<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 April 20, 1997
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 __X__ No _____
Number of shares of common stock, $.01 par value per share, outstanding as of
May 28, 1997: 33,011,417.
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 29, 1996 and
April 20, 1997.............................................................................. 3
Consolidated Statements of Operations for the quarters ended April 21, 1996
and April 20, 1997.......................................................................... 4
Consolidated Statements of Cash Flows for the quarters ended April 21, 1996
and April 20, 1997.......................................................................... 5
Notes to Consolidated Financial Statements.................................................. 6
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 6. Exhibits and Reports on Form 8-K........................................................ 14
Signature Page.................................................................................. 15
Exhibit Index................................................................................... Exhibit - 1
</TABLE>
2
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 29, April 20,
1996 1997
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents.............. $ 50,741 $ 237
Accounts receivable.................... 5,589 9,406
Prepaid expenses and other current 579 438
assets................................
Deferred income taxes.................. - 1,315
------------ ---------
Total current assets.................. 56,909 11,396
Property and Equipment, net............. 28,213 27,766
Notes Receivable:
Area developers........................ 140,754 211,742
Others................................. 5,333 5,257
Goodwill, net........................... 68,921 66,722
Trademarks, net......................... 22,239 22,153
Recipes, net............................ 4,758 4,597
Other Assets, net....................... 5,291 7,107
Deferred Income Taxes................... - 612
------------ ---------
Total assets.......................... $ 332,418 $ 357,352
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable....................... $ 3,873 $ 4,832
Accrued expenses....................... 3,615 4,886
Deferred franchise revenue............. 3,000 3,000
------------ ---------
Total current liabilities............. 10,488 12,718
Revolving Credit Facility............... - 7,800
Deferred Franchise Revenue.............. 6,105 6,700
Other Noncurrent Liabilities............ 308 285
Commitments and Contingencies
Stockholders' Equity:
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: 32,299,756 in
December and 32,939,413 in April..... 323 329
Additional paid-in capital............. 353,203 362,351
Accumulated deficit.................... (38,009) (32,831)
------------ ---------
Total stockholders' equity............ 315,517 329,849
------------ ---------
Total liabilities and stockholders'
equity.............................. $ 332,418 $ 357,352
============ =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------
April 21, April 20,
1996 1997
--------- ---------
<S> <C> <C>
Revenue:
Royalties and franchise-related fees.. $ 3,559 $ 9,338
Interest income....................... 423 5,287
Company-operated stores............... 18,397 2,103
--------- ---------
Total revenue....................... 22,379 16,728
Costs and Expenses:
Cost of products sold................. 5,490 704
Salaries and benefits................. 9,128 3,018
General and administrative............ 9,031 5,774
--------- ---------
Total costs and expenses............ 23,649 9,496
--------- ---------
Income (Loss) from Operations........... (1,270) 7,232
Other Income (Expense):
Interest income (expense), net........ (3,333) 221
Other income, net..................... 1,286 -
--------- ---------
Total other income (expense)........ (2,047) 221
--------- ---------
Income (Loss) Before Income Taxes....... (3,317) 7,453
Income Taxes............................ - 2,275
--------- ---------
Net Income (Loss)....................... $ (3,317) $ 5,178
========= =========
Net Income (Loss) Per Common and
Equivalent Share...................... $ (0.35) $ 0.15
========= =========
Weighted Average Number of Common
and Equivalent Shares Outstanding..... 9,679 34,962
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------
April 21, April 20,
1996 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................ $ (3,317) $ 5,178
Adjustments to reconcile net income
(loss) to net cash from (used in)
operating activities:
Depreciation and amortization.......... 1,914 1,763
Gain on sale of marketable equity
securities............................ (1,267) -
Warrant and option expense............. 58 26
Deferred income taxes.................. - (1,926)
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable.................. (3,710) (3,873)
Accounts payable and accrued
expenses............................ (2,440) 5,363
Deferred franchise revenue........... 1,660 595
Other assets and liabilities......... (2,981) (90)
--------- ---------
Net cash provided by (used in)
operating activities............... (10,083) 7,036
--------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment....... (17,557) (3,872)
Proceeds from sale of assets............. 25,088 3,600
Purchase of other assets................. (744) (2,362)
Acquisition of Noah's New York Bagels,
Inc., net of cash acquired.............. (100,902) -
Issuance of notes receivable............. (39,003) (124,298)
