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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21097
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EINSTEIN/NOAH BAGEL CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1294908
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14123 DENVER WEST PARKWAY
GOLDEN, CO 80401-4086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 215-9300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, $.01 PAR VALUE
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, and (2) has been subject to such filing
requirements for the past 90 days: Yes: X No:__
--
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY
$341,072,810 AT MARCH 17, 1997 (BASED ON THE CLOSING SALE PRICE ON THE NASDAQ
NATIONAL MARKET ON MARCH 17, 1997, AS REPORTED BY THE WALL STREET JOURNAL
(WESTERN EDITION)). AT MARCH 17, 1997, THE REGISTRANT HAD ISSUED AND
OUTSTANDING AN AGGREGATE OF 32,689,678 SHARES OF COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
THOSE SECTIONS OR PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON MAY 13, 1997 DESCRIBED IN PART III HEREOF
ARE INCORPORATED BY REFERENCE IN THIS REPORT.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS 10-K UNDER "ITEM 1. BUSINESS", "ITEM 3. LEGAL
PROCEEDINGS", "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", AND ELSEWHERE IN THIS FORM 10-K,
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). SUCH FORWARD-
LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
EINSTEIN/NOAH BAGEL CORP. (THE "COMPANY"), ITS AREA DEVELOPERS, AND EINSTEIN
BROS.(TM) BAGELS STORES 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; THE COMPANY'S
RELATIONSHIPS WITH, AND THE CONTINUED SUCCESS OF, BOSTON CHICKEN, INC. ("BOSTON
CHICKEN"); 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 BENEFITS COSTS; CHANGES IN GOVERNMENT REGULATION; REGIONAL WEATHER
CONDITIONS; AND OTHER FACTORS REFERENCED IN THIS FORM 10-K. THE SUCCESS OF THE
COMPANY IS DEPENDENT ON ITS AREA DEVELOPERS AND THE MANNER IN WHICH THEY OPERATE
AND DEVELOP EINSTEIN BROS. BAGELS STORES AND NOAH'S NEW YORK BAGELS STORES.
ITEM 1. BUSINESS
SPECIAL NOTE: CERTAIN STATEMENTS SET FORTH BELOW UNDER THIS CAPTION
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT.
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR ADDITIONAL FACTORS
RELATING TO SUCH STATEMENTS.
GENERAL
The Company franchises and operates specialty retail stores that feature
fresh-baked bagels, proprietary cream cheeses, specialty coffees and teas, and
creative soups, salads and sandwiches, primarily under the Einstein Bros. Bagels
and Noah's New York Bagels brand names. As of December 29, 1996, there were 315
stores in operation systemwide, of which 14 were Company stores and 301 were
stores operated by area developers financed in part by the Company. As of
December 29, 1996, the Company had entered into area development agreements that
provide for the development of 1086 additional stores, the majority of which are
scheduled to open over the next three years. The Company 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.
The Company was incorporated in Delaware in February 1995 under the name
Progressive Bagel Concepts, Inc. The Company's name was subsequently changed to
Einstein/Noah Bagel Corp. in June 1996. The Company's principal executive
offices are located at 14123 Denver West Parkway, Golden, Colorado, and its
telephone number is (303) 215-9300.
THE COMPANY'S BRANDS
The Company has two principal brands. The Einstein Bros. Bagels brand was
developed by the Company after it was formed in March 1995. The Noah's New York
Bagels brand, which was acquired when the Company acquired Noah's New York
Bagels, Inc. in February 1996, was originally introduced in 1989 in Berkeley,
California. As of December 29, 1996, the Company and its area developers had
opened a total of 199 Einstein Bros. Bagels stores in 27 states and the District
of Columbia, and 90 Noah's New York Bagels stores in California, Washington and
Oregon.
The key component of the Company's product strategy is its offering of fresh-
baked bagels, produced utilizing proprietary processes that allow for maximum
inclusion of high quality ingredients, such as whole blueberries, raisins and
nuts. Bagels are offered in a wide variety of both traditional and creative
flavors and are baked fresh throughout the day in each Einstein Bros. Bagels and
Noah's New York Bagels store using steamed-baking processes.
Einstein Bros. Bagels and Noah's New York Bagels stores also offer consumers a
line of traditional and creative flavors of cream cheese and an extensive line
of beverages featuring branded coffees and teas, fruit teas, bottled sodas,
juices and
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waters, and a full line of fountain sodas. The stores also include a menu of
creative soups, salads and bagel sandwiches offering customers a variety of
lunch alternatives, as well as branded retail products that support the major
menu categories, including ground and whole bean coffee, teas, bagel chips,
coffee mugs and other items. Stores are typically in leased locations of
approximately 2200 square feet with ample parking, substantial indoor seating
and when practical, additional outdoor seating.
AREA DEVELOPERS
The Company's strategy of concentrated development of local markets is
supported by area developers financed in part by the Company. The Company
believes that having a relatively small group of area developers, each led by a
management group with substantial multi-unit retail food service experience and
short- and long-term incentives tied to performance, is a superior means of
achieving market leadership than either Company ownership of all stores or more
traditional franchising approaches utilizing a larger number of franchisees. The
Company anticipates that domestic expansion of its brands will be undertaken by
its current area developers and is not seeking additional domestic area
developers or franchisees.
As of December 29, 1996, the Company had entered into area development
agreements with eleven entities for the development and operation of an
aggregate of 1,083 Einstein Bros. Bagels stores and an aggregate of 304 Noah's
New York Bagels stores over the next six years (as summarized below). In
addition, as of December 29, 1996, the Company and its area developers were
operating 26 bagel stores under the Bagel & Bagel, Offerdahl's Bagel Gourmet and
Baltimore Bagel brands. The Company and its area developers intend to convert
all such stores to Einstein Bros. Bagels stores by early 1998. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2.
<TABLE>
<CAPTION>
CURRENT ADDITIONAL
STORES STORES
AREA DEVELOPER (1) PRIMARY DEVELOPMENT TERRITORIES OPEN COMMITTED
- ------------------ ------------------------------- ------------- -----------------
<S> <C> <C> <C>
Einstein Bros. Bagels and
Melvyn & Elmo's(TM):(2)
Alamo Bagels, L.P.(3)................. Dallas/Ft. Worth, Houston, Austin 6 104
BCE West Bagels, L.L.C.(3)............ Denver, Salt Lake City, Phoenix, Tucson, 48 59
Albuquerque, Las Vegas, Colorado Springs
Colonial Bagels, L.P.(3).............. Boston, Cleveland, Pittsburgh, 16 96
Providence/ New Bedford, Springfield
Finest Bagels, L.L.C.(3).............. Kansas City, St. Louis, Minneapolis 29 49
Great Lakes Bagels, L.L.C............. Milwaukee, Chicago, Detroit, Madison, 40 157
Indianapolis
Gulfstream Bagels, L.P.(3)............ Miami, Fort Lauderdale, West Palm Beach, 34 61
Orlando, Tampa
Liberty Foods, L.L.C.(3).............. New York City metropolitan area 14 136
Mayfair Bagels, L.L.C.(3)............. Washington, D.C., Baltimore, Richmond,
Atlanta(4), Charlotte, Norfolk 12 137
Philly Rose, L.P...................... Philadelphia 12 73
Noah's New York Bagels:
Noah's Bay Area Bagels, L.L.C......... Sacramento, San Francisco/Oakland/San Jose 46 49
Noah's Pacific, L.L.C................. Los Angeles, Portland, Seattle/Tacoma 44 165
========== ============
Total.......................... 301 1,086
========== ============
</TABLE>
(1) At December 29, 1996 the Company operated one Einstein Bros. Bagels store
and 13 stores under the Baltimore Bagel brand in Southern California. On
March 24, 1997, the Company sold all of these stores (plus two additional
stores opened after December 29, 1996) to Sunbelt Bagels, L.L.C., and
granted it the right to develop an additional 64 Einstein Bros. Bagels
stores in the San Diego, Palm Springs and portions of the Los Angeles
metropolitan areas.
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(2) Includes 11 stores operated under the Bagel & Bagel brand and 2 stores
operated under the Offerdahl's Bagel Gourmet brand.
(3) On March 28, 1997, certain of the Company's area developers entered into
letters of intent pursuant to which such area developers propose to enter
into certain transactions in which Alamo Bagels, L.P. would be merged into
Finest Bagels, L.L.C., BCE West Bagels, L.L.C. would be merged into Sunbelt
Bagels, L.L.C., and Liberty Foods, L.L.C. would be merged into Colonial
Bagels, L.P. In each of the transactions, owners of equity interests in the
merging area developer would receive equity interests in the surviving area
developer. In addition, Gulfstream Bagels, L.P. ("Gulfstream") and Mayfair
Bagels, L.L.C. ("Mayfair") have entered into a letter of intent pursuant to
which certain development rights, stores and other assets of Mayfair in
Atlanta, Charlotte and Norfolk would be transferred to Gulfstream. The
Company currently intends to consent to these proposed transactions because
the Company believes that they will result in lower investment overhead,
increased operational and advertising efficiencies, and greater economies of
scale. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2.
(4) Stores in the Atlanta metropolitan area will operate under the Melvyn &
Elmo's brand because the Company does not currently have the right to use
the Einstein Bros. Bagels brand for restaurant services in the Atlanta
metropolitan area.
The Company believes that rapid penetration of selected designated market
areas ("DMAs") is superior to more limited penetration of many DMAs for several
reasons. Concentration of stores allows both area developers and Company
personnel to gain greater expertise concerning the trade areas within the DMA,
thus improving their ability to locate and approve sites on a more informed and
efficient basis as part of a market-wide strategy. In addition, store
concentration can permit more efficient operations in terms of multi-unit
management, convenient employee training, and sharing of employees, expertise
and other resources within a DMA. Concentrated DMA penetration also permits
cost-efficient media advertising to commence sooner than would be the case with
a more scattered nationwide expansion. The Company believes that media
advertising increases aggregate store revenue (which, in turn, can promote
certain in-store operating efficiencies) and assists the Company's area
developers in securing real estate for future sites on acceptable terms and
recruiting management and hourly employees.
The Company's success is dependent to a significant extent upon its area
developers and the manner in which they operate and develop their stores and
manage their organizational and financial resources. The opening and success of
stores are dependent on a number of factors, including the availability of
suitable sites, the negotiation of acceptable lease or purchase terms for such
sites, permitting and regulatory compliance, the ability to meet construction
schedules, the ability to hire and train qualified personnel, the financial and
other capabilities of the Company and its area developers, and general economic
and business conditions. Not all of the foregoing factors are within the
control of the Company or its area developers. There can be no assurance that
area developers will have access to the financial resources necessary to open
the number of stores required by their development schedules or that area
developers will successfully develop or operate stores in their development
areas in a manner consistent with the Company's concepts and standards.
DEVELOPMENT AGREEMENTS
The Company's form of area development agreement currently provides for the
development of a specified number of bagel stores of a specified brand within a
defined geographic territory in accordance with a schedule of store opening
dates. The development schedule generally covers two to five years and contains
benchmarks for the number of stores to be opened and in operation at quarterly
or semi-annual intervals. An area developer's development schedule typically
requires concurrent store development by the area developer in multiple DMAs.
Area developers initially pay a non-refundable development fee of $5,000 per
store to be developed and a non-refundable real estate services fee of $5,000
per store to be developed. Such fees are not recognized as income by the
Company until the store for which such fees have been paid is opened. The area
development agreements generally provide that the area developer has the right
to open a specified number of stores within each DMA during the term of the
development schedule applicable to that DMA and generally preclude the Company
from operating or franchising bagel stores of the brand for which rights have
been granted within such territory, except that, subject to certain area
developer rights of first refusal, the Company reserves the right to engage in
certain limited special distribution arrangements and to develop target sites
and conversion sites within the specified territory. Target sites are sites
which the Company believes should be developed for competitive or market reasons
regardless of the applicable development schedule or the location of pre-
existing sites. Conversion sites are sites obtained from other companies which
are suitable for conversion to bagel stores.
Breaches of the area development agreement, including failure to meet
development schedules, may lead to termination of the limited exclusivity
provided by the agreement, renegotiation of development and franchise provisions
or termination of the right to build future stores, although such termination
will not generally affect existing franchise agreements for
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developed locations unless such breaches independently constitute defaults of
the franchise agreements. Any such termination could be contested by the area
developer.
FRANCHISE AGREEMENTS
Once an acceptable lease for an approved store site has been executed or real
estate for a new site has been acquired, the Company and the area developer
enter into a franchise agreement under which the area developer becomes the
franchisee for the specific store to be developed at the site. Franchise
agreements typically provide for a non-refundable franchise fee of $35,000 per
store, a 5% royalty on "Royalty Base Revenue" (defined as gross revenue
less customer refunds and coupons, the portion of employee meals not charged to
the employee and monies received by the store from other stores directly
attributable to an approved commissary operated in the store), a national
advertising fund contribution of 2% on Royalty Base Revenue, a local advertising
fund contribution of 4% on Royalty Base Revenue and a $10,000 minimum grand
opening expenditure. The national and local advertising fund contributions may
each be increased by .25% per calendar year over the prior year at the
discretion of the Company. The Company's franchise and area development
agreements, with respect to markets where the Company has already commenced
store development, generally provide for 6% royalties.
The Company's form of franchise agreement provides that the Company may
specify computer hardware and software for use in stores, including licensed
software designated or created by or for Boston Chicken and used by the Company
and its area developers. The cost of designated computer hardware is
approximately $15,000 to $40,000 per store. The Company currently specifies
off-the-shelf computer hardware for use in stores and charges fees aggregating
$16,000 for licensed software for store systems, $15,000 of which is paid to
Boston Chicken and $1,000 of which is paid to a third-party for certain
proprietary software which the area developer is required to use under an
existing computer and communications systems services agreement. The Company's
form of franchise agreement also provides for a periodic maintenance and support
fee for modifications and enhancements made to the licensed software and certain
other maintenance and support services. The Company and its area developers pay
$323 to Boston Chicken and the Company's area developers pay an additional $77
to the Company per four-week accounting period per store for these services. The
Company believes that the integrated hardware and licensed software systems used
by its area developers facilitate the movement of knowledge, including
financial, customer and employee performance data, allowing the Company and its
area developers to react quickly in a competitive environment.
The Company's form of franchise agreement provides for an area of limited
exclusivity surrounding the bagel store in which the Company may neither develop
nor grant to others the right to develop additional bagel stores (generally
limited to bagel stores of the brand that has been licensed to the franchisee),
except that the Company reserves the right to engage in certain limited special
distribution arrangements and, in the event that the franchisee chooses not to
develop them, to develop conversion sites within the franchisee's designated
territory. Designated territories in suburban locations are generally a one-
mile radius surrounding the store, while urban locations occasionally have a
smaller (e.g., one-half mile) radius or a trade-area-specific designated
territory.
