<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1996
REGISTRATION NO. 333-04725
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EINSTEIN/NOAH BAGEL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 5812 84-1294908
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
1526 COLE BOULEVARD, SUITE 200
GOLDEN, COLORADO 80401
TELEPHONE (303) 202-9300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
PAUL A. STRASEN
VICE PRESIDENT AND GENERAL COUNSEL
EINSTEIN/NOAH BAGEL CORP.
1526 COLE BOULEVARD, SUITE 200
GOLDEN, COLORADO 80401
TELEPHONE (303) 202-3463
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
KEVIN J. MCCARTHY DAVID A. SCHUETTE
BELL, BOYD & LLOYD MAYER, BROWN & PLATT
THREE FIRST NATIONAL PLAZA 190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60602 CHICAGO, ILLINOIS 60603
TELEPHONE: (312) 372-1121 TELEPHONE: (312) 782-0600
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL PROPOSED PROPOSED ADDITIONAL
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) OFFERINGPRICE(2) FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share. 575,000 shares(1) $17.00 9,775,000 $3,371
- -------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 75,000 shares of Common Stock which may be purchased pursuant to
an over-allotment option granted by the Company to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
AMENDING THE PROSPECTUS, PART II AND FILING CERTAIN EXHIBITS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED
BY ITEMS OF PART I OF FORM S-1.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT CAPTION OR LOCATION
ITEM NUMBER AND CAPTIONS IN PROSPECTUS
------------------------ -------------------
<C> <S>
1.Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.. Outside Front Cover Page
2.Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front and Outside Back Cover Pages;
Additional Information
3.Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors
4.Use of Proceeds........................... Use of Proceeds; Management's Discussion
and Analysis of Financial Condition and
Results of Operations
5.Determination of Offering Price........... Outside Front Cover Page; Underwriting
6.Dilution.................................. Dilution
7.Selling Security Holders.................. *
8.Plan of Distribution...................... Outside Front Cover Page; Concurrent
Offerings; Underwriting
9.Description of Securities to be Description of Capital Stock
Registered..............................
10.Interests of Named Experts and Counsel.... *
11.Information with Respect to the Outside Front Cover Page; Prospectus
Registrant.............................. Summary--The Company; Risk Factors;
Dividend Policy; Capitalization; Selected
Historical and Pro Forma Consolidated
Financial and Store Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Relationship with Boston
Chicken; Principal Stockholders and
Securities Ownership of Management; Shares
Eligible for Future Sale; Financial
Statements
12.Disclosure of Commission Position on
Indemnification for Securities Act *
Liabilities.............................
</TABLE>
- --------
*Item inapplicable or answer is negative and omitted from Prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 31, 1996
PROSPECTUS
3,125,000 SHARES
LOGO
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby are being issued and sold by
Einstein/Noah Bagel Corp. (the "Company"). Of the 3,125,000 shares offered
hereby, 2,700,000 shares are being offered in an Initial Public Offering and
425,000 shares are being offered in a non-underwritten Concurrent Public
Offering by the Company directly to certain persons or entities, consisting
primarily of officers, directors and employees of each of the Company and
Boston Chicken, Inc. ("Boston Chicken"). Shares of Common Stock offered in the
Concurrent Public Offering are being offered at a price equal to the initial
public offering price per share, net of underwriting discount. Boston Chicken
will not be a purchaser in the Concurrent Public Offering.
Concurrent with the offering of the shares hereby, the Company is offering an
additional 2,000,000 shares of Common Stock in a Concurrent Private Placement
to Boston Chicken at a price equal to the initial public offering price per
share, net of underwriting discount. Following the Offerings, Boston Chicken is
expected to beneficially own approximately 60.4% of the outstanding shares of
Common Stock.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $15.00 and $17.00 per share and that the purchase price
for the shares being offered in the Concurrent Public Offering and the
Concurrent Private Placement will be between $13.95 and $15.81 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "ENBX," subject to notice of issuance.
SEE "RISK FACTORS" AT PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share--Initial Public
Offering.......................... $ $ $
- --------------------------------------------------------------------------
Per Share--Concurrent Public
Offering.......................... $ $ -- $
- --------------------------------------------------------------------------
Total (3).......................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $840,000.
(3) The Company has granted the several Underwriters an option for 30 days to
purchase up to 405,000 additional shares of Common Stock, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount, and Proceeds to Company will be
$ , $ , and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock offered in the Initial Public Offering are being
offered by the several Underwriters, subject to prior sale, when, as and if
issued to and accepted by the Underwriters, subject to the approval of certain
legal matters by counsel for the Underwriters. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about , 1996.
-----------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
-----------
The date of this Prospectus is , 1996.
<PAGE>
[Photograph depicting front facade of, and outside seating for, an Einstein
Bros. Bagels store.]
[Photograph depicting front facade of a Noah's New York Bagels store.]
Einstein Bros.(TM), Noah's Bagels(R) and Noah's New York Bagels(R) are
trademarks owned by the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
[Photograph depicting the Service Counter at an Einstein Bros. Bagels Store.]
[Photograph depicting front exterior [Photograph depicting an employee
of an Einstein Bros. Bagels Store.] sorting newly-baked bagels behind
the counter of an Einstein Bros.
Bagels Store.]
[Photograph depicting the interior of an Einstein Bros. Bagels Store.]
[Einstein Bros. Bagels Logo]
<PAGE>
[Photograph depicting the Service Counter at a Noah's New York Bagels Store.]
[Photograph depicting the front exterior of a Noah's New York Bagels Store at
its grand opening.]
[Photograph depicting the front exterior of a Noah's New York Bagels Store.]
[Photograph depicting an employee carrying newly-baked bagels behind the
counter of a Noah's New York Bagels Store.]
[Noah's New York Bagels Logo]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus (i)
gives effect to a 225-for-1 stock split declared by the board of directors of
the Company on July 8, 1996, (ii) gives effect to the conversion of the
Company's $120.0 million convertible loan facility from Boston Chicken, Inc.
("Boston Chicken") into 15,307,421 shares of Common Stock on June 17, 1996,
(iii) assumes the conversion of 6,250 shares of preferred stock, par value $.01
per share, of the Company into 488,282 shares of Common Stock and (iv) assumes
no exercise of the over-allotment option granted by the Company to the
Underwriters. Unless the context suggests otherwise, references in this
Prospectus to the "Company" mean Einstein/Noah Bagel Corp., its predecessors,
and its and their subsidiaries. References herein to the "Offerings" include
the 2,700,000 shares being offered in an initial public offering through the
Underwriters (the "Initial Public Offering"), the 425,000 shares being offered
concurrently in a non-underwritten public offering to certain persons or
entities, consisting primarily of officers, directors and employees of each of
the Company and Boston Chicken (the "Concurrent Public Offering") and the
2,000,000 shares being offered concurrently to Boston Chicken in a private
placement (the "Concurrent Private Placement") and references herein to the
"Concurrent Offerings" include the Concurrent Public Offering and the
Concurrent Private Placement. See "--The Offerings," "Concurrent Offerings" and
"Underwriting."
THE COMPANY
The Company operates and franchises specialty retail stores that feature
fresh-baked bagels, cream cheeses, coffee and other related products, primarily
under the Einstein Bros. Bagels and Noah's New York Bagels brand names. As of
July 30, 1996, there were 199 stores in operation systemwide, of which 17 were
Company-operated and 182 were operated by area developers financed in part by
the Company. Such financing generally permits the Company in certain
circumstances to convert its loan into a majority equity interest in the area
developer. As of July 30, 1996, the Company had entered into area development
agreements that provide for the development of 997 additional stores, the
majority of which are scheduled to open over the next three years. The Company
estimates that there will be between 275 and 300 stores in operation systemwide
by the end of 1996.
The Company's principal business objective is to become the leading specialty
retailer of fresh-baked bagels and related products in the United States and to
ultimately support and extend its consumer brands through alternate
distribution channels, such as wholesale and contract food service. The Company
believes that there is an opportunity to develop a significant multi-unit
specialty retail business based on fresh-baked bagels because of the growth in
per capita consumption of bagels and the fragmented state of the current retail
bagel market. To achieve its specialty retail objectives, the Company and its
area developers employ a concentrated market development strategy that is
designed to create strong local brand awareness. The Company believes this
strategy will allow it and its area developers to more efficiently leverage
marketing, development and operations resources, while establishing a strong
competitive position in each targeted market. The Company initially plans to
segregate development of its Einstein Bros. Bagels and Noah's New York Bagels
stores on a geographic basis; however, the Company intends to test the
development and operation of both brands within the same trade area.
Einstein Bros. Bagels stores feature both traditional and creative bagels
baked fresh throughout the day and offered to customers in an inviting store
environment that combines the authentic tastes of a bagel bakery with the
comfortable setting of a neighborhood meeting place. Each Einstein Bros. Bagels
store blends function, style and customer comfort with simple, contemporary
colors and furnishings in a relaxed social atmosphere. In addition to a
distinctive variety of fresh-baked bagels, Einstein Bros. Bagels stores offer a
broad selection of specialty cream cheeses, premium coffee products and an
array of creative soups, salads and sandwiches. The stores' atmosphere and
products are enhanced by a service philosophy designed to develop customer
loyalty, so that visiting an Einstein Bros. Bagels store becomes part of the
customer's daily or weekly routine. The first Einstein Bros. Bagels store
opened in June 1995 in Ogden, Utah and as of July 30, 1996, there were 106
stores
3
<PAGE>
operating under the brand in 17 states. The Company currently expects that it
and its area developers will develop Einstein Bros. Bagels stores primarily
outside of the West Coast area.
Noah's New York Bagels stores are authentic kosher bagel bakeries featuring
bagels baked fresh throughout the day, cream cheese "shmears", kosher dairy
deli items, including fish salads and four varieties of lox, and selected New
York deli-style beverages. Noah's New York Bagels stores recreate the mood and
feeling of a turn-of-the-century New York bakery. A key element of the Noah's
New York Bagels brand is involvement on a store-by-store basis as a committed
and conscientious member of the community. The first Noah's New York Bagels
store opened in Berkeley, California in 1989 and as of July 30, 1996, there
were 57 stores operating under the brand in three states. The Company currently
expects that it and its area developers will develop Noah's New York Bagels
stores primarily on the West Coast.
The Company was established in early 1995 as Progressive Bagel Concepts, Inc.
and launched its business through the acquisition of three regional bagel
retailers. The Company's formation was facilitated by Boston Chicken, which, in
addition to providing convertible and non-convertible loan financing, has
supported, and continues to support, the Company's growth with multi-unit
retail infrastructure and systems pursuant to fee service agreements.
Subsequently, the Company changed its name to Einstein Bros. Bagels, Inc.,
developed the Einstein Bros. Bagels brand and acquired two West Coast bagel
retailers, including Noah's New York Bagels, Inc. ("Noah's"). In June 1996, the
Company changed its name to Einstein/Noah Bagel Corp. to reflect its dual brand
development strategy. The Company and its area developers intend to convert
stores currently operating under all other brand names to either Einstein Bros.
Bagels stores or Noah's New York Bagels stores over the next 12 to 18 months.
The Company's executive offices are located at 1526 Cole Boulevard, Suite
200, Golden, Colorado 80401 and its telephone number is (303) 202-9300.
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS."
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered hereby:
Initial Public Offering...... 2,700,000 shares
Concurrent Public Offering... 425,000 shares
Common Stock offered in the
Concurrent Private Placement.. 2,000,000 shares
Common Stock to be outstanding
after the Offerings(1)........ 28,577,000 shares
Use of Proceeds................ To finance the development of additional stores
and to repay indebtedness utilized for the
acquisition and development of stores. See "Use
of Proceeds."
Proposed Nasdaq National Market
Symbol........................ ENBX
</TABLE>
- --------
(1) Includes 15,307,421 shares of Common Stock issued upon the conversion of
the Company's $120.0 million convertible loan facility from Boston Chicken
(the "Loan Conversion"), 488,282 shares of Common Stock estimated to be
issuable upon the conversion of 6,250 shares of Series A Preferred Stock,
$.01 par value per share, of the Company (the "Preferred Shares") at a
contractual conversion price equal to 80% of an assumed initial public
offering price of $16.00 per share (being the mid-point of the proposed
initial public offering price range) (the "Preferred Conversion") and
1,721,250 shares of Common Stock subject to repurchase by the Company (the
"Repurchase Shares"), which repurchase obligation terminates upon
consummation of the Offerings. See "Relationship with Boston Chicken--Loan
Agreement," "Description of Capital Stock" and Note 12 of Notes to the
Company's Audited Consolidated Financial Statements included elsewhere
herein. References herein to the "Transactions" include the Loan
Conversion, the Preferred Conversion and the termination of the Company's
repurchase obligation with respect to the Repurchase Shares. Excludes
5,030,591 shares of Common Stock issuable upon exercise of outstanding
stock options (vested and unvested) and warrants.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MARCH 24, 1995 DECEMBER 26, 1994 QUARTER
(INCEPTION) THROUGH THROUGH (16 WEEKS) ENDED
DECEMBER 31, 1995 DECEMBER 31, 1995 APRIL 21, 1996(1)
------------------- ----------------- ----------------------
ACTUAL PRO FORMA(2) ACTUAL PRO FORMA(3)
------------------- ----------------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Total revenue........... $ 26,423 $ 70,388 $ 22,379 $ 25,683
Income (loss) from
operations(4)(5)....... (43,152) (46,369) (1,270) (2,453)
Net income (loss)(4)(5). $(43,716) $(54,802) $ (3,317) $ (2,428)
======== ======== ======== ========
Net income (loss) per
common and equivalent
share(6)............. $ (4.56) $ (2.20) $ (0.36) $ (0.10)
======== ======== ======== ========
Weighted average
number of common and
equivalent shares
outstanding during
the period........... 9,613 24,940 9,633 24,940
======== ======== ======== ========
STORE DATA (UNAUDITED):
Systemwide revenue(7)... $ 26,986 $ 71,263 $ 29,764 $ 33,088
======== ======== ======== ========
Number of stores in
operation at period
end:
Company-operated...... 47 84 61 61
Area developers....... 13 13 77 77
-------- -------- -------- --------
Total................. 60 97 138 138
======== ======== ======== ========
<CAPTION>
APRIL 21, 1996(1)
----------------------
AS
ACTUAL ADJUSTED(8)
-------- ------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................... $ 643 $ 37,566
Notes receivable.............................................. 38,298 38,298
Total assets.................................................. 184,514 221,437
Long-term debt(9)............................................. 178,162 --
Stockholders' equity (deficit)................................ (12,033) 203,052
</TABLE>
- -------
(1) The Company's fiscal year is the 52/53-week period ending on the last
Sunday in December and normally consists of 13 four-week periods. The first
quarter consists of four periods, and each of the remaining three quarters
consists of three periods, with the first, second and third quarters ending
16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year.
(2) Giving pro forma effect to the acquisition of Brackman Brothers, Inc.,
Bagel & Bagel, Inc., Offerdahl's Bagel Gourmet, Inc., Baltimore Bagel Co.
and Noah's and the Loan Conversion as of December 26, 1994 (deemed to be
the beginning of the Company's 1995 fiscal year). See the Company's
Unaudited Pro Forma Consolidated Financial Statements and Notes thereto
contained elsewhere herein.
(3) Giving pro forma effect to the acquisition of Noah's and the Loan
Conversion as of the beginning of the Company's 1996 fiscal year. See the
Company's Unaudited Pro Forma Consolidated Financial Statements and Notes
thereto contained elsewhere herein.
(4) Includes for the pro forma quarter (16 weeks) ended April 21, 1996
approximately $954,000 of stock option expense attributable to the
acceleration of the vesting of compensatory stock options issued by Noah's
for such period. The vesting acceleration occurred immediately prior to the
acquisition of Noah's by the Company. See Note 5 of Notes to the Company's
Unaudited Pro Forma Consolidated Financial Statements included elsewhere
herein.
(5) Includes a $26,575,000 write-off of intangible assets for the period from
March 24, 1995 (inception) through December 31, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
March 24, 1995 (inception) to December 31, 1995--Results of Operations" and
Note 13 of Notes to the Company's Audited Consolidated Financial Statements
included elsewhere herein.
(6) As of April 21, 1996, the Company had approximately $38.5 million of debt
outstanding; the net proceeds from the Offerings will be used to repay such
indebtedness. For the quarter (16 weeks) ended April 21, 1996, assuming
such debt had been repaid utilizing the proceeds from the sale of 2,587,164
shares of Common Stock ($14.88 per share) and giving effect to the Loan
Conversion as of the beginning of the fiscal year, the net loss per common
and equivalent share would have been $0.00. For the period from March 24,
1995 (inception) through December 31, 1995, giving effect to the Loan
Conversion as of the beginning of the period, the net loss per common and
equivalent share would have been $1.70.
(7) Includes gross revenue for all stores operated by the Company and its area
developers. Gross revenue excludes sales taxes.
(8) Adjusted to give effect to the Offerings at an assumed initial public
offering price of $16.00 per share (being the mid-point of the proposed
initial public offering price range) and the application of the net
proceeds therefrom and to give effect to the Transactions. See
"Capitalization."
(9) Includes at April 21, 1996, $11,852,000 attributable to the Repurchase
Shares and $7,813,000 attributable to the Preferred Shares. See Note 12 of
Notes to the Company's Audited Consolidated Financial Statements included
elsewhere herein.
5
<PAGE>
THE COMPANY
The Company operates and franchises specialty retail stores that feature
fresh-baked bagels, cream cheeses, coffee and other related products,
primarily under the Einstein Bros. Bagels and Noah's New York Bagels brand
names. As of July 30, 1996, there were 199 stores in operation systemwide, of
which 17 were Company-operated and 182 were operated by area developers
financed in part by the Company. Such financing generally permits the Company
in certain circumstances to convert its loan into a majority equity interest
in the area developer. As of July 30, 1996, the Company had entered into area
development agreements that provide for the development of 997 additional
stores, the majority of which are scheduled to open over the next three years.
The Company estimates that there will be between 275 and 300 stores in
operation systemwide by the end of 1996.
The Company was incorporated in Delaware in February 1995 under the name
Progressive Bagel Concepts, Inc. In March 1995, the Company launched its
business through the acquisition of three regional bagel retailers, Brackman
Brothers, Inc. of Salt Lake City, originally founded in 1988 ("Brackman"),
Bagel & Bagel, Inc. of Kansas City, originally founded in 1988 ("Bagel &
Bagel"), and Offerdahl's Bagel Gourmet, Inc. of Fort Lauderdale, originally
founded in 1989 ("Offerdahl's"), and in August 1995, acquired Baltimore Bagel
Co. of San Diego, originally founded in 1981 ("Baltimore Bagel") (collectively
the "Founding Companies"). The Company issued 1,959,152 shares of Common Stock
and the Preferred Shares to the owners of the Founding Companies in such
transactions. Also in March 1995, the Company raised approximately $20.8
million in a private placement of Common Stock to investors and entered into a
series of agreements with Boston Chicken, including a convertible secured loan
agreement pursuant to which Boston Chicken agreed to loan to the Company up to
$80.0 million (subsequently increased to $120.0 million). On June 17, 1996,
this loan was converted into 15,307,421 shares of Common Stock. Boston Chicken
further facilitated the Company's formation and continues to facilitate the
Company's growth by providing multi-unit retail infrastructure and systems
pursuant to fee service agreements. The relationship between the Company and
Boston Chicken, including the terms of the loan agreement, is described more
fully under "Relationship with Boston Chicken." See also "Certain
Transactions."
After formation, the Company assembled a management team comprised of
individuals from the Founding Companies and Boston Chicken, as well as other
professionals experienced in rapid multi-unit retail growth. The Company also
launched a project that resulted in the development of the Einstein Bros.
Bagels brand and store. As part of the development project, management
analyzed (i) the Founding Companies' stores, including brand positionings,
product offerings, operational service systems and atmosphere, (ii) the
competitive environment and (iii) the preferences of consumers across the
United States. The Einstein Bros. Bagels brand and store were first tested in
Ogden, Utah in June 1995 and, based on extensive consumer research, were
revised throughout the summer of 1995, resulting in the current brand
positioning, product offering and store design.
In the fall of 1995, the Company developed and launched its area developer
program, which incorporates aspects of the area developer program utilized by
Boston Chicken. The Company believes that having a relatively small group of
area developers, each led by a management group with substantial multi-unit
retail food service experience and short- and long-term incentives tied to
performance, is a superior means to achieve market leadership than either
direct Company ownership of all stores or more traditional franchising
approaches which utilize a larger number of franchisees. As of July 30, 1996,
the Company had entered into area development agreements with ten entities
that provide for the development of 1,179 stores, 182 of which were open as of
such date. See "Business--Expansion Strategy" and "Business--Development
Agreements." The Company expects to enter into similar agreements with at
least one additional entity during 1996 and, in connection with such
transactions, expects to sell to such entity Company-operated stores, if any,
in the territories covered by such agreements.
In the fall of 1995, after the development of the Einstein Bros. Bagels
brand, the Company decided to convert its existing stores operating under the
Brackman Bros., Bagel & Bagel, Offerdahl's Bagel Gourmet and Baltimore Bagel
brand names to the Einstein Bros. Bagels brand. The Company and its area
developer for the Salt Lake City market completed conversion of nine Brackman
Bros. stores located in the Salt Lake City area to Einstein Bros. Bagels
stores in March 1996. The Company and its area developers intend to convert
stores currently operating under all other brand names to either Einstein
Bros. Bagels stores or Noah's New York Bagels stores over the next 12 to 18
months.
The Company acquired Noah's, the leading West Coast bagel retailer, in
February 1996, enabling the Company to achieve a strong base of operations on
the West Coast and to add a second premier consumer brand, Noah's New York
Bagels. In connection with the transaction, certain stockholders of Noah's,
including Noah Alper, the founder of Noah's, and members of Noah's management,
acquired 855,225 shares of Common Stock, and Mr. Alper became Vice Chairman of
the Board.
6
<PAGE>
RISK FACTORS
Prospective purchasers of the shares of Common Stock offered hereby should
consider carefully the specific factors set forth below as well as the other
information contained in this Prospectus in evaluating an investment in the
Common Stock.
LIMITED OPERATING HISTORY AND RECENT LOSSES
The Company commenced operations in March 1995 and has a limited operating
history upon which investors may evaluate the Company's performance. As of
July 30, 1996, the Company and its area developers operated 199 stores, 36 of
which were operating under brands other than Einstein Bros. Bagels or Noah's
New York Bagels. Approximately 128 of the stores operated by the Company and
its area developers have been open for less than one year and an additional 32
of such stores have been open for less than two years. Consequently, operating
results achieved to date may not be indicative of the results that may be
achieved in the future by any new or existing store. The Company has incurred
significant operating losses to date and there can be no assurance that the
Company will be profitable in the future, or that, if profitability is
achieved, it will be sustained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Audited
Consolidated Financial Statements and the Notes thereto.
COMPETITION; EASE OF ENTRY INTO BUSINESS
The food service industry is intensely competitive with respect to food
quality, concept, convenience, location, customer service and value. In
addition, there are many well-established food service competitors with
substantially greater financial and other resources than the Company and with
substantially longer operating histories than the Company. Many of such
competitors are less dependent than the Company on a single, primary product.
The Company believes that it competes with other bagel retailers and bakeries,
specialty coffee retailers, doughnut shops, fast-food restaurants,
delicatessens, take-out food service companies, supermarkets and convenience
stores. The Company believes that competition in the retail bagel market will
increase as large retail bagel companies attract additional capital, new
competitors enter the market and bagel retailers compete for market share. In
addition, the Company believes that the start-up costs associated with retail
bagel and similar food service establishments are not a significant impediment
to entry into the retail bagel business. See "Business--Competition."
RAPID EXPANSION
The Company intends to expand primarily by developing additional bagel
stores through its area developer network, although the Company and its area
developers may also acquire existing bagel stores or other properties. As of
July 30, 1996, the Company had entered into area development agreements with
ten entities that provide for the opening of 1,179 stores, 182 of which were
open as of such date. By the end of 1996, the Company expects to have between
275 and 300 stores in operation systemwide. Such expansion will require the
addition of management, facilities, systems and personnel. Failure to acquire
necessary resources on a cost-effective basis could have a material adverse
effect on the results of operations and financial condition of the Company and
its area developers. There can be no assurance that the Company and its area
developers will be able to achieve their development and operating goals,
manage expanding operations effectively, or maintain or accelerate growth. In
addition, there can be no assurance of the viability of any of the Company's
brands in a particular geographic region or locale. See "Business--Expansion
Strategy."
AVAILABILITY OF CAPITAL
The Company anticipates that it and its area developers will have a
continuing need for additional financing for the development of stores and for
bagel and cream cheese production capacity, the amount of which is dependent
primarily on the number of stores opened, the cost of such stores, store
operating results and production capacity requirements. The Company's capital
requirements will also depend on the amount and timing of borrowings under the
loan agreements between the Company and its existing and future area
developers. The Company and its area developers may seek additional funds from
public or private offerings of debt or equity securities or other types of
financing. There can be no assurance that the Company and its area
7
<PAGE>
developers will be able to raise such funds on satisfactory terms when needed.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Business--Expansion Strategy" and "Business--Area Developer Financing."
DEPENDENCE ON AREA DEVELOPERS
The Company's success is dependent to a significant extent upon its area
developers and the manner in which they operate and develop their stores. The
opening and success of stores are dependent on a number of factors, including
the availability of suitable sites, the negotiation of acceptable lease or
purchase terms for such sites, permitting and regulatory compliance, the
ability to meet construction schedules, the ability to hire and train
qualified personnel, the financial and other capabilities of the Company and
its area developers, and general economic and business conditions. Not all of
the foregoing factors are within the control of the Company or its area
developers. There can be no assurance that area developers will have access to
financial resources necessary to open the stores required by their development
schedules or that such area developers will successfully develop or operate
stores in their development areas in a manner consistent with the Company's
concepts and standards. See "Business--Area Developer Financing."
The Company has extended secured debt financing to its area developers
pursuant to which the Company has agreed to lend an aggregate of approximately
$186.8 million, of which approximately $79.4 million had been advanced as of
July 30, 1996. These loans subject the Company to the risks of being a secured
lender. The Company anticipates that its area developers will incur
substantial net losses during their expansion phases, which is anticipated to
result in negative net worth for such area developers. The Company believes
that such losses will be recovered as expansion moderates and development
costs correspondingly diminish, store investment costs decrease, operational
efficiencies increase as a result of overall system maturity and operational
experience, advertising efficiencies commence and average weekly store revenue
increases. However, there can be no assurance that such events will occur or
that such losses will be recovered. The failure of an area developer to
achieve a sufficient level of profitability subsequent to the completion of
its expansion phase could have a material adverse impact on the Company's
financial position and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--
Expansion Strategy" and Note 11 of Notes to the Company's Audited Consolidated
Financial Statements.
DEPENDENCE ON BOSTON CHICKEN
The Company's success is highly dependent on its continued relationship with
Boston Chicken. The Company and Boston Chicken are parties to various
agreements, pursuant to which Boston Chicken has agreed to provide to the
Company certain accounting and administration, and computer and communications
services. In addition, Boston Chicken has agreed to make available to the
Company a non-convertible loan facility of up to $50.0 million, approximately
$20.0 million of which was outstanding as of July 30, 1996. The termination of
any of these agreements, the loss of any of these services or a material
adverse change in Boston Chicken's business or financial condition could have
a material adverse effect on the Company. See "Relationship with Boston
Chicken."
CONTROL BY AND CONFLICTS OF INTEREST WITH BOSTON CHICKEN
After consummation of the Offerings, Boston Chicken will beneficially own
approximately 60.4% of the outstanding shares of Common Stock of the Company
(or 59.3% if the Underwriters' over-allotment option is exercised in full). In
addition, in connection with the Concurrent Private Placement, the Company
intends to grant to Boston Chicken an option that would permit it to maintain
ownership of shares of Common Stock having up to 52% of the voting power of
all of the outstanding shares of capital stock of the Company having the power
generally to vote in the election of directors. By reason of its holdings and
such option, Boston Chicken will be able to control the affairs and policies
of the Company, elect the Company's board of directors and approve or
disapprove any matter submitted to a vote of the stockholders, including
certain fundamental corporate transactions requiring stockholder approval. In
addition, concentrated ownership of the Company could affect the potential
applicability to the Company of personal holding company tax in certain
circumstances. See "Certain Transactions," "Principal Stockholders and
Securities Ownership of Management" and "Relationship with Boston Chicken."
8
<PAGE>
The Concurrent Private Placement Agreement expected to be entered into
between the Company and Boston Chicken prohibits the Company from taking
certain actions without the consent of Boston Chicken as long as such option
to Boston Chicken has not terminated, including altering any rights attaching
to the Common Stock, offering or issuing any equity securities or debt
securities convertible into equity securities, in either case other than
Common Stock, distributing assets or securities of the Company having a fair
market value in excess of 10% of the Company's consolidated gross assets or
consolidated gross revenues measured as of the immediately preceding fiscal
year end, and filing a petition in bankruptcy.
In addition to existing agreements between the Company and Boston Chicken,
the Company may enter into additional or modified agreements, arrangements and
transactions with Boston Chicken. While the Company expects that any such
future arrangements and transactions will be determined through negotiation
between the two companies, there can be no assurance that conflicts of
interest will not occur with respect to such future business dealings and
similar corporate matters. Conflicts may arise in connection with product
offerings, consumer and market positioning, recruiting, site selection and
issuances of additional securities by the Company. There can be no assurance
that any such conflicts will be resolved in a manner favorable to the Company
or its minority stockholders.
LIMITED SOURCES OF BAGEL DOUGH AND CREAM CHEESE SUPPLY
The Company's development plans require that the Company rapidly develop
significant bagel dough production capacity from internal or external sources.
To date, the Company has met its bagel dough production requirements through a
combination of local fresh dough commissaries owned and operated by the
Company or its area developers, two frozen dough production facilities
operated by the Company, and a frozen dough production facility owned and
operated by a third-party baking company that has committed certain capacity
to the Company. The Company has entered into a long-term supply agreement with
such third-party baking company. Any interruption of existing or planned
production capacity at any plant or commissary could have a material adverse
effect on the ability of the Company or its area developers to supply bagels
to their stores. In addition, stores in certain markets are currently
dependent for frozen bagel dough on a single production facility owned and
controlled by the third-party baking company.
The Company also purchases from a single supplier certain proprietary cream
cheeses and spreads sold in Einstein Bros. Bagels stores. Any interruption of
such supply or the inability of the Company to obtain sufficient additional
capacity to meet its requirements could have a material adverse effect on the
Company's ability to supply its proprietary cream cheese to certain bagel
stores. See "Business--Vendors."
RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability
of products and the type, number and location of competing restaurants. Multi-
unit food service chains such as the Company can also be substantially
adversely affected by publicity resulting from food quality, illness, injury
or other health concerns or operating issues stemming from one store or a
limited number of stores, whether or not the Company is liable. In addition,
factors such as increased costs of goods, labor and employee benefits costs,
regional weather conditions and the potential scarcity of experienced
management and hourly employees may also adversely affect the food service
industry in general and the results of operations and financial condition of
the Company and its area developers in particular.
GOVERNMENT REGULATION
The restaurant industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale
of food and building and zoning requirements. The Company and its area
developers are also subject to laws governing their relationship with
employees, including minimum wage requirements, overtime, working and safety
conditions and citizenship requirements. In addition, the Company is subject
to regulation by the Federal Trade Commission and must comply with certain
state laws which govern the offer, sale and termination of franchises and the
refusal to renew franchises. The failure to obtain or retain food licenses or
approvals to sell franchises, or increases in employee benefits costs or other
costs associated
9
<PAGE>
with employees, could adversely affect the Company and its area developers.
See "Business--Government Regulation."
ABSENCE OF PRIOR PUBLIC MARKET AND POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for shares of the
Common Stock and there can be no assurance that an active trading market will
develop or, if developed, will be sustained. The initial public offering price
of the Common Stock will be determined through negotiations with the
representatives of the Underwriters (the "Representatives") by a committee of
the Company's board of directors composed of members who have agreed not to
purchase shares of Common Stock in the Offerings. See "Underwriting" for the
factors to be considered in determining the initial public offering price of
the shares of Common Stock offered hereby. The market price of the Common
Stock could be subject to significant fluctuations in response to the
Company's operating results and other factors, and there can be no assurance
that the market price of the Common Stock will bear any relationship to, or
will not decline below, the initial public offering price.
ANTI-TAKEOVER EFFECT OF CHARTER AND STATUTORY PROVISIONS
Boston Chicken's ownership interest in the Company and the terms of certain
provisions in the Company's Restated Certificate of Incorporation and Amended
and Restated Bylaws may have the effect of discouraging a change in control of
the Company. Such provisions include the requirement that all stockholder
action must be effected at a duly-called annual or special meeting of
stockholders and the requirement that stockholders follow an advance
notification procedure for stockholder nominations of candidates for the board
of directors and to present other stockholder business to be considered at any
meeting of stockholders. In addition, the board of directors has the
authority, without further action by the stockholders, to issue up to 20
million shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, and to issue authorized but
unissued shares of Common Stock up to a maximum of 200 million shares. The
issuance of preferred stock or additional shares of Common Stock could have
the effect of delaying, deferring or preventing a change in control of the
Company, even if such change in control would be beneficial to the Company's
stockholders. See "Principal Stockholders and Securities Ownership of
Management," "Relationship with Boston Chicken" and "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have approximately
28,577,000 shares of Common Stock outstanding. The Company intends to file,
shortly after the completion of the Offerings, a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
approximately 9,875,000 of these shares of Common Stock pursuant to which
certain stockholders (not including Boston Chicken) may resell their shares of
Common Stock in the public market. The holders of approximately 9,000,000 of
such 9,875,000 shares have agreed that they will not sell any of such shares
for a period of 180 days from the date of this Prospectus, and holders of an
additional approximately 400,000 of such shares have agreed that they will not
sell any of such shares for a period of 30 days from the date of this
Prospectus, subject to certain exceptions, without the consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). In addition, the
persons purchasing shares of Common Stock in the Concurrent Public Offering
have agreed that they will not sell such shares for a period of 365 days from
the date of this Prospectus, without the consent of Merrill Lynch. The Company
also intends to register under the Securities Act all shares issued or
issuable under its stock option plans, fewer than 10% of which will be vested
and exercisable within 180 days of the date of this Prospectus. See
"Management--1995 Stock Option Plan" and "Management--Directors Plan." In
connection with the Concurrent Private Placement, the Company expects to enter
into a registration agreement with Boston Chicken, pursuant to which the
Company will grant to Boston Chicken certain demand and piggyback registration
rights under the Securities Act with respect to shares purchased in the
Concurrent Private Placement and other shares owned by Boston Chicken. Boston
Chicken has agreed with the Representatives not to sell shares purchased in
the Concurrent Private Placement for a period of 365 days from the date of
this Prospectus and not to sell other shares owned by it for a period of 180
days from the date of this Prospectus, subject to certain exceptions, without
the consent of Merrill Lynch. In addition, the Company may file a
10
<PAGE>
registration statement covering shares of Common Stock for issuance in
connection with potential future acquisitions and resales thereof by the
recipients, although no such acquisitions are currently pending. Shares so
registered could not be sold in the public market for a period of 180 days
from the date of this Prospectus, subject to certain exceptions, without the
consent of Merrill Lynch. No predictions can be made as to the effect, if any,
that market sales of such shares or the availability of such shares for sale
will have on the market price for shares of Common Stock prevailing from time
to time. Sales of substantial amounts of shares of Common Stock in the public
market following the Offerings could adversely affect the market price of the
Common Stock and could impair the Company's future ability to raise capital
through an offering of equity securities or securities convertible into equity
securities. See "Concurrent Offerings," "Certain Transactions--Registration
Rights," "Relationship with Boston Chicken--Concurrent Private Placement
Agreement and Registration Agreement" and "Shares Eligible for Future Sale."
TRADEMARKS
The Company owns a number of federal trademark and service mark
registrations and the Company has federal trademark applications pending for
additional trademarks and service marks. However, the Company has not yet
obtained federal registrations for certain of the trademarks or service marks
used in its business, certain of the Company's applications have been the
subject of oppositions to such marks, and there can be no assurance that any
such registrations for the Company's trademarks and service marks will be
obtained. In addition, the Company is aware of the use by other persons in
certain geographic areas of names and marks which may be deemed to be similar
to the Einstein Bros. or Noah's New York Bagels brands. There can be no
assurance that such marks will be available for use by the Company and its
area developers in all locations or that the Company will be able to assure
the exclusive use of such marks by the Company and its area developers. See
"Business--Trademarks and Other Proprietary Rights."
ABSENCE OF DIVIDENDS OR DISTRIBUTIONS
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's secured revolving credit facility contains a prohibition on the
payment of cash dividends. See "Dividend Policy."
DILUTION
Investors purchasing shares of Common Stock in the Initial Public Offering
will experience immediate and substantial dilution in the net tangible book
value per share of the Common Stock from the initial public offering price as
compared to the increase in net tangible book value per share that will accrue
to existing stockholders. Based on an initial public offering price of $16.00
per share (being the mid-point of the proposed initial public offering price
range), such dilution would have been equal to $12.20 per share as of April
21, 1996. Investors in the Common Stock of the Company purchased prior to the
Initial Public Offering (including Boston Chicken's investment as a result of
the Loan Conversion) paid an average price per share of $7.64 for an aggregate
81.7% equity interest in the Company compared to investors in the Concurrent
Public Offering and the Concurrent Private Placement, who, considered
together, will have paid an average price per share of $14.88 based on such
assumed initial public offering price, net of estimated underwriting discount,
for an aggregate 8.6% interest in the Company, and new investors in the
Initial Public Offering, who will have paid an average price per share of
$16.00 based on such assumed initial public offering price for an aggregate
9.7% equity interest in the Company. See "Dilution."
RECOVERABILITY OF INTANGIBLE ASSETS
The Company has recorded significant intangible assets in connection with
the Company's acquisitions of Brackman, Bagel & Bagel, Offerdahl's, Baltimore
Bagel and Noah's. Applicable accounting standards require the Company to
review long-lived assets (such as goodwill and other identifiable intangible
assets) to be held and used by the Company for impairment whenever events or
changes in circumstances indicate that the carrying values of those assets may
not be recoverable. In the event that the Company determines that the carrying
value of such intangible assets is impaired, it would write-down such carrying
value, which would result in a charge to earnings. Any such charge could have
a material adverse effect on the Company's financial results. See Notes 2, 4
and 13 of Notes to the Company's Audited Consolidated Financial Statements and
Note 5 of Notes to the Company's Unaudited Consolidated Financial Statements
contained elsewhere herein.
11
<PAGE>
CONCURRENT OFFERINGS
Concurrently with the shares offered hereby in the Initial Public Offering,
certain persons or entities, consisting primarily of officers, directors and
employees of each of the Company and Boston Chicken, are being offered the
opportunity to purchase an aggregate of 425,000 shares of Common Stock in the
Concurrent Public Offering, and Boston Chicken is being offered the
opportunity to purchase 2,000,000 shares of Common Stock in the Concurrent
Private Placement, in each case, at a price equal to the initial public
offering price per share, net of underwriting discount. The consummation of
each of the Initial Public Offering, the Concurrent Public Offering and the
Concurrent Private Placement is conditioned upon the consummation of the other
Offerings. Any such sales will also be conditioned upon the participants in
the Concurrent Public Offering and Boston Chicken agreeing not to sell shares
of Common Stock purchased in the Concurrent Public Offering and the Concurrent
Private Placement, respectively, for a period of 365 days after the date of
this Prospectus, without the consent of Merrill Lynch. See "Certain
Transactions--Concurrent Public Offering," "Relationship with Boston Chicken--
Concurrent Private Placement Agreement and Registration Agreement," "Shares
Eligible for Future Sale" and "Underwriting." None of the members of the
committee of the board of directors who will negotiate the initial public
offering price of the Common Stock with the Representatives will be purchasers
in the Offerings.
USE OF PROCEEDS
The net proceeds to the Company from each of the Initial Public Offering,
the Concurrent Public Offering and the Concurrent Private Placement are
estimated to be approximately $39.4 million ($45.5 million if the
Underwriters' over-allotment option is exercised in full), $6.2 million and
$29.8 million, respectively, or an aggregate of $75.4 million ($81.5 million
if the Underwriters' over-allotment option is exercised in full) assuming an
initial public offering price of $16.00 per share (being the mid-point of the
proposed initial public offering price range) after deduction of estimated
underwriting discount and offering expenses. The Company intends to use
approximately $43.0 million of the aggregate net proceeds from the Offerings
to repay borrowings under the Company's secured revolving credit facility,
approximately $20.0 million of such proceeds to repay borrowings under its
non-convertible loan facility from Boston Chicken (subject to the waiver by
the lenders under the secured revolving credit facility of a covenant
prohibiting such repayment) and the balance of such net proceeds for store
development, although the amount of the proceeds used to repay borrowings is
expected to increase to the extent the aggregate borrowings of the Company
increase. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The use of proceeds
for development of new stores includes development of Company-operated stores
and loaning of funds to area developers to finance development of stores. See
"Business."
As of July 30, 1996, the Company had approximately $43.0 million outstanding
under its secured revolving credit facility, which amount was used to repay a
bridge loan from Boston Chicken incurred in connection with the development
and acquisition of stores and for general corporate purposes. See
"Relationship with Boston Chicken--Loan Agreement." Borrowings under the
secured revolving credit facility bear interest at either the lender's base
rate (currently 8.25% per annum) plus 1.0% or, at the Company's option, the
rate offered in the interbank Eurodollar market for one-, two- or three-month
dollar deposits offered by the lender plus 3.0%. As of July 30, 1996, the
entire amount outstanding under the secured revolving credit facility bore
interest at the lender's base rate plus 1.0%. Any borrowings outstanding under
the Company's secured revolving credit facility are payable on April 30, 1998.
As of July 30, 1996, the Company had approximately $20.0 million outstanding
under its non-convertible loan facility from Boston Chicken, which amount was
incurred in connection with the development of stores and for general
corporate purposes. Borrowings under the non-convertible loan facility from
Boston Chicken bear interest at the reference rate of Bank of America Illinois
(currently 8.25% per annum) plus 1.0%. Any borrowings outstanding under the
Company's non-convertible loan facility from Boston Chicken are payable on
June 15, 2003.
Pending use of the net proceeds as set forth above, they will be invested in
short-term interest-bearing instruments. To the extent that the net proceeds,
the secured revolving credit facility, the non-convertible loan facility from
Boston Chicken and funds from operations are insufficient to finance the
Company's expansion plans, the Company intends to seek additional funds for
this purpose from future public or private offerings of debt or equity
securities, although there can be no assurance that the Company will be able
to raise such funds on satisfactory terms when needed. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
12
<PAGE>
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and the board of
directors intends to continue a policy of retaining earnings to finance its
growth and for general corporate purposes. In addition, the Company's secured
revolving credit facility contains a prohibition on payment of any cash
dividends, and the Company does not anticipate paying any such dividends in
the foreseeable future.
