U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27148
New World Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3690261
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification No.)
246 Industrial Way West
Eatontown, NJ 07724
(Address of principal executive offices, including zip code)
(732) 544-0155
(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. Yes X No ___
Number of shares of common stock, $.001 par value per share, outstanding as of
May 29, 2002: 17,481,394
NEW WORLD RESTAURANT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
April 2, 2002
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 2, 2002 and
January 1, 2002...............................................-3-
Consolidated Statements of Operations for the three months
ended April 2, 2002 and April 1, 2001.........................-4-
Consolidated Statements of Cash Flows for the three months
ended April 2, 2002 and April 1, 2001.........................-5-
Notes to Consolidated Financial Statements.........................-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED APRIL 2, 2002....................................-11-
PART II: OTHER INFORMATION..................................................-17-
SIGNATURES.........................................................-18-
2
NEW WORLD RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
April 2,
2002 January 1,
(Unaudited) 2002
----------- ----------
ASSETS
Current Assets:
Cash and cash equivalents..................... $6,959 $14,238
Franchise and other receivables, net.......... 6,611 6,331
Due from bankruptcy estate.................... 3,918 3,918
Current maturities of notes receivables....... 248 248
Inventories................................... 8,650 8,806
Prepaid expenses and other current assets..... 3,438 1,779
Deferred income taxes - current portion....... 500 500
Investment in debt securities................. 34,156 34,156
Assets held for resale........................ 69 1,224
----------- ----------
Total current assets.......................... 64,549 71,200
Property, plant and equipment, net............ 111,761 115,362
Notes and other receivables, net.............. 744 786
Trademarks and recipes, net................... 100,077 101,159
Goodwill, net................................. 2,211 2,211
Deferred income taxes......................... 8,934 8,934
Debt issuance costs and other assets.......... 5,643 6,206
----------- ----------
Total assets.................................. $293,919 $305,858
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................. $18,484 $20,170
Accrued expenses.............................. 32,762 33,860
Short-term debt and current portion of
long-term debt.............................. 39,070 37,137
Current portion of obligations under capital
leases...................................... 199 199
Other current liabilities..................... 46 76
----------- ----------
Total current liabilities..................... 90,561 91,442
Senior notes and other long-term debt......... 123,887 120,536
Obligations under capital leases.............. 278 400
Other liabilities............................. 17,556 19,803
----------- ----------
Total liabilities............................. 232,282 232,181
Series D Preferred Stock, $.001 par value;
25,000 shares authorized; 0 and 0 shares
issued and outstanding...................... - -
Series F Preferred Stock, $.001 par value;
116,000 shares authorized; 78,255 and
72,192 shares issued and outstanding........ 52,236 46,743
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000
shares authorized; 0 issued and
outstanding................................. - -
Series A convertible preferred stock, $.001
par value; 400 shares authorized; 0 shares
issued and outstanding...................... - -
Series B convertible preferred stock, $.001
par value; 225 shares authorized, 0 shares
outstanding................................. - -
Series C convertible preferred stock, $.001
par value; 500,000 shares authorized,
0 shares outstanding........................ - -
Common stock, $.001 par value; 150,000,000
shares authorized; 17,481,394 and
17,481,394 shares issued and outstanding.... 17 17
Additional paid-in capital.................... 101,345 100,189
Accumulated deficit........................... (91,961) (73,272)
----------- ----------
Total stockholders' equity.................... 9,401 26,934
----------- ----------
Total liabilities and stockholders' equity.... $293,919 $305,858
=========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3
NEW WORLD RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FIRST QUARTER ENDED APRIL 2, 2002 AND APRIL 1, 2001
UNAUDITED
April 2, April 1,
2002 2001
-------- --------
Revenues:
Retail sales......................................... $ 90,184 $ 3,672
Manufacturing revenues............................... 6,861 5,150
Franchise related revenues........................... 1,540 1,653
Total revenues....................................... 98,585 10,475
Cost of sales........................................ 80,215 7,367
General and administrative expenses.................. 12,607 2,209
Depreciation and amortization........................ 4,511 787
Income from operations............................... 1,252 112
Interest expense, net................................ 13,586 444
Gain from sale of investments........................ - 241
(Loss) before income taxes and minority interest..... (12,334) (91)
Provision for income taxes........................... - 166
Minority interest.................................... - 723
Net (loss)........................................... (12,334) (980)
Dividends and accretion on preferred stock........... 6,355 3,317
Net (loss) available to common stockholders.......... $ (18,689) $ (4,297)
Net (loss) per common share - Basic.................. ($1.07) ($0.27)
Net (loss) per common share - Diluted................ ($1.07) ($0.27)
Weighted average number of common shares outstanding:
Basic................................................ 17,481,394 15,896,836
Diluted.............................................. 17,481,394 15,896,836
The accompanying notes are an integral part of these consolidated financial
statements.