Repayment of notes receivable............ 7,972 53,386
Proceeds from sales of marketable
equity securities, net of purchases..... 1,267 -
--------- ---------
Net cash used in investing activities.. (123,879) (73,546)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock... 13,009 8,206
Proceeds from debt....................... 208,929 29,500
Repayment of debt........................ (90,432) (21,700)
--------- ---------
Net cash provided by financing
activities............................ 131,506 16,006
---------- ---------
Net Decrease in Cash and Cash
Equivalents.............................. (2,456) (50,504)
Cash and Cash Equivalents, beginning of
period................................... 5,368 50,741
--------- ---------
Cash and Cash Equivalents, end of period.. $ 2,912 $ 237
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
5
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
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 29, 1996 and notes related thereto. 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 20, 1997 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 are included in the audited consolidated financial
statements as filed with the Securities and Exchange Commission in the Company's
Form 10-K/A for the year ended December 29, 1996. The consolidated results of
operations for the quarter ended April 20, 1997 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 in the form of convertible secured loans. 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 by 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 facility provided by the Company, with draws
permitted during a three-year draw period in a predetermined maximum amount
generally equal to four times the amount of the area developer's contributed
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. The Company may extend the draw and repayment periods in connection
with the area developer purchasing additional development rights, contributing
additional capital or other amendments to the loan agreement. Interest is set at
the applicable reference rate of Bank of America Illinois (8.5% at April 20,
1997 and an average rate of 8.3% for the quarter ended April 20, 1997) plus 1%,
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, which is at a 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. Default provisions contained in the area
developer loans typically include default in payment of principal and interest,
breach of a representation or warranty or of any covenant contained in the loan
agreement or security instruments, bankruptcy or bankruptcy-related act of the
borrower, resignation or termination of key management personnel, default under
the area development agreement, termination of three or more franchise
agreements, dissolution or liquidation, material adverse change in financial
condition, default of other indebtedness, sublease or any real estate lease, a
judgment in excess of $100,000 (not satisfied, vacated or covered by insurance)
and the invalidity or termination of any security instrument. The conversion
price is negotiated at arms' length with each area developer and is set at a
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 or subsequent amendments thereto. On average, upon conversion, the
Company would own an 80% interest in each of its area developers. 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.
6
<PAGE>
There can be no assurance the Company will convert any loan amount or exercise
its option at such time as it may be permitted to do so and, if it does convert
or exercise its option, that such conversion or option exercise will result in a
majority interest in such area developer.
(b) Commitments to Extend Area Developer Financing
The following table summarizes credit commitments for area developer financing
(in thousands of dollars, except number of area developers):
<TABLE>
<CAPTION>
December 29, April 20,
1996 1997
------------ ---------
<S> <C> <C>
Number of area developers receiving financing 11 12
Loan commitments............................. $ 283,200 $ 359,900
Unused loans................................. (142,446) (148,158)
------------ ---------
Loans outstanding............................ $ 140,754 $ 211,742
============ =========
Contributed capital.......................... $ 75,765 $ 95,227
============ =========
</TABLE>
The following table summarizes area developer financing activity of the
Company during the quarters ended (in thousands of dollars):
<TABLE>
<CAPTION>
Quarter Ended
-----------------------
April 21, April 20,
1996 1997
--------- ---------
<S> <C> <C>
Area developer loan balances, beginning
of quarter...................................... $ 3,538 $ 140,754
Loan advances.................................... 36,928 124,298
Loan repayments.................................. (7,900) (53,310)
--------- ---------
Area developer loan balances, end of
quarter......................................... $ 32,566 $ 211,742
========= =========
</TABLE>
The majority of the loan advance and repayment activity reflects the revolving
nature of the loans; that is, amounts are drawn and repaid on a regular basis to
optimize cash management.
(c) Credit Risk and Allowance for Loan Losses
Three of the Company's area developers accounted for approximately 16%, 15%
and 12% of the area developer notes receivable balance at April 20, 1997, and no
other area developer of the Company individually accounted for 10% or more of
such notes receivable balance as of such date.
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 29, 1996 or April 20, 1997.