CAPITALIZATION
The following table sets forth the capitalization of the Company at April
21, 1996 and as adjusted to give effect to (i) the issuance on June 17, 1996
of 15,307,421 shares of Common Stock upon the Loan Conversion, (ii) the
issuance of 488,282 shares of Common Stock upon the Preferred Conversion and
(iii) the termination of the Company's repurchase obligation with respect to
the Repurchase Shares (collectively, the "Transactions"), and as further
adjusted to give effect to the Offerings at an assumed initial public offering
price of $16.00 per share (being the mid-point of the proposed initial public
offering price range) and the application of the net proceeds therefrom. See
"Relationship with Boston Chicken--Loan Agreement," "Description of Capital
Stock" and Note 12 of Notes to the Company's Audited Consolidated Financial
Statements included elsewhere herein. This table should be read in conjunction
with the Company's Audited Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS FURTHER
ACTUAL AT AS ADJUSTED FOR ADJUSTED
APRIL 21, 1996 THE TRANSACTIONS FOR THE OFFERINGS
-------------- ---------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt.............. $ -- $ -- $ --
=========== =========== ========
Revolving credit facility
(1)......................... $ 38,497 $ 38,497 $ --
Convertible loan from Boston
Chicken..................... 120,000 -- --
Repurchase shares............ 11,852 -- --
Preferred stock, par value
$.01 per share, 20,000,000
shares authorized; 6,250
shares of Series A Preferred
Stock issued and
outstanding; no shares
issued and outstanding as
adjusted.................... 7,813 -- --
----------- ----------- --------
Total long-term debt....... 178,162 38,497 --
Stockholders' equity
(deficit):
Preferred stock, 20,000,000
shares authorized; no
shares issued and
outstanding............... -- -- --
Common Stock, par value
$.01 per share,
200,000,000 shares
authorized; 5,353,128
shares issued and
outstanding; 22,870,081
shares issued and
outstanding as adjusted
for the Transactions;
27,995,081 shares issued
and outstanding as further
adjusted for the
Offerings................. 54 229 280
Additional paid-in capital. 34,946 174,436 249,805
Deficit.................... (47,033) (47,033) (47,033)
----------- ----------- --------
Total stockholders'
equity (deficit)........ (12,033) 127,632 203,052
----------- ----------- --------
Total capitalization..... $ 166,129 $ 166,129 $203,052
=========== =========== ========
</TABLE>
- --------
(1) The balance outstanding as of April 21, 1996 represents the amount drawn
under the Company's bridge loan from Boston Chicken. In May 1996, the
Company repaid such indebtedness with proceeds from its secured revolving
credit facility.
13
<PAGE>
DILUTION
The net tangible deficit of the Company at April 21, 1996 was approximately
$108.7 million or $20.30 per share. Net tangible book value (deficit) per
share represents the amount of total tangible assets less total liabilities of
the Company, divided by the number of shares of Common Stock outstanding.
Net tangible book value dilution per share represents the difference between
the amount paid by purchasers of shares of Common Stock in the Offerings and
the pro forma net tangible book value per share of Common Stock immediately
after completion of the Offerings. After giving effect to the Transactions and
the Offerings at an assumed initial public offering price of $16.00 per share
(being the mid-point of the proposed initial public offering price range), and
after deducting estimated underwriting discount and offering expenses, the pro
forma net tangible book value of the Company at April 21, 1996 would have been
approximately $106.4 million, or $3.80 per share. This represents an immediate
increase in such net tangible book value of $24.10 per share to stockholders
as of April 21, 1996 and an immediate dilution of $12.20 per share to
investors purchasing shares in the Initial Public Offering, as illustrated in
the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $16.00
Net tangible deficit per share before the Offerings.... $(20.30)
Increase in net tangible book value per share
attributable to the Transactions...................... 21.66
Additional increase in net tangible book value per
share attributable to investors in the Offerings...... 2.44
-------
Pro forma net tangible book value per share after the
Offerings............................................... 3.80
------
Net tangible book value dilution per share to investors
in the Initial Public Offering.......................... $12.20
======
</TABLE>
The following table summarizes on a pro forma basis at April 21, 1996 the
differences between existing stockholders, investors in the Concurrent
Offerings and investors in the Initial Public Offering with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average consideration paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 22,870,081 81.7% $174,665,000 68.8% $ 7.64
Investors in the Concurrent
Private Placement........... 2,000,000 7.1 29,760,000 11.7 14.88
Investors in the Concurrent
Public Offering............. 425,000 1.5 6,324,000 2.5 14.88
Investors in the Initial
Public Offering............. 2,700,000 9.7 43,200,000 17.0 16.00
---------- ----- ------------ -----
Total ..................... 27,995,081 100.0% $253,949,000 100.0% $ 9.07
========== ===== ============ =====
</TABLE>
- --------
(1) Includes 15,307,421 shares of Common Stock issued upon the Loan Conversion
and 488,282 shares of Common Stock issuable upon the Preferred Conversion
based on an assumed initial public offering price of $16.00 per share
(being the mid-point of the proposed initial public offering price range).
See "Relationship with Boston Chicken" and "Description of Capital Stock."
Excludes 5,030,591 shares of Common Stock subject to issuance upon
exercise of outstanding stock options (vested and unvested) and warrants.
The Average Price Per Share for investors in the Concurrent Offerings is
less than the Average Price Per Share for investors in the Initial Public
Offering because no underwriting discount will be paid on account of shares
sold in the Concurrent Offerings. The net proceeds per share to the Company,
however, will be identical for all shares sold in each of the Offerings.
14
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES)
EINSTEIN/NOAH BAGEL CORP.
The following table sets forth selected historical and pro forma
consolidated financial and store data for the Company. These data should be
read in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the historical and pro forma
consolidated financial statements and related notes thereto of the Company.
The historical financial statements of the Company for the period from March
24, 1995 (inception) through December 31, 1995 have been audited by Arthur
Andersen LLP, independent accountants, whose report thereon appears elsewhere
herein. The financial data for the quarter (16 weeks) ended April 21, 1996 is
unaudited, but in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
Company's consolidated financial position and results of operations. Interim
results are not necessarily indicative of results for subsequent periods or
the full year.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MARCH 24, 1995 DECEMBER 26, QUARTER (16 WEEKS)
(INCEPTION) THROUGH 1994 THROUGH ENDED
DECEMBER 31, 1995 DECEMBER 31, 1995 APRIL 21, 1996(1)
------------------- ----------------- -----------------------
ACTUAL PRO FORMA(2) ACTUAL PRO FORMA(3)
------------------- ----------------- ------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Company-operated
stores............... $ 25,685 $ 69,650 $18,397 $21,701
Royalties and
franchise related
fees................. 738 738 3,982 3,982
-------- -------- ------- -------
Total revenue........ 26,423 70,388 22,379 25,683
Cost of products sold... 8,239 25,085 5,490 6,608
Salaries and
benefits(4)............ 13,531 29,547 9,128 11,489
General and
administrative
expenses............... 21,230 35,550 9,031 10,039
Write-off of intangible
assets(5).............. 26,575 26,575 -- --
-------- -------- ------- -------
Loss from operations.... (43,152) (46,369) (1,270) (2,453)
Other income (expenses),
net.................... (564) (8,433) (2,047) 25
-------- -------- ------- -------
Net income (loss)....... $(43,716) $(54,802) $(3,317) $(2,428)
======== ======== ======= =======
Net income (loss) per
common and equivalent
share(6)............. $ (4.56) $ (2.20) $ (0.36) $ (0.10)
======== ======== ======= =======
Weighted average
number of common and
equivalent shares
outstanding during
the period........... 9,613 24,940 9,633 24,940
======== ======== ======= =======
STORE DATA (UNAUDITED):
Systemwide revenue(7)... $ 26,986 $ 71,263 $29,764 $33,088
======== ======== ======= =======
Number of stores in
operation at period
end:
Company-operated...... 47 84 61 61
Area developers....... 13 13 77 77
-------- -------- ------- -------
Total................ 60 97 138 138
======== ======== ======= =======
<CAPTION>
APRIL 21, 1996(1)
-----------------------
DECEMBER 31, 1995 ACTUAL AS ADJUSTED(8)
------------------- ------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital......... $ 41 $ 643 $37,566
Notes receivable........ 7,267 38,298 38,298
Total assets............ 50,299 184,514 221,437
Long-term debt(9)....... 58,875 178,162 --
Stockholders' equity
(deficit).............. (20,994) (12,033) 203,052
</TABLE>
- -------
(1) The Company's fiscal year is the 52/53-week period ending on the last
Sunday in December and normally consists of 13 four-week periods. The
first quarter consists of four periods, and each of the remaining three
quarters consists of three periods, with the first, second and third
quarters ending 16 weeks, 28 weeks and 40 weeks, respectively, into the
fiscal year.
15
<PAGE>
(2) Giving pro forma effect to the acquisition of Brackman, Bagel & Bagel,
Offerdahl's, Baltimore Bagel and Noah's and the Loan Conversion as of
December 26, 1994 (deemed to be the beginning of the Company's 1995 fiscal
year). See the Company's Unaudited Pro Forma Consolidated Financial
Statements and Notes thereto contained elsewhere herein.
(3) Giving pro forma effect to the acquisition of Noah's and the Loan
Conversion as of the beginning of the Company's 1996 fiscal year. See the
Company's Unaudited Pro Forma Consolidated Financial Statements and Notes
thereto contained elsewhere herein.
(4) Includes for the pro forma quarter (16 weeks) ended April 21, 1996
approximately $954,000 of stock option expense attributable to the
acceleration of the vesting of compensatory stock options issued by Noah's
for such period. The vesting acceleration occurred immediately prior to
the acquisition of Noah's by the Company. See Note 5 of Notes to the
Company's Unaudited Pro Forma Consolidated Financial Statements included
elsewhere herein.
(5) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--March 24, 1995 (inception) to December 31, 1995--
Results of Operations" and Note 13 of Notes to the Company's Audited
Consolidated Financial Statements included elsewhere herein.
(6) As of April 21, 1996, the Company had approximately $38.5 million of debt
outstanding; the net proceeds of the Offerings will be used to repay such
indebtedness. For the quarter (16 weeks) ended April 21, 1996, assuming
such debt had been repaid utilizing the proceeds from the sale of
2,587,164 shares of Common Stock ($14.88 per share) and giving effect to
the Loan Conversion as of the beginning of the fiscal year, the net loss
per common and equivalent share would have been $0.00. For the period from
March 24, 1995 (inception) through December 31, 1995, giving effect to the
Loan Conversion as of the beginning of the period, the net loss per common
and equivalent share would have been $1.70.
(7) Includes gross revenue for all stores operated by the Company and its area
developers. Gross revenue excludes sales taxes.
(8) Adjusted to give effect to the Offerings at an assumed initial public
offering price of $16.00 per share (being the mid-point of the proposed
initial public offering price range) and the application of the net
proceeds therefrom and to give effect to the Transactions. See
"Capitalization."
(9) Includes at December 31, 1995, $11,062,000 attributable to the Repurchase
Shares and $7,813,000 attributable to the Preferred Shares. Includes at
April 21, 1996, $11,852,000 attributable to the Repurchase Shares and
$7,813,000 attributable to the Preferred Shares. See Note 12 of Notes to
the Company's Audited Consolidated Financial Statements included elsewhere
herein.
PREDECESSOR COMPANIES
The summary historical combined financial data shown below represent the
financial data of the Company's predecessors: Brackman, Bagel & Bagel and
Offerdahl's. The financial data for the year ended December 31, 1995 include
the results of operations of the predecessors through their respective dates
of acquisition which were March 24, 1995 for Brackman and Bagel & Bagel and
March 31, 1995 for Offerdahl's. The financial information is presented on the
historic cost basis of each of the predecessors. The net income (loss) per
common and equivalent share and the weighted average number of common and
equivalent shares outstanding during the period have not been presented for
these periods because the Company believes this information is not meaningful.
Subsequent to the acquisition of these predecessors, the Company sold
substantially all of their assets. See Note 13 of Notes to the Company's
Audited Consolidated Financial Statements included elsewhere herein.
Accordingly, the Company does not believe that such operating results are
meaningful or are indicative of future operating results of the Company.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
--------------------------------------------------- JANUARY 1, 1995
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH
1991 1992 1993 1994 MARCH 31, 1995
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENTS OF
OPERATIONS DATA:
Total revenue........... $4,134 $7,880 $12,048 $19,158 $5,882
Income from operations.. 400 565 449 1,452 39
Net income (loss)....... 351 501 389 696 (158)
COMBINED BALANCE SHEET
DATA:
Total assets............ $1,708 $2,580 $ 4,770 $ 9,511
Long-term debt.......... 532 591 1,011 2,822
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company commenced operations in March 1995 through the acquisition of
three regional bagel retailers, with subsequent acquisitions in August 1995
and February 1996. The Company sold certain acquired stores in 1995 and 1996
to area developers financed in part by the Company. To date, the predominant
source of the Company's revenue has been derived from sales at Company-
operated stores. However, because the Company has sold, and intends to
continue to sell, substantially all of the Company-operated stores to its area
developers and also intends to continue to expand its business primarily
through such area developers, the Company anticipates that its future revenue
will be increasingly derived from royalties, franchise-related fees and
interest income. Consequently, comparisons of operating results to date may
not be meaningful.
The Company currently estimates that there will be between 275 and 300
stores in operation systemwide by the end of 1996. This rapid expansion
significantly affects the comparability of results of operations from period
to period in a number of ways. Store revenue is not as high in the first
periods following opening as it is in later periods and revenue for any new
store is also highly dependent on the proximity of other stores and
competitors, the size of the store and its visibility. Further, the cost of
products sold is generally higher as a percentage of revenue for newly opened
stores than for more mature stores because of inefficiencies caused by less
experienced employees and a lack of store-specific operating history from
which to predict daily food production needs. Moreover, in order to support
its expansion program, the Company is continuing to develop its corporate
support center, and accordingly, certain related expenditures will be higher
as a percentage of revenue in earlier periods than in later comparable
periods. In addition, the Company's rapid expansion significantly affects its
liquidity and capital requirements.
The Company's success is highly dependent on its continued relationship with
Boston Chicken. After consummation of the Offerings, Boston Chicken will
beneficially own approximately 60.4% of the outstanding shares of Common Stock
of the Company (or 59.3% if the Underwriters' over-allotment option is
exercised in full). In addition, in connection with the Concurrent Private
Placement, the Company intends to grant to Boston Chicken an option that would
permit it to maintain ownership of shares of Common Stock having up to 52% of
the voting power of all of the outstanding shares of capital stock of the
Company having the power generally to vote in the election of directors. The
Company and Boston Chicken are parties to various agreements, pursuant to
which Boston Chicken has agreed to provide to the Company certain accounting
and administration and computer and communications services. In addition,
Boston Chicken has agreed to make available to the Company a non-convertible
loan facility of up to $50.0 million, approximately $20.0 million of which was
outstanding as of July 30, 1996. See "Relationship with Boston Chicken."
MARCH 24, 1995 (INCEPTION) TO DECEMBER 31, 1995
Results of Operations
Revenue. Total revenue for the period ended December 31, 1995 was $26.4
million, consisting of $25.7 million from sales at Company-operated stores and
$0.7 million from royalties and franchise-related fees. At December 31, 1995,
the Company had 47 Company-operated stores compared to 13 stores owned by area
developers.
Costs and Expenses. Cost of products sold (which consists of food and paper
costs at stores and commissary expenses) were $8.2 million for the period
ended December 31, 1995. Salaries and benefits (which includes salaries and
benefits for both store employees and support center employees) were $13.5
million and general and administrative expenses (which includes both store
expenses and support center expenses) were $21.2 million for the period ended
December 31, 1995. Such expenses resulted from the operations of Company-
operated stores and the development and operation of the Company's support
center.
17
<PAGE>
In addition, after the acquisition of the Founding Companies, the Company
launched a development project, pursuant to which management analyzed (i) the
Founding Companies' stores, including brand positionings, product offerings,
operational service systems and atmosphere, (ii) the competitive environment
and (iii) the preferences of consumers across the United States. The project
resulted in the development of the Einstein Bros. Bagels brand and store. In
connection with, and as a result of, the development of the Einstein Bros.
Bagels brand and store, management determined to discontinue the use of the
identifiable intangible assets acquired in the acquisitions of the Founding
Companies, including trademarks and recipes. Consequently, during the period
ended December 31, 1995, the Company wrote-off $26.6 million of such assets.
The write-off resulted from the discontinuation of the use of these assets and
management's evaluation of the lack of recoverability of the costs thereof.
Goodwill of $14.0 million resulting from these acquisitions continues to be
amortized over its estimated useful life of 35 years. The Company will
continue to evaluate whether events and circumstances occur which may warrant
revising the estimated useful life or writing down all or part of the balance.
See Note 2 of Notes to the Company's Audited Consolidated Financial Statements
included elsewhere herein.
Other Expense. The Company incurred other expense of $0.6 million for the
period ended December 31, 1995, consisting principally of interest expense of
$1.3 million on the Company's loan agreement with Boston Chicken, offset by
other income of $0.7 million resulting from gains recognized on the sale of
marketable equity securities.
QUARTER ENDED APRIL 21, 1996 COMPARED TO THE PERIOD BEGINNING MARCH 24, 1995
(INCEPTION) AND ENDED APRIL 16, 1995
Results of Operations
Revenue. Total revenue increased $21.0 million to $22.4 million for the
quarter ended April 21, 1996 from $1.4 million for the period ended April 16,
1995. Revenue from Company-operated stores increased $17.0 million to $18.4
million for the quarter ended April 21, 1996 from $1.4 million for the period
ended April 16, 1995. The increase in revenue from Company-operated stores was
due to the short operating period in the first quarter of the Company's first
fiscal year of operations resulting in a combination of a higher average
number of Company-operated stores open and a higher number of operating weeks
in the current reporting period. There were 61 Company-operated stores at
April 21, 1996 compared to 24 stores at April 16, 1995.
Royalty and franchise-related fees were $4.0 million for the quarter ended
April 21, 1996. There were no such fees in the comparable period last year.
There were 77 stores operated by area developers as of April 21, 1996.
Cost of Products Sold. Cost of products sold increased $5.1 million to $5.5
million for the quarter ended April 21, 1996, compared with $0.4 million for
the comparable period last year. The increase was due to the short operating
period in the first quarter of the Company's first fiscal year of operations
resulting in a combination of a higher average number of Company-operated
stores open and a higher number of operating weeks in the current reporting
period.
Salaries and Benefits. Salaries and benefits increased $8.5 million to $9.1
million for the quarter ended April 21, 1996, compared with $0.6 million for
the comparable period last year. The increase was due to the short operating
period in the first quarter of the Company's first fiscal year of operations
resulting in an increase in the number of employees at Company-operated stores
due to a higher average number of stores open during the current period, an
increase in the number of employees at the Company's support center necessary
to support systemwide expansion, and a higher number of operating weeks in the
current reporting period.
General and Administrative. General and administrative expenses increased
$8.5 million to $9.0 million for the quarter ended April 21, 1996, compared
with $0.5 million for the comparable period last year. The increase was due to
the short operating period in the first quarter of the Company's first fiscal
year of operations resulting in an increase in the number of Company-operated
stores due to a higher average number of stores open during the current
period, an increase in expenses at the Company's support center necessary to
support systemwide expansion, and a higher number of operating weeks in the
current reporting period.
Included in general and administrative expenses for the quarter ended April
21, 1996 are depreciation and amortization charges of $1.9 million, including
amortization on $97.6 million of goodwill and intangible assets.
18
<PAGE>
These assets are being amortized over their estimated useful lives ranging
from 10 to 35 years. The Company will continue to evaluate whether events and
circumstances occur which may warrant revising the estimated useful lives or
writing down all or part of the balance.
Other Expense. The Company incurred other expense of $2.2 million for the
quarter ended April 21, 1996 compared to other expense of $0.1 million for the
comparable period last year. The increase reflects higher interest expense
attributable to the borrowings under the Company's loan agreement and bridge
loan with Boston Chicken, offset by gains recognized on the sale of marketable
equity securities.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's primary capital requirements relate to the development of
stores, principally in the form of partial financing for its area developers.
The remainder of the Company's capital requirements relate primarily to
investments in, and operation of, its corporate support center necessary to
support the increase in the number of stores in operation systemwide. For the
period ended December 31, 1995 and the quarter ended April 21, 1996, the
Company expended approximately $22.4 million and $48.5 million, respectively,
relating to store development and expended approximately $2.4 million and $0.1
million, respectively, on its corporate support center. In addition, in
February 1996, the Company acquired all of the outstanding capital stock of
Noah's for $100.9 million in cash.
The Company has entered into convertible secured loan agreements with its
area developers whereby the area developer may draw on a revolving line of
credit, with certain limitations, in order to provide partial funding for
store development and working capital. As of December 31, 1995 and April 21,
1996, the Company had made secured loan commitments aggregating approximately
$16.0 million and $89.5 million, respectively, of which approximately $3.5
million and $32.6 million, respectively, had been advanced. These area
developers had contributed capital aggregating $4.0 million at December 31,
1995. The contributed capital at April 21, 1996 was $24.0 million, consisting
of $22.4 million in cash and $1.6 million in promissory notes. The Company
anticipates fully funding its commitments pursuant to its loan agreements with
these area developers, increasing such loan commitments and entering into
additional loan commitments with other area developers. The Company
anticipates its current and future area developers will incur substantial net
losses during their expansion stage, which is anticipated to result in
negative net worth for its area developers. The Company believes that such
losses will be recovered as expansion moderates and development costs
correspondingly diminish, store investment costs decrease, operational
efficiencies increase as a result of overall system maturity and operational
experience, advertising efficiencies commence and average weekly store revenue
increases. However, there can be no assurance that such events will occur or
that such losses will be recovered. The failure of an area developer to
achieve a sufficient level of profitability subsequent to completion of its
expansion phase could have a material adverse impact on the Company's
financial position and results of operations.
In connection with entering into new area development agreements, the
Company has sold, and intends to continue to sell, Company-operated stores
located in areas covered by such area development agreements to the respective
area developer. In 1995, the Company sold 13 Company-operated stores to BCE
West Bagels, L.L.C., one of its area developers, and during the quarter ended
April 21, 1996, the Company sold an aggregate of 46 Company-operated stores
and related assets to Finest Bagels, L.L.C., Gulfstream Bagels, L.P. (formerly
Einstein Bros. America, L.P.) and Mayfair Bagels, L.L.C., each of which is an
area developer of the Company. The aggregate proceeds from the sale of these
stores and related assets were approximately $5.5 million in 1995 and $25.1
million in the quarter ended April 21, 1996. There were no material gains or
losses recognized as a result of these sales.
Capital Resources
For the period ended December 31, 1995, the Company's primary sources of
capital included $20.8 million from the sale of shares of Common Stock and
$40.0 million from borrowings under its loan agreement with Boston Chicken.
For the quarter ended April 21, 1996, the Company generated approximately
$13.0 million from the sale of shares of Common Stock, $80.0 million from
borrowings under its loan agreement with Boston
19
<PAGE>
Chicken and $38.5 million from borrowings under its bridge loan from Boston
Chicken. The aggregate amount available under the loan agreement with Boston
Chicken was increased from $80.0 million to $120.0 million in February 1996.
In March 1996, the bridge loan from Boston Chicken was increased from $25.0
million to $40.0 million. In May 1996, Boston Chicken and the Company amended
the loan agreement to add a $14.0 million non-convertible loan facility and in
July 1996, Boston Chicken and the Company increased the amount available under
the non-convertible loan facility to $50.0 million. See "Relationship with
Boston Chicken--Loan Agreement."
In May 1996, the Company and Bank of America Illinois, as agent for the
lenders, entered into a $45.0 million secured revolving credit facility. Loans
made under the secured revolving credit facility bear interest at the lender's
base rate plus 1.0% or, at the Company's option, the rate offered in the
interbank Eurodollar market for one-, two- or three-month dollar deposits
offered by the lender plus 3.0%. As of July 30, 1996, the Company had
approximately $43.0 million outstanding under the secured revolving credit
facility, the proceeds of which were primarily utilized to repay its bridge
loan from Boston Chicken and for store development. The borrowings under the
secured revolving credit facility are due in April 1998. In connection with
the consummation of the secured revolving credit facility, Boston Chicken
agreed to subordinate its loan to the Company to the loan under the secured
revolving credit facility and to release its security interest in the assets
of the Company. The secured revolving credit facility contains certain
financial covenants and restrictions on other borrowings, and prohibits the
payment of cash dividends on the Common Stock. See Note 7 to the Company's
Unaudited Financial Statements for the Quarter ended April 21, 1996 included
elsewhere herein.
On June 17, 1996, the Company's $120.0 million convertible loan facility
from Boston Chicken was converted into 15,307,421 shares of Common Stock.
At July 30, 1996, the Company had approximately $30.0 million available
under its non-convertible loan facility with Boston Chicken.
The Company anticipates it will have a continuing need for additional
financing to continue systemwide expansion. The Company expects that, based
upon its and its area developers' current development schedules, cash
requirements through fiscal 1996 will be satisfied from amounts available
under its secured revolving credit facility and under its non-convertible loan
facility with Boston Chicken and the net proceeds from the Offerings remaining
after repayment of debt. However, the timing of the Company's capital
requirements will be affected by the number of Company-operated and area
developer stores opened, operational results of the stores and the amount and
timing of borrowings under the loan agreements between the Company and its
existing and future area developers. As the Company's capital requirements
increase, the Company will seek additional funds from public or private
offerings of debt or equity securities. There can be no assurance that the
Company will be able to raise such capital on satisfactory terms when needed.
20
<PAGE>
BUSINESS
GENERAL
The Company operates and franchises specialty retail stores that feature
fresh-baked bagels, cream cheeses, coffee and other related products,
primarily under the Einstein Bros. Bagels and Noah's New York Bagels brand
names. As of July 30, 1996, there were 199 stores in operation systemwide, of
which 17 were Company-operated and 182 were operated by area developers
financed in part by the Company. Such financing generally permits the Company
in certain circumstances to convert its loan into a majority equity interest
in the area developer. As of July 30, 1996, the Company had entered into area
development agreements that provide for the development of 997 additional
stores, the majority of which are scheduled to open over the next three years.
The Company estimates that there will be between 275 and 300 stores in
operation systemwide by the end of 1996.
BUSINESS STRATEGY
The Company's principal business objective is to become the leading
specialty retailer of fresh-baked bagels and related products in the United
States and to ultimately support and extend its consumer brands through
alternate distribution channels, such as wholesale and contract food service.
The Company believes that there is an opportunity to develop a significant
multi-unit specialty retail business based on fresh-baked bagels because of
the growth in per capita consumption of bagels and the fragmented state of the
current retail bagel market. Key elements of the Company's strategy include:
Distinctive Consumer Brands. The Company believes that its Einstein Bros.
Bagels and Noah's New York Bagels brands are distinct within the retail bagel
market and have their own respective competitive advantages in key areas,
including store design and atmosphere, products and customer and community
service. The Company intends to build initial brand awareness by developing
stores that foster customer loyalty and are an integral part of the local
community. Marketing methods, including the use of broadcast media, will be
used to further enhance brand awareness and facilitate extension of the brands
into new geographic areas and ultimately into alternate distribution channels.
Local Market Focus. The Company believes that a concentrated, rapid
development of stores into select markets is the best strategy for
establishing a competitive position as the preferred provider of fresh-baked
bagels. By focusing on select markets, the Company and its area developers
intend to leverage marketing, development and operations resources and
accelerate attainment of the critical mass necessary to achieve media spending
efficiency.
Area Developer Organization. The Company's strategy of concentrated
development in local markets is supported by area developers financed in part
by the Company. The Company believes that having a relatively small group of
area developers, each led by a management group with substantial multi-unit
retail food service experience and short- and long-term incentives tied to
performance, is a superior means to achieve market leadership than either
direct Company ownership of all stores or more traditional franchising
approaches which utilize a larger number of franchisees. As a result of
providing convertible financing to its area developers, the Company generally
will have, after a moratorium period (typically two years) and after the area
developer has completed not less than 80% of its area development commitment
(or in the event of certain defaults), the right to acquire a majority equity
interest in such area developers. See "--Expansion Strategy" and "--Area
Developer Financing."
Relationship with Boston Chicken. The Company's formation and growth have
been significantly advanced by its relationship with Boston Chicken. Boston
Chicken has provided (i) significant capital financing, (ii) multi-unit retail
infrastructure and systems, including accounting and administration, real
estate and computer and communications services and systems, pursuant to fee
service agreements, and (iii) assistance in recruiting experienced area
developer candidates. The Company believes that the multi-unit retail
infrastructure and services provided to date and in the future by Boston
Chicken allow the Company to focus its energy and resources on brand and store
development. See "Relationship with Boston Chicken." In addition, the Company
is implementing certain key business strategies that it believes have been
important to Boston Chicken's development of the Boston Market(R) brand.
21
<PAGE>
Production Efficiencies. The Company believes that its use of proprietary
frozen bagel dough products for both the Einstein Bros. Bagels and Noah's New
York Bagels brands provides significant operational and developmental
advantages. Products for both brands have been developed so that they can be
produced in large, centrally located plants and efficiently packaged and
shipped to stores, where they are baked fresh. The Company believes that its
centralized production allows for a more consistent, superior bagel product
and permits more rapid development, production and deployment of a variety of
new products into stores systemwide. Similarly, the Company believes that its
long-term supply agreement with, and option to acquire, Doc's Cheese Company,
L.L.C. ("Doc's"), in Logan, Utah, provides additional product quality and cost
advantages. See "--Vendors." Doc's has developed a proprietary process that
blends fresh, natural ingredients directly into the cream cheese as it is
being produced, unlike flavored cream cheeses created by adding flavors to
already processed plain cream cheese. In addition, the Doc's product has an
extended refrigerated shelf life enabling the Company to gain centralized
production efficiencies. While the Company currently intends to retain
proprietary product recipes for each of the Einstein Bros. Bagels and Noah's
New York Bagels brands' bagel and cream cheese products, the Company believes
that the use of common production facilities for the two brands could offer
certain additional manufacturing and distribution efficiencies.
Community Involvement. The Company believes that a key component in
developing both the Einstein Bros. Bagels and Noah's New York Bagels brands is
a strong local and community-based effort that encourages a close relationship
between each store and its community. The Company and its area developers
utilize community involvement as a means of providing charitable service, as
well as building brand awareness and loyalty. Stores are typically designed to
complement their respective communities by adapting to the surrounding
neighborhood and architecture, incorporating local motifs and themes.
EXPANSION STRATEGY
Geographic and Brand Focus. The Company's current expansion strategy for
Einstein Bros. Bagels and Noah's New York Bagels is based on geographic
segregation of the brands. Noah's New York Bagels is the leading West Coast
bagel retailer, and the Company currently intends to continue expansion of
this brand primarily on the West Coast. The Company and its area developers
have moved aggressively to penetrate targeted designated market areas ("DMAs")
throughout the rest of the United States with the Einstein Bros. Bagels brand,
and the Company currently intends to continue the expansion of this brand
primarily outside of the West Coast. However, the Company intends to test the
development and operation of both brands within the same trade area, and the
Company has granted rights for the development of both brands to separate area
developers for the Las Vegas DMA. The Company estimates that there will be
between 275 and 300 stores in operation systemwide by the end of 1996.
As of July 30, 1996, in addition to 163 Einstein Bros. Bagels and Noah's New
York Bagels stores, the Company and its area developers were operating 36
bagel stores under the Bagel & Bagel, Offerdahl's Bagel Gourmet and Baltimore
Bagel brands. As part of the Company's expansion strategy, it and its area
developers intend to convert all such stores to either Einstein Bros. Bagels
stores or Noah's New York Bagels stores over the next 12 to 18 months. The
Company and its area developer for the Salt Lake City market completed
conversion of nine Brackman Bros. stores to Einstein Bros. Bagels stores in
March 1996.
Area Developer Organizations. The Company's strategy of concentrated
development of local markets is supported by area developers financed in part
by the Company. The Company currently expects that by the end of 1996 all
stores within the system, including Noah's New York Bagels stores, will be
owned and operated by area developers. The Company believes that having a
relatively small group of area developers, each led by a management group with
substantial multi-unit retail food service experience and short- and long-term
incentives tied to performance, is a superior means to achieve market
leadership than either direct Company ownership of all stores or more
traditional franchising approaches which utilize a larger number of
franchisees. As a result of providing convertible financing to its area
developers, the Company generally will have, after a moratorium period
(typically two years) and after the area developer has completed not less than
80% of its area development
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commitment (or in the event of certain defaults), the right to acquire a
majority equity interest in such area developers. See "--Area Developer
Financing."
As of July 30, 1996, the Company had entered into area development
agreements with ten entities for the development and operation of an aggregate
of 875 Einstein Bros. Bagels stores and an aggregate of 304 Noah's New York
Bagels stores over the next six years (as summarized below). One hundred and
four of such Einstein Bros. Bagels stores and 57 of such Noah's New York
Bagels stores were open as of July 30, 1996 and a majority of the additional
stores committed are scheduled to open over the next three years. The Company
expects to enter into similar agreements with at least one additional entity
during 1996 for the development of Einstein Bros. Bagels or Noah's New York
Bagels stores. The Company and its area developers currently operate stores in
29 territories, and expect to have stores in all of the territories currently
covered by area developer agreements by the end of 1996.
<TABLE>
<CAPTION>
CURRENT ADDITIONAL
STORES STORES
AREA DEVELOPER PRIMARY DEVELOPMENT TERRITORIES OPEN(1) COMMITTED
- -------------- ------------------------------- ------- ----------
<S> <C> <C> <C>
Einstein Bros. Bagels:
BCE West Bagels, Denver, Salt Lake City, Phoenix,
L.L.C................. Tucson,
Albuquerque, Las Vegas, Colorado
Springs 34 77
Colonial Bagels, L.P... Boston, Cleveland, Pittsburgh,
Providence/New Bedford, Springfield,
MA 3 119
Finest Bagels, L.L.C... Kansas City, St. Louis, Minneapolis 20 48
Great Lakes Bagels, Milwaukee, Chicago, Detroit, Madison
L.L.C................. 27 148
Gulfstream Bagels, Miami, Fort Lauderdale, West Palm
L.P................... Beach,
Orlando, Tampa 28 67
Liberty Foods, L.L.C... New York City metropolitan area 7 143
Mayfair Bagels, L.L.C.. Washington, D.C., Baltimore 4 65
Philly Rose, L.P....... Philadelphia 2 83
Noah's New York Bagels:
Noah's Bay Area Bagels, Sacramento, San Francisco/Oakland/
L.L.C. ............... San Jose 32 63
Noah's Pacific, L.L.C.. Los Angeles, Portland,
Seattle/Tacoma 25 184
--- ---
Total................. 182(2) 997
=== ===
</TABLE>
- --------
(1) Includes 11 stores operated under the Bagel & Bagel brand, and 10 stores
operated under the Offerdahl's Bagel Gourmet brand.
(2) In addition, at July 30, 1996, the Company operated 17 stores, two of
which were operated under the Einstein Bros. Bagels brand and 15 of which
were operated under the Baltimore Bagel brand.
The Company believes that rapid penetration of selected DMAs is superior to
more limited penetration of many DMAs for several reasons. Concentrations of
stores allow both area developers and Company personnel to gain greater
expertise concerning the trade areas within the DMA, thus improving their
ability to locate and approve sites on a more informed and efficient basis as
part of a market-wide strategy. In addition, store concentrations can permit
more efficient operations, in terms of multi-unit management, convenient
employee training, and sharing of employees, expertise and other resources
within a DMA. Concentrated DMA penetration also permits cost-efficient media
advertising to commence sooner than would be the case with a more scattered
nationwide expansion. The Company believes that media advertising increases
aggregate store revenue (which, in turn, can promote certain in-store
operating efficiencies) and is valuable in assisting the Company's area
developers to secure real estate for future sites on acceptable terms and
assists in the efficient recruiting of both management and hourly employees.
Site Selection. The Company has an extensive site selection process,
commencing with an overall market plan for each DMA that is compiled by the
Company and the relevant area developer. This market plan divides
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the DMA into trade areas based on an aerial review, an extensive vehicle tour
and demographic analysis, and takes into account traffic counts, patterns and
drive times, natural and other boundaries and day-time populations. Once the
market plan is established, local real estate managers of the Company or area
developer and local real estate brokers focus on the most desirable sites in
each trade area, taking into account such factors as visibility, ready
accessibility (particularly for morning drive-time traffic), parking, signage
and adaptability of any current structure, and determine the availability of
the site and the costs relating thereto. A thorough analysis of each site,
including the foregoing types of information, photographs of the site and
neighboring area, and a proposed layout and site elevations, as well as other
materials, must be submitted to the Company for approval. Company personnel
visit each site in connection with the site approval process. In addition,
leases must contain certain terms and provisions and be approved by the
Company. The Company emphasizes neighborhood locations, including end-cap and
in-line locations with easy morning-time access from high traffic roads.
The Company estimates that the initial investment for a Company-operated or
franchised Einstein Bros. Bagels or Noah's New York Bagels store currently
ranges from approximately $269,000 to $592,000. This estimate includes
development and franchise fees (where applicable), professional fees,
deposits, leasehold improvements, furniture, fixtures, equipment, opening
inventory and supplies, architectural and engineering fees, permit and impact
fees, grand opening expenses, computer and software expenses and initial
working capital. This estimate does not include any additional costs which may
be associated with the purchase of the site or underlying real estate. The
actual cost depends on, among other factors, the size and location of the
store, the level of pre-opening expenditures and the amount of improvements,
less any applicable construction allowance.
The Company believes that its ability to achieve rapid development growth is
dependent on (i) its ability to secure area development agreements with
qualified area developers for specific geographic regions, (ii) its and its
area developers' ability to secure suitable sites, which includes negotiating
acceptable lease terms, securing required permitting, complying with other
regulatory requirements and meeting construction schedules, (iii) the
operational and other capabilities of the Company's area developers, (iv) the
availability of capital to its area developers, (v) the ability of the Company
to manage this anticipated expansion and recruit and train personnel, and (vi)
the general economic and business environment. There can be no assurance that
the Company or its area developers will be able to achieve their goals.
The standard forms of area development agreement and franchise agreement,
and the terms of the Company's secured convertible financing to area
developers, are discussed more fully below under "--Development Agreements,"
"--Franchise Agreements" and "--Area Developer Financing."
THE EINSTEIN BROS. BAGELS BRAND
The Company developed the Einstein Bros. Bagels brand primarily during the
three-month period following the Company's formation and opened a test store
in Ogden, Utah in June 1995. The Company continued to develop and refine the
Einstein Bros. Bagels brand and concept store during the summer and early fall
of 1995 based on extensive consumer and competitor research. As of July 30,
1996, the Company and its area developers had opened a total of 106 Einstein
Bros. Bagels stores in 17 states.
Products. The key component of the Einstein Bros. Bagels product strategy is
the Einstein Bros. bagel, which is produced utilizing a proprietary process
that allows for maximum inclusion of high quality ingredients, such as whole
blueberries, raisins and nuts. Bagels are offered in a wide variety of both
traditional and creative flavors, including Plain, Cinnamon Raisin Swirl,
Chopped Onion, Chopped Garlic, Honey Wheat, Spinach Herb, Nutty Banana, Wild
Blueberry, Dark Pumpernickel, Chocolate Chip and Vegetable. Bagels are baked
fresh throughout the day in each store using a steamed-baking process that
produces a moist and dense interior wrapped in a firm, shiny crust.
The exclusive line of Einstein Bros. Bagels cream cheeses includes Wildberry
Lite, Cheddar & Peppers, Veggie Lite, Smoked Salmon, Mendocino Sun-Dried
Tomato and Spinach Dill Lite, in addition to traditional cream cheese flavors.
Unlike flavored cream cheeses created by adding flavors to already processed
plain cream cheese, Einstein Bros. Bagels cream cheeses are created by
blending quality flavors and ingredients (such as fresh
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<PAGE>
fruits and vegetables) directly into the cream cheese during initial
production. This process is specifically designed to yield a more consistently
flavored and more spreadable cream cheese than traditional grocery store
products.
The Einstein Bros. Bagels stores also offer consumers an extensive line of
beverages featuring branded coffee products. In addition to several blends of
premium drip coffee, customers can choose from a traditional offering of
espresso-based drinks, including Lattes, Cappuccinos and Americanos, that can
be augmented with gourmet syrup flavorings. High quality herbal, green and
black teas complete the hot beverage offerings. Cold beverages featured by
Einstein Bros. Bagels stores include Cool Cat(TM) iced cappuccino drinks,
fruit teas, bottled sodas, juices and waters, and a full line of fountain
sodas.
The Einstein Bros. Bagels menu of creative soups, salads and bagel
sandwiches offers customers a variety of lunch alternatives. Sandwiches
include signature offerings such as the Tasty Turkey, Veg-Out and Salmon-And-
The-Works, in addition to made-to-order deli sandwiches. Salads include spicy
Tabouli, Caesar, Greek and a Pasta-of-the-Week, as well as distinctive chicken
and tuna salads. The stores also offer a wide variety of soups that are
rotated and offered on a daily basis. In addition, stores feature branded
retail products that support the major menu categories, including ground and
whole bean coffee, teas, bagel chips, coffee mugs and other items.
Store Design and Atmosphere. The Einstein Bros. Bagels store is designed to
combine the authentic tastes of a bagel bakery with the comfortable setting of
a neighborhood meeting place. Each Einstein Bros. Bagels store blends
function, style and customer comfort with simple, contemporary colors and
furnishings in a relaxed social atmosphere. The look of the Einstein Bros.
Bagels store incorporates stained concrete or wood floors and eggplant-,
spruce- and mustard-colored analyene-dyed woods. Menu boards are black with
white lettering and designed to resemble chalkboards. The seating area
features cafe-style tables and wooden chairs with mismatched colors. Walls are
covered with whimsical drawings and sayings that relate to the Einstein Bros.
Bagels products. Other characteristic decorative items include a community
events calendar board that is customized to the store's neighborhood, a
bulletin board for community notices, painted Einstein Bros. Bagels logos and
a chalkboard for children.
A key component of the brand's "neighborhood feel" is its ability to blend
with local architecture by utilizing existing buildings and adapting the
Einstein Bros. Bagels trade dress to such locations. Einstein Bros. Bagels
stores are typically in leased locations of approximately 2,200 square feet
with ample parking, indoor seating for 30 to 40 customers, and, when
practical, additional outdoor seating. The Company and its area developers
generally seek sites located in neighborhood areas with seven-day-a-week
trade.
THE NOAH'S NEW YORK BAGELS BRAND
The Noah's New York Bagels brand was created in 1989 in Berkeley, California
and has evolved into the leading specialty retailer of fresh-baked bagels on
the West Coast. As of July 30, 1996, two of the Company's area developers
operated 57 Noah's New York Bagels stores in the San Francisco Bay Area,
Sacramento, Southern California, Portland and Seattle markets.