The Company's form of franchise agreement requires that each store be operated
in accordance with the operating procedures and menu, and meet the applicable
quality, service and cleanliness standards, established by the Company. The
Company may work with a franchisee to improve substandard performance or any
items of non-compliance and may terminate any franchise agreement if the
franchisee does not comply. The Company is specifically authorized to take
accelerated action in the event that the operations of any franchise store
present a health risk. The Company believes that maintaining superior food
quality, a clean and pleasing environment and excellent customer service are
critical to the reputation and success of the Company's brands and, therefore,
intends to strictly enforce applicable contractual requirements. Upon any
termination of a franchise agreement, the Company has the right to purchase the
assets of the franchisee at the net tangible book value of such assets.
AREA DEVELOPER FINANCING
Secured Loan Agreements. Each of the Company's area developers is funded in
part by a senior secured loan made by the Company that is typically convertible
into a majority equity interest in the area developer. The Company believes that
the development and operation of stores in a DMA is improved when management is
permitted to focus primarily on store development and operations, rather than on
raising capital. Accordingly, to facilitate the development of its brands, the
Company has made, and currently intends to make, loans to area developers to
provide partial financing for store development and working capital. The
Company's loan agreements with its area developers generally require the area
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developer to expend at least 75% of its equity capital on developing stores
prior to drawing on its revolving loan, with advances permitted during a two- or
three-year draw period in a pre-determined maximum amount generally equal to
four times the amount of the area developer's cash equity capital contributions.
The loans are typically convertible into a majority equity interest in the
area developer after the expiration of a moratorium period, provided that the
area developer has completed not less than 80% of its store 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 stores versus 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 such capital, and the demand on Company resources. 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. Upon conversion, the Company would typically become the majority
equity owner of the area developer, resulting in the Company consolidating the
area developer's operations in its financial statements. Consequently, the
franchise and related fees earned by the Company (including interest, royalties,
real estate-related fees, software fees, and other fees) from such area
developer would be eliminated in consolidation. The operating results of the
area developer (primarily store revenue, less expenses) would be included in the
Company's financial results. Such results would be adjusted for any remaining
minority interest in the area developer not acquired by the Company.
Each loan agreement contains customary representations, warranties, terms and
covenants. The Company's loans to its area developers subject the Company to
the risks of being a secured lender. The Company considers each area
developer's use of loan proceeds, adherence to its store development schedule,
store performance trends, type and amount of collateral securing the loan,
prevailing economic conditions and other factors it deems relevant at the time
in evaluating whether to establish an allowance for potential loan losses. See
Note 11 of Notes to Consolidated Financial Statements.
As a result of executing the rapid expansion strategy required by the Company,
the Company's area developers have incurred aggregate net losses in each of the
last two years 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 DMA. 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 interest charges, the intensity of competition and the quality of management;
however, there can be no assurance that such losses will be recovered. Because
substantially all of the Company's area developers are less than one year into
significant store development in their respective DMAs, 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 a material adverse impact on the
Company's financial position and results of operations. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2.
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Area Developer Equity. Members of management of each of the Company's area
developers generally make an equity investment in the area developer entity. The
amount and type of such investments vary among the area developers. Future
investments by management or others could include contributions of assets. In
addition to direct equity investments provided by area developer management,
equity investments in the Company's area developers are made by Bagel Store
Development Funding, L.L.C., a Delaware limited liability company ("Bagel
Funding"), formed in December 1995 to invest in area developers of the Company.
Bagel Funding has received total capital commitments from its members
aggregating $90.0 million, $75.0 million of which has been contributed to Bagel
Funding and the balance of which has been called for contribution prior to April
1, 1997. Certain directors and officers of each of the Company and Boston
Chicken have made equity investments in Bagel Funding aggregating approximately
$15.2 million as of December 29, 1996. As of December 29, 1996, Bagel Funding
had invested a total of approximately $70.2 million in area developers. The
Company is currently the manager of Bagel Funding, but has no equity interest in
Bagel Funding. See Notes 10 and 13 of Notes to Consolidated Financial
Statements.
Bagel Funding has the right to require an area developer to redeem Bagel
Funding's equity interest in such area developer at a pre-determined formula
purchase price based on store level cash flow of the area developer in the event
(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's conversion and option
rights expire unexercised and the Company has not consented to the area
developer's request to undertake a firm commitment underwritten public offering
of the area developer's equity, or (iii) the Company does not acquire a majority
interest in the area developer pursuant to the exercise of the Company's
conversion or option rights, such rights have expired under the secured loan
agreement and the Company has not consented to a request by the area developer
to terminate its area development and franchise agreements with the Company. In
the event the area developer does not redeem Bagel Funding's equity interest
when required to do so, the Company will be obligated to purchase from Bagel
Funding its equity interest in the area developer at the same price applicable
to the area developer.
MARKETING AND COMPETITION
The Company believes that a key component in developing both the Einstein
Bros. Bagels and Noah's New York Bagels brands is a strong local and community-
based effort that encourages a close relationship between each store and its
community. The Company and its area developers utilize community involvement as
a means of providing charitable service, as well as building brand awareness and
loyalty. The Company also utilizes the traditional marketing and advertising
methods of television, radio, newspapers and other print media (including use of
free-standing inserts and promotional coupons), signage, direct mail and in-
store point-of-purchase displays to promote its brands. The Company and its
area developers are currently testing a combination of multi-media and consumer
promotions designed to launch the Company's brands in local markets and to build
strong brand awareness in a short time. Both Company stores and area
developer stores are generally required to contribute to a national advertising
fund and a local advertising fund to pay for the development of advertising
material and for advertising in their respective DMAs. See "-- Franchise
Agreements" and Note 9 of the Notes to Consolidated Financial Statements.
The food service industry is intensely competitive with respect to food
quality, concept, location, service and price. In addition, there are many well-
established food service competitors with substantially greater financial and
other resources than the Company and with substantially longer operating
histories. Many of such competitors are less dependent than the Company on a
single, primary product. The Company believes that it competes with other bagel
retailers and bakeries (including Bruegger's Bagel Bakery), specialty coffee
retailers, doughnut shops, fast-food restaurants, delicatessens, take-out food
service companies, supermarkets and convenience stores. The Company believes
that competition in the retail bagel market will increase as large retail bagel
companies attract additional capital, new competitors enter the market and bagel
retailers compete for market share. In addition, the Company believes that the
start-up costs associated with retail bagel and similar food service
establishments are not a significant impediment to entry into the retail bagel
business. The Company believes that its Einstein Bros. Bagels and Noah's New
York Bagels brands compete favorably in the important factors of food quality,
convenience, service and price.
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
product, and the type, number and location of competing restaurants. Multi-unit
food service chains such as the Company can also be substantially adversely
affected by publicity resulting from food quality, illness, injury or other
health concerns (including food-borne illness claims) or operating issues
stemming from one store or a limited number of stores, whether or
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not the Company is liable. Claims relating to foreign objects, food-borne
illness or operating issues are common in the food service industry and a number
of such claims may exist at any given time. In addition, factors such as
increased cost of goods, labor and employee benefits costs, regional weather
conditions and potential scarcity of experienced management and hourly employees
may also adversely affect the food service industry in general and the results
of operations and financial condition of the Company and its area developers in
particular. The Company attempts to manage or adapt to these factors, but some
or all of these factors could adversely affect the Company and some or all of
its area developers.
VENDORS
In May 1996, the Company entered into a project and approved supplier
agreement (the "Harlan Supply Agreement") with Harlan Bagel Supply Company,
L.L.C. ("Harlan") and the equity owners of Harlan. Harlan completed the
construction of a production facility in Avon, Indiana (the "Harlan Facility")
in August 1996, which is capable of producing frozen dough for approximately 1.4
million dozen bagels per month. Under the Harlan Supply Agreement, Harlan has
agreed to sell to the Company, its area developers and their food service
distributors up to 1.4 million dozen bagels per month through June 1, 2003, for
which such purchasers will be charged a price equal to the cost of ingredients
and packaging, will absorb an agreed upon allowance for product losses and will
pay a fixed toll charge (which is subject to adjustment for inflation, changes
in formulations, specifications or procedures required by the Company or failure
of the Company, its area developers and their food service distributors to
purchase certain minimum numbers of bagels). Under certain circumstances,
contract purchase amounts may be increased, which would permit Harlan to double
the Harlan Facility's capacity. Harlan has granted to the Company an option,
exercisable at any time from December 15, 1999 through June 1, 2002, to acquire
all of the assets of Harlan at a formula price equal to a multiple of Harlan's
profits from sales of products under the Harlan Supply Agreement. The Company
owns certain equipment used in the Harlan Facility, which is leased to Harlan
pursuant to an operating lease.
The Company also expects to enter into an approved supplier agreement (the
"Whittier Supply Agreement") with Noah's Pacific, L.L.C. ("Noah's Pacific"), an
area developer of the Company to whom the Company currently subleases a dough
production facility in Whittier, California (the "Whittier Facility"), or with a
third party bagel producer to whom the Whittier Facility would be transferred
(Noah's Pacific or such third party producer being referred to herein as the
"Whittier Supplier"). Under the Whittier Supply Agreement, the Whittier
Supplier would agree to sell bagels to the Company, its area developers and
their food service distributors for sale in Einstein Bros. Bagels stores.
Noah's Pacific has recently completed the installation of a new production line
in the Whittier Facility, which is designed to produce frozen dough for
approximately 950,000 dozen bagels per month. The Company owns certain
equipment in the Whittier Facility which is leased to Noah's Pacific pursuant to
an operating lease.
The Company is a party to a cream cheese supply agreement and certain related
agreements (the "Doc's Agreements") with Doc's Cheese Company, L.L.C. ("Doc's").
Under the Doc's Agreements, Doc's has agreed to supply the Company, its area
developers and other authorized purchasers with up to 160,000 pounds of cream
cheese per week through October 2, 2000, and the Company has agreed, subject to
certain exceptions and limitations, that it, its area developers and other
authorized purchasers will purchase the lesser of such amount or 60% of their
requirements for cream cheese. The Company has provided certain debt financing
to Doc's, primarily to fund the purchase of cream cheese production equipment
and for Doc's working capital needs. The Doc's Agreements also grant the
Company an option, exercisable at any time on or before October 2, 2000, to
acquire all of the assets of Doc's at a formula price based on cream cheese
production volumes and production cost. The Company has recently approved
another vendor for the sale of cream cheese to its area developers but does not
have a long-term supply agreement with such new vendor.
The Company has a long-term distribution agreement with Marriott Distribution
Services, Inc. ("Marriott"), which provides for distribution of food, beverages
and supplies to stores operated by the Company and its area developers at a
negotiated fixed mark-up above cost. The Company and its area developers
currently purchase in excess of 10% of their products and supplies from
Marriott.
The Company and its area developers may be subject to shortages or
interruptions in supply caused by transportation strikes, adverse weather or
other conditions which could adversely affect the quality, availability and cost
of ingredients.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including Noah's
New York Bagels(R), Noah's Bagels(R), A Taste of Old New York(R), Noah's
Shmears(R), Shmear 'Em(R), Protect Your Bagels, Put Lox on Them(R), The Veg
Out(R) and Veggie Confetti(R). In addition, the Company has federal trademark
applications pending for a number of trademarks and service marks, including
Just Say
8
<PAGE>
Noah's(TM), Einstein Bros.(TM), The Einstein Bros logo, Melvyn & Elmo's(TM) and
Man Cannot Live on Great Bagels Alone(TM), as well as certain logos used by the
Company. The Company has applied to register Noah's New York Bagels(R) in more
than 30 foreign countries and Einstein Bros. Bagels(TM) in approximately 70
foreign countries. Most of such pending applications in the United States and
foreign countries were filed in 1995 and 1996. The Company has not yet obtained
federal registrations for the principal trademarks and service marks used in
connection with the Einstein Bros. Bagels stores and products and there can be
no assurance that and such registrations will be obtained.
The Company is aware of the use by other persons or entities in certain
geographic areas of names and marks which may be deemed to be similar to certain
of the Company's marks. Some of these persons or entities may have prior rights
to such marks in their respective localities. While the Company is not aware of
any prior uses that would prevent the use of any of the Company's marks in any
DMA for which it has granted development rights for such marks, there can be no
assurance that the Company's marks will be available for use by the Company and
its area developers in all locations.
The Company considers its intellectual property rights to be important to its
business and actively defends and enforces such rights.
GOVERNMENT REGULATION
Stores, commissaries and other production facilities operated by the Company
and its area developers are required to comply with federal, state and local
government laws and regulations applicable to food production and consumer food
service businesses generally, including those relating to the preparation and
sale of food, minimum wage requirements, overtime, working and safety
conditions, and citizenship requirements, as well as regulations relating to
zoning, construction, health, business licensing and employment. An increase in
employee benefits costs or other costs associated with employees, such as
minimum wage requirements, could adversely affect the Company.
Certain states and the Federal Trade Commission require a franchisor to
transmit specified disclosure statements to potential franchisees before
granting a franchise. Additionally, some states require the franchisor to
register its franchise with the state or qualify for certain statutory or
discretionary exemptions from registration before it may offer a franchise. The
Company believes that its Uniform Franchise Offering Circular (together with any
applicable state versions or supplements) complies with both the Federal Trade
Commission guidelines and all applicable state laws regulating franchising in
those states in which it has offered franchises.
RELATIONSHIP WITH BOSTON CHICKEN
The Company's rapid growth has been fostered in part by its relationship with
Boston Chicken. Boston Chicken has provided (i) significant capital financing,
(ii) multi-unit retail infrastructure and systems, including accounting,
administration, real estate and computer and communications services and
systems, and (iii) assistance in recruiting experienced area developer
candidates. The Company believes that the multi-unit retail infrastructure and
services provided by Boston Chicken, pursuant to fee service agreements, allow
the Company to focus its energy and resources on brand and store development.
The Company has granted to Boston Chicken an option (the "BCI Option") to
maintain ownership of shares of common stock of the Company 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
BCI Option is exercisable at a per share exercise price equal to (i) the
weighted average price per share at which the Company's common stock is issued
or sold in a transaction pursuant to which the BCI Option becomes exercisable,
in the case of a transaction in which such price per share is readily
ascertainable, or (ii) in all other cases, the average of the closing sale
prices for the common stock on the Nasdaq National Market (or such other
principal exchange or market on which the common stock may then be trading) for
the five trading days ending on the fifth trading day prior to the date of the
transaction pursuant to which the BCI Option becomes exercisable. The BCI
Option terminates if (i) Boston Chicken sells or transfers shares of the
Company's common stock and as a result owns less than a majority of the then
outstanding shares of the Company's voting stock or (ii) the percentage of
outstanding shares of voting stock of the Company owned by Boston Chicken is
reduced below 50% other than as a result of Boston Chicken's voluntary sale or
transfer of shares of the Company's common stock and Boston Chicken fails to
acquire a sufficient number of shares of common stock so that it owns at least a
majority of the then outstanding shares of voting stock of the Company by July
31 of the calendar year next following the calendar year in which such reduction
occurs. In addition, the percentage ownership level of 52% is subject to
reduction to the extent voluntary sales or transfers by Boston Chicken reduce
its ownership of the outstanding shares of voting stock of the
9
<PAGE>
Company to less than 52% but do not otherwise result in termination of the BCI
Option. In determining the percentage ownership of the voting stock of the
Company owned by Boston Chicken for purposes of the BCI Option, the following
shares are excluded: (i) 701,177 shares of the Company's common stock subject to
options granted by Boston Chicken, (ii) any shares of common stock held by
officers, directors or employees of Boston Chicken, and (iii) any shares of
common stock held by any person or entity that would not be counted under
generally accepted accounting principles in determining whether Boston Chicken
owns a majority of the voting stock for consolidated financial statement
purposes. See Note 12 of the Notes to Consolidated Financial Statements.
