1996, primarily due to an increase in the number of Company-owned
restaurants open.
Sales from Company-owned restaurants increased $2.1 million, or 79.3%,
to $4.7 million for the period ended June 29, 1997 compared to $2.6 million
for the period ended June 30, 1996. This increase is largely the result of
opening eight additional Company-owned restaurants and the acquisition of
eleven bagel restaurants during the period subsequent to June 30, 1996. At
June 29, 1997, the Company had 39 Company-owned restaurants compared to 20
restaurants at June 30, 1996.
Franchise revenues decreased by $66,000, or 39.0%, to $104,000 for the
period ended June 29, 1997 compared to $170,000 for the period ended June 30,
1996. The decrease in franchise revenues is due to a decrease in initial
franchise fees and royalty revenues of $25,000 and $41,000, respectively.
The decrease in initial franchise fees is due to the opening of two franchise
restaurants
10
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during the period ended June 29, 1997 compared to recognition of initial fees
related to four franchise restaurants for the period ended June 30, 1996.
The decrease in royalty revenues is due to the discontinuance of royalty
revenue recognition on certain franchise restaurants due to collectibility
concerns. At June 29, 1997, there were 31 franchised restaurants compared to
30 restaurants at June 30, 1996.
Cost of sales increased by $587,000, or 63.8%, to $1.5 million for the
period ended June 29, 1997 compared to $920,000 for the period ended June 30,
1996, 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 32.0% for the period ended June 29, 1997 from 35.0% for
the period ended June 30, 1996, primarily as a result of purchasing and
operating efficiencies experienced in 1997, and, to a lesser extent, modest
price increases taken during late 1996. Prices of the Company's commodities
(meat and cheese, flour and other bakery ingredients) have generally remained
fairly stable during the comparable periods.
Restaurant operating expenses increased by $1.1 million, or 90.0%, to
$2.4 million for the period ended June 29, 1997 compared to $1.2 million for
the period ended June 30, 1996, primarily due to the increase in
Company-owned restaurant sales discussed above. As a percentage of
Company-owned restaurant sales, restaurant operating expenses increased to
50.0% for the period ended June 29, 1997 from 47.2% for the period ended June
30, 1996. Such increase is primarily due to: (i) the acquisition of Lots A'
Bagels, Inc. and (ii) increased occupancy costs. The seven Lots A' Bagels
restaurants in Colorado Springs, Colorado traditionally experience increased
restaurant operating expenses primarily due to higher labor and occupancy
costs, and increased direct advertising costs. As Lots A' Bagels, Inc. was
acquired in December 1996, such traditionally higher restaurant operating
expenses are not reflected in the period ended June 30, 1996. Occupancy
costs, as a percent of net sales, have increased due to the operating and
leasing of new restaurant sites in new markets in which sales volumes have
not yet matured.
General and administrative expenses increased by $150,000, or 76.9%, to
$344,000 for the period ended June 29, 1997 compared to $195,000 for the
period ended June 30, 1996. This increase is primarily attributable to the
growth in Company-owned restaurants. As a percentage of total revenues,
general and administrative expenses of 7.1% for the period ended June 29,
1997 is very comparable to 6.9% for the period ended June 30, 1996.
Depreciation and amortization increased by $195,000 or 183.2%, to
$301,000 for the period ended June 29, 1997 compared to $106,000 for the
period ended June 30, 1996. As a percentage of total revenues, depreciation
and amortization increased to 6.2% for the period ended June 29, 1997 from
3.8% for the period ended June 30, 1996. This increase is primarily the
result of the significant addition of capital expenditures to develop and
acquire additional Company-owned restaurants as well as pre-opening costs
amortization on new restaurant development for the period subsequent to June
30, 1996. New restaurants incur higher depreciation and amortization costs
as compared to older restaurants. Such costs are typically highest during the
initial twelve months of operation when pre-opening costs are amortized. The
increase in depreciation and amortization coupled with the decrease in
franchise revenues as discussed previously are the primary reasons
11
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operating income, in dollars, has remained consistent even though total
revenues have increased 72.1%.
Net interest income increased by $121,000 to $35,000 for the period
ended June 29, 1997 compared to net interest expense of $86,000 for the
period ended June 30, 1996. This increase in net interest income is the
result of interest income earned during 1997 from the remaining net proceeds
of the Company's initial public offering. In addition, virtually all
existing debt was retired with these proceeds.
TWENTY-SIX WEEKS ENDED JUNE 29, 1997
COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 30, 1996
Total revenues increased by $4.1 million, or 79.1%, to $9.3 million for
the period ended June 29, 1997 compared to $5.2 million for the period ended
June 30, 1996, primarily due to an increase in the number of Company-owned
restaurants open.
Sales from Company-owned restaurants increased $4.2 million, or 85.7%,
to $9.0 million for the period ended June 29, 1997 compared to $4.8 million
for the period ended June 30, 1996. This increase is largely the result of
opening eight additional Company-owned restaurants and the acquisition of
eleven bagel restaurants during the period subsequent to June 30, 1996. At
June 29, 1997, the Company had 39 Company-owned restaurants compared to 20
restaurants at June 30, 1996.
