<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 14, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-21097
EINSTEIN/NOAH BAGEL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1294908
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14123 Denver West Parkway
Golden, CO 80401
(Address of principal executive offices, including zip code)
(303) 215-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
Number of shares of Common Stock, $.01 par value per share, outstanding as of
August 20, 1996: 28,871,453.
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1995 and July 14, 1996...................... 2
Consolidated Statements of Operations for the quarter ended July 9, 1995, period from
inception (March 24, 1995) through July 9, 1995, and quarter and two
quarters ended July 14, 1996............................................................... 3
Consolidated Statements of Cash Flows for the period from inception (March 24, 1995)
through July 9, 1995 and for the two quarters ended July 14, 1996.......................... 4
Notes to Consolidated Financial Statements................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities.................................................................. 14
Item 4. Submission of Matters to a Vote of Security-Holders.................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................................... 14
Signature Page.................................................................................. 15
Exhibit Index................................................................................Exhibit-1
</TABLE>
1
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, July 14,
1995 1996
----------- --------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 5,368 $ 569
Accounts receivable, net............................ 1,327 5,354
Inventory........................................... 883 1,054
Prepaid expenses and other current assets........... 1,709 481
-------- --------
Total current assets............................ 9,287 7,458
Property and Equipment, net........................... 19,410 28,828
Notes Receivable...................................... 7,267 65,322
Excess of Purchase Price Over Fair Value of Net Assets
Acquired, net..................................... 13,715 69,706
Trademarks, net....................................... - 21,840
Recipes, net.......................................... - 5,000
Other Assets, net..................................... 620 8,566
-------- --------
Total assets....................................... $ 50,299 $206,720
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable.................................... $ 5,633 $ 3,198
Accrued expenses.................................... 2,968 6,055
Deferred franchise revenue.......................... 645 2,415
-------- --------
Total current liabilities....................... 9,246 11,668
Convertible Debt...................................... 40,000 -
Revolving Credit Facilities........................... - 56,650
Deferred Franchise Revenue............................ 265 5,550
Other Noncurrent Liabilities.......................... 2,907 1,777
Repurchase Common Stock Shares - 1,721,250 shares
issued and outstanding............................... 11,062 12,548
Series A Preferred Stock - 6,250 shares issued and
outstanding.......................................... 7,813 7,813
Commitments and Contingencies
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 in 1995 and 21,150,975 in 1996........ 38 212
Additional paid-in capital......................... 22,684 157,240
Accumulated deficit................................ (43,716) (46,738)
-------- --------
Total stockholders' equity
(deficit)...................................... (20,994) 110,714
-------- --------
Total liabilities and stockholders' equity...... $ 50,299 $206,720
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
2
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Period from
March 24, 1995 Two
Quarter Ended (inception) Quarters
------------------ through Ended
July 9, July 14, July 9, July 14,
1995 1996 1995 1996
------- -------- -------------- --------
<S> <C> <C> <C> <C>
Revenue:
Company-operated stores................ $ 6,292 $13,092 $ 7,715 $31,489
Royalties and franchise-related fees... - 5,114 - 9,096
------- ------- ------- -------
Total revenue........................ 6,292 18,206 7,715 40,585
Costs and Expenses:
Cost of products sold.................. 1,918 4,588 2,356 10,078
Salaries and benefits.................. 2,993 5,316 3,636 14,444
General and administrative............. 3,165 5,999 3,687 15,030
------- ------- ------- -------
Total costs and expenses............. 8,076 15,903 9,679 39,552
------- ------- ------- -------
Income (Loss) from Operations............ (1,784) 2,303 (1,964) 1,033
Other Expense:
Interest expense, net................... (141) (2,651) (221) (5,984)
Other income, net....................... 1 643 1 1,929
------- ------- ------- -------
Total other expense................... (140) (2,008) (220) (4,055)
------- ------- ------- -------
Income (Loss) Before Income Taxes........ (1,924) 295 (2,184) (3,022)
Income Taxes............................. - - - -
------- ------- ------- -------
Net Income (Loss)........................ $(1,924) $ 295 $(2,184) $(3,022)
======= ======= ======= =======
Net Income (Loss) Per Common and
Equivalent Share........................ $ (0.20) $ 0.01 $ (0.23) $ (0.23)
======= ======= ======= =======
Weighted Average Number of Common
and Equivalent Shares Outstanding....... 9,679 20,370 9,626 14,261
======= ======= ======= =======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Period from
