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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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 28, 1998
[ ] 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 12, 1998, there were 4,657,100 shares of the Registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
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NEW YORK BAGEL ENTERPRISES, INC.
INDEX
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Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets at June 28, 1998
and December 28, 1997 3
Unaudited Consolidated Statements of Operations for the
Twenty-Six Weeks and Thirteen Weeks Ended
June 28, 1998 and June 29, 1997 4
Unaudited Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended June 28, 1998
and June 29, 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits 17
SIGNATURES 18
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1998 AND DECEMBER 28, 1997
<TABLE>
June 28, December 28,
Assets 1998 1997 (a)
---------- ------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 29,972 $ 872,949
Accounts receivable 228,887 171,068
Inventories 430,152 349,937
Income tax receivable 180,484 484,957
Prepaid expenses and other current assets 164,740 169,156
Property and equipment available for sale 79,055 193,256
------------ ------------
Total current assets 1,113,290 2,241,323
Property and equipment, net 9,505,486 10,281,696
Goodwill, net 1,195,716 1,220,441
Other assets 248,749 357,001
------------ ------------
Total assets $ 12,063,241 $ 14,100,461
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current installments on long-term debt $ 1,845,415 $ 2,490,858
Accounts payable 863,388 715,453
Accrued payroll and benefits 295,429 292,321
Accrued liabilities 448,100 539,143
Current portion of deferred franchise fees 17,000 35,000
------------ ------------
Total current liabilities 3,469,332 4,072,775
Long-term debt, less current installments 28,750 28,750
Deferred rents payable 107,441 99,201
Other liabilities 69,119 133,724
------------ ------------
Total liabilities 3,674,642 4,334,450
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
Accumulated deficit (5,030,871) (3,671,433)
Treasury stock, at cost, 10,400 shares at
June 28, 1998 (17,974) -
------------ ------------
Total stockholders' equity 8,388,599 9,766,011
------------ ------------
Total liabilities and stockholders' equity $ 12,063,241 $ 14,100,461
------------ ------------
------------ ------------
(a) The balance sheet at December 28, 1997 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.
</TABLE>
3
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NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-SIX WEEKS AND THIRTEEN WEEKS ENDED
JUNE 28, 1998 AND JUNE 29, 1997
(Unaudited)
<TABLE>
Twenty-Six Thirteen Weeks
Weeks Ended Ended
June 28, June 29, June 28, June 29,
1998 1997(a) 1998 1997(a)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants $ 9,883,348 $9,004,747 $5,121,661 $4,715,145
Franchise revenues 97,265 289,070 17,337 104,023
----------- ---------- ---------- ----------
Total revenues 9,980,613 9,293,817 5,138,998 4,819,168
Costs and expenses:
Cost of sales 3,398,805 2,870,752 1,777,432 1,506,978
Restaurant operating expenses 5,526,815 4,612,203 2,868,242 2,471,632
General and administrative expenses 737,349 713,883 347,097 344,124
Depreciation and amortization 500,138 433,312 247,616 242,016
Provision for impairments and closures 1,105,725 - - -
----------- ---------- ---------- ----------
Total costs and expenses 11,268,832 8,630,150 5,240,387 4,564,750
Operating income (loss) (1,288,219) 663,667 (101,389) 254,418
Interest income (expense), net (71,219) 95,285 (35,603) 34,643
----------- ---------- ---------- ----------
Earnings (loss) before income taxes (1,359,438) 758,952 (136,992) 289,061
Income tax expense - 291,437 - 110,831
----------- ---------- ---------- ----------
Earnings (loss) before cumulative
effect of accounting change (1,359,438) 467,515 (136,992) 178,230
Cumulative effect of accounting change, net
of income tax benefit of $80,782 - (129,041) - -
----------- ---------- ---------- ----------
Net earnings (loss) $(1,359,438) $ 338,474 $ (136,992) $ 178,230
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Earnings (loss) per share - basic and diluted:
Earnings (loss) before cumulative effect
of accounting change $ (0.29) $ 0.10 $ (0.03) $ 0.04
Cumulative effect of accounting change - (0.03) - -
----------- ---------- ---------- ----------
Net earnings (loss) $ (0.29) $ 0.07 $ (0.03) $ 0.04
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average number of shares
outstanding-basic and diluted 4,660,426 4,667,500 4,657,100 4,667,500
(a) As restated for the change in accounting principle. See Note 3.