Products. The Noah's New York Bagels store is an authentic kosher bagel
bakery featuring 14 varieties of fresh-baked bagels, including Super Onion,
New York Rye, Whole Wheat Sesame, Egg, Garlic and Everything bagels, as well
as hand-made bialys and knishes. Noah's bagels are made from proprietary
recipes and are baked fresh throughout the day using a steamed-baking process
to create a light, moist and flavorful product.
Noah's New York Bagels stores offer 12 flavors of Noah's Shmears(R), which
are also made from proprietary recipes utilizing a process that results in a
cream cheese product that is light and smooth while still having a rich taste.
Regular and low fat Noah's Shmears flavors include Plain, Lox, Sun-Dried
Tomato, Basil, Chive, Garlic Herb, Veggie, Walnut Raisin and Strawberry.
The Noah's New York Bagels kosher dairy deli menu includes four varieties of
lox (New York Nova, Oregon, Norwegian and Nova lox trim), and salads and
specialty items, including Seven Herb Salmon, Smoked
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<PAGE>
Whitefish, Albacore Tuna and Hummus. Beverages include premium branded coffees
and traditional New York deli-style beverages.
Store Design and Atmosphere. Noah's New York Bagels stores recreate the mood
and feeling of a turn-of-the-century New York bakery. Mosaic tilework
incorporating the Noah's New York Bagels logo is reminiscent of the tile in
many New York landmarks and subway stations. Signage, menus and literature
incorporate Yiddish words and phrases, old photos and various New York
memorabilia. The lighting, marble counters and tables, and cherry woodwork
contribute to a feeling of old-fashioned comfort.
Particularly on weekends, the Noah's New York Bagels stores are a community
meeting place. The upbeat attitude of each Noah's New York Bagels store crew
helps set the store's atmosphere. Store crew members are encouraged to deliver
warm, personal service, as well as to participate in the Noah's New York
Bagels commitment to the community. Noah's New York Bagels stores are
typically in leased locations ranging in size from 900 to 2,500 square feet,
with newer stores being approximately 1,800 square feet. Stores include
approximately 16 seats, with additional outdoor seating in most locations.
MARKETING
The Company believes that a key component in developing both the Einstein
Bros. Bagels and Noah's New York Bagels brands is a strong local and
community-based effort that encourages a close relationship between each store
and its community. The Company and its area developers intend to utilize
community involvement as a means of providing charitable service, as well as
building brand awareness and loyalty. The Company also utilizes traditional
marketing and advertising methods including television, radio, newspapers and
other print media (including use of free-standing inserts and promotional
coupons), signage, direct mail and in-store point-of-purchase displays to
promote its brands. Both the Company-operated and area developer stores
contribute to a national advertising fund and a local advertising fund to pay
for the development of advertising material and for advertising in their
respective DMAs. See "--Franchise Agreements" and Note 9 of the Notes to the
Company's Audited Consolidated Financial Statements.
VENDORS
Under a short-term supply contract with the Company, Harlan Bakeries, Inc.
("Harlan Bakeries") currently supplies up to 700,000 dozen bagels per month to
the Company and its area developers from existing production capacity. In May
1996, the Company entered into a project and approved supplier agreement (the
"Harlan Supply Agreement") with Harlan Bakeries, Harlan Bagel Supply Company,
LLC ("Harlan") and the equity owners of Harlan Bakeries and Harlan. Under the
Harlan Supply Agreement, Harlan has agreed to complete the construction of a
new production facility in Avon, Indiana (the "New Facility"), which is
expected to become operational in early August 1996. The New Facility is
designed to produce frozen dough for approximately 1.4 million dozen bagels
per month, which is expected to be sufficient to supply approximately 200
Einstein Bros. Bagels stores. Under the Harlan Supply Agreement, Harlan has
agreed to sell to the Company, its area developers and their food service
distributors up to 1.4 million dozen bagels per month through June 1, 2003,
for which such purchasers will be charged a price equal to the cost of
ingredients and packaging, will absorb an agreed upon allowance for product
losses, and will pay a fixed toll charge (which is subject to adjustment for
inflation, changes in formulations, specifications or procedures required by
the Company or failure of the Company, its area developers and their food
service distributors to purchase certain minimum numbers of bagels). Pursuant
to the Harlan Supply Agreement, Harlan Bakeries has changed the pricing of
bagels under the existing short-term supply contract from a cost-plus formula
to the pricing described above, effective June 1, 1996. Under certain
circumstances, contract purchase amounts may be increased, which would permit
Harlan to double the New Facility's capacity. The Harlan Supply Agreement also
provides for the grant to the Company of an option, exercisable at any time
from December 15, 1999 through June 1, 2002, to acquire all of the assets of
Harlan at a formula price equal to a multiple of Harlan's profits from sales
of products under the Harlan Supply Agreement.
The Harlan Supply Agreement is subject to the receipt of financing for the
New Facility, including equipment financing, a mortgage loan and working
capital financing. The Company has financed the acquisition
26
<PAGE>
of certain equipment for the New Facility out of the Company's capital
resources, and the parties currently anticipate that approximately $7.2
million of equipment used in the New Facility will be owned by the Company and
leased to Harlan pursuant to an operating lease. The Company has been informed
by Harlan that Harlan has obtained a commitment from a lender for the mortgage
financing and working capital financing needed for the project, and Harlan
currently expects to close such financing in early August 1996.
The Company is also a party to a cream cheese supply agreement and certain
related agreements with Doc's (the "Doc's Agreements"). Under the Doc's
Agreements, Doc's has agreed to supply the Company, its area developers and
other authorized purchasers with up to 160,000 pounds of cream cheese per week
(which the Company believes is sufficient to supply at least 350 bagel stores)
through October 2, 2000, and the Company has agreed, subject to certain
exceptions and limitations, that it, its area developers and other authorized
purchasers will purchase the lesser of such amount or 60% of their
requirements for cream cheese. Prices for Doc's products are based on Doc's
cost, adjusted as necessary to provide Doc's with sufficient cash flow to fund
principal payments on certain outstanding indebtedness. The Company has
provided certain debt financing to Doc's, primarily to fund the purchase of
cream cheese production equipment and for Doc's working capital needs. The
Doc's Agreements also grant the Company an option, exercisable at any time on
or before October 2, 2000, to acquire all of the assets of Doc's at a formula
price based on cream cheese production volumes and production cost.
The Company has a national account relationship with Sysco Corporation
("Sysco"), which provides for deliveries of food, paper and smallware products
to participating stores several times a week at a negotiated standardized
mark-up above cost. The Company and its area developers currently purchase in
excess of 10% of their products and supplies from Sysco. The Company is
currently evaluating its distribution strategies and distributor
relationships.
The Company and its area developers may be subject to shortages or
interruptions in supply caused by transportation strikes, adverse weather or
other conditions which could adversely affect the quality, availability and
cost of ingredients.
The Harlan Supply Agreement and the Doc's Agreements are exhibits to the
Registration Statement of which this Prospectus is a part.
COMPETITION
The food service industry is intensely competitive with respect to food
quality, concept, convenience, location, customer service and value. In
addition, there are many well-established food service competitors with
substantially greater financial and other resources than the Company and with
substantially longer operating histories. Many of such competitors are less
dependent than the Company on a single, primary product. The Company believes
that it competes with other bagel retailers and bakeries, including, among
others, Bruegger's Bagel Bakery, Manhattan Bagel, Big Apple Bagel and
Chesapeake Bagel Bakery, specialty coffee retailers, doughnut shops, fast-food
restaurants, delicatessens, take-out food service companies, supermarkets and
convenience stores. The Company believes that competition in the retail bagel
market will increase as large retail bagel companies attract additional
capital, new competitors enter the market and bagel retailers compete for
market share. In addition, the Company believes that the start-up costs
associated with retail bagel and similar food service establishments are not a
significant impediment to entry into the retail bagel business. The Company
believes that its Einstein Bros. Bagels and Noah's New York Bagels brands
compete favorably in the important factors of taste, food quality,
convenience, customer service and value.
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability
of product and the type, number and location of competing restaurants. Multi-
unit food service chains such as the Company can also be substantially
adversely affected by publicity resulting from food quality, illness, injury
or other health concerns or operating issues stemming from one store or a
limited number of stores, whether or not the Company is liable. In addition,
factors such as increased costs of goods, labor and employee
27
<PAGE>
benefit costs, regional weather conditions and potential scarcity of
experienced management and hourly employees may also adversely affect the food
service industry in general and the results of operations and financial
condition of the Company and its area developers in particular. The Company
attempts to manage or adapt to these factors, but some or all of these factors
could cause the Company and some or all of its area developers to be adversely
affected.
DEVELOPMENT AGREEMENTS
The Company's form of area development agreement currently provides for the
development of a specified number of bagel stores of a specified brand within
a defined geographic territory in accordance with a development schedule of
store opening dates. The development schedule generally covers two to five
years and contains store opening benchmarks for the number of stores to be
opened and in operation at quarterly or semi-annual intervals. An area
developer's development schedule typically requires concurrent store
development by the area developer in multiple DMA's. Area developers initially
pay a non-refundable development fee of $5,000 per store to be developed and a
non-refundable real estate services fee of $5,000 per store to be developed.
Such fees are not recognized as income by the Company until the store is
opened. The area development agreements generally provide that the area
developer has the right to open a specified number of stores within each DMA
during the term of the development schedule applicable to that DMA and
generally preclude the Company from operating or franchising bagel stores of
the brand for which rights have been granted within such territory, except
that the Company reserves the right to engage in certain special distribution
arrangements and, in the event the area developer chooses not to develop them,
to develop target sites and conversion sites within the specified territory.
Target sites are sites which the Company believes should be developed for
competitive or market reasons regardless of the applicable development
schedule or the location of pre-existing sites. Conversion sites are sites
obtained from other companies which are suitable for conversion to bagel
stores.
Breaches of the area development agreement, including failure to meet
development schedules, may lead to termination of the limited exclusivity
provided by the agreement, renegotiation of development and franchise
provisions or termination of the right to build future stores, although such
termination will not generally affect existing franchise agreements for
developed locations unless such breaches independently constitute defaults of
the franchise agreements. Any such termination could be contested by the area
developer.
The form of area development agreement between the Company and its area
developers is an exhibit to the Registration Statement of which this
Prospectus is a part.
FRANCHISE AGREEMENTS
Once an acceptable lease for an approved store site has been executed or
real estate for a new site has been acquired, the Company and the area
developer enter into a franchise agreement under which the area developer
becomes the franchisee for the specific store to be developed at the site.
Franchise agreements typically provide for a non-refundable franchise fee of
$35,000 per store, a 5% royalty on "Royalty Base Revenue," which is defined as
gross revenue less customer refunds and coupons, the portion of employee meals
not charged to the employee and monies received by the store from other stores
directly attributable to an approved commissary operated in the store, a
national advertising fund contribution of 2% on Royalty Base Revenue, a local
advertising fund contribution of 4% on Royalty Base Revenue and a $10,000
minimum grand opening expenditure. The national and local advertising fund
contributions may each be increased by .25% per calendar year over the prior
year at the discretion of the Company. The Company's franchise and area
development agreements with respect to markets where the Company has already
commenced store development generally provide for 6% royalties.
The Company's form of franchise agreement provides that the Company may
specify computer hardware and software for use in stores, including licensed
software designated or created by or for Boston Chicken and used by the
Company and its area developers. The cost of designated computer hardware is
approximately $15,000 to $30,000 per store. The Company currently specifies
off-the-shelf computer hardware for use in stores and charges fees aggregating
$16,000 for licensed software for store systems, which fee is paid to Boston
Chicken (including $1,000 for third-party proprietary software which the area
developer is required to use) under
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<PAGE>
an existing computer and communications systems services agreement (the
"Computer Services Agreement"). See "Relationship with Boston Chicken--
Computer and Communications Systems Services Agreement." The Company's form of
franchise agreement also provides for a periodic maintenance and support fee
for modifications and enhancements made to the licensed software and certain
other maintenance and support services. The Company and its area developers
pay $323 to Boston Chicken and such area developers pay $77 to the Company per
four-week accounting period per store for these services. The Company believes
that the integrated hardware and licensed software systems used by its area
developers will facilitate the movement of knowledge, including financial,
customer and employee performance data, allowing the Company and its area
developers to react more quickly in a competitive environment.
The Company's form of franchise agreement provides for an area of limited
exclusivity surrounding the bagel store in which the Company may neither
develop nor grant to others the right to develop additional bagel stores
(generally limited to bagel stores of the brand that has been licensed to the
franchisee), except that the Company reserves the right to engage in certain
special distribution arrangements and, in the event that the franchisee
chooses not to develop them, to develop conversion sites within the
franchisee's designated territory. Designated territories in suburban
locations are generally a one-mile radius surrounding the store, while urban
locations occasionally have a smaller (e.g., one-half mile) radius or a trade-
area-specific designated territory.
The Company's form of franchise agreement requires that each store be
operated in accordance with the operating procedures and menu, and meet the
applicable quality, service and cleanliness standards, established by the
Company. The Company may work with a franchisee to improve substandard
performance or any items of non-compliance and may terminate any franchise
agreement if the franchisee does not comply with such standards. The Company
is specifically authorized to take accelerated action in the event that the
operations of any franchised store present a health risk. The Company believes
that maintaining superior food quality, a clean and pleasing environment and
excellent customer service are critical to the reputation and success of the
Company's brands and, therefore, intends to strictly enforce applicable
contractual requirements. Upon any termination of a franchise agreement, the
Company has the right to purchase the assets of the franchisee at the net
tangible book value of such assets.
The form of franchise agreement between the Company and its area developers
is an exhibit to the Registration Statement of which this Prospectus is a
part.
AREA DEVELOPER FINANCING
Secured Loan Agreements. The Company's area developers are generally funded
in part by a senior secured loan made by the Company that is typically
convertible into a majority equity interest in the area developer. The Company
believes that the development and operation of stores in a DMA is improved
when management is permitted to focus primarily on store development and
operations, rather than on raising capital. Accordingly, to facilitate the
development of its brands, the Company has made, and currently intends to
make, loans to area developers to provide partial financing for store
development and working capital. The maximum amount of such a loan is based on
the amount of equity investments (excluding promissory notes) made by the
members of the area developer's management, one or more equity investments
made by Bagel Store Development Funding, L.L.C., a Delaware limited liability
company, formerly Einstein Bros. Equity Funding, L.L.C. ("Bagel Funding"), and
equity investments made by any other investors.
The area developer financing program requires the area developer to expend
at least 75% of its equity capital contributed in cash toward developing
stores and funding working capital prior to drawing on its revolving loan,
with advances permitted during a two- or three-year draw period in a pre-
determined maximum amount generally equal to four times the amount of the area
developer's equity capital contributions (excluding promissory notes). Upon
expiration of the draw period under the loan agreement, the loan generally
converts to an amortizing term loan payable over five years in periodic
installments, with a final balloon payment. Interest is set at 1% over the
applicable reference rate of Bank of America Illinois as established from time
to time and is payable currently. The loan is secured by a pledge of
substantially all of the assets of the area developer.
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<PAGE>
Each loan agreement contains customary representations, warranties, terms
and covenants. The Company's loans to its area developers subject the Company
to the risks of being a secured lender. The Company considers each area
developer's use of loan proceeds, adherence to its store development schedule,
store performance trends, type and amount of collateral securing the loan,
prevailing economic conditions and other factors it deems relevant at the time
in evaluating whether to establish an allowance for potential loan losses. See
Note 11 of Notes to the Company's Audited Consolidated Financial Statements.
The Company may convert all or any portion of the loan amount at its
election into equity in the area developer at a conversion price that is
generally set at a 12% premium over the per unit price paid by the investors
in the area developer for their equity investment made concurrently with the
execution of the loan agreement. To the extent such loan is not fully drawn or
has been drawn and repaid, the Company has a corresponding option to acquire
at the loan conversion price the amount of additional equity it could have
acquired by conversion of the loan had the loan been fully drawn. The
Company's conversion and option rights are only exercisable after a moratorium
period (typically two years) and after the area developer has completed not
less than 80% of its store development commitment. In addition, the Company
may exercise its conversion and option rights upon the occurrence of certain
specified defaults under the area developer loan agreement. An area
developer's default of its development schedule is a default under the loan
agreement (so as to permit the Company to exercise its conversion and option
rights) only if during the 180-day period immediately preceding the event
giving rise to the default, the area developer had access to debt or equity
capital, either directly or through Company sources, on commercially
reasonable terms for similarly situated restaurant businesses, or income from
operations, sufficient in either case to complete its development obligations.
The Company also has certain rights regarding future financings of the area
developer that allow the Company, if it so desires, to maintain the potential
for a majority interest in the area developer upon conversion of the loan and
any corresponding option exercise. There can be no assurance, however, that
the Company will exercise its future rights to acquire an equity interest in
any area developer or that such exercise will result in a majority interest in
the area developer. Any determination to convert any area developer loan would
involve a variety of economic and operational considerations, including the
status of the area developer's market penetration, the performance of the area
developer's stores, the Company's desire to own such stores, the Company's
ability to manage such stores if necessary, and the financial impact of
converting the loan. In addition, any loan conversion or other acquisition of
an equity interest in an area developer by the Company would not be indicative
of whether the Company intended to, or would, convert or otherwise acquire an
equity interest in any other area developer.
The form of secured loan agreement between the Company and its area
developers is an exhibit to the Registration Statement of which this
Prospectus is a part.
Area Developer Equity. Members of management of each of the Company's area
developers generally make an equity investment in the area developer entity.
The amount and type of such investments vary among the area developers. At
July 30, 1996, the aggregate amount of investments by management of the
Company's ten area developers was approximately $0.8 million in cash and
approximately $4.5 million in full recourse, secured, interest-bearing
promissory notes. Future investments by management or others could include
contributions of assets.
In addition to equity investments provided by an area developer's
management, Bagel Funding may make one or more equity investments in the
Company's area developers. Bagel Funding was formed in December 1995 to invest
in area developers of the Company. Bagel Funding has received total capital
commitments from its members aggregating $90.0 million, $45.8 million of which
has been contributed to Bagel Funding and the balance of which is payable from
such members to Bagel Funding at such times on or after October 1, 1996 and on
or before December 31, 1998 as Bagel Funding's manager or managers make one or
more capital calls. As of July 30, 1996, Bagel Funding had invested a total of
approximately $45.8 million in area developers.
Bagel Funding has the right to require each area developer to redeem Bagel
Funding's equity interest in the area developer (the "Bagel Funding Put") at a
pre-determined formula purchase price based on the store level cash flow of
the area developer in the event (i) the Company acquires a majority interest
in the area developer pursuant to the exercise of its conversion or option
rights under the area developer's secured loan agreement, (ii)
30
<PAGE>
the Company's conversion and option rights expire unexercised and the Company
has not consented to a public offering of the area developer, or (iii) the
Company does not acquire a majority interest in an area developer pursuant to
the exercise of the Company's conversion or option rights, such rights have
expired under the secured loan agreement and the Company has not consented to
a request by the area developer to terminate its area development and
franchise agreements with the Company. In the event the area developer does
not redeem Bagel Funding's equity interest when required to do so, the Company
will be obligated to purchase from Bagel Funding its equity interest in the
area developer at the same price applicable to the area developer.
The form of Fourth Amended and Restated Limited Liability Company Agreement
of Bagel Funding and the form of agreement between the Company and Bagel
Funding relating to the contingent repurchase obligation of the Company with
respect to the Bagel Funding Put (including the terms of the formula purchase
price for the Bagel Funding Put) are exhibits to the Registration Statement of
which this Prospectus is a part.
The Company is currently the manager of Bagel Funding. Certain directors and
executive officers of each of the Company and Boston Chicken have made, or
have committed to make, equity investments in Bagel Funding aggregating
approximately $21.7 million. See "Certain Transactions--Bagel Store
Development Funding."
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
Noah's New York Bagels(R), Noah's Bagels(R), A Taste of Old New York(R),
Noah's Shmears(R), Shmear 'Em(R) and Protect Your Bagels, Put Lox on Them(R).
In addition, the Company has federal trademark applications pending for a
number of trademarks and service marks, including Just Say Noah's(TM),
Einstein Bros.(TM), Einstein's(TM), Poppies(TM), The Coffee Table(TM),
Bubbler(TM), Cool Cat(TM), Little Monsters(TM), Fresh & Holesome(TM), Veggie
Confetti(TM), The Veg-Out(TM), Bagelmeister(TM) and Boomerang(TM), as well as
certain logos used by the Company. The Company has applied to register Noah's
New York Bagels(R) in more than 30 foreign countries and to register each of
Einstein Bros.(TM) and Einstein's(TM) in approximately 20 foreign countries.
Most of such pending applications in the United States and foreign countries
were filed in 1995 and 1996. The Company has not yet obtained federal
registrations for any of the trademarks or service marks used in connection
with the Einstein Bros. Bagels stores and products and there can be no
assurance that any such registrations will be obtained.
After the Company filed an application for the service mark Einstein's for
restaurant services in May 1995, Peach State Restaurants, Inc. ("Peach
State"), which owns a restaurant in Atlanta that uses the name Einstein's,
filed a federal trademark application for the name Einstein's for restaurant
services and filed an opposition to the Company's application for Einstein's.
In July 1996 the Company entered into an agreement with Peach State in which
Peach State agreed to withdraw such application, to abandon such opposition
and to not object to, or interfere with, any of the Company's trademark and
service mark applications that include the name Einstein's. Peach State has
also agreed not to use any mark incorporating the name Einstein's for
restaurant services outside of the Atlanta metropolitan area, and the Company
has agreed not to use any mark incorporating the name Einstein's for
restaurant services in the State of Georgia (except for permitted national
advertising and promotion and similar uses).
Hebrew University of Jerusalem ("Hebrew University"), which claims certain
rights to the name Albert Einstein, has obtained an extension of time to file
an opposition to certain of the Company's U.S. applications for Einstein's and
has filed oppositions to the Company's trademark applications in three foreign
countries, although the Company does not use (and does not intend to use,
absent a licensing agreement or other consent of Hebrew University) Albert
Einstein's first name, likeness or scientific formulae or theories in
connection with the Einstein Bros. Bagels brand. The Company is currently
seeking to enter into an agreement with Hebrew University pursuant to which
Hebrew University would grant to the Company rights to use certain indicia of
Albert Einstein and Hebrew University would abandon its trademark oppositions.
There can be no assurance, however, that the Company and Hebrew University
will enter into such an agreement, or that Hebrew University will not oppose
the registration or challenge the use of the Company's Einstein's trademark
under laws governing trademarks or publicity rights.
31
<PAGE>
The Company is aware of the use by other persons or entities in certain
geographic areas of names and marks which may be deemed to be similar to
certain of the Company's marks. Some of these persons or entities may have
prior rights to such marks in their respective localities. While the Company
is not aware of any prior uses that would prevent the use of the Company's
marks in any DMA for which it has granted development rights, there can be no
assurance that the Company's marks will be available for use by the Company
and its area developers in all locations.
The Company considers its intellectual property rights to be important to
its business and its policy is to actively defend and enforce such rights.
GOVERNMENT REGULATION
Stores, commissaries and other production facilities operated by the Company
and its area developers are required to comply with federal, state and local
government laws and regulations applicable to food production and consumer
food service businesses generally, including those relating to the preparation
and sale of food, minimum wage requirements, overtime, working and safety
conditions and citizenship requirements, as well as regulations relating to
zoning, construction, health, business licensing and employment. An increase
in employee benefit costs or other costs associated with employees, such as
minimum wage requirements, could adversely affect the Company.
Certain states and the Federal Trade Commission require a franchisor to
transmit specified disclosure statements to potential franchisees before
granting a franchise. Additionally, some states require the franchisor to
register its franchise with the state or qualify for certain statutory or
discretionary exemptions from registration before it may offer a franchise.
The Company believes that its Uniform Franchise Offering Circular (together
with any applicable state versions or supplements) complies with both the
Federal Trade Commission guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises. The Company's
Uniform Franchise Offering Circular, which contains the base forms of the
Company's current area development, franchise and area developer financing
agreements, is an exhibit to the Registration Statement of which this
Prospectus is a part.
PROPERTIES/LEASING
The Company leases its support center facility, which consists of
approximately 14,000 square feet and is located in Golden, Colorado, from an
unaffiliated third party. The Company has entered into a lease with Boston
Chicken for approximately 38,000 square feet of office space (and certain
common areas, including parking areas) that is nearing completion in Golden,
Colorado to meet its future needs. See "Relationship With Boston Chicken--
Other Relationships Between Boston Chicken and the Company." The Company also
leases office space in San Diego, California for use as a support center for
the operations of the Company in such location. The Company also intends to
establish an office in Los Angeles, California.
The Company and its wholly owned subsidiaries lease the land and buildings
for all Company-operated stores. In addition, the Company and its subsidiaries
may lease land or buildings that they sublease or assign to area developers.
While the Company expects its area developers primarily to continue to lease
sites in the future, the Company or its area developers may also purchase land
and/or buildings for stores to the extent acceptable terms are available. The
majority of the Company's stores are located in retail community shopping
centers, community business districts or freestanding locations.
Stores leased by the Company are typically leased under "triple net" leases
that require the Company to pay its proportionate share of real estate taxes,
maintenance costs and insurance premiums. In some cases, in addition to base
rent, the Company pays percentage rent based on sales in excess of specified
amounts. Generally, the Company's store leases have initial terms of five
years with options to renew for three additional five-year periods at market
rates.
32
<PAGE>
The Company owns commissaries in or near Salt Lake City, Utah and San Diego,
California. The facility in Salt Lake City also contains office space for the
use of operational personnel of the Company's area developer in the Salt Lake
City area and is presently the subject of an environmental remediation program
to correct soil and groundwater contamination resulting from the closure of an
underground storage tank by a prior owner. A groundwater remediation system
has been installed at the site, which is subject to the oversight of the State
of Utah, Division of Environmental Response and Remediation. All of the costs
of the remediation are being paid by certain of the former shareholders of
Brackman pursuant to an indemnification agreement with the Company entered
into by them at the time Brackman was acquired. The remaining costs of the
remediation are not expected to exceed the amount such former shareholders are
obligated to pay under the indemnification agreement.
The Company leases dough production facilities in San Leandro and Whittier,
California, which are subleased to one of its area developers. The Company
leases facilities used as commissaries in or near Fort Lauderdale, Florida and
Kansas City, Kansas. The Company also leases a facility in Parker, Colorado
which it currently uses as a test commissary. The Company may lease or
sublease its commissaries and related office space to area developers.
EMPLOYEES
At July 8, 1996, the Company had approximately 1,175 employees, including
approximately 105 employed at its support center offices in Golden, Colorado,
approximately 40 employed at zone offices or commissaries and approximately
1,030 employed at bagel stores operated by the Company. None of the Company's
employees are represented by a labor union or covered by a collective
bargaining contract. The Company believes that its relationships with its
employees are generally good.
LEGAL PROCEEDINGS
The Company, like others in the food service business, is from time to time
the subject of complaints, threat letters or litigation from customers
alleging illness, injury or other food quality, health or operational
concerns. Adverse publicity resulting from such allegations may materially
adversely affect the Company and one or more of its brands, regardless of
whether such allegations are valid or whether the Company is liable. In
addition, the Company also encounters complaints and allegations from former
or prospective employees or others from time to time, as well as other matters
which are common for businesses similar to the Company's. The Company does not
believe that any such matters of which it is aware are material to the Company
individually or in the aggregate, but matters may arise which could adversely
affect the Company or its business operations. See "--Trademarks and Other
Proprietary Rights."
In the course of enforcing its rights under existing area development and
franchise agreements, the Company may also be the subject from time to time of
complaints, threat letters or litigation concerning the proper interpretation
and application of these agreements, particularly in the event of a default or
termination of area development or franchise rights. No such matters are
currently pending.
INSURANCE
The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company in its business. While management
believes that its insurance coverage is adequate, if the Company was held
liable for amounts exceeding the limits of its insurance coverage or for
claims outside the scope of its insurance coverage, the Company's business,
results of operations and financial condition could be materially adversely
affected.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott A. Beck(3) 38 Chairman of the Board
Noah C. Alper 49 Vice Chairman of the Board
Mark R. Goldston 41 President, Chief Executive Officer and Director
Michael J. Beau-
doin 34 Senior Vice President--Supply Chain
W. Eric Carlborg 32 Senior Vice President--Finance
David G. Stanchak 38 Vice President, Chief Development Officer and Director
Jeffrey L. Butler 34 President of Einstein Bros. Bagels Concept
Joel M. Alam 38 Vice President and Secretary
Paul A. Strasen 39 Vice President and General Counsel
Kyle T. Craig 48 Director
M. Laird
Koldyke(1)(2)(3) 35 Director
Gail A. Lozoff 46 Director and Vice President--Design and Merchandising
John H.
Muehlstein,
Jr.(3) 41 Director
John A.
Offerdahl(1) 31 Director and Vice President--Operations, Southeast Zone
Lloyd D.
Ruth(1)(2)(3) 49 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the board of directors.
(2) Member of the Reporting Person Stock Option Committee of the board of
directors.
(3) Member of the Compensation and Stock Option Committees of the board of
directors.
Messrs. Craig, Stanchak and Beck were elected to the board of directors as
designees of Boston Chicken, Messrs. Koldyke, Muehlstein and Ruth were elected
to the board of directors as designees of investors in the Company's March
1995 private placement and Messrs. Offerdahl and Daniel V. Colangelo (the
Company's former President and Chief Executive Officer and formerly a
director) and Ms. Lozoff were elected to the board of directors as designees
of Offerdahl's, Brackman and Bagel & Bagel, respectively. Boston Chicken and
Brackman did not designate nominees for the 1996 election of directors and the
private placement investors designated Messrs. Koldyke, Muehlstein and Ruth
for such election. All such contractual designation rights have expired or
will expire upon the consummation of an initial public offering of the Common
Stock. See "Risk Factors--Control by and Conflicts of Interest with Boston
Chicken."
All directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the pleasure of the board of directors.
Mr. Beck became Chairman of the Board of the Company in July 1996. Mr. Beck
has served as a director of the Company since March 1995. He has been Chief
Executive Officer and a director of Boston Chicken since June 1992 and served
as Chairman of Boston Chicken from such time until December 1995 when he
became Co-Chairman. He was Vice Chairman of the Board of Blockbuster
Entertainment Corporation ("Blockbuster") in Fort Lauderdale, Florida from
September 1989 until January 1992, and Chief Operating Officer of Blockbuster
34
<PAGE>
from September 1989 to January 1991. Since 1980, Mr. Beck also has been
President of Pace Affiliates, Inc., an investment banking firm he founded.
Mr. Alper became the Company's Vice Chairman of the Board in March 1996. Mr.
Alper founded Noah's in 1989 and served as its Chairman of the Board until
March 1996.
Mr. Goldston became President and Chief Executive Officer and a director of
the Company in April 1996. Since January 17, 1996, Mr. Goldston has also been
employed by Boston Chicken to undertake various special projects for Boston
Chicken. From July 1994 to April 1996, Mr. Goldston was the Chairman and Chief
Executive Officer of The Goldston Group, a strategic advisory firm which
advises high-growth companies on improving performance and creating operating
leverage and efficiencies. From October 1991 to June 1994, Mr. Goldston served
as President and Chief Operating Officer of L.A. Gear, Inc. From September
1989 to October 1991, Mr. Goldston was a principal of Odyssey Partners, L.P.,
an investment firm, and from September 1988 to September 1989 served as Chief
Marketing Officer of Reebok Inc.
Mr. Beaudoin became the Company's Senior Vice President--Supply Chain in
July 1996. Prior thereto, he served as Vice President and Chief Financial
Officer of the Company from July 1995 to July 1996, after serving as Assistant
to the Chairman of Boston Chicken from February 1995. From December 1992 to
February 1995, he held several positions with NewLeaf Entertainment (a joint
venture between Blockbuster and IBM), including Vice President of Finance,
Marketing and Operations. From June 1990 through November 1992, Mr. Beaudoin
was an Associate and Limited Partner of Pfingsten Partners, L.P., a private
equity investment firm in Deerfield, Illinois.
Mr. Carlborg became Senior Vice President--Finance of the Company in July
1996. From October 1995 through June 1996, he was Vice President of Alignment
and Planning of Boston Chicken. Prior thereto, Mr. Carlborg served as Vice
President--Corporate Finance of Merrill Lynch from January 1994 to October
1995 and served as an Associate of Merrill Lynch from August 1989 through
December 1993.
Mr. Stanchak became a director and Vice President and Chief Development
Officer of the Company in March 1995. From June 1992 until March 1995, he
served as a Senior Vice President of Boston Chicken, and from August 1989
until June 1992, Mr. Stanchak was the National Director of Real Estate and
Real Estate Legal Counsel for Blockbuster.
Mr. Butler became President of Einstein Bros. Bagels Concept in May 1996.
From January 1996 until May 1996, Mr. Butler served as Chief Operating Officer
of the Company. Prior thereto, he was employed by BC Great Lakes, L.L.C., an
area developer of Boston Chicken ("BC Great Lakes"), since June of 1995, and
also served as President of the managing member of BC Heartland, L.L.C., also
a Boston Chicken area developer, since August 1995. From June 1993 until June
1995, Mr. Butler served as President and Chief Executive Officer of the
general partner of BC Detroit L.P., a predecessor of BC Great Lakes. From
January 1992 to June 1993, Mr. Butler served as Vice President--Human
Resources of Boston Chicken. Prior thereto, Mr. Butler was an independent
consultant from July 1991 until January 1992 and was Regional Director of
Operations for Blockbuster in San Diego and Orange County, California from
April 1990 until June 1991.
Mr. Alam became Vice President and Secretary in April 1995. From January
1994 to April 1995, he was Vice President and Associate General Counsel of
Boston Chicken and from May 1993 to January 1994 he was Assistant General
Counsel of Boston Chicken. Prior thereto, Mr. Alam was an associate at the
Chicago law firm of Bell, Boyd & Lloyd from 1986 to May 1993.
Mr. Strasen became Vice President and General Counsel of the Company in
April 1995. Prior thereto, he was a partner at the Chicago law firm of Bell,
Boyd & Lloyd from 1988 to April 1995.
Mr. Craig has been a director of the Company from the date the Company was
incorporated in February 1995. Mr. Craig was Chairman of the Board of the
Company from June 1995 until he resigned in July 1996. From February 1995
until being appointed as Chairman in June 1995, Mr. Craig served as Vice
President of the Company. Mr. Craig also served as the Chief Concept Officer
of Boston Chicken from April 1994 through June
35
<PAGE>
1995. From November 1993 until April 1994, he was President of KFC-Brand
Development, a unit of KFC Corp. in Louisville, Kentucky, and from April 1990
until November 1993, he was President of KFC-USA, also a unit of KFC Corp. in
Louisville, Kentucky. KFC Corp. is a wholly owned subsidiary of PepsiCo, Inc.
Mr. Koldyke became a director of the Company in March 1995. Mr. Koldyke has
served as a general partner of the Frontenac Company ("Frontenac"), a venture
capital company, in Chicago, Illinois since 1989.
Ms. Lozoff became a director and Vice President--Design and Merchandising of
the Company in April 1995, after working with Bagel & Bagel, which she founded
in June 1988. Ms. Lozoff also served as President and Chief Executive Officer
of Bagel & Bagel from May 1992 to April 1995.
Mr. Muehlstein became a director of the Company in March 1995. Since 1986,
he has been a partner at the Chicago law firm of Pedersen & Houpt.
Mr. Offerdahl became a director and Vice President--Operations, Southeast
Zone of the Company in March 1995, after working with Offerdahl's, which he
founded in 1989. Mr. Offerdahl served as the Chairman and Chief Executive
Officer of Offerdahl's from December 1989 until March 1995. From May 1986
until September 1994, Mr. Offerdahl played professional football for the Miami
Dolphins in the National Football League.
Mr. Ruth became a director of the Company in March 1995. Since January 1987,
he has been a general partner at Marquette Management Partners, a venture
capital company, in Deerfield, Illinois.
MANAGEMENT COMPENSATION
The Company was incorporated in February 1995 and did not conduct any
operations prior to that time. The only executive officer of the Company who
earned more than $100,000 in salary and bonus during fiscal year 1995 was
Daniel V. Colangelo, the Company's former President and Chief Executive
Officer who served in that capacity during fiscal year 1995 (the "named
executive officer"). Mr. Colangelo's total cash compensation during fiscal
year 1995 consisted of $103,462 in salary and $47,375 in bonus.
On March 24, 1995, the Company entered into a three-year employment
agreement with Mr. Colangelo, pursuant to which he became the President of the
Company's Rocky Mountain Division and a director of the Company. Mr. Colangelo
was later promoted to President and Chief Executive Officer of the Company.
Under the employment agreement, Mr. Colangelo was entitled to receive an
annual salary of $125,000 and reimbursement for reasonable business expenses.
In addition, during 1995, Mr. Colangelo was granted options to purchase 50,979
shares of Common Stock under the Plan (defined herein) at an exercise price of
$5.88 per share. See "--Option Grants in Last Fiscal Year."
In March 1996, Mr. Colangelo's employment agreement was terminated and the
Company entered into a consulting agreement with him in connection with his
resignation as President and Chief Executive Officer and a director of the
Company. Pursuant to the consulting agreement, Mr. Colangelo will, upon the
Company's request, provide information, advice and assistance to the Company
concerning matters that were within the scope of his knowledge and expertise
during the course of his employment by the Company. The consulting agreement
has a term of one year and is automatically renewed for successive one-year
periods unless terminated by either party upon 30 days' prior written notice.
Under the consulting agreement, Mr. Colangelo receives $100,000 per year and
is entitled to reimbursement for his related reasonable business expenses. In
addition, the options granted during 1995 to Mr. Colangelo under the Plan were
deemed vested and were exercised by him in January 1996. Mr. Colangelo also
retained options granted in January 1996 under the Plan to purchase an
aggregate of 37,931 shares of Common Stock at an exercise price of $6.59 per
share, which options were granted in January 1996 and vest in accordance with
the Plan's vesting schedule during the term of his consulting agreement.
The Company has also entered into employment and consulting agreements with
certain of its other current executive officers and others. See "Certain
Transactions--Employment and Consulting Agreements."
36
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options made to
the named executive officer during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
DATE OF OPTIONS TO EMPLOYEES OR BASE EXPIRATION ----------------------
NAME GRANT GRANTED(1) IN FISCAL YEAR PRICE DATE 5% 10%
- ---- ------- ---------- ---------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel V. Colangelo..... 3/24/95 25,491 1.2% $5.88 3/24/05 $ 94,337 $ 239,068
5/16/95 16,992 0.8 5.88 5/16/05 62,886 159,428
7/25/95 8,496 0.4 5.88 7/25/05 31,443 79,746
</TABLE>
- --------
(1) Options granted to Mr. Colangelo in 1995 were deemed fully vested in
January 1996 in connection with his resignation as President and Chief
Executive Officer of the Company. See "--Management Compensation."
(2) These amounts represent certain assumed annual rates of appreciation
calculated from the exercise price, as required by the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the future
performance of the Common Stock. There can be no assurance that the
amounts reflected in this table will be achieved.
DIRECTOR COMPENSATION
In addition to annual grants under the Directors Plan (as defined herein),
directors who are not officers or employees of, or consultants to, the Company
receive $500 cash compensation for each board of directors meeting at which
they are present and for each committee meeting at which they are present not
held in conjunction with a meeting of the board of directors. Outside
directors are also reimbursed for their expenses for each board and committee
meeting attended.
The Company has also entered into employment and consulting agreements with
certain of its directors who are also current executive or other officers of
the Company. See "Certain Transactions--Employment and Consulting Agreements."
1995 STOCK OPTION PLAN
General. The board of directors has adopted the 1995 Employee Stock Option
Plan, effective February 16, 1995, as subsequently amended (the "Plan"). On
May 28, 1996, the Plan was amended and restated by the board of directors and,
as amended and restated, was subsequently approved by the stockholders of the
Company. The board of directors adopted additional amendments to the Plan (as
so amended, the "Amended Plan"), to be effective August 15, 1996, to comply
with recent changes to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules promulgated thereunder.
The purpose of the Amended Plan is to benefit the Company by offering
certain present and future employees, officers and consultants of the Company
and its subsidiaries, if any, a favorable opportunity to become holders of
Common Stock over a period of years, thereby giving them a long-term stake in
the growth and prosperity of the Company and encouraging the continuance of
their involvement with the Company. Under the Amended Plan, eligible persons
may be granted options to purchase an aggregate of not more than 5,500,000
shares of Common Stock. An aggregate of approximately 1,540,000 shares of
Common Stock are currently available for option grants under the Amended Plan.
Such options are not intended to be treated as incentive stock options as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
The Amended Plan will be administered, with respect to persons subject to
Section 16 of the Exchange Act and the rules promulgated thereunder
("Reporting Persons"), by the Reporting Person Stock Option Committee (the
"Reporting Person Committee"), consisting of two members of the board of
directors, each of whom will be "non-employee directors" (as such term is
defined under Rule 16b-3 of the Exchange Act) and, with respect to all other
persons receiving options under the Amended Plan, by the Stock Option
Committee (the "Stock Option Committee").
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<PAGE>
The Reporting Person Committee may grant options under the Amended Plan to
Reporting Persons and the Stock Option Committee may grant options under the
Amended Plan to other eligible employees, officers, and consultants of the
Company and its subsidiaries, in each case selected initially and from time to
time thereafter by the relevant Committee based on the importance of their
services; provided, however, that the maximum number of shares subject to all
options granted to any individual in any calendar year shall in no event
exceed 300,000. Eligible individuals may be selected individually or by groups
or categories, as determined by the relevant Committee in its discretion.
Options granted under the Amended Plan have a term of 10 years, subject to
earlier expiration if the optionee's service terminates, and no options under
the Amended Plan may be granted after February 1, 2005. Options may not be
transferred other than by will, by the laws of descent and distribution, or
pursuant to a qualified domestic relations order. The relevant Committee has
the discretion to permit the assignment or transfer of an option on such terms
and conditions as such Committee may deem necessary or appropriate or as
otherwise required by or deemed advisable under applicable law.
Options granted under the Amended Plan become exercisable with respect to
10% of the total number of shares subject to the option on the first
anniversary of the date of grant, an additional 20% on the second anniversary
of the date of grant, an additional 30% on the third anniversary of the date
of grant and the balance on the fourth anniversary of the date of grant. The
relevant Committee has the discretion to accelerate the exercisability of any
option subject to such terms and conditions as such Committee deems necessary,
including a requirement that the optionee grant the Company an option to
repurchase all or a portion of the shares issued upon exercise of the
accelerated option for their fair market value on the date of grant. If an
option expires or is terminated or canceled unexercised as to any shares, such
shares may be optioned again. Shares subject to options may be made available
from unissued or reacquired shares of Common Stock.
