Einstein Bros 2003 Annual Report Download

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http://www.sec.gov/Archives/edgar/data/949373/000104746904009609/a2132006z10-k.htm[9/11/2014 10:13:55 AM]
10-K 1 a2132006z10-k.htm 10-K
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NEW WORLD RESTAURANT GROUP, INC. FORM 10-K TABLE OF CONTENTS
NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One):
ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2003
OR
oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-27148
NEW WORLD RESTAURANT GROUP, INC.
(Name of Registrant as Specified in its Charter)
Delaware 13-3690261
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1687 Cole Blvd., Golden, Colorado 80401
(Address of Principal Executive Offices) (Zip Code)
(303) 568-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value

Table of contents

  • Page 1
    ...to rapidly review the document NEW WORLD RESTAURANT GROUP, INC. FORM 10-K TABLE OF CONTENTS NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO...

  • Page 2
    ... AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PRINCIPAL ACCOUNTANT FEES AND SERVICES EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 1 SPECIAL NOTE...

  • Page 3
    ... menus; Our ability to open new company-owned Einstein Bros. locations; Our ability to satisfy our obligations under our indebtedness; Changes in the price of our raw ingredients; Our ability to attract, retain and motivate qualified employees; Changes in labor costs; Our dependence on our suppliers...

  • Page 4
    ..."Einstein Acquisition") of Einstein/Noah Bagel Corp. ("ENBC") and its majority-owned subsidiary, Einstein/Noah Bagel Partners, L.P. which operated 2 brands: Einstein Bros. and Noah's New York Bagels ("Noah's"). We currently operate company-owned stores predominantly under the Einstein Bros. and Noah...

  • Page 5
    ... 0.6610444 new shares of common stock for every share of common stock held by such stockholder pursuant to a 1.6610444-for-one forward stock split in order to effect the transactions contemplated by the Equity Recap; the per share exercise price and the number of shares of common stock issuable upon...

  • Page 6
    ... that of quick service restaurants. Einstein Bros.' menu specializes in high-quality foods for breakfast and lunch, including fresh baked goods, made-to-order sandwiches on bagels and breads such as challah, hearty soups, innovative salads, desserts, five fresh-brewed premium coffees daily and other...

  • Page 7
    ... setting of a neighborhood-meeting place. The locations offer over 20 varieties of fresh baked bagels, as well as bagel sticks and bialys and up to 15 flavors of cream cheese, an extensive variety of breakfast and lunch sandwiches, salads, soups, coffees and café beverages, soft drinks and desserts...

  • Page 8
    ...drive their sales of bread and bagels. We have established a vendor partnership with Costco pursuant to which we sell Einstein Bros. and Noah's products dual branded with the Kirkland signature brand through more than 300 Costco stores. We recently entered into a similar arrangement with Target Corp...

  • Page 9
    ...a built-in customer base for our manufacturing operations. Management Information Systems Each Einstein Bros. and Noah's company-operated location uses point-of-sale computers to collect daily transaction data, which is used to generate pertinent marketing information, including daily sales, product...

  • Page 10
    ... for each location with final reports following the end of each fiscal period. Trademarks and Service Marks Our rights in our trademarks and service marks ("Marks") are a significant part of our business. We are the owners of the federal registration of the "Einstein Bros.," "Noah's New York Bagels...

  • Page 11
    ...our sales and revenues. In addition, inflation and increased food and energy costs may harm the restaurant industry in general and our locations in...competitors, one or more new major competitors with substantially greater financial, marketing and operating resources could enter the market at any time...

  • Page 12
    ... in the labor pool or other general inflationary pressures or changes could also increase labor costs. In addition, changes in labor laws or reclassifications of employees from management to hourly employees could affect our labor cost. An increase in labor costs could have a material adverse effect...

  • Page 13
    ... Officer, Jerold E. Novack. We are cooperating fully with the SEC's investigation. We are also cooperating fully with a Department of Justice inquiry relating to the same. In addition, in August 2003, the New York Attorney General commenced on investigation into prior sale of franchisees in New York...

  • Page 14
    ... from Washington and Lee University. ITEM 2. PROPERTIES As of December 30, 2003, we and our franchisees and licensees operated 736 locations as follows: State Company-Operated Franchised/Licensed Total Alabama Arizona California Colorado Connecticut Delaware District of Columbia Florida Georgia...