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
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NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY- SIX WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997
<TABLE>
Twenty-Six Weeks
Ended
June 28, June 29,
1998 1997 (a)
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,359,438) $ 338,474
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 500,138 433,312
Provision for impairments and closures 1,105,725 -
Cumulative effect of accounting change, net of
income tax benefit - 129,041
Increase (decrease) in cash resulting from changes
in listed items, net of effect from acquisitions:
Deferred income taxes - 48,912
Inventory (80,215) (18,470)
Income taxes receivable 304,473 (64,492)
Property and equipment available for sale 114,201 -
Prepaid expenses and other current assets 4,415 14,578
Accounts receivable (57,819) (116,155)
Other assets 108,252 (106,690)
Accounts payable 147,936 (207,683)
Accrued liabilities and other liabilities (144,300) 36,065
Deferred franchise fees (18,000) (39,000)
----------- -----------
Net cash provided by operating activities 625,368 447,892
Cash flows from investing activities:
Additions to property, plant and equipment (1,604,928) (3,427,372)
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)
Proceeds from sale-leaseback transactions 800,000 -
----------- -----------
Net cash used in investing activities (804,928) (1,477,182)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 560,000 -
Principal payments on long-term debt (1,205,443) -
Decrease in distributions payable - (164,194)
Purchase of treasury stock (17,974) -
----------- -----------
Net cash used in financing activities (663,417) (164,194)
----------- -----------
Net decrease in cash (842,977) (1,193,484)
Cash at beginning of period 872,949 1,305,130
----------- -----------
Cash at end of period $ 29,972 $ 111,646
----------- -----------
----------- -----------
(a) As restated for the change in accounting principle. See Note 3.
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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 28, 1998, the Company has 45 Company-
owned restaurants primarily located in Oklahoma, Kansas, Colorado, Texas
and Tennessee and 24 franchised restaurants located throughout the United
States.
(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 unaudited consolidated financial
statements be read in conjunction with the annual consolidated financial
statements included in the Company's 1997 Form 10-K for the period ended
December 28, 1997. In the opinion of management of the Company, the
accompanying unaudited consolidated financial statements reflect all
adjustments (all of which were of a normal recurring nature) necessary to
present fairly the consolidated financial position of the Company and the
results of its operations and its cash flows for the interim periods. The
results of the interim period are not necessarily indicative of the results
of the full year.
(3) CHANGE IN ACCOUNTING PRINCIPLE
Effective September 28, 1997, the Company changed its accounting policy on
restaurant preopening costs. In prior periods, the Company initially
capitalized and then amortized pre-opening cost over the initial 12-months
of a restaurant's operation. Under the new method, the Company expenses
such restaurant pre-opening costs as incurred. Management believes the
change is preferable to obtain a better matching of expenses with revenues.
The effect of adopting the accounting change on earnings (loss) before
cumulative effect of accounting change, net earnings (loss), and net
earnings (loss) per share for the twenty-six weeks ended June 29, 1997 is
to decrease such amounts $(2,053), ($131,094) and ($0.03), respectively.
The effect of adopting the accounting change on earnings (loss) before
cumulative effect of accounting change, net earnings (loss), and net
earnings (loss) per share for the thirteen weeks ended June 29, 1997 is to
decrease such amounts by ($32,000), ($32,000) and ($0.01), respectively.
The change is considered a cumulative effect-type accounting change and,
accordingly, the cumulative effect as of the beginning of fiscal 1997 has
been reported in the accompanying unaudited consolidated financial
statement of operations for the twenty-six week period ended June 29, 1997.