March 24, 1995 Two Quarters
(inception) through Ended
July 9, 1995 July 14, 1996
------------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................................. $ (2,184) $ (3,022)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................................... 557 3,087
Gain on sale of marketable equity securities............................ - (1,872)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable and due from affiliates............................ 474 (3,731)
Accounts payable and accrued expenses.................................. (4,304) (5,162)
Deferred franchise revenue............................................. - 7,040
Other assets and liabilities........................................... (191) (4,834)
-------- ---------
Net cash used in operating activities................................. (5,648) (8,494)
-------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment...................................... (941) (27,066)
Proceeds from sale of assets............................................ - 42,217
Purchase of other assets................................................ (120) (7,179)
Net assets purchased, net of cash acquired.............................. (2,358) -
Acquisition of Noah's New York Bagels, Inc.............................. - (100,902)
Issuance of notes receivable............................................ (1,796) (118,747)
Repayment of notes receivable........................................... - 60,692
Purchase of marketable equity securities................................ (21,465) (66,778)
Proceeds from sales of marketable equity securities..................... - 68,650
-------- ---------
Net cash used in investing activities................................. (26,680) (149,113)
-------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock.................................. 23,819 16,158
Borrowings under revolving credit facilities............................ 43,191 286,154
Repayments of revolving credit facilities............................... (33,755) (149,504)
-------- ---------
Net cash provided by financing activities............................. 33,255 152,808
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents...................... 927 (4,799)
Cash and Cash Equivalents, beginning of period............................ - 5,368
-------- ---------
Cash and Cash Equivalents, end of period.................................. $ 927 $ 569
======== =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
NOTES TO 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 July 14, 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 its
1995 audited consolidated financial statements included in the prospectus that
forms a part of the Company's Registration Statement on Form S-1 (Reg. No. 333-
04725). The consolidated results of operations for the quarter and two quarters
ended July 14, 1996 are not necessarily indicative of the results expected for
the full year.
2. ACQUISITION
In February 1996, the Company acquired Noah's New York Bagels, 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.
The following represents the unaudited pro forma results of operations for
the two quarters ended July 14, 1996 as if the acquisition had occurred at the
beginning of the Company's fiscal year (in thousands of dollars, except per
share amount):
<TABLE>
<CAPTION>
<S> <C>
Revenue.................. $43,889
Net loss................. $ 4,904
Net loss per share....... $ 0.36
</TABLE>
This pro forma information is not indicative of the results of operations
that actually would have been obtained if the transactions had occurred at the
beginning of the Company's fiscal year. The pro forma information is not
intended to be a projection of future results.
5
<PAGE>
3. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for
use in expansion of their operations. 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 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 as established 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 unit equity price paid by the investors
in the area developer for the equity investment made concurrently with the
execution of the loan agreement. The maximum loan amount is established to give
the Company majority ownership of the area developer upon conversion provided
the Company exercises its right to participate in any intervening financing of
the developer. 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 credit commitments for area developer
financing (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, July 14,
1995 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Number of area developers receiving financing.......... 2 8
Loan commitments....................................... $16,000 $162,540
Unused loans........................................... 12,462 103,219
------- --------
Loans outstanding (included in Notes Receivable)....... $ 3,538 $ 59,321
======= ========
Allowance for loan losses $ - $ -
======= ========
</TABLE>
6
<PAGE>
(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 July 14, 1996.
The following table sets forth certain aggregate financial information
obtained from area developers to which the Company had outstanding loans (in
thousands, except total number of area developers and store data):
<TABLE>
<CAPTION>
December 31,
1995
--------------
<S> <C>
Total number of area developers...... 2
Total number of area developer
stores open......................... 13
Total gross assets................... $9,262
Total debt to the Company............ $3,538
Total members' equity................ $2,676
</TABLE>
4. DEBT
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.