  • Page 15
    ... and production facilities is presented below: Location Facility Size Golden, CO(1) Hamilton, NJ (2) Whittier, CA(3) Los Angeles, CA(4) Eatontown, NJ(5) Branford, CT(6) Walnut Creek, CA(7) (1) (2) (3) (4) Headquarters, Support Center, Test Kitchen Franchise Support Center, Test Kitchen Production...

  • Page 16
    ... Einstein and Noah Corp. ("ENC") in the Superior Court for the State of California, County of San Francisco. The plaintiffs allege that ENC failed to pay overtime wages to managers and assistant managers of its California stores, whom it is alleged were improperly designated as exempt employees...

  • Page 17
    ... with the Court. In July 2002, the New Jersey Division of Taxation entered judgment in the amount of $5,744,902, plus costs, against Manhattan Bagel Construction Company, a wholly owned subsidiary of Manhattan. This judgment represents amounts for corporate income taxes for the period from 1996 to...

  • Page 18
    ... the notes thereto, included elsewhere in this Form 10-K. Fiscal Year Ended December 30, 2003 December 31, 2002 January 1, 2002 (Dollars in thousands) December 31, 2000 December 26, 1999 Income Statement Data: Revenues Cost of sales General and administrative expenses Depreciation and amortization...

  • Page 19
    ... of debt discount, notes paid-in-kind, debt issuance costs and the ...2003, 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. We also operate dough production and coffee...

  • Page 20
    ... revenues are recognized upon shipment to customers. Retail sales are recognized when payment is tendered at the point of sale. Pursuant to our franchise and license agreements, franchisees and licensees are generally required to pay an initial franchise fee and a monthly royalty payment equal...

  • Page 21
    ... an annual basis. Furthermore, from time to time, we will commit to the purchase price of certain commodities that are related to the ingredients used for the production of our bagels. On a periodic basis, we review the relationship of these purchase commitments to our business plan, general market...

  • Page 22
    ... where applicable. Issued $0.60 and $1.00 warrants (formerly pre-split $0.01 warrants) classified as liabilities, if any, are recognized in the balance sheet at their fair value, as determined periodically based on quoted market prices of the underlying common stock. As of December 30, 2003 and...

  • Page 23
    ... as the unemployment rate, minimum wage levels, 26 increasing cost of employee benefits and inflation in general. While we expect the cost of these items to continue to increase, we plan to utilize changes to our menu offerings and limited time offer menu selections to decrease our cost of sales as...

  • Page 24
    ..., from our investment in the Einstein/Noah Bagel Corp. 7.25% Convertible Debentures due 2004 (the "Einstein Bonds"). These proceeds from the bankruptcy court were in excess of our original estimates. Loss on exchange of Mandatorily Redeemable Series F Preferred Stock due to Equity Recap. Loss...

  • Page 25
    ... the Einstein Bros. and Noah's company operated stores. The decrease in the percentage of cost of sales in relation to retail sales primarily resulted from the implementation of supply chain cost reduction initiatives related to the integration of Einstein. Cost of Sales-Manufacturing costs. Cost of...

  • Page 26
    ...costs associated with exiting the Eatontown, NJ facility and corporate...Einstein Acquisition resulted in an impairment charge of $3.3 million to assets held for resale (stores earmarked for sale... market price of the underlying common stock ...investment in the Einstein/Noah Bagel Corp. 7.25% Convertible...

  • Page 27
    ... and/or modify inefficient products; Upgrade/deployment of technology to enable more accurate sales identification and tracking of cost of products sold; Realignment and consolidation of the senior management team resulting in a reduction of overhead; and, Focusing on reducing the various elements...

  • Page 28
    ... for new stores, $4.1 million for replacement and new equipment at our company-operated stores, $0.1 million for our manufacturing operations and $0.5 million for general corporate purposes. These investing expenditures were partially offset by $0.4 million received related to the Einstein Bonds...

  • Page 29
    ... Statements. Our debt at December 30, 2003 is principally comprised of the $160 Million Facility due 2008 and the AmSouth Revolver. A 100 basis point increase in market interest rates would have an immaterial effect on our borrowing costs, since the interest rate on the $160 Million Facility is...