The accompanying unaudited consolidated financial statements for the
twenty-six weeks ended June 29, 1997 have been restated to reflect adoption
of the new accounting policy.
6
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NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSURES
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used (including associated goodwill) is measured by a
comparison of the carrying amount of an asset to estimated future net cash
flows (undiscounted and without interest charges) expected to be generated
by the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
For purposes of determining impairment, the Company groups long-lived
assets at a market level due to the bakery-satellite relationship which, in
management's estimation, results in the market level as the lowest level
for which there are cash flows that are largely independent of the cash
flows of other groups of assets.
The impairment charge, which amounted to $585,000 for the twenty-six weeks
ended June 28, 1998, represents a reduction of the carrying value of the
impaired assets to estimated fair value. Such impairment charge relates to
long-lived restaurant assets. The primary indicators of impairment are
continued operating losses or sufficient negative trends that management
determines impairment is probable. Estimated fair values were determined
by using a combination of discounted estimated future cash flows and
valuation multiples recently used by the Company in actual acquisitions.
Management judgement is inherent in the estimated fair value determination
and, accordingly, actual results could vary from such estimates.
Store closure costs are recognized when a decision is made to close a
restaurant within the next twelve months. Store closure costs, which
amounted to $520,725 for the twenty-six weeks ended June 28, 1998, include
the costs of writing down the carrying amount of a restaurant's assets to
estimated fair value less costs of disposal aggregating $472,261, and the
net present value of any remaining noncancelable lease payments after the
expected closure date net of estimated sublease income considered by
management to be probable aggregating $48,464.
(5) NET EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
EARNINGS PER SHARE (Statement 128) which replaces the prior accounting
standard regarding computation and presentation 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 reflects the potential dilution that could
occur if contracts to issue securities (such as stock
7
<PAGE>
options) were exercised. The Company adopted Statement 128 as of December
28, 1997 and, accordingly, earnings per share data for all periods
presented has been computed in accordance with Statement 128. For all
periods presented, there are no differences between net earnings (loss) and
outstanding shares utilized in the computation of basic and diluted
earnings per share.
Options to purchase common stock were not included in the computation of
diluted earnings (loss) per share because the options' exercise price was
greater than the average market price of the common shares during such
period so the effect would not be dilutive. As of June 28, 1998, there are
407,500 options outstanding at a weighted average exercise price of $5.11,
which may become dilutive in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS FORM 10-QSB INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THIS
FORM 10-QSB REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY
AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB
ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE,
IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN
CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE
PLANNED. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE
"RISK FACTORS" SECTION OF THE COMPANY'S FORM 10-K ANNUAL REPORT, WHICH
INCLUDE, WITHOUT LIMITATION, THE COMPANY'S ABILITY TO DEVELOP, CONSTRUCT,
ACQUIRE OR FRANCHISE ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE
COMPANY'S DEVELOPMENT SCHEDULE, CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT
PLANS, AVAILABILITY AND TERMS OF CAPITAL, ACCEPTANCE OF NEW PRODUCT
OFFERINGS, COMPETITION, MANGEMENT OF QUARTER TO
8
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QUARTER EARNINGS, INCREASES IN OPERATING COSTS AND CHANGES IN GOVERNMENT
REGULATION. ALL SUBSEQUENT WRITTERN OR ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS.
OVERVIEW
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.
Costs 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:
<TABLE>
Twenty-Six Weeks Thirteen Weeks
Ended Ended
June 28, June 29, June 28, June 29,
1998 1997 (1) 1998 1997 (1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants 99.0% 96.9% 99.7% 97.8%
Franchise revenues 1.0 3.1 0.3 2.2
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales (2) 34.4% 31.9% 34.7% 32.0%
Restaurant operating expenses (2) 55.9 51.2 56.0 52.4
General and administrative expenses 7.4 7.7 6.7 7.1
Depreciation and amortization 5.0 4.7 4.8 5.0
Provision for impairments & closures 11.1 0.0 0.0 0.0
Operating income (loss) (12.9) 7.1 (2.0) 5.3
Interest income (expense), net (0.7) 1.0 (0.7) 0.7
Income tax expense 0.0 3.1 0.0 2.3
Cumulative effect of accounting change 0.0 (1.4) 0.0 0.0
Net earnings (loss) (13.6) 3.6 (2.7) 3.7
(1) As restated for the change in accounting principle. See Note 3 to
unaudited consolidated financial statements.