Borrowings under the facility may be either floating rate loans with interest at
the lender's base rate plus 1.0% (subsequently reduced to .5% in August 1996)
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 requiring the Company to
maintain minimum interest coverage and cash flow ratios, specified store level
sales, and a minimum capital level. As of July 14, 1996, $42.7 million was
outstanding under the facility.
The Company also has an unsecured revolving credit facility from Boston
Chicken, Inc. providing for borrowings of up to $14.0 million (subsequently
increased to $50.0 million) through June 15, 2003. The facility bears interest
at the reference rate of Bank of America Illinois plus 1%. As of July 14, 1996,
$14.0 million was outstanding under the facility.
The Company utilized a portion of the proceeds from its equity offerings (see
Note 8) to payoff the outstanding balances under both facilities.
7
<PAGE>
5. ROYALTIES AND FRANCHISE-RELATED FEES
The components of royalties and franchise-related fees are comprised of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
Period from
March 24, 1995 Two
Quarter Ended (inception) Quarters
------------------------------------- through Ended
July 9, 1995 July 14, 1996 July 9, 1995 July 14, 1996
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Royalties.................................. $ - $ 995 $ - $1,674
Initial franchise and area developer fees.. - 3,060 - 5,660
Interest income............................ - 914 - 1,337
Other...................................... - 145 - 425
---------------- ----------------- ---------------- -----------------
$ - $5,114 $ - $9,096
================ ================= ================ =================
</TABLE>
6. COMMITMENTS
In December 1995, Bagel Store Development Funding, L.L.C., formerly named
Einstein Bros. Equity Funding, L.L.C. ("Bagel Funding"), was formed to invest in
existing and proposed area developers. Through July 14, 1996, Bagel Funding had
raised $90.0 million (including an aggregate of $45.0 million in subscriptions
receivable) and had invested a total of $40.4 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. CONTINGENCIES
The Company is subject to various lawsuits, claims, and other legal matters
in the course of conducting its business, including its business as a
franchisor. The Company believes that the outcome of such lawsuits, claims, and
other legal matters will not have a material impact on the Company's financial
position or results of operations.
8. SUBSEQUENT EVENT
In August 1996, the Company completed an underwritten initial offering of
3,105,000 shares of its common stock to the public, a concurrent non-
underwritten public offering of 425,000 shares of its common stock to certain
individuals and entities and a concurrent private placement of 2,000,000 shares
of its common stock to Boston Chicken, Inc., raising aggregate net proceeds of
approximately $86.0 million. Such proceeds were partially used to retire the
outstanding balances under its revolving credit facilities. For the two quarters
ended July 14, 1996, assuming the offering proceeds had been utilized to repay
the then outstanding balances under the revolving credit facilities of $56.7
million, the loss per share would have been $0.18.
8
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS FORM 10-Q UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE "FORWARD-
LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF EINSTEIN/NOAH BAGEL CORP. (THE "COMPANY"), ITS
AREA DEVELOPERS AND FRANCHISEES, AND EINSTEIN BROS. BAGELS STORES AND NOAH'S NEW
YORK BAGELS STORES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: COMPETITION;
SUCCESS OF OPERATING INITIATIVES; AREA DEVELOPERS' ADHERENCE TO DEVELOPMENT
SCHEDULES; ADVERTISING AND PROMOTIONAL EFFORTS; ADVERSE PUBLICITY; ACCEPTANCE OF
NEW PRODUCT OFFERINGS; AVAILABILITY, LOCATIONS AND TERMS OF SITES FOR STORE
DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS; AVAILABILITY AND
TERMS OF CAPITAL; FOOD, LABOR AND EMPLOYEE BENEFIT COSTS; CHANGES IN GOVERNMENT
REGULATIONS; REGIONAL WEATHER CONDITIONS; AND OTHER FACTORS REFERENCED IN THIS
FORM 10-Q. THE SUCCESS OF THE COMPANY IS DEPENDENT ON ITS AREA DEVELOPERS AND
FRANCHISEES AND THE MANNER IN WHICH THEY OPERATE AND DEVELOP EINSTEIN BROS.