Franchise revenues decreased by $51,000, or 14.9%, to $289,000 for the
period ended June 29, 1997 compared to $340,000 for the period ended June 30,
1996. The decrease in franchise revenues is due to a decrease in royalty
revenues. Royalty revenues have decreased due to the discontinuance of
royalty revenue recognition on certain franchise restaurants due to
collectibility concerns. At June 29, 1997, there were 31 franchised
restaurants compared to 30 restaurants at June 30, 1996.
Cost of sales increased by $1.1 million, or 65.6%, to $2.9 million for
the period ended June 29, 1997 compared to $1.7 million for the period ended
June 30, 1996, 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 31.9% for the period ended June 29, 1997 from
35.7% for the period ended June 30, 1996, primarily as a result of purchasing
and operating efficiencies experienced in 1997, and, to a lesser extent,
modest price increases taken during late 1996. Prices of the Company's
commodities (meat and cheese, flour and other bakery ingredients) have
generally remained fairly stable during the comparable periods.
Restaurant operating expenses increased by $2.3 million, or 102.6%, to
$4.5 million for the period ended June 29, 1997 compared to $2.2 million for
the period ended June 30, 1996, primarily due to the increase in
Company-owned restaurant sales discussed above. As a percentage of
Company-owned restaurant sales, restaurant operating expenses increased to
49.5% for the period
12
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ended June 29, 1997 from 45.4% for the period ended June 30, 1996. Such
increase is primarily due to: (i) the acquisition of Lots A' Bagels, Inc.;
(ii) increased occupancy costs; and (iii) national advertising contribution.
The seven Lots A' Bagels restaurants in Colorado Springs, Colorado
traditionally experience increased restaurant operating expenses primarily
due to higher labor and occupancy costs, and increased direct advertising
costs. As Lots A' Bagels, Inc. was acquired in December 1996, such
traditionally higher restaurant operating expenses are not reflected in the
period ended June 30, 1996. Occupancy costs, as a percent of net sales, have
increased due to the operating and leasing of new restaurant sites in new
markets in which sales volumes have not yet matured. The National
Advertising Fund was created in April 1996 at which time the Company began
contributing 0.5% of net sales as advertising expense which was not apparent
for the full period ended June 30, 1996.
General and administrative expenses increased by $312,000, or 77.6%, to
$714,000 for the period ended June 29, 1997 compared to $402,000 for the
period ended June 30, 1996. This increase is primarily attributable to the
growth in Company-owned restaurants. As a percentage of total revenues,
general and administrative expenses have remained consistent at 7.7% for the
periods ended June 29, 1997 and June 30, 1996, respectively.
Depreciation and amortization increased by $404,000 or 227.8%, to
$581,000 for the period ended June 29, 1997 compared to $177,000 for the
period ended June 30, 1996. As a percentage of total revenues, depreciation
and amortization increased to 6.2% for the period ended June 29, 1997 from
3.4% for the period ended June 30, 1996. This increase is primarily the
result of the significant addition of capital expenditures to develop and
acquire additional Company-owned restaurants as well as pre-opening costs
amortization on new restaurant development for the period subsequent to June
30, 1996. New restaurants incur higher depreciation and amortization costs
as compared to older restaurants. Such costs are typically highest during the
initial twelve months of operation when pre-opening costs are amortized. The
increase in depreciation and amortization coupled with the decrease in
franchise revenues as discussed previously are the primary reasons operating
income, in dollars, has remained consistent even though total revenues have
increased 79.1%.
Net interest income increased by $258,000 to $95,000 for the period
ended June 29, 1997 compared to net interest expense of $163,000 for the
period ended June 30, 1996. This increase in net interest income is the
result of interest income earned during 1997 from the remaining net proceeds
of the Company's initial public offering. In addition, virtually all
existing debt was retired with these proceeds.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 128,
EARNINGS PER SHARE (Statement 128) which replaces the current accounting
standard regarding computation of earnings per share. Statement 128 requires
a dual presentation of basic earnings per share (based on the weighted
average number of common shares outstanding) and diluted earnings per share
which
13
<PAGE>
reflects the potential dilution that could occur if contracts to issue
securities (such as stock options) were exercised. Statement 128 is
effective for financial statements issued for periods ending after December
15, 1997. The Company believes that adoption of Statement 128 will not have
a material effect on the earnings per share amounts for the periods ended
June 29, 1997 and June 30, 1996 as presented in the accompanying unaudited
consolidated financial statements.
In April 1997, the American Institute of Certified Public Accountants
issued a proposed Statement of Position (SOP) REPORTING ON THE COSTS OF
START-UP ACTIVITIES. The proposed SOP requires that entities expense costs
of start-up activities as they are incurred. The proposed SOP, if adopted,
would be effective for financial statements for fiscal years beginning after
December 15, 1997, with earlier application encouraged. The initial
application of the SOP is to be reported as a cumulative effect of a change
in accounting principle. The Company currently capitalizes restaurant
pre-opening costs and amortizes such costs over the initial twelve months of
a restaurant's operations. Pre-opening costs capitalized, net of accumulated
amortization, at June 29, 1997 are $188,000. While the one-time recording of
the cumulative effect of the change in accounting principle could be
material, the ongoing effect of the proposed new accounting principle would
be dependent upon the number and timing of new restaurants opened.