EMPLOYEES
At March 14, 1997, the Company had approximately 398 employees, including
approximately 115 employed at its support center offices in Golden, Colorado,
approximately 19 employed at zone offices or commissaries and approximately 264
employed at bagel stores operated by the Company. None of the Company's
employees are represented by a labor union or covered by a collective bargaining
contract. The Company believes that its relationship with its employees is
good.
EXECUTIVE OFFICERS
Set forth below are the names and ages of the executive officers of the
Company, the positions they hold with the Company, and summaries of their
business experience. Executive officers are elected by, and serve at the
discretion of the Board of Directors. The executive officers of the Company are
as follows:
Scott A. Beck, age 38, became Chairman of the Board of the Company in July
1996. Mr. Beck has served as a director of the Company since March 1995. He has
been Chief Executive Officer and a director of Boston Chicken since June 1992
and has served as Chairman or Co-Chairman of the Board of Boston Chicken since
that date. In January 1997, he also assumed the responsibilities of President of
Boston Chicken. He was Vice Chairman of the Board of Blockbuster Entertainment
Corporation ("Blockbuster") in Fort Lauderdale, Florida from September 1989
until his retirement in January 1992 and Chief Operating Officer of Blockbuster
from September 1989 to January 1991. From June 1987 to August 1989, Mr. Beck was
Managing Partner of Blockbuster's first and largest franchisee until its
acquisition by Blockbuster in 1989. Since 1980, Mr. Beck also has been President
of Pace Affiliates, Inc., an investment banking firm he founded.
Mark R. Goldston, age 42, became President and Chief Executive Officer and a
director of the Company in April 1996. Since January 17, 1996, Mr. Goldston has
also been employed by Boston Chicken to undertake various special projects and
in August 1996, he became a Vice Chairman of the Board and a director of Boston
Chicken. From July 1994 to April 1996, Mr. Goldston was Chairman and Chief
Executive Officer of The Goldston Group, a strategic advisory firm. From
October 1991 to June 1994, Mr. Goldston served as President and Chief Operating
Officer of L.A. Gear, Inc.
W. Eric Carlborg, age 33, became Senior Vice President -- Finance of the
Company in July 1996. From October 1995 through June 1996, he was Vice
President of Alignment and Planning of Boston Chicken. Prior to that time, Mr.
Carlborg served as Vice President -- Corporate Finance of Merrill Lynch from
January 1994 to October 1995 and served as an Associate of Merrill Lynch from
August 1989 through December 1993.
David G. Stanchak, age 38, became a director and Chief Development Officer of
the Company in March 1995. From June 1992 until March 1995, he served as a
Senior Vice President of Boston Chicken, and from August 1989 until June 1992,
Mr. Stanchak was the National Director of Real Estate and Real Estate Legal
Counsel for Blockbuster.
Jeffrey L. Butler, age 35, became President of Einstein Bros. Bagels Concept
in May 1996. From January 1996 until May 1996, Mr. Butler served as Chief
Operating Officer of the Company. Prior to that time, he was employed by BC
Great Lakes, L.L.C., an area developer of Boston Chicken ("BC Great Lakes"),
since June 1995, and also served as President of the managing member of BC
Heartland, L.L.C., also a Boston Chicken area developer, since August 1995.
From June 1993 until June 1995, Mr. Butler served as President and Chief
Executive Officer of the general partner of BC Detroit L.P., a predecessor of BC
Great Lakes. From January 1992 to June 1993, Mr. Butler served as Vice
President -- Human Resources of Boston Chicken. Prior to that time, Mr. Butler
was an independent consultant from July 1991 until January 1992.
Joel M. Alam, age 39, became a Senior Vice President of the Company in
February 1997 and has been Secretary of the Company since April 1995. From
April 1995 to February 1997, he was a Vice President of the Company. From
January
10
<PAGE>
1994 to April 1995, he was Vice President and Associate General Counsel of
Boston Chicken and from May 1993 to January 1994 he was Assistant General
Counsel of Boston Chicken. Prior to that time, Mr. Alam was an associate at the
Chicago law firm of Bell, Boyd & Lloyd from 1986 to May 1993.
Paul A. Strasen, age 40, became a Senior Vice President of the Company in
February 1997 and has been General Counsel of the Company since April 1995.
From April 1995 to February 1997, he was a Vice President of the Company. Prior
to that time, he was a partner at the Chicago law firm of Bell, Boyd & Lloyd
from 1988 to April 1995.
Theodore P. Heininger, age 43, became Vice President-Controller of the Company
in March 1997. Prior to that time, he served as Vice President of Performance
Evaluation since January 1996 and was the Company's Controller from April 1995
until January 1996. From June 1993 to March 1995, Mr. Heininger was employed as
Vice President and Chief Financial Officer with Meyercord Co., a subsidiary of
the Berwind Group in Carol Stream, Illinois. He served as Vice President and
Chief Financial Officer of GPS Healthcare, also a subsidiary of the Berwind
Group, in Pottsville, Pennsylvania, from October 1990 to May 1993. Mr. Heininger
is a certified public accountant.
ITEM 2. PROPERTIES
The Company leases its support center facility in Golden, Colorado, which
consists of approximately 38,000 square feet of office space (and certain common
areas, including parking areas), from Boston Chicken. The Company also leases
office space in Los Angeles, California.
The Company and its subsidiaries also lease sites for stores and commissaries
that are subleased to area developers. While the Company expects its area
developers primarily to continue to lease sites in the future, the Company or
its area developers may also purchase land and/or buildings for stores and
commissaries to the extent acceptable terms are available. The majority of the
Company's stores are located in retail community shopping centers, community
business districts or freestanding locations.
Stores and commissaries leased by the Company are typically leased under
"triple net" leases that require the lessee to pay its proportionate share of
real estate taxes, maintenance costs and insurance premiums. In some cases,
store leases require not only base rent but also percentage rent based on sales
in excess of specified amounts. Generally, the Company's store leases have
initial terms of five years with options to renew for two or three additional
five-year periods at market rates.
A subsidiary of the Company leases dough production facilities in San Leandro
and Whittier, California, which are subleased to one of the Company's area
developers.
ITEM 3. LEGAL PROCEEDINGS
The Company, like others in the food service business, is from time to time
the subject of complaints, threat letters or litigation from customers alleging
illness, injury or other food quality, health (including food-borne illness
claims) or operational concerns. Claims relating to foreign objects, food-borne
illness or operating issues are common in the food service industry and a number
of such claims may exist at any given time. Adverse publicity resulting from
such allegations may materially adversely affect the Company and one or more of
its brands, regardless of whether such allegations are valid or whether the
Company is liable. In addition, the Company also encounters complaints and
allegations from former or prospective employees or others from time to time, as
well as other matters which are common for businesses similar to the Company's.
The Company does not believe that any such matters of which it is aware are
material to the Company individually or in the aggregate, but matters may arise
which could adversely affect the Company or its business operations.
In the course of enforcing its rights under existing area development and
franchise agreements, the Company may also be the subject, from time to time, of
complaints, threat letters or litigation concerning the proper interpretation
and application of these agreements, particularly in the event of a default or
termination of area development or franchise rights. No such matters are
currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal 1996.
11
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the common
stock during each of the Company's fiscal quarters since its initial public
offering of common stock on August 1, 1996, as quoted on the Nasdaq National
Market as reported by The Wall Street Journal (Western Edition).
<TABLE>
<CAPTION>
High Low
--------- ------------
<S> <C> <C>
1996:
Third Quarter (ended October 6, 1996) 36 1/2 19
Fourth Quarter (ended December 29, 1996) 36 1/8 29 1/4
</TABLE>
As of March 14, 1997, there were approximately 700 record holders of the
common stock.
The Company has never paid cash dividends on its common stock and the Board of
Directors intends to continue a policy of retaining any earnings for use in the
Company's operations. The Company does not anticipate paying any cash dividends
in the foreseeable future. In addition, the Company's current revolving credit
facilities contain prohibitions on the payment of any cash dividends.
12
<PAGE>
During the fourth quarter of 1996, the Company issued an aggregate of 124,139
shares of common stock pursuant to the exercise of warrants for an aggregate
exercise price of $803,179.33. The shares of common stock issued upon exercise
of such warrants were 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. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial and store data
for the Company. This data should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto included in Item 8
hereof and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Item 7 hereof.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 24, 1995
(INCEPTION) FISCAL YEAR
THROUGH ENDED
DECEMBER 31, 1995 DECEMBER 29, 1996 (1)
--------------------- ----------------------
(In thousands, except share data and number of stores)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Company stores......................................................... $ 25,685 $ 35,803
Royalties and franchise related fees................................... 671 19,918
Interest income........................................................ 67 5,986
---------- ------------
Total revenue..................................................... 26,423 61,707
Cost and expenses:
Cost of products sold.................................................. 8,239 11,546
Salaries and benefits.................................................. 13,531 18,302
General and administrative expenses.................................... 47,805 (2) 21,820
---------- -----------
69,575 51,668
---------- -----------
Income (loss) from operations........................................... (43,152) 10,039
Other expense, net...................................................... (564) (4,332)
---------- -----------
Net income (loss)....................................................... $(43,716) $ 5,707
========== ===========
Net income (loss) per common and equivalent share...................... $ (4.54) $ 0.25
========== ===========
Weighted average number of common and
equivalent shares outstanding during the period....................... 9,659 22,344
========== ===========
STORE DATA (UNAUDITED):
Systemwide revenue (3).................................................. $ 26,986 $145,631
========== ===========
Number of stores:
Beginning of period.................................................... - 60
Opened or acquired..................................................... 60 266
Closed................................................................. - 11
---------- -----------
End of year............................................................ 60 315
========== ===========
Company stores......................................................... 47 14
Area developer stores.................................................. 13 301
CONSOLIDATED BALANCE SHEET DATA:
Working capital......................................................... $ 41 $ 46,421
Notes receivable........................................................ 7,267 146,087
Total assets............................................................ 50,299 332,418
Long-term debt (4)...................................................... 58,875 -
Stockholders' equity (deficit).......................................... $(20,994) $315,517
</TABLE>
(1) The Company's fiscal year is the 52/53-week period ending on the last Sunday
in December and normally consists of 13 four-week periods.
(2) Includes a $25,575,000 write-off of intangible assets. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
(3) Includes gross revenue for all stores in the Einstein/Noah Bagel Corp.
system.
(4) Includes at December 31, 1995, $11,062,000 attributable to repurchase common
stock shares and $7,813,000 attributable to Series A preferred stock. See
Note 12 of the Notes to Consolidated Financial Statements.
13
<PAGE>
ITEM 7: 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. 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. 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" ON PAGE 2. This rapid expansion significantly
affects the comparability of results of operations from period to period in a
number of ways. Store revenue is generally 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. Further, salaries,
benefits and the cost of products sold are generally higher as a percentage of
revenue for newly opened stores than for more mature stores because of
inefficiencies caused by less experienced employees and a lack of store-specific
operating history from which to predict daily food production needs. Moreover,
in order to support its expansion program, the Company is continuing to develop
its corporate support center, and accordingly, certain related expenditures will
be higher as a percentage of revenue in earlier periods than in later comparable
periods. In addition, the Company's rapid expansion significantly affects its
liquidity and capital requirements.
The Company's success is highly dependent on its continued relationship with,
and the continued success of, Boston Chicken, which, as of March 14, 1997,
beneficially owned approximately 54% of the outstanding shares of common stock
of the Company. In addition, Boston Chicken has an option that permits 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. See "Item 1. Business
- -- Relationship with Boston Chicken". The Company and Boston Chicken are
parties to various agreements, pursuant to which Boston Chicken has agreed to
provide to the Company certain accounting and administration and computer and
communications services. Boston Chicken has also made available to the Company
a non-convertible loan facility of up to $50.0 million. See "-- Liquidity and
Capital Resources".
RESULTS OF OPERATIONS
Fiscal year ended December 29, 1996 compared to the period beginning March 24,
1995 (inception) and ended December 31, 1995
Revenue. Total Company revenue increased 134% for the year ended December 29,
1996 over the prior period. Royalties and franchise-related fees were $19.9
million compared to $671,000 in the prior period, caused by an increase in
stores opened and operated by area developers, which totaled 301 as of December
29, 1996 compared to 13 as of December 31, 1995. Interest income was $6.0
million compared to $67,000 in the prior period, due to higher interest income
generated on increased loans made to area developers. Revenue from Company
stores increased 39% for the year ended December 29, 1996 to $35.8 million from
$25.7 million in the prior period. The increase is due to the revenue from
acquired stores and stores opened by the Company prior to being sold to area
developers.
Cost of Products Sold. Cost of products sold increased 40% to $11.5 million
for the year ended December 29, 1996, compared to $8.2 million in the prior
period. The increase was primarily due to the increase in revenue from Company
stores.
Salaries and Benefits. Salaries and benefits increased 35% to $18.3 million
for the year ended December 29, 1996, compared to $13.5 million in the prior
period. The increase in salaries and benefits was due to a greater number of
Company stores in 1996 and an increase in the number of employees at the
Company's support center necessary to support systemwide expansion.
14
<PAGE>
General and Administrative. General and administrative expenses decreased 54%
to $21.8 million for the year ended December 29, 1996 compared to $47.8 million
in the prior period. The decrease was due primarily to a $26.6 million write-
off of intangible assets in the prior period. After the acquisition of Brackman
Brothers, Inc., Bagel & Bagel, Inc., Offerdahl's Bagel Gourmet, Inc. and
Baltimore Bagel Co. (collectively the "Founding Companies"), the Company
launched a development project, pursuant to which management analyzed (i) the
Founding Companies' stores, including brand positioning, product offerings,
operational service systems and atmosphere, (ii) the competitive environment and
(iii) the preferences of consumers across the United States. The project
resulted in the development of the Einstein Bros. Bagels brand and store. In
connection with, and as a result of, the development of the Einstein Bros.