In the event the relationship between the Company and an officer, employee
or consultant who is an optionee is terminated for any reason other than
death, permanent disability or retirement, such optionee's option shall expire
and all rights to purchase shares pursuant thereto shall terminate on the date
of termination, except that, to the extent any option or portion thereof is
exercisable on the date of termination, such option (or portion thereof) may
be exercised for a period of 15 days after such termination (or until the
scheduled termination of the option, if earlier); provided, however, that,
with respect to any option held by such optionee, the relevant Committee may,
in its sole discretion, accelerate exercisability, permit continued vesting in
accordance with the vesting schedule set forth in the Amended Plan or permit
exercisability beyond the 15-day period referenced above (but in no event
beyond its specified term), subject to such terms and conditions, if any, as
determined by such Committee in its sole discretion.
In the event of termination of said relationship because of death or
permanent disability (as that term is defined in Section 22(e)(3) of the Code,
as now in effect or as subsequently amended), the option may be exercised in
full (to the extent not previously exercised) without regard to the vesting
schedule set forth in the Amended Plan, by the optionee or, if he or she is
not living, by his or her heirs, legatees or legal representative, as the case
may be, during its specified term prior to two years after the date of death
or permanent disability. In the event of termination of employment because of
early, normal or deferred retirement under an approved retirement program of
the Company (or other plan or arrangement as may be approved by the relevant
Committee, in its discretion, for this purpose), the option may be exercised
by the optionee (or, if he or she dies after such retirement, by his or her
heirs, legatees or legal representative, as the case may be), to the extent
that any portion thereof would be exercisable on the date of such retirement
(or with respect to such greater portion as determined by the relevant
Committee), at any time during its specified term prior to one year after the
date of such retirement.
Except as otherwise determined by the relevant Committee, upon the
termination of a relationship between the Company or any subsidiary and a
consultant who is an optionee, such optionee's option shall expire and all
rights to purchase shares pursuant thereto shall terminate.
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The exercise price of options granted under the Amended Plan is the fair
market value of the shares of Common Stock on the date of the grant. The
exercise price is payable in cash, by check, by a promissory note in a form
specified by the relevant Committee and payable to the Company no later than
15 business days after the exercise date, or, if approved by such Committee,
by shares of Common Stock or by a combination of these payment methods. In the
event that shares of Common Stock are changed by a stock dividend, split or
combination of shares, merger, consolidation or reorganization of the Company
with any other corporation or corporations in which holders of the Common
Stock receive other securities, or any other relevant change in the
capitalization of the Company, a proportionate or equitable adjustment will be
made to the number or kind of shares subject to the Amended Plan and to the
exercise price.
The relevant Committee may require an optionee to satisfy any tax
withholding obligation upon exercise and may permit an eligible participant
(or any beneficiary or person entitled to act) to elect to pay a portion or
all of the amount requested by the Company for such taxes with respect to such
option, at such time and in such manner as such Committee shall deem to be
appropriate (including, but not limited to, authorizing the Company to
withhold, or agreeing to surrender to the Company on or about the date such
tax liability is determinable, Common Stock, other securities or property, or
other forms of payment, or any combination thereof, owned by such participant,
or a portion of such forms of payment that would otherwise be distributed, or
has been distributed, as the case may be, pursuant to such option to such
participant, having a fair market value equal to the amount of such taxes).
The board of directors may amend or discontinue the Amended Plan at any
time, provided that no amendment or discontinuance may, without the consent of
the optionee, change or impair any option previously granted or, without the
approval of stockholders, materially increase the benefits accruing to
participants under the Amended Plan, materially increase the number of
securities which may be issued under the Amended Plan, or materially modify
the requirements as to eligibility for participation in the Amended Plan.
The Amended Plan provides that, unless otherwise determined by the relevant
Committee in its sole discretion, options granted prior to May 7, 1996 shall
be governed by the Plan as it was in effect prior to such date and options
granted from May 7, 1996 through August 14, 1996 shall be governed by the
Amended Plan as it was in effect during such period.
Federal Income Tax Consequences of the Amended Plan. The following is a
brief summary of the current federal income tax rules relevant to stock
options issued under the Amended Plan. These rules are subject to change in
the future.
Options granted or to be granted under the Amended Plan are, or will be,
non-qualified stock options ("NQO"). In general, an optionee will not
recognize any taxable income, and the Company will not be entitled to a
deduction, upon the grant of an NQO. Upon the exercise of an NQO where the
exercise price is paid in cash, the optionee will recognize ordinary income
(subject to wage and employment tax withholding) equal to the excess of the
fair market value of the shares acquired over the option exercise price. The
amount of such excess is generally determined by reference to the fair market
value of the Common Stock on the date of exercise. An optionee's basis in the
underlying stock received will equal such stock's fair market value on the
date of exercise. The Company will be entitled to a deduction (subject to the
$1 million cap described below, if applicable) equal to the ordinary income
taxable to the optionee in the year of exercise.
Upon the sale of shares acquired pursuant to the exercise of an NQO, such
optionee will recognize capital gain or loss equal to the difference between
the selling price of the shares and the optionee's basis in the shares. Such
capital gain or loss will be long-term gain or loss if the optionee has held
the shares for more than one year. The Company will not be entitled to any
deduction with respect to any capital gain recognized by the optionee.
If an optionee surrenders previously acquired shares of Common Stock,
however acquired, in payment of all or part of the option exercise price of an
NQO, the optionee will not, as a result of such delivery, recognize gain or
loss for federal income tax purposes on the shares surrendered. The optionee's
tax basis in, and holding period for, the previously acquired stock
surrendered will carry over to an equal number of the shares of Common Stock
received on a share-for-share basis. The fair market value of the shares
received in excess of the shares surrendered will constitute compensation
taxable to the optionee as ordinary income. The tax basis for
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such shares will equal their fair market value and such shares' holding period
for federal income tax purposes begins on the date of exercise. The Company
will be entitled to a tax deduction (subject to the $1 million cap described
below, if applicable) equal to the compensation income recognized by the
optionee.
A publicly held corporation may not, subject to certain exceptions, deduct
for federal income tax purposes in any taxable year certain compensation paid
to certain executives in excess of $1 million for each such executive (the "$1
million cap"). The Company believes that under recently promulgated
regulations the $1 million cap will be inapplicable to options granted under
the Amended Plan.
Options Granted under the Plan and the Amended Plan. As of July 30, 1996,
the Company had options outstanding for an aggregate of 3,655,187 shares of
Common Stock under the Plan at exercise prices ranging from $5.88 to $15.00
per share, with a weighted average exercise price of approximately $6.83 per
share. As of such date, no shares of Common Stock had been issued under the
Amended Plan. The following table sets forth certain information with respect
to options granted under the Plan and the Amended Plan (whether or not
exercised) through July 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING
OPTIONS GRANTED UNDER THE PLAN
NAME AND POSITION AND THE AMENDED PLAN
----------------- ------------------------------
<S> <C>
Daniel V. Colangelo, former President and Chief
Executive Officer............................. 88,910
All current executive officers as a group (9
persons)...................................... 695,018
All directors who are not executive officers as
a group (6 persons)........................... 257,322
All associates of all directors and executive
officers (2 persons).......................... 53,650
All eligible employees who are not executive
officers or associates thereof and consultants
as a group.................................... 2,883,244
</TABLE>
DIRECTORS PLAN
General. On May 28, 1996, the board of directors of the Company adopted a
1996 Stock Option Plan for Non-Employee Directors (the "Directors Plan"),
which has been approved by the stockholders of the Company. On May 28, 1996,
options to purchase an aggregate of 4,318 shares of Common Stock were granted
under the Directors Plan to each of Messrs. Koldyke, Muehlstein and Ruth at an
exercise price of $11.58 per share. The Directors Plan is administered by the
board of directors.
Options under the Directors Plan may only be granted to directors of the
Company who are not officers or employees of the Company. Options may be
granted with respect to a total of not more than 100,000 shares of Common
Stock under the Directors Plan, subject to antidilution and other adjustments.
Such options are not intended to be treated as incentive stock options as
defined in Section 422 of the Code. Each option granted under the Directors
Plan is for a term of ten years, subject to earlier termination if the
optionee's service as a director terminates. If an option expires or is
terminated or canceled unexercised as to any shares, such released shares may
again be optioned. Options which have been granted become exercisable after
the end of one year from the date of grant.
Pursuant to the Directors Plan, options for shares having a fair market
value of $50,000 at the date of grant, as determined in good faith by the
board of directors on such date, are granted at the time of each election or
re-election of eligible directors to the Board, except that the initial grants
of options under the Directors Plan were made on the date of adoption of the
Directors Plan by the board of directors, which option grants are subject to
approval of the Directors Plan by the stockholders of the Company. The
exercise price is payable in cash, by check, by a promissory note in a form
specified by the board of directors and payable to the Company no later than
15 business days after the exercise date or, if approved by the board of
directors, by shares of Common Stock of the Company or by a combination of
these methods.
If tenure as a director with the Company or any of its subsidiaries is
terminated for any reason other than death, permanent disability or
resignation, such director's option shall expire and all rights to purchase
shares under it shall terminate 15 days after such termination (or until the
scheduled termination of the option, if earlier).
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In the event of death or permanent disability, an exercisable option may be
exercised in full by the optionee or, if he is not living, by his or her
heirs, legatees, or legal representative, as the case may be, during its
specified term prior to two years after the date of death or permanent
disability; provided, however, that in the event an optionee hereunder should
die or become permanently disabled prior to the end of one year of service as
a director of the Company, then such optionee's option shall become
immediately exercisable as of the date of such death or permanent disability
and shall be exercisable for a period of two years after such date. In the
event of resignation, an exercisable option may be exercised by the optionee
(or, if he or she dies within three months after such termination, by his or
her heirs, legatees, or legal representative, as the case may be), at any time
during its specified term prior to three months after the date of such
resignation.
No option is transferable by the optionee otherwise than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
order, and each option shall be exercisable during an optionee's lifetime only
by him.
The board of directors may amend or discontinue the Directors Plan at any
time, provided, however, that the Directors Plan may not be amended more than
once every six months except to comport with relevant changes in the law, and
provided further that no such amendment or discontinuation shall (a) change or
impair any option previously granted without the consent of the optionee, or
(b) without the approval of stockholders, (i) increase the maximum number of
shares which may be purchased by all optionees, (ii) change the purchase price
of any option, or (iii) change the option period or increase the time
limitations on the grant of options.
Federal Income Tax Consequences of the Directors Plan. The federal income
tax consequences relating to stock options under the Directors Plan are the
same as those relating to stock options issued under the Amended Plan. See "--
1995 Stock Option Plan--Federal Income Tax Consequences of the Amended Plan."
Copies of the Amended Plan and the Directors Plan are exhibits to the
Registration Statement of which this Prospectus is a part.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has approved the terms of compensation paid and to be
paid to the Company's executive officers for fiscal years 1995 and 1996.
During the year ended December 31, 1995, the following persons served as
members of the Stock Option Committee of the board of directors: Scott Beck,
Kyle Craig and John Muehlstein.
Currently, no executive officer of the Company, except for Scott Beck, who
is Chairman of the Board of the Company and a member of the Compensation
Committee of the board of directors, serves as a member of the compensation
committee or as a director of any other entity, one of whose executive
officers serves on the compensation committee or is a director of the Company.
Mr. Beck is Co-Chairman of the Board and Chief Executive Officer of Boston
Chicken. Mr. Beck does not serve on the compensation committee of Boston
Chicken's board of directors.
CERTAIN TRANSACTIONS
FORMATION OF THE COMPANY AND SUBSEQUENT ACQUISITIONS
In March 1995, the Company acquired the operations of Brackman, Bagel &
Bagel and Offerdahl's, and in connection with such acquisitions, issued
1,959,152 shares of Common Stock valued at $5.88 per share to the owners of
such companies. Concurrently with the acquisitions, the Company also raised
approximately $20.8 million in a private placement of its Common Stock to
investors (including approximately $5.2 million of such amount that was
purchased, directly or indirectly, by officers and directors of each of the
Company and Boston Chicken). The terms of each of these transactions resulted
from arms-length negotiations between the Company and unrelated third parties.
In addition, the Company believes that such arms-length negotiations
established the fair market value of the Common Stock as of the date such
transactions were entered into by the Company. These transactions are
separately described below.
On March 24, 1995, pursuant to an agreement to contribute shares, the
Company acquired all of the outstanding capital stock of Brackman, of which
Daniel V. Colangelo, the Company's former President and
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Chief Executive Officer, was a shareholder (the "Brackman Acquisition"). The
consideration paid by the Company consisted of 573,750 shares of Common Stock
and 488,236 shares of Boston Chicken common stock, which shares of Boston
Chicken common stock were purchased by the Company for a cash purchase price
of $17.00 per share, pursuant to a stock purchase agreement between the
Company and Boston Chicken dated as of March 24, 1995. See "Relationship with
Boston Chicken--Other Relationships Between Boston Chicken and the Company."
Following the Brackman Acquisition, Mr. Colangelo entered into an employment
agreement with the Company, pursuant to which he became President--Rocky
Mountain Zone and a director of the Company. See "Management--Management
Compensation."
On March 24, 1995, pursuant to an agreement to contribute assets, the
Company acquired all of the assets, properties and business of Bagel & Bagel,
of which Richard Lozoff, Gail Lozoff's spouse, was the sole shareholder (the
"Bagel & Bagel Acquisition"). The consideration paid by the Company consisted
of 573,750 shares of Common Stock and 323,530 shares of Boston Chicken common
stock, which shares of Boston Chicken common stock were purchased by the
Company for a cash purchase price of $17.00 per share, pursuant to a stock
purchase agreement between the Company and Boston Chicken dated as of March
24, 1995. See "Relationship with Boston Chicken--Other Relationships between
Boston Chicken and the Company." Following the Bagel & Bagel Acquisition, Ms.
Lozoff entered into an employment agreement with the Company, pursuant to
which she became Vice President--Design and Merchandising and a director of
the Company. See "--Employment and Consulting Agreements."
On March 31, 1995, pursuant to an agreement to contribute assets, the
Company acquired substantially all of the assets, properties and business of
Offerdahl's, of which John Offerdahl was a majority shareholder (the
"Offerdahl's Acquisition"). The consideration paid by the Company consisted of
811,652 shares of Common Stock and 331,852 shares of Boston Chicken common
stock, which shares of Boston Chicken common stock were purchased by the
Company for a cash purchase price of $16.875 per share, pursuant to a stock
purchase agreement between the Company and Boston Chicken dated as of March
31, 1995. See "Relationship with Boston Chicken--Other Relationships between
Boston Chicken and the Company." Following the Offerdahl's Acquisition, Mr.
Offerdahl entered into an employment agreement with the Company, pursuant to
which he became Vice President--Operations, Southeast Zone and a director of
the Company. In addition, Mr. Offerdahl's spouse, Lynnora Offerdahl, entered
into a consulting agreement with the Company. See "--Employment and Consulting
Agreements."
On March 24, 1995, the Company entered into Subscription Agreements pursuant
to which certain investors, including Messrs. Craig, Stanchak, Beaudoin,
Butler and Beck, Mr. Alam and his spouse, PJS Bagel Investing, L.L.C., an
entity controlled by Mr. Strasen and his spouse ("PJS"), OBG Holdings, Inc.
(formerly Offerdahl's), of which Mr. Offerdahl and his spouse are majority
stockholders ("OBG"), Frontenac VI, Limited Partnership ("Frontenac"), of
which Mr. Koldyke is a general partner, Marquette Venture Partners II, L.P.
("Marquette") and MVP II Affiliates Fund, L.P. ("MVP II"), the general partner
of each of which is an entity of which Mr. Ruth is a general partner, and
Pedersen Bagel Investments Joint Venture ("Pedersen Bagel"), of which Mr.
Muehlstein is a general partner, purchased 1,618,972 shares of Common Stock at
$5.88 per share.
In February 1996, the Company acquired all of the outstanding stock of
Noah's for an aggregate purchase price of $100.9 million in cash. In
connection with the transaction, certain former shareholders of Noah's,
including Noah Alper, Vice Chairman of the Board, and other members of Noah's
management purchased 855,225 shares of Common Stock at a purchase price of
$10.52 per share.
REGISTRATION RIGHTS
The Company is a party to an amended and restated registration rights
agreement dated as of February 1, 1996 (the "Stockholder Registration
Agreement") with certain stockholders of the Company, including Messrs. Craig,
Alper, Stanchak, Beaudoin, Butler, Beck, Bacheller and Colangelo, as well as
Mr. Alam and his spouse, PJS, OBG, Frontenac, Marquette, MVP II and B&B
Holdings, Inc. (formerly Bagel & Bagel), of which Ms. Lozoff's spouse is the
sole stockholder ("B&B"), and with Boston Chicken (with respect to the shares
of
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<PAGE>
Common Stock issued pursuant to the Loan Conversion). Pursuant to such
agreement, the Company granted to such stockholders and Boston Chicken certain
piggyback registration rights under the Securities Act with respect to shares
of Common Stock owned by them (the "Registrable Securities"). In addition, the
Company is obligated to file, within 13 months after the completion of an
initial public offering, a registration statement under the Securities Act
that would include the Registrable Securities then held by such stockholders
and Boston Chicken, permitting them to make public resales of the Registrable
Securities. The Company expects to file such registration statement shortly
after the completion of the Offerings. Pursuant to the Stockholder
Registration Agreement, each holder of Registrable Securities has agreed not
to sell, for a specified period of time, up to 30% of the Registrable
Securities held by such holder. See "Shares Eligible for Future Sale." The
Company expects to enter into the Boston Chicken Registration Agreement
(defined below) that will supersede the rights of Boston Chicken under the
Stockholder Registration Agreement. The Company has obtained from the parties
to the Stockholder Registration Agreement a waiver of the provision of such
agreement prohibiting the Company from granting registration rights superior
to those granted under the agreement, and a consent to the grant by the
Company to Boston Chicken of registration rights pursuant to the Boston
Chicken Registration Agreement. See "--Concurrent Public Offering,"
"Relationship with Boston Chicken--Concurrent Private Placement Agreement and
Registration Agreement" and "Shares Eligible for Future Sale."
CONCURRENT PUBLIC OFFERING
In the Concurrent Public Offering, the Company is offering to certain
persons or entities, consisting primarily of officers, directors and employees
of each of the Company and Boston Chicken, the opportunity to purchase an
aggregate of 425,000 shares of Common Stock at a price equal to the initial
public offering price per share, net of underwriting discount. In the
Concurrent Public Offering, executive officers and directors of the Company
(none of whom are members of the committee of the Company's board of directors
who will negotiate the initial public offering price with the Representatives)
are expected to purchase an aggregate of 35,500 of such shares of Common Stock
as follows: Mr. Scott Beck--3,750; Mr. Goldston--3,750; Mr. Carlborg--3,750;
Mr. Stanchak--3,750; Mr. Beaudoin--3,750; Mr. Butler--3,750; Mr. Alam--3,000;
Mr. Strasen--2,500; Mr. Muehlstein--3,750; and Mr. Ruth--3,750. Certain
executive officers and directors of Boston Chicken (other than Scott Beck) are
expected to purchase in the Concurrent Public Offering an aggregate of 32,000
shares of Common Stock. The consummation of the Concurrent Public Offering is
conditioned upon the consummation of each of the Initial Public Offering and
the Concurrent Private Placement. In addition, any such sales are also
conditioned upon participants in the Concurrent Public Offering agreeing not
to sell shares of Common Stock purchased in such offering for a period of 365
days after the date of this Prospectus, without the consent of Merrill Lynch.
BAGEL STORE DEVELOPMENT FUNDING
In December 1995, Bagel Funding was formed under the name Einstein Bros.
Equity Funding, L.L.C. with the objective of raising $90.0 million to invest
in existing and proposed area developers of the Company. Bagel Funding has
received total capital commitments from its members aggregating such amount,
$45.8 million of which has been contributed to Bagel Funding and the balance
of which is payable by such members to Bagel Funding at such times on or after
October 1, 1996 and on or before December 31, 1998 as the manager or managers
of Bagel Funding make one or more capital calls. In the event a member fails
to make its capital contribution within three days of the date it is due, or
such longer period as the manager or managers determine (but in no event
longer than 45 days), Bagel Funding is required to treat such defaulting
member's interest in future profits as terminated, so that such defaulting
member is entitled to receive from Bagel Funding only the amount of such
member's capital account at the time of such default, reduced by any future
allocation of losses to such member, payable without interest thereon at the
expiration of the term of Bagel Funding.
Through July 30, 1996, Bagel Funding had invested a total of approximately
$45.8 million in area developers of the Company. See "Business--Area Developer
Financing." No fees were paid to the Company in its capacity as manager in
1995. The Company will be entitled to receive fees of $500,000 and $50,000 for
serving as manager of Bagel Funding during 1996 and the first quarter of 1997,
respectively.
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Bagel Funding has the right to require each area developer to redeem Bagel
Funding's equity interest in the area developer (the "Bagel Funding Put") at a
predetermined formula purchase price based on the store level cash flow of the
area developer in the event (i) the Company acquires a majority interest in
the area developer pursuant to the exercise of its conversion or option rights
under the area developer's secured loan agreement, (ii) the Company's
conversion and option rights expire unexercised and the Company has not
consented to a public offering of the area developer, or (iii) the Company
does not acquire a majority interest in an area developer pursuant to the
exercise of the Company's conversion or option rights, such rights have
expired under the secured loan agreement and the Company has not consented to
a request by the area developer to terminate its area development and
franchise agreements with the Company. In the event the area developer does
not redeem Bagel Funding's equity interest when required to do so, the Company
will be obligated to purchase from Bagel Funding its equity interest in the
area developer at the same price applicable to the area developer.
The Company's term as manager of Bagel Funding expires on April 20, 1997,
although the Company may be removed prior to such time for cause by action of
more than two-thirds in interest of Bagel Funding's members and may be removed
for any reason at fiscal year-end by action of more than four-fifths in
interest of Bagel Funding's members. Prior to the expiration of the Company's
term as manager, Bagel Funding also has a three-person advisory committee, the
members of which were nominated by the Company and approved by a majority in
interest of Bagel Funding's members. None of the members of the advisory
committee are officers, directors or employees of the Company. The advisory
committee is required to approve any sale by Bagel Funding of an interest in
an area developer and to determine the manner in which Bagel Funding's
interests in an area developer should be voted on any merger, consolidation,
sale of all or substantially all of the assets of the area developer or
amendment of its governing documents. The advisory committee is also available
to consult with the manager with respect to any matters requested by the
manager concerning Bagel Funding's investments and has the power to resolve
any questions with respect to potential conflicts of interest between Bagel
Funding and the manager that may be presented to it by the manager. Bagel
Funding's limited liability company agreement contains no specific provisions
with respect to the resolution of potential conflicts of interest between
Bagel Funding and its manager; however, resolution of such potential conflicts
of interest will be governed by applicable Delaware law. The advisory
committee has the authority to adopt rules and procedures not inconsistent
with Bagel Funding's limited liability company agreement, relating to the
conduct of the advisory committee's affairs. Actions taken by the advisory
committee must be authorized by a majority of the persons then serving as
advisory committee members. Each member of the advisory committee may
designate from time to time an alternate and such alternate may attend any and
all meetings of the advisory committee and otherwise may act in place of the
member selecting such alternate.
Effective April 21, 1997, or at such earlier time as the Company ceases to
be the manager of Bagel Funding, each of the members of the advisory committee
will become a manager of Bagel Funding and collectively will constitute the
three-person board of managers. At such time the advisory committee of Bagel
Funding will disband and all authority previously vested in the advisory
committee will be vested in the board of managers. In addition, when the
Company ceases to be the manager of Bagel Funding, the equity interests of
Bagel Funding in the Company's area developers will automatically be converted
from nonvoting equity interests to voting equity interests, which will have
the power to select the manager or general partner, as applicable, of each of
the Company's area developers.
Bagel Funding has also acquired from the Company, for an aggregate purchase
price of $45,000, warrants to acquire 1,012,500 shares of Common Stock of the
Company having an exercise price of $6.47 per share (the "Bagel Funding
Warrants"), or 11,250 shares of Common Stock for every $1.0 million of capital
committed to Bagel Funding. The Bagel Funding Warrants have a term of five
years. In the event the total capital ultimately contributed to Bagel Funding
is less than $90.0 million or Bagel Funding is dissolved prior to the time all
remaining capital commitments have been called, the number of shares
purchasable upon exercise of the Bagel Funding Warrants will be adjusted based
on the total amount of capital contributed or committed to be contributed to
Bagel Funding less the amount of cash to be distributed to the members of
Bagel Funding upon such dissolution. In the event of such a dissolution, the
amount of capital committed to be contributed to Bagel Funding shall be deemed
to be zero. Such adjustments to the number of shares covered by the Bagel
Funding Warrants, if any, will be made by the Company (i) at the time that
Bagel Funding may no longer accept additional capital subscriptions, (ii) at
such time, if any, as any member of Bagel Funding fails to honor its
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commitment to contribute capital and (iii) immediately prior to any
dissolution of Bagel Funding that occurs prior to the time all committed
capital has been contributed to Bagel Funding, but only if the Warrants have
not been distributed by Bagel Funding.
Bagel Funding is required to distribute the Bagel Funding Warrants to its
members on the later of (i) six months after the date of the closing of an
underwritten initial public offering of the Company or (ii) four months after
all committed capital has been contributed to Bagel Funding, but in no event
later than the date that is six months prior to the expiration date of the
Bagel Funding Warrants.
Messrs. Scott Beck, Butler, Carlborg, Muehlstein, Ruth and Stanchak each own
a direct equity interest in Bagel Funding. Such interests aggregate
approximately 8.1% of the outstanding equity interest in Bagel Funding.
Certain executive officers and directors of Boston Chicken own direct equity
interests in Bagel Funding. Such interests, excluding interests owned by Scott
Beck, aggregate approximately 16.3% of the outstanding equity interest in
Bagel Funding.
INTERESTS IN AREA DEVELOPERS BY CERTAIN PERSONS
BCE West Bagels, L.L.C. Effective November 26, 1995, the Company entered
into a convertible secured loan agreement and an area development agreement
with BCE West Bagels, L.L.C. ("Old BCE West") for the development of the
following DMAs: Phoenix (excluding portions of California included in the
Phoenix DMA); Tucson; Albuquerque/Santa Fe; Denver (excluding portions of
South Dakota included in the Denver DMA); Colorado Springs; Las Vegas; and El
Paso. Also effective November 26, 1995, the Company entered into a convertible
secured loan agreement and an area development agreement with BCE SLC Bagels,
L.L.C. ("BCE SLC") for the development of the Salt Lake City DMA. At the time
of the consummation of such transactions, Lawrence Beck, Scott Beck's father,
was the majority equity owner of Old BCE West and BCE SLC. In connection with
the execution of such agreements, the Company sold to Old BCE West and BCE SLC
the Company-operated stores and other assets located in certain of such DMAs
at net book value for an aggregate purchase price of $1,432,519 and
$3,719,625, respectively, pursuant to asset sale agreements, and entered into
a franchise agreement for each such store. The Company realized no significant
gain or loss on such sales. The Company believes that the terms of the
agreements entered into with Old BCE West and BCE SLC are as favorable to the
Company as the terms that could be negotiated with unrelated third parties.
On December 29, 1995, Lawrence Beck sold to Bagel Funding 1,750,000 units of
membership interest in each of Old BCE West and BCE SLC for an aggregate
purchase price of approximately $3.5 million. The Company understands that
Lawrence Beck did not realize any significant gain or loss on such sales.
Lawrence Beck retained a minority equity interest in each of Old BCE West and
BCE SLC, and an entity controlled by him remained the manager of each such
entity.
Effective January 29, 1996, BCE SLC acquired the assets of Old BCE West, BCE
SLC was renamed BCE West, L.L.C. ("BCE West") and Old BCE West was dissolved.
For the Company's 1995 fiscal year and the quarter ended April 21, 1996, BCE
West (together with its predecessor, Old BCE West) paid to the Company an
aggregate of $2,308,714 and $486,553, respectively, in development, franchise,
royalty, real estate, software license, software maintenance, miscellaneous
and accounting fees and deposits. For the quarter ended April 21, 1996, BCE
West paid $80,200 in national and $135,266 in local advertising fund
contributions. In addition, for such period, BCE West paid to the Company
$193,734 in interest on its loan from the Company.
Finest Bagels, L.L.C. Effective January 1, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Finest Bagels, L.L.C. ("Finest") for the development of the following DMAs:
St. Louis; Kansas City; and Minneapolis/St. Paul. Bagel Funding is the
majority equity owner of Finest. In connection with the execution of such
agreements, the Company sold to Finest the Company-operated stores and other
assets located in certain of those DMAs at net book value for an aggregate
purchase price of $6,216,545, pursuant to an asset sale agreement, and entered
into a franchise agreement with Finest for each such store. The Company
realized no significant gain or loss on such sale. For the Company's first
quarter
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<PAGE>
ended April 21, 1996, Finest paid to the Company an aggregate of $1,613,001 in
development, franchise, royalty, real estate, software license, software
maintenance, miscellaneous and accounting fees and deposits. For the quarter
ended April 21, 1996, Finest paid $54,350 in national and $109,830 in local
advertising fund contributions. In addition, for such period, Finest paid to
the Company $74,717 in interest on its loan from the Company. The Company
believes that the terms of the agreements entered into with Finest are as
favorable to the Company as terms of agreements that could be negotiated by
the Company with unrelated third parties.
Einstein Bros. America, L.P. Effective March 25, 1996, the Company entered
into a convertible secured loan agreement and an area development agreement
with Einstein Bros. America, L.P. ("EBA") for the development of the following
DMAs: Milwaukee; Chicago; Detroit; Madison; Tampa/St. Petersburg/Sarasota;
Orlando/Daytona Beach/Melbourne; Ft. Myers/Naples; Miami/Ft. Lauderdale; and
West Palm Beach/Ft. Pierce. Bagel Funding is the majority equity owner of EBA.
In connection with the execution of such agreements, the Company sold to EBA
the Company-operated stores and other assets located in certain of those DMAs
at net book value for an aggregate purchase price of $18,622,026, pursuant to
an asset sale agreement, and entered into a franchise agreement with EBA for
each such store. The Company realized no significant gain or loss on such
sale. For the Company's first quarter ended April 21, 1996, EBA paid to the
Company an aggregate of $5,392,331 in development, franchise, real estate
fees, deposits and reimbursement of expenses.
Effective June 17, 1996, EBA contributed to Great Lakes Bagels, L.L.C.
("Great Lakes") its assets located in the following DMAs: Milwaukee; Chicago;
Detroit; and Madison (the "Great Lakes DMAs"). Upon such contribution, the
equity interests in Great Lakes were distributed in redemption of a portion of
the equity interests in EBA and EBA's name was changed to Gulfstream Bagels,
L.P. ("Gulfstream"). At the same time, the Company entered into a convertible
secured loan agreement and an area development agreement with Great Lakes for
the development of the Great Lakes DMAs, and it modified the agreements it had
previously entered into with Gulfstream to exclude the Great Lakes DMAs from
such agreements.
The Company believes that the terms of the agreements entered into with
Gulfstream and Great Lakes are as favorable to the Company as terms of
agreements that could be negotiated by the Company with unrelated third
parties.
Mayfair Bagels, L.L.C. On April 1, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Mayfair Bagels, L.L.C. ("Mayfair") for the development of a portion of the
Baltimore and Washington, D.C. DMAs. Bagel Funding is the majority equity
owner of Mayfair. In connection with the execution of such agreements, the
Company sold to Mayfair certain assets located in certain of those DMAs at net
book value for an aggregate purchase price of $249,084, pursuant to an asset
sale agreement. The Company realized no significant gain or loss on such sale.
For the Company's first quarter ended April 21, 1996, Mayfair paid to the
Company an aggregate of $860,000 in deposits and reimbursement of expenses.
The Company believes that the terms of the agreements entered into with
Mayfair are as favorable to the Company as terms of agreements that could be
negotiated by the Company with unrelated third parties.
Liberty Foods, L.L.C. Effective May 6, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Liberty Foods, L.L.C. ("Liberty") for the development of the New York DMA.
Bagel Funding is the majority equity owner of Liberty. In connection with the
execution of such agreements, the Company sold to Liberty the Company-operated
store and certain assets located in the DMA at net book value for an aggregate
purchase price of $869,743, pursuant to an asset sale agreement, and entered
into a franchise agreement with Liberty for such store. The Company realized
no significant gain or loss on such sale. The Company believes that the terms
of agreements entered into with Liberty are as favorable to the Company as
terms of agreements that could be negotiated by the Company with unrelated
third parties.
Colonial Bagels, L.P. Effective June 17, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Colonial Bagels, L.L.C. ("Colonial") for the development of the following
DMAs: Boston; Burlington/Plattsburgh; Cleveland; Pittsburgh; Providence/New
Bedford; and Springfield, MA. Bagel Funding is the majority equity owner of
Colonial. Lawrence Beck owns a 50 percent
46
<PAGE>
interest in the general partner of Colonial. In connection with the execution
of such agreements, the Company sold to Colonial certain assets located in
certain of those DMAs at net book value for an aggregate purchase price of
$72,377, pursuant to an asset sale agreement. The Company realized no
significant gain or loss on such sale. The Company believes that the terms of
agreements entered into with Colonial are as favorable to the Company as terms
of agreements that could be negotiated by the Company with unrelated third
parties.
Noah's Pacific, L.L.C. Effective June 17, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Noah's Pacific, L.L.C. ("Noah's Pacific") for the development of the following
DMAs: Los Angeles; Portland; Seattle/Tacoma; and Las Vegas. Bagel Funding is
the majority equity owner of Noah's Pacific. Noah Alper owns a minority equity
interest in Noah's Pacific. In connection with the execution of such
agreements, the Company sold to Noah's Pacific the Company-owned stores and
certain assets located in certain of those DMAs at net book value for an
aggregate purchase price of approximately $15.8 million, pursuant to an asset
sale agreement, and entered into a franchise agreement with Noah's Pacific for
each such store. The Company realized no significant gain or loss on such
sale. The Company believes that the terms of agreements entered into with
Noah's Pacific are as favorable to the Company as terms of agreements that
could be negotiated by the Company with unrelated third parties.
Noah's Bay Area Bagels, L.L.C. Effective July 15, 1996, the Company entered
into a convertible secured loan agreement and an area development agreement
with Noah's Bay Area Bagels, L.L.C. ("Noah's Bay Area") for the development of
the following DMAs: San Francisco/Oakland/San Jose and Sacramento/Stockton/
Modesto. Bagel Funding is the majority equity owner of Noah's Bay Area. Noah
Alper owns a minority equity interest in Noah's Bay Area. In connection with
the execution of such agreements, the Company sold to Noah's Bay Area the
Company-owned stores and certain assets located in those DMAs at net book
value for an aggregate purchase price of approximately $13.6 million, pursuant
to an asset sale agreement, and entered into a franchise agreement with Noah's
Bay Area for each such store. The Company realized no significant gain or loss
on such sale. The Company believes that the terms of the agreements entered
into with Noah's Bay Area are as favorable to the Company as terms of
agreements that could be negotiated by the Company with unrelated third
parties.
Philly Rose, L.P. On July 29, 1996, the Company entered into a convertible
secured loan agreement and an area development agreement with Philly Rose,
L.P. ("Philly Rose") for the development of the Philadelphia DMA. Bagel
Funding is the majority equity owner of Philly Rose. In connection with the
execution of such agreements, the Company sold to Philly Rose the Company-
owned stores and certain assets located in such DMA at net book value for an
aggregate purchase price of $375,455, pursuant to an asset sale agreement, and
entered into a franchise agreement with Philly Rose for each such store. The
Company realized no significant gain or loss on such sale. The Company
believes that the terms of the agreements entered into with Philly Rose are as
favorable to the Company as terms of agreements that could be negotiated by
the Company with unrelated third parties.
BCE West, Finest, Gulfstream, Great Lakes, Mayfair, Colonial, Noah's Pacific
and Noah's Bay Area are each represented by Pedersen & Houpt, a law firm in
which John Muehlstein, Jr., a director of the Company, is a partner.
AREA DEVELOPER WARRANTS
On January 15, 1996, in connection with the formation of the Company's
prospective area developers, the Company issued to eleven such entities
warrants to acquire an aggregate of 1,237,050 shares of Common Stock of the
Company, each at an exercise price per share of $6.47, as follows: BCE SLC
(now named BCE West)-- 85,050 shares; Finest--77,175 shares; Great Lakes
Bagels, L.L.C. ("Great Lakes")--108,225 shares; Liberty--100,350 shares;
Mayfair--77,175 shares; NJ Rose Bagels, L.L.C. ("NJ Rose")--92,700 shares;
NNYB, L.L.C. ("NNYB")--270,000 shares; P&L Bagels, L.L.C. ("P&L")--100,350
shares; P&L II Bagels, L.L.C. ("P&L II")--156,150 shares; R&A Bagels ("R&A")--
92,700 shares; and Texas Bagels, L.L.C.--77,175 shares. The warrants issued to
Great Lakes and R&A were transferred to EBA in connection with EBA's
transactions with the Company. In addition, NNYB assigned warrants for 168,750
shares of Common Stock to Noah's Pacific in
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<PAGE>
connection with Noah's Pacific's transactions with the Company, P&L assigned
all of the warrants issued to it to Colonial in connection with Colonial's
transactions with the Company and NJ Rose assigned all of the warrants issued
to it to Philly Rose in connection with Philly Rose's transactions with the
Company. See "--Interests in Area Developers by Certain Persons." Each warrant
becomes exercisable by the holder thereof during the five-day period
commencing on the date of entering into an area development agreement and
secured loan agreement with the Company, and is exercisable only in its
entirety. If an area development agreement and secured loan agreement are not
entered into prior to July 15, 1997, each warrant expires as of such date.
Lawrence Beck owns a majority equity interest in each of P&L and P&L II. As of
July 30, 1996, each of the warrants granted to BCE West, Finest, Great Lakes,
Liberty, Mayfair, NJ Rose, P&L and R&A, as well as the warrants transferred to
Noah's Pacific, had been exercised.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into a consulting agreement with Mr. Colangelo in
connection with his resignation as President and Chief Executive Officer of
the Company. See "Management--Management Compensation."
On March 24, 1995, the Company entered into an employment agreement with Ms.
Lozoff, pursuant to which Ms. Lozoff became Vice President--Design and
Merchandising and a director of the Company. The employment agreement
terminates August 1, 1998. Ms. Lozoff receives an annual salary of $125,000
and reimbursement of reasonable business expenses. In addition, at the time
she entered into the employment agreement, Ms. Lozoff was granted options to
purchase 42,483 shares of Common Stock under the Plan with an exercise price
of $5.88 per share.
On March 31, 1995, the Company entered into an employment agreement with Mr.
Offerdahl, pursuant to which Mr. Offerdahl became Vice President of
Operations--Southeast Zone and a director of the Company. The employment
agreement terminates August 1, 1998. Mr. Offerdahl receives an annual salary
of $125,000 per year and reimbursement of reasonable business expenses. In
addition, at the time he entered into the employment agreement, Mr. Offerdahl
was granted options to purchase 42,483 shares of Common Stock under the Plan
with an exercise price of $5.88 per share.
On March 31, 1995, the Company entered into a consulting agreement with
Lynnora Offerdahl, Mr. Offerdahl's spouse, pursuant to which she provides
information, advice and assistance concerning product development, restaurant
design and general projects for the Company. The one-year consulting agreement
is automatically renewed for additional one year periods unless terminated by
either party upon 60 days' prior written notice. Ms. Offerdahl receives a
monthly consulting fee of $5,000 and reimbursement of reasonable business
expenses. In addition, at the time she entered into the consulting agreement,
Ms. Offerdahl was granted options to purchase 42,483 shares of Common Stock
under the Plan with an exercise price of $5.88 per share.
On April 5, 1996, Mr. Goldston was elected President and Chief Executive
Officer and a director of the Company. The Company has agreed to pay to Mr.
Goldston a base salary of $360,000 per year, with a guaranteed bonus of
$400,000 for fiscal year 1996. For fiscal year 1997, Mr. Goldston will be
eligible for a $400,000 bonus, his receipt of which will be based upon the
achievement of mutually agreed upon reasonable performance goals. In addition,
the Company granted to Mr. Goldston options under the Plan to purchase 114,030
shares of Common Stock at an exercise price of $10.52 per share. Beginning in
fiscal year 1997, and for each year thereafter as long as he remains an
employee of the Company, Mr. Goldston will be eligible for an annual stock
option grant under the Amended Plan to purchase, at a minimum, that number of
shares of Common Stock that have an aggregate exercise price of $800,000. In
connection with his employment, Mr. Goldston also purchased 28,508 shares of
Common Stock at a price of $10.52 per share.
Effective January 17, 1996, Boston Chicken employed Mr. Goldston to
undertake various special projects for Boston Chicken. As an employee of
Boston Chicken, Mr. Goldston receives an annual salary of $40,000 and is
eligible to participate in Boston Chicken's employee stock option plan. Mr.
Goldston has been granted options
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<PAGE>
under that plan to purchase 100,000 shares of Boston Chicken common stock at
an exercise price of $27.9375 per share. Boston Chicken has agreed to
structure Mr. Goldston's future projects so that his employment with Boston
Chicken will not interfere with his duties with the Company.
In addition, in consideration for certain consulting services rendered to
Boston Chicken by Mr. Goldston and the consulting firm of which Mr. Goldston
was a principal, Boston Chicken has paid $1,818,086 for consulting services
rendered during fiscal years 1995 and 1996 and granted an option (outside of
the Boston Chicken employee option plan) to purchase 100,000 shares of Boston
Chicken common stock at an exercise price of $16.00 per share. Boston Chicken
has also granted to Mr. Goldston an option to purchase from Boston Chicken
344,673 shares of Common Stock at an exercise price of $6.38 per share.
On July 1, 1996, the Company entered into a transition and consulting
agreement with Mr. Craig in connection with his resignation as Chairman of the
Board of the Company, pursuant to which Mr. Craig will continue as a full-time
employee of the Company until June 30, 1997 and will provide consulting
services to the Company for a period of one year thereafter. As an employee of
the Company Mr. Craig will be paid approximately $3,600 bi-weekly through the
end of fiscal 1996 and approximately $7,900 bi-weekly during the first six
months of fiscal 1997. During the term of his employment, Mr. Craig will
continue to participate in the Company's employee benefit plans, except that
he will not be eligible to receive options under any of the Company's stock
option plans.
BOWANA AVIATION, INC.
During the 1995 fiscal year, the Company from time to time used airplanes
owned by a company controlled by Scott Beck and Lawrence Beck, for which the
Company incurred aggregate rental expense of $85,874 in such fiscal year. The
Company believes that the terms of its use of the planes were at least as
favorable to the Company as those it could have obtained from an unaffiliated
party. The Company has entered into two subleases with Boston Chicken,
pursuant to which the Company will be entitled to the non-exclusive use of
aircraft leased by Boston Chicken from unaffiliated leasing companies. See
"Relationship with Boston Chicken--Other Relationships Between Boston Chicken
and the Company."