4
NEW WORLD RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIRST QUARTER ENDED APRIL 2, 2002 AND APRIL 1, 2001
UNAUDITED
April 2, April 1,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)........................................ ($12,334) ($980)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation and amortization..................... 4,511 787
Minority interest................................. - 723
Gain on sale of debt securities................... - (241)
Payment of integration and reorganization costs... (242) -
Stock issued for compensation..................... - 507
Amortization of debt issuance costs and debt
discount........................................ 3,167 -
Accretion of warrant value and investment return.. 2,234 -
Notes issued as paid in kind interest on
asset-based secured loan........................ 1,489 -
Deferred income tax asset......................... - 166
Changes in operating assets and liabilities:
Franchise and other receivables................... (281) (398)
Inventories....................................... 156 (172)
Prepaid expenses.................................. (1,860) (32)
Deposits and other assets......................... (482) 246
Receipts of notes receivable...................... 43 260
Additions to notes receivable..................... - (10)
Accounts payable.................................. (1,686) (991)
Accrued expenses and other liabilities............ (2,125) (992)
-------- --------
Net cash used in operating activities............. (7,410) (1,127)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (888) (31)
Proceeds from sales of assets held for resale..... 1,155 -
Deferred acquisition costs........................ - (624)
Investment in debt securities..................... - (28,912)
Proceeds from the sale of debt securities......... - 3,885
-------- --------
Net cash provided by / (used in) investing
activities...................................... 267 (25,682)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net.............. - 23,755
Minority owners' capital contributions to
affiliated entity............................... - 9,166
Payment of liabilities in connection with
acquired assets................................. - (987)
Repayments of capital leases...................... (122) (119)
Repayment of notes payable........................ (14) (3,050)
Early retirement of debt.......................... - -
-------- --------
Net cash (used in) / provided by financing
activities...................................... (136) 28,765
-------- --------
Net (decrease) increase in cash................... (7,279) 1,956
CASH, beginning of period......................... 14,238 2,271
-------- --------
CASH, end of period............................... $6,959 $4,227
======== ========
5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.......................................... 5,287 683
======== ========
Non-cash Investing and Financing Activities:
Non-cash dividends and accretion on preferred
stock........................................... 6,355 3,317
======== ========
Stock issued to extinguish liabilities............ - 63
======== ========
Stock issued in exchange for debt securities...... - 805
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6
NEW WORLD RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
unaudited interim consolidated financial statements furnished herein include all
adjustments necessary for a fair presentation of the Company's financial
position at April 2, 2002 and the results of its operations and its cash flows
for the three-month periods ended April 2, 2002 and April 1, 2001. All such
adjustments are of a normal recurring nature. Interim financial statements are
prepared on a basis consistent with the Company's annual financial statements.
Results of operations for the three-month period ended April 2, 2002 are not
necessarily indicative of the operating results that may be expected for future
periods. The consolidated balance sheet as of January 1, 2002 has been derived
from the audited consolidated financial statements at that date but does not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
January 1, 2002 on file with the Securities and Exchange Commission.
2. Acquisitions
On June 19, 2001, the Company purchased substantially all of the assets (the
Einstein Acquisition) of Einstein/Noah Bagel Corp. and its majority-owned
subsidiary, Einstein/Noah Bagel Partners, L.P. (collectively, Einstein).
Einstein was the largest bagel bakery chain in the United States, with 463
stores, nearly all of which are company-operated. The Einstein Acquisition was
made pursuant to an Asset Purchase Agreement, which was entered into by the
Company as the successful bidder at an auction conducted by the United States
Bankruptcy Court, District of Arizona, on June 1, 2001 in the Einstein
bankruptcy case. The purchase price was $160,000,000 in cash and the assumption
of certain liabilities, subject to adjustment to the extent that Assumed Current
Liabilities (as defined in the Asset Purchase Agreement) exceed $30,000,000.
Pursuant to the Asset Purchase Agreement, the Company is entitled to a reduction
in purchase price to the extent that assumed current liabilities (as defined)
exceed $30,000,000 as of the acquisition date. The accompanying balance sheet as
of April 2, 2002 reflects approximately $3,918,000 as due from the Einstein
Bankruptcy Estate. This amount is based upon the final determination of assumed
current liabilities by the independent arbitrator as of the acquisition date,
net of certain payments received from the Einstein Bankruptcy Estate through the
date of these financial statements.
In connection with the Einstein Acquisition, the Company incurred approximately
$13,564,000 of acquisition costs. The acquisition has been accounted for under
the purchase method of accounting. The aggregate purchase price of $167,179,000
is being allocated based on the preliminary estimates of the fair value of the
tangible and intangible assets acquired and liabilities assumed as follows
(amounts in thousands):
Assets Acquired:
Current assets.................... $17,326
Plant property and equipment...... 116,860
Trademarks and intangible assets.. 87,494
Liabilities assumed:
Current liabilities............... 42,370
Long-term liabilities............. 12,131
--------
Total purchase price.............. $167,179
========
The estimation of the fair value of assets acquired and liabilities assumed was
determined by the Company's management based on information currently available.
The Company has obtained appraisals of the fair value of certain acquired
property, plant and equipment as well as certain identified intangibles. The
Company is in the process of completing such evaluations. Accordingly, the
allocation of the purchase price is subject to revisions.
7
The following consolidated statements of operations data for the quarter ended
April 2, 2002 and unaudited pro forma consolidated statements of operations data
for the quarter ended April 1, 2001, gives effect to the Einstein Acquisition as
if it had occurred as of the beginning of the pro forma period reported. The
following unaudited pro forma consolidated results of operations gives effect to
purchase accounting adjustments and the financings necessary to complete the
acquisition. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what operating results would have
been had the acquisition actually taken place as of the beginning of the pro
forma period reported, and may not be indicative of future operating results.
For the Quarter Ended
-------------------------------------
(In thousands, except per share data)
Actual Proforma
April 2, 2002 April 1, 2001
------------- -------------
Revenues..................................... $98,585 $122,253
======== ========
Net (loss)................................... ($12,334) ($9,341)
======== ========
Net (loss) available to common stockholders.. ($18,689) ($15,552)
======== ========
Earnings per share - Basic................... ($1.07) ($0.98)
======== ========
3. Earnings Per Share.
Basic income (loss) per share is calculated by dividing net income (loss)
attributable to common shareholders by the weighted average number of shares of
common stock outstanding during the period. Diluted income (loss) per share is
calculated by dividing net income (loss) attributable to common shareholders by
the weighted average number of common shares outstanding, adjusted for
potentially dilutive securities. The following table summarizes the equivalent
number of common shares assuming the related securities that were outstanding as
of April 2, 2002 had been exercised, but not included in the calculation of
diluted loss per share as such shares are antidilutive:
Warrants.............. 60,721,694
Options............... 6,056,915
----------
Total................. 66,778,609
==========
4. Investment in Debt Securities.
Investments in debt securities are reported at fair value which is based upon
management's estimate of the present value of amounts expected to be recovered
from the Einstein Bankruptcy Estate for the Company's investment in Einstein
debt securities. Unrealized gains and losses from those securities, which are
classified as available-for-sale are reported as unrealized holding gains and
losses as a separate component of stockholders' equity. At April 2, 2002, the
carrying amount of debt securities approximates their fair value and,
accordingly, no unrealized gain or loss has been recorded.