BAGELS AND NOAH'S NEW YORK BAGELS STORES.
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 from its area
developers. Consequently, comparisons of operating results to date may not be
meaningful.
Store activity, for both Company-operated and franchised stores, was as
follows:
Stores at Stores Stores Stores
Beginning Opened in Closed in at End
of Quarter the Quarter the Quarter of Quarter
---------- ----------- ----------- ----------
138 51 (1) 188
The Company currently estimates that there will be between 275 and 300
stores in operation systemwide by the end of 1996. SEE "SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS" ABOVE. 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 Company-operated or franchised stores and those of
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.
9
<PAGE>
Gross systemwide revenue for all stores was $30.7 million for the quarter
ended July 14, 1996 compared to $6.4 million for the comparable quarter in 1995.
The Company's success is highly dependent on its continued relationship
with Boston Chicken Inc. ("Boston Chicken"), which beneficially owns
approximately 60% of the outstanding shares of common stock of the Company. In
addition, the Company has granted to Boston Chcken 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 agreement, pursuant to which Boston
Chicken has ageed 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.
RESULTS OF OPERATIONS
Revenue. Total revenue increased $11.9 million to $18.2 million for the
quarter ended July 14, 1996 from $6.3 million for the quarter ended July 9,
1995. For the two quarters ended July 14, 1996, total revenue increased $32.9
million to $40.6 million from $7.7 million for the prior period. Revenue from
Company-operated stores increased $6.8 million to $13.1 million for the quarter
ended July 14, 1996 from $6.3 million for the quarter ended July 9, 1995. For
the two quarters ended July 14, 1996, revenue from Company-operated stores
increased $23.8 million to $31.5 million from $7.7 million for the prior period.
The increase in revenue from Company-operated stores for the current quarter was
due to a higher average number of Company-operated stores open. The increase in
revenue from Company-operated stores for the two quarters ended July 14, 1996
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 two quarters ended July 14, 1996.
Royalty and franchise-related fees were $5.1 million for the quarter ended
July 14, 1996 and $9.1 million for the two quarters ended July 14, 1996. There
were no such fees in the comparable periods last year. There were 139 stores
operated by area developers as of July 14, 1996.
Cost of Products Sold. Cost of products sold increased $2.7 million to
$4.6 million for the quarter ended July 14, 1996, compared with $1.9 million for
the prior period. Cost of products sold increased $7.7 million to $10.1 million
for the two quarters ended July 14, 1996, compared with $2.4 million for the
prior period. The increase in cost of products sold for the current quarter was
due to a higher average number of Company-operated stores open. The increase in
cost of products sold for the two quarters ended July 14, 1996 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 two quarters
ended July 14, 1996.
Salaries and Benefits. Salaries and benefits increased $2.3 million to
$5.3 million for the quarter ended July 14, 1996, compared with $3.0 million for
the prior period. Salaries and benefits increased $10.8 million to $14.4 million
for the two quarters ended July 14, 1996, compared with $3.6 million for the
prior period. The increase in salaries and benefits for the current quarter was
due to a higher average number of stores open and an increase in the number of
employees at the Company's support center necessary to support systemwide
expansion. The increase in salaries and benefits for the two quarters ended July
14, 1996 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 two quarters ended July 14, 1996.
General and Administrative. General and administrative expenses increased
$2.8 million to $6.0 million for the quarter ended July 14, 1996, compared with
$3.2 million for the prior period. General and administrative expenses increased
$11.3 million to $15.0 million for the two quarters ended July 14, 1996,
compared with $3.7 million for the prior period. The increase in general and
administrative expenses for the current quarter was due to an increase in the
number of stores open and an increase in expenses at the Company's support
center necessary to support systemwide expansion. The increase in general and
administrative expenses for the two quarters ended July 14, 1996 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 two quarters
ended July 14, 1996.