7
<PAGE>
The following table sets forth certain combined audited financial information,
as of the dates indicated, provided annually by all the Company's area
developers. During 1995, two area developers were formed, and their data have
been included in the table for 1995 from the dates of their respective
formation. During 1996, ten area developers were formed, and their data have
been included in the table for 1996 from the dates of their respective
formations. In addition, two area developers with geographically contiguous
territories combined in 1996.
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
(in thousands, except number of
area developers and store data)
<S> <C> <C>
Total number of area
developers.................... 2 11
Total number of area developer
stores open................... 13 301
Balance sheet data:
Total gross assets............ $ 9,262 $ 221,156
Total debt:
To the Company............. 3,538 140,754
To third parties........... - -
Total other liabilities
(including trade
payables).................... 3,011 37,033
Total partner/member
equity....................... $ 2,676 $ 33,847
Fiscal Period Ended
December 31, December 29,
1995 1996
------------ ------------
(in thousands)
Statement of operations data:
Gross revenue................. $ 768 $ 109,940
Income (loss) from
continuing operations........ (1,324) (40,592)
Statement of cash flows data:
Cash flows from (used in)
operating activities......... $ 1,616 $ (16,382)
Cash flows used in
investing activities......... (8,064) (187,955)
Cash flows from financing
activities................... 7,038 205,756
------------ -----------
Net change in cash......... $ 590 $ 1,419
============ ===========
</TABLE>
3. 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 April 21, 1997
-------------- --------------
<S> <C> <C>
Royalties.................. $ 680 $ 4,223
Initial franchise and area
developer fees............ 2,600 4,160
Real estate fees and lease
income.................... - 844
Other...................... 279 111
-------------- --------------
$ 3,559 $ 9,338
============== ==============
</TABLE>
8
<PAGE>
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 requires disclosure of basic and
dilutive earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the weighted-
average number of common shares outstanding for the reporting period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. SFAS No. 128 is effective for financial statements issued for
period ending after December 15, 1997. The pro forma earnings per share for the
quarters ended April 21, 1996 and April 20, 1997, utilizing the requirements of
SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
April 21, 1996 April 21, 1997
---------------- ---------------
<S> <C> <C>
Basic earnings (loss) per share.... ($0.35) $0.16
Diluted earnings (loss) per share.. ($0.35) $0.15
</TABLE>
5. Commitments
As of April 20, 1997, Bagel Store Development Funding, L.L.C. ("Bagel
Funding") had invested a total of $89.5 million, in the common equity of the
Company's area developers. As of April 20, 1997, the Company was the manager of
Bagel Funding. Bagel Funding has the right to require each area developer to
redeem Bagel Funding's equity interest in an area developer at a pre-determined
formula price based on the store level cash flow of the area developer in the
event that (i) the Company acquires a majority equity 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 does not consent to
the area developer's request to undertake a firm commitment underwritten public
offering after the Company's conversion and option rights under its loan
agreement with the area developer have expired unexercised; or (iii) the Company
does not consent to the area developer's request to terminate the area
developer's area development and franchise agreements with the Company after the
Company's conversion and option rights under its loan agreement with the area
developer have expired unexercised. 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.
6. 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.
7. Subsequent Event
On May 29, 1997, the Company issued in a private offering of $125.0 million
aggregate principal amount of 7 1/4% convertible subordinated debentures due
June 1, 2004. Interest is payable semi-annually on June 1 and December 1 of each
year beginning December 1, 1997. The debentures are convertible at any time
prior to maturity into shares of the Company's common stock at a conversion rate
of $21.25 per share, subject to adjustments under certain conditions. The
debentures may be redeemed at the option of the Company beginning June 1, 2000,
initially at 104.14% of their principal amount and at declining prices
thereafter, plus accrued interest.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 Einstein Bros. Bagels(TM) and Noah's New York Bagels(R)
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; development and operating costs; area developers' adherence to
development schedules; advertising and promotional efforts; brand awareness;
adverse publicity; acceptance of new product offerings; the Company's
relationship with, and the continued success of, Boston Chicken, Inc. ("Boston
Chicken"), the Company's majority stockholder; 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 the manner in which they operate and develop Einstein
Bros. Bagels and Noah's New York Bagels stores.