(2) As a percentage of sales from Company-owned restaurants.
</TABLE>
THIRTEEN WEEKS ENDED JUNE 28, 1998
COMPARED TO THIRTEEN WEEKS ENDED JUNE 29, 1997
Total revenues increased by $320,000, or 6.6%, to $5.1 million for the
period ended June 28, 1998 compared to $4.8 million for the period ended June
29, 1997, primarily due to an increase in the number of Company-owned
restaurants open.
Sales from Company-owned restaurants increased $407,000, or 8.6%, to $5.1
million for the period ended June 28, 1998 compared to $4.7 million for the
period ended June 29, 1997. This increase is largely the result of opening 13
additional Company-owned restaurants
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during the period subsequent to June 29, 1997. Such increase has been offset
somewhat by the closing of seven Company-owned restaurants during the last
quarter of 1997 and the first quarter of 1998. In addition, the Company
experienced a 16.0% decrease in same restaurant sales during the second
quarter of 1998 compared to the same period in 1997. Such decline is
primarily attributed to the following: (i) increased competition, (ii)
increased development within certain markets, and (iii) restaurant
manager/operational issues. The Company is focusing on operational issues
and new product offerings. At June 28, 1998 the Company had 45
Company-owned restaurants compared to 39 restaurants at June 29, 1997.
Franchise revenues decreased by $87,000, or 83.3%, to $17,000 for the
period ended June 28, 1998 compared to $104,000 for the period ended June 29,
1997. Franchise and development fees decreased $20,000, or 74.1%, to $7,000
during the second quarter of 1998 as compared to $27,000 for the comparable
period in 1997 and royalty revenue decreased by $67,000, or 86.7%, to $10,000
for 1998 compared to $77,000 for 1997. The overall decrease is primarily due
to the decrease in new restaurant development within the franchise program as
well as the closing or disenfranchising of 14 franchise restaurants during
the period subsequent to June 29, 1997. Franchise royalty revenue has also
decreased due to the discontinuance of royalty revenue recognition on certain
franchise restaurants due to collectibility concerns. As a result of the
above activity, management expects franchise revenues to continue to decline.
There were 24 franchised restaurants as of June 28, 1998 as compared to 31
restaurants at June 29, 1997.
Cost of sales increased by $270,000, or 17.9%, to $1.8 million for the
period ended June 28, 1998 compared to $1.5 million for the period ended June
29, 1997, partially due to the increase in Company-owned restaurant sales
discussed above. As a percentage of Company-owned restaurant sales, cost of
sales increased to 34.7% for the period ended June 28, 1998 from 32.0% for
the period ended June 29, 1997, primarily as a result of certain markets that
incur higher food costs as a result of utilizing frozen-dough bagels and
pre-packaged cream cheeses. Prices of the Company's commodities (meat, flour
and other bakery ingredients) have generally remained fairly stable during
the comparable periods. However, the Company has experienced a 10% increase
in all "butter fat" products (cheese, cream cheese, etc.) since the first of
the year. This increase is being experienced nation wide by all restaurants.
Restaurant operating expenses increased by $397,000, or 16.0%, to $2.9
million for the period ended June 28, 1998 compared to $2.5 million for the
period ended June 29, 1997, partially due to the increase in Company-owned
restaurant sales discussed above. As a percentage of Company-owned
restaurant sales, restaurant operating expenses increased to 56.0% for the
period ended June 28, 1998 from 52.4% for the period ended June 29, 1997.