LOANS TO EXECUTIVE OFFICERS
On August 9, 1995, the Company made a loan to Kyle T. Craig in the principal
amount of $400,000, the proceeds of which were used by Mr. Craig to pay off a
loan from Boston Chicken. Interest on the principal amount of the Company's
loan to Mr. Craig accrues at the reference rate announced by Bank of America
Illinois from time to time plus 1%. The principal balance of the loan and all
accrued but unpaid interest thereon are due and payable upon demand.
On March 31, 1995, in connection with the Company's acquisition of the
assets of Offerdahl's (now known as OBG) the Company made a non-recourse loan
to OBG in the principal amount of $437,497, the proceeds of which were used to
purchase an aggregate of 74,345 shares of Common Stock, which shares secure
the payment of principal and interest under such loan. Also on March 31, 1995,
the Company made a non-recourse loan to OBG in the principal amount of
$1,312,500, the proceeds of which were used to purchase an equity interest in
BC Equity Funding, L.L.C., a Delaware limited liability company which invests
in Boston Chicken area developers ("BCEF"), which equity interest secures the
payment of principal and interest under such loan. Each loan described above
accrues interest on the principal amount at the reference rate announced by
Bank of America Illinois from time to time plus 1%. The principal balance of
each loan and all accrued but unpaid interest thereon are due and payable on
April 15, 2001, but may be required to be repaid earlier under certain
circumstances.
Also in connection with the Company's acquisition of the assets of
Offerdahl's, on each of April 15, 1995, June 15, 1995, September 15, 1995 and
January 15, 1996, the Company made an interest-free loan to OBG in the
principal amount of $46,100, and on April 15, 1996, the Company made an
additional interest-free loan to
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<PAGE>
OBG in the principal amount of $1,502,276. The proceeds of each such loan were
used to satisfy income tax obligations arising from the acquisition. Each such
loan is secured by units of membership interest in BCEF owned by OBG. The
principal balance of each loan and all accrued but unpaid interest thereon are
due and payable on April 15, 2001, but may be required to be repaid in whole
or in part under certain circumstances.
OTHER RELATIONSHIPS
Blind Faith, Inc., of which Ms. Lozoff and her spouse are the sole
shareholders, leases to the Company the land and building on which a store is
located. The Company subleases such land and building to one of its area
developers. The annual rental payments under the lease and sublease, each of
which terminates in May 2009, aggregate $72,000.
Quantum Media International, Inc. ("Quantum"), of which Mr. Goldston was a
director, performs advertising and marketing services for the Noah's New York
Bagels brand. During 1995, Noah's paid Quantum an aggregate of approximately
$188,000. Through May 1996, Noah's and the Company paid Quantum an aggregate
of approximately $61,000. The Company intends to retain the services of
Quantum for the Noah's New York Bagels brand during 1996.
CERTAIN TRANSACTIONS WITH BOSTON CHICKEN
See "Risk Factors--Dependence on Boston Chicken," "Risk Factors--Control by
and Conflicts of Interest with Boston Chicken" and "Relationship with Boston
Chicken."
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<PAGE>
PRINCIPAL STOCKHOLDERS AND SECURITIES OWNERSHIP OF MANAGEMENT
OWNERSHIP OF COMPANY COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by each person known by the Company to be the
beneficial owner of 5% or more of the outstanding Common Stock, by each of the
Company's directors and the named executive officer and by all directors and
executive officers of the Company as a group, as of July 30, 1996 and as
adjusted for the sale by the Company of the shares in the Offerings. The
beneficial ownership reflected in the following table is calculated in
accordance with Section 13(d) of the Exchange Act. Unless otherwise indicated,
ownership includes sole voting and investment power. As of such date, there
were approximately 125 record holders of Common Stock. See "Concurrent
Offerings" and "Capitalization."
<TABLE>
<CAPTION>
SHARES SHARES
SHARES BENEFICIALLY TO BE BENEFICIALLY OWNED
OWNED BEFORE THE PURCHASED AFTER
OFFERINGS(1) IN THE THE OFFERINGS(1)
----------------------CONCURRENT-------------------
NAMES(2) NUMBER PERCENT OFFERINGS NUMBER PERCENT
-------- ------------ ------------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Boston Chicken, Inc.(3).... 15,307,421 66.7% 2,000,000 17,307,421 60.4%
Daniel V. Colangelo........ 351,354 1.5 -- 351,354 1.2%
Scott A. Beck(4)........... 49,659 * 3,750 53,409 *
Noah C. Alper(5)........... 93,600 * -- 93,600 *
Mark R. Goldston(6)........ 145,697 * 3,750 149,447 *
David G. Stanchak.......... 25,491 * 3,750 29,241 *
Kyle T. Craig.............. 47,581 * -- 47,581 *
M. Laird Koldyke(7)........ 424,827 1.9 -- 424,827 1.5%
Gail A. Lozoff(8).......... 577,998 2.5 -- 577,998 2.0%
John H. Muehlstein, Jr.(9). 678,661 3.0 3,750 682,411 2.4%
John A. Offerdahl(10)...... 894,493 3.9 -- 894,493 3.1%
Lloyd D. Ruth(11).......... 212,414 * 3,750 216,164 *
All directors and executive
officers as a group
(excluding Mr.
Colangelo)(15 persons).... 3,318,116 14.4% 35,500 3,353,616 11.6%
</TABLE>
- --------
*Less than 1%.
(1) Includes shares subject to options granted by the Company which are
exercisable within 60 days of July 30, 1996 as follows: Mr. Craig--5,098;
Mr. Stanchak--4,248; Mr. Offerdahl--4,248; and all executive officers and
directors as group--27,358.
(2) Unless otherwise indicated, the address of such person is c/o
Einstein/Noah Bagel Corp., 1526 Cole Boulevard, Suite 200, Golden,
Colorado 80401. The address for each of Boston Chicken and Scott Beck is
14103 Denver West Parkway, Golden, Colorado 80401-4086.
(3) Includes 701,177 shares of Common Stock on which Boston Chicken has
granted options to purchase such shares to certain individuals (including
Mr. Goldston), of which options to purchase 152,840 shares of Common
Stock are exercisable within 60 days of July 30, 1996. Includes 510,246
shares of Common Stock owned by BCEF, of which Boston Chicken is the
manager. See "Relationship with Boston Chicken--Loan Agreement."
(4) Excludes the aggregate number of shares of Common Stock shown above as
owned by Boston Chicken that may be deemed to be beneficially owned by
Scott Beck because he may be deemed to be an affiliate of Boston Chicken.
Mr. Beck disclaims any beneficial ownership of such shares.
(5) Represents 93,600 shares held by a trust, of which Mr. Alper is a trustee
and a beneficiary.
(6) Includes 117,189 shares of Common Stock subject to options from Boston
Chicken which were currently exercisable as of July 30, 1996.
(7) Represents 424,827 shares of Common Stock held by Frontenac, the general
partner of which is an entity of which Mr. Koldyke is a general partner.
Frontenac's address is 135 S. La Salle Street, Suite 3800, Chicago,
Illinois 60603.
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<PAGE>
(8) Includes 573,750 shares of Common Stock held by B&B (formerly Bagel &
Bagel), of which Ms. Lozoff's spouse is the sole stockholder.
(9) Represents shares of Common Stock held by Pedersen Bagel, of which Mr.
Muehlstein is a general partner. Pedersen Bagel's address is 161 N. Clark
St., Suite 3100, Chicago, Illinois 60601.
(10) Includes 885,997 shares of Common Stock held by OBG and 4,248 shares
beneficially owned by Mr. Offerdahl's spouse, which are subject to
options from the Company that were exercisable as of July 30, 1996. OBG's
address is 1801 Clint Moore Road, Suite 215, Boca Raton, Florida 33487.
(11) Includes 206,514 shares of Common Stock held by Marquette and 5,900
shares of Common Stock held by MVP II, the general partner of each of
which is an entity of which Mr. Ruth is a general partner. The address
for each of Marquette and MVP II is 520 Lake Cook Road, Suite 450,
Deerfield, Illinois 60015.
PERSONAL HOLDING COMPANY TAX
Under Section 541 of the Internal Revenue Code, a personal holding company
is subject to a 39.6% tax on its undistributed personal holding company income
(the "PHC Tax"). In order to be considered a personal holding company in any
taxable year, a corporation must satisfy two tests. First, at any time during
the last half of the taxable year more than 50% in value of its outstanding
stock must be owned, directly or indirectly, by or for not more than five
individuals (the "Stock Ownership Test"). Second, at least 60% of its adjusted
gross income for the taxable year must be personal holding company income,
which generally consists of passive forms of income such as dividends,
interest, rents and royalties, as defined for tax purposes, but not including
income from the provision of services (the "Income Test"). Although the
ownership of Boston Chicken is attributed to its stockholders for purposes of
such calculation, certain attribution rules that are included as part of the
Stock Ownership Test could result in the Stock Ownership Test being satisfied
in the case of the Company. The Company believes that the nature of its
activities and its expected sources of income during 1996 will be such that
the Income Test will not be satisfied and consequently that the PHC Tax will
not apply for its 1996 taxable year. Because the Company intends to utilize
area developers financed in part by the Company from which it will receive
interest and certain royalty income, there can be no assurance that the
Company will not meet the Income Test in future years.
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<PAGE>
OWNERSHIP OF BOSTON CHICKEN COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Boston Chicken's common stock as of July 8, 1996 by the Company's
directors and the named executive officer and all directors and executive
officers as a group. The beneficial ownership reflected in the following table
is calculated in accordance with Section 13(d) of the Exchange Act. Unless
otherwise indicated, ownership includes sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
OWNED(1)(2)
-----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
<S> <C> <C>
Daniel V. Colangelo.......................................... 0 *
Scott A. Beck................................................ 6,564,410 10.3%
Mark R. Goldston............................................. 50,000 *
David G. Stanchak............................................ 427,730 *
Noah C. Alper................................................ 0 *
Kyle T. Craig................................................ 75,173 *
M. Laird Koldyke............................................. 0 *
Gail A. Lozoff (3)........................................... 291,177 *
John H. Muehlstein, Jr....................................... 5,000 *
John A. Offerdahl (4)........................................ 77,589 *
Lloyd D. Ruth................................................ 0 *
All directors and executive officers as a group (excluding
Mr. Colangelo) (15 persons)................................. 7,934,946 12.4%
</TABLE>
- --------
*Less than 1%.
(1) Includes shares subject to options which are exercisable within 60 days of
July 8, 1996 as follows: Mr. Scott Beck--543,025; Mr. Craig--48,025; Mr.
Goldston--50,000; Mr. Stanchak--108,424; and all executive officers and
directors as a group (including such individuals)--901,060. Options
granted to Messrs. Craig and Stanchak by Boston Chicken continue to vest
pursuant to their respective consulting agreements with Boston Chicken.
(2) Excludes an aggregate of 4,360,687 of the 6,711,350 shares of common stock
of Boston Chicken beneficially owned by BC Midwest Trust and certain
partnerships, which shares may be deemed to be beneficially owned by Scott
Beck by virtue of his ownership of shares of BC Midwest, Inc., the trustee
of BC Midwest Trust and the general partner of such partnerships. Mr. Beck
disclaims beneficial ownership with respect to all of such shares because
such shares exceed his pecuniary interest of 2,350,663 shares as a
beneficiary of BC Midwest Trust, as a limited partner of such partnerships
and as a stockholder of BC Midwest, Inc.
(3) Represents shares owned by B&B.
(4) Represents shares owned by OBG.
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<PAGE>
RELATIONSHIP WITH BOSTON CHICKEN
During 1994 and 1995 Boston Chicken spent substantial amounts of time and
resources investigating the potential of the bagel business. In March 1995,
Boston Chicken made an investment in the Company in the form of a convertible
secured loan and sold to the Company at net book value certain assets and
certain know-how and agreements. On June 17, 1996, Boston Chicken converted
the loan into shares of Common Stock, as more fully described below. Also in
March 1995, Boston Chicken and the Company entered into fee service agreements
pursuant to which Boston Chicken has provided the Company with certain multi-
unit retail infrastructure support, including accounting and administration
services, financial services, real estate services and computer and
communications services. Any of the foregoing fee service agreements which
remain in effect may be changed at any time, as may be agreed by Boston
Chicken and the Company. See "Risk Factors--Control by and Conflicts of
Interest with Boston Chicken."
The loan agreement between Boston Chicken and the Company, each of the other
agreements referred to above and other agreements between the Company and
Boston Chicken, are summarized below and are attached as exhibits to the
Registration Statement of which this Prospectus is a part.
LOAN AGREEMENT
On March 24, 1995, Boston Chicken made a senior secured convertible loan to
the Company, secured by substantially all of the Company's and its
subsidiaries' assets, pursuant to which the Company could draw on a line of
credit through March 1998, in order to provide partial funding for store
development and working capital. In February 1996, in connection with the
Noah's acquisition, Boston Chicken increased the amount available under the
loan from $80.0 million to $120.0 million. Also in February 1996, Boston
Chicken provided a $25.0 million bridge loan to the Company (later increased
to $40.0 million), which was repaid by the Company upon the closing of the
Company's secured revolving credit facility. On May 9, 1996, Boston Chicken
and the Company amended the convertible loan agreement to include a $14.0
million non-convertible facility, which was subsequently increased to $50.0
million. On June 17, 1996, pursuant to the terms of the convertible loan
agreement, Boston Chicken converted $80.0 million outstanding under the loan
into Common Stock at a conversion price of $6.38 per share, and converted the
remaining $40.0 million outstanding under the loan into Common Stock at a
conversion price of $14.42 per share. The Company issued an aggregate of
15,307,421 shares of Common Stock in the Loan Conversion, including 510,246
shares issued to BCEF pursuant to its participation interest in the
convertible loan, which interest is described below. As of July 30, 1996,
approximately $20.0 million was outstanding under the non-convertible loan
facility. Interest on the non-convertible loan is based on the reference rate
of Bank of America Illinois plus 1.0%. Any borrowings outstanding under the
Company's non-convertible loan facility from Boston Chicken are payable on
June 15, 2003. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 of Notes to the Company's
Audited Consolidated Financial Statements.
Boston Chicken may satisfy a portion of its funding obligations under the
loan agreement in cash or in shares of Boston Chicken common stock. Boston
Chicken has agreed to guarantee the price of any shares of Boston Chicken
common stock delivered to the Company in satisfaction of Boston Chicken's
obligations under the loan agreement and thereafter sold by the Company.
Boston Chicken's obligation to guarantee the selling price of the shares is
contingent upon the Company selling all of the shares of Boston Chicken common
stock received by it with respect to a particular advance within the first
seven trading days after the advance date in one or more bona fide broker's or
market maker transactions through or to Merrill Lynch to one or more persons
not affiliated with, related to, or associated with the Company. As of July
30, 1996 Boston Chicken had issued to the Company, and the Company had sold in
the over-the-counter market, through Merrill Lynch acting as broker, 2,701,615
shares of registered Boston Chicken common stock for aggregate proceeds of
approximately $88.0 million.
In April 1996, Boston Chicken sold a $4 million undivided interest in the
convertible loan to BCEF pursuant to a participation agreement. BCEF's
interest in the convertible loan included the pro rata participation by BCEF
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in the principal, interest and security of the loan and the conversion and
option rights of Boston Chicken under such loan. In connection with the
conversion and option rights, two-thirds of BCEF's participation interest was
convertible into Common Stock at a conversion price of $6.38 per share and the
remaining one-third had a conversion price of $14.42 per share. BCEF had no
independent right to exercise any conversion or option rights with respect to
its participation interest, or to cause Boston Chicken to exercise such
conversion or option rights. Upon conversion of the convertible loan by Boston
Chicken, BCEF received 510,246 shares of Common Stock. The shares of Common
Stock acquired by BCEF upon Boston Chicken's conversion of the loan may not be
transferred by BCEF without providing Boston Chicken prior notice and the
opportunity to purchase such shares for, at the option of Boston Chicken, cash
or registered shares of Boston Chicken common stock. Certain executive
officers and directors of the Company own in the aggregate less than 10% of
the outstanding equity interests of BCEF.
In connection with the closing of the Company's secured revolving credit
facility with Bank of America Illinois, Boston Chicken agreed to subordinate
all of its loans to the Company, both convertible and non-convertible, to all
indebtedness under the Company's secured revolving credit facility, and
further agreed to release its security interest in the assets of the Company.
CONCURRENT PRIVATE PLACEMENT AGREEMENT AND REGISTRATION AGREEMENT
Concurrent with the consummation of the Initial Public Offering and the
Concurrent Public Offering, the Company expects to enter into a concurrent
private placement agreement with Boston Chicken (the "Concurrent Private
Placement Agreement"), pursuant to which Boston Chicken would purchase
2,000,000 shares of Common Stock at the initial public offering price per
share, net of underwriting discount. The Concurrent Private Placement
Agreement includes customary terms and provisions, representations and
warranties and indemnification obligations. In addition, the Concurrent
Private Placement Agreement would permit Boston Chicken to maintain ownership
of shares of Common Stock having up to 52% of the voting power of all of the
outstanding shares of capital stock of the Company having the power generally
to vote in the election of directors pursuant to an option (the "BCI Option")
to purchase newly issued shares of Common Stock for cash or registered shares
of Boston Chicken common stock at a per share exercise price equal to the (i)
the weighted average price per share at which the Common Stock was issued or
sold in a transaction pursuant to which the BCI Option becomes exercisable, in
the case of a transaction in which such price per share is readily
ascertainable, or (ii) in all other cases, the average of the closing sale
prices for the Common Stock on the Nasdaq National Market (or such other
principal exchange or market on which the Common Stock may then be trading)
for the five trading days ending on the fifth trading day prior to the date of
the transaction pursuant to which the BCI Option becomes exercisable, but
subject in each case to adjustments for issuances of shares of Common Stock in
connection with recapitalizations, dividends, stock splits, consolidations of
shares and other diluting events. In the event payment is made in registered
shares of Boston Chicken common stock, Boston Chicken will guarantee the price
at which those shares can be sold at the market within a limited time period.
The BCI Option will terminate if (i) Boston Chicken sells or transfers shares
of Common Stock and as a result owns less than a majority of the then
outstanding shares of the Company's voting stock or (ii) the percentage of
outstanding shares of voting stock of the Company owned by Boston Chicken is
reduced below 50% other than as a result of Boston Chicken's voluntary sale or
transfer of shares of Common Stock and Boston Chicken fails to acquire a
sufficient number of shares of Common Stock so that it owns at least a
majority of the then outstanding shares of voting stock of the Company by July
31 of the calendar year next following the calendar year in which such
reduction occurs. In addition, the percentage ownership level of 52% is
subject to reduction to the extent voluntary sales or transfers by Boston
Chicken reduce its ownership of the outstanding shares of voting stock of the
Company to less than 52% but do not otherwise result in termination of the BCI
Option. The Concurrent Private Placement Agreement prohibits the Company from
taking certain actions without the consent of Boston Chicken as long as the
BCI Option has not terminated, including altering any rights attaching to the
Common Stock, offering or issuing any equity securities or debt securities
convertible into equity securities, in either case other than Common Stock,
distributing assets or securities of the Company having a fair market value in
excess of 10% of the Company's consolidated gross assets or consolidated gross
revenues measured as of the immediately preceding fiscal year end, and filing
a petition in bankruptcy.
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In connection with the Concurrent Private Placement Agreement, the Company
also expects to enter into a registration agreement with Boston Chicken (the
"Boston Chicken Registration Agreement"), pursuant to which the Company would
grant to Boston Chicken five demand and unlimited piggyback registration
rights under the Securities Act with respect to the shares of Common Stock
purchased by Boston Chicken in the Concurrent Private Placement or otherwise
owned by it, including shares of Common Stock subject to the BCI Option for
which the Company will bear substantially all of the expenses in connection
with such registrations (other than underwriting discounts or commissions).
The Boston Chicken Registration Agreement will supersede the rights of Boston
Chicken under the Stockholder Registration Agreement. Boston Chicken's demand
registration rights under the Boston Chicken Registration Agreement are not
exercisable by it until the earlier of (i) the date on which the Company
requests the effectiveness of the resale registration statement under the
Stockholder Registration Agreement or (ii) 13 months after the closing of the
Offerings. In addition, the Company has agreed in connection with Boston
Chicken's first demand registration, to waive the requirement of the
Stockholder Registration Agreement, if it is still applicable, that the
holders of the Registrable Securities agree not to sell up to 30% of such
Registrable Securities for certain periods and Boston Chicken has agreed to
consent to such waiver. The Company has obtained from the parties to the
Stockholder Registration Agreement a waiver of the provision of such agreement
prohibiting the Company from granting registration rights superior to those
granted under such agreement, and a consent to the grant by the Company to
Boston Chicken of registration rights pursuant to the Boston Chicken
Registration Agreement. See "Certain Transactions--Registration Rights" and
"Shares Eligible for Future Sale."
The Concurrent Private Placement Agreement and the Boston Chicken
Registration Agreement are exhibits to the Registration Statement of which
this Prospectus is a part.
ASSIGNMENT AND REIMBURSEMENT AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into an assignment
and reimbursement agreement, pursuant to which Boston Chicken assigned to the
Company certain intellectual property rights relating to the development,
manufacture and sale of bagels and bagel-related products (the "Bagel Rights")
and certain rights under contracts to which Boston Chicken was a party,
including Boston Chicken's rights under a lease of office space in Golden,
Colorado that is currently used as the Company's support center (the "Bagel
Contracts"). The Company paid to Boston Chicken an aggregate of $1,160,334 in
consideration for certain assets and Boston Chicken's assignment of the Bagel
Rights and the Bagel Contracts, and in reimbursement of certain costs and
expenses paid by Boston Chicken in connection with the development and
creation of the Company and certain of its relationships, the development or
acquisition of the Bagel Rights, the negotiation of the Bagel Contracts and
the costs associated with transferring certain employees from Boston Chicken
to the Company. The Company also agreed to assume Boston Chicken's liabilities
and obligations under the Bagel Contracts and in connection with the other
activities performed by Boston Chicken for which the Company reimbursed Boston
Chicken.
ACCOUNTING AND ADMINISTRATION SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into an accounting
and administration services agreement, subsequently amended and restated in
May 1996 and June 1996 to incorporate minor changes to such agreement (the
"Accounting and Administration Services Agreement"), pursuant to which Boston
Chicken has agreed to assist the Company, its subsidiaries and its area
developers in performing certain services, including maintaining accounting
records, performing accounting activities, preparing financial reports,
administering options, establishing and administering employee benefits, human
resources, insurance and recordkeeping services, assisting with lease
negotiations, maintaining lease files and complying with reporting obligations
thereunder, and providing certain other administrative support services.
In consideration for such assistance, the Company has agreed to pay to
Boston Chicken a base fee of $30,000 for each four-week accounting period, and
to cause each Entity (defined below) to pay a supplemental base fee of $4,500
for each accounting period for services to each area developer or business
unit of the Company (each such area developer or business unit being herein
sometimes referred to as an "Entity"), which fees may
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be increased cumulatively not more than 10% per fiscal year by Boston Chicken.
The Accounting and Administration Services Agreement also provides for a per
store fee, ranging from $850 per four-week accounting period if the Company or
Entity operates fewer than twelve bagel stores, to $350 per four-week
accounting period if the Company or Entity operates more than 200 bagel stores
(which range of per store fees may be reduced to a range from $700 to $250
upon compliance with certain reporting requirements, administrative procedure
compliance requirements and timeliness deadlines established by Boston
Chicken). The Company has also agreed to reimburse Boston Chicken for all non-
ordinary, out-of-pocket expenses incurred by Boston Chicken or its affiliates
in connection with the Accounting and Administration Services Agreement. All
such expenses in excess of $50,000 must be approved by the Company prior to
being incurred. Pursuant to the Accounting and Administration Services
Agreement, the Company paid to Boston Chicken in fiscal year 1995 fees
aggregating $489,750.
The Accounting and Administration Services Agreement has a term of three
years and may be terminated by the Company or Boston Chicken upon 180 days'
prior written notice. In addition, Boston Chicken may terminate the agreement
without notice 15 days after giving notice of non-payment of the fees provided
for in the agreement, unless such non-payment is cured within such 15-day
period.
FINANCIAL SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into a financial
services agreement, (as amended, the "Financial Services Agreement"), pursuant
to which Boston Chicken agreed to provide certain financial services to the
Company and its area developers, including identification and analysis of
possible transactions and related financial and strategic advice, assistance
in budget and forecast preparation, consultations and advice as to
presentations, discussions and disclosures to financial analysts and the
financial press, and advice concerning crisis management and control. In
consideration for such financial services, the Company agreed to pay to Boston
Chicken financial services fees aggregating $500,000 for fiscal year 1995 and
approximately $96,000 for fiscal year 1996. The Company also agreed to
reimburse Boston Chicken for all non-ordinary, out-of-pocket expenses incurred
by Boston Chicken or its affiliates in connection with the Financial Services
Agreement. All such expenses in excess of $50,000 were required to be approved
by the Company prior to being incurred. The Financial Services Agreement was
terminated effective as of May 20, 1996.
REAL ESTATE SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into a real estate
services agreement, subsequently amended and restated in May 1996 to make
minor changes to such agreement (the "Real Estate Services Agreement"),
pursuant to which Boston Chicken agreed to assist the Company, its
subsidiaries and its area developers in conducting certain real estate-related
activities, including site analysis, advisory services regarding customer
trade area studies and other real estate matters. In consideration for such
real estate services, the Company agreed to pay a general real estate advisory
fee of $5,000 for each bagel store location proposed to be owned, operated,
leased or franchised by the Company or any of its area developers or
subsidiaries. The Company also agreed that the Company and its subsidiaries
would pay Boston Chicken's regular fees for customer area trade studies,
market development plans, and demographic and census reports, charts and maps
(which fees were subject to change from time to time by Boston Chicken). The
Company also agreed to reimburse Boston Chicken for all non-ordinary, out-of-
pocket expenses incurred by Boston Chicken or its affiliates in connection
with the Real Estate Services Agreement. All such expenses in excess of
$50,000 were required to be approved by the Company prior to being incurred.
Pursuant to the Real Estate Services Agreement, the Company paid to Boston
Chicken in fiscal year 1995 fees aggregating $280,000. The Real Estate
Services Agreement was terminated effective as of June 17, 1996.
COMPUTER AND COMMUNICATIONS SYSTEMS SERVICES AGREEMENTS
On March 24, 1995, Boston Chicken and the Company entered into the Computer
Services Agreement, subsequently amended and restated in May 1996 and June
1996 to make certain changes to such agreement, pursuant to which (i) the
Company has agreed to acquire communications and computer systems or hardware
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specified or required from time to time by Boston Chicken for use by the
Company and its subsidiaries and area developers (except for Noah's Pacific an
area developer of the Company operating Noah's New York Bagels stores, which
has entered into a separate agreement with Boston Chicken for computer systems
conversion and services as more fully described below), (ii) Boston Chicken
has licensed the Company to use retail store-level computer software programs
and certain other computer software programs in connection with various
support and control functions (which the Company has agreed to use
exclusively, along with other software specified by Boston Chicken), and (iii)
Boston Chicken has agreed to provide certain computer and communications
support services. In consideration for such license and provision of services,
the Company has agreed to pay, and to cause each of its subsidiaries and area
developers to pay, to Boston Chicken a one-time license fee of $15,000 per
bagel store. In addition, the Company agreed to pay fees aggregating $156,000
for certain real estate software, fees aggregating $156,000 for certain Lotus
Notes Database(R) templates and fees aggregating $156,000 for certain
structured report software. In addition, the Company has agreed to pay to
Boston Chicken, for data center and network service operations and support of
certain infrastructure programs, $750,000 for each of the 1996, 1997 and 1998
fiscal years and 0.25% of net systemwide revenue of the Company, its
subsidiaries and its area developers (excluding the revenue derived from
Noah's New York Bagels stores) for each of the 1999 and 2000 fiscal years. The
Company has also agreed to pay, and to cause each of its subsidiaries and area
developers to pay, to Boston Chicken a software maintenance and support
service fee of $323 for each of Boston Chicken's four-week accounting periods
for each installed copy of certain software licensed from Boston Chicken,
which fee may be increased by Boston Chicken at any time at its option. The
Company has also agreed to compensate Boston Chicken at hourly rates for
performance of support services not otherwise covered by the foregoing fees
and to incur certain additional amounts as may be needed to modify, enhance or
replace computer or communications systems or computer software, some of which
amounts may be payable to Boston Chicken. The Company has also agreed to
reimburse Boston Chicken for certain costs and expenses incurred by Boston
Chicken in connection with the Computer Services Agreement. Pursuant to the
Computer Services Agreement, the Company, its subsidiaries and area developers
paid to Boston Chicken in fiscal year 1995 fees aggregating $234,823.
The Computer Services Agreement has a term of five years and may be
terminated by the Company or Boston Chicken upon one year prior written
notice. In addition, Boston Chicken may terminate the agreement without notice
15 days after giving notice of non-payment of the fees provided for in the
agreement, unless such non-payment is cured within such 15-day period.
In June 1996, Noah's Pacific and Boston Chicken entered into a computer and
communications systems conversion and services agreement (the "Noah's Pacific
Agreement") substantially similar to the Computer Services Agreement with
respect to the systems and hardware acquired by Noah's Pacific and the
computer and communications support services provided by Boston Chicken. The
Noah's Pacific Agreement provides that Boston Chicken will provide certain
conversion assistance to Noah's Pacific and Noah's Bay Area, L.L.C. ("Noah's
Bay Area"), an entity which has entered into an area development agreement and
franchise agreements with the Company for the development and operation of
additional Noah's New York Bagels stores and for which Noah's Pacific performs
certain services. The conversion services provided by Boston Chicken under the
Noah's Pacific Agreement include assisting with the development of a
conversion plan and timetable for converting the Noah's Pacific system to the
Company's system, the development of employee training materials, programs and
processes and customizing and adapting the Company's systems and software
programs for use in connection with the development and operation of Noah's
New York Bagels stores. In consideration of the conversion assistance,
software support and other services to be provided by Boston Chicken pursuant
to the Noah's Pacific Agreement, Noah's Pacific has agreed to pay to Boston
Chicken $1.5 million for the period beginning June 17, 1996 and ending
December 29, 1996, $3.0 million for each of Boston Chicken's 1997 and 1998
fiscal years and, for each of Boston Chicken's accounting periods in fiscal
1999 and 2000, an amount equal to 0.5% of the combined Royalty Base Revenue of
all stores owned by Noah's Pacific, Noah's Bay Area or their subsidiaries or
affiliates which are operating during any such accounting period.
The Noah's Pacific Agreement terminates at the end of Boston Chicken's
fiscal year 2000. In addition, Boston Chicken may terminate the agreement
without notice (i) 15 days after giving notice of non-payment of
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the fees provided for in the agreement, unless such non-payment is cured
within such 15-day period and (ii) if Noah's Pacific breaches any provision of
the agreement or, as to a particular store owned and operated by Noah's
Pacific or Noah's Bay Area, if the franchise agreement covering the operation
of the store is terminated for any reason.
OTHER RELATIONSHIPS BETWEEN BOSTON CHICKEN AND THE COMPANY
Pursuant to subscription agreements and certain other agreements entered
into upon the formation of the Company, the stockholders of the Company agreed
to vote their shares in favor of three persons designated by Boston Chicken as
directors of the Company. The Company currently has ten directors, including
the following designees of Boston Chicken: Scott Beck, Kyle Craig and David
Stanchak. Boston Chicken did not designate nominees for the 1996 election of
directors. In addition, certain officers of the Company were previously
officers or employees of Boston Chicken. See "Management."
The Company has from time to time purchased from Boston Chicken shares of
Boston Chicken common stock for delivery by the Company in connection with
acquisitions of other businesses by the Company. In addition to shares of
Boston Chicken common stock funded by Boston Chicken under the loan agreement,
during the period from March 24, 1995 through August 10, 1995, the Company
also purchased an aggregate of 1,298,958 shares of Boston Chicken common stock
in connection with such acquisitions, having an aggregate market value,
measured as of the respective dates such shares were acquired, of
approximately $23.4 million. See "Certain Transactions--Formation of the
Company and Subsequent Acquisitions." The Company may from time to time
acquire shares of common stock, or other securities, of Boston Chicken for
such purposes in the future. See also "--Loan Agreement."
In connection with the formation of the Company, the Company granted options
to purchase an aggregate of 224,300 shares of Common Stock to certain officers
and employees of Boston Chicken at an exercise price of $5.88 per share. Of
such shares, 50,978 shares are subject to options granted to executive
officers of Boston Chicken as follows: Mark W. Stephens, Vice Chairman of the
Board and Chief Financial Officer, 15,294 shares; Thomas R. Sprague, Executive
Vice President, 15,294 shares; Donald J. Bingle, Vice President, General
Counsel and Secretary, 10,195 shares; and Mark A. Link, Vice President--
Financial Reporting, 10,195 shares.
In July 1996, the Company, as tenant, entered into a lease with Boston
Chicken, as landlord, for approximately 38,000 square feet of office space
(and certain common areas, including parking areas) located in Golden,
Colorado to which the Company intends to relocate its support center facility.
The lease commences on September 1, 1996 and has a 15-year term, renewable for
two consecutive five-year terms. The lease provides for initial rent of
approximately $38,000 per month to be increased by 15% every five years during
the initial term and any renewal term of the lease. Under the lease, the
Company has agreed that, in the event Boston Chicken enters into a
sale/leaseback transaction with any third party, the Company will, at Boston
Chicken's option, amend the amount of rental payments under the lease to equal
40% of the rental amounts agreed to be paid by Boston Chicken pursuant to such
a transaction. The lease is a "triple net" lease, which requires the Company
to pay its proportionate share of costs associated with the property, building
and common areas related to the leased premises, including, without
limitation, real estate taxes, maintenance costs and insurance premiums. In
addition, the Company is required to pay to Boston Chicken an administrative
and management fee not to exceed 15% of such costs. Under the terms of the
lease, the Company is required to procure and maintain comprehensive
commercial liability and property damage insurance for the leased premises.
The lease contains other provisions typical of commercial leases generally,
including indemnification provisions, a prohibition against subleasing without
landlord consent and standard provisions relating to defaults under the lease
and remedies available upon default. The Company believes the terms and
provisions of the lease, including the rent payable thereunder, are at least
as favorable to the Company as those it could have obtained from an
unaffiliated third party.
The Company is a party to two subleases with Boston Chicken, pursuant to
which the Company is entitled to the non-exclusive use of aircraft leased by
Boston Chicken from unaffiliated leasing companies. Under the subleases, the
Company is obligated to pay to Boston Chicken between $1,900 and $2,800
(depending on the
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type of aircraft) for each hour of flight time such aircraft is used by the
Company. There is no minimum monthly use requirement or lease payment under
either of the subleases, and both subleases may be terminated by either party
upon 30 days' written notice. The Company believes that costs incurred by it
under the subleases are lower than the costs it would incur to lease and
maintain its own aircraft from an unaffiliated third party lessor and slightly
higher than the costs it would incur to charter individual aircraft on a spot-
basis from unaffiliated third party lessors. However, the Company believes
that such higher costs are reasonably related to the benefits to the Company
from the subleases, including aircraft availability and higher maintenance
standards, that it would not realize from charter arrangements with
unaffiliated third party lessors.
See also "Risk Factors--Dependence on Boston Chicken," "Risk Factors--
Control by and Conflicts of Interest with Boston Chicken" and "Certain
Transactions."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200 million shares
of Common Stock, $.01 par value per share, and 20 million shares of preferred
stock, $.01 par value per share (the "Preferred Stock"). Upon completion of
the Offerings, approximately 28,577,000 shares of Common Stock and no shares
of Preferred Stock will be issued and outstanding. The following description
is a summary of the provisions of the Company's Restated Certificate of
Incorporation (the "Certificate of Incorporation"), and its Amended and
Restated Bylaws (the "Bylaws"), copies of which are exhibits to the
Registration Statement of which this Prospectus is a part. See "Risk Factors--
Anti-Takeover Effect of Charter and Statutory Provisions."
COMMON STOCK
Except as required by law or by the Certificate of Incorporation, holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the holders of Common Stock. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors and are not permitted to act by written consent. Subject
to preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the board of directors out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution, or winding
up of the Company, holders of the Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. Holders of Common Stock
have no preemptive rights and have no right to convert their Common Stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are,
and the Common Stock to be outstanding upon consummation of the Offerings will
be, fully paid and nonassessable. The board of directors may issue additional
authorized shares of Common Stock without further action by the stockholders.
PREFERRED STOCK
The board of directors has the authority, without further action by the
stockholders, to issue up to 20 million shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any
series or the designation of such series. However, pursuant to the Certificate
of Incorporation, the holders of Preferred Stock would not have cumulative
voting rights with respect to the election of directors. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and could have the effect of delaying, deferring, or preventing a change
in control of the Company.
On August 10, 1995, the Company issued the Preferred Shares in connection
with the acquisition of Baltimore Bagel. Each of the Preferred Shares has a
liquidation preference of $1,000 and pays annual dividends of $60.00. Upon
completion of the Offerings, each Preferred Share will automatically be
converted into that number of shares of Common Stock derived by dividing
$1,000 plus accrued and unpaid dividends by 80% of the initial public offering
price per share. The Preferred Shares are redeemable at the option of the
Company at
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any time after February 10, 1999, at a price per share equal to $1,250 plus
accrued and unpaid dividends. In addition, a majority of the holders of the
Preferred Shares may require the Company to redeem one-third of such shares on
each of February 28, 1998, May 1, 1998 and August 1, 1998, at a price per
share of $1,250 plus accrued and unpaid dividends. The Preferred Shares are
also redeemable by the holders in the event the Company has failed to pay
three consecutive quarterly dividends at a price of $1,250 per share plus
accrued and unpaid dividends.
The Company has no present plan to issue any additional shares of Preferred
Stock.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is LaSalle National
Trust, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no market for the Common Stock of the
Company. No predictions can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for future sale, will have on the market price for shares prevailing from time
to time. Sales of substantial amounts of Common Stock in the public market
following the Offerings could adversely affect the market price of the Common
Stock.
Upon completion of the Offerings, the Company will have approximately
28,577,000 shares of Common Stock outstanding (approximately 28,982,000 shares
if the Underwriters' over-allotment option is exercised in full). The shares
of Common Stock offered in the Initial Public Offering and the Concurrent
Public Offering will be freely tradable (other than by an "affiliate" of the
Company as such term is defined in the Securities Act) without restriction or
registration under the Securities Act, except that the purchasers in the
Concurrent Public Offering will have agreed not to sell shares so purchased
for a period of 365 days from the date of this Prospectus, without the consent
of Merrill Lynch. The 2,000,000 shares of Common Stock offered to Boston
Chicken in the Concurrent Private Placement will be, and the approximately
22,966,000 shares of Common Stock acquired by the existing stockholders of the
Company were, issued and sold by the Company in private transactions
("Restricted Shares") and may not be resold unless registered under the
Securities Act (which registration is contemplated as described below in the
case of Restricted Securities held by certain existing stockholders) or sold
in accordance with an exemption therefrom, such as Rule 144, Rule 144A or Rule
701 thereunder. In addition, Boston Chicken will have agreed with the
Representatives not to sell shares of Common Stock purchased in the Concurrent
Private Placement for a period of 365 days from the date of this Prospectus,
without the consent of Merrill Lynch.
In general, under Rule 144 as currently in effect, a holder of Restricted
Shares who beneficially owns shares that were not acquired from the Company or
an affiliate of the Company within the previous two years would be entitled to
sell in the public market within any three-month period a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of Common Stock or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities
and Exchange Commission (the "Commission"). Sales pursuant to Rule 144 are
also subject to certain other requirements relating to manner of sale, notice
and the availability of current public information about the Company. A person
who is deemed not to have been an affiliate of the Company at any time during
the three months immediately preceding a sale and who beneficially owns shares
that were not acquired from the Company or an affiliate of the Company within
the past three years is entitled to sell such shares under Rule 144(k) without
regard to the foregoing limitations. Rule 144A under the Securities Act
permits the immediate sale by the holders of Restricted Shares issued prior to
completion of the Offerings of all or a portion of their shares to certain
"qualified institutional buyers" as defined in Rule 144A. Although under Rule
144, as currently in effect, none of the Restricted Securities will be
available for resale under such rule upon consummation of the Offerings, the
Company intends to file a
61
<PAGE>
registration statement under the Securities Act with respect to approximately
9,875,000 of such Restricted Securities as more fully described below.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally issued by the Company to its employees,
directors, officers, consultants or advisers prior to completion of the
Offerings, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. Securities issued in reliance on
Rule 701 are Restricted Shares and, beginning 90 days after the date of this
Prospectus (unless subject to the contractual lockup restrictions described in
"Underwriting"), may be sold by non-affiliates subject only to the manner of
sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its two-year minimum holding period requirement.
Pursuant to the Stockholder Registration Agreement, certain stockholders of
the Company were granted piggyback registration rights under the Securities
Act with respect to shares of Common Stock owned by them (the "Registrable
Securities"). In addition, the Company is obligated to file, within 13 months
after the completion of an initial public offering, a registration statement
under the Securities Act which would include the Registrable Securities then
held by such stockholders, pursuant to which the holders thereof would be able
to make public resales of the Registrable Securities. The Company intends to
file such registration statement shortly after the completion of the Offerings
with respect to approximately 9,875,000 shares of Common Stock owned by such
stockholders and others (not including Boston Chicken), pursuant to which they
may resell such shares in the public market. The holders of approximately
9,000,000 of such shares have agreed that they will not sell any of such
shares for a period of 180 days from the date of this Prospectus, and holders
of an additional approximately 400,000 of such shares have agreed that they
will not sell any of such shares for a period of 30 days from the date of this
Prospectus, subject to certain exceptions, without the consent of Merrill
Lynch. Pursuant to the Stockholder Registration Agreement, each holder of
Registrable Securities has agreed not to sell up to 30% of the Registrable
Securities held by such holder, for a period ending on the earlier of (i) the
date that the Registrable Securities are permitted to be sold by the holders
thereof pursuant to Rule 144 under the Securities Act and (ii) the six-month
anniversary of the effective date of the registration statement filed by the
Company pursuant to which such holders may make public resales. The Company
has agreed to waive such provision of the Stockholder Registration Agreement
with respect to those stockholders who have agreed not to sell such shares as
described above.
Boston Chicken is a party to the Stockholder Registration Agreement.
However, in connection with the Concurrent Private Placement, the Company
expects to enter into the Boston Chicken Registration Agreement (which will
supersede Boston Chicken's rights under the Stockholder Registration
Agreement). Pursuant to the Boston Chicken Registration Agreement, the Company
will grant to Boston Chicken five demand and unlimited piggyback registration
rights under the Securities Act with respect to the shares of Common Stock
owned by Boston Chicken, including shares of Common Stock subject to the BCI
Option, for which the Company will bear substantially all of the expenses
(other than underwriting discounts or commissions). The demand registration
rights are not exercisable by Boston Chicken until the earlier of (i) the date
on which the Company requests the effectiveness of the resale registration
statement under the Stockholder Registration Agreement or (ii) 13 months after
completion of the Offerings. In addition, the Company has agreed, in
connection with Boston Chicken's first demand registration, to waive the
requirement of the Stockholder Registration Agreement, if it is still
applicable, that the holders of the Registrable Securities agree not to sell
up to 30% of such Registrable Securities for certain periods and Boston
Chicken has agreed to consent to such waiver. The Company has obtained from
the parties to the Stockholder Registration Agreement a waiver of the
provision of such agreement prohibiting the Company from granting registration
rights superior to those granted under such agreement, and a consent to the
grant by the Company to Boston Chicken of registration rights pursuant to the
Boston Chicken Registration Agreement. See "Certain Transactions--Registration
Rights" and "Relationship with Boston Chicken--Concurrent Private Placement
Agreement and Registration Agreement."