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 has sold all of the stores operated by it to area
developers financed in part by the Company. Because the Company has sold all of
its 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 derived principally from royalties, franchise-related
fees and interest income from its area developers as opposed to revenue from
Company stores. Additionally, due to the sale of Company stores to its area
developers, costs of goods sold and salaries, benefits and general and
administrative expenses from store operations will be eliminated, which will
impact the overall costs and expenses of the Company. See "Special Note
Regarding Forward-Looking Statements" above. Consequently, comparisons of
operating results to date may not be meaningful.
The Company currently estimates that there will be between 615 and 665 stores
in operation systemwide by the end of 1997. See "Special Note Regarding Forward-
Looking Statements" above. Area developer 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 franchise stores
and those of competitors, the size of the store and its visibility.
Consequently, the rate of royalty income increases may not be commensurable with
the rate of store openings. 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 systemwide rapid expansion significantly affects its liquidity and
capital requirements.
The Company and Boston Chicken, the Company's majority stockholder, 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 made available to the
Company a non-convertible loan facility of up to $50.0 million, none of which
was outstanding as of April 20, 1997.
Results of Operations
Revenue. Total revenue decreased to $16.7 million for the quarter ended April
20, 1997 from $22.4 million for the prior comparable quarter due to the decrease
in the number of Company-operated stores. The decrease in Company-operated
stores was due to the sale of Company-operated stores to the Company's area
developers. The Company completed the sale of its remaining stores to area
developers in March 1997. There was an average of 12
10
<PAGE>
Company-operated stores for the quarter ended April 20, 1997 compared to 66 for
the prior comparable quarter. As a result, revenue from Company-operated stores
decreased to $2.1 million for the quarter ended April 20, 1997 from $18.4
million for the prior comparable quarter.
Royalty and franchise-related fees increased to $9.3 million for the quarter
ended April 20, 1997 from $3.6 million for the prior comparable quarter. The
increase was primarily due to an increase in royalties and initial franchise and
area development fees attributable to the larger base of franchise stores
operating systemwide, which increased to an average of 354 stores for the first
quarter of 1997 from an average of 38 stores for the first quarter of 1996.
Interest income from loans to area developers increased to $5.3 million for the
quarter ended April 20, 1997 from $423,000 in the prior comparable quarter, due
to higher outstanding loan balances associated with the increase in stores
opened by the Company's area developers.
Cost of Products Sold. Cost of products sold decreased to $704,000 for the
quarter ended April 20, 1997 from $5.5 million for the prior comparable quarter.
The decrease was primarily due to the decrease in the number of Company-operated
stores. Cost of products sold, as a percentage of Company-operated store
revenue, increased to 33.5% from 29.8%. The increase was primarily due to
changing store mix and production methods related to the changing store mix.
Salaries and Benefits. Salaries and benefits decreased to $3.0 million for
the quarter ended April 20, 1997 from $9.1 million for the prior comparable
quarter. The decrease was due to the decrease in the number of Company-operated
stores in 1997, offset by increases in employees at the Company's support center
necessary to support systemwide expansion.
General and Administrative. General and administrative expenses decreased to
$5.8 million for the quarter ended April 20, 1997 from $9.0 million for the
quarter ended April 21, 1996. The decrease was due to the decrease in the number
of Company-operated stores in 1997, offset by increases in expenditures
necessary to support systemwide expansion.
Other Income (Expense). The Company had other income, consisting of interest
income on short-term cash investments, of $221,000 for the quarter ended April
20, 1997 compared to other expenses of $2.0 million for the quarter ended April
21, 1996. During the first quarter of 1996, the Company had an average
outstanding balance of $109.4 million on its credit facilities resulting in $3.3
million in interest expense. In the first quarter of 1997, the Company had a
positive cash balance for the majority of the quarter. The interest expense
incurred in 1996 was partially offset by gains realized on the sale of
marketable equity securities.
Income Taxes. The provision for income taxes for the quarter ended April 20,
1997 reflects the Company's expected effective tax rate.
Liquidity and Capital Resources
Liquidity. Cash provided by operating activities for the quarter ended April
20, 1997 was $7.0 million, an increase of $17.1 million from cash used in
operating activities of $10.1 million for the quarter ended April 21, 1996. Net
income increased to $5.2 million for the first quarter of 1997 compared to a net
loss of $3.3 million for the first quarter of 1996. Cash provided by working
capital increased to $2.0 million for the first quarter of 1997, compared to
cash used to fund working capital of $7.5 million for the first quarter of 1996.