5. Recent Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, Business Combination ("SFAS 141"),
and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. The adoption of SFAS No. 141 had no
impact on the Company's consolidated financial statements.
SFAS 142 requires goodwill be subject to at least an annual assessment for
impairment with amortization over its estimated useful life to be discontinued
effective January 1, 2002. The Company continues to evaluate the effect of the
adoption of SFAS 142 on its consolidated financial statements. In this
connection, the Company is in the process of assessing its reporting units. Once
the reporting units have been established, the Company will use the two-step
approach to assess its goodwill and intangible assets. In the first step, the
Company will compare the estimated fair value of each reporting unit that houses
goodwill to the carrying amount of the unit's assets and liabilities, including
its goodwill and intangible assets. If the fair value of the reporting unit is
below its carrying amount, then the second step of the impairment test is
performed, in which the current fair value of the unit's assets and liabilities
will determine the current implied fair value of the unit's goodwill and
intangible assets. In addition, the Company continues to reassess the
classifications of its intangible assets, including goodwill, previously
recorded in connection with earlier purchase acquisitions, as well as their
useful lives.
8
The Company believes that its intangibles are deemed to have an indefinite
useful life as it is expected to generate cash flows indefinitely. Thus, the
Company ceased amortizing intangibles on January 1, 2002. The following
consolidated statements of operations data for the quarters ended April 2, 2002
and April 1, 2001 reflects the adjustment to net loss, net loss available to
common stockholders and basic earnings per share resulting from the
implementation of SFAS 142.
For the Quarter ended
-------------------------------------
(In thousands, except per share data)
April 2, 2002 April 1, 2001
------------- -------------
Reported Net (Loss)......................... $ (12,334) (980)
Add back: Goodwill amortization............. - 30
Add back: Trademark amortization............ - 137
Adjusted Net (Loss)......................... (12,334) (813)
========== ========
Reported Net (Loss) available to common
stockholders.............................. (18,689) (4,297)
Adjusted Net (Loss) available to common
stockholders.............................. (18,689) (4,130)
========== ========
Basic earnings per share:
Reported Net (Loss) available to common
stockholders.............................. $ (1.07) $ (0.27)
Goodwill amortization....................... - $ 0.00
Trademark amortization...................... - $ 0.01
Adjusted Net (Loss) available to common
stockholders...... $ (1.07) $ (0.26)
========== ========
6. Accrued Expenses.
As of April 2, 2002, accrued expenses consist of the following:
Compensation and employee benefits............$ 10,201
Distribution costs............................ 3,418
Accrued professional services................. 2,419
Reorganization and integration................ 2,384
Utilities..................................... 2,195
Accrued taxes................................. 1,933
Accrued interest.............................. 1,487
Other......................................... 8,725
---------
$32,762
=========
7. Contingencies.
Effective November 27, 2001, the Company's Common Stock was delisted from the
Nasdaq National Market. The failure to maintain its listing on the Nasdaq
National Market or another national or regional exchange could have a material
adverse effect on the liquidity and trading market for the Company's Common
Stock, which in turn may have an adverse effect on the price of the Company's
Common Stock.
On April 3, 2002, the Company was notified by the Securities and Exchange
Commission that the Commission is conducting an informal investigation into the
resignation of the former Chairman, R. Ramin Kamfar, the termination of the
former Chief Financial Officer, Jerold Novack, and the delay in filing the
Company's Fiscal 2001 Form 10-K. The Company is cooperating fully with the
investigation. The Company is also cooperating fully with a recent Department of
Justice inquiry relating to these issues.
The Company has also been notified by Special Situations Fund, L.P., Special
Situations Cayman Fund, L.P. and Special Situations Private Equity Fund, L.P.,
holders of our Series F Preferred Stock, that they believe that material
misrepresentations were made to them in June 2001 in connection with their
purchase of the Company's stock. Although the Special Situations Funds have not
initiated any legal proceedings against the Company, they may do so.
Given the early stage of these matters, Management cannot predict their outcome.
However, there can be no assurance that the Company will not be subject to
regulatory sanctions, civil penalties and/or claims for monetary damages and
other relief.
9
8. Fixed Fee Distribution Agreement.
The Company maintains a fixed fee distribution agreement with a national
distribution company (distributor) whereby the distributor supplies
substantially all products for resale in the Company's company-operated
restaurant locations. In addition, the Company maintains a separate fixed fee
distribution agreement with the distributor for delivery of certain proprietary
products to its franchised locations. Effective February 20, 2002, the Company
entered into Mutual Termination Agreements (Agreement) with the distributor
which provided for the termination of each of the fixed fee distribution
agreements effective August 2, 2002. Pursuant to the restated agreement, the
distributor is required to provide distribution services to all locations
through August 2, 2002, which services must meet or exceed minimum service
parameters, and the Company is required to pay the distributor $12,000,000,
representing a portion of the unamortized $5,000,000 investment made by the
distributor at the inception of the original agreement and a reduced amount of
outstanding trade payables and other previously accrued charges, payable as
follows:
(a) The sum of $1,200,000 on February 25, 2002 (net of $900,000 rebate);
(b) The sum of $ 4,800,000 in equal installments of $228,571 on each
Wednesday beginning on February 27, 2002 through and including July
31, 2002;
(c) The sum of $6,000,000 which will accrue interest on the first day of
each calendar month from August 1, 2002 at the rate of 9% per annum
and will be payable in equal installments of $176,500 each week
beginning August 28, 2002 through March 28, 2003. In the event that
the Company repays the full $6,000,000 prior to October 31, 2002, all
interest will be forgiven and all previous interest payments
recharacterized as payments of principal.