  • Page 30
    ...internal controls over financial reporting. 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to Directors required by Item 10 will be included in our 2004 Proxy Statement, which will be filed within 120 days after the close of the 2003 fiscal year, and is...

  • Page 31
    ...a new symbol "NWRG.PK." Current Report on Form 8-K filed with the SEC on October 31, 2003, announcing our extension to 5:00 p.m., Eastern Time, on Tuesday, November 4, 2003, of our offer to exchange $160 million aggregate principal amount of our 13% senior secured notes due 2008 (the "original notes...

  • Page 32
    ... Agreement And Mutual General Release between the Company and Anthony Wedo, effective as of October 24, 2003* Consulting Agreement between the Company and Jill B. W. Sisson effective as of December 8, 2003* Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights...

  • Page 33
    ... the Company and The Bank of New York, as Collateral Agent(17) Trademark Security Agreement dated as of July 8, 2003, between Chesapeake Bagel Franchise Corp. and The Bank of New York, as Collateral Agent(17) Trademark Security Agreement dated as of July 8, 2003, between Einstein/Noah Bagel Partners...

  • Page 34
    ... of July 8, 2003, between the Company, the Subsidiary Guarantors and Jefferies & Company, Inc.(17) List of Subsidiaries* Certification of Principal Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant's Annual Report on Form 10...

  • Page 35
    ...2003. Incorporated by reference from Registrant's Form S-4, filed on August 12, 2003. Incorporated by reference from Registrant's Current Report on Form... /s/ LAWRENCE P. GELFOND Chief Executive Officer and Director March 26, 2004 Chief Financial Officer and Principal Accounting Officer March ...

  • Page 36
    ..., 2004 Director March 26, 2004 NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Audited Annual Financial Statements Report of Independent Certified Public Accountants Consolidated Balance Sheets as of December 30, 2003 and December 31, 2002 Consolidated...

  • Page 37
    ... fairly, in all material respects, the information therein. /s/ GRANT THORNTON LLP Denver, Colorado March 9, 2004 F-2 NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 30, 2003, AND DECEMBER 31, 2002 (in thousands, except share and per share information...

  • Page 38
    ... per share information) December 30, 2003 December 31, 2002 January 1, 2002 Revenues: Retail sales Manufacturing revenues Franchise related revenues Total revenues Cost of sales: Retail costs Manufacturing costs Total cost of sales General and administrative expenses Depreciation and amortization...

  • Page 39
    ...YEARS ENDED DECEMBER 30, 2003, DECEMBER 31, 2002 AND JANUARY 1, 2002 (in thousands, except share and per share information) Common Stock Shares Balance, December 31, 2000 Net loss Net unrealized gain on available for sale securities Comprehensive loss Issuance of common stock Issuance of warrants in...

  • Page 40
    ... Dividends and accretion on preferred stock Balance, December 30, 2003 (67,708) 9,380,843...costs Amortization of debt discount Notes issued as paid in kind for interest on Bridge Loan Greenlight Interest Standstill and step-up warrants Stock issued for compensation and consulting Gain on sale...

  • Page 41
    ...as of December 30, 2003. We specialize in high-quality foods for breakfast and lunch in a café atmosphere with a neighborhood emphasis. Our product offerings include fresh baked goods, made-to-order sandwiches on a variety of breads and bagels, soups, salads, desserts, premium coffees and other caf...

  • Page 42
    ... 0.6610444 new shares of common stock for every share of common stock held by such stockholder pursuant to a 1.6610444-for-one forward stock split in order to effect the transactions contemplated by the Equity Recap; the per share exercise price and the number of shares of common stock issuable upon...

  • Page 43
    ... of the Einstein Acquisition (see Note 3), we elected to change our fiscal year end to the Tuesday closest to December 31. Our annual accounting period ... following: December 30, 2003 December 31, 2002 (amounts in thousands) Advertising Funds(a) New Jersey Economic Development Authority(b) Worker...

  • Page 44
    ... 2003 balance ...2003. This collateral could be accessed by the insurance company...number of factors, including the length of time trade accounts receivable are past due, our previous loss and payment history, the customer's current ability to pay its obligation to us, and the condition of the general...

  • Page 45
    .../Noah Bagel Corp. 7.25% Convertible Debentures due 2004 (the "Einstein Bonds") which classified as available for sale securities and were recorded at fair value with temporary fluctuations in fair value excluded from earnings and reported as a separate component of stockholders' equity. Due to...