Such increase is primarily due to: (i) the increase in direct labor costs of
2.4% from 21.9% in 1997 to 24.3% in 1998 and (ii) the increase in occupancy
costs (rent and utilities) of 2.2% from 7.2% in 1997 to 9.4% in 1998. These
increases are attributable to the increase in the minimum wage rate, the
decrease in the same-store sales as discussed above and certain of the
Company's new restaurant developments in which sales levels have not matured.
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General and administrative expenses have remained fairly consistent for
the thirteen week periods ended June 28, 1998 and June 29, 1997.
Depreciation and amortization increased by $6,000, or 2.3%, to $248,000
for the period ended June 28, 1998 compared to $242,000 for the period ended
June 29, 1997. As a percentage of total revenues, depreciation and
amortization decreased to 4.8% for the period ended June 28, 1998 from 5.0%
for the period ended June 29, 1997. This nominal increase is primarily the
result of additional capital expenditures to develop the Company-owned
restaurants offset by the closing of certain restaurants, the impairing of
others, and the recognition of the sale-leaseback that occurred during March
1998.
Net interest expense increased by $70,000, or 202.8%, to $36,000 for the
period ended June 28, 1998 compared to net interest income of $35,000 for the
period ended June 29, 1997. The increase in interest expense is due to the
borrowings from a bank that were initiated in September 1997. In addition,
during the period ended June 29, 1997 the Company still had a portion of the
proceeds from its initial public offering invested in interest-bearing
securities as such proceeds had not yet been expended.
TWENTY-SIX WEEKS ENDED JUNE 28, 1998
COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 29, 1997
Total revenues increased by $687,000, or 7.4%, to $10.0 million for the
period ended June 28, 1998 compared to $9.3 million for the period ended June
29, 1997, primarily due to an increase in the number of Company-owned
restaurants open.
Sales from Company-owned restaurants increased $879,000, or 9.8%, to
$9.9 million for the period ended June 28, 1998 compared to $9.0 million for
the period ended June 29, 1997. This increase is largely the result of
opening 13 additional Company-owned restaurants during the period subsequent
to June 29, 1997. Such increase has been offset somewhat by the closing of
seven Company-owned restaurants during the last quarter of 1997 and the first
quarter of 1998. In addition, the Company experienced a 14.9% decrease in
same restaurant sales during the first twenty-six weeks of 1998 compared to
the same period in 1997. Such decline is primarily attributed to the
following: (i) increased competition, (ii) increased development within
certain markets, and (iii) restaurant manager/operational issues. The
Company is focusing on operational issues and new product offerings. At
June 28, 1998 the Company had 45 Company-owned restaurants compared to 39
restaurants at June 29, 1997.
Franchise revenues decreased by $192,000, or 66.3%, to $97,000 for the
period ended June 28, 1998 compared to $289,000 for the period ended June 29,
1997. Franchise and development fees decreased $69,000, or 59.0%, to $48,000
during the second quarter of 1998 as compared to $116,000 for the comparable
period in 1997 and royalty revenue decreased by $123,000, or 71.4%, to
$50,000 for 1998 compared to $173,000 for 1997. The overall decrease is
primarily due to the decrease in new restaurant development within the
franchise program as well as the closing or disenfranchising of 14 franchise
restaurants during the period subsequent to June 29, 1997. Franchise royalty
revenue has also decreased due to the
12
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discontinuance of royalty revenue recognition on certain franchise
restaurants due to collectibility concerns. As a result of the above
activity, management expects franchise revenues to continue to decline.
There were 24 franchised restaurants as of June 28, 1998 as compared to 31
restaurants at June 29, 1997.
Cost of sales increased by $528,000, or 18.4%, to $3.4 million for the
period ended June 28, 1998 compared to $2.9 million for the period ended June
29, 1997, primarily due to the increase in Company-owned restaurant sales
discussed above. As a percentage of Company-owned restaurant sales, cost of
sales increased to 34.4% for the period ended June 28, 1998 from 31.9% for
the period ended June 29, 1997, primarily as a result of certain markets that
incur higher food costs as a result of utilizing frozen-dough bagels and
pre-packaged cream cheeses. Prices of the Company's commodities (meat, flour
and other bakery ingredients) have generally remained fairly stable during
the comparable periods. However, the Company has experienced a 10% increase
in all "butter fat" products (cheese, cream cheese, etc.) since the first of
the year. This increase is being experienced nation wide by all restaurants.