The Company intends to register under the Securities Act approximately
305,000 shares of Common Stock outstanding pursuant to the exercise of
options, approximately 3,668,000 shares of Common Stock subject to outstanding
options and approximately 1,627,000 shares of Common Stock reserved for
issuance under the
62
<PAGE>
Amended Plan and the Directors Plan. All shares purchased in the future under
such plans will be available for resale in the public market without
restriction, except that affiliates must comply with the provisions of Rule
144 other than the two-year holding period requirement described above. In
addition, the Company may file a registration statement covering shares of
Common Stock for issuance in connection with potential future acquisitions and
resales thereof by the recipients, although no such acquisitions are currently
pending. Shares so registered could not be sold in the public market for a
period of 180 days from the date of this Prospectus, subject to certain
exceptions, without the consent of Merrill Lynch.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters,
for whom Merrill Lynch, Alex. Brown & Sons Incorporated and Montgomery
Securities are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company the respective number of shares
of Common Stock set forth opposite its name below at the initial public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. In the Purchase Agreement, the several Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
of the shares of Common Stock offered hereby if any of such shares are
purchased. In the event of default by an Underwriter, the Purchase Agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting Underwriters may be increased or the Purchase Agreement may be
terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Alex. Brown & Sons Incorporated.................................
Montgomery Securities...........................................
---------
Total...................................................... 2,700,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock in the Initial Public Offering
to the public initially at the price to the public set forth on the cover page
of this Prospectus, and to certain dealers (who may include the Underwriters)
at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the Initial Public
Offering contemplated hereby, the offering price and other selling terms may
be changed by the Representatives.
The Company and the Underwriters have agreed to reserve up to 220,000 shares
of Common Stock offered in the Initial Public Offering for sale by the
Underwriters to certain individuals and entities, including eligible employees
and area developers of the Company and Boston Chicken, and other entities or
persons related to the Company or such entities or persons, and members of
their families. The price of such shares to such persons will be the initial
public offering price set forth on the cover of this Prospectus. The number of
shares available to the general public will be reduced to the extent those
persons and entities purchase reserved shares. Any reserved shares of Common
Stock not purchased by such persons or entities will be offered by the
Underwriters to the public on the same basis as the other shares of Common
Stock offered in the Initial Public Offering. Participants in the reserved
share program have agreed not to make any disposition of such shares of Common
Stock for a period of 30 days after the date of this Prospectus without the
consent of Merrill Lynch.
The obligations of the several Underwriters to pay for and accept delivery
of the shares of Common Stock offered in the Initial Public Offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all the shares
of Common Stock offered in
64
<PAGE>
the Initial Public Offering (other than the shares of the Common Stock covered
by the over-allotment option described below) if any are taken. Purchasers in
the Initial Public Offering are purchasing shares of Common Stock from the
Underwriters subsequent to the Underwriters' purchase of such shares from the
Company and not directly from the Company.
Prior to the Offerings, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
will be determined by negotiations between a committee of the Company's board
of directors composed of members who have agreed not to purchase shares of
Common Stock in the Offerings and the Representatives. Among the factors to be
considered in such negotiations are the prevailing market conditions, the
results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Representatives believe to be comparable to the Company, estimates of
the business potential of the Company, the prospects for earnings, the present
state of the Company's development and other factors deemed relevant.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
405,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page hereof, less the underwriting discount. The
Underwriters may exercise such option only to cover over-allotments, if any,
made in connection with the sale of Common Stock offered in the Initial Public
Offering. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment, subject to certain conditions,
to purchase approximately the same percentage thereof which the number of
shares of Common Stock to be purchased by it shown in the above table is of
the 2,700,000 shares of Common Stock offered in the Initial Public Offering.
If purchased, the Underwriters will offer such additional shares on the same
terms as those on which shares in the Initial Public Offering are being
offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act.
The Company and its directors, executive officers and certain other
stockholders (including Boston Chicken) have agreed that they will not offer,
sell, contract to sell, or otherwise dispose of any shares of Common Stock or
any shares convertible or exchangeable into any shares of Common Stock for a
period of 180 days from the date of this Prospectus without the prior written
consent of Merrill Lynch, except that the Company may, without such consent,
(i) issue shares upon the exercise of options granted pursuant to the Plan,
the Amended Plan and the Directors Plan and (ii) issue up to 1,000,000 shares
pursuant to potential acquisitions, which shares, when issued, will be subject
to restrictions on resale for a period of 180 days from the date of this
Prospectus. In addition, each of the foregoing persons (including Boston
Chicken) purchasing shares of Common Stock in the Concurrent Offerings has
agreed not to sell such shares for a period of 365 days from the date of this
Prospectus, without the prior written consent of Merrill Lynch. See "Shares
Eligible for Future Sale."
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Charles A. Lewis, Vice Chairman--Investment Banking of Merrill Lynch & Co.
and his family beneficially own 318,828 shares of Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the validity of the shares of
Common Stock offered hereby will be passed upon for the Company by Bell, Boyd
& Lloyd, Chicago, Illinois. Mayer, Brown & Platt, Chicago, Illinois, is acting
as counsel for the Underwriters in connection with certain legal matters
relating to the sale of the shares of Common Stock offered hereby.
65
<PAGE>
EXPERTS
The consolidated balance sheet of Einstein/Noah Bagel Corp. and subsidiaries
as of December 31, 1995 and the related consolidated statements of operations,
stockholders' deficit and cash flows for the period from March 24, 1995
(inception) through December 31, 1995 included in this Prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement of which this Prospectus is a part, have been included herein in
reliance on the reports of Arthur Andersen LLP, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
The consolidated financial statements of Noah's New York Bagels, Inc. as of
December 31, 1994 and December 30, 1995 and for each of the three fiscal years
in the period ended December 30, 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Bagel & Bagel, Inc. for the year ended December
27, 1994 and the period from December 28, 1994 to March 23, 1995 included in
this Prospectus have been audited by Mayer Hoffman McCann L.C., independent
auditors, as stated in their reports appearing herein and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The combined financial statements of Offerdahl's Bagel Gourmet, Inc. and
Affiliates for the years ended December 31, 1993 and 1994 and for the period
from January 1, 1995 to April 2, 1995 included in this Prospectus have been
included herein in reliance upon the reports of Arthur Andersen LLP,
independent accountants, given upon the authority of that firm as experts in
accounting and auditing.
The financial statements of Baltimore Bagel Co. for the years ended December
31, 1994 and for the period from January 1, 1995 to August 10, 1995 included
in this Prospectus have been included herein in reliance upon the reports of
Arthur Andersen LLP, independent accountants, given upon the authority of that
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act
with respect to the Common Stock offered hereby. As used herein, the term
"Registration Statement" means the initial Registration Statement and any and
all amendments thereto. This Prospectus omits certain information contained in
said Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto. Statements herein concerning the contents of
any contract or other document are not necessarily complete. In each instance
such contract or other document has been filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus is a part.
As a result of the Initial Public Offering and the Concurrent Public
Offering, the Company will become subject to the informational requirements of
the Exchange Act, and in accordance therewith will file reports and other
information with the Commission. Reports, registration statements, proxy
statements, and other information filed or to be filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
66
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-3
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1995......................... F-4
Consolidated Statement of Operations for the period from March 24, 1995
(inception) through December 31, 1995.................................. F-5
Consolidated Statement of Stockholders' Deficit for the period from
March 24, 1995 (inception) through December 31, 1995................... F-6
Consolidated Statement of Cash Flows for the period from March 24, 1995
(inception) through December 31, 1995.................................. F-7
Notes to Audited Consolidated Financial Statements...................... F-8
Consolidated Balance Sheets at December 31, 1995 and April 21, 1996..... F-19
Consolidated Statements of Operations for the period from March 24, 1995
(inception) through April 16, 1995 and for the quarter ended April 21,
1996................................................................... F-20
Consolidated Statements of Cash Flows for the period from March 24, 1995
(inception) through April 16, 1995 and for the quarter ended April 21,
1996................................................................... F-21
Notes to Unaudited Consolidated Financial Statements.................... F-22
NOAH'S NEW YORK BAGELS, INC.
Independent Auditors' Report.............................................. F-25
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1994 and December 30, 1995.. F-26
Consolidated Statements of Operations for the fiscal years ended
December 31, 1993, December 31, 1994 and December 30, 1995............. F-27
Consolidated Statements of Shareholders' Equity (Deficit) for the fiscal
years ended December 31, 1993, December 31, 1994 and December 30, 1995. F-28
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1993, December 31, 1994 and December 30, 1995............. F-29
Notes to Audited Consolidated Financial Statements...................... F-30
BAGEL & BAGEL, INC.
Report of Independent Public Accountants.................................. F-36
Financial Statements:
Statements of Operations for the fiscal year ended December 27, 1994 and
for the period from December 28, 1994 through March 23, 1995........... F-37
Statements of Cash Flows for the fiscal year ended December 27, 1994 and
for the period from December 28, 1994 through March 23, 1995........... F-38
Notes to Audited Financial Statements................................... F-39
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
Report of Independent Public Accountants.................................. F-41
Combined Financial Statements:
Combined Statements of Operations for the fiscal years ended December
31, 1993 and December 31, 1994 and for the period from January 1, 1995
through April 2, 1995.................................................. F-42
Combined Statements of Cash Flows for the fiscal years ended December
31, 1993 and December 31, 1994 and for the period from January 1, 1995
through April 2, 1995.................................................. F-43
Notes to Audited Combined Financial Statements.......................... F-44
BALTIMORE BAGEL CO.
Report of Independent Public Accountants.................................. F-45
Financial Statements:
Statements of Operations for the years ended December 31, 1993 and
December 31, 1994 and for the period from January 1, 1995 through
August 10, 1995........................................................ F-46
Statements of Cash Flows for the years ended December 31, 1993 and 1994
and for the period from January 1, 1995 through August 10, 1995........ F-47
Notes to Financial Statements........................................... F-48
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Financial Information of Einstein/Noah
Bagel Corp............................................................... F-49
Unaudited Pro Forma Consolidated Statement of Operations for the fiscal
year ended December 31, 1995............................................. F-50
Unaudited Pro Forma Consolidated Statement of Operations for the quarter
ended April 21, 1996..................................................... F-51
Notes to Unaudited Pro Forma Consolidated Financial Statements............ F-52
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited the accompanying consolidated balance sheet of Einstein/Noah
Bagel Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995,
and the related consolidated statements of operations, stockholders' deficit
and cash flows for the period from inception (March 24, 1995) through December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Einstein/Noah Bagel Corp.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the period from inception (March 24, 1995) through
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
July 16, 1996
F-3
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
ASSETS
- ------
<S> <C>
Current Assets:
Cash and cash equivalents....................................... $ 5,368
Accounts receivable............................................. 1,327
Inventory....................................................... 883
Deposits........................................................ 1,492
Prepaid expenses and other current assets....................... 217
-------
Total current assets.......................................... 9,287
Property and Equipment, net....................................... 19,410
Notes Receivable.................................................. 7,267
Excess of Purchase Price Over Fair Value of Net Assets Acquired,
net.............................................................. 13,715
Other Assets, net................................................. 620
-------
Total assets.................................................. $50,299
=======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
<S> <C>
Current Liabilities:
Accounts payable................................................ $ 5,633
Accrued expenses................................................ 2,968
Deferred franchise revenue...................................... 645
-------
Total current liabilities..................................... 9,246
Convertible Debt.................................................. 40,000
Deferred Franchise Revenue........................................ 265
Other Noncurrent Liabilities...................................... 2,907
Repurchase Common Stock Shares--1,721,250 shares issued and
outstanding...................................................... 11,062
Series A Preferred Stock--6,250 shares issued and outstanding..... 7,813
Commitments
Stockholders' Deficit:
Preferred Stock--$.01 par value; 20,000,000 shares authorized;
no shares issued and outstanding............................... --
Common Stock--$.01 par value; 200,000,000 shares authorized;
3,848,607 shares issued and outstanding........................ 38
Additional paid-in capital...................................... 22,684
Accumulated deficit............................................. (43,716)
-------
Total stockholders' deficit................................... (20,994)
-------
Total liabilities and stockholders' deficit................... $50,299
=======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-4
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Revenue:
Company-operated stores............................................ $ 25,685
Royalties and franchise-related fees............................... 738
--------
26,423
Costs and Expenses:
Cost of products sold.............................................. 8,239
Salaries and benefits.............................................. 13,531
General and administrative......................................... 21,230
Write-off of intangible assets..................................... 26,575
--------
Total costs and expenses........................................... 69,575
--------
Loss from Operations................................................. (43,152)
Other Income (Expense):
Interest expense, net.............................................. (1,281)
Other income, net.................................................. 717
--------
Total other expense.............................................. (564)
========
Net loss........................................................... $(43,716)
========
Net loss per common and equivalent share........................... $ (4.56)
========
Weighted average number of common and equivalent shares
outstanding....................................................... 9,613
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-5
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Common Stock
Balance at inception............................................... $ --
Issuance of common stock........................................... 38
--------
Balance at December 31, 1995....................................... $ 38
========
Additional paid-in capital
Balance at inception............................................... $ --
Issuance of common stock, net of offering cost of $500............. 22,051
Dividends on Series A preferred stock and accretion of dividends on
repurchase shares................................................. (1,077)
Expense recognized for warrants issued............................. 1,710
--------
Balance at December 31, 1995....................................... $ 22,684
========
Accumulated deficit
Balance at inception............................................... $ --
Net loss........................................................... (43,716)
--------
Balance at December 31, 1995....................................... $(43,716)
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-6
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss........................................................... $(43,716)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 1,657
Warrant expense.................................................. 1,710
Write-off of intangible assets................................... 26,575
Gain on the sale of marketable equity securities..................... (719)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable................................................ (680)
Accounts payable and accrued expenses.............................. 1,778
Deferred franchise revenue......................................... 910
Other assets and liabilities....................................... 173
--------
Net cash used in operating activities............................ (12,312)
Cash Flows from Investing Activities:
Purchase of property and equipment................................. (18,109)
Proceeds from sale of property and equipment....................... 5,519
Purchase of marketable equity securities, net of proceeds from
sales............................................................. (22,682)
Purchase of other assets........................................... (621)
Issuance of notes receivable....................................... (10,569)
Repayment of notes receivable...................................... 3,831
--------
Net cash used in investing activities............................ (42,631)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock............................. 20,311
Proceeds from convertible debt..................................... 91,060
Repayment of convertible debt...................................... (51,060)
--------
Net cash provided by financing activities........................ 60,311
--------
Net Increase in Cash and Cash Equivalents............................ 5,368
Cash and Cash Equivalents, inception................................. --
--------
Cash and Cash Equivalents, end of year............................... $ 5,368
========
Supplemental Cash Flow Information:
Interest Paid...................................................... $ 1,107
========
Supplemental Schedule of Non-Cash Activities:
Exchange of Series A preferred stock, repurchase common stock,
common stock and marketable equity securities for net assets
acquired.......................................................... $ 42,742
========
Issuance of common stock for note receivable....................... $ 437
========
Accretion of dividends on repurchase common stock.................. $ 933
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-7
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Einstein/Noah Bagel Corp. and subsidiaries, formerly Einstein Bros. Bagels,
Inc. (the "Company"), operate and franchise specialty retail stores in the
United States that feature fresh-baked bagels, proprietary cream cheeses,
specialty coffees and teas, and creative soups, salads and sandwiches. At
December 31, 1995, there were 60 stores in operation systemwide, consisting of
47 Company-operated stores and 13 franchise stores. In 1995, the Company sold
13 Company-operated stores to newly-formed area developers of the Company.
Subject to the provisions of the applicable franchise agreements, the Company
is obligated to allow franchisees to utilize the Company's trademarks,
copyrights, recipes, operating procedures and other elements of its systems in
the operation of franchised stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year is the 52/53 week period ending on the last Sunday
in December.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit, and highly
liquid instruments purchased with maturities of three months or less.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of food, paper products and supplies.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization has been
calculated using the straight-line method. The following represent the useful
lives over which the assets are depreciated and amortized:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15-30 years
Furniture, fixtures and equipment............................. 6-8 years
Pre-opening expenses.......................................... 1 year
</TABLE>
Property and equipment additions include acquisitions of buildings and
equipment, costs incurred in the development and construction of new stores
and major improvements to existing stores. Expenditures for maintenance and
repairs are charged to expense as incurred. Pre-opening costs consist
primarily of salaries and other direct expenses incurred in connection with
the set-up, initial stocking of stores, initial training of employees and
general management activities incurred prior to the opening of new stores.
F-8
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" to evaluate the recoverability of long-lived assets and
assets to be disposed of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. SFAS No. 121 also establishes
the procedures for review of recoverability, and measurement of impairment if
necessary, of long-lived assets and certain identifiable intangibles to be
held and used by an entity.
Excess Purchase Price Over Fair Value of Identifiable Net Assets Acquired
The excess purchase price over the fair value of identifiable net assets
acquired from acquisitions is being amortized on a straight-line basis over 35
years. The Company evaluates whether events and circumstances have occurred
that indicate revision to the remaining useful life or the remaining balances
may be appropriate. Such events and circumstances include, but are not limited
to, a change in business strategy or change in current and long-term projected
operating performance. When factors indicate that the carrying amount of an
asset may not be recoverable, the Company estimates the future cash flows
expected to result from the use of such asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company will
recognize an impairment loss equal to the excess of the carrying amount over
the fair value of the asset.
Revenue Recognition
Revenue from Company-operated stores is recognized in the period related
food and beverage products are sold. Royalties are recognized in the same
period that related franchised store revenue is generated. Revenue derived
from initial franchise fees and area development fees is recognized when the
franchised store opens. Interest is recognized as earned. The components of
royalties and franchise-related fees for fiscal 1995 are as follows (in
thousands of dollars):
<TABLE>
<S> <C>
Initial franchise and area development fees......................... $520
Royalties........................................................... 35
Other............................................................... 183
----
Total royalties and franchise-related fees.......................... $738
====
</TABLE>
Per Share Data
Net loss per common share is computed by dividing net loss, adjusted for
dividends on Series A preferred stock, by the weighted average number of
common shares outstanding during the period and common stock and common stock
equivalent shares issued within one year prior to the effective date of the
Company's initial public offering at a price or exercise price less than the
initial public offering price. The common stock equivalents have been reduced
by the number of shares of common stock which could be purchased with the
proceeds from the assumed exercise of the options and warrants, including tax
benefits assumed to be realized.
Stock Options
Employee stock options are accounted for pursuant to APB No. 25.
Employee Benefit Plan
The Company has a 401(k) plan to which the Company makes no contributions.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT DATA
Accounts receivable are net of an allowance for doubtful accounts of $81,000
at December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS OF
DOLLARS)
<S> <C>
Property and equipment consists of:
Land.................................................. $ 123
Buildings and improvements............................ 12,083
Furniture, fixtures and equipment..................... 7,544
Pre-opening expenses.................................. 401
-------
20,151
Less: Accumulated depreciation and amortization....... (741)
-------
Total property and equipment, net................... $19,410
=======
Accrued expenses consist of:
Accrued payroll and fringe benefits................... $ 876
Accrued interest...................................... 325
Accrued other......................................... 1,767
-------
Total accrued expenses.............................. $ 2,968
=======
Interest expense, net consists of:
Interest expense...................................... $ 1,432
Interest income....................................... (151)
-------
Total interest expense, net......................... $ 1,281
=======
</TABLE>
4. ACQUISITIONS
In 1995, the Company acquired four regional bagel companies. In March 1995,
the acquisitions included Brackman Brothers, Inc. ("Brackman") for which the
Company issued 573,750 shares of common stock valued at $5.88 per share and
other marketable equity securities with a value of $8.3 million, Bagel &
Bagel, Inc. ("Bagel & Bagel") for which the Company issued 573,750 shares of
common stock valued at $5.88 per share and other marketable equity securities
with a value of $5.5 million, and Offerdahl's Bagel Gourmet, Inc.
("Offerdahl's") for which the Company issued 811,625 shares of common stock
valued at $5.88 per share and other marketable equity securities with a value
of $5.6 million. In August 1995, the Company acquired Baltimore Bagel Co.
("Baltimore Bagel") for which the Company issued 6,250 shares of Series A
preferred stock with a value of $7.8 million and other marketable equity
securities with a value of $4.0 million. Pursuant to the acquisitions, the
Company agreed to repurchase up to 1,721,250 shares of the common stock under
certain circumstances (see Note 12). The acquisitions have been accounted for
as purchases, and, accordingly, the purchase prices were allocated to assets
(both tangible and identifiable intangible) and liabilities based upon an
evaluation of their fair values at the dates of the acquisitions. The total
purchase price for these four companies, including assumption of liabilities,
was $51.1 million, of which $21.2 million was allocated to trademarks
(amortized over a 35-year life), $5.4 million was allocated to recipes
(amortized over a 10-year life) and $14.0 million was allocated to excess
purchase price over fair value of identifiable net assets acquired (amortized
over a 35-year life). Such intangibles were identified by management based
upon its evaluation of the businesses acquired. The allocation of the purchase
price to trademarks and recipes was based upon a royalty savings methodology
which determines the present value of the stream of royalties which the
Company believes an independent third party would be willing to pay to obtain
the use of such trademarks and recipes. The estimated useful life for these
assets was based upon various factors which existed at the time of the
acquisitions, including the anticipated periods of benefit to be derived from
the utilization of such assets in connection with executing a
F-10
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
regional brand business strategy, increasing consumer demand for bagel
products, the lack of a competitor with national brand awareness, the lack of
regulatory limitations on the potential useful lives of such assets, the
absence of any inherent or technological obsolescence for such assets, and in
the case of trademarks, the long-lived nature of a primary brand name in the
consumer marketplace. Subsequent to these acquisitions, management launched a
development project which resulted in the development of the Einstein Bros.
Bagel brand and store, at which time management determined it would
discontinue the use of the acquired trademarks and recipes. Consequently, this
change in business strategy resulted in an impairment of these identifiable
intangible assets, and accordingly, the assets were written down to their fair
market values, resulting in a write-off of $26.6 million (see Note 13). The
financial statements include the results of operations for the acquired
entities from their dates of acquisition.
The following represents the unaudited pro forma results of operations as if
all of the above-noted business combinations had occurred at the beginning of
the Company's fiscal year (in thousands of dollars, except per share data):
<TABLE>
<S> <C>
Revenue........................................................... $38,065
Net loss.......................................................... 43,540
Net loss per share................................................ $ 4.53
</TABLE>
The pro forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined as of the beginning of the Company's fiscal year, and is not intended
to be a projection of future results or trends.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
The carrying value approximates fair value due to the length of maturity of
the investments.
Notes Receivable
The estimated fair value of the Company's notes receivable, including the
conversion option (Notes 6 and 11), is based on the discounted value of future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings.
Convertible Debt
The estimated fair value of the Company's convertible debt, including the
conversion option (see Note 7), is based on the discounted value of future
payments using the current rate at which a similar loan would be made to a
company with similar credit ratings.
Common Stock Subject to Repurchase
The estimated fair value of the Company's common stock subject to repurchase
by the Company is based on the price of other common stock equity transactions
near December 31, 1995.
Series A Preferred Stock
The estimated fair value of the Company's Series A preferred stock is based
on the discounted value of future cash flows using interest rates which would
be applicable to similar instruments held in companies with similar credit
ratings.
The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Cash and cash equivalents...................... $ 5,368 $ 5,368
Notes receivable............................... 7,267 7,267
Convertible debt............................... 40,000 40,000
Repurchase common stock........................ 11,062 11,142
Series A preferred stock....................... 7,813 7,813
</TABLE>
F-11
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES RECEIVABLE
The following table summarizes the primary components of notes receivable as
of December 31, 1995 (in thousands of dollars):
<TABLE>
<S> <C>
Due from area developers (Note 11)................................ $3,538
Notes receivable from stockholder................................. 1,888
Term loans........................................................ 1,108
Revolving loan.................................................... 226
Other............................................................. 507
------
$7,267
======
</TABLE>
Notes receivable from stockholder bear interest at 1% over the applicable
reference rate of Bank of America Illinois. Principal and interest are due
April 2001. The notes are collateralized by various assets.
Term loans bear interest based upon the reference rate plus 1%. Principal is
due in annual installments with balloon payments required through various
dates through 2001. The loans are collateralized by various assets.
The revolving loan provides a credit facility to a vendor of up to $400,000
through October 2000 with interest payable currently based upon the reference
rate plus 1%. The loan is collateralized by various assets.
7. DEBT
The Company has entered into a secured loan agreement (the "Agreement")
providing borrowings through March 1998, pursuant to which Boston Chicken,
Inc. ("Boston Chicken") provides debt financing and, in turn, obtains the
right to convert all or any portion of the loan into shares of common stock of
the Company. In January 1996, Boston Chicken increased the available
borrowings under the Agreement from $80.0 million to $120.0 million. The
ownership percentage represented by the shares of common stock to be acquired
upon conversion (or exercise of the option, as provided below) is dependent
upon total equity and rights outstanding, but would represent a majority
ownership in certain instances. The loan may be converted at any time after
the earlier of April 1997, the completion of an initial public offering, or
the Company being in default of the loan and until October 2003. Additionally,
during this same period, to the extent the loan is not fully drawn or has been
drawn and repaid, Boston Chicken has the option to acquire at the loan
conversion price, as defined, the amount of additional equity it could have
acquired by conversion of the loan had the loan been fully drawn. The loan is
collateralized by substantially all of the assets of the Company and a pledge
of the common stock of its subsidiaries. The Agreement contains various
restrictive covenants including restricting cash dividends and limiting
additional indebtedness. Interest is based upon the reference rate of Bank of
America Illinois plus 1% and is payable currently. In April 1998, the loan
converts to an amortizing term loan payable through May 2003, with a final
balloon payment.
Principal maturities on the outstanding balance as of December 31, 1995 were
as follows (in thousands of dollars):
<TABLE>
<S> <C>
1998.............................................................. $ 3,077
1999.............................................................. 4,000
2000.............................................................. 4,000
Thereafter........................................................ 28,923
-------
$40,000
=======
</TABLE>
In connection with the acquisition of Noah's New York Bagels, Inc.
("Noah's") in February 1996 (Note 15), Boston Chicken provided the Company
with a non-convertible bridge loan facility of up to $40.0 million.
F-12
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
As of December 31, 1995, the Company had cumulative federal and state tax
operating loss carryforwards available to reduce future taxable income of
approximately $11.1 million which begin to expire in 2010.
The primary components that comprise the net deferred tax asset as of
December 31, 1995 are as follows (in thousands of dollars):
<TABLE>
<S> <C>
Deferred tax assets:
Accounts payable and accrued expenses.......................... $ 218
Deferred franchise revenue..................................... 355
Other noncurrent liabilities................................... 220
Write-off of intangible assets that are amortizable for tax.... 2,017
Net operating loss............................................. 4,104
Other.......................................................... 1,380
-------
Total deferred tax assets.................................... 8,294
Deferred tax liabilities:
Property and equipment......................................... (489)
Other assets................................................... (116)
-------
Total deferred tax liabilities............................... (605)
-------
Net deferred tax asset....................................... 7,689
Valuation allowance.............................................. (7,689)
-------
Net deferred tax asset........................................... $ --
=======
</TABLE>
The increase in the valuation allowance of $7,689,000 from inception through
December 31, 1995, is due to uncertainty regarding the realization of the
related tax benefits.
9. NATIONAL AND LOCAL ADVERTISING FUNDS
The Company administers a National Advertising Fund to which Company-
operated stores and franchised stores make contributions based on individual
franchise agreements (2% of net revenue). Collected amounts are spent
primarily on developing marketing and advertising materials for use
systemwide. Such amounts are not segregated from the cash resources of the
Company, but the National Advertising Fund is accounted for separately and not
included in the financial statements of the Company.
The Company maintains Local Advertising Funds that provide comprehensive
advertising and sales promotion support for stores in particular markets.
Contributions are made by both Company-operated and franchised stores
(currently 4% of net revenue). The Company disburses funds and accounts for
all transactions related to such Local Advertising Funds. Such amounts are not
segregated from the cash resources of the Company, but are accounted for
separately and are not included in the financial statements of the Company.
10. COMMITMENTS
The Company leases sites for its stores, commissaries and office space.
Lease terms are generally five years with two or three five-year renewal
options. The Company also subleases sites to its area developers. The sublease
terms to area developers are negotiated at arms length on commercially
reasonable terms. The Company is contingently liable for all lease costs
including common area maintenance charges. Most of the leases contain
escalation clauses and common area maintenance charges.
F-13
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year and sublease proceeds as of December 31,
1995 (in thousands of dollars):
<TABLE>
<CAPTION>
MINIMUM SUBLEASE NET MINIMUM
RENTAL PAYMENTS PROCEEDS RENTAL PAYMENTS
--------------- -------- ---------------
<S> <C> <C> <C>
1996............................. $ 3,495 $ 822 $ 2,673
1997............................. 2,908 597 2,311
1998............................. 2,686 590 2,096
1999............................. 2,403 560 1,843
2000............................. 1,587 529 1,058
Thereafter....................... 3,046 1,352 1,694
------- ------ -------
$16,125 $4,450 $11,675
======= ====== =======
</TABLE>
The net rental expense under operating leases, primarily for Company-
operated stores, was approximately $1,909,000 for the period from March 24,
1995 (inception) through December 31, 1995.
In December 1995, Bagel Store Development Funding, L.L.C. ("Bagel Funding"),
formerly Einstein Bros. Equity Funding, L.L.C., was formed with the objective
of raising $90.0 million to invest in existing and proposed area developers.
Through December 31, 1995, Bagel Funding had raised approximately $40.0
million (including an aggregate of $20.0 million in subscription receivables)
and had invested a total of $3.5 million in area developers. In March 1996,
Bagel Funding raised the remainder of anticipated funds, so that the funds
raised equalled the $90.0 million (including an aggregate of $45.0 million in
subscription receivables). Bagel Funding can require an area developer to
redeem Bagel Funding's equity interest at a formula price in the event the
Company acquires a majority interest in the area developer, and if the area
developer fails to do so, the Company will be required to purchase Bagel
Funding's unredeemed equity interest at the formula price. In the event the
Company's conversion and/or option rights expire unexercised under the area
developer's secured loan agreement with the Company, as originally in effect,
Bagel Funding will have the right to require, subject to the Company's prior
consent, that the area developer undertake a firm commitment underwritten
public offering of equity of the area developer. In the event the Company does
not consent to a public offering, the area developer can be required to
purchase Bagel Funding's unredeemed equity interest in the area developer at a
formula price and if the area developer fails to do so, the Company will be
required to purchase Bagel Funding's unredeemed equity interest. Also, in the
event the Company does not acquire a majority interest in the area developer
pursuant to the Company's conversion and/or option rights prior to the time
such rights expire unexercised under the area developer's secured loan
agreement with the Company, as originally in effect, Bagel Funding will have
the right to request that the area developer seek to terminate its area
development and franchise agreements with the Company. If the Company does not
consent to such termination, the area developer can be required to redeem
Bagel Funding's equity interest in the area developer at a formula price, and
if the area developer fails to do so, the Company will be required to purchase
Bagel Funding's unredeemed equity interest.
The Company has entered into a supply agreement relating to the purchase of
certain minimum levels of cream cheese, which expires in October 2000, or
earlier in certain circumstances. The agreement requires the Company, its
subsidiaries, area developers and other authorized purchasers to purchase the
lesser of 160,000 pounds of cream cheese per week or 60% of their requirements
for cream cheese (excluding certain requirements that may be satisfied through
other commitments and certain requirements of acquired companies). The price
per pound is determined over the term of the contract based upon production
costs.
11. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for
use in expansion of their operations. These financing arrangements permit the
Company to obtain an equity interest in the area developer
F-14
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at a predetermined price after a moratorium (generally two years) and after
the area developer has completed not less than 80% of its area development
commitment (or in the event of certain defaults) on conversion of the loan
into equity. The maximum loan amount is established to give the Company
majority ownership of the area developer upon conversion (or option exercise,
as described further below) provided the Company exercises its right to
participate in any intervening financing of the area developer.
Area developer financing requires the developer to expend at least 75% of
its contributed capital toward developing stores prior to drawing on the
revolving loan account, with draws permitted during a three-year draw period
in a pre-determined maximum amount equal to four times the amount of the area
developer's equity capital. Upon expiration of the draw period, the loan
converts to an amortizing term loan payable over five years in periodic
installments, with a final balloon payment. Interest is set at 1% over the
applicable reference rate of Bank of America Illinois from time to time and is
payable each four-week period. The loan is secured by a pledge of substantially
all of the assets of the area developer.
(a) Loan Conversion Option
All or any portion of the loan amount may be converted at the Company's
election at any time after the expiration of a specified moratorium period
(generally two years) and after the area developer has completed not less than
80% of its area development commitment (or in the event of certain defaults)
into equity in the area developer at the conversion price set forth in such
loan agreement, generally at a 12% premium over the per equity unit price paid
by the investors in the area developer for the equity investment made
concurrently with the execution of the loan agreement. To the extent such loan
is not fully drawn or has been drawn and repaid, the Company has a
corresponding option to acquire at the loan conversion price the amount of
additional equity it could have acquired by conversion of the loan had it been
fully drawn.
There can be no assurance the Company will or will not convert any loan
amount or exercise its option at such time as it may be permitted to do so
and, if it does convert, that such conversion will constitute a majority
interest in the area developer.
(b) Commitments to Extend Area Developer Financing
The following table summarizes as of December 31, 1995 credit commitments
for area developer financing (in thousands of dollars):
<TABLE>
<S> <C>
Number of area developers receiving financing.................... 2
Loan commitments................................................. $16,000
Unused loans..................................................... 12,462
-------
Loans outstanding (included in Notes Receivable)................. $ 3,538
=======
Allowance for loan losses........................................ $ --
=======
</TABLE>
The principal maturities on the aforementioned notes receivable are as
follows (in thousands of dollars):
<TABLE>
<S> <C>
1998............................................................... $ 82
1999............................................................... 354
2000............................................................... 354
Thereafter......................................................... 2,748
------
$3,538
======
</TABLE>
F-15
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Credit Risk and Allowance for Loan Losses
The allowance for credit losses is maintained at a level that in
management's judgment is adequate to provide for estimated possible loan
losses. The amount of the allowance is based on management's review of each
area developer's use of loan proceeds, stage of development, adherence to its
store development schedule, store performance trends, type and amount of
collateral securing the loan, prevailing economic conditions, and other
factors which management deems relevant at the time. Based upon this review
and analysis, no allowance was required as of December 31, 1995.
12. STOCKHOLDERS' EQUITY
Common Stock
On July 8, 1996, the Company approved a 225-for-one split of the Company's
common stock in the form of a stock dividend. Per share amounts, the number of
common shares and capital accounts have been restated to give retroactive
effect to the stock split.
The Company issued 3,536,361 shares of common stock at the time of its
formation, which provided net proceeds of approximately $20.8 million.
Preferred Stock
In connection with the acquisition of the net assets of Baltimore Bagel, the
Company issued 6,250 shares of Series A preferred stock. The Series A
preferred stock has a liquidation preference of $1,000 per share, pays annual
dividends of $60 per share, and is automatically convertible into common stock
of the Company in an initial public offering with the number of shares of
common stock received being equal to $1,000 plus accrued and unpaid dividends
divided by 80% of the gross offering price per share to the public.
The Series A preferred stock is redeemable by the Company at any time after
February 10, 1999, at a price per share equal to $1,250 plus accrued and
unpaid dividends. A majority of the holders may require the Company to redeem
one-third of the shares of Series A preferred stock on each of February 28,
1998, May 1, 1998 and August 1, 1998, at a price of $1,250 plus accrued and
unpaid dividends. The holders of the Series A preferred stock may also require
redemption in the event the Company has failed to pay three consecutive
quarterly dividends.
Common Stock Subject to Repurchase
Pursuant to the purchase agreements (see Note 4), the Company has agreed
that, in the event it has not completed an initial public offering of its
common stock resulting in gross proceeds of at least $15.0 million by
specified dates or Boston Chicken's ownership of, or right to acquire an
ownership interest in, the Company's common stock falls below 25%, the holders
of common stock subject to repurchase by the Company can require the Company
to redeem such shares of common stock at their fair market value, but not less
than a specified floor price per share. The difference between the
consideration paid per share and the greater of the fair market value of the
shares or the floor price per share is being accreted to the shares as a
dividend over the life of the put option.
Warrants
The Company sold warrants to purchase 1,012,500 shares of common stock of
the Company to Bagel Funding. The warrants have an exercise price of $6.47 per
common share and expire in 2000. The market value of the warrants was recorded
as an expense and credited to additional paid-in capital during fiscal 1995.
F-16
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plan
The Company has a stock option plan (the "Plan") under which options to
purchase up to 3,600,000 shares of common stock, subsequently increased to
5,500,000 shares of common stock, may be granted to certain employees and
officers of, and consultants to, the Company. The option price is equal to the
fair market value of the stock on the date of the grant and each option has a
term of ten years. Options granted under the Plan generally vest at a rate of
10% at the end of the first year, an additional 20% at the end of the second
year, an additional 30% at the end of the third year, with the balance vesting
at the end of the fourth year from the date of the grant.
Activity under the option plan through December 31, 1995 was as follows:
<TABLE>
<CAPTION>
OPTION
PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Granted........................................... 2,090,248 $5.88-$6.47
Cancelled......................................... (16,778) 5.88
--------- -----------
Outstanding as of December 31, 1995............... 2,073,470 $5.88-$6.47
========= ===========
Exercisable as of December 31, 1995............... 29,738 $ 5.88
========= ===========
</TABLE>
As of December 31, 1995, the Company had 17,146,125 shares of common stock
reserved for issuance upon exercise of options and warrants and conversion of
Boston Chicken's loan into common stock. In addition, the Company has
contractually agreed to reserve a sufficient number of shares of common stock
for issuance to the holder of the Series A preferred stock upon conversion.
13. WRITE-OFF OF INTANGIBLE ASSETS
After the acquisition of Brackman, Bagel & Bagel, Offerdahl's and Baltimore
Bagel (collectively the "Founding Companies"), the Company launched a
development project, pursuant to which management analyzed (i) the Founding
Companies' stores, including brand positionings, product offerings,
operational service systems and atmosphere, (ii) the competitive environment
and (iii) the preferences of consumers across the United States. The project
resulted in the development of the Einstein Bros. Bagels brand and store. In
connection with, and as a result of, the development of the Einstein Bros.
Bagels brand and store, management determined to discontinue the use of the
identifiable intangible assets acquired in the acquisitions of the Founding
Companies, including trademarks and recipes. Consequently, this change in
business strategy resulted in an impairment of these identifiable intangible
assets, and accordingly, the assets were written down to their fair market
values resulting in a write-off of $26.6 million.
14. RELATED-PARTY TRANSACTIONS
Certain officers and directors of Boston Chicken have an equity interest in
the Company. For the Company's 1995 fiscal year, the Company paid to Boston
Chicken approximately $1.2 million for the purchase of furniture, equipment
and other miscellaneous assets and approximately $3.0 million in software
license, software maintenance, real estate, financial advisory, accounting
fees and interest on its loan with Boston Chicken.
Certain officers and directors of the Company are officers and investors in
Bagel Funding and had invested $8.4 million in Bagel Funding at December 31,
1995. The Company is the manager of Bagel Funding. No fees were paid to the
Company in its capacity as manager during 1995.
The Company has entered into secured loan and area developer agreements with
certain area developers in which certain directors and officers and members of
their families have a direct or indirect equity interest. The
F-17
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Company received from these entities approximately $2.3 million in
development, franchise, royalty, management services and interest in fiscal
1995. The Company has also sold to these entities, stores, inventory,
equipment and other miscellaneous assets for which it received approximately
$5.5 million in 1995.
During 1995, the Company paid $85,874 to Bowana Aviation, Inc. ("Bowana")
for the Company's use of an aircraft owned by Bowana. A director and a member
of his family (both stockholders of the Company) own Bowana. The Company
believes that the amounts charged are at rates comparable to those charged by
third parties.
15. SUBSEQUENT EVENTS
In February 1996, the Company acquired Noah's, the largest regional bagel
retailer on the West Coast, for approximately $100.9 million, including
approximately $83.7 million of intangible assets, including excess purchase
price over the fair value of net assets acquired.
In May 1996, the Company entered into a secured revolving credit facility
providing for borrowings of up to $45.0 million through April 30, 1998.
Borrowing under the facility may be either floating rate loans with interest
at the lender's base rate plus 1.0% or, at the Company's option, the rate
offered in the interbank Eurodollar market for one-, two-, or three-month
dollar deposits offered by the lender plus 3.0%. In addition, a commitment fee
of .25% of the average daily unused portion of the loan is required. The
facility contains covenants, among others, restricting other borrowings,
prohibiting cash dividends, and requires the Company to maintain minimum
interest coverage and cash flow ratios, specified store level sales, and a
minimum capital level.
In June 1996, the $120.0 million convertible loan to the Company was
converted into 15,307,421 shares of common stock of the Company.