Bagels brand and store, management determined to discontinue the use of the
identifiable intangible assets acquired in the acquisitions of the Founding
Companies, including trademarks and recipes. This change in business strategy
resulted in an impairment of such intangible assets, and accordingly, the assets
were written down to their fair market values. In addition, in 1995, certain
acquired store locations were determined to be unsuitable for the Einstein Bros.
Bagels brand and store, resulting in a $2.4 million provision for anticipated
costs required to close those locations. Absent these write-downs, general and
administrative expenses increased 16% for the year ended December 29, 1996
compared to the prior period. This increase was due to an increase in
expenditures at the Company's support center necessary to support systemwide
expansion and a greater number of Company stores in 1996.
Included in general and administrative expenses are depreciation and
amortization charges of $5.4 million in fiscal year 1996 and $1.7 million in the
prior period. The increase in depreciation and amortization charges is
primarily attributable to the goodwill and intangible assets related to the
acquisition of Noah's New York Bagels, Inc. in February 1996.
Other Income (Expense). The Company incurred other expense of $4.3 million
for the year ended December 29, 1996, compared to $564,000 in the prior period.
The increase reflects higher net interest expense attributable to borrowings
under the Company's loan agreements, offset by gains recognized on the sale of
marketable equity securities.
Income Taxes. No income tax expense has been recorded for the year ended
December 29, 1996 or the prior period. During 1996, the Company recognized a
portion of its deferred tax asset which resulted in no tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations in 1996 totaled $6.5 million, an increase of
$18.8 million from the cash used in operations in 1995 of $12.3 million. The
primary cause of the change resulted from the Company incurring a net loss of
$43.7 million in 1995 compared to net income of $5.7 million in 1996. Included
in the 1995 net loss was a non-cash charge of $26.6 million to writeoff
intangible assets. See "-- Results of Operations -- General Administrative".
Cash provided from financing activities totaled $271.6 million in 1996. In
August 1996, the Company completed an underwritten initial public offering of
3,105,000 shares of its common stock, a concurrent non-underwritten public
offering of 425,000 shares of its common stock and a concurrent private
placement of 2,000,000 shares of its common stock to Boston Chicken. In
December 1996, the Company completed an underwritten offering of 2,640,000
shares of its common stock to the public and a concurrent non-underwritten
public offering of 500,000 shares of its common stock to Boston Chicken. The
aggregate net proceeds of all these offerings totaled approximately $174.6
million. In 1996, the Company borrowed $80.0 million from Boston Chicken under
its convertible secured loan agreement resulting in a $120.0 million outstanding
balance. In June 1996, Boston Chicken converted the entire $120.0 million
balance of convertible debt into 15,307,421 shares of common stock of the
Company. As of December 29, 1996, the Company had $50.7 million available in
cash and cash equivalents. In addition, the Company had a $50.0 million non-
convertible credit facility with Boston Chicken and a $45.0 million senior
secured credit facility with Bank of America Illinois and the lenders named
therein. No balance was outstanding under either facility at December 29, 1996.
During 1995, the Company borrowed $40.0 million from Boston Chicken under its
convertible secured loan agreement (which Boston Chicken converted to equity of
the Company in 1996) and raised $20.8 million from the sale of approximately
3,500,000 shares of its common stock.
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 rapid store development and to finance their working
capital needs. As of December 29, 1996, the Company had secured loan
commitments to its area developers aggregating $283.2 million, of which $140.8
million had been advanced. Net loan advances were $137.2 million in 1996 and
$3.5 million in 1995. The increase was attributable to the increase in area
developer stores which totaled 301 in 1996 compared to 13 in 1995.
15
<PAGE>
In addition to providing funding to its area developers, the Company's capital
requirements have consisted of store acquisition and development, development of
its corporate infrastructure, which supports systemwide expansion, and
investments in food production facilities. In 1996, the Company expended $107.9
million on store acquisition and development, including the acquisition of all
the capital stock of Noah's New York Bagels, Inc. for $100.9 million. In 1995,
the Company expended $16.9 million on store acquisition and development. In
1996, the Company expended $10.1 million on its corporate infrastructure and
investments in food production facilities compared to $1.2 million in 1995.
These capital expenditures have been offset with proceeds from selling Company
stores. The Company generated $49.9 million in 1996 and $5.5 million in 1995
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
its practice of selling Company 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 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 2.
SEASONALITY
Historically, the Company has experienced lower average store revenue during
the November and December holiday periods.
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on its
operations to date. Substantial increases in the cost of labor, employee
benefits, food and other operating expenses could adversely affect store
operations.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
The following table shows quarterly financial results for the period from
March 24, 1995 (inception) through December 31, 1995 and fiscal 1996. The first
quarter consists of four four-week periods (first quarter 1995 data is for the
period from March 24, 1995 (inception) through April 16, 1995) and the second,
third and fourth quarters consist of three four-week periods, except the fourth
quarter in 1995, which consists of two four-week periods and one five-week
period.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995: QUARTER QUARTER QUARTER QUARTER
- ----- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue............................ $ 1,423 $ 6,292 $ 8,483 $ 10,225
Loss from Operations............... (180) (1,784) (30,220) (10,968)
Net Loss........................... (260) (1,924) (30,010) (11,522)
Net Loss per Common and
Equivalent Share................ $ (0.03) $ (0.20) $ (3.11) $ (1.20)
1996:
- -----
Revenue............................ $22,379 $18,206 $ 10,257 $ 10,865
Income (Loss) from Operations...... (1,270) 2,303 4,235 4,771
Net Income (Loss).................. (3,317) 295 3,953 4,776
Net Income (Loss) per Common and
Equivalent Share................ $ (0.35) $ 0.01 $ 0.13 $ 0.15
</TABLE>
17
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................................................... 20
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and December 29, 1996.................................. 21
Consolidated Statements of Operations for the period from March 24, 1995 (inception)
through December 31, 1995 and the fiscal year ended December 29, 1996................................... 22
Consolidated Statements of Stockholders' Equity (Deficit) for the period from March 24, 1995
(inception) through December 31, 1995, and the fiscal year ended December 29, 1996...................... 23
Consolidated Statements of Cash Flows for the period from March 24, 1995 (inception)
through December 31, 1995 and the fiscal year ended December 29, 1996................................... 24
Notes to Audited Consolidated Financial Statements...................................................... 25
Report of Independent Public Accountants on Schedule II.................................................... 38
Supplemental Schedule II................................................................................... 39
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited the accompanying consolidated balance sheets of
Einstein/Noah Bagel Corp. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and December 29, 1996, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the period from
March 24, 1995 (inception) through December 31, 1995, and for the fiscal year
ended December 29, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Einstein/Noah Bagel Corp.
and subsidiaries as of December 31, 1995 and December 29, 1996, and the results
of their operations and their cash flows for the period from March 24, 1995
(inception) through December 31, 1995 and for the fiscal year ended December 29,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 24, 1997
19
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
-------------- ------------
ASSETS
- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................................... $ 5,368 $ 50,741
Accounts receivable, net............................................................ 1,327 5,589
Prepaid expenses and other current assets........................................... 2,592 579
-------------- ------------
Total current assets............................................................ 9,287 56,909
Property and Equipment, net............................................................ 19,410 28,213
Notes Receivable....................................................................... 7,267 146,087
Goodwill, net.......................................................................... 13,715 68,921
Trademarks, net........................................................................ - 22,239
Recipes, net........................................................................... - 4,758
Other Assets, net...................................................................... 620 5,291
-------------- ------------
Total assets.................................................................... $ 50,299 $332,418
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current Liabilities:
Accounts payable.................................................................... $ 5,633 $ 3,873
Accrued expenses.................................................................... 2,968 3,615
Deferred franchise revenue.......................................................... 645 3,000
-------------- ------------
Total current liabilities....................................................... 9,246 10,488
Convertible Debt....................................................................... 40,000 -
Deferred Franchise Revenue............................................................. 265 6,105
Other Noncurrent Liabilities........................................................... 2,907 308
Repurchase Common Stock Shares - 1,721,250 issued and outstanding in 1995.............. 11,062 -
Series A Preferred Stock - 6,250 issued and outstanding in 1995........................ 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; 3,848,607 shares
issued and outstanding in 1995 and 32,299,756 issued and outstanding in 1996........ 38 323
Additional paid-in capital......................................................... 22,684 353,203
Accumulated deficit................................................................. (43,716) (38,009)
-------------- ------------
Total stockholders' equity (deficit)............................................... (20,994) 315,517
-------------- ------------
Total liabilities and stockholders' equity (deficit)............................. $ 50,299 $ 332,418
============== ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
20
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
March 24, 1995 Fiscal
(inception) Year
through Ended
December 31, December 29,
1995 1996
-------------- ------------
<S> <C> <C>
Revenue:
Company stores................................. $ 25,685 $35,803
Royalties and franchise-related fees........... 671 19,918
Interest income................................ 67 5,986
-------------- ------------
Total revenue.............................. 26,423 61,707
Costs and Expenses:
Cost of products sold.......................... 8,239 11,546
Salaries and benefits.......................... 13,531 18,302
General and administrative..................... 47,805 21,820
-------------- ------------
Total costs and expenses................... 69,575 51,668
-------------- ------------
Income (Loss) from Operations..................... (43,152) 10,039
Other Income (Expense):
Interest expense, net.......................... (1,281) (6,261)
Other income, net.............................. 717 1,929
-------------- ------------
Total other income (expense)............... (564) (4,332)
-------------- ------------
Income (Loss) Before Income Taxes................. (43,716) 5,707
Income Taxes...................................... - -
-------------- ------------
Net Income (Loss)................................. $(43,716) $ 5,707
============== ============
Net Income (Loss) Per Common and
Equivalent Share............................... $ (4.54) $ 0.25
============== ============
Weighted Average Number of Common
and Equivalent Shares Outstanding.............. 9,659 22,344
============== ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
21
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Period from
March 24,
1995 Fiscal
(inception) Year
through Ended
December 31, December 29,
1995 1996
-------------- ------------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period....................................... $ - $ 38
Conversion of preferred stock, repurchase common stock,
and debt........................................................... - 175
Issuance of common stock............................................. 38 96
Exercise of stock options and warrants............................... - 14
-------------- ------------
Balance at end of year............................................... $ 38 $ 323
============== ============
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period....................................... $ - $ 22,684
Conversion of preferred stock, repurchase common stock and
debt............................................................... - 140,270
Issuance of common stock, net of offering costs of $500 in 1995
and $10,343 in 1996................................................ 22,051 182,491
Exercise of stock options and warrants............................... - 9,227
Dividends on Series A preferred stock and accretion of dividends
on repurchase common stock.......................................... (1,077) (1,708)
Issuance of options and warrants..................................... 1,710 239
-------------- ------------
Balance at end of year............................................... $ 22,684 $353,203
============== ============
ACCUMULATED DEFICIT
Balance at beginning of period....................................... $ - $(43,716)
Net income (loss).................................................... (43,716) 5,707
-------------- ------------
Balance at end of year............................................... $ (43,716) $(38,009)
============== ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
22
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
March 24, 1995 Fiscal
(inception) Year
through Ended
December 31, December 29,
1995 1996
--------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)..................................................... $ (43,716) $ 5,707
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization....................................... 1,657 5,431
Warrant and option expense.......................................... 1,710 239
Write-off of intangible assets...................................... 26,575 -
Gain on the sale of marketable equity securities.................... (719) (1,824)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable............................................... (680) (3,966)
Accounts payable and accrued expenses............................. 1,778 (292)
Deferred franchise revenue........................................ 910 8,180
Other assets and liabilities...................................... 173 (7,003)
--------------- ------------
Net cash provided by (used in) operating activities.............. (12,312) 6,472
--------------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment.................................... (18,109) (38,198)
Proceeds from sale of net assets...................................... 5,519 49,943
Acquisition of Noah's New York Bagels, Inc., net of cash acquired..... - (100,902)
Purchase of marketable equity securities, net of proceeds from sales.. (22,682) 1,824
Purchase of other assets.............................................. (621) (6,552)
Issuance of notes receivable.......................................... (10,569) (209,514)
Repayment of notes receivable......................................... 3,831 70,694
--------------- ------------
Net cash used in investing activities............................. (42,631) (232,705)
--------------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock................................ 20,311 191,606
Proceeds from convertible debt........................................ 91,060 352,272
Repayment of convertible debt......................................... (51,060) (272,272)
--------------- ------------
Net cash provided by financing activities......................... 60,311 271,606
--------------- ------------
Net Increase in Cash and Cash Equivalents................................ 5,368 45,373
Cash and Cash Equivalents, beginning of period........................... - 5,368
--------------- ------------
Cash and Cash Equivalents, end of year................................... $ 5,368 $ 50,741
=============== ============
Supplemental Cash Flow Information:
Interest Paid......................................................... $ 1,107 $ 7,232
=============== ============
Supplemental Schedule of Non-Cash Activities:
Conversion of debt to common stock.................................... $ - $ 120,000
=============== ============
Conversion of preferred stock, repurchase common stock
and accrued dividends on preferred stock............................ $ - $ 20,445
=============== ============
Exchange of preferred stock, repurchase common stock,
common stock and marketable equity securities for net
assets acquired..................................................... $ 42,742 $ -
=============== ============
Issuance of common stock for note receivable.......................... $ 437 $ -
=============== ============
Accretion of dividends on repurchase common stock.................... $ 933 $ 1,486
=============== ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
23
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Einstein/Noah Bagel Corp. and its subsidiaries (the "Company") franchise and
operate specialty retail stores in the United States that feature fresh-baked
bagels, cream cheeses, specialty coffees and teas, and creative soups, salads
and sandwiches. At December 31, 1995, there were 60 stores in operation
systemwide, consisting of 47 Company stores and 13 franchise stores. In 1995,
the Company sold 13 Company stores to area developers of the Company. At
December 29, 1996, there were 315 stores in operation systemwide, consisting of
301 franchise stores and 14 Company stores. In 1996, the Company sold 105
Company stores to area developers of the Company. Subject to the provisions of
the applicable franchise agreements, the Company is obligated to allow
franchisees to utilize the Company's trademarks, copyrights, recipes, operating
procedures and other elements of its systems in the operation of franchise
stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of Einstein/Noah Bagel Corp. and its
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year. The Company's fiscal year is the 52/53-week period ending on the
last Sunday in December, and normally consist of 13 four-week periods. The
first quarter consists of four periods and each of the remaining three quarters
consist of three periods. Fiscal period 1995 was the period from March 24, 1995
(inception) through December 31, 1995. Fiscal year 1996 contained 13 four-week
periods.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand
and on deposit and highly liquid instruments purchased with maturities of three
months or less.
Inventories. Inventories, which are classified in prepaid expenses and other
current assets, are stated at the lower of cost (first-in, first-out) or market
and consist of food, paper products and supplies.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method with buildings
and improvements being depreciated over 15 to 30 years, leasehold improvements
being amortized over the lesser of their useful lives or their lease terms,
including option periods, furniture, fixtures and equipment being depreciated
over 5 to 8 years, and pre-opening costs being depreciated over one year.