The Company has begun the process of replacing the distributor in order to
ensure the continuing delivery of goods to its company-operated and franchised
locations. Failure to engage the services of a new distributor prior to August
2, 2002 could result in a significant disruption to the operations of
company-operated and franchised locations.
As a result of the mutual termination agreements, $2,670,000 of liabilities
previously classified as long-term have been reclassified to current
liabilities.
9. Revolving Line of Credit.
On January 18, 2002, the Company entered into a Loan and Security Agreement
(loan agreement) with a lender which provided for a $7,500,000 Revolving Loan
Facility (facility). The revolving loan facility was secured by substantially
all of the assets of the Company. The underlying loan agreement provided for
periodic borrowings based upon availability as calculated pursuant to the loan
agreement. In addition, the loan agreement required the Company to meet certain
financial covenants and placed restrictions on the Company's ability to obtain
additional borrowings and to enter into certain capital transactions. The
Company did not use or draw funds under the facility. Nevertheless, on March 25,
2002, the lender notified the Company that the Company was in default under
certain terms and conditions of the loan agreement. As the result of these
defaults, the Company was unable to obtain advances under the revolving loan
facility. On May 30, 2002, the Company paid the lender $175,000 in full
satisfaction of amounts due under the loan agreement.
On May 30, 2002, the Company entered into a Loan and Security Agreement with one
of the Company's principal stockholders, which provides for a $7,500,000
revolving loan facility. The facility is secured by substantially all of the
Company's assets. Borrowings under the facility will bear interest at the rate
of 11% per annum. The facility will expire on March 31, 2003. At the time that
the Company entered into this facility, the Company terminated its prior
revolving loan facility.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under Management's Discussion and Analysis
of Financial Condition and Results of Operations constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1996 with respect to our financial condition and business. The words estimate,
plan, intend, believe, expect and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements involve and are
subject to known and unknown risks, uncertainties and other factors, which could
cause our actual results, performance and achievements to be materially
different from any future results, performance (financial or operating), or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: success of the integration of New
World and acquired businesses; success of cost-saving strategies; competition;
success of operating, franchising and licensing initiatives; development
schedules; advertising and promotional efforts; adverse publicity; acceptance of
new product offerings; availability of new locations, and terms of sites for
store development; changes in business strategy or development plans;
availability and terms of capital; food, labor, and employee benefit costs;
changes in government regulations; regional weather conditions; and other
factors referenced in this Form 10-Q or in our Form 10-K for our 2001 fiscal
year.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leader in the quick casual segment of the restaurant industry and the
largest operator of bagel bakeries in the United States. With 761 locations in
34 states, we operate and license locations primarily under the Einstein Bros.
and Noah's brand names and franchise locations primarily under the Manhattan and
Chesapeake brand names. Our locations specialize in high-quality foods for
breakfast and lunch, including fresh baked goods, made-to-order sandwiches on a
variety of breads and bagels, soups, salads, desserts, premium coffees and other
cafe beverages, and offer a cafe experience with a neighborhood emphasis. As of
May 14, 2002, our retail system consisted of 468 company-operated locations and
293 franchised and licensed locations. We also operate three dough production
facilities and one coffee roasting facility.
On June 19, 2001, we purchased (the "Einstein Acquisition") substantially all of
the assets of Einstein/Noah Bagel Corp. and its majority-owned subsidiary,
Einstein/Noah Bagel Partners, L.P. (collectively, "Einstein"). Einstein was the
largest bagel bakery chain in the United States, with 463 stores, nearly all of
which are company-operated. The Einstein Acquisition was made pursuant to an
asset purchase agreement entered into by us as the successful bidder at an
auction conducted by the United States Bankruptcy Court, District of Arizona, on
June 1, 2001, in the Einstein bankruptcy case. The purchase price was $160
million in cash plus the assumption of certain liabilities, subject to
adjustment in the event that assumed current liabilities (as defined under the
asset purchase agreement) exceed $30 million. The acquisition was accounted for
using the purchase method of accounting.
In January and March 2001, we issued Series F Preferred Stock and warrants to
purchase our Common Stock and equity in a newly formed affiliate, Greenlight New
World, L.L.C. The aggregate net proceeds of those financings of approximately
$32.9 million were used to purchase Einstein bonds and pay related costs. In
June 2001, we issued additional Series F Preferred Stock and warrants to
purchase our Common Stock for aggregate net proceeds of $23.8 million, which
were used to fund a portion of the purchase price of the Einstein Acquisition.
In June 2001, we issued $140 million of Senior Increasing Rate Notes due 2003
(the "Notes") and warrants to purchase our Common Stock. The net proceeds of
approximately $122.4 million were used to fund a portion of the purchase price
of the Einstein Acquisition, to repay then-outstanding bank debt and for general
working capital purposes. Also in June 2001, we obtained a $35 million
asset-backed loan to a non-restricted subsidiary, EnbcDeb Corp., for net
proceeds of $32.3 million, which were used to fund a portion of the purchase
price of the Einstein Acquisition.
As a result of the Einstein Acquisition and the related financing transactions,
management believes that period-to-period comparisons of our operating results
are not necessarily indicative of, and should not be relied upon as an
indication of, future performance.