Restaurant operating expenses increased by $915,000, or 19.8%, to $5.5
million for the period ended June 28, 1998 compared to $4.6 million for the
period ended June 29, 1997, 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 55.9% for the
period ended June 28, 1998 from 51.2% for the period ended June 29, 1997.
Such increase is primarily due to: (i) the increase in direct labor costs of
2.7% from 21.6% in 1997 to 24.3% in 1998 and (ii) the increase in occupancy
costs (rent and utilities) of 2.6% from 7.1% in 1997 to 9.7% in 1998. These
increases are attributable to the increase in the minimum wage rate, the
decrease in the same-store sales as discussed above and certain of the
Company's new restaurant developments in which sales levels have not matured.
General and administrative expenses have remained fairly consistent for
the twenty-six week periods ended June 28, 1998 and June 29, 1997.
Depreciation and amortization increased by $67,000, or 15.4%, to
$500,000 for the period ended June 28, 1998 compared to $433,000 for the
period ended June 29, 1997. As a percentage of total revenues, depreciation
and amortization increased to 5.0% for the period ended June 28, 1998 from
4.7% for the period ended June 29, 1997. This increase is primarily the
result of the significant addition of capital expenditures to develop
Company-owned restaurants for the period subsequent to June 29, 1997. Such
increase is offset by the closing of certain restaurants, the impairing of
others, and the recognition of the sale-leaseback that occurred during March
1998.
A provision for impairment and restaurant closures of $1.1 million was
recorded for the period ended June 28, 1998. The impairment charge, which
amounted to $585,000, represents a reduction of the carrying value of
property and equipment for one operating market (two restaurants) to
estimated fair value. Such charge was a result of increased operating losses
primarily due to declining sales levels. In addition, the Company closed two
under-performing restaurants during the period resulting in restaurant
closure cost of $521,000.
13
<PAGE>
The majority of the aforementioned restaurant closure cost relate to a
single restaurant. Such restaurant was opened November 1, 1997, but due to
operating losses and negative cash flow experienced since opening, management
made the decision during March 1998 to close the restaurant. The other
restaurant closure related to a restaurant in which an impairment provision
had been recorded during the third quarter of 1997. As disclosed in the
accompanying notes to the unaudited consolidated financial statements,
long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management also
continuously assesses whether or not to close underperforming restaurants.
Accordingly, while at this time, the Company is not aware of any restaurants
for which a provision for impairment should be recorded which has not been so
recorded in the accompanying unaudited consolidated financial statements and
management had not made a decision prior to June 28, 1998 to close any
restaurants other than those restaurants for which store closure costs have
been recorded in the accompanying unaudited consolidated financial
statements, additional provisions for impairment and closures may be required
from time-to-time including in the near term. Additionally, on July 24, 1998
management made the decision to close two restaurants for which a provision
for impairment had previously been recorded. The amount of restaurant
closure cost applicable to these two restaurants has not yet been determined.
Net interest expense increased by $166,000, or 174.8%, to $71,000 for
the period ended June 28, 1998 compared to net interest income of $95,000 for
the period ended June 29, 1997. The increase in interest expense is due to
the borrowings from a bank that were initiated in September 1997. In
addition, during the period ended June 29, 1997 the Company still had a
portion of the proceeds from its initial public offering invested in
interest-bearing securities as such proceeds had not yet been expended.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new
restaurants. Capital expenditures totaled $1.6 million and $3.4 million for
the twenty-six week periods ended June 28, 1998 and June 29, 1997,
respectively. The Company has funded its capital expenditures with proceeds
from its Credit Facility and sale-leaseback transactions discussed below and
cash flows from operating activities. Cash flows from operating activities
were $650,000 and $448,000 for the periods ended June 28, 1998 and June 29,
1997, respectively.