Property and equipment additions include acquisitions of buildings and
equipment, costs incurred in the development and construction of new stores, and
major improvements to existing stores. Expenditures for maintenance and repairs
are charged to expense as incurred. Pre-opening costs consist primarily of
salaries and other direct expenses incurred in connection with the set-up,
initial stocking of stores, initial training of employees and general store
management activities incurred prior to the opening of new stores.
24
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Long-Lived Assets. The Company evaluates whether events and circumstances
have occurred that indicate revision to the remaining useful lives or the
remaining balances of long-lived assets may be appropriate. Such events and
circumstances include, but are not limited to, a change in business strategy or
a change in current and long-term projected operating performance. When factors
indicate that the carrying amount of an asset may not be recoverable, the
Company estimates the future cash flows expected to result from the use of such
asset and its eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, the Company will recognize an impairment loss equal to the
excess of the carrying amount over the fair value of the asset.
Revenue Recognition. Revenue from Company stores is recognized in the period
during which related food and beverage products are sold. Royalties are
recognized in the same period that related franchise store revenue is generated.
Revenue derived from initial franchise fees and area development fees is
recognized when the franchise store opens. Real estate fees are recognized as
earned, and lease income is recognized over the life of the lease on a straight-
line basis. Interest income is recognized as earned. The components of
royalties and franchise-related fees are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL PERIOD OR YEAR
ENDED
-----------------------------
DECEMBER 31, DECEMBER 29,
1995 1996
-------------- -------------
<S> <C> <C>
Initial franchise and area development fees.......................... $ 520 $ 12,140
Royalties............................................................ 35 6,086
Real estate fees and lease income.................................... - 1,564
Other................................................................ 116 128
-------------- -------------
Total royalties and franchise related fees........................... $ 671 $ 19,918
============== =============
</TABLE>
Per Share Data. Net income (loss) per common share is computed by dividing
net income (loss), adjusted for dividends on Series A preferred stock, by the
weighted average number of common shares and dilutive common stock equivalents
outstanding during the period. Common and equivalent shares include any common
stock, options and warrants issued within one year prior to the effective date
of the Company's initial public offering, with a price below the initial public
offering price. These have been included as common stock equivalents
outstanding, reduced by the number of shares of common stock which could be
purchased with the proceeds from the assumed exercise of the options and
warrants, including tax benefits assumed to be realized.
Advertising Costs. Advertising costs are expensed in the period incurred.
Employee Stock Options. The Company accounts for its employee stock options
in accordance with the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25. Required pro forma disclosures of compensation
expense determined under the fair value method of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") are presented in Note 12.
Employee Benefit Plan. The Company has a 401(k) plan to which the Company
makes no contributions.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications have been made to the 1995
amounts to conform with the 1996 presentation.
25
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT DATA
Accounts receivable are net of an allowance for doubtful accounts of $81,000
at December 31, 1995. There was no allowance at December 29, 1996.
<TABLE>
<CAPTION>
December 31, 1995 DECEMBER 29, 1996
------------------- -------------------
<S> <C> <C>
Property and equipment consists of (in thousands of dollars):
Land....................................................... $ 123 $ 118
Buildings and improvements................................. 366 384
Development in progress.................................... 1,212 1,449
Leasehold improvements..................................... 10,505 9,763
Furniture, fixtures and equipment.......................... 7,544 17,962
Pre-opening expenses....................................... 401 -
------------------- -------------------
20,151 29,676
Less: Accumulated depreciation and amortization (741) (1,463)
------------------- -------------------
Total property and equipment, net $ 19,410 $ 28,213
=================== ===================
</TABLE>
Included in furniture, fixtures and equipment are $14.9 million (net of
accumulated depreciation of approximately $860,000) of assets leased to
others at December 29, 1996.
Goodwill, trademarks, and recipes are reported net of accumulated amortization
of $2.2 million, $584,000, and $484,000, respectively, as of December 29, 1996.
Goodwill is net of accumulated amortization of $269,000 as of December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996
--------------------- -------------------
<S> <C> <C>
Accrued expenses consist of (in thousands of dollars):
Accrued payroll and fringe benefits.................... $ 876 $ 871
Accrued interest........................................ 325 17
Accrued other........................................... 1,767 2,727
-------------------- -------------------
Total accrued expenses................................. $ 2,968 $ 3,615
==================== ===================
</TABLE>
<TABLE>
<CAPTION>
FISCAL PERIOD OR YEAR ENDED
---------------------------------------------
DECEMBER 31, 1995 DECEMBER 29, 1996
---------------------- -------------------
<S> <C> <C>
Interest expense, net consists of (in thousands of dollars):
Interest expense.......................................... $ (1,432) $ (6,950)
Interest income........................................... 151 689
---------------------- -------------------
Total interest expense, net.......................... $ (1,281) $ (6,261)
====================== ===================
</TABLE>
4. ACQUISITIONS
In 1995, the Company acquired four regional bagel companies. In March 1995,
the acquisitions included Brackman Brothers, Inc., for which the Company issued
573,750 shares of common stock valued at $5.88 per share and other marketable
equity securities with a value of $8.3 million, Bagel & Bagel, Inc., for which
the Company issued 573,750 shares of common stock valued at $5.88 per share and
other marketable equity securities with a value of $5.5 million, and Offerdahl's
Bagel Gourmet, Inc., for which the Company issued 811,625 shares of common stock
valued at $5.88 per share and other marketable equity securities with a value of
$5.6 million. In August 1995, the Company acquired Baltimore Bagel Co.
("Baltimore Bagel"), for which the Company issued 6,250 shares of Series A
preferred stock with a value of $7.8
26
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
million and other marketable equity securities with a value of $4.0 million.
Pursuant to the acquisitions, the Company agreed to repurchase up to 1,721,250
shares of the common stock under certain circumstances (see Note 12). The
acquisitions have been accounted for as purchases, and, accordingly, the
purchase prices were allocated to assets (both tangible and intangible) and
liabilities based upon their fair values at the dates of the acquisitions. The
total purchase price for these four companies, including assumption of
liabilities, was $51.1 million, of which $21.2 million was allocated to
trademarks (amortized over a 35-year life), $5.4 million was allocated to
recipes (amortized over a 10-year life) and $14.0 million was allocated to
goodwill (amortized over a 35-year life). Such assets were identified by
management based upon its evaluation of the businesses acquired. The allocation
of the purchase price to trademarks and recipes was based upon a royalty savings
methodology which determines the present value of the stream of royalties which
the Company believes an independent third party would be willing to pay to
obtain the use of such trademarks and recipes. The estimated useful life for
these assets was based upon various factors which existed at the time of the
acquisitions, including the anticipated periods of benefit to be derived from
the utilization of such assets in connection with executing a regional brand
business strategy, increasing consumer demand for bagel products, the lack of a
competitor with national brand awareness, the lack of regulatory limitations on
the potential useful lives of such assets, the absence of any inherent or
technological obsolescence for such assets, and in the case of trademarks, the
long-lived nature of a primary brand name in the consumer marketplace.
Subsequent to these acquisitions, management launched a project which resulted
in the development of the Einstein Bros. Bagels brand and store, at which time
management determined it would discontinue the use of the acquired trademarks
and recipes. Consequently, this change in business strategy resulted in an
impairment of these intangible assets, and, accordingly, the assets were written
down to their fair market values, resulting in a write-off of $26.6 million in
1995.
In February 1996, the Company acquired all of the outstanding capital stock of
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 intangible) and liabilities based upon an
evaluation of their fair values at the date of the acquisition. Of the 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 goodwill (amortized over a 35-year
life). Such assets 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 the royalty savings methodology described in the
preceding paragraph.
The financial statements include the results of operations for the acquired
entities from their dates of acquisition. The following represents the
unaudited pro forma results of operations as if all of the purchase transactions
described above had occurred at the beginning of the periods presented (in
thousands of dollars, except per share data):
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
Revenue......................... $ 70,388 $65,011
Net income (loss)............... (56,236) 3,825
Net income (loss) per share..... (5.82) 0.16
</TABLE>
The pro forma information given above does not purport to be indicative of the
results that actually would have been reported if the transactions had occurred
at the beginning of the periods presented and is not intended to be a projection
of future results or trends.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and Cash Equivalents. The carrying value approximates fair value due to
the length of maturity of the investments.
27
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Notes Receivable. The estimated fair value of notes receivable (Notes 6 and
11), including the conversion option, is based on the discounted value of future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings.
Convertible Debt. The estimated fair value of convertible debt, including the
conversion option, is based on the discounted value of future payments using the
current rate at which similar loans would be made to companies with similar
credit ratings.
Repurchase Common Stock Shares. The estimated fair value of common stock
subject to repurchase by the Company is based on the price of other common stock
transactions near December 31, 1995.
Series A Preferred Stock. The estimated fair value of Series A preferred
stock is based on the discounted value of future cash flows using interest rates
which would be applicable to similar instruments held in companies with similar
credit ratings.
The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996
------------------------------------ --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................... $ 5,368 $ 5,368 $ 50,741 $ 50,741
Notes receivable........................................ 7,267 7,267 146,087 146,087
Convertible debt........................................ 40,000 40,000 - -
Repurchase common stock shares.......................... 11,062 11,142 - -
Series A preferred stock................................ 7,813 7,813 - -
</TABLE>
6. NOTES RECEIVABLE
The following table summarizes the primary components of notes receivable (in
thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------------ ---------------
<S> <C> <C>
Due from area developers (Note 11).................. $ 3,538 $140,754
Notes receivable from stockholder................... 1,888 3,437
Term loans.......................................... 1,108 1,496
Other............................................... 733 400
-------------------- ---------------
$ 7,267 $146,087
==================== ===============
</TABLE>
Notes receivable from stockholder bear interest at the applicable reference
rate of Bank of America Illinois ("Reference Rate") plus 1%. Principal and
interest are due April 2001. The notes are collateralized by various assets.
Term loans bear interest at the Reference Rate plus 1%. Principal is due in
annual installments with balloon payments required on various dates through
2001. The loans are collateralized by various assets.
7. DEBT
The Company has 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 Reference Rate plus
applicable margin or, eurodollar rate loans with interest at the eurodollar rate
plus applicable margin. In addition, a commitment fee of .5% of the average
daily unused portion of the loan is required. The facility contains covenants
that, among other things, restrict other borrowings, prohibit cash dividends,
and require maintenance of specified cash flow ratios, store-level sales,
28
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
and minimum capital levels. The facility is collateralized by substantially all
of the assets of the Company. As of December 29, 1996, no balance was
outstanding under the facility.
The Company also has an unsecured non-convertible revolving credit facility
from Boston Chicken, Inc. ("Boston Chicken") providing for borrowings of up to
$50.0 million through June 15, 2003. The facility bears interest at the
Reference Rate plus applicable margin. As of December 29, 1996, there was no
balance outstanding under the facility.
8. INCOME TAXES
As of December 29, 1996, the Company had cumulative federal and state tax
operating loss carryforwards available to reduce future taxable income of
approximately $17.0 million which begin to expire in 2010.
The primary components that comprise deferred tax assets and liabilities are
as follows (in thousands of dollars):
<TABLE>
<CAPTION> DECEMBER 31, 1995 DECEMBER 29, 1996
------------------- ------------------
<S> <C> <C>
Deferred tax assets:
Accounts payable and accrued expenses..... $ 218 $ 199
Deferred franchise revenue................ 355 3,551
Other noncurrent liabilities.............. 220 226
Write-off of intangible assets that
are amortizable for tax.................. 2,017 1,582
Net operating loss carryforwards.......... 4,104 6,648
Other..................................... 1,380 63
------------------- ------------------
Total deferred tax assets............. 8,294 12,269
Deferred tax liabilities:
Property and equipment.................... (489) (1,335)
Other assets.............................. (116) (652)
------------------- ------------------
Total deferred tax liabilities........ (605) (1,987)
------------------- ------------------
Net deferred tax assets............... 7,689 10,282
Valuation allowance....................... (7,689) (10,282)
------------------- ------------------
Net deferred tax assets................... $ - $ -
=================== ==================
</TABLE>
The increase in the valuation allowance of $2,593,000 from December 31, 1995
to December 29, 1996 is due to uncertainty regarding the realization of the
related tax benefits. The difference between the Company's actual tax provision
and the tax provision that would result from applying the statutory federal
income tax rate to income before income taxes is attributable to the following
(in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 29, 1996
-----------------
<S> <C>
Income tax expense at statutory rate.................. $ 1,997
State taxes, net of federal benefit................... 228
Permanent difference related to goodwill.............. 1,138
Change of valuation allowance......................... (3,363)
-----------------
Provision for income taxes............................ $ -
=================
</TABLE>
9. NATIONAL AND LOCAL ADVERTISING FUNDS
The Company administers a National Advertising Fund (the "Fund") to which
stores make contributions based on individual franchise agreements (2% of base
revenue). Collected amounts are spent primarily on developing marketing and
advertising materials for use systemwide. In addition, the Company maintains
Local Advertising Funds ("LAFs") that
29
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
provide comprehensive advertising and sales promotion support for stores in
particular markets. Contributions are made by all stores (a minimum of 4% of net
revenue). The Company disburses funds and accounts for all transactions related
to the Fund and LAFs. Such amounts are not segregated from the cash resources of
the Company; however, consistent with Statement of Financial Accounting
Standards No. 45 "Accounting for Franchise Fee Revenue", such funds are
accounted for separately and are not included in the financial statements of the
Company because the Company acts only as an agent for its franchisees in placing
orders for advertising and paying related invoices out of such accounts.
10. COMMITMENTS AND CONTINGENCIES
The Company leases sites for its stores, commissaries, and office space. Lease
terms are generally five years with two or three five-year renewal options. The
Company also subleases sites to its area developers. The sublease terms to area
developers are negotiated at arm's length on commercially reasonable terms. The
Company is contingently liable for all lease costs including common area
maintenance charges. Most of the leases contain escalation clauses and common
area maintenance charges.
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year, sublease proceeds, and rental receipts due
under leases on equipment owned by the Company as of December 29, 1996 (in
thousands of dollars):
<TABLE>
<CAPTION>
MINIMUM
RENTAL RECEIPTS
ON
MINIMUM SUBLEASE NET MINIMUM EQUIPMENT OWNED
RENTAL PAYMENTS PROCEEDS RENTAL PAYMENTS BY THE COMPANY
--------------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
1997.............................. $14,085 $13,139 $ 946 $1,279
1998.............................. 13,436 12,686 750 1,278
1999.............................. 12,892 12,232 660 1,276
2000.............................. 11,952 11,395 557 1,284
2001.............................. 9,130 8,627 503 1,273
Thereafter........................ 36,573 30,704 5,869 2,076
--------------- ------- --------------- ---------------
$98,068 $88,783 $9,285 $8,466
=============== ======= =============== ===============
</TABLE>
Rental expense, net of sublease income, under operating leases was
approximately $1,909,000 and $1,601,000 for the period from March 24, 1995
(inception) through December 31, 1995 and for the fiscal year ended December 29,
1996, respectively.