This change in working capital was attributable to increases in accounts payable
and accrued expenses experienced as a result of the general growth of the
business in 1997 and the impact of the working capital reduction incurred from
the sale of Company-operated stores to area developers in the first quarter of
1996.
Cash provided by financing activities decreased to $16.0 million for the first
quarter of 1997 compared to $131.5 million for the first quarter of 1996.
Financing was primarily provided by proceeds from debt. Proceeds from the
issuance of common stock provided $8.2 million for the first quarter of 1997,
compared with $13.0 million for the first quarter of 1996. Subsequent to the end
of the first quarter of 1997, the Company issued $125.0 million of 7 1/4%
subordinated convertible debentures due 2004.
11
<PAGE>
The Company's primary use of capital reflects its goal of establishing brand
awareness and market leadership by providing partial financing to its area
developers for their use in store development and to finance their working
capital needs. As of April 20, 1997, the Company had secured loan commitments to
its area developers aggregating $359.9 million, of which $211.7 million had been
advanced. Net loan advances to area developers were $71.0 million (consisting of
$124.3 million of loan advances, net of $53.3 million of loan repayments) in the
first quarter of 1997 compared to $29.0 million (consisting of $36.9 million of
loan advances, net of $7.9 million of loan repayments) in the first quarter of
1996. The majority of the loan advance and repayment activity reflects the
revolving nature of the loans; that is, amounts are drawn and repaid on a
regular basis to optimize cash management. The increase in net loan advances was
attributable to the increase in the number of stores opened by area developers
in 1997 compared to 1996.
As a result of executing the rapid expansion strategy required by the Company,
the Company's area developers have incurred aggregate net losses of $1.3 million
in 1995 (during which period most stores were operated by the Company) and $40.6
million in 1996, which amounts included (a) approximately $10.5 million of
depreciation and amortization charges, (b) approximately $26.0 million
attributable to investment overhead, scale inefficiencies in operating overhead,
and other start-up costs which the Company believes are necessary to establish
the Einstein Bros. Bagels and Noah's New York Bagels brands in new territories
and open stores at a rate sufficient to gain a competitive advantage over
similar concepts, and (c) royalties, interest, and other franchise-related fees
that would no longer be incurred in the event the Company acquired, or converted
its convertible secured loans to its area developers. As a result of the
foregoing factors, as well as ongoing improvements to store operating
performance and increases in scale efficiencies, the Company does not consider
these start-up losses to be a meaningful financial measure during this rapid
expansion phase (i.e., that period during which new stores constitute a
significant percentage of the store base). The Company believes the rapid
expansion phase for most of its area developers should last approximately three
to four years from the time significant development commences in an area
developer's primary markets. As the rapid expansion phase ends, the size of an
area developer's store base should enable the area developer to gradually reduce
and eventually recover start-up losses. The reduction in and recovery of losses
are expected to be driven primarily by lower investment overhead, increased
operational and advertising efficiencies, greater economies of scale, and
increases in store revenue through continued product and service enhancements.
The point at which losses may be recovered will vary by area developer depending
primarily upon the size and timing of the area developer's store development
schedule, the achievement of advertising efficiency, the level of debt and
interest charges, the intensity of competition and the quality of management;
however, there can be no assurance that such losses will be recovered. Because a
majority of the Company's area developers are less than one year into
significant store development in their respective market areas, the Company
believes they will remain in the rapid expansion phase during 1997. Subsequent
to the completion of the rapid expansion phase, the Company expects area
developer profitability to be a more meaningful factor in assessing loan
recoverability and any future loan commitments. Although the Company believes
its current area developers will achieve profitability, in the event the
foregoing strategy does not come to fruition or an area developer otherwise
fails to achieve a sufficient level of profitability subsequent to the
completion of its rapid expansion phase, such event could have material adverse
impact on the Company's financial position and results of operations. See
"Special Note Regarding Forward-Looking Statements" on page 9.
The allowance for area developers' loan 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 the use
of loan proceeds, adherence to store development schedules, store performance
trends, type and amount of collateral securing the loan, prevailing economic
conditions, and other factors that management deems relevant at the time. Based
upon this review and analysis, no allowance for loan losses was required as of
December 29, 1996 and April 20, 1997.