Based on its contemplated limited expansion plans, the Company estimates
that its capital expenditures for development of Company-owned restaurants
will be approximately $200,000 during the remainder of 1998. The Company
expects that proceeds from its Credit Facility or refinancing of such
facility, sale-leaseback transactions and cash provided by operating
activities will provide sufficient funds to finance its capital expenditures
through 1998.
CREDIT FACILITY. As previously disclosed in the Company's 1997 Form
10-K, the Company has a loan agreement with a revolving line of credit and
term loan facilities (the "Credit Facility") with NationsBank, N.A. (the
"Bank"). Borrowings from term loans during the twenty-six week period ended
June 28, 1998 amounted to $560,000 and were used to fund
14
<PAGE>
new restaurant development. In addition, the Company repaid $1.2 million of
borrowings from the Credit Facility during the twenty-six week period ended
June 28, 1998 primarily with the proceeds of the sale-leaseback transactions
discussed below and available cash. The Credit Facility is secured by
substantially all of the Company's assets and matures on September 30, 1998.
The proceeds from the Credit Facility (which are classified as a current
liability at June 28, 1998) were primarily used for acquisition of long-lived
assets such as property and equipment. The Company is not in compliance with
a restrictive debt covenant which requires a specified ratio of current
assets to current liabilities, however the Company anticipates that it will
enter into an agreement with the Bank whereby the entire amount due on the
Credit Facility at September 30, 1998 will be refinanced for an additional
year, maturing on September 30, 1999, although the Company currently does not
have a commitment from the Bank to refinance such credit facility. As of
June 28, 1998, the Company had $1.8 million of outstanding borrowings
pursuant to the Credit Facility.
SALE-LEASEBACK TRANSACTIONS. During February 1998, the Company entered
into agreements to sell and lease back two restaurant sites with an entity
owned by a then officer of the Company and a significant stockholder, both of
whom are Directors. The sale-leaseback transactions include two owned
restaurant locations in which the Company sold such properties to such entity
for approximately $800,000 and leased back over a 15-year period. The leases
will be accounted for as operating leases. As a result of the sale-leaseback
transactions, the Company incurred a loss of $277,000 which has been deferred
for financial reporting purposes and is included within leasehold
improvements and is being amortized over the term of the related leases. The
Company believes that the terms and conditions of both the real estate sales
and the related lease back were fair and reasonable and were on terms at
least as favorable as would be available from non-affiliated parties. The
Company utilized the proceeds to fund new restaurant development and to
reduce borrowings under the Credit Facility. The Company anticipates
entering into an additional sale-leaseback transaction with such entity
concerning two restaurant locations during August 1998.
STOCK REPURCHASE PROGRAM. During January 1998, the Company's Board of
Directors approved a plan to repurchase up to 1.0 million shares of the
Company's Common Stock (the "Stock Repurchase Program"). Purchases pursuant
to the Stock Repurchase Program are to be made from time to time in the open
market or directly from stockholders at prevailing market prices. The Stock
Repurchase Program is anticipated to be funded with internally generated cash
and borrowings under the Credit Facility or the refinancing of the Credit
Facility. As of June 28, 1998, the Company had purchased 10,400 shares of
Common Stock for $17,974.
FINANCIAL CONDITION. Total assets at June 28, 1998 are $12.1 million as
compared to $14.1 million as of December 29, 1997. Cash and cash equivalents
have decreased by approximately $840,000 primarily due to capital
expenditures for new restaurant development. Income tax receivable has also
decreased as a partial refund for 1997 was received from the Internal Revenue
Service in March 1998. Property and equipment reflects an approximate
$800,000 decrease despite significant new capital expenditures due to the
provision for impairments and closures related to three restaurants and the
sale-leaseback of two previously owned restaurant locations. Current
liabilities have decreased approximately
15
<PAGE>
$600,000 primarily as a result of repayments of certain term loans with the
Bank. Stockholders' equity has decreased $1.4 million due to the net loss
for the twenty-six week period ended June 28, 1998, which loss is primarily
due to the $1.1 million provision for impairments and closures.