  • Page 46
    ..., and will review this determination in future periods if our intentions for these brands were to change. The fair value of Einstein Bros. and Noah's indefinite-lived intangible assets (trademarks) exceeded their carrying value thus no impairment was present at December 30, 2003. In 2003 and 2002...

  • Page 47
    ... recognized when payment is tendered at the point of sale. Manufacturing revenues are recognized upon shipment to customers. Pursuant to the franchise agreements, franchisees are generally required to pay an initial franchise fee and a monthly royalty payment equal to a percentage of the franchisees...

  • Page 48
    ... and the effective discount rate from the Certificate of Designation. Debt Issuance Cost Direct costs incurred for the issuance...stock price in the months subsequent to the Equity Recap (and the resultant forward and reverse stock splits), we have determined that, commencing in the fourth quarter 2003...

  • Page 49
    ... reviewed and...enacted tax rates expected to apply to taxable...SFAS 123. Had compensation cost for these plans been...2003 December 31, 2002 January 1, 2002 (amounts in thousands, except for per share amounts) Net loss available to common stockholders: As reported Add (deduct): total stock-based employee...

  • Page 50
    ... Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", and accordingly classified those warrants as a liability in the balance sheet. Further, those warrants classified as a liability were subject to the provisions of SFAS 133, including the http://www.sec.gov...

  • Page 51
    ...applicable. Freestanding warrants and the maximum number...additional discount on the debt or preferred stock instrument...balance sheet at their fair value, as determined periodically based on quoted market prices of the underlying common stock. As of December 30, 2003... principles generally accepted ...

  • Page 52
    ... Acquisition") of Einstein/Noah Bagel Corp. and its majorityowned subsidiary, Einstein/Noah Bagel Partners, L.P. (collectively, "Einstein"). Einstein was the largest bagel bakery chain in the United States, with 458 stores, nearly all of which were company-operated. The Einstein Acquisition was made...

  • Page 53
    ...the Einstein Acquisition...of each period reported, and may not...2003 December 31, 2002 (amounts in thousands) Leasehold improvements Store/factory equipment Furniture & fixtures Office...2003, December 31, 2002 and January 1, 2002, respectively. 5. Debt Issuance Costs and Other Assets Debt issuance costs...

  • Page 54
    ... Facility, net of unamortized discount of $0 and $1,916(b) Bridge loan(c) Greenlight obligation(d) Revolving credit note payable to an affiliate(e) AmSouth Revolver(f) Promissory note payable Chesapeake Bagel Bakery acquisition(g) Note payable to New Jersey Economic Development Authority(h) Other...

  • Page 55
    ... to repay the notes against us until July 15, 2003. The interest rate and terms under the standstill agreement stayed the same as the original agreement. We paid interest on the closing date consisting of $6,650,000 for the normally scheduled quarterly payment, $2,216,067 for the extension through...

  • Page 56
    ... Agreement"), EnbcDeb Corp. sold $35 million aggregate principal amount of secured increasing rate notes to third-parties. The aggregate proceeds were $33,250,000. The notes were secured by EnbcDeb Corp.'s investment in $61.5 million aggregate principal amount of the Einstein/Noah Bagel Corp. 7.25...

  • Page 57
    ... met (including but not limited to a combination of New World and Einstein) and b) warrants for an additional 1.5% of our fully diluted common stock were to be issued at such time as the Series F is redeemed through the issuance of senior subordinated notes, which obligations were superceded by the...

  • Page 58
    ... interest rate of 9% per annum. The note has a 10-year maturity. Principal is paid annually and interest is paid quarterly. The note is secured by our subsidiary, Manhattan Bagel Company, Inc. In 2002, we violated the debt coverage ratio associated with this loan. Therefore, the balance outstanding...

  • Page 59
    ... on a former plant in South Carolina. The mortgage bore interest at prime plus 1.25% and was scheduled to mature in March 2010. The mortgage was secured by the associated real estate. This property was sold and the mortgage repaid in full during 2003. Scheduled debt maturities are as follows: Year...

  • Page 60
    ... Right's then-current exercise price, a number of the acquiring company's common shares having a market value at that time of twice the Right's exercise price. Mandatorily Redeemable Series F Preferred Stock The Series F Mandatorily Redeemable Preferred Stock had varying redemption scenarios based...