10
<PAGE>
Included in general and administrative expenses are depreciation and
amortization charges of $1.2 million for the quarter ended July 14, 1996 and
$3.1 million for the two quarters ended July 14, 1996. These depreciation and
amortization charges include amortization on $98.3 million of goodwill and
intangible assets. These assets are being amortized over their estimated useful
lives ranging from 10 to 35 years. The Company will continue to evaluate in the
ordinary course 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 $2.0 million for the
quarter ended July 14, 1996, compared to other expense of $0.1 million for the
prior period. The Company incurred other expense of $4.1 million for the two
quarters ended July 14, 1996, compared to other expense of $0.2 million for the
prior period. The increases reflect higher interest expense attributable to the
borrowings under the Company's loan agreements, 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 bagel and cream cheese production facilities and investments
in, and operation of, its corporate support center necessary to support the
increase in the number of stores in operation systemwide. In addition, in
February 1996, the Company acquired all of the outstanding capital stock of
Noah's New York Bagels, Inc. 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 July 14, 1996, the Company had secured
loan commitments aggregating approximately $162.5 million, of which
approximately $59.3 million had been advanced. As a result of executing the
rapid expansion strategy required by the Company, the Company's area developers
incurred net losses of $1.3 million in 1995, and the Company anticipates its
area developers will continue to incur substantial net losses during their
expansion stage. 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. SEE
"SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 9.
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. During the two quarters ended July 14, 1996, the Company sold an
aggregate of 68 Company-operated stores and related assets to Finest Bagels,
L.L.C., Gulfstream Bagels, L.P. (formerly Einstein Bros. America, L.P.), Noah's
Pacific, L.L.C., Liberty Foods, L.L.C., Colonial Bagels, 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
$42.2 million. There were no material gains or losses recognized as a result of
these sales.
Capital Resources. For the two quarters ended July 14, 1996, the Company's
primary sources of capital included $16.2 million from the sale of shares of
common stock and $136.7 million of net borrowings under its revolving credit
facilities. The Company had two credit facilities with Boston Chicken,
consisting of a $120.0 million convertible loan facility and a $50.0 million
non-convertible loan facility. In addition, the Company has a $45.0 million
credit facility with Bank of America Illinois, as agent for the lenders. On June
17, 1996, the outstanding balance of $120.0 million under the Company's
convertible loan facility from Boston Chicken was converted into 15,307,421
shares of common stock. As of July 14, 1996, an aggregate of $56.7 million was
outstanding under the two remaining facilities.
11
<PAGE>
In August 1996, the Company completed an underwritten initial offering of
3,105,000 shares of its common stock to the public, a concurrent non-
underwritten public offering of 425,000 shares of its common stock to certain
individuals and entities and a concurrent private placement of 2,000,000 shares
of its common stock to Boston Chicken. The aggregate net proceeds of these
offerings were approximately $86.0 million, $69.3 million of which was utilized
to repay the outstanding balances under its revolving credit facilities.
The Company anticipates it will have a continuing need for additional
financing to continue systemwide expansion. 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.
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 9.
12
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On June 10, 1996, in accordance with applicable provisions of the Delaware
General Corporation Law (the "DGCL"), the stockholders of the Company approved
the Company's Restated Certificate of Incorporation, which, in addition to the
items described below under the heading "Item 4. Submission of Matters to a Vote
of Security-Holders", increased the number of authorized shares of capital stock
of the Company to 220,000,000 shares, 200,000,000 of which were designated as
common stock, $.01 par value per share (the "Common Stock"), and 20,000,000 of
which were designated as preferred stock, $.01 par value per share (the
"Preferred Stock"). Prior thereto, the Company was authorized to issue 1,000,000
shares of Common Stock and 200,000 shares of Preferred Stock. Future issuances
of capital stock could have the effect of making any change in control of the
Company more difficult, even if such change of control would be beneficial to
the Company and its minority stockholders.
Item 4. Submission of Matters to a Vote of Security-Holders
On June 10, 1996, in accordance with applicable provisions of the DGCL, the
stockholders of the Company took the following actions by written consent: (i)
approved the Company's Restated Certificate of Incorporation, including changing
the name of the Company from Einstein Bros. Bagels, Inc. to Einstein/Noah Bagel
Corp., increasing the number of authorized shares of capital stock of the
Company as described above under the heading "Item 2. Changes in Securities" and
prohibiting action by stockholder consent; (ii) elected as directors of the
Company Noah C. Alper, Scott A. Beck, Kyle T. Craig, Mark R. Goldston, M. Laird
Koldyke, Gail A. Lozoff, John H. Muehlstein, Jr., John A. Offerdahl, Lloyd D.