In connection with the Einstein Acquisition, unauthorized bonus payments in the
aggregate amount of $3.5 million were made to certain former executive officers
and former employees. A portion of those payments (approximately $1.0 million)
was made in the third quarter of our fiscal year ended January 1, 2002 ("fiscal
2001") and the balance (approximately $2.5 million) in the first quarter ended
April 2, 2002 ("Q1 2002"). All of these payments were originally recorded in our
financial statements in the second and third quarters of fiscal 2001 as part of
the acquisition costs associated with the Einstein Acquisition and as a
restructuring charge. We have revised the results for those quarters so as to
reverse that treatment. The aggregate of such payments (including $1.0 million
in the third quarter of fiscal 2001 and $2.5 million in Q1 2002) has been
recorded as general and administrative expense. An aggregate of $2.5 million of
such payments was offset against payments to be made in connection with the
separation of certain officers and employees from our company. With respect to
that portion of the unauthorized payments that has not been repaid or offset
plus certain other unauthorized payments that have not been recovered of $0.2
million, or an aggregate of $1.2 million, we have recorded a receivable from the
former officer. Based on our evaluation of the collectability of this amount, we
have recorded an allowance for uncollectable receivable.
Currently, we are implementing certain programs relating to the Einstein
Acquisition that are expected to result in cost savings through integration of
production, distribution, purchasing and general and administrative expenses. We
expect to recognize the full benefit of these savings during fiscal 2002. In
addition, we intend to increase sales through the expansion of our lunch daypart
and new location growth, primarily through franchising and licensing.
Fiscal Quarter Ended April 2, 2002 Compared to Fiscal Quarter Ended April 1,
2001
Revenues.
Total revenues increased to $98.6 million for the fiscal quarter ended April 2,
2002 from $10.5 million for the comparable 2001 period. The increase in revenues
was attributable to additional revenues from the Einstein Bros. and Noah's New
York Bagel brands acquired in June 2001. Retail sales increased to $90.2 million
or 91.5% of total revenues for the fiscal quarter ended April 2, 2002
11
from $3.7 million or 35.1% of total revenues for the comparable 2001 period. The
increase was attributable to the addition of 458 company-operated stores that
were acquired as the result of the Einstein Acquisition in June 2001.
Manufacturing revenues increased to $6.9 million or 7.0% of total revenues for
the fiscal quarter ended April 2, 2002 from $5.2 million or 49.2% of total
revenues for the comparable 2001 period. The increase in manufacturing revenues
results from the inclusion of approximately $2.6 million of manufacturing
revenues associated with manufacturing facilities acquired as the result of the
Einstein Acquisition in June 2001 offset by a $0.9 million decrease resulting
from a lower franchise store base in comparison to prior year. Franchise related
revenues decreased 6.8% to $1.5 million or 1.6% of total revenues for the fiscal
quarter ended April 2, 2002 from $1.6 million or 15.8% of total revenues for the
comparable 2001 period. The decrease in franchise related revenues reflects a
lower average franchise store base in the 2002 period.
Costs and Expenses.
Cost of Sales as a percentage of related manufacturing and retail sales
decreased to 82.7% for the fiscal quarter ended April 2, 2002 from 83.5% for the
comparable 2001 period. The decline primarily resulted from a shift in sales
mix.
General and administrative expenses increased to $12.6 million or 12.8% of total
revenues for the fiscal quarter ended April 2, 2002 from $2.2 million for the
comparable 2001 period. The increase is attributable to additional general and
administrative costs resulting from the Einstein Acquisition. In addition,
general and administrative expenses for the fiscal quarter ended April 2, 2002
include approximately $2.6 million (inclusive of related payroll tax expenses)
in connection with the unauthorized bonus payments to former officers and
employees of the Company. Such unauthorized bonuses were offset against payments
to be made in connection with the separation of certain officers and employees
of the Company. The 2002 period also includes legal expenses of approximately
$1.7 million incurred in connection with the Company's voluntary internal
investigation of the unauthorized bonus payments.
Depreciation and amortization expenses increased to $4.5 million or 4.6% of
total revenues for the fiscal quarter ended April 2, 2002 from $0.8 or 7.5% of
total revenues for the comparable 2001 period. The increase was primarily
attributable to depreciation on assets acquired in the Einstein Acquisition
offset by the implementation of SFAS 142 whereby intangibles with indefinite
lives are no longer required to be amortized.
Interest expense, net for the fiscal quarter ended April 2, 2002 increased to
$13.6 million, or 13.8% of total revenues from $0.4 million or 4.2% of total
revenues for the comparable 2001 period. The increase was primarily the result
of interest and related costs incurred on debt utilized to finance the Einstein
Acquisition. Interest expense for the fiscal quarter ended April 2, 2002 was
comprised of approximately $8.0 million of interest paid or payable in cash and
noncash interest expense of approximately $5.5 million resulting from the
amortization of debt discount, debt issuance costs, the amortization of warrants
issued in connection with debt financings, the accretion of the value assigned
to warrants issued to Greenlight New World, L.L.C. and the related guaranteed
investment return.
Gain from sale of debt securities was $0.2 million or 2.3% of total revenues for
the fiscal 2001 period. There was no such gain in the fiscal quarter ended April
2, 2002.
Provision for income taxes was $0 for the fiscal quarter ended April 2, 2002
from $0.2 million for the comparable 2001 period. The 2002 period reflects the
Company's current tax position and management's assessment of potential future
realization of deferred tax assets.
Minority interest was $0.7 million or 6.9% or total revenues for the 2001
period. This charge is attributable to accretion of the value assigned to
warrants and the guaranteed investment return to investors in Greenlight New
World, L.L.C.
Net Loss.