Area developer loans are convertible into a majority equity interest in the
area developer at a conversion price set forth in the loan agreement, which is
at a premium over the per unit price paid by investors in the area developer for
their equity investments, after the expiration of a moratorium period, provided
that the area developer has completed not less than 80% of its area development
commitment, or in the event of certain defaults. Any determination to convert
any area developer loan or otherwise acquire an equity interest in any area
developer would involve a variety of economic and operational considerations,
including the projected financial impact of converting the loan, 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 and the willingness of the
Company to incur the risk of owning such stores versus
12
<PAGE>
receiving income as a franchisor, lender and service provider, the Company's
ability to manage stores if necessary, the future capital requirements of the
area developer and its ability to raise a portion of such capital, and the
demand on Company resources. However, factors and circumstances unique to a
specific transaction may also impact the Company's decision. 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. There can be no assurance that the Company will exercise its future
rights to acquire an equity interest in any area developer to which it provides
financing or that such exercise will result in control of the area developer. At
April 20, 1997, the Company had not converted (nor did it have the right to
convert) any loan to any area developer or otherwise acquired any equity
interest in any area developer.
In addition to providing funding to its area developers, the Company's capital
requirements have consisted of development of its corporate infrastructure,
which supports systemwide expansion, and investments in food production
facilities. During the first quarter of 1997, the Company expended $3.9 million
related to its corporate infrastructure and investments in food production
facilities. During the first quarter of 1996, the Company expended $17.6 million
on its corporate infrastructure, investments in food production facilities and
store development, as well as $100.9 million for the acquisition of all the
capital stock of Noah's New York Bagels, Inc. These capital expenditures have
been offset with proceeds from selling Company stores. The Company generated
$3.6 million in 1997 and $25.1 million in 1996 from the sale of stores to newly-
formed area developers. There were no material gains or losses recognized as a
result of these sales. The Company completed the sale of its remaining stores to
newly-formed area developers during the first quarter of 1997. Consequently, the
Company does not anticipate it will realize cash proceeds from the sale of
stores in the future.
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 stores opened, operational
results of the stores, and the amount and timing of borrowings under the loan
agreements between the Company and its 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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
(c) During the first quarter of 1997, the Company issued (i) 231,023 shares
of the Company's common stock to one of its area developers in
connection with the acquisition by such area developer of certain assets
of Bagel Boulevard Cafe America, Inc., Bagel Boulevard of Florida, Inc.,
Bagel Boulevard of Georgia, Inc. and Bagel Boulevard of Texas, Inc. and
(ii) 364,150 shares of the Company's common stock upon the exercise of
certain warrants for an aggregate purchase price of $2.4 million. All of
such shares were issued and sold without registration under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance
on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated under the Securities Act.
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 April 20, 1997.
14
<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: May 30, 1997 /s/ Mark R. Goldston
-------------------------------------
Mark R. Goldston
President and Chief Executive Officer
Date: May 30, 1997 /s/ W. Eric Carlborg
-------------------------------------
W. Eric Carlborg
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibits
- ------- --------
4.1 Indenture dated as of May 29, 1997 by and between the Company and
Bankers Trust Company, as Trustee, which includes as Exhibits the forms
of Debenture for the Company's 7 1/4% Convertible Subordinated
Debentures due 2004 (the "Debenture Indenture") (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
dated as of May 30, 1997).
4.2 Registration Rights Agreement dated May 22, 1997 by and between the
Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Alex. Brown & Sons Incorporated and Morgan Stanley & Co.
Incorporated (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated as of May 30, 1997).
10.1 Debenture Indenture (included in Exhibit 4.1).
10.2 Third Amendment dated May 20, 1997 to Secured Credit Agreement by and
among the Company, the Lenders referenced therein and Bank of America
Illinois, as Agent.
11 Statement re: Computation of Earnings (Loss) Per Share.
27 Financial Data Schedule.
Exhibit-1
<PAGE>
EXHIBIT 10.2
THIRD AMENDMENT
TO
SECURED CREDIT AGREEMENT
THIS THIRD AMENDMENT (this "Amendment") dated as of May 20, 1997 is
entered into by and among Einstein/Noah Bagel Corp. (f/k/a Einstein Bros.