As of December 29, 1996, Bagel Store Development Funding, L.L.C. ("Bagel
Funding") had invested a total of $70.2 million in the common equity of the
Company's area developers. At December 29, 1996, 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.
The Company has entered into a supply agreement relating to the purchase of
certain minimum levels of cream cheese, which expires in October 2000, or
earlier in certain circumstances. The agreement requires the Company, its
subsidiaries,
30
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
area developers and other authorized purchasers to purchase the lesser of
160,000 pounds of cream cheese per week or 60% of their requirements for cream
cheese (excluding certain requirements that may be satisfied through other
commitments and certain requirements of acquired companies). The price per pound
is determined over the term of the contract based upon production costs.
The Company has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business. 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.
11. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for use
in expansion of their operations. The maximum loan amount is established to
give the Company majority ownership of the area developer upon conversion (or
option exercise, as described further below) provided the Company exercises its
right to participate in any intervening financing of the area developer. Area
developer financing requires the developer to expend at least 75% of its
contributed capital toward developing stores prior to drawing on the revolving
loan 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 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. The Company may extend the
draw and repayment periods, subject to the area developer purchasing additional
development rights, contributing additional capital, or in connection with other
amendments to the loan agreement. Interest is set at the Reference Rate from
time to time (8.25% at December 29, 1996 and an average rate of 8.27% for 1996)
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. 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 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 31, DECEMBER 29,
1995 1996
-------------- --------------
<S> <C> <C>
Number of area developers receiving
financing............................. 2 11
Loan commitments....................... $ 16,000 $ 283,200
Unused loans........................... (12,462) (142,446)
-------- ---------
Loans outstanding (included in Notes
Receivable)........................... $ 3,538 $ 140,754
======== =========
</TABLE>
31
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes area developer financing activity of the
Company during 1995 and 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Area developer loan balances,
beginning of period.................. $ - $ 3,538
Loan advances........................... 7,369 206,762
Loan repayments......................... (3,831) (69,546)
---------- --------
Area developer loan balances,
end of year.......................... $ 3,538 $140,754
========== ========
</TABLE>
The principal maturities on the aforementioned notes receivable are as follows
(in thousands of dollars):
<TABLE>
<S> <C>
1998.................................... $ 375
1999.................................... 9,582
2000.................................... 14,075
2001.................................... 14,075
Thereafter.............................. 102,647
------------
$140,754
============
</TABLE>
(c) Credit Risk and Allowance for Loan Losses
Five of the Company's area developers accounted for 21%, 17%, 15%, 10% and 10%
of the area developers' notes receivable balance at December 29, 1996, 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 31, 1995 or December 29, 1996.
The following table sets forth certain aggregate financial information, as of
the dates indicated, provided by financed area developers (in thousands, except
number of area developers and store data):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
-------------- ------------
<S> <C> <C>
Total number of area developers.............. 2 11
Total number of area developer
stores open................................ 13 301
Total gross assets........................... $9,262 $220,015
Total debt:
To the Company............................. 3,538 140,754
To third parties........................... - -
Total partner/member equity.................. 2,676 33,847
</TABLE>
32
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. STOCKHOLDERS' EQUITY
Common Stock. On July 8, 1996, the Company effected a 225-for-one split of
the Company's common stock in the form of a stock dividend. Per share amounts,
the number of common shares and capital accounts have been restated to give
retroactive effect to the stock split.
The Company issued 3,536,361 shares of common stock at the time of its
formation, which provided net proceeds of approximately $20.8 million.
In June 1996, Boston Chicken converted its $120.0 million loan to the Company
into 15,307,421 shares of common stock.
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 and a
concurrent private placement of 2,000,000 shares of its common stock to Boston
Chicken raising aggregate net proceeds of approximately $86.0 million.
In December 1996, the Company completed an additional underwritten offering of
2,640,000 shares of its common stock to the public and a concurrent non-
underwritten public offering of 500,000 shares to Boston Chicken. The aggregate
net proceeds of these offerings were approximately $88.6 million.
Preferred Stock. In connection with the acquisition of the net assets of
Baltimore Bagel, the Company issued 6,250 shares of Series A preferred stock.
The Series A preferred stock had a liquidation preference of $1,000 per share,
paid annual dividends of $60 per share, and was automatically convertible into
common stock of the Company upon closing of its initial public offering, with
the number of shares of common stock received being equal to $1,000 plus accrued
and unpaid dividends divided by 80% of the gross offering price per share to the
public. The total number of shares of common stock issued on conversion was
465,829.
Repurchase Common Stock Shares. Pursuant to the purchase agreements (see Note
4), the Company had agreed that, in the event it had not completed an initial
public offering of its common stock resulting in gross proceeds of at least
$15.0 million by specified dates or if Boston Chicken's ownership of, or right
to acquire an ownership interest in, the Company's common stock fell below 25%,
the holders of common stock subject to repurchase by the Company could require
the Company to redeem such shares of common stock at their fair market value,
but not less than a specific floor price per share. In 1996, as a result of the
completion of an initial public offering of common stock, the repurchase
obligation was eliminated, resulting in such shares being reclassified to
stockholders' equity.
Warrants. The Company sold warrants to purchase 1,012,500 shares of common
stock of the Company to Bagel Funding. The warrants have an exercise price of
$6.47 per share and expire in 2000. In 1996, the Company also sold or issued
warrants to purchase an aggregate of 1,252,425 shares of common stock of the
Company to other third parties at exercise prices ranging from $6.47 to $11.58
per share. The warrants expire at various dates through 2001.
Stock Option Plans. The Company has a stock option plan (the "Plan") under
which options to purchase up to 5,500,000 shares of common stock may be granted
to certain employees and officers of, and consultants to, the Company. The
option price is equal to the fair market value of the stock on the date of the
grant and each option has a term of ten years. Options granted under the Plan
generally vest at a rate of 10% at the end of the first year, an additional 20%
at the end of the second year, an additional 30% at the end of the third year,
and the balance vesting at the end of the fourth year from the date of the
grant.
The Company also has a non-employee directors stock option plan (the
"Directors Plan"), under which options to purchase up to 100,000 shares of the
common stock of the Company may be granted to directors of the Company who are
not officers or employees of the Company. Under the terms of the Directors
Plan, the Company automatically grants to
33
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
each such director, upon election or re-election as a director of the Company,
options to purchase shares having a fair market value of $50,000 at the date of
the grant, except that initial grants under the Directors Plan were made on the
date the Directors Plan was adopted by the Company's board of directors.
Options are granted at a price equal to the fair market value of the stock on
the date of grant, become exercisable after the end of one year from the date of
grant and have a term of ten years from the date of grant. The options are
subject to termination should the optionee's service as a director of the
Company terminate. At December 29, 1996, 12,954 shares had been granted under
the Directors Plan, at an exercise price of $11.58 per share.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no employee compensation expense has been recognized for the
Company's stock option plans. Had employee compensation expense for the
Company's plans been determined based on the fair value at the grant date for
awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net income and net income per common and equivalent share would have
been reduced to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Net income (loss) - as reported........................... $(43,716) $5,707
Net income (loss) - pro forma............................. (44,395) 3,188
Net income (loss) per common and equivalent share -
as reported............................................ (4.54) 0.25
Net income (loss) per common and equivalent
share - pro forma...................................... (4.97) 0.14
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Expected volatility....................................... 38.0% 37.1%
Risk-free interest rate................................... 6.8% 6.3%
Expected lives............................................ 5 years 5 years
Dividend yield............................................ 0 0
</TABLE>
Activity under the option plans through December 29, 1996 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION
NUMBER OF PRICE
SHARES PER SHARE
------------------- ------------------
<S> <C> <C>
Granted.................................................. 2,090,248 $5.93
Canceled................................................. (16,778) 5.88
------------------- ------------------
Outstanding as of December 31, 1995...................... 2,073,470 5.93
Granted................................................ 1,959,165 7.94
Exercised.............................................. (353,096) 6.03
Canceled............................................... (201,464) 7.27
------------------- ------------------
Outstanding as of December 29, 1996...................... 3,478,075 $6.87
=================== ==================
Exercisable as of December 29, 1996...................... 275,824 $5.93
=================== ==================
</TABLE>
34
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Information on options outstanding at December 29, 1996 is as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
WEIGHTED ----------------------------
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICE OF OPTIONS LIFE (YEARS) EXERCISE PRICE OF OPTIONS EXERCISE PRICE
----------------- ------------ -------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$5.88 1,616,739 8.46 $ 5.88 257,700 $5.88
6.01 - 9.00 1,433,755 9.04 6.58 18,124 6.54
9.01 - 12.00 417,411 9.41 11.36 - -
12.01 - 15.00 8,109 9.58 15.00 - -
27.01 - 30.00 685 9.70 29.13 - -
30.01 - 33.00 1,376 9.76 32.63 - -
------------ -------------- ---------------- ------------ ----------------
Total 3,478,075 8.81 $ 6.87 275,824 $5.93
============ ============== ================ ============ ================
</TABLE>
Boston Chicken Option. The Company has granted to Boston Chicken an option
(the "BCI Option") to purchase such number of shares of the Company's common
stock as will permit Boston Chicken to maintain ownership of shares of common
stock having up to 52% of the voting power of all of the outstanding shares of
the capital stock of the Company having the power generally to vote in the
election of directors. The terms of the BCI Option provide that certain shares
of the Company's common stock owned by Boston Chicken are excluded in
determining the percentage ownership of the voting stock of the Company owned by
Boston Chicken for purposes of BCI Option. As of December 29, 1996, Boston
Chicken had the right under the BCI Option to purchase 416,407 shares of the
Company's common stock at a weighted average price of $28.61.
As of December 29, 1996, the Company had 6,878,449 shares of common stock
reserved for issuance upon exercise of options and warrants.
13. RELATED PARTY TRANSACTIONS
Boston Chicken is the majority shareholder of the Company. For the
Company's 1995 fiscal year, the Company paid to Boston Chicken approximately
$1.2 million for the purchase of furniture, equipment and other miscellaneous
assets, and the Company paid to Boston Chicken amounts aggregating approximately
$3.0 million and $10.2 million in fiscal 1995 and 1996, respectively, for
software license, software maintenance, real estate, financial advisory and
accounting fees, and interest.
Certain officers and directors of the Company and Boston Chicken are
investors in Bagel Funding and had invested an aggregate of $15.2 million in
Bagel Funding at December 29, 1996. The Company is the manager of Bagel Funding
but has no equity interest in Bagel Funding. Bagel Funding paid $500,000 to the
Company in its capacity as manager during 1996.
Certain directors and officers and members of their families have a direct
or indirect equity interest in the Company's area developers. The Company
received fees and other payments from these entities aggregating approximately
$2.3 million and $33.0 million in fiscal 1995 and 1996, respectively, for area
development, real estate, software maintenance, franchise, royalty,
miscellaneous fees, interest and deposits. The Company has also sold to these
entities, stores, inventory, equipment and other miscellaneous net assets for
which it received approximately $5.5 million and $49.9 million in fiscal 1995
and 1996, respectively.
During fiscal 1995 and 1996, the Company paid approximately $86,000 and
$98,000, respectively, to Bowana Aviation, Inc. ("Bowana") for the Company's use
of aircraft owned by Bowana. A director and a member of his family (both
35
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
stockholders of the Company) own Bowana. The Company believes that the amounts
charged by Bowana are at rates at least comparable to those charged by
unaffiliated third parties.
14. SUBSEQUENT EVENT
On March 24, 1997, the Company sold the 16 remaining Company stores and
related assets to Sunbelt Bagels, L.L.C., a newly-formed area developer for
approximately $3.3 million. No material gain or loss resulted from this sale.
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Einstein/Noah Bagel Corp. and
subsidiaries as of December 31, 1995 and December 29, 1996, and for the period
from March 24, 1995 (inception) through December 31, 1995, and for the fiscal
year ended December 29, 1996 included in this Form 10-K, and have issued our
report thereon dated March 24, 1997. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
supplemental schedule listed in Part IV, Item 14 of this Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Denver, Colorado
March 24, 1997
37
<PAGE>
SCHEDULE II
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Additions Deductions
at charged to for Balance
beginning costs and accounts at end of
Classifications of period expenses written-off period
- -------------------------------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Fiscal year ended December 29, 1996:
Allowance for Doubtful Accounts...... $ 81,000 $ - $ (81,000) $ -
Period ended December 31, 1995:
Allowance for Doubtful Accounts....... - 81,000 - 81,000
</TABLE>
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. The information appearing under the caption "Election of
Directors" in the Company's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 13, 1997 (the "Proxy Statement") is
incorporated herein by reference.
Executive Officers. Information with respect to executive officers of the
Company is set forth under the caption "Executive Officers" in Item 1 of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal Stockholders and
Securities Ownership of Management" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the captions "Certain Transactions" and
"Relationship with Boston Chicken" in the Proxy Statement is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. The Company's Consolidated Financial Statements are set forth in Part
II, Item 8.
A. Report of Independent Public Accountants (Arthur Andersen LLP);
B. Consolidated Balance Sheets at December 31, 1995 and December 29,
1996;
C. Consolidated Statements of Operations for the period from March
24, 1995 (inception) through December 31, 1995 and the fiscal year
ended December 29, 1996;
D. Consolidated Statements of Stockholders' Equity for the period
from March 24, 1995 (inception) through December 31, 1995 and the
fiscal year ended December 29, 1996;
E. Consolidated Statements of Cash Flows for the period from March
24, 1995 (inception) through December 31, 1995 and the fiscal year
ended December 29, 1996; and
F. Notes to Consolidated Financial Statements.
39
<PAGE>
2. The following schedules are set forth in Part II, Item 8.
A. Report of Independent Public Accountants (Arthur Andersen LLP);
and
B. Schedule II - Valuation and Qualifying Accounts.
3. Exhibits
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:
(i) The Company's Amended and Restated 1995 Stock Option Plan.
(ii) The Company's 1996 Stock Option Plan for Non-Employee Directors.
(iii) Letter Agreement dated April 5, 1996 between Mark R. Goldston and
the Company.
(iv) Letter Agreement dated as of September 23, 1996 terminating the
Employment Agreement dated March 31, 1995 between the Company and
John A. Offerdahl.
(v) Consulting Agreement dated as of July 1, 1996 between Kyle T. Craig
and the Company.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of fiscal 1996.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 31, 1997
Einstein/Noah Bagel Corp.
By: /s/ MARK R. GOLDSTON
--------------------------------
Name: Mark R. Goldston
Title: President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 31, 1997.