F-18
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, APRIL 21, APRIL 21,
1995 1996 1996
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 7)
ASSETS
- ------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................ $ 5,368 $ 2,912 $ 2,912
Accounts receivable...................... 1,327 5,334 5,334
Inventory................................ 883 1,408 1,408
Deposits................................. 1,492 3,319 3,319
Prepaid expenses and other current
assets.................................. 217 634 634
-------- -------- --------
Total current assets................... 9,287 13,607 13,607
Property and Equipment, net............... 19,410 34,564 34,564
Notes Receivable.......................... 7,267 38,298 38,298
Excess of Purchase Price Over Fair Value
of Identifiable Net Assets Acquired, net. 13,715 69,547 69,547
Trademarks, net........................... -- 21,986 21,986
Recipes, net.............................. -- 5,121 5,121
Other Assets, net......................... 620 1,391 1,391
-------- -------- --------
Total assets........................... $ 50,299 $184,514 $184,514
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
- ------------------------------------
<S> <C> <C> <C>
Current Liabilities:
Accounts payable......................... $ 5,633 $ 5,418 $ 5,418
Accrued expenses......................... 2,968 6,556 6,556
Deferred franchise revenue............... 645 990 990
-------- -------- --------
Total current liabilities.............. 9,246 12,964 12,964
Convertible Debt.......................... 40,000 120,000 --
Long-term Debt............................ -- 38,497 38,497
Deferred Franchise Revenue................ 265 1,595 1,595
Other Noncurrent Liabilities.............. 2,907 3,826 3,826
Repurchase Common Stock Shares--1,721,250
shares issued and outstanding............ 11,062 11,852 11,852
Series A Preferred Stock--6,250 shares
issued and outstanding................... 7,813 7,813 7,813
Commitments
Stockholders' Equity (Deficit):
Preferred Stock--$.01 par value;
20,000,000 shares authorized; no shares
issued and outstanding.................. -- -- --
Common Stock--$.01 par value;
200,000,000 shares authorized issued
and outstanding, 3,848,607 shares in
1995, 5,353,128 shares in 1996 and
20,660,549 shares in 1996 on a pro
forma basis............................. 38 54 207
Additional paid-in capital............... 22,684 34,946 154,793
Accumulated deficit...................... (43,716) (47,033) (47,033)
-------- -------- --------
Total stockholders' equity (deficit)... (20,994) (12,033) 107,967
-------- -------- --------
Total liabilities and stockholders'
equity (deficit)...................... $ 50,299 $184,514 $184,514
======== ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-19
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 24, 1995)
THROUGH QUARTER ENDED
APRIL 16, 1995 APRIL 21, 1996
--------------------- --------------
<S> <C> <C>
Revenue:
Company-operated stores................. $1,423 $18,397
Royalties and franchise-related fees.... -- 3,982
------ -------
1,423 22,379
Costs and Expenses:
Cost of products sold................... 438 5,490
Salaries and benefits................... 643 9,128
General and administrative.............. 522 9,031
------ -------
Total costs and expenses.............. 1,603 23,649
------ -------
Loss from Operations...................... (180) (1,270)
Other Income (Expense):
Interest expense, net................... (80) (3,333)
Other income, net....................... -- 1,286
------ -------
Total other expense................... (80) (2,047)
------ -------
Net loss.................................. $ (260) $(3,317)
====== =======
Net loss per common and equivalent share.. $(0.03) $ (0.36)
====== =======
Weighted average number of common and
equivalent shares outstanding............ 9,386 9,633
====== =======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-20
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 24, 1995
(INCEPTION)
THROUGH QUARTER ENDED
APRIL 16, 1995 APRIL 21, 1996
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $ (260) $ (3,317)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 67 1,914
Gain on sale of marketable equity securities... -- (1,267)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable.......................... 454 (3,710)
Accounts payable and accrued expenses........ (1,673) (2,440)
Deferred franchise revenue................... -- 1,660
Other assets and liabilities................. 24 (2,923)
-------- ---------
Net cash used in operating activities........ (1,388) (10,083)
Cash Flows from Investing Activities:
Purchase of property and equipment............. (389) (17,557)
Proceeds from sale of property and equipment... -- 25,088
Acquisition of Noah's New York Bagels, Inc..... -- (100,902)
Net proceeds (purchases) from investment in
marketable equity securities.................. (21,465) 1,267
Purchase of other assets....................... (59) (744)
Issuance of notes receivable................... (2,041) (39,003)
Repayment of notes receivable.................. -- 7,972
-------- ---------
Net cash used in investing activities........ (23,954) (123,879)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock......... 20,183 13,009
Proceeds from debt............................. 34,637 208,929
Repayment of debt.............................. (26,533) (90,432)
-------- ---------
Net cash provided by financing activities.... 28,287 131,506
-------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 2,945 (2,456)
Cash and Cash Equivalents, beginning of period... -- 5,368
-------- ---------
Cash and Cash Equivalents, end of period......... $ 2,945 $ 2,912
======== =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-21
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by Einstein/Noah
Bagel Corp. (the "Company") and are unaudited except for the consolidated
balance sheet at December 31, 1995. The financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not necessarily include all information and footnotes required by generally
accepted accounting principles. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position, results of operations and cash
flows as of April 21, 1996 and for all periods presented have been made. The
statements are subject to year-end audit adjustment. A description of the
Company's accounting policies and other financial information is included in
the audited consolidated financial statements included elsewhere herein. The
consolidated results of operations for the quarter ended April 21, 1996 are
not necessarily indicative of the results expected for the full year.
2. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for
use in expansion of their operations. These financing arrangements permit the
Company to obtain an equity interest in the area developer at a predetermined
price after a moratorium (generally two years) and after the area developer
has completed not less than 80% of its area development commitment (or in the
event of certain defaults) on conversion of the loan into equity. The maximum
loan amount is established to give the Company majority ownership of the area
developer upon conversion (or option exercise, as described further below)
provided the Company exercises its right to participate in any intervening
financing of the area developer.
Area developer financing requires the area developer to expend at least 75%
of its contributed capital toward developing stores prior to drawing on the
revolving loan account, with draws permitted during a three-year draw period
in a pre-determined maximum amount equal to four times the amount of the area
developer's equity capital. Upon expiration of the draw period, the loan
converts to an amortizing term loan payable over five years in periodic
installments, with a final balloon payment. Interest is set at 1% over the
applicable reference rate of Bank of America Illinois from time to time and is
payable each four-week period. The loan is secured by a pledge of
substantially all of the assets of the area developer.
(a) Loan Conversion Option
All or any portion of the loan amount may be converted at the Company's
election at any time after the expiration of a specified moratorium (generally
two years) and after the area developer has completed not less than 80% of its
area development commitment (or in the event of certain defaults) into equity
in the area developer at the conversion price set forth in such loan
agreement, generally at a 12% premium over the per equity unit price paid by
the investors in the area developer for the equity investment made
concurrently with the execution of the loan agreement. To the extent such loan
is not fully drawn or has been drawn and repaid, the Company has a
corresponding option to acquire at the loan conversion price the amount of
additional equity it could have acquired by conversion of the loan, had it
been fully drawn.
There can be no assurance the Company will or will not convert any loan
amount or exercise its option at such time as it may be permitted to do so
and, if it does convert, that such conversion will constitute a majority
interest in the area developer.
F-22
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Commitments to Extend Area Developer Financing
The following table summarizes credit commitments for area developer
financing (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 21,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Number of area developers receiving financing... 2 4
Loan commitments................................ $16,000 $89,500
Unused Loans.................................... 12,462 56,934
------- -------
Loans outstanding (included in Notes
Receivable).................................... $ 3,538 $32,566
======= =======
Allowance for loan losses....................... $ -- $ --
======= =======
</TABLE>
(c) Credit Risk and Allowance for Loan Losses
The allowance for credit losses is maintained at a level that in
management's judgment is adequate to provide for estimated possible loan
losses. The amount of the allowance is based on management's review of each
area developer's use of loan proceeds, stage of development, adherence to its
store development schedule, store performance trends, type and amount of
collateral securing the loan, prevailing economic conditions, and other
factors which management deems relevant at the time. Based upon this review
and analysis, no allowance was required as of December 31, 1995 and April 21,
1996.
3. STOCK SPLIT
On July 8, 1996, the board of directors of the Company approved a 225-for-
one stock split of the Company's common stock in the form of a stock dividend.
Per share amounts, the number of common shares, and capital accounts have been
restated to give retroactive effect to the stock split.
4. ROYALTIES AND FRANCHISE-RELATED FEES
The components of royalties and franchise-related fees are comprised of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
QUARTER ENDED
APRIL 21, 1996
--------------
(UNAUDITED)
<S> <C>
Royalties.................................................. $ 680
Initial franchise and area developer fees.................. 2,600
Interest income............................................ 423
Other...................................................... 279
------
$3,982
======
</TABLE>
5. ACQUISITION
In February 1996, the Company acquired Noah's New York Bagel's, Inc. for
approximately $100.9 million. The acquisition has been accounted for as a
purchase, and, accordingly, the purchase price was allocated to assets (both
tangible and identifiable intangible) and liabilities based upon an evaluation
of their fair values at the date of the acquisition. Of such total purchase
price, $22.1 million was allocated to trademarks (amortized over a 35-year
life), $5.2 million was allocated to recipes (amortized over a 10-year life)
and $56.3 million was allocated to excess purchase price over fair value of
identifiable net assets acquired (amortized over a 35-year life). Such
intangibles were identified by management based upon its evaluation of the
business acquired. The allocation of the purchase price to trademarks and
recipes was based upon a royalty savings methodology which determines the
present value of the stream of royalties which the Company believes an
independent third party would be willing to pay to obtain the use of such
trademarks and recipes. The estimated useful life for these assets was based
upon various factors which existed at the time of the acquisition, including
the anticipated periods of benefit to be derived from the utilization of such
assets in connection with executing a dual brand business strategy, increasing
consumer demand for bagel products, the lack of a competitor with national
brand awareness, the lack of regulatory limitations on the potential useful
lives of such assets, the absence of any inherent or technological
obsolescence for such assets, and in the case of trademarks, the long-lived
nature of a primary brand name in the consumer marketplace.
F-23
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The following represents the unaudited pro forma results of operations as if
the combination had occurred at the beginning of the Company's fiscal year (in
thousands of dollars, except per share data):
<TABLE>
<S> <C>
Revenue........................................................... $25,683
Net loss.......................................................... 5,199
Net loss per share................................................ $ 0.55
</TABLE>
The pro forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined as of the beginning of the Company's fiscal year, and is not intended
to be a projection of future results or trends.
6. COMMITMENTS
In December 1995, Bagel Store Development Funding, L.L.C. ("Bagel Funding"),
formerly Einstein Bros. Equity Funding, L.L.C., ("Bagel Funding") was formed
to invest in existing and proposed area developers. Through April 21, 1996,
Bagel Funding had raised $90.0 million (including an aggregate of $45.0
million in subscriptions receivable) and had invested a total of $21.9 million
in area developers. Bagel Funding can require an area developer to redeem
Bagel Funding's equity interest at a formula price in the event the Company
acquires a majority interest in the area developer, and if the area developer
fails to do so, the Company will be required to purchase Bagel Funding's
unredeemed equity interest. In the event the Company's conversion and/or
option rights expire unexercised under the area developer's secured loan
agreement with the Company, as originally in effect, Bagel Funding will have
the right to require, subject to the Company's prior consent, that the area
developer undertake a firm commitment underwritten public offering of equity
of the area developer. In the event the Company does not consent to a public
offering, the area developer can be required to purchase Bagel Funding's
unredeemed equity interest in the area developer at a formula price and if the
area developer fails to do so, the Company will be required to purchase Bagel
Funding's unredeemed equity interest. Also, in the event the Company does not
acquire a majority interest in the area developer pursuant to the Company's
conversion and/or option rights prior to the time such rights expire
unexercised under the area developer's secured loan agreement with the
Company, as originally in effect, Bagel Funding will have the right to request
that the area developer seek to terminate its area developer and franchise
agreements with the Company. If the Company does not consent to such
termination, the area developer can be required to redeem Bagel Funding's
equity interest in the area developer at a formula price, and if the area
developer fails to do so, the Company will be required to purchase Bagel
Funding's unredeemed equity interest.
7. SUBSEQUENT EVENT
In May 1996, the Company entered into a secured revolving credit facility
providing for borrowings of up to $45.0 million through April 30, 1998.
Borrowing under the facility may be either floating rate loans with interest
at the lender's base rate plus 1.0% or, at the Company's option, the rate
offered in the interbank Eurodollar market for one-, two-, or three-month
dollar deposits offered by the lender plus 3.0%. In addition, a commitment fee
of .25% of the average daily unused portion of the loan is required. The
facility contains covenants, among others, restricting other borrowings,
prohibiting cash dividends, and requires the Company to maintain minimum
interest coverage and cash flow ratios, specified store level sales and a
minimum capital level. In May 1996, the Company utilized $39.6 million to
repay the outstanding bridge loan from Boston Chicken, Inc. The Company's
balance sheet as of April 21, 1996, gives effect to this refinancing as if it
occurred as of the balance sheet date.
In June 1996, the $120.0 million convertible loan to the Company was
converted into 15,307,421 shares of common stock of the Company. The pro forma
balance sheet gives effect to this conversion as if it had occurred on April
21, 1996.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Noah's New York Bagels, Inc.:
We have audited the accompanying consolidated balance sheets of Noah's New
York Bagels, Inc. (the "Company") as of December 31, 1994 and December 30,
1995, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the three fiscal years in the
period ended December 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
December 30, 1995, and the results of their operations and cash flows for each
of the three fiscal years in the period ended December 30, 1995 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
May 7, 1996
F-25
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND DECEMBER 30, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1994 1995
------- -------
ASSETS
- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 1,726 $ 1,630
Accounts receivable........................................ 239 550
Inventory.................................................. 255 652
Prepaid expenses........................................... 657 963
------- -------
Total current assets..................................... 2,877 3,795
Property and Equipment....................................... 9,631 19,847
Other Assets................................................. 752 926
------- -------
Total Assets............................................. $13,260 $24,568
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
- -------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable........................................... $ 1,296 $ 3,439
Accrued payroll............................................ 455 831
Other accrued expenses..................................... 178 328
Current portion of long-term debt.......................... 211 1,005
------- -------
Total current liabilities................................ 2,140 5,603
Long-Term Debt:
Related parties............................................ 4,480 --
Bank....................................................... 3,378 10
Deferred Credits............................................. 270 309
Redeemable Preferred Stock (liquidation preference of $6,573
in 1994 and $23,891 in 1995)................................ 3,331 20,325
Shareholders' Deficit:
Common stock, no par value: authorized, 38,000,000 shares;
issued and outstanding, 5,359,219 shares in 1994 and
5,365,197 shares in 1995.................................. 387 858
Accumulated deficit........................................ (726) (1,566)
Unearned compensation...................................... -- (971)
------- -------
Total shareholders' deficit.............................. (339) (1,679)
------- -------
Total Liabilities and Shareholders' Deficit.............. $13,260 $24,568
======= =======
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND DECEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Net Sales............................................ $8,148 $17,530 $32,323
Costs and Expenses:
Cost of sales...................................... 3,122 6,704 12,118
Salaries and benefits.............................. 2,504 6,340 12,388
General and administrative expenses................ 1,877 4,728 8,561
------ ------- -------
Total Costs and Expenses........................... 7,503 17,772 33,067
------ ------- -------
Income (Loss) from Operations........................ 645 (242) (744)
Interest Expense--Net (including interest expense of
$--, $352 and $326)................................. (168) (331) (79)
Other Income (Expense)............................... (17) 20 (17)
------ ------- -------
Net Income (Loss).................................... $ 460 $ (553) $ (840)
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
---------------- EARNINGS UNEARNED
SHARES AMOUNT (DEFICIT) COMPENSATION TOTAL
--------- ------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993.. 922,222 $ 16 $ 203 $ -- $ 219
Dividends Declared.......... -- -- (836) -- (836)
Net Income.................. -- -- 460 -- 460
Issuance of Common Stock for
Acquisition................ 1,180,000 717 -- -- 717
--------- ----- ------- ----- -------
Balance at January 1, 1994.. 2,102,222 733 (173) -- 560
Recapitalization............ 3,219,028 -- -- -- --
Stock Options Exercised..... 37,969 1 -- -- 1
Accretion of Redeemable
Preferred Stock............ -- (347) -- -- (347)
Net Loss.................... -- -- (553) -- (553)
--------- ----- ------- ----- -------
Balance at December 31,
1994....................... 5,359,219 387 (726) -- (339)
Stock Options Exercised..... 5,978 1 -- -- 1
Accretion of Redeemable
Preferred Stock............ -- (520) -- -- (520)
Compensatory Stock Option
Grants..................... -- 990 -- (990) --
Amortization of Unearned 19
Compensation............... -- -- -- 19
Net Loss.................... -- -- (840) -- (840)
--------- ----- ------- ----- -------
Balance at December 30,
1995....................... 5,365,197 $ 858 $(1,566) $(971) $(1,679)
========= ===== ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND DECEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................. $ 460 $ (553) $ (840)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 289 863 1,966
Noncash compensation expense..................... -- -- 19
Deferred credits................................. 50 220 39
Other............................................ -- 276 184
Changes in assets and liabilities:
Accounts receivable............................. (74) (71) (311)
Inventory....................................... (70) (138) (397)
Prepaid expenses................................ (39) (582) (306)
Other assets.................................... (32) (94) (205)
Accounts payable and accrued expenses........... 498 1,190 2,669
------- ------- --------
Net cash provided by operating activities...... 1,082 1,111 2,818
Cash Flows from Investing Activities--
Purchases of property and equipment............... (1,996) (7,578) (12,160)
Cash Flows from Financing Activities:
Borrowings from related parties................... 1,250 5 5,191
Proceeds from issuance of short-term debt......... -- 2,000 --
Proceeds from issuance of redeemable preferred
stock, net....................................... -- 2,970 7,123
Net borrowings (repayments) under line-of-credit
agreements....................................... 95 3,550 (2,550)
Repayments of long-term debt...................... (113) (315) (24)
Repayments related party debt..................... -- (104) (495)
Stock options exercised........................... -- 15 1
Dividends paid.................................... (207) (167) --
------- ------- --------
Net cash provided by financing activities...... 1,025 7,954 9,246
------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents....................................... 111 1,487 (96)
Cash and Cash Equivalents at Beginning of Year..... 128 239 1,726
------- ------- --------
Cash and Cash Equivalents at End of Year........... $ 239 $ 1,726 $ 1,630
======= ======= ========
Other Cash Flow Information--Interest paid......... $ 119 $ 313 $ 400
======= ======= ========
Supplemental Information of Noncash Transactions:
Acquisition of P&A Ventures, Inc.--common stock
issued........................................... $ 717 $ -- $ --
Dividends paid with notes payable................. 462 -- --
Conversion of promissory note to series B
redeemable preferred stock....................... -- -- 5,283
Conversion of related party debt to Series B
redeemable preferred stock....................... -- -- 4,068
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND DECEMBER 30, 1995
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business--Noah's New York Bagels, Inc. (the "Company") produces high quality
bagels, cream cheeses and salads and sells them, along with a variety of
sandwiches, beverages and other delicatessen items, primarily through Company-
owned and operated restaurants on the West Coast. In addition, the Company
operates a wholesale business selling bagels and cream cheeses directly to
various grocers, delicatessens and restaurants.
Recapitalization--In April 1994, the Company effected a recapitalization
whereby each outstanding share of common stock (2,102,222 shares) converted
into 2.53125 shares of common stock (3,291,028 shares) and 0.84375 shares of
Series A convertible preferred stock (1,773,750 shares).
Change in Fiscal Year End--In 1995 the Company changed its year end from
December 31 to the Saturday closest to December 31. As a result fiscal 1995
ended December 30, 1995.
Cash and Cash Equivalents--The Company classifies as cash equivalents all
highly liquid investments, primarily composed of money market accounts and
certificate of deposits with a maturity of three months or less, which are
convertible to a known amount of cash and carry an insignificant risk of
change in value.
Inventory, primarily raw ingredients and food held for resale, is stated at
the lower of cost (first-in, first-out method) or market.
Property and Equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets ranging
from 3 to 10 years. Amortization of improvements to leased properties is based
upon the term of the applicable lease or the estimated useful lives of such
assets, whichever is shorter.
Income Taxes--Effective May 3, 1994, the Company converted from an S-
Corporation to a C-Corporation subject to federal and state income taxes.
Pre-opening costs consist of direct costs of hiring and training the initial
workforce and other direct costs associated with opening a new store. Such
costs are amortized over a twelve-month period commencing with the store
opening.
Deferred Rent--Certain of the Company's lease agreements provide for
scheduled rent increases during the lease term, or for rental payments
commencing at a date other than initial occupancy. Provision is made for the
excess of operating lease rentals computed on a straight-line basis over the
lease term, over cash rentals paid.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Impact of New Accounting Standards--The Company will adopt Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of in 1996. The
adoption of SFAS No. 121 is expected to have no material affect on the
Company's consolidated financial statements.
F-30
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments--In accordance with SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments," the carrying value of
the Company's current assets and liabilities approximate their estimated fair
value.
The Company is required to adopt "SFAS" No. 123, Accounting for Stock-Based
Compensation in fiscal 1996. SFAS No. 123 establishes accounting and
disclosure requirements using a fair value based method of accounting for
stock based employee compensation plans. Under SFAS No. 123 the Company may
either adopt the new fair value based accounting method or continue the
intrinsic value based method under APB 25. Accounting for Stock issued to
Employees and provide pro forma disclosures of net earnings as if the
accounting provisions of SFAS No. 123 had been adopted. The Company plans to
adopt only the disclosure requirements of SFAS No. 123; therefore such
adoption will have no effect on the Company's consolidated net earnings or
cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 and December
30, respectively (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Leasehold improvements.................................. $ 5,002 $11,248
Equipment............................................... 3,875 7,422
Furniture and fixtures.................................. 808 2,076
Construction in progress................................ 1,116 2,187
------- -------
Total............................................... 10,801 22,933
Less accumulated depreciation and amortization.......... (1,170) (3,086)
------- -------
Property and equipment--net............................. $ 9,631 $19,847
======= =======
</TABLE>
3. BANK LINE OF CREDIT
At December 30, 1995 the Company had a line of credit agreement with a bank
that provides for unsecured borrowings up to $12,000,000 through January 1,
2002 of which $1,000,000 was outstanding and was repaid in February 1996.
Interest on borrowings under this agreement are at varying rates, based on the
bank's prime rate or at a fixed rate.
Long-term debt at December 31 and December 30, respectively, consists of the
following (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Line of credit........................................... $3,550 $ 1,000
Other.................................................... 39 15
------ -------
Total................................................ 3,589 1,015
Less current portion..................................... (211) (1,005)
------ -------
Total................................................ $3,378 $ 10
====== =======
</TABLE>
Minimum principal payments are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................... $1,005
1997............................................................... 5
1998............................................................... 5
------
Total.......................................................... $1,015
======
</TABLE>
F-31
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE TO RELATED PARTIES
During 1995, $4,068,000 of related party debt (including $83,000 of accrued
interest) was converted into Series B preferred stock and $495,000 was repaid.
Notes payable to related parties at December 31, 1994 consisted of convertible
subordinated notes of $3,330,000 issued to shareholders bearing interest at
8%; subordinated notes issued to shareholders of $655,000 bearing interest at
10%; a promissory note issued to shareholders of $475,000 bearing interest at
10%; and S-Corporation distribution notes of $20,000 payable in installments
of principal and interest at 10%.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) net operating loss carryforwards.
Significant components of the Company's net deferred taxes at December 31
and December 30, respectively, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
---- -----
<S> <C> <C>
Deferred tax assets:
Federal operating tax loss carryforward.................... $227 $ 619
State operating tax loss carryforward...................... 24 75
Nondeductible accruals..................................... 95 92
---- -----
Total.................................................... $346 $ 786
==== =====
Deferred tax liabilities:
Preopening stores expense.................................. $149 $ 197
Depreciation............................................... 118 245
Other...................................................... 34 44
---- -----
Total.................................................... 301 486
---- -----
Net deferred tax assets...................................... 45 300
Less valuation allowance..................................... (45) (300)
---- -----
Total.................................................... $ -- $ --
==== =====
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. As it is more likely
than not that sufficient taxable income will not be generated in future
periods to utilize the deferred tax assets, a valuation allowance has been
recorded. During 1995 the valuation allowance increased by $255,000 and during
1994 the valuation allowance increased by $45,000.
As of December 30, 1995, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $1,821,000 and a net
operating loss carryforward for state tax purposes of approximately
$1,214,000. Subsequent to year end, there was a change in ownership of the
Company (Note 9). Certain provisions of the 1986 Tax Reform Act have
significantly limited the use of the Company's net operating loss
carryforwards under the change in ownership provisions of Section 382 of the
Internal Revenue Code. Federal NOL's expire beginning 2009; state NOL's expire
beginning 1999.
F-32
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. REDEEMABLE PREFERRED STOCK
Changes in redeemable preferred stock are as follows (in thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B
-------------- --------------
SHARES DOLLARS SHARES DOLLARS TOTAL
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993.............. -- $ -- -- $ -- $ --
Recapitalization (Note 1).............. 1,774 -- -- -- --
Issuance of Series A for cash.......... 1,500 2,970 -- -- 2,970
Stock options exercised................ 12 14 -- -- 14
Accretion to redemption value.......... -- 347 -- -- 347
----- ------ ----- ------- -------
Balance at December 31, 1994........... 3,286 3,331 -- -- 3,331
Issuance of Series B for cash.......... -- -- 2,121 7,550 7,550
Conversion of related party debt to
Series B (Note 4)..................... -- -- 1,143 4,068 4,068
Conversion of promissory note to Series
B..................................... -- -- 1,481 5,283 5,283
Costs of issuing Series B.............. -- -- -- (427) (427)
Accretion to redemption value.......... -- 520 -- -- 520
----- ------ ----- ------- -------
Balance at December 30, 1995........... 3,286 $3,851 4,745 $16,474 $20,325
===== ====== ===== ======= =======
</TABLE>
In March 1995, the Company amended and restated its Articles of
Incorporation to authorize the issuance of 76,000,000 shares including
38,000,000 shares of common stock and 38,000,000 shares of preferred stock. Of
the 38,000,000 shares of preferred stock, 3,375,000 shares are designated
Series A convertible redeemable preferred stock and 4,904,425 shares are
designated as Series B cumulative convertible redeemable preferred stock.
In March 1995, the Company issued $5,191,000 of 5.90% convertible promissory
notes to a shareholder. In September 1995, the entire unpaid principal balance
of $5,191,000 and accrued interest of $92,000 automatically converted into
1,481,219 shares of the Company's Series B cumulative convertible redeemable
preferred stock.
Liquidation Preferences--Upon liquidation, the holders of Series A
convertible redeemable preferred stock and Series B cumulative convertible
redeemable preferred stock are entitled to receive a preferential payment of
$2.00 per share and $3.56 per share, respectively, before payments are made to
the holders of common stock.
Dividends and Dividend Preferences--If declared by the Board of Directors of
the Company, the holders of Series A cumulative convertible redeemable
preferred stock are entitled to receive dividends at a rate per annum of $.16
per share. If declared by the Board of Directors of the Company, dividends
accrue and accumulate on Series B cumulative convertible redeemable preferred
stock at a rate of $.2848 per share, per annum. Through December 31, 1995, no
dividends have been declared.
Conversion Rights--All series of preferred stock are convertible into common
stock on a one-for-one basis, as adjusted, based on the issuance of common
stock, options, warrants or other securities convertible into common stock.
Preferred Stock Redemption--Series A convertible redeemable preferred stock
is redeemable at the option of the holder under certain conditions beginning
March 31, 2001 at a per share price of $2.00, plus an amount equal to all
accrued but unpaid dividends. Series B cumulative convertible redeemable
preferred stock is redeemable at the option of the holder under certain
conditions beginning March 31, 2001 at a per share price of $3.56, plus an
amount equal to the total of all accrued but unpaid dividends. The preferred
stock is being accreted to its minimum redemption value.
F-33
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLANS
Under Company's stock option plans, the Company may grant incentive and
nonqualified options to purchase up to 2,053,750 shares of common stock and
101,250 shares of Series A Preferred Stock. Options vest ratably over five
years, are exercisable up to ten years and are generally granted at an
exercise price that approximates fair market value at the date of grant, as
determined by the Board of Directors.
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
NUMBER
OF STOCK OPTION PRICE
OPTIONS PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1993
Granted......................................... 844,500 $ .20
Canceled........................................ (7,500) .20
Outstanding at December 31, 1994.................. 837,000 .20
Granted......................................... 977,075 .20-.50
Exercised....................................... (5,978) .20
Canceled........................................ (103,247) .20-.50
--------- ---------
Outstanding at December 30, 1995.................. 1,704,850 $.20-$.50
========= =========
</TABLE>
At December 30, 1995, stock options available for grant were 45,158 and
approximately 170,000 options were exercisable.
During 1995, the Company granted options with exercise prices below market
value. The difference between the market value and the exercise price will be
recognized as compensation expense over the five year vesting period.
Compensation expense in 1995 related to such options was $19,000. Immediately
prior to the acquisition of the Company in February 1996 (see Note 9), certain
options were accelerated and exercised. Accordingly, the unamortized
compensation expense of $971,000 at December 30, 1995, will be recognized as
compensation expense in 1996.
8. LEASES
The Company leases restaurant, office and production facilities under
operating lease agreements that expire at various dates, with options to
extend through 2016. In addition to minimum rental payments, certain of the
leases require contingent payments based on sales levels. The Company also
pays real estate taxes, insurance and maintenance expenses related to these
leases. Net rental expense for all operating leases was as follows (in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ------
<S> <C> <C> <C>
Minimum rentals......................................... $309 $638 $1,409
Contingent rentals and other charges.................... -- 40 40
---- ---- ------
$309 $678 $1,449
==== ==== ======
</TABLE>
F-34
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The aggregate future minimum lease payments under all non-cancelable lease
agreements are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................. $ 3,305
1997............................................................. 4,213
1998............................................................. 4,074
1999............................................................. 3,982
2000............................................................. 3,749
Thereafter....................................................... 15,167
-------
Total minimum lease commitments.............................. 34,490
Less sublease rentals............................................ (160)
-------
Total minimum lease commitments.............................. $34,330
=======
</TABLE>
9. SUBSEQUENT EVENT
In February 1996, all outstanding preferred and common stock of the Company
was acquired by Einstein/Noah Bagel Corp. for approximately $100.9 million in
cash.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Bagel & Bagel, Inc.:
We have audited the accompanying statements of operations and cash flows for
the year ended December 27, 1994 and the period from December 28, 1994 to
March 23, 1995 of Bagel & Bagel, Inc. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Bagel &
Bagel, Inc. for the year ended December 27, 1994 and the period from December
28, 1994 to March 23, 1995 in conformity with generally accepted accounting
principles.
MAYER HOFFMAN McCANN L.C.
Kansas City, Missouri
April 26, 1996
F-36
<PAGE>
BAGEL & BAGEL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 27, 1994 AND THE PERIOD FROM
DECEMBER 28, 1994 TO MARCH 23, 1995
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 27, DECEMBER 28, 1994
1994 TO MARCH 23, 1995
------------ -----------------
<S> <C> <C>
Net Sales........................................ $5,858,908 $1,887,424
Cost and Expenses:
Cost of products sold.......................... 2,369,512 735,691
Salaries and benefits.......................... 1,534,138 534,759
General and administrative..................... 1,704,667 653,430
---------- ----------
Total costs and expenses..................... 5,608,317 1,923,880
---------- ----------
Income (Loss) from Operations.................... 250,591 (36,456)
---------- ----------
Other Expense:
Interest expense............................... (133,331) (79,093)
Other expense, net............................. (249,000) (14,277)
---------- ----------
Total other expense.......................... (382,331) (93,370)
---------- ----------
Net Loss......................................... $ (131,740) $ (129,826)
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-37
<PAGE>
BAGEL & BAGEL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 27, 1994 AND FOR THE PERIOD FROM
DECEMBER 28, 1994 TO MARCH 23, 1995
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER DECEMBER 28, 1994
27, 1994 TO MARCH 23, 1995
----------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss...................................... $ (131,740) $ (129,826)
Adjustments to reconcile loss to net cash
provided by operating activities:
Depreciation and amortization............... 375,742 139,478
Changes in assets and liabilities:
Accounts receivable....................... 1,469 63,053
Inventories............................... (186,994) 20,349
Prepaid expenses and other current assets. (9,242) 34,587
Accounts payable and accrued expenses..... 683,417 (115,568)
----------- -----------
Net cash provided by operating
activities............................. 732,652 12,073
Cash Flows from Investing Activities:
Purchase of property and equipment............ (2,087,859) (525,019)
Purchase of other assets...................... (11,464) --
----------- -----------
Net cash used in investing activities... (2,099,323) (525,019)
Cash Flows from Financing Activities:
Increase in short-term obligations............ 632,679 2,038,652
Proceeds from long-term obligations........... 903,420 101,180
Repayment of long-term obligations............ (125,894) (1,672,197)
----------- -----------
Net cash provided by financing
activities............................. 1,410,205 467,635
----------- -----------
Net increase (decrease) in Cash................. 43,534 (45,311)
Cash, beginning of period....................... 210,340 253,874
----------- -----------
Cash, end of period............................. $ 253,874 $ 208,563
=========== ===========
Supplemental Cash Flow Information:
Interest Paid................................. $ 84,880 $ 12,701
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-38
<PAGE>
BAGEL & BAGEL, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company operates a chain of bagel stores in the Kansas City metropolitan
area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
The provision for depreciation and amortization has been calculated using
the straight-line and accelerated methods. The following represents the useful
lives over which the assets are depreciated and amortized:
<TABLE>
<S> <C>
Leasehold improvements.......................................... 8 years
Furniture, fixtures, and equipment.............................. 5-7 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Revenue Recognition
Revenue from sales is recognized in the period the related food and beverage
products are sold.
Income Taxes
The Company is organized as a Subchapter S corporation for federal and state
income tax purposes. Any taxable income or loss is the responsibility of the
individual stockholders.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain items in the financial statements for the year ended December 27,
1994 have been reclassified to conform with the presentation of the period
ended March 23, 1995.
3. COMMITMENTS AND CONTINGENCIES
The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with renewal options ranging from one to ten years. Most
of these leases contain escalation clauses and common area maintenance
charges. Total rent expense was approximately $306,000 for the year ended
December 27, 1994 and $100,000 for the period ended March 23, 1995, including
contingent rental expense of approximately $101,000 for the year ended
December 27, 1994 and $23,000 for the period ended March 23, 1995.
On December 13, 1994, the Company suffered a fire at one of its retail
locations, resulting in the involuntary conversion of the equipment, inventory
and leasehold improvements therein. The Company retains insurance
F-39
<PAGE>
BAGEL & BAGEL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
coverage at the replacement value which is deemed to be in excess of the net
book value of the assets lost. As the claim for recovery from insurance is
probable of realization, no loss has been recorded in the financial statements
for the year ended December 27, 1994. In addition, as the amount of the
insurance proceeds to be collected is uncertain, no gain has been recorded in
the financial statements for the year ended December 27, 1994 and the period
ended March 23, 1995. If the final insurance proceeds exceed the net book
value of the assets lost, a gain may result which would be recorded at that
time.
4. RELATED-PARTY TRANSACTIONS
The Company leases certain facilities from an entity controlled by the sole
stockholder. Total rent paid under this lease was $8,307 for the year ended
December 27, 1994 and $18,000 for the period ended March 23, 1995.
5. SALE OF ASSETS
In March 1995, the Company sold substantially all of its net assets in
exchange for consideration with a market value of approximately $8.9 million.
F-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Offerdahl's Bagel Gourmet, Inc.
and Affiliates:
We have audited the accompanying combined statements of operations and cash
flows of Offerdahl's Bagel Gourmet, Inc. and Affiliates (Florida corporations)
for the years ended December 31, 1993 and 1994 and the period from January 1,
1995 to April 2, 1995. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Offerdahl's Bagel Gourmet, Inc. and Affiliates for the years ended December
31, 1993 and 1994 and the period from January 1, 1995 to April 2, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 24, 1996
F-41
<PAGE>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO APRIL 2, 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER PERIOD FROM
31, JANUARY 1, 1995
---------------------- TO
1993 1994 APRIL 2, 1995
---------- ---------- ---------------
<S> <C> <C> <C>
Net Sales............................... $2,691,161 $4,785,116 $1,712,091
Cost and Expenses:
Cost of products sold................. 1,167,075 2,082,739 1,010,311
Salaries and benefits................. 761,466 1,525,307 776,739
General and administrative............ 487,359 1,014,670 227,585
---------- ---------- ----------
Total costs and expenses............ 2,415,900 4,622,716 2,014,635
---------- ---------- ----------
Income (loss) from Operations........... 275,261 162,400 (302,544)
Other Income (Expense):
Interest expense...................... -- (585) (6,058)
Interest income....................... -- 295 --
Other income (expense)................ (2,909) 23,749 365
---------- ---------- ----------
Total other income (expense)........ (2,909) 23,459 (5,693)
---------- ---------- ----------
Net Income (Loss)....................... $ 272,352 $ 185,859 $ (308,237)
========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-42
<PAGE>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND FOR THE PERIOD
FROM JANUARY 1, 1995 TO APRIL 2, 1995
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1995
-------------------- TO APRIL 2,
1993 1994 1995
--------- --------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)...................... $ 272,352 $ 185,859 $(308,237)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 120,091 232,158 68,321
Changes in assets and liabilities:
Accounts receivable................ (35,804) 35,842 (17,420)
Inventories........................ (46,770) (48,527) 7,592
Prepaid expenses and other current
assets............................ (13,965) (27,352) (9,969)
Accounts payable and accrued
expenses.......................... 111,424 84,834 879,557
Other.............................. (43,367) (57,974) (28,848)
--------- --------- ---------
Net cash provided by operating
activities...................... 363,961 404,840 590,996
Cash Flows from Investing Activities:
Purchases of property and equipment.... (600,775) (800,205) (458,380)
--------- --------- ---------
Net cash used in investing
activities...................... (600,775) (800,205) (458,380)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock. 547,005 760,000 28,080
Distributions to stockholders.......... (235,000) (570,000) (32,000)
Proceeds from long-term obligations.... -- 250,000 --
Repayment of long-term obligations..... -- -- (250,000)
--------- --------- ---------
Net cash provided by (used in)
financing activities............ 312,005 440,000 (253,920)
--------- --------- ---------
Net increase (decrease) in Cash.......... 75,191 44,635 (121,304)
Cash, beginning of period................ 128,316 203,507 248,142
--------- --------- ---------
Cash, end of period...................... $ 203,507 $ 248,142 $ 126,838
========= ========= =========
Supplemental Cash Flow Information:
Interest Paid.......................... $ -- $ -- $ 6,643
========= ========= =========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-43
<PAGE>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Offerdahl's Bagel Gourmet, Inc. and Affiliates (the "Company") operates a
chain of bagel stores in Southern Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Offerdahl's Bagel Gourmet Inc., Bagel Gourmet (Sheridan), Inc., Bagel Gourmet
(Weston), Inc., Bagel Gourmet (Pembroke), Inc., Bagel Gourmet (Boynton), Inc.,
Bagel Gourmet (Promenade), Inc., Bagel Gourmet, Inc., and Bagel Gourmet
Production, Inc. Bagel Gourmet, Inc. was formed in 1993 through the merger of
Bagel Gourmet (Sheridan), Inc., Bagel Gourmet (Pembroke), Inc., Bagel Gourmet
(Boynton), Inc., Bagel Gourmet (Promenade), Inc. and Bagel Gourmet (Weston),
Inc., with Bagel Gourmet (Weston), Inc. as the surviving corporation. Bagel
Gourmet (Weston), Inc. then changed its name to Bagel Gourmet, Inc.
Offerdahl's Bagel Gourmet, Inc. was formed December 31, 1994 through the
merger of Bagel Gourmet Production, Inc. and Bagel Gourmet, Inc. All the
companies are under common control. All material intercompany accounts and
transactions have been eliminated in combination.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
The provision for depreciation and amortization has been calculated using
the straight-line method. The following represents the useful lives over which
the assets are depreciated and amortized:
<TABLE>
<S> <C>
Leasehold improvements........................................ 10-15 years
Furniture, fixtures, and equipment............................ 5-7 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Revenue Recognition
Revenue from sales is recognized in the period the related food and beverage
products are sold.
Income Taxes
The Company is organized as a Subchapter S corporation for federal and state
income tax purposes. Any taxable income or loss is the responsibility of the
individual stockholders.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. COMMITMENTS
The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with two or three five-year renewal options. Most of
these leases contain escalation clauses and common area maintenance charges.
Total rent expense was approximately $168,000 in 1993, $264,000 in 1994, and
$97,000 from January 1, 1995 through April 2, 1995.
4. SALE OF ASSETS
In March 1995, the Company sold certain of its net assets in exchange for
consideration with a market value of approximately $10.4 million.
F-44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Baltimore Bagel Co.:
We have audited the accompanying statements of operations and cash flows of
Baltimore Bagel Co. (a California corporation) for the years ended December
31, 1993 and 1994 and the period from January 1, 1995 to August 10, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Baltimore Bagel Co. for the years ended December 31, 1993 and 1994 and the
period from January 1, 1995 to August 10, 1995 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 24, 1996
F-45
<PAGE>
BALTIMORE BAGEL CO.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD FROM
JANUARY 1, 1995 TO AUGUST 10, 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, PERIOD FROM
---------------------- JANUARY 1, 1995
1993 1994 TO AUGUST 10, 1995
---------- ---------- ------------------
<S> <C> <C> <C>
Net Sales............................ $6,365,586 $7,714,995 $5,760,017
Cost and Expenses:
Cost of products sold.............. 1,887,879 2,378,824 1,857,310
Salaries and benefits.............. 2,550,276 2,623,055 2,033,937
General and administrative......... 1,762,373 2,138,286 1,614,783
---------- ---------- ----------
Total costs and expenses......... 6,200,528 7,140,165 5,506,030
---------- ---------- ----------
Income from Operations............... 165,058 574,830 253,987
Other Income (Expense):
Interest expense................... (40,101) (36,106) (13,100)
Interest income.................... 11,667 12,766 16,261
Other income (expense), net........ (80) 29,743 (21,027)
---------- ---------- ----------
Total other income (expense)..... (28,514) 6,403 (17,866)
---------- ---------- ----------
Net Income........................... $ 136,544 $ 581,233 $ 236,121
========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-46
<PAGE>
BALTIMORE BAGEL CO.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND FOR THE PERIOD FROM
JANUARY 1, 1995 TO AUGUST 10, 1995
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD FROM
-------------------- JANUARY 1, 1995
1993 1994 TO AUGUST 10, 1995
--------- --------- ------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.......................... $ 136,544 $ 581,233 $ 236,121
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 206,353 205,828 148,926
Loss on disposal of property and
equipment........................ 26,417 -- 16,619
Changes in assets and liabilities:
Accounts receivable............. (3,140) (8,956) 3,254
Inventories..................... (18,263) (1,097) 823
Prepaid expenses and other
current assets................. 4,518 (25,815) 16,677
Accounts payable and accrued
expenses....................... 21,703 67,220 42,713
Other assets.................... -- (4,950) 10,343
--------- --------- ---------
Net cash provided by operating
activities................... 374,132 813,463 475,476
Cash Flows from Investing Activities:
Purchases of property and equipment. (46,464) (480,908) (217,774)
Proceeds from sale of property and
equipment.......................... -- -- 29,004
--------- --------- ---------
Net cash used in investing
activities................... (46,464) (480,908) (188,770)
Cash Flows from Financing Activities:
Distributions to stockholders....... -- -- (823,950)
Proceeds from long-term obligations. 364,123 436,566 149,880
Repayment of long-term obligations.. (375,621) (764,837) (105,381)
--------- --------- ---------
Net cash used in financing
activities................... (11,498) (328,271) (779,451)
--------- --------- ---------
Net increase (decrease) in cash and
equivalents.......................... 316,170 4,284 (492,745)
Cash and equivalents, beginning of
period............................... 172,291 488,461 492,745
--------- --------- ---------
Cash and equivalents, end of period... $ 488,461 $ 492,745 $ --
========= ========= =========
Supplemental Cash Flow Information:
Interest Paid....................... $ 40,101 $ 36,106 $ 13,100
========= ========= =========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-47
<PAGE>
BALTIMORE BAGEL CO.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company operates a chain of bagel stores in southern California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
The provision for depreciation and amortization has been calculated using
the straight-line method. The following represents the useful lives over which
the assets are depreciated and amortized:
<TABLE>
<S> <C>
Leasehold improvements......................................... 5-18 years
Furniture, fixtures, and equipment............................. 3-7 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Revenue Recognition
Revenue from sales is recognized in the period the related food and beverage
products are sold.