Bagels, Inc.), a Delaware corporation (the "Borrower"), the lenders who are
party to the Credit Agreement referred to below (the "Lenders") and Bank of
America Illinois, an Illinois banking corporation, as Agent for the Lenders
(herein, in such capacity, the "Agent").
W I T N E S E T H:
-----------------
WHEREAS, the Borrower, the Lenders and the Agent are parties to a
certain Secured Credit Agreement dated as of May 17, 1996 (as heretofore
amended, called the "Credit Agreement"; terms used but not otherwise defined
herein are used herein as defined in the Credit Agreement);
WHEREAS, the Borrower desires to amend the Credit Agreement to permit
the issuance and incurrence of Convertible Subordinated Debentures (the "2004
Subordinated Debt") due 2004 pursuant to the terms and conditions of a certain
Indenture to be dated on or near June 1, 1997 (substantially in the form
attached hereto as Exhibit A, the "Indenture") between the Borrower and Bankers
Trust Company, a banking corporation duly organized and existing under the laws
of the state of New York, as trustee;
WHEREAS, subject to the terms and conditions set forth herein the
Agent and the Lenders are willing to amend the Credit Agreement so as to, among
other things, permit the issuance and incurrence of the 2004 Subordinated Debt.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Borrower, the Agent and the Lenders hereby agree as
follows:
SECTION 1. AMENDMENTS.
----------
Upon receipt of the documents to be delivered by the Borrower pursuant
to Section 2 below, and in reliance on the Borrower's warranties set forth in
Section 3 below, as of the date hereof the Credit Agreement shall be hereby
amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by revising the
definition of "Subordinated Debt" to read in its entirety as follows:
<PAGE>
" "Subordinated Debt" means Debt of the Borrower (A) (1) which is
subordinated in priority of payment to the Debt of the Borrower under
this Agreement and the Revolving Note in a manner consistent with the
BCI Subordination Agreement and (2) which shall not mature prior to
the Termination Date (the Lenders acknowledge that, (a) prior to the
conversion thereof into equity, the BCI Convertible Debt shall
constitute "Subordinated Debt", and (b) any other Debt owed to BCI by
the Borrower existing as of the Effective Date and covered by the
terms and conditions of the BCI Subordination Agreement shall
constitute "Subordinated Debt"), and (B) pursuant to the Convertible
Subordinated Debentures (the "2004 Subordinated Debt") due 2004 issued
pursuant to the terms and conditions of a certain Indenture (the "2004
Indenture") dated on or near June 1, 1997 between the Borrower and
Bankers Trust Company, a banking corporation duly organized and
existing under the laws of the state of New York, as trustee."
(b) Section 6.2 of the Credit Agreement is amended by deleting the
"and" at the end of Section 6.2(12) of the Credit Agreement, redesignating
Section 6.2(13) of the Credit Agreement as Section 6.2(14) of the Credit
Agreement, and adding a new Section 6.2(13) of the Credit Agreement to read
in its entirety as follows:
" (13) 2004 Subordinated Debt; and"
(c) Section 6.14 of the Credit Agreement is amended to read in its
entirety as follows:
" SECTION 6.14 Subordinated Debt. Make any payment or prepayment
with respect to any Subordinated Debt, except that (i) interest may be
paid on Subordinated Debt to the extent permitted by the terms of such
Subordinated Debt (including without limitation the BCI Subordination
Agreement or the 2004 Indenture if applicable), including without
limitation the subordination provisions thereof, and (ii) prior to an
Event of Default, Subordinated Debt and interest thereon may be
converted into equity of the Borrower or may be prepaid solely from
the proceeds of a substantially contemporaneous issuance of equity or
Subordinated Debt of the Borrower; provided, that within fifteen (15)
Business Days of the receipt of any BCI Exempted Stock, the Borrower
may prepay principal of the BCI Convertible Debt by an amount equal to
the net cash proceeds received from the disposition of such BCI
Exempted Stock."
-2-
<PAGE>
SECTION 2. CERTAIN DOCUMENTS.
-----------------
Concurrently herewith the Borrower has delivered the following to the
Agent, each duly executed and appropriately dated and in form and substance
satisfactory to the Agent:
(a) Certificate of the Borrower. A certificate of the Secretary of
the Borrower certifying (i) a true and correct copy of the most recent
draft of the Indenture (it being understood that any changes to the
Indenture must be approved by the Agent); (ii) a copy of the Certificate of
Incorporation and bylaws of the Borrower (or a statement that no change has
been made to such documents since the date of the Credit Agreement), and
(iii) resolutions of the board of directors of the Borrower authorizing the
execution, delivery and performance by the Borrower of the Indenture, the
transactions contemplated thereby and the incurrence of the 2004
Subordinated Debt.