  • Page 61
    ... and Special Situations Fund, L.P, Special Situations Cayman Fund, L.P. and Special Situations Private Equity Fund, L.P. (collectively, "Special Situations"). In connection with the sale of the June 2001 Series F, we sold warrants to purchase 295,156 shares of common stock at a price per share...

  • Page 62
    ... changes at the September 24, 2003 annual meeting: • • an amendment to increase the number of shares of common stock authorized for issuance from 150,000,000 to 1,500,000,000; an amendment to effect a 1.6610444-for-one forward stock split in order to effect the transactions contemplated by...

  • Page 63
    ... Incentive Plan, amended on December 19, 2003, (the "2003 Plan") subject to stockholder approval at the next annual meeting. The 2003 Plan provides for granting incentive stock options to employees and granting non-statutory stock options to employees and consultants. Unless terminated sooner, the...

  • Page 64
    ...average assumptions used for grants in 2003, 2002 and 2001 respectively: risk-free interest rates of 3.0%; expected dividend yields of 0%; expected lives of four years and expected stock price volatility of 100%. 10. Income Taxes Components of the (provision for) benefit from the income taxes are as...

  • Page 65
    ... - (366) - (167) The actual income tax (provision) benefit at December 30, 2003, December 31, 2002 and January 1, 2002 is reconciled to the amounts computed by applying the statutory federal rate to income before taxes as follows: December 30, 2003 December 31, 2002 (amounts in thousands) January...

  • Page 66
    ...goods sold based on the volume of purchases of the vendor's product. In connection with our acquisition of Manhattan, we agreed to guarantee certain loans to franchisees made by two financial institutions. Each balance sheet date, we evaluate the fair value of such liability. As of December 30, 2003...

  • Page 67
    ... in brand focus given the Einstein Acquisition (Note 3). During 2001, we sold four stores in New York, and closed ten locations classified as assets held for resale. During 2002, we sold seven stores for an aggregate sales price of $1.4 million, and closed 15 stores classified as assets held for...

  • Page 68
    ...several restaurant and other locations. We recorded a ...Application of costs against accrual Underaccrual Additional Expense (amounts in thousands) Overaccrual Expense Reduction Balance as of December 30, 2003 Category Facility consolidation costs Severance costs Contract termination and other Store...

  • Page 69
    ...) $ Application of costs against accrual 573 $ (1,147) $ 1,064 Balance as of January 1, 2002 Category Initial 2001 Accrual Underaccrual Additional Expense (amounts in thousands) Overaccrual Expense Reduction Facility consolidation costs Severance costs Contract termination and other Store...

  • Page 70
    ... with six regional custom distributors to our company-operated and franchised locations. Purchase Commitments We have obligations with certain of our major suppliers of raw materials (primarily frozen bagel dough) for minimum purchases both in terms of quantity and pricing on an annual basis. The...

  • Page 71
    ... Einstein and Noah Corp. ("ENC") in the Superior Court for the State of California, County of San Francisco. The plaintiffs allege that ENC failed to pay overtime wages to managers and assistant managers of its California stores, whom it is alleged were improperly designated as exempt employees...

  • Page 72
    ... with the Court. In July 2002, the New Jersey Division of Taxation entered judgment in the amount of $5,744,902, plus costs, against Manhattan Bagel Construction Company, a wholly owned subsidiary of Manhattan. This judgment represents amounts for corporate income taxes for the period from 1996 to...

  • Page 73
    ... Greenlight formed a limited liability company, GNW, and contributed $10.0 million to GNW to purchase Einstein bonds. We were the exclusive manager of GNW. The agreement provided Greenlight with a secure interest in GNW and a right to receive the return of its original contribution plus a guaranteed...

  • Page 74
    ...common stock pursuant to the 2003 Plan subject to stockholder approval of such a plan at the 2004 annual meeting. The options vest in part, upon length of service and... includes the following items that are further discussed in Management's Discussion and Analysis of Financial Condition and Results of...

  • Page 75
    ... available to common stockholders includes dividends and accretion on Preferred Stock for the respective 2003 quarters' ended April 1 and July 1 of $4.6 million...average number of shares in interim periods. F-49 Schedule II-Valuation of Qualifying Accounts Balance at Beginning of Period Balance at...