Net loss for the fiscal quarter ended April 2, 2002 was $12.3 million compared
to a net loss of $1.0 million for the comparable 2001 period. The decrease in
net income is primarily the result of interest expense incurred in the fiscal
quarter 2002 relating to debt incurred to finance the Einstein Acquisition as
well as the increase in general and administrative expenses.
Supplemental Unaudited Analysis of the fiscal quarter ended April 2, 2002 to the
pro forma fiscal quarter ended April 1, 2001.
The following unaudited pro forma financial data for the fiscal quarter ended
April 1, 2001 gives effect to the Einstein Acquisition as if it had occurred as
of the beginning of the period reported. All of the following unaudited pro
forma financial data gives effect to purchase accounting adjustments necessary
to reflect the Einstein Acquisition. These pro forma results have been prepared
for the purpose of supplementary analysis only in order to assist in the
evaluation of changes and trends in our business and do not purport to be
indicative of what operating results would have been had the acquisition
actually taken place as of the beginning of the period reported, and may not be
indicative of future operating results. Financial data for the fiscal quarter
ended April 2, 2002 are actual results.
12
Actual Proforma
April 2, April 1,
2002 2001
(Dollars in thousands)
Statement of Operations Data
Revenues:
Einstein............................... $ 91,208 $ 111,778
New World.............................. 7,377 10,475
Total revenues......................... 98,585 122,253
Cost of sales.......................... 80,215 102,077
General and administrative expense..... 12,607 11,986
EBITDA................................. $ 5,763
$ 8,190
Other Information
Number of operating days included in fiscal period:
Einstein............................... 91 112
New World.............................. 91 91
Revenues. Total revenues declined 19.4% to $98.6 million for the quarter ended
April 2, 2002 from pro forma total revenues of $122.3 million in the fiscal 2001
period. The decline is primarily attributable to the differences in the fiscal
calendar between the periods presented as discussed below and a decline in store
base.
Revenues - Einstein. Pro forma revenues for Einstein decreased 18.4% to $91.2
million for the quarter ended April 2, 2002 from pro forma revenues of $111.8
million in the fiscal 2001 period. The decline is the result of differences in
the fiscal accounting calendar for the periods presented. The fiscal 2001 period
included 16 weeks (112 days) of operations as compared to 13 weeks (91 days) for
the fiscal 2002 period. Einstein sales for the 2001 period normalized for the
fiscal calendar difference discussed above would have been approximately $90.5
million for the fiscal 2001 quarter as compared to $91.2 million for the fiscal
2002 quarter, which represents a 0.8% increase.
Revenues - New World. Revenues for New World decreased 29.6% to $7.4 million for
the fiscal 2002 quarter from $10.5 million for the comparable 2001 period. The
decrease is attributable to the sales associated with company owned stores that
have been sold or closed. The company owned store base has declined 57.1% with
18 company owned stores for the fiscal quarter ended April 2, 2002 from 42
stores for the fiscal quarter ended April 1, 2001. Such revenues accounted for
approximately $2.0 of the sales decline. EBITDA on company operated Manhattan
Bagel stores including direct general and administrative charges was ($0.2)
million and $0.1 million in 2002 and 2001, respectively. We have closed or
intend to close the balance of the restaurants by July 15, 2002. Furthermore,
there has been a 5% decline in our franchise store base in the fiscal 2002
quarter as compared to the comparable period in 2001.
Cost of Sales. Cost of sales expressed as a percentage of the related retail and
manufacturing sales decreased to 82.7% for the quarter ended April 2, 2002 from
pro forma cost of sales of 84.6% for the 2001 period. The decrease is the result
of management's decision to close under-performing Einstein company-operated
stores.
General and Administrative Expenses. General and administrative expenses
increased 5.2% to $12.6 million for the quarter ended April 2, 2002 compared to
pro forma general and administrative expenses of $12.0 million for the fiscal
2001 period. General and administrative expenses for the quarter ended April 2,
2002 include charges of approximately $2.6 million (inclusive of related payroll
tax expenses) in connection with the unauthorized bonus payments to certain
former officers and employees. Such unauthorized bonus payments were offset
against payments to be made in connection with the separation of certain
officers and employees from our company. The 2002 period also includes legal
expenses of approximately $1.7 million incurred in connection with the voluntary
internal investigation of the unauthorized bonus payments. Exclusive of these
one-time charges and payments relative to the internal investigation, general
and administrative expenses in the fiscal 2002 quarter would have decreased $4.3
million or 31.1% from the pro forma fiscal 2001 period.
Also included in 2002 general and administrative are $0.6 million in performance
bonuses paid to the former officers and employees referenced above that we
believe would not have otherwise been paid both based on our recently completed
restatement of results and in light of the unauthorized bonus payments. The
comparable amount in 2001 was $0.2 million. Further, the 2002 and 2001 general
and administrative expenses included $0.2 million of salary and direct expenses
for those of the former officers and employees whose
13
positions are duplicative with others. It is our intent not to replace these
individuals. The before-mentioned general and administrative costs specifically
excludes the $2.6 million of unauthorized bonuses and separation costs.
EBITDA. EBITDA is defined as income (loss) from operations before restructuring
charges plus depreciation and amortization. EBITDA should not be considered as
an alternative to, or more meaningful than, earnings from operations or other
traditional indicators of operating performance, such as cash flow from
operating activities. EBITDA decreased 29.6% to $5.8 million for the quarter
ended April 2, 2002 from pro forma EBITDA of $8.2 million for the fiscal 2001
quarter. The decrease was the result of the sales decline and the increase in
general and administrative expenses discussed above.