YEAR 2000 COMPLIANCE
The Company is currently taking actions to provide that its computer
systems are capable of processing in the Year 2000. The gross costs
associated with this are not expected to be material and are being expensed
as incurred.
The Company purchases products and services from various vendors. If
the Company was unable to acquire such products and services due to the
vendors' inability to address the Year 2000 issue, the Company could incur a
disruptive effect on its business. However, the key providers of such
products and services are generally large and sophisticated entities, and the
company does not expect to incur a material disruption to its business from
the Year 2000 issue.
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
20, 1998.
(b) The directors elected at the meeting were:
<TABLE>
For Withheld
<S> <C> <C>
David L Murfin 4,325,260 45,210
Paul T. Sorrentino 4,311,602 58,868
</TABLE>
(c) Other matters voted upon at the meeting and the results of those
votes were as follows:
<TABLE>
For Against Withheld
<S> <C> <C> <C>
Selection of KPMG
Peat Marwick LLP as
independent auditors 4,339,082 20,700 10,688
</TABLE>
The foregoing matters are described in detail in the Company's proxy
statement dated March 31, 1998 for the 1998 Annual Meeting of Stockholders.
16
<PAGE>
Item 5. Other Information
On April 17, 1998, the Company was notified by the Nasdaq Stock Market,
Inc. (Nasdaq) that it has failed to maintain the appropriate market value of
public float that is required to maintain the Company's listing on the Nasdaq
National Market. The Company has appealed the potential delisting from the
Nasdaq National Market. Such appeal is set for hearing on September 3, 1998.
If Nasdaq denies the Company's continued listing on the Nasdaq National
Market, the Company intends to pursue listing under the Nasdaq SmallCap
Market. To the extent the Nasdaq SmallCap Market listing is not achievable,
the Company's common stock would then be traded over the counter. Until the
results of the hearing are made final, there will be no change in the
Company's listing.
Item 6. Exhibits
(a) Exhibit 27 - Financial Data Schedule.
(b) Exhibit 27.1 - Restated Financial Data Schedule.
17
<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 1998.
NEW YORK BAGEL ENTERPRISES, INC.
By: /s/ ROBERT J. GERESI
-----------------------------------
Robert J. Geresi
Chief Executive Officer
and President
By: /s/ RICHARD R. WEBB
-----------------------------------
Richard R. Webb
Chief Financial Officer,
Secretary and Treasurer
18
<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 28, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1998
<PERIOD-END> JUN-28-1998
<CASH> 29,972
<SECURITIES> 0
<RECEIVABLES> 248,887
<ALLOWANCES> (20,000)
<INVENTORY> 430,152
<CURRENT-ASSETS> 1,113,290
<PP&E> 11,705,538
<DEPRECIATION> 2,200,052
<TOTAL-ASSETS> 12,063,241
<CURRENT-LIABILITIES> 2,986,554
<BONDS> 28,750
0
0
<COMMON> 46,675
<OTHER-SE> 8,341,924
<TOTAL-LIABILITY-AND-EQUITY> 12,063,241
<SALES> 9,883,348
<TOTAL-REVENUES> 9,980,613
<CGS> 3,398,805
<TOTAL-COSTS> 10,159,207
<OTHER-EXPENSES> 1,105,725
<LOSS-PROVISION> 3,900
<INTEREST-EXPENSE> 71,219
<INCOME-PRETAX> (1,359,438)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,359,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,359,438)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
<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 28, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<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> 8,615,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,163
<INTEREST-EXPENSE> (95,285)
<INCOME-PRETAX> 758,952
<INCOME-TAX> 291,437
<INCOME-CONTINUING> 467,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (129,041)
<NET-INCOME> 338,474
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