Generally, pre-opening costs would be recognized during the approximate
60-day period prior to a restaurant commencing operation under the proposed
new accounting principle versus over the twelve months subsequent to
commencing operation under the existing principle.
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 $4.2 million and
$1.2 million for the twenty-six weeks ended June 29, 1997 and June 30, 1996,
respectively. The Company has funded its capital expenditures with proceeds
from its initial public offering and cash flows from operating activities.
Cash flows from operating activities were $448,000 and $1,045,000 for the
periods ended June 29, 1997 and June 30, 1996, respectively.
Effective August 27, 1996 the Company completed the initial public
offering of its common stock in which it sold 1,867,500 shares of its Class A
common stock and received net proceeds of $14,679,032. Approximately $4.5
million of the net proceeds were used to retire all outstanding bank
indebtedness. In addition, the Company distributed $156,000 on March 4, 1997
to the stockholders existing prior to its initial public offering in
connection with their estimated federal and state income tax obligations
attributable to the Company's 1996 earnings prior to the Termination Date.
Based on its contemplated expansion plans, the Company estimates that
its remaining capital expenditures will be approximately $2.0 million in
1997. This estimate includes the estimated costs of developing and acquiring
new Company-owned restaurants. The Company anticipates that the net proceeds
from the Company's initial public offering will be fully utilized during the
third quarter of 1997.
14
<PAGE>
In June 1997, the Company entered into a commitment with NationsBank,
N.A. (the "Bank") concerning a $10.0 million credit facility. The credit
facility is anticipated to provide funding for the Company's various
corporate activities, including real estate and equipment financing for new
and existing restaurants, acquisitions funding and short term working capital
needs. The credit facility is anticipated to be a variable rate that bears
interest at the Bank's then prime rate, mature during November 1998 and
contain certain financial and other restrictive covenants. The credit
facility is anticipated to be secured by substantially all of the assets of
the Company. The Company is currently negotiating definitive credit facility
documents, even though there can be no assurances that such transaction will
be completed. As of June 29, 1997, there were no funds drawn on such credit
facility.
FINANCIAL CONDITION
As of June 29, 1997, total assets are consistent with total assets as of
December 29, 1996. Cash and cash equivalents and investment securities
available for sale combined have decreased $4.2 million due to capital
expenditures of $4.2 million as the Company continues to utilize proceeds
from its initial public offering to develop and acquire Company-owned
restaurants. Note receivable at June 29, 1997 is a short-term promissory note
due from a franchisee that was paid July 31, 1997 (see note 3 to the
unaudited consolidated financial statements).
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of stockholders was held on
May 21, 1997.
(b) The directors elected at the meeting were:
For Against Withheld
--- ------- --------
William S. Atherton 3,598,552 --- 21,233
William J. Walsh, Jr. 3,596,485 --- 23,300
(c) Other matters voted upon at the meeting and the results of those
votes were as follows:
For Against Withheld
--- ------- --------
Approval of the Amendment
to the New York Bagel
Enterprises, Inc. 1996
Incentive Plan 3,306,550 256,165 23,553
Selection of KPMG Peat
Marwick LLP as
independent auditors 3,588,402 20,050 11,333
The foregoing matters are described in detail in the Company's proxy statement
dated March 31, 1997 for the 1997 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) Report on Form 8-K/A. An amendment to the current report filed
with respect to the acquisition of Lots A' Bagels, Inc. was filed
on July 31, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 13th day of August, 1997.
NEW YORK BAGEL ENTERPRISES, INC.
By: /s/ ROBERT J. GERESI
------------------------------------
Robert J. Geresi
Chief Executive Officer
and President
By: /s/ JON H. CRAMER
------------------------------------
Jon H. Cramer
Chief Financial Officer,
Secretary and Treasurer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR
THE TWENTY-SIX WEEK PERIOD ENDED JUNE 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 111,646
<SECURITIES> 1,244,140
<RECEIVABLES> 473,811
<ALLOWANCES> (42,363)
<INVENTORY> 301,809
<CURRENT-ASSETS> 2,797,488
<PP&E> 12,263,866
<DEPRECIATION> (1,293,351)
<TOTAL-ASSETS> 15,269,593
<CURRENT-LIABILITIES> 921,054
<BONDS> 57,500
0
0
<COMMON> 46,675
<OTHER-SE> 14,097,726
<TOTAL-LIABILITY-AND-EQUITY> 15,269,593
<SALES> 9,004,747
<TOTAL-REVENUES> 9,293,817
<CGS> 2,870,752
<TOTAL-COSTS> 8,626,813
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,163
<INTEREST-EXPENSE> (95,285)
<INCOME-PRETAX> 762,289
<INCOME-TAX> 292,721
<INCOME-CONTINUING> 469,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469,568
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