(b) Legal Opinions. A copy of all legal opinions delivered in
connection with the Indenture on behalf of the Borrower together with
reliance letter(s) relating thereto permitting the Lenders to rely on
opinions as to the authorization of the issuance and incurrence of the 2004
Subordinated Debt and other similar matters.
(c) Miscellaneous. Such other approvals, opinions or documents as
-------------
the Agent may reasonably request.
SECTION 3. WARRANTIES.
----------
To induce the Agent and the Lenders to enter into this Amendment, the
Borrower warrants to the Agent and the Lenders as of the date hereof that:
(a) The representations and warranties contained in the Credit
Agreement and Loan Documents are true and correct in all material respects
on and as of the date hereof (except to the extent such representations and
warranties expressly refer to an earlier date); and
(b) No Default or Event of Default has occurred and is continuing.
SECTION 4. GENERAL.
-------
(a) As hereby modified, the Credit Agreement shall remain in full
force and effect and is hereby ratified, approved and confirmed in all
respects.
-3-
<PAGE>
(b) This Amendment shall be binding upon and shall inure to the
benefit of the Borrower, the Lenders and the Agent and respective
successors and assigns of the Lenders and the Agent.
(c) This Amendment may be executed in any number of counterparts and
by the different parties on separate counterparts, and each such
counterpart shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Amendment.
-4-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By: /s/ Paul A. Strasen
------------------------------
Title: Senior Vice President
------------------------
BANK OF AMERICA ILLINOIS, as Agent
By: /s/ David A. Johanson
------------------------------
Title: Vice President
------------------------
BANK OF AMERICA ILLINOIS, as Lender
By: /s/ L. Richard Di Donato
------------------------------
Title: Vice President
------------------------
LASALLE NATIONAL BANK
By: /s/ John C. Thurston
------------------------------
Title: Commercial Loan Officer
------------------------
HARRIS TRUST AND SAVINGS BANK
By: /s/ John M. Dillon
------------------------------
Title: Vice President
------------------------
The undersigned hereby acknowledge the foregoing amendments and reaffirm
their respective duties and obligations arising under the Loan Documents to
which each is a party.
BRACKMAN BROTHERS, INC.
By: /s/ Paul A. Strasen
------------------------------
Its: President
------------------------------
BALTIMORE BAGEL CO.
By: /s/ Paul A. Strasen
------------------------------
Its: President
------------------------------
-5-
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
By: /s/ Paul A. Strasen
--------------------------------
Its: President
-------------------------------
-6-
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended
---------------------
April 21, April 20,
1996 1997
---------- ---------
<S> <C> <C>
Primary earnings per share:
Weighted average number of shares
outstanding................................ 7,935 32,559
Incremental shares pursuant to Staff
Accounting Bulletin No. 83................. 1,744 2,403
---------- ---------
Adjusted primary weighted average
number of common and equivalent shares
outstanding................................ 9,679 34,962
========== =========
Fully diluted earnings per share:
Weighted average number of shares
outstanding................................ 7,935 32,559
Incremental shares pursuant to Staff
Accounting Bulletin No. 83................. 1,744 2,403
---------- ---------
Adjusted fully diluted weighted average
number of common and equivalent shares
outstanding................................ 9,679 34,962
========== =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> APR-20-1997
<CASH> 257
<SECURITIES> 0
<RECEIVABLES> 9,406
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,396
<PP&E> 27,766
<DEPRECIATION> 0
<TOTAL-ASSETS> 357,352
<CURRENT-LIABILITIES> 12,718
<BONDS> 0
0
0
<COMMON> 329
<OTHER-SE> 329,849
<TOTAL-LIABILITY-AND-EQUITY> 357,352
<SALES> 2,103
<TOTAL-REVENUES> 16,728
<CGS> 704
<TOTAL-COSTS> 704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,453
<INCOME-TAX> 2,275
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,178
<EPS-PRIMARY> .15
<EPS-DILUTED> 0
</TABLE>