Income Taxes
The Company is organized as a Subchapter S corporation for federal and state
income tax purposes. Any taxable income or loss is the responsibility of the
individual stockholders.
Employee Benefit Plan
The Company has a 401(k) plan for which all full-time employees participate.
Company contributions were approximately $4,800 in 1993, $11,300 in 1994, and
$4,700 for the period ended August 10, 1995.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. COMMITMENTS
The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with one or two five-year renewal options. Most of these
leases contain escalation clauses and common area maintenance charges. Total
rent expense was approximately $479,500 in 1993, $535,900 in 1994, and
$473,500 for the period ended August 10, 1995.
4. RELATED-PARTY TRANSACTIONS
The Company leases its corporate offices from an entity controlled by the
stockholders. Total rent paid under this lease was approximately $79,900 in
1993, $81,100 in 1994, and $59,700 for the period ended August 10, 1995.
5. SALE OF ASSETS
In August 1995, the Company sold substantially all of its net assets in
exchange for consideration with a market value of approximately $11.8 million.
F-48
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION OF EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
The pro forma consolidated statements of operations for the fiscal year
ended December 31, 1995 and for the quarter ended April 21, 1996 give effect
to the acquisitions of Noah's New York Bagel's, Inc., Bagel & Bagel, Inc.,
Baltimore Bagel Co., Brackman Brothers, Inc., and Offerdahl's Bagel Gourmet,
Inc. as of December 26, 1994 (the beginning of the Company's 1995 fiscal
year). The pro forma consolidated financial statements are based upon the
assumptions set forth in the accompanying notes to such statements. The pro
forma adjustments are based upon available information and assumptions that
management believes are reasonable under the circumstances.
The pro forma consolidated financial statements should be read in
conjunction with the related historical financial statements and are not
necessarily indicative of the results that would have actually occurred had
the acquisitions been consummated on the dates or for the periods indicated or
which may occur in the future.
F-49
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOAH'S NEW
YORK OFFERDAHL'S BRACKMAN
EINSTEIN/NOAH BAGELS, BAGEL & BALTIMORE BAGEL BROTHERS,
BAGEL CORP. INC. BAGEL, INC. BAGEL CO. GOURMET, INC. INC. PRO FORMA UNAUDITED
(HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Company-operated
stores........... $ 25,685 $32,323 $1,887 $5,760 $1,712 $2,283 $ 69,650
Royalties and
franchise-related
fees............. 738 -- -- -- -- -- 738
-------- ------- ------ ------ ------ ------ --------
26,423 32,323 1,887 5,760 1,712 2,283 70,388
Costs and
Expenses:
Cost of products
sold............. 8,239 12,118 736 1,857 1,010 1,125 25,085
Salaries and
benefits......... 13,531 12,388 535 2,034 777 282 29,547
General and
administrative... 21,230 8,561 653 1,615 228 497 2,766 (1) 35,550
Write-off of
intangible
assets........... 26,575 -- -- -- -- -- 26,575
-------- ------- ------ ------ ------ ------ --------
Total costs and
expenses.......... 69,575 33,067 1,924 5,506 2,015 1,904 116,757
-------- ------- ------ ------ ------ ------ --------
Income (Loss) from
Operations........ (43,152) (744) (37) 254 (303) 379 (46,369)
Other Income
(Expense):
Interest income
(expense), net.... (1,281) (79) (79) 3 (6) -- (9,090)(2) (10,532)
Other income
(expense), net.... 717 (17) (14) (21) -- -- 665
-------- ------- ------ ------ ------ ------ --------
Total other
expense.......... (564) (96) (93) (18) (6) -- (9,867)
-------- ------- ------ ------ ------ ------ --------
Income (Loss)
Before Income
Taxes............. (43,716) (840) (130) 236 (309) 379 (56,236)
Provision for
Income Taxes...... -- -- -- -- -- 98 98 (3) --
-------- ------- ------ ------ ------ ------ --------
Net Income (Loss). $(43,716) $ (840) $ (130) $ 236 $ (309) $ 281 $(56,236)
======== ======= ====== ====== ====== ====== ========
Net loss per
common and
equivalent share.. $ (4.56) $ (5.85)
======== ========
Weighted average
number of common
and equivalent
shares
outstanding....... 9,613 9,633 (4)
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of this statement.
F-50
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED APRIL 21, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOAH'S NEW
EINSTEIN/NOAH YORK BAGELS,
BAGEL CORP. INC. PRO FORMA UNAUDITED
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Company-operated stores..... $18,397 $3,304 $21,701
Royalties and franchise-
related fees............... 3,982 -- 3,982
------- ------ -------
22,379 3,304 25,683
Costs and Expenses:
Cost of products sold....... 5,490 1,118 6,608
Salaries and benefits(5).... 9,128 2,361 11,489
General and administrative.. 9,031 795 213 (1) 10,039
------- ------ -------
Total costs and expenses.. 23,649 4,274 28,136
------- ------ -------
Loss from Operations.......... (1,270) (970) (2,453)
Other Income (Expense):
Interest expense, net....... (3,333) (4) (699)(2) (4,036)
Other income, net........... 1,286 4 1,290
------- ------ -------
Total other expense....... (2,047) -- (2,746)
------- ------ -------
Net Loss...................... $(3,317) $ (970) $(5,199)
======= ====== =======
Net loss per common and
equivalent share............. $ (0.36) $ (0.55)
======= =======
Weighted average number of
common and equivalent shares
outstanding.................. 9,633 9,633
======= =======
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of this statement.
F-51
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. To record amortization on the intangible assets acquired in connection with
the acquisition of Noah's New York Bagel's, Inc. (Noah's) over periods
ranging from 10 to 35 years.
2. To adjust interest expense to reflect the acquisition of Noah's as of the
beginning of the Company's fiscal year.
3. To adjust the provision for income taxes based upon the consolidated loss.
4. The pro forma weighted average number of shares for 1995 gives effect to
the issuance of 1,959,125 shares of common stock and 6,250 shares of Series
A preferred stock deemed to be issued as of December 26, 1994 (the
beginning of the Company's 1995 fiscal year) pursuant to the acquisition of
the common stock of Brackman Brothers, Inc. and certain net assets of Bagel
& Bagel, Inc., Baltimore Bagel Co. and Offerdahl's Bagel Gourmet, Inc. and
all other shares of common stock, options and warrants issued during the
year prior to the initial public offering. The options and warrants issued,
and shares of common stock sold, are deemed outstanding for the entire
reporting period pursuant to Staff Accounting Bulletin No. 83.
5. Noah's salaries and benefits include approximately $954,000 of stock option
expense attributable to the acceleration of the vesting of compensatory
stock options. The acceleration of the vesting occurred immediately before
the acquisition of Noah's by Einstein/Noah Bagel Corp.
Note: Subsequent to the acquisitions of Noah's, Bagel & Bagel, Inc., Baltimore
Bagel Co., Offerdahl's Bagel Gourmet, Inc. and Brackman Brothers, Inc., the
Company sold all of the stores acquired in these acquisitions, with the
exception of the Baltimore Bagel Co. stores, to area developers of the
Company. Consequently, the store revenue (and related operating expenses)
reflected in the pro forma consolidated statement of operations will be
replaced with revenue (and operating expenses) of the Company as a franchisor
and lender.
F-52
<PAGE>
[Photograph depicting the exterior of a free-standing Einstein Bros. Bagels
store at dusk.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OF-
FERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Company............................................................... 6
Risk Factors.............................................................. 7
Concurrent Offerings...................................................... 12
Use Of Proceeds........................................................... 12
Dividend Policy........................................................... 13
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Historical and Pro Forma Consolidated Financial and Store Data... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 21
Management................................................................ 34
Certain Transactions...................................................... 41
Principal Stockholders and Securities Ownership of Management............. 51
Relationship with Boston Chicken.......................................... 54
Description of Capital Stock.............................................. 60
Shares Eligible For Future Sale........................................... 61
Underwriting.............................................................. 64
Legal Matters............................................................. 65
Experts................................................................... 66
Additional Information.................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,125,000 SHARES
LOGO
COMMON STOCK
----------------
P R O S P E C T U S
----------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be borne by the
Company in connection with the registration, issuance, and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimates except the SEC registration fee, the
NASD filing fee, and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 23,751
NASD filing fee................................................. 6,501
Nasdaq listing fee.............................................. 50,000
Transfer agent and registrar's fee and expenses................. 10,000
Blue Sky fees and expenses...................................... 25,000
Printing and engraving expenses................................. 200,000
Legal fees and expenses......................................... 350,000
Accounting fees and expenses.................................... 150,000
Miscellaneous................................................... 24,748
--------
Total....................................................... $840,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes
indemnification of directors, officers, employees, and agents of the Company;
allows the advancement of costs of defending against litigation; and permits
companies incorporated in Delaware to purchase insurance on behalf of
directors, officers, employees, and agents against liabilities whether or not
in the circumstances such companies would have the power to indemnify against
such liabilities under the provisions of the statute.
The Company's Restated Certificate of Incorporation provides for
indemnification of the Company's officers and directors to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law. The Company
intends to obtain directors and officers insurance covering its executive
officers and directors.
The Company's Restated Certificate of Incorporation eliminates, to the
fullest extent permitted by Delaware law, liability of a director to the
Company or its stockholders for monetary damages for a breach of such
director's fiduciary duty of care except for liability where a director (a)
breaches his or her duty of loyalty to the Company or its stockholders, (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law, (c) authorizes payment of an illegal dividend or stock
repurchase, or (d) obtains an improper personal benefit. While liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his or her responsibilities under any other law, including the federal
securities laws.
Insofar as indemnification by the Company for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers, and controlling persons of the Company pursuant to the
foregoing provisions, the Company has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 24, 1995, in connection with the formation of the Company, the
Company issued to the shareholders of Brackman Bros., Inc. ("Brackman") and to
Bagel & Bagel, Inc. ("Bagel & Bagel") an aggregate of 573,750 and 573,750
shares of Common Stock, respectively, as partial consideration for all of the
outstanding shares of Brackman and substantially all of the assets of Bagel &
Bagel. On such date, the Company
II-1
<PAGE>
also sold to certain accredited investors an aggregate of 3,536,361 shares of
Common Stock for $20.8 million in cash. The above-mentioned securities were
sold without registration under the Securities Act in reliance on Section 4(2)
of the Securities Act and Rule 506 of Regulation D promulgated under the
Securities Act.
On March 31, 1995, in connection with the formation of the Company, the
Company issued to Offerdahl's Bagel Gourmet, Inc. ("Offerdahl's") an aggregate
of 885,996 shares of Common Stock as partial consideration for substantially
all of the assets of Offerdahl's and a non-recourse promissory note in the
aggregate amount of $437,497. Such securities were sold without registration
under the Securities Act in reliance on Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated under the Securities Act.
On August 10, 1995, the Company issued to the shareholder of Baltimore Bagel
Co. ("Baltimore Bagel") an aggregate of 6,250 shares of Series A Preferred
Stock in connection with the merger of Baltimore Bagel into a wholly owned
subsidiary of the Company. Such shares were issued without registration under
the Securities Act in reliance on Section 4(2) of the Securities Act and Rule
506 of Regulation D promulgated under the Securities Act.
On December 29, 1995, the Company sold a warrant to purchase an aggregate of
1,012,500 shares of Common Stock to Bagel Store Development Funding, L.L.C.,
formerly known as Einstein Bros. Equity Funding, L.L.C., at an exercise price
of $6.47 per share. The cash purchase price for the warrant was $45,000. Such
warrant was sold without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act.
On January 15, 1996, the Company sold warrants to purchase an aggregate of
1,237,050 shares of Common Stock to certain accredited investors at an
exercise price of $6.47 per share. The aggregate purchase price for the
warrants was $1,100, which purchase price was paid by delivery of promissory
notes from the accredited investors. An aggregate of 902,475 shares of Common
Stock have been issued pursuant to the exercise of certain of such warrants
for an aggregate exercise price of $5,839,013. Such warrants, and the shares
of Common Stock issued upon exercise thereof, were sold without registration
under the Securities Act in reliance on Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated under the Securities Act.
On February 1, 1996, the Company sold to certain accredited investors (all
of whom were former shareholders of Noah's New York Bagels, Inc.) an aggregate
of 855,225 shares of Common Stock for a cash purchase price of $10.52 per
share. Such shares were issued without registration under the Securities Act
in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated under the Securities Act.
On April 5, 1996, the Company sold to Mark A. Goldston, President and Chief
Executive Officer and a director of the Company, 28,508 shares of Common Stock
for a cash purchase price of $10.52 per share. Such shares were sold without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act in reliance on Rule 506 of Regulation D promulgated under the
Securities Act.
On May 28, 1996, in connection with entering into its secured revolving
credit facility, the Company issued a warrant to purchase an aggregate of
15,375 shares of Common Stock to one accredited investor at an exercise price
of $11.58. Such warrant was issued without registration under the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act.
Since its inception, the Company has granted options for 3,978,144 shares of
Common Stock pursuant to its stock option plans at exercise prices ranging
from $5.88 to $15.00 per share, of which options to purchase 304,781 shares of
Common Stock have been exercised. Such options were issued without
registration under the Securities Act in reliance on Section 4(2) and Rule 701
promulgated under the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The exhibits to the Registration Statement are listed in the Exhibit
Index which appears elsewhere in this Registration Statement and is hereby
incorporated herein by reference.
(b) Financial Statement Schedules:
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts........................... II-6
</TABLE>
All other schedules are omitted because of the absence of the condition
under which they are required or because the information is included in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the provisions described under Item 14 above or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of any action,
suit, or proceeding) is asserted against the Company by such director,
officer, or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT, OR AMENDMENT THERETO, TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN GOLDEN,
COLORADO, ON JULY 30, 1996.
Einstein/Noah Bagel Corp.
/s/ Mark R. Goldston
By: _________________________________
Mark R. Goldston
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT, OR AMENDMENT THERETO, HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON JULY 30, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Mark R. Goldston President, Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
Mark R. Goldston
/s/ W. Eric Carlborg Senior Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
W. Eric Carlborg
/s/ Noah Alper Director
___________________________________________
Noah Alper
/s/ Scott A. Beck Director
___________________________________________
Scott A. Beck
/s/ Kyle T. Craig Director
___________________________________________
Kyle T. Craig
/s/ M. Laird Koldyke Director
___________________________________________
M. Laird Koldyke
/s/ Gail Lozoff Director
___________________________________________
Gail Lozoff
/s/ John H. Muehlstein, Jr. Director
___________________________________________
John H. Muehlstein, Jr.
/s/ John A. Offerdahl Director
___________________________________________
John A. Offerdahl
/s/ Lloyd D. Ruth Director
___________________________________________
Lloyd D. Ruth
/s/ David G. Stanchak Director
___________________________________________
David G. Stanchak
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Einstein/Noah Bagel Corp. and
subsidiaries as of December 31, 1995 for the period from March 24, 1995
(inception) to December 31, 1995 included in this Registration Statement and
have issued our report thereon dated July 16, 1996. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The supplemental schedule listed in Part II, Item 16 of this
Registration Statement is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
supplemental schedule has been subjected to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Denver, Colorado
July 16, 1996
II-5
<PAGE>
SCHEDULE II
EINSTEIN/NOAH BAGEL CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATIONS OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Period from March 24, 1995
(inception)
through December 31, 1995:
Allowance for Doubtful Accounts. $ -- $81,000 $ -- $81,000
</TABLE>
II-6
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT(+) PAGE*
------- ------------------------- ----
<S> <C> <C>
1** Form of Purchase Agreement with Underwriters.
2.1(a)** Agreement to Contribute Shares dated February 17, 1995 among
the Company, Brackman Brothers, Inc. ("Brackman") and the
shareholders of Brackman (the "Brackman Agreement").
2.1(b)** Amendment to Agreement to Contribute Shares dated March 24,
1995 among the Company, Brackman and the shareholders of
Brackman (the "Amendment to Brackman Agreement").
2.2** Agreement to Contribute Assets dated March 2, 1995 among the
Company, Bagel & Bagel, Inc. and Richard Lozoff (the "Bagel
& Bagel Agreement").
2.3** Agreement to Contribute Assets dated March 23, 1995 among
the Company, Offerdahl's Bagel Gourmet, Inc.
("Offerdahl's") and the stockholders of Offerdahl's (the
"Offerdahl's Agreement").
2.4** Agreement and Plan of Merger dated August 10, 1995 among the
Company, Baltimore Bagel Co., BBC Acquiring Corporation and
Michael E. Brau and Rachel C. Brau, individually and as
trustees of the Brau Living Trust dated January 23, 1990
(the "Baltimore Bagel Agreement").
2.5** Merger Agreement dated as of January 22, 1996, as amended,
among the Company, NNYB Acquisition Corporation, Noah's New
York Bagels, Inc. ("Noah's"), and the shareholders and
optionholders of Noah's (the "Noah's Agreement").
3.1** Restated Certificate of Incorporation of the Company
("Certificate of Incorporation").
3.2** Amended and Restated Bylaws of the Company ("Bylaws").
4.1** Certificate of Incorporation (included in Exhibit 3.1).
4.2** Bylaws (included in Exhibit 3.2).
4.3** Certificate representing Common Stock.
4.4** Amended and Restated Registration Rights Agreement dated
February 1, 1996 by and among the Company and certain
stockholders of the Company.
4.5** Form of Concurrent Private Placement Agreement between
Boston Chicken, Inc. ("Boston Chicken") and the Company
("Concurrent Private Placement Agreement").
4.6** Form of Registration Agreement between Boston Chicken and
the Company.
5.1 Opinion of Bell, Boyd & Lloyd.
10.1(a)** Amended and Restated Loan Agreement dated May 17, 1996
between Boston Chicken, Inc. ("Boston Chicken") and the
Company.
10.1(b) First Amendment to the Amended and Restated Loan Agreement
between Boston Chicken and the Company dated July 19, 1996.
10.2** Form of Concurrent Private Placement Agreement (included in
Exhibit 4.5).
10.3(a)** Secured Demand Note of the Company dated January 30, 1996
payable to Boston Chicken ("Secured Demand Note")
(incorporated by reference to Exhibit 10.23(d) Boston
Chicken's 1995 annual report on Form 10-K).
10.3(b)** First Amendment to Secured Demand Note dated as of March 7,
1996.
</TABLE>
- --------
(+)In the case of incorporation by reference to documents filed by Boston
Chicken under the Securities Exchange Act of 1934, as amended, Boston
Chicken's file number under that Act is 0-22802.
*This information appears only in the manually signed original of the
Registration Statement.
**Previously filed.
Exhibit-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT(+) PAGE*
------- ------------------------- ----
<S> <C> <C>
10.4** Brackman Agreement and Amendment to Brackman Agreement
(included in Exhibits 2.1(a) and 2.1(b) hereof).
10.5** Bagel & Bagel Agreement (included in Exhibit 2.2 hereof).
10.6** Offerdahl's Agreement (included in Exhibit 2.3 hereof).
10.7** Baltimore Bagel Agreement (included in Exhibit 2.4 hereof).
10.8** Noah's Agreement (included in Exhibit 2.5 hereof).
10.9** Credit Agreement dated as of May 17, 1996 among the
Company, the Lenders named therein, and Bank of America
Illinois, as Agent.
10.10** Amended and Restated 1995 Stock Option Plan of the Company.
10.11** 1996 Non-Employee Director Stock Option Plan of the
Company.
10.12(a)** Amended and Restated Accounting and Administration Services
Agreement dated as of May 28, 1996 between Boston Chicken
and the Company.
10.12(b)** First Amendment to Amended and Restated Accounting and
Administration Services Agreement dated as of June 17,
1996 between Boston Chicken and the Company.
10.13(a)** Financial Services Agreement dated as of March 24, 1995
between Boston Chicken and the Company ("Financial
Services Agreement") (incorporated by reference to Exhibit
10.15 to Boston Chicken's 1994 annual report on Form 10-
K).
10.13(b)** First Amendment to Financial Services Agreement dated as of
March 7, 1996.
10.13(c)** Financial Services Agreement Termination Agreement
effective as of May 20, 1996.
10.14(a)** Amended and Restated Real Estate Services Agreement dated
as of May 28, 1996 between Boston Chicken and the Company.
10.14(b)** Amended and Restated Real Estate Services Agreement
Termination Agreement dated as of June 17, 1996 between
the Company and Boston Chicken.
10.15(a)** Amended and Restated Computer and Communications Systems
Services Agreement dated as of June 17, 1996 between
Boston Chicken and the Company.
10.15(b)** First Amendment to the Amended and Restated Computer and
Communications Systems Services Agreement dated as of June
17, 1996 between Boston Chicken and the Company.
10.16** Assignment and Reimbursement Agreement dated March 24, 1995
between Boston Chicken and the Company.
10.17(a)** Employment Agreement dated March 24, 1995 between Daniel V.
Colangelo and the Company.
10.17(b)** Amendment to Employment Agreement and Transition and
Consulting agreement dated January 16, 1996 between Daniel
V. Colangelo and the Company, as amended March 6, 1996.
10.18** Letter Agreement dated April 5, 1996 between Mark R.
Goldston and the Company.
10.19** Employment Agreement dated March 24, 1995 between Gail
Lozoff and the Company.
10.20** Secured Loan Agreement dated October 2, 1995 between Doc's
Cheese Company, L.L.C. ("Doc's") and the Company.
</TABLE>
- --------
(+)In the case of incorporation by reference to documents filed by Boston
Chicken under the Securities Exchange Act of 1934, as amended, Boston
Chicken's file number under that Act is 0-22802.
*This information appears only in the manually signed original of the
Registration Statement.
**Previously filed.
Exhibit-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE*
------- ---------------------- ----
<S> <C> <C>
10.21(++)** Supply Agreement dated October 2, 1995 between Doc's and
the Company.
10.22** License Agreement dated October 2, 1995 between Doc's and
the Company.
10.23** Option agreement dated October 2, 1995 between Doc's and
the Company.
10.24(++)** Project and Approved Supplier Agreement among Harlan Bagel
Supply Company, Harlan Bakeries, Inc. and the Company.
10.25** Option Agreement among Harlan Bagel Supply Company, Hal P.
Harlan, Hugh P. Harlan, Doug H. Harlan and the Company
(included in Exhibit 10.24).
10.26** Right of First Refusal Agreement among Harlan Bakeries,
Inc., Hal P. Harlan, Hugh P. Harlan, Doug H. Harlan and
the Company (included in Exhibit 10.24).
10.27** Aircraft dry leases dated January 16, 1996 between the
Company and Bowana Aviation, Inc.
10.28** Form of Fourth Amended and Restated Limited Liability
Company Agreement of Bagel Store Development Funding,
L.L.C. ("Bagel Funding") dated as of July 1, 1996.
10.29** Warrant Purchase Agreement dated as of December 29, 1995
between the Company and Bagel Funding (including form of
warrant to purchase 1,012,500 shares of Common Stock).
10.30** Form of agreement between the Company and Bagel Funding
relating to the Company's purchase of Bagel Funding's
interests in area developers.
10.31** Form of Area Development Agreement between the Company and
its Area Developers (included in Exhibit 99).
10.32** Form of Franchise Agreement between the Company and its
Area Developers (included in Exhibit 99).
10.33** Form of Secured Loan Agreement between the Company and its
Area Developers (included in Exhibit 99).
10.34** Employment Agreement dated March 31, 1995 between John A.
Offerdahl and the Company.
10.35** Office Lease Agreement dated as of July 1, 1996 between
the Company and Boston Chicken.
10.36** Consulting Agreement dated as of July 1, 1996 between Kyle
T. Craig and the Company.
10.37(a)** Aircraft Dry Sublease and related Letter Agreement dated
as of July 9, 1996 between the Company and Boston
Chicken.
10.37(b)** Aircraft Dry Sublease and related Letter Agreement dated
as of July 9, 1996 between the Company and Boston
Chicken.
11 Statement re: Computation of Loss Per Share.
21.1** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP with respect to the Audited
Consolidated Financial Statements of the Company.
23.2 Consent of Deloitte & Touche LLP with respect to the
Audited Consolidated Financial Statements of Noah's New
York Bagels, Inc.
23.3 Consent of Mayer Hoffman McCann L.C. with respect to the
Audited Financial Statements of Bagel & Bagel, Inc.
</TABLE>
- --------
(++)Confidential treatment requested.
*This information appears only in the manually signed original of the
Registration Statement.
**Previously filed.
Exhibit-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE*
------- ---------------------- ----
<S> <C> <C>
23.4 Consent of Arthur Andersen LLP with respect to the Audited
Combined Financial Statements of Offerdahl's Bagel Gourmet,
Inc.
23.5 Consent of Arthur Andersen LLP with respect to the Audited
Financial Statements of Baltimore Bagel Co.
23.6 Consent of Bell, Boyd & Lloyd (included in Exhibit 5.1).
27** Financial Data Schedule
99** Uniform Franchise Offering Circular, as amended as of May 31,
1996.
</TABLE>
- --------
*This information appears only in the manually signed original of the
Registration Statement.
**Previously filed.
Exhibit-4
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF BELL, BOYD & LLOYD]
July 30, 1996
Einstein/Noah Bagel Corp.
1526 Cole Boulevard, Suite 200
Golden, Colorado 80401
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for Einstein/Noah Bagel Corp., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"), of a registration statement on Form S-1,
Registration No. 333-04725 (the "Registration Statement") relating to the
registration of 3,530,000 shares of common stock, par value $0.01 per share, of
the Company (the "Shares"). An aggregate of 2,700,000 of the Shares are proposed
to be issued and sold by the Company to a group of underwriters (the
"Underwriters") for resale pursuant to a purchase agreement (the "Purchase
Agreement"), and an additional 405,000 of the Shares may be issued and sold by
the Company pursuant to over-allotment options granted to the Underwriters in
the Purchase Agreement. Additionally, an aggregate of 425,000 of the Shares are
proposed to be issued and sold to certain additional investors in a concurrent
public offering (the "Concurrent Public Offering") to be made pursuant to
certain purchase agreements (the "Concurrent Public Offering Purchase
Agreements").
We are familiar with the proceedings to date with respect to the
proposed issuance and sale of the Shares and have examined the Registration
Statement and such corporate and other records, documents, instruments,
certificates, and questions of law, and satisfied ourselves as to such matters
of fact, as we have considered relevant and necessary as a basis for this
opinion.
Based on the foregoing, we are of the opinion that:
1. The Company is a corporation duly incorporated in and validly
existing under the laws of the State of Delaware.
2. The Shares are legally authorized and, upon issuance and
delivery thereof to the Underwriters in accordance with the terms of the
Purchase Agreement and to certain additional investors in the Concurrent Public
Offering in accordance with the Concurrent Public Offering Purchase
Agreements, and the receipt by the Company, in each case, of the purchase price
therefor, will be legally issued, fully paid and non-assessable.
<PAGE>
Einstein/Noah Bagel Corp.
July 30, 1996
Page 2
Our opinion expressed herein is limited to the laws of the State of
Delaware and of the United States. We do not find it necessary for the purposes
of this opinion to cover, and accordingly we express no opinion as to, the
application of the securities or blue sky laws of the various states in the
United States or of any foreign jurisdiction to the sale of the Shares.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement. In giving this consent, we do not admit
that we are within the category of persons whose consent is required by Section
7 of the Securities Act.
Very truly yours,
/s/ Bell, Boyd & Lloyd
<PAGE>
EXHIBIT 10.1(b)
FIRST AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
This First Amendment to Amended and Restated Loan Agreement ("First
Amendment") is made and entered into as of the 19th day of July, 1996 by and
between Einstein/Noah Bagel Corp. (formerly known as Einstein Bros. Bagels,
Inc.), a Delaware corporation (the "Company"), and Boston Chicken, Inc., a
Delaware corporation ("Boston Chicken").
RECITALS
--------
A. The Company and Boston Chicken are parties to an Amended and
Restated Secured Loan Agreement dated as of May 17, 1996 (the "Loan Agreement"),
pursuant to which Boston Chicken has agreed, among other things, to loan to the
Company up to $134,000,000, including a $120,000,000 Convertible Loan and a
$14,000,000 Nonconvertible Loan, upon the terms and subject to the conditions
set forth therein.
B. On June 17, 1996, Boston Chicken exercised its conversion rights
and converted the $120,000,000 Convertible Loan into common stock of the
Company.
C. The Company now desires to increase the maximum principal balance
available to be borrowed under the Nonconvertible Loan to $50,000,000.
D. Boston Chicken is willing to increase the Nonconvertible Loan to
$50,000,000, on the terms and conditions set forth herein.
COVENANTS
---------
Based upon the above recitals, the parties agree as follows:
1.1 Amendment of Loan Agreement. Upon satisfaction by the Company of
the conditions set forth in Section 3.1 hereof, the Loan Agreement shall be
amended as of the date hereof as follows:
(1) Section 1.1(a) of the Loan Agreement is hereby deleted and
the following Section 1.1 is inserted in place thereof:
1.1 The Loan; Funding Alternatives; Promissory Note. (a) Boston
Chicken agrees, on the terms and subject to the conditions set forth, to
advance at any time and from time to time during the period commencing on
the date hereof and ending on June 14, 1998 (the "Draw Loan Termination
<PAGE>
Date"), amounts requested by the Company in an aggregate principal amount
not to exceed $50,000,000 (the "Loan" or the "Nonconvertible Loan"), in
integral multiples of $100,000. The Loan shall be evidenced by an amended
and restated nonconvertible promissory note dated as of May 17, 1996, in
the form attached hereto as Exhibit A, as amended by First Amendment to
Nonconvertible Promissory Note dated as of July 19, 1996 (the
"Nonconvertible Note" or the "Note").
(2) Section 1.1(d) is hereby amended by deleting subsection (i)
therefrom in its entirety.
(3) Section 1.2 of the Loan Agreement is hereby amended in its
entirety to read as follows:
1.2 Maximum Principal Balance. The aggregate outstanding
principal balance of the Loan shall not exceed $50,000,000 (the "Maximum
Principal Balance").
(4) Sections 1.7 and 1.8 of the Loan Agreement are hereby deleted in
their entirety. Sections 1.7 and 1.8 of the Loan Agreement are hereby designated
"Intentionally Omitted".
(5) Section 4.2 of the Loan Agreement is hereby amended in its
entirety to read as follows:
4.2 Capital Stock. The Company's authorized stock consists
of 220,000,000 shares of capital stock, of which 200,000,000 shares are
common stock, $.01 par value per share and 20,00,000 shares are preferred
stock, $.01 par value per share. As of July 19, 1996, of the Company's
authorized capital stock, (a) 22,872,224 shares of common stock are issued
and outstanding, (b) 3,654,488 shares of common stock are reserved for
issuance upon the exercise of options granted under the Company's Amended
and Restated 1995 Stock Option Plan, (c) 12,954 shares of common stock are
reserved for issuance upon the exercise of options granted under the
Company's 1996 Stock Option Plan for Non-Employee Directors, and (d) 6,250
shares of series A convertible preferred stock are issued and outstanding.
Such issued and outstanding shares are fully paid and non-assessable and
are free and clear of all liens, claims and encumbrances of any kind.
Except for (i) options granted under the Company's Amended and Restated
1995 Stock Option Plan, (ii) a warrant issued to Bagel Store Development
Funding, L.L.C. to purchase up to 1,012,500 shares of common stock for an
exercise price of $6.47 per share pursuant to that certain warrant
certificate dated December 29, 1995, (iii) warrants to purchase up to
427,275 shares in the aggregate of common stock
2
<PAGE>
for an exercise price of $6.47 per share issued to area developers and
prospective area developers of the Company, and (iv) a warrant issued to BA
Securities, Inc. to purchase up to 15,375 shares of common stock for an
exercise price of $11.58 per share pursuant to that certain warrant
certificate dated May 28, 1996, there are no outstanding options, warrants,
rights, contracts or agreements of any kind for the issuance or sale of any
shares of capital stock of the Company or for the issuance or sale of other
securities or obligations of the Company or for the purchase by the Company
of any of its shares.
(6) Sections 5.2, 5.3, 5.4 and 5.6 of the Loan Agreement are
hereby deleted in their entirety. Sections 5.2, 5.3, 5.4 and 5.6 of the Loan
Agreement are hereby designated "Intentionally Omitted".
(7) Section 8.1 of the Loan Agreement is hereby amended as
follows: (a) Section 8.1(a) is hereby amended by deleting the phase "either of
the Notes" and substituting the term "the Note" in place thereof, (b) Section
8.1(b) is hereby amended by deleting the phrase "either of the Notes" and
substituting the term "the Note" in place thereof, and (c) Section 8.1(k) is
hereby amended by deleting the parenthetical "(other than the Notes)" and
substituting "(other than the Note)" in place thereof.
(8) Section 9.4 of the Loan Agreement is hereby amended by
deleting the name "Amy S. Powers" and substituting the name "Paul T. Metzger" in
place thereof.
(9) Except as specifically provided herein, all references in the
Loan Agreement to "the Notes" shall be deemed to be references to "the Note" and
all references in the Loan Agreement to "the Loans" shall be deemed to be
references to "the Loan".
(10) The form of Amended and Restated Convertible Secured Note
attached to the Loan Agreement as Exhibit A-1 is hereby deleted.
(11) The form of Nonconvertible Secured Note attached to the Loan
Agreement as Exhibit A-2 shall be deemed to be Exhibit A to the Loan Agreement.
2.1 Effect of Amendment to Loan Agreement. From and after the
effective date hereof, reference in the Loan Agreement and all other documents
executed pursuant to the Loan Agreement (as each of the foregoing is amended
hereby or pursuant hereto) to (a) the Loan Agreement shall be deemed to be
references to the Loan Agreement as amended hereby and (b) the Note shall be
deemed to be references to the Note as amended by the First Amendment to
Nonconvertible Note of even date herewith, in the form attached hereto as
Exhibit A, to be delivered hereunder (the "Note Amendment").
3.1 Effective Date; Conditions. This First Amendment shall not
become effective until:
3
<PAGE>
(1) The Company shall have executed and delivered to Boston
Chicken this Amendment and the Note Amendment;
(2) The Company shall have delivered to Boston Chicken a
certificate of the Company dated as of the effective date hereof in
substantially the form attached hereto as Exhibit B, which shall be signed by a
duly authorized officer of the Company;
(3) The Company shall have delivered to Boston Chicken, in form
and substance satisfactory to Boston Chicken, resolutions of the board of
directors of the Company authorizing, among other things, (i) the execution,
delivery and performance by the Company of this First Amendment and the Note
Amendment, and (ii) such other resolutions as the Company deems necessary or
desirable to consummate the transactions contemplated herein; and
(4) The Company shall have delivered to Boston Chicken such other
documents and instruments as Boston Chicken may request in connection herewith.
4.1 Representations. To induce Boston Chicken to enter into this
First Amendment, the Company represents to Boston Chicken as of the date hereof
that:
(1) The representations and warranties contained in Article IV of the
Loan Agreement are true and correct;
(2) No Default or Event of Default has occurred and is continuing; and
(3) This First Amendment and the Note Amendment have each been duly
authorized by all required action on the part of the Company, and each of
this First Amendment and the Note Amendment has been duly executed and
delivered by the Company and constitutes the legal, valid, and binding
obligation of the Company enforceable in accordance with its terms.
5.1 Definitions; Ratification. Any term used but not defined herein
or in the exhibits hereto shall have the meaning ascribed thereto in the Loan
Agreement. Except as expressly contemplated herein, the Loan Agreement and all
related certificates, and other documents, are hereby ratified and confirmed and
shall remain in full force and effect.
6.1 GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF COLORADO APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF
LAW PROVISIONS THEREOF.
4
<PAGE>
7.1 Counterparts. This First Amendment may be executed in
counterparts, each of which shall be deemed an original, but each of which
together shall constitute but one and the same instrument.
8.1 Headings. The headings of the sections of this First Amendment
are inserted for convenience only and shall not be deemed to constitute a part
of this First Amendment.
IN WITNESS WHEREOF, the parties have executed this First Amendment to
be effective on the date provided herein.
BOSTON CHICKEN, INC. EINSTEIN/NOAH BAGEL CORP.
By: /s/ Donald J. Bingle By: /s/ Paul A. Strasen
---------------------- --------------------
Title: Vice President Title: Vice President
------------------- -----------------
5
<PAGE>
EXHIBIT A
<PAGE>
RIGHTS OF THE HOLDER TO RECEIVE PAYMENT HEREUNDER ARE SUBJECT TO A SUBORDINATION
AGREEMENT DATED MAY 17, 1996 EXECUTED BY BOSTON CHICKEN, INC. IN FAVOR OF BANK
OF AMERICA ILLINOIS, AS AGENT FOR CERTAIN LENDERS
FIRST AMENDMENT TO AMENDED AND RESTATED
NONCONVERTIBLE NOTE
This First Amendment to Amended and Restated Nonconvertible Note (the
"First Amendment") is made and entered into as of the 19th day of July, 1996 by
and between Einstein/Noah Bagel Corp. (formerly known as Einstein Bros. Bagels,
Inc.), a Delaware corporation (the "Company"), and Boston Chicken, Inc., a
Delaware corporation ("Boston Chicken").
RECITALS
--------
A. Boston Chicken and the Company have previously entered into an
Amended and Restated Loan Agreement dated as of May 17, 1996, as amended (the
"Loan Agreement"), pursuant to which Boston Chicken agreed, among other things,
to make a nonconvertible loan to the Company in the maximum principal amount of
$14,000,000, evidenced by that certain Amended and Restated Nonconvertible Note
dated May 17, 1996 (the "Note") payable to the order of Boston Chicken in the
original principal amount of $14,000,000.
B. The Company and Boston Chicken have agreed to increase the
principal amount of the Note to $50,000,000, and desire to execute this First
Amendment to evidence such increase.
NOW, THEREFORE, in consideration of the mutual promises set forth below and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Boston Chicken and the Company agree as follows:
1. The Note is hereby amended by deleting all references to
"$14,000,000" and "fourteen million dollars" therefrom and substituting
"$50,000,000" and "fifty million dollars", respectively in place thereof.
2. This First Amendment shall become effective when the Company and
Boston Chicken shall have each executed and delivered this First Amendment.
<PAGE>
3. The Company represents and warrants to Boston Chicken that: (a)
the execution, delivery and performance of this First Amendment have been duly
authorized by all necessary corporate action and will not require any consent or
approval of its stockholders, violate any provisions of any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to it or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Company is a party or by which it or its properties may
be bound or affected; (b) this First Amendment is the legal, valid and binding
obligation of the Company, enforceable against it in accordance with the terms
thereof; and (c) no default has occurred and is continuing or exists under the
Loan Agreement or the Note, as amended hereby, as of the effective date hereof.
4. The Note, as amended hereby, is hereby ratified and confirmed and
remains in full force and effect in accordance with their respective terms.
5. This First Amendment shall be governed by and construed in
accordance with the laws of the State of Colorado.
6. The First Amendment may be executed in two or more counterparts,
each of which together shall constitute the same agreement.
IN WITNESS WHEREOF, each of the undersigned has, through its duly
authorized officers, executed this First Amendment as of the day and year first
above written.
Borrower:
EINSTEIN/NOAH BAGEL CORP.,
a Delaware corporation
By:
-----------------------------
Its: Vice President
Lender:
BOSTON CHICKEN, INC., a Delaware
corporation
By:
-----------------------------
Its: Vice President
2
<PAGE>
EXHIBIT B
<PAGE>
CERTIFICATE
The undersigned, being the Chief Financial Officers of Einstein/Noah
Bagel Corp., a Delaware corporation (the "Company"), hereby represents,
warrants, and certifies that (i) no Default or Event of Default has occurred
under the Amended and Restated Secured Loan Agreement dated as of May 17, 1996
between the Company and Boston Chicken, Inc., a Delaware corporation (the "Loan
Agreement"), and (ii) all of the covenants, agreements, representations, and
warranties made by the Company therein and in the Security Instruments and in
any writing delivered pursuant to the Loan Agreement are true and correct and
complete and have been fully complied with as of the date of this Certificate.
X
--------------------------------
Name: W. Eric Carlborg
Title: Chief Financial Officer
Dated: July 19, 1996
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF LOSS PER SHARE
(In thousands)
<TABLE>
<CAPTION>
Period from Period from
inception (March 24, inception (March 24,
1995) through 1995) through Quarter Ended
December 31, 1995 April 16, 1995 April 21, 1996
-------------------- -------------------- --------------
<S> <C> <C> <C>
Primary earnings per share:
Weighted average number of shares outstanding....... 7,944 7,717 7,964
Incremental shares pursuant to Staff Accounting
Bulletin No. 83................................... 1,669 1,669 1,669
------ ----- ------
Adjusted primary weighted average number of
common and equivalent shares outstanding.......... 9,613 9,386 9,633
====== ===== ======
Fully diluted earnings per share:
Weighted average number of shares outstanding....... 7,944 7,717 7,964
Incremental shares pursuant to Staff Accounting
Bulletin No. 83................................... 1,669 1,669 1,669
------ ----- ------
Adjusted fully diluted weighted average number of
common and equivalent shares outstanding.......... 9,613 9,386 9,633
====== ===== ======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated July 16, 1996 on our audit of the consolidated financial
statements of Einstein/Noah Bagel Corp. We also consent to the references to
our firm under the captions "Experts" and "Selected Financial Data."
ARTHUR ANDERSEN LLP
Denver, Colorado
July 29, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-04725 of Einstein/Noah Bagel Corp. of our report dated May 7, 1996 on the
consolidated financial statements of Noah's New York Bagels, Inc. as of
December 31, 1994 and December 30, 1995 and for each of the three fiscal years
in the period ended December 30, 1995 appearing in the Prospectus, which is a
part of such Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Francisco, California
July 30, 1996
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-1 of
Einstein/Noah Bagel Corp. of our report dated April 26, 1996 on the financial
statements of Bagel & Bagel, Inc. appearing in the Prospectus, which is a part
of this Registration Statement and to the reference to us under the heading
"Experts" in such Prospectus.
MAYER HOFFMAN McCANN L.C.
Kansas City, Missouri
July 29, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated April 24, 1996, on our audit of the combined financial
statements of Offerdahl's Bagel Gourmet, Inc. and Affiliates. We also consent
to the references to our firm under the caption "Experts."
ARTHUR ANDERSEN LLP
Denver, Colorado
July 29, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated April 24, 1996, on our audit of the financial statements of
Baltimore Bagel Co. We also consent to the references to our firm under the
caption "Experts."
ARTHUR ANDERSEN LLP
Denver, Colorado
July 29, 1996