Liquidity and Capital Resources
At April 2, 2002, we had a working capital deficit of $26.0 million compared to
a working capital deficit at January 1, 2002 of $20.2 million. The decline in
working capital was primarily the result of the accrual and payment of costs
relative to the termination of our distribution agreement and the acceleration
of such payments, the accrual and payment of costs relative to the internal
investigation, and the interest in connection with the $35 million asset-backed
loan utilized to finance the Einstein Acquisition (approximately $1.5 million).
We had net cash used in operating activities of $7.4 million for the fiscal
quarter ended April 2, 2002 compared with net cash used in operating activities
of $1.1 million for the fiscal quarter ended April 1, 2001. The increase in cash
used in operating activities was attributable to changes in operating assets and
liabilities, specifically due to the acceleration of payment relative to the
termination of the distribution agreement, the expense relative to the internal
investigation as well as an increase in prepaid expenses relative to new
insurance policies.
We had net cash provided by investing activities of $0.3 million for the fiscal
quarter ended April 2, 2002 compared with net cash used in investing activities
of $25.7 million for the fiscal quarter ended April 1, 2001. During 2001, cash
used in investing activities was attributable to our investment in debt
securities and the Einstein Acquisition.
We had net cash used in financing activities of $0.1 million for the fiscal
quarter ended April 2, 2002 compared with net cash provided by investing
activities of $28.8 million for the fiscal quarter ended April 1, 2001. During
2001, cash provided by financing activities relates to the issuance of Series F
Preferred Stock and proceeds from the sale of an interest in Greenlight New
World, L.L.C.
On May 30, 2002, we entered into a Loan and Security Agreement with BET
Associates, L.P., one of our principal stockholders, which provides for a $7.5
million revolving loan facility. The facility is secured by substantially all of
our assets. Borrowings under the facility bear interest at the rate of 11% per
annum. The facility will expire on March 31, 2003. In connection with obtaining
the facility, we paid MYFM Capital LLC a fee of $75,000. Leonard Tannenbaum, one
of our directors, is the Managing Director of MYFM Capital and is a partner at
BET Associates, L.P. At the time that we entered into this facility, we
terminated our prior revolving loan facility with Foothill Capital.
On June 19, 2001, we consummated a private placement of 140,000 units consisting
of $140 million of Senior Increasing Rate Notes due 2003 with detachable
warrants for the purchase of 13.7 million shares of our Common Stock,
exercisable at $.01 per share. The proceeds, net of discount and related
offering expenses, were $122.4 million. The proceeds were utilized to fund a
portion of the purchase price for the Einstein Acquisition, to repay our
then-existing bank debt and for general working capital purposes. The Notes
currently bear interest at 16% per annum. In addition, since we have not
completed a registered exchange offer for the Notes, we began paying additional
interest on the Notes on November 17, 2001 at the rate of .25% per annum
increasing by .25% each 90 days that such default continues up to a maximum rate
of additional interest of 1% per annum.
On June 19, 2001, we obtained a $35 million asset-backed secured loan to our
wholly owned non-restricted subsidiary, EnbcDeb Corp. The proceeds, net of
discount and related offering expenses, were $32.3 million. The proceeds were
utilized to fund a portion of the purchase price for the Einstein Acquisition.
The asset-backed loan, for which EnbcDeb Corp. issued increasing rate notes (the
"EnbcDeb Notes"), is secured by Einstein bonds owned by EnbcDeb Corp. The
EnbcDeb Notes matured on June 15, 2002. Because EnbcDeb Corp. is a
non-restricted subsidiary, a default on the EnbcDeb Notes does not result in a
default under the Notes or our revolving loan facility. Interest on the EnbcDeb
Notes initially accrues at the rate of 14% per annum, increasing by .35% on the
fifteenth day of each month following issuance, plus 2% per annum penalty on
overdue amounts. As before mentioned, since the EnbcDeb Notes matured on June
15, 2002, the additional 2% penalty is effective as a result of the default.
Interest is payable on the fifteenth day of every month and may be paid in kind
at our option. As of April 2, 2002, an aggregate of $39.1 million principal
amount of EnbcDeb Notes was outstanding. We must apply all proceeds relating to
the Einstein bonds to the repayment of the EnbcDeb Notes. We anticipate that
approximately $34.2 million aggregate principal amount of the EnbcDeb Notes
outstanding will be repaid from the proceeds of the Einstein bonds distributed
in the Einstein bankruptcy case ($24.2 million of which has already been
distributed and applied to redeem a portion of the outstanding EnbcDeb Notes).
To the extent that the proceeds received are
14
insufficient to repay the EnbcDeb Notes in full, the holders of the EnbcDeb
Notes will have the option to require us to issue them preferred stock ("Series
G Preferred Stock") having a redemption value equal to the deficiency. If the
amount of such deficiency is less than $5.0 million, then the Series G Preferred
Stock will be entitled to an annual cash dividend equal to 17% per annum,
increasing 100 basis points per month until the Series G Preferred Stock is
redeemed, and we will be required to issue warrants to purchase 5% of our fully
diluted Common Stock. If the amount of the deficiency is $5.0 million or
greater, then the Series G Preferred Stock will be entitled to an annual cash
dividend equal to 18% per annum, increasing 100 basis points per month until the
Series G Preferred Stock is redeemed, and we will be required to issue warrants
to purchase 10% of our fully diluted Common Stock.
On January 17, 2001, we entered into a Bond Purchase Agreement with Greenlight
Capital. Pursuant to the agreement, Greenlight Capital formed a limited
liability company, Greenlight New World, L.L.C. ("GNW"), and contributed $10
million to GNW to purchase Einstein bonds. We are the exclusive manager of GNW.