Signature Title
--------- -----
/s/ MARK R. GOLDSTON President, Chief Executive Officer
- ----------------------------------
Mark R. Goldston and Director (Principal Executive
Officer)
/s/ SCOTT A. BECK Director
- ----------------------------------
Scott A. Beck
/s/ DAVID G. STANCHAK Director
- ----------------------------------
David G. Stanchak
/s/ KYLE T. CRAIG Director
- ----------------------------------
Kyle T. Craig
/s/ M. LAIRD KOLDYKE Director
- ----------------------------------
M. Laird Koldyke
/s/ GAIL A. LOZOFF Director
- ----------------------------------
Gail A. Lozoff
/s/ JOHN H. MUEHLSTEIN, JR. Director
- ----------------------------------
John H. Muehlstein, Jr.
/s/ JOHN A. OFFERDAHL Director
- ----------------------------------
John A. Offerdahl
/s/ LLOYD D. RUTH Director
- ----------------------------------
Lloyd D. Ruth
/s/ W. ERIC CARLBORG Senior Vice President - Finance
- ----------------------------------
W. Eric Carlborg (Principal Financial Officer)
/s/ THEODORE P. HEININGER Vice President - Controller
- ----------------------------------
Theodore P. Heininger (Principal Accounting Officer)
41
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT+ PAGE
- --------- --------------------------------------------------------------------- --------
<S> <C> <C>
2 Merger Agreement dated as of January 22, 1996, as amended, among the
Company, NNYB Acquisition Corporation, Noah's New York Bagels, Inc.
("Noah's"), and the shareholders and optionholders of Noah's (the
"Noah's Agreement") (incorporated by reference to Exhibit 2.5 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
04725)).
3.1 Restated Certificate of Incorporation of the Company ("Certificate
of Incorporation") (incorporated by reference to Exhibit 3 to the
Company's quarterly report for the quarter ended October 6, 1996).
3.2 Amended and Restated Bylaws of the Company ("Bylaws") (incorporated
by reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (Registration No. 333-04725)).
4.1 Certificate of Incorporation (included in Exhibit 3.1).
4.2 Bylaws (included in Exhibit 3.2).
4.3 Certificate representing Common Stock (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-04725)).
4.4 Amended and Restated Registration Rights Agreement dated February 1,
1996 by and among the Company and certain stockholders of the Company
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-1 (Registration No. 333-04725)).
4.5 Concurrent Private Placement Agreement dated August 1, 1996 between
Boston Chicken, Inc. ("Boston Chicken") and the Company (incorporated
by reference to Exhibit 10.3 to Boston Chicken's quarterly report on
Form 10-Q for the quarter ended July 14, 1996).
4.6 Registration Agreement dated August 1, 1996 between Boston Chicken
and the Company (incorporated by reference to Exhibit 10.3 to Boston
Chicken's quarterly report on Form 10-Q for the quarter ended July
14, 1996).
</TABLE>
__________
+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit 1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT+ PAGE
- ---------- ------------------------------------------------------------------ -------
<S> <C> <C>
4.7 Concurrent Offering Purchase Agreement dated November 26, 1996
between Boston Chicken and the Company ("Concurrent Offering
Purchase Agreement") (incorporated by reference to Exhibit 10.41
to Boston Chicken's 1996 annual report on Form 10-K).
4.8 Registration Rights Agreement dated February 24, 1997 by and
between the Company and Alamo Bagels, L.P.
10.1(a) Amended and Restated Loan Agreement dated May 17, 1996 between
Boston Chicken and the Company (the "Loan Agreement") (incorporated
by reference to Exhibit 10.1(a) to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
10.1(b) First Amendment to the Loan Agreement dated July 19, 1996
(incorporated by reference to Exhibit 10.1(b) to the Company's
Registration Statement on Form S-1 (Registration No. 333-04725)).
10.1(c) Second Amendment to the Loan Agreement dated September 16, 1996
(incorporated by reference to Exhibit 10.1(c) to the Company's
Registration Statement on Form S-1 (Registration No. 333-12395)).
10.2 Concurrent Private Placement Agreement dated August 1, 1996 between
Boston Chicken and the Company (included in Exhibit 4.5).
10.3(a) Secured Demand Note of the Company dated January 30, 1996 payable
to Boston Chicken ("Secured Demand Note") (incorporated by
reference to Exhibit 10.23(d) to Boston Chicken's 1995 annual
report on Form 10-K).
10.3(b) First Amendment to Secured Demand Note dated as of March 7, 1996
(incorporated by reference to Exhibit 10.3(b) to the Company's
Registration Statement on Form S-1 (Registration No. 333-04725)).
10.3(c) Second Amendment to Secured Demand Note dated as of September 16,
1996 (included in Exhibit 10.1(c)).
10.4 Noah's Agreement (included in Exhibit 2).
</TABLE>
__________
+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit 2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT+ PAGE
- ----------- -------------------------------------------------------------------- --------
<S> <C> <C>
10.5(a) Secured Credit Agreement dated as of May 17, 1996 among the
Company, the Lenders named therein, and Bank of America Illinois,
as Agent ("Secured Credit Agreement") (incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement on Form S-
1 (Registration No. 333-04725)).
10.5(b) First Amendment and Waiver to Secured Credit Agreement dated
August 27, 1996 (incorporated by reference to Exhibit 10.9(b) to
the Company's Registration Statement on Form S-1 (Registration
No. 333-12395)).
10.6 The Company's Amended and Restated 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No.
333-04725)).
10.7 The Company's 1996 Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (Registration No. 333-04725)).
10.8(a) Amended and Restated Accounting and Administration Services
Agreement dated as of May 28, 1996 between Boston Chicken and the
Company (incorporated by reference to Exhibit 10.12(a) to the
Company's Registration Statement on Form S-1 (Registration No.
333-04725)).
10.8(b) First Amendment to Amended and Restated Accounting and
Administration Services Agreement dated as of June 17, 1996
between Boston Chicken and the Company (incorporated by reference
to Exhibit 10.12(b) to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.9 Financial Services Agreement Termination Agreement effective as
of May 20, 1996 (incorporated by reference to Exhibit 10.13(c) to
the Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.10(a) Amended and Restated Real Estate Services Agreement dated as of
May 28, 1996 between Boston Chicken and the Company (incorporated
by reference to Exhibit 10.14(a) to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
</TABLE>
__________
+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit 3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT+ PAGE
- ---------- ------------------------------------------------------------------- --------
<S> <C> <C>
10.10(b) Amended and Restated Real Estate Services Agreement Termination
Agreement dated as of June 17, 1996 between the Company and Boston
Chicken (incorporated by reference to Exhibit 10.14 (b) to the
Company's Registration Statement on Form S-1 (Registration No. 333-
04725)).
10.11(a) Amended and Restated Computer and Communications Systems Services
Agreement dated as of June 17, 1996 between Boston Chicken and the
Company (incorporated by reference to Exhibit 10.15(a) to the
Company's Registration Statement on Form S-1 (Registration No. 333-
04725)).
10.11(b) First Amendment to the Amended and Restated Computer and
Communications Systems Services Agreement dated as of June 17, 1996
between Boston Chicken and the Company (incorporated by reference
to Exhibit 10.15(b) to the Company's Registration Statement on Form
S-1 (Registration No. 333-04725)).
10.12 Letter Agreement dated April 5, 1996 between Mark R. Goldston and
the Company (incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
04725)).
10.13+++ Project and Approved Supplier Agreement dated May 24, 1996 among
the Company, Harlan Bagel Supply Company, L.L.C. ("Harlan Bagel
Supply"), Harlan Bakeries, Inc. ("Harlan Bakeries") and Hal P.
Harlan, Hugh P. Harlan and Doug H. Harlan (the "Harlans")
(incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (Registration No. 333-04725)).
10.14 Option Agreement dated August 27, 1996 among Harlan Bagel Supply,
the Harlans and the Company (incorporated by reference to Exhibit
10.25 to the Company's Registration Statement on Form S-1
(Registration No. 333-12395)).
10.15 Right of First Refusal Agreement dated August 27, 1996 among Harlan
Bakeries, the Harlans and the Company (incorporated by reference to
Exhibit 10.26 to the Company's Registration Statement on Form S-1
(Registration No. 333-12395)).
</TABLE>
__________
+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.
+++ Confidential treatment requested.
Exhibit 4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT+ PAGE
- ----------- ------------------------------------------------------------------ --------
<S> <C> <C>
10.16 Aircraft Dry Leases dated January 16, 1996 between the Company and
Bowana Aviation, Inc. (incorporated by reference to Exhibit 10.27
to the Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.17 Fourth Amended and Restated Limited Liability Company Agreement of
Bagel Store Development Funding, L.L.C. ("Bagel Funding") dated as
of July 1, 1996 (incorporated by reference to Exhibit 10.28 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
12395)).
10.18 Form of agreement between the Company and Bagel Funding relating to
the Company's purchase of Bagel Funding's interests in area
developers (incorporated by reference to Exhibit 10.30 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
04725)).
10.19 Form of Area Development Agreement between the Company and its Area
Developers (included in Exhibit 99).
10.20 Form of Franchise Agreement between the Company and its Area
Developers (included in Exhibit 99).
10.21 Form of Secured Loan Agreement between the Company and its Area
Developers (included in Exhibit 99).
10.22 Letter Agreement dated as of September 23, 1996 terminating the
Employment Agreement dated March 31, 1995 between the Company and
John A. Offerdahl (incorporated by reference to Exhibit 10.3 to the
Company's quarterly report on Form 10-Q for the quarter ended
October 6, 1996).
10.23 Office Lease Agreement dated as of July 1, 1996 between the Company
and Boston Chicken (incorporated by reference to Exhibit 10.35 to
the Company's Registration Statement on Form S-1 (Registration No.
333-04725)).
10.24 Consulting Agreement dated as of July 1, 1996 between Kyle T. Craig
and the Company (incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
04725)).
</TABLE>
__________
+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit 5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT+ PAGE
- ------------ ---------------------------------------------------------------- --------
<S> <C> <C>
10.25(a) Aircraft Dry Sublease and related Letter Agreement dated as of
July 9, 1996 between the Company and Boston Chicken (incorporated
by reference to Exhibit 10.37(a) to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
10.25(b) Aircraft Dry Sublease and related Letter Agreement dated as of
July 9, 1996 between the Company and Boston Chicken (incorporated
by reference to Exhibit 10.37(b) to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
10.26 Concurrent Offering Purchase Agreement (included in Exhibit 4.7).
11 Statement re: Computation of Earnings (Loss) Per Share
21 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP with respect to the Audited
Consolidated Financial Statements of the Company.
27 Financial Data Schedule.
99 Uniform Franchise Offering Circular, as amended as of
September 1, 1996 (incorporated by reference to Exhibit 99 to
the Company's Registration Statement on Form S-1 (Registration
No. 333-12395)).
</TABLE>
__________
+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit 6
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is dated as of
February 24, 1997 and is by and between Einstein/Noah Bagel Corp., a Delaware
corporation (the "Company"), and Alamo Bagels, L.P., a Delaware limited
partnership ("Alamo").
WITNESSETH:
WHEREAS, the Company has agreed to provide Alamo with certain
registration rights as set forth herein in connection with the purchase by Alamo
on the date hereof of certain securities of the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and subject to and
on the terms and conditions herein set forth, the parties hereto agree as
follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1 "Business Day" means any day on which the Nasdaq National Market is
------------
open for trading.
1.2 "Closing Date" means February 24, 1997.
------------
1.3 "Common Stock" means the common stock, par value $.01 per share, of
------------
the Company.
1.4 "Eligible Securities" means all or any portion of the Common Stock
-------------------
acquired by Alamo pursuant to that certain Stock Purchase Agreement of even date
herewith between Alamo and the Company and all other securities issued with
respect thereto by reason of dividends, stock splits, combinations or similar
transactions.
1.5 "Fair Market Value" means (i) if the Common Stock is listed on a
-----------------
national securities exchange or authorized for quotation on the National
Association of Securities Dealers Inc.'s Nasdaq National Market System
("Nasdaq/NMS"), the closing sale price of the Common Stock on such exchange or
Nasdaq/NMS, as the case may be, or if no such reported sale of the security
shall have occurred on such date, on the next preceding date on which there was
such a reported sale.
1.6 "Person" means an individual, a partnership (general or limited),
------
corporation, joint venture, business trust, cooperative, association or other
form of business organization, whether or not regarded as a legal entity under
applicable law, a trust (inter vivos or testamentary), an estate of a deceased,
insane or incompetent person, a quasi-governmental entity, a government or any
agency, authority, political subdivision or other instrumentality thereof, or
any other entity.
<PAGE>
1.7 The terms "register," "registered" and "registration" refer to a
--------- ---------- ------------
registration effected by preparing and filing with the SEC a registration
statement in compliance with the Securities Act and the declaration or ordering
of the effectiveness of such registration statement.
1.8 "Registration Expenses" means all expenses incident to the Company's
---------------------
performance of or compliance with the registration requirements set forth in
this Agreement including, without limitation, the following: (i) the fees,
disbursements and expenses of the Company's counsel(s), accountants and experts
in connection with the registration of Eligible Securities to be disposed of
under the Securities Act; (ii) all expenses in connection with the preparation,
printing and filing of the registration statement, any preliminary prospectus or
final prospectus, any other offering document and amendments and supplements
thereto and the mailing and delivering of copies thereof to the underwriters and
dealers; (iii) the cost of printing or producing any agreement(s) among
underwriters, underwriting agreement(s) and blue sky or legal investment
memoranda, any selling agreements and any other documents in connection with the
offering, sale or delivery of Eligible Securities to be disposed of; (iv) SEC or
blue sky registration fees attributable to Eligible Securities; (v) all expenses
in connection with the qualification of Eligible Securities to be disposed of
for offering and sale under state securities laws, including the fees and
disbursements of counsel for the underwriters in connection with such
qualification and in connection with any blue sky and legal investment surveys;
(vi) the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of Eligible
Securities to be disposed of; and (vii) fees and expenses incurred in connection
with the listing of Eligible Securities on each securities exchange on which
securities of the same class are then listed; provided, however, that
Registration Expenses with respect to any Eligible Registration pursuant to this
Agreement shall not include underwriting discounts or commissions attributable
to Eligible Securities, transfer taxes applicable to Eligible Securities, or any
fees and disbursements of any legal counsel, accountant or other expert or
professional advisor retained by a Stockholder.
1.9 "Registration Period" means the period from September 15, 1997 to
-------------------
December 31, 1997 in which Stockholder may demand registration of the Eligible
Securities.
1.10 "Resale Registration Statement" shall have the meaning set forth in
-----------------------------
Section 2.1(a) hereof.
1.11 "SEC" means the Securities and Exchange Commission.
---
1.12 "Securities Act" means the Securities Act of 1933, as amended, and
--------------
the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the relevant time.
1.13 "Selling Stockholder" means any Stockholder requesting the
-------------------
registration of Eligible Securities registered pursuant to Article 2 hereof.