Ruth and David G. Stanchak, which individuals constituted all of the board of
directors' nominees for directors; (iii) approved the Company's Amended and
Restated 1995 Stock Option Plan, and (iv) approved the Company's 1996 Stock
Option Plan for Non-Employee Directors. Each of such actions was approved by the
holders of approximately 93% of the Company's Common Stock and the holders of
100% of the Company's Series A Preferred Stock. In accordance with Section
228(d) of the DGCL, the Company notified all stockholders from whom the Company
did not receive a written consent, of the taking of such actions by less than
unanimous written consent.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits: See Exhibit Index appearing elsewhere herein, which is
incorporated herein by reference.
B. Reports on Form 8-K: The Company did not file any reports on Form 8-K
during the quarter ended July 14, 1996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EINSTEIN/NOAH BAGEL CORP.
Date: August 28, 1996 /s/ Scott A. Beck
---------------------------------------
Scott A. Beck
Chairman of the Board
Date: August 28, 1996 /s/ W. Eric Carlborg
---------------------------------------
W. Eric Carlborg
Senior Vice President of Finance
(Principal Financial Officer)
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS*
- ------ --------
<S> <C>
4.1 Concurrent Private Placement Agreement dated August 1,
1996 between Boston Chicken, Inc. ("Boston Chicken") and
the Company ("Concurrent Private Placement Agreement")
(Incorporated by reference to Exhibit 10.3 to Boston
Chicken's quarterly report on Form 10-Q for the quarter
ended July 14, 1996).
4.2 Registration Agreement dated August 1, 1996 between
Boston Chicken and the Company ("Registration Agreement")
(Incorporated by reference to Exhibit 10.3 to Boston
Chicken's quarterly report on Form 10-Q for the quarter
ended July 14, 1996).
10.1 Concurrent Private Placement Agreement (included in
Exhibit 4.1).
10.2 Registration Agreement (included in Exhibit 4.2).
11 Statement re Computation of Earnings (Loss) Per Share.
27 Financial Data Schedule.
</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.
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
Period from
March 24, 1995 Two
Quarter Ended (inception) Quarters
-------------------- through Ended
July 9, July 14, July 9, July 14,
1995 1996 1995 1996
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Primary earnings per share:
Weighted average number of shares
outstanding 7,935 18,140 7,882 12,309
Incremental shares pursuant to Staff
Accounting Bulletin No. 83 1,744 2,230 1,744 1,952
------ ------- ------- -------
Adjusted primary weighted average
number of common and equivalent
shares outstanding 9,679 20,370 9,626 14,261
====== ======= ======= =======
Fully diluted earnings per share:
Weighted average number of shares
outstanding 7,935 18,140 7,882 12,309
Incremental shares pursuant to Staff
Accounting Bulletin No. 83 1,744 2,230 1,744 1,952
------ ------- ------- -------
Adjusted fully diluted weighted average
number of common and equivalent
shares outstanding 9,679 20,370 9,626 14,261
====== ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUL-14-1996
<CASH> 569
<SECURITIES> 0
<RECEIVABLES> 5,354
<ALLOWANCES> 0
<INVENTORY> 1,054
<CURRENT-ASSETS> 7,458
<PP&E> 28,828
<DEPRECIATION> 0
<TOTAL-ASSETS> 206,720
<CURRENT-LIABILITIES> 11,668
<BONDS> 0
7,813
0
<COMMON> 212
<OTHER-SE> 110,502
<TOTAL-LIABILITY-AND-EQUITY> 206,720
<SALES> 31,489
<TOTAL-REVENUES> 40,585
<CGS> 10,078
<TOTAL-COSTS> 39,552
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,984
<INCOME-PRETAX> (3,022)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,022)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> 0
</TABLE>