The agreement provided Greenlight Capital with a secure interest in GNW and a
right to receive the return of its original contribution plus a guaranteed
accretion of 15% per year, increasing to 17% on January 16, 2002 and by an
additional 2% each six months thereafter (the "Guaranteed Return"). In
connection with the agreement, we issued Greenlight Capital warrants to purchase
an aggregate of 4,242,056 shares of our Common Stock at $0.01 per share. On June
19, 2001, we, GNW and Greenlight Capital entered into a letter agreement,
pursuant to which, among other things, Greenlight Capital consented to the
pledge of the Einstein bonds owned by GNW to secure the EnbcDeb Notes. We are
required to apply all proceeds received with respect to the Einstein bonds to
repay the EnbcDeb Notes. To the extent that there are any excess proceeds, we
are required to pay them to Greenlight Capital. If Greenlight Capital does not
receive a return equal to its Guaranteed Return, we are obligated to issue
Greenlight Capital Series F Preferred Stock with a face amount equal to the
deficiency and warrant coverage equal to 1.5% of our fully diluted Common Stock
for each $1 million of deficiency.
We plan to satisfy our capital requirements for the balance of fiscal 2002
through cash flow from operations and borrowings under our revolving loan
facility. However, the Notes mature in June 2003 and the revolving loan facility
expires in March 2003. Accordingly, we intend to pursue refinancing the Notes
and replacing the revolving loan facility, although we can give you no assurance
that we will be able to do so on satisfactory terms and conditions, or at all.
Seasonality and General Economic Trends
The Company anticipates that its business will be affected by general economic
trends that affect retailers in general. While the Company has not operated
during a period of high inflation, it believes based on industry experience that
it would generally be able to pass on increased costs resulting from inflation
to its customers. The Company's business may be affected by other factors,
including increases in the commodity prices of green coffee and/or flour,
acquisitions by the Company of existing stores, existing and additional
competition, marketing programs, weather, and variations in the number of store
openings. The Company has few, if any, employees at the minimum wage level and
therefore believes that an increase in the minimum wage would have minimal
impact on its operations and financial condition.
Risk Factors Relating to Our Financial Condition
We face the following significant risks relating to our results of operations
and financial condition.
We have $140 Million Aggregate Principal Amount of Notes Outstanding that Mature
on June 15, 2003, and We Must Raise Additional Capital to Refinance these Notes
and for Other General Corporate Purposes.
We must raise significant additional capital before June 15, 2003 to refinance
the Notes and for other general corporate purposes. We cannot assure you that we
will be able to raise such capital on satisfactory terms and conditions, if at
all. In addition, our existing revolving loan facility expires on March 31,
2003. We intend to pursue refinancing the Notes and replacing the revolving loan
facility through the issuance of debt or equity or a combination thereof and
obtaining additional bank financing, but we currently have no commitments with
respect to any refinancing. We currently have outstanding warrants to purchase
60,721,694 shares of our Common Stock, which may adversely affect our ability to
raise additional equity financing in the future.
We have and expect to continue to have a substantial amount of debt.
We have a high level of debt and are highly leveraged. In addition, we may,
subject to certain restrictions, incur substantial additional indebtedness in
the future. Our high level of debt could:
o make it difficult for us to satisfy our obligations under our
indebtedness;
o limit our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes;
15
o increase our vulnerability to downturns in our business or the economy
generally;
o limit our ability to withstand competitive pressures from our less
leveraged competitors; and
o harm us if we fail to comply with the covenants in the instruments and
agreements governing our indebtedness, because a failure could result
in an event of default that, if not cured or waived, could result in
all of our indebtedness becoming immediately due and payable, which
could render us insolvent.
We may not be able to generate sufficient cash flow to make payments under our
indebtedness due to events that are beyond our control.
Economic, financial, competitive, legislative and other factors beyond our
control may affect our ability to generate cash flow from operations to make
payments on our indebtedness and to fund necessary working capital. A
significant reduction in operating cash flow would likely increase the need for
alternative sources of liquidity. If we are unable to generate sufficient cash
flow to make payments on our debt, we will have to pursue one or more
alternatives, such as reducing or delaying capital expenditures, refinancing our
debt, selling assets or raising equity. We cannot assure you that any of these
alternatives could be accomplished on satisfactory terms, if at all, or that
they would yield sufficient funds to retire our debt.
16
PART II - OTHER INFORMATION
NEW WORLD RESTAURANT GROUP, INC.
APRIL 2, 2002
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
On June 19, 2001, we obtained a $35 million asset-backed secured loan to our
wholly owned non-restricted subsidiary, EnbcDeb Corp. The proceeds, net of
discount and related offering expenses, were $32.3 million. The proceeds were
utilized to fund a portion of the purchase price for the Einstein Acquisition.
The asset-backed loan, for which EnbcDeb Corp. issued the EnbcDeb Notes, is
secured by Einstein bonds owned by EnbcDeb Corp. The EnbcDeb Notes matured on
June 15, 2002. Because EnbcDeb Corp. is a non-restricted subsidiary, a default
on the EnbcDeb Notes does not result in a default under the Notes or our
revolving loan facility.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended and Restated Employment Agreement dated as of June 17, 2002,
between the Company and Anthony Wedo.
(b) Reports on Form 8-K filed during the quarter ended April 2, 2002
On January 1, 2002, The Company filed a Form 8-K and related press release
announcing that certain market makers were quoting its common stock on the OTC
Bulletin Board.
On February 4, 2002, the Company filed a Form 8-K and related press release
relating to the Company's intent to offer senior secured notes pursuant to Rule
144A.
On February 4, 2002, the Company filed a Form 8-K and related press release
announcing that comparable store sales for its company owned units increased
2.2% over prior year levels for the 4th quarter ended January 1, 2002.
17
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.
NEW WORLD RESTAURANT GROUP, INC.
Date: June 24, 2002 By: /s/ Anthony Wedo
---------------------------
Anthony Wedo
Chief Executive Officer
By: /s/ Max Craig
---------------------------
Max Craig
Chief Financial Officer
18