1.14 "Stockholder" means Alamo while holding Eligible Securities and any
-----------
person holding Eligible Securities to whom the rights under this Agreement have
been transferred in accordance with Section 6.8 hereof.
2
<PAGE>
ARTICLE 2
DEMAND REGISTRATION
2.1 Registration of Shares on Request.
----------------------------------
(a) Upon the written request to register Eligible Securities by any
Stockholder of Eligible Securities during the Registration Period, the Company
shall prepare and file with the Commission a registration statement under the
Securities Act, on such form and in such manner as the Company may deem
appropriate, covering the offer and sale of the Eligible Securities (such number
of shares to be registered as specified in such written request) by the Selling
Stockholders thereof directly to the public or in a public transaction to or
through a broker, dealer or market maker (the "Resale Registration Statement");
provided, however, that the Company shall not be obligated to effect any such
- -------- -------
Resale Registration Statement pursuant to this Section 2.1(a) if (i) the Company
has already registered the Eligible Securities in accordance with Section 2.1(f)
hereof, or (ii) the aggregate number of the Eligible Securities as shall be
specified in such written request, together with the number of Eligible
Securities requested to be registered by Non-Requesting Stockholders pursuant to
Section 2.1(c) hereof, is less than 231,023. The Company shall be permitted to
include in such Resale Registration Statement such other shares of Common Stock
that it deems desirable in its sole discretion.
(b) The Company shall be entitled to postpone the filing of any
registration statement required to be prepared and filed by it pursuant to a
Stockholder's written request under this Article 2 if (i) the Company is
currently engaged in a self-tender or exchange offer and the filing of a
registration statement would cause a violation of the Exchange Act, (ii) an
underwriter or group of underwriters used by, or proposed to be used by, the
Company in connection with a registered public offering certifies that the
registration of such Eligible Securities would have an adverse effect on, or
would make impracticable, such registered public offering. In the event of such
postponement, the Company shall be required, upon the request of such Selling
Stockholders, to file the registration statement pursuant to this Article 2 as
soon as practicable after the termination or consummation of any of the events
set forth in (i) and (ii) above.
(c) In the event the Company receives a request from a Stockholder to
effect the registration of Eligible Securities pursuant to Section 2.1(a)
hereof, the Company will notify each other person holding Eligible Securities to
whom the rights under this Agreement have been transferred in accordance with
Section 6.8 hereof (the "Non-Requesting Stockholders") that it intends to effect
the registration of Eligible Securities. Thereafter, upon the written request
of any of the Non-Requesting Stockholders within ten (10) Business Days after
the giving of such notice by the Company, the Company will use all reasonable
efforts to effect the registration of the number of Eligible Securities in which
the Company has been so requested by such Non-Requesting Stockholders to
register.
(d) The Company shall not be obligated to file more than one
registration statement in response to a request from a Stockholder delivered
pursuant to this Article 2.
3
<PAGE>
(e) The Company (as between the Company and the Selling Stockholders)
shall be responsible for the payment of all Registration Expenses in connection
with any registration pursuant to this Article 2.
(f) If at any time prior to the request by a Stockholder to register
Eligible Securities pursuant to this Article 2, the Company registers the
Eligible Securities in accordance with Article 3 of this Agreement on a
registration statement covering the offer and sale of the Eligible Securities by
the Stockholders thereof directly to the public or in a public transaction to or
through a broker, dealer or market maker, then the Company's obligation under
Section 2.1(a) hereof to file a registration statement upon the request of a
Stockholder shall be deemed to have been satisfied and the Stockholder's right
to request registration of the Eligible Securities under Section 2.1(a) shall be
terminated.
ARTICLE 3
REGISTRATION PROCEDURES
3.1 Registration and Qualification.
-------------------------------
(a) If and whenever the Company is required to effect the registration
of any Eligible Securities under the Securities Act as provided in Article 2
hereof, the Company will, as promptly as is practicable, register the Eligible
Securities under the Securities Act and use reasonable efforts to cause the
registration statement to become effective;
(b) The Company shall prepare and file with the SEC such amendments
and supplements to any registration statement registering Eligible Securities
and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective, and comply with the provisions of the
Securities Act with respect to the disposition of all Eligible Securities, until
the earliest of (i) such time as all of such Eligible Securities have been
disposed of in accordance with the intended methods of disposition by the
Selling Stockholders as set forth in the Resale Registration Statement, (ii) the
expiration of two years after the date the Resale Registration Statement has
been declared effective by the SEC, (iii) the date on which such Eligible
Securities are permitted to be sold in their entirety within any three month
period pursuant to Rule 144 (or any successor provision to such Rule) under the
Securities Act, or (iv) the date on which all of such Eligible Securities shall
have been transferred pursuant to an applicable exemption under the Securities
Act, new certificates for such securities not bearing a legend restricting
further transfer shall have been delivered by the Company and such securities
shall be freely transferable to the public without registration under the
Securities Act; provided, however, that in the event that the Company shall
-------- -------
notify the Selling Stockholders of the happening of any event which causes the
prospectus included as part of such registration statement, as then in effect,
to include an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, such
Selling Stockholders shall thereafter sell no shares under such registration
statement until the Company has filed an amendment or supplement to the
prospectus to cause the prospectus not to include an untrue statement of a
material fact or omit to state any material facts required to be stated therein
or
4
<PAGE>
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and the Company shall be obligated to
promptly amend or supplement the prospectus so that the prospectus does not
include an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(c) The Company will use its reasonable best efforts to register or
qualify such Eligible Securities under the blue sky laws of such jurisdictions
as any Selling Stockholder reasonably requests and to do any and all other acts
which may be reasonably necessary to enable such Selling Stockholder to
consummate the disposition in such jurisdictions of the Eligible Securities
owned by such Selling Stockholder (provided that the Company will not be
required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction, or (iii) consent to general
service of process in any such jurisdiction);
(d) The Company may require the Selling Stockholders to furnish to the
Company such information regarding the Selling Stockholders and the distribution
of the Eligible Securities as the Company may from time to time reasonably
request in writing and as shall be required by law or by the SEC in connection
with any registration;
(e) The Company shall provide to each Selling Stockholder such number
of copies of the Resale Registration Statement, each amendment and supplement
thereto, the prospectus included in such Resale Registration Statement
(including each preliminary prospectus) and such other documents as such Selling
Stockholder may reasonably request in order to facilitate the disposition of the
Eligible Securities registered pursuant to such registration statement; and
(f) The Company will provide a transfer agent and registrar for all
Eligible Securities not later than the effective date of the registration
statement, and use its reasonable best efforts to cause the Eligible Securities
to be listed on each securities exchange or national market system on which the
Common Stock is then listed.
(g) The Company may, by notice given to all Selling Stockholders
covered by the Resale Registration Statement, require such Selling Stockholders
not to make any sale of Eligible Securities pursuant to the Resale Registration
Statement if (i) in the opinion of the Company, (x) securities laws applicable
to such sale would require the Company to disclose material non-public
information ("Non-Public Information") and (y) the disclosure of such Non-Public
Information would adversely affect the Company or (ii) such sale would occur
during the measurement period (a "Measurement Period") for determining the
amount of Common Stock, or the amount of any other consideration the amount of
which will be based on the price of the Common Stock, in connection with the
acquisition of a business or assets by the Company. In the event the sales
under the Resale Registration Statement are deferred because of the existence of
Non-Public Information, the Company will notify the Selling Stockholders
promptly upon such Non-Public Information being included by the Company in a
filing with the SEC, being otherwise disclosed to the public (other than through
the actions of a Selling Stockholder) or
5
<PAGE>
ceasing to be material to the Company, and upon such notice being given by the
Company, the Selling Stockholders shall again be entitled to sell Eligible
Securities pursuant to the Resale Registration Statement. In the event such
sales are deferred because it is proposed to be made during a Measurement
Period, the Company shall specify, in notifying the Selling Stockholders of the
deferral of its or their rights to use the Resale Registration Statement, when
the Measurement Period will end, at which time the Selling Stockholders shall
again be entitled to sell Eligible Securities pursuant to the Resale
Registration Statement. If the Measurement Period is thereafter changed, the
Company will promptly notify the Selling Stockholders of such change and upon
the end of the Measurement Period as so changed, the Selling Stockholders will
again be entitled to sell Eligible Securities pursuant to the Resale
Registration Statement. If the acquisition agreement to which such Measurement
Period relates is terminated prior to the end of the Measurement Period, the
deferral period hereunder shall end immediately and the Company will notify the
Selling Stockholders of the end of the deferral period.
ARTICLE 4
INDEMNIFICATION
4.1 Indemnification.
----------------
(a) In the event of any registration of any Eligible Securities
hereunder, the Company agrees to indemnify and hold harmless each Stockholder
who exercises his or its registration rights hereunder and, to the extent
applicable, its directors and officers, its partners, its trustees and each
Person who controls any of such Persons, each Person who participates as an
underwriter in the offering or sale of any Eligible Securities, and each Person,
if any, who controls such underwriter within the meaning of the Securities Act
against any losses, claims, damages, liabilities and expenses, joint or several,
to which such Person may be subject under the Securities Act or otherwise
insofar as such losses, claims, damages, liabilities or expenses (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under the
Securities Act, any final prospectus included therein, or any amendment or
supplement thereto, or any document incorporated by reference therein, or (ii)
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the Company will promptly reimburse each such Person for any legal or any other
expenses reasonably incurred by such Person in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, any final prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company or such underwriter by such Selling Stockholders expressly for use in
the registration statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of a Selling Stockholder or
any such Person and shall survive the transfer of such securities by the Selling
Stockholders.
6
<PAGE>
(b) The Selling Stockholders, by virtue of exercising their
registration rights hereunder, agree and undertake to severally and not jointly
indemnify and hold harmless (in the same manner and to the same extent as set
forth in clause (a) of this Article 4) the Company, each director of the
Company, each officer of the Company who shall sign such registration statement,
and each Person who participates as an underwriter in the offering or sale of
such securities, each Person, if any, who controls the Company or any such
underwriter within the meaning of the Securities Act, with respect to any
statement in or omission from such registration statement, any final prospectus
included therein, or any amendment or supplement thereto, but only to the extent
that such statement or omission was made in reliance upon and in conformity with
written information furnished by such Selling Stockholders to the Company
expressly for use in the registration statement. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Company or any such director, officer or controlling Person and shall
survive the transfer of the registered securities by the Selling Stockholders
and the expiration of this Agreement.
(c) Indemnification similar to that specified in the preceding
subdivisions of this Article 4 (with appropriate modifications) shall be given
by the Company and the Selling Stockholders with respect to any required
registration or other qualification of such Eligible Securities under any
federal or state law or regulation of governmental authority other than the
Securities Act.
ARTICLE 5
BENEFITS
5.1 Benefits of Registration Rights. Subject to the limitations of
-------------------------------
Section 2.1(c) hereof, Stockholders may severally or jointly exercise the
registration rights hereunder in such manner and in such proportion as they
shall agree among themselves.
5.2 Qualification for Rule 144 Sales. Upon the written request of any
--------------------------------
Stockholder, the Company will deliver to such Stockholder a written statement as
to whether it has complied with the filing requirements described in Rule
144(c)(1).
ARTICLE 6
MISCELLANEOUS
6.1 Captions. The captions or headings in this Agreement are for
--------
convenience and reference only, and in no way define, describe, extend or limit
the scope or intent of this Agreement.
6.2 Severability. If any clause, provision or section of this Agreement
------------
shall be invalid or unenforceable, the invalidity or unenforceability of such
clause, provision or section shall not affect the enforceability or validity of
any of the remaining clauses, provisions or sections hereof to the extent
permitted by applicable law.
7
<PAGE>
6.3 Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the internal laws of the State of Delaware, without reference to
its rules as to conflicts or choice of laws.
6.4 Modification and Amendment. This Agreement may not be changed,
--------------------------
modified, discharged or amended, except by an instrument signed by the
Stockholders owning at least 75% of the Eligible Securities.
6.5 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be an original, but all of which together shall constitute one and
the same instrument.
6.6 Entire Agreement. This Agreement constitutes the entire agreement and
----------------
understanding among the parties and supersedes any prior understandings and/or
written or oral agreements among them respecting the subject matter herein.
6.7 Notices. All notices, requests, demands, consents and other
-------
communications required or permitted to be given pursuant to this Agreement
shall be in writing and delivered by hand, by overnight courier delivery service
or by certified mail, return receipt requested, postage prepaid. Notices shall
be deemed given when actually received, which shall be deemed to be not later
than the next Business Day if sent by overnight courier or after five (5)
Business Days if sent by mail. Notice to Stockholders shall be made to the
address listed on the stock transfer records of the Company.
6.8 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register Eligible Securities granted to Alamo hereunder may not be assigned
without the consent of the Company. Any permitted transfer of registration
rights pursuant to this Section shall be effective upon receipt by the Company
of written notice from Alamo or such other Stockholder transferring Eligible
Securities (i) stating the name and address of the transferee, (ii) the number
of Eligible Securities transferred and (iii) the date of transfer, which notice
shall be accompanied by an agreement of the transferee stating that all of the
terms and provisions of this Agreement will be binding upon and enforceable
against such transferee.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed as of the day and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By: /s/ Joel M. Alam
-----------------------------------
Title: Vice President and Secretary
--------------------------------
ALAMO BAGELS, L.P.
By: Alamo Bagels, Inc.
Its: General Partner
By: /s/ Pearce B. Tucker
------------------------------------
Title: President
--------------------------------
9
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
December December
31, 1995 29, 1996
--------------- -------------
<S> <C> <C>
Primary earnings per share:
Weighted average number of shares outstanding................ 7,915 20,072
Dilutive effect of common stock options and warrants......... 1,744 2,272
--------------- -------------
Adjusted primary weighted average number of
common and equivalent shares outstanding.................... 9,659 22,344
=============== =============
Fully diluted earnings per share:
Weighted average number of shares outstanding................ 7,915 20,072
Dilutive effect of common stock options and warrants........ 1,744 2,325
--------------- -------------
Adjusted fully diluted weighted average number of
common and equivalent shares outstanding.................... 9,659 22,397
=============== =============
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES
Baltimore Bagel Co., a Delaware corporation
Brackman Brothers, Inc., a Utah corporation
Noah's New York Bagels, Inc., a California corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-11197.
Arthur Andersen LLP
Denver, Colorado
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 50,741
<SECURITIES> 0
<RECEIVABLES> 5,589
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,909
<PP&E> 28,213
<DEPRECIATION> 0
<TOTAL-ASSETS> 332,418
<CURRENT-LIABILITIES> 10,488
<BONDS> 0
0
0
<COMMON> 323
<OTHER-SE> 315,194
<TOTAL-LIABILITY-AND-EQUITY> 332,418
<SALES> 35,803
<TOTAL-REVENUES> 61,707
<CGS> 11,546
<TOTAL-COSTS> 11,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,261
<INCOME-PRETAX> 5,707
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,707
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
</TABLE>
