<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-21097
EINSTEIN/NOAH BAGEL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1294908
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14103 Denver West Parkway
Golden, CO 80401
(Address of principal executive offices, including zip code)
(303) 215-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Number of shares of common stock, $.01 par value per share, outstanding as of
November 17, 1998: 33,270,535.
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 28, 1997 and
October 4, 1998............................................. 3
Consolidated Statements of Operations for the quarter and
three quarters ended October 5, 1997 and October 4, 1998.... 4
Consolidated Statements of Cash Flows for the three quarters
ended October 5, 1997 and October 4, 1998................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
Signature Page......................................................... 13
Exhibit Index.......................................................... 14
</TABLE>
2
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 28, October 4,
1997 1998
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
- - ------
Current Assets:
Cash and cash equivalents......................................... $ 34,148 $ 6,251
Accounts receivable............................................... 1,593 922
Inventories....................................................... 9,823 9,385
Prepaid expenses and other current assets......................... 502 747
-------- --------
Total current assets........................................... 46,066 17,305
Property and Equipment, net......................................... 194,152 191,068
Goodwill, net....................................................... 360,155 357,048
Trademarks, net..................................................... 22,075 22,600
Recipes, net........................................................ 7,202 6,574
Other Assets, net................................................... 13,478 8,179
-------- --------
Total assets................................................... $643,128 $602,774
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current Liabilities:
Accounts payable.................................................. $ 16,140 $ 13,042
Accrued expenses.................................................. 38,369 36,419
Current portion of senior term loan............................... 6,000 6,000
-------- --------
Total current liabilities...................................... 60,509 55,461
Revolving Credit Facility........................................... -- 1,200
Long-Term Portion of Senior Term Loan............................... 24,000 19,500
Convertible Subordinated Debentures................................. 125,000 125,000
Other Noncurrent Liabilities........................................ 23,225 19,731
Minority Interest................................................... 80,048 75,396
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock - $.01 par value; 20,000,000 shares authorized;
no shares issued and outstanding............................... -- --
Common Stock - $.01 par value; 200,000,000 shares authorized;
issued: 33,333,246 shares in December and
34,083,681 shares in October................................... 333 341
Additional paid-in capital........................................ 374,685 377,616
Treasury stock, at cost (813,146 shares in December and October).. (5,261) (5,261)
Accumulated deficit............................................... (39,411) (66,210)
-------- --------
Total stockholders' equity..................................... 330,346 306,486
-------- --------
Total liabilities and stockholders' equity................... $643,128 $602,774
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
------------------------ ------------------------
October 5, October 4, October 5, October 4,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Store revenue............................ $ -- $87,325 $ 2,103 $285,699
Royalties and franchise-related fees..... 13,882 -- 41,782 --
---------- ---------- ---------- ----------
Total revenue......................... 13,882 87,325 43,885 285,699
Costs and Expenses:
Store:
Cost of products sold................. -- 29,559 704 98,038
Salaries and benefits................. -- 26,789 609 89,458
Other controllable costs.............. -- 6,829 122 23,086
Rent, occupancy and related costs..... -- 8,171 150 26,762
Marketing expenses.................... -- 3,625 126 11,082
Depreciation and amortization......... -- 4,553 66 15,601
---------- ---------- ---------- ----------
Total store costs and expenses...... -- 79,526 1,777 264,027
Non-Store:
Salaries, benefits, general and
administrative...................... 3,096 7,149 12,887 30,008
Depreciation and amortization
(excluding goodwill amortization)... 1,061 823 3,039 2,644
Goodwill amortization................. 458 2,463 1,541 8,172
---------- ---------- ---------- ----------
Total non-store costs and expenses.. 4,615 10,435 17,467 40,824
---------- ---------- ---------- ----------
Total costs and expenses............ 4,615 89,961 19,244 304,851
---------- ---------- ---------- ----------
Income (Loss) from Operations.............. 9,267 (2,636) 24,641 (19,152)
Other Income (Expense):
Interest income.......................... 653 5 1,630 273
Interest expense......................... (2,146) (2,694) (3,696) (9,162)
Other.................................... -- (1) -- (3,410)
---------- ---------- ---------- ----------
Total other income (expense).......... (1,493) (2,690) (2,066) (12,299)
---------- ---------- ---------- ----------
Income (Loss) before Income Taxes and
Minority Interest........................ 7,774 (5,326) 22,575 (31,451)
Income Taxes............................... 2,410 -- 6,919 --
Minority Interest in Loss of Subsidiary.... -- (893) -- (4,652)
---------- ---------- ---------- ----------
Net Income (Loss).......................... $ 5,364 $(4,433) $15,656 $(26,799)
========== ========== ========== ==========
Basic Earnings (Loss) per Share............ $.16 $(.13) $.48 $(.81)
========== ========== ========== ==========
Diluted Earnings (Loss) per Share.......... $.16 $(.13) $.45 $(.81)
========== ========== ========== ==========
Weighted Average Number of Common
Shares Outstanding:
Basic................................. 33,266 33,271 32,927 32,930
========== ========== ========== ==========
Diluted............................... 34,578 33,271 34,776 32,930
========== ========== ========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Quarters Ended
-----------------------
October 5, October 4,
1997 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................ $ 15,656 $(26,799)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 4,646 26,417
Provision for write-down of notes receivable.............. -- 3,409
Minority interest......................................... -- (4,652)
Warrant and option exercise............................... 48 --
Deferred income taxes..................................... (300) --
Changes in assets and liabilities:
Accounts receivable..................................... (10,021) 671
Accounts payable and accrued expenses................... 8,341 (5,492)
Deferred franchise revenue.............................. (1,030) --
Other assets and liabilities............................ (107) (3,475)
--------- --------
Net cash provided by (used in) operating activities.. 17,185 (9,920)
--------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment........................... (6,588) (14,545)
Proceeds from sale of assets................................. 3,600 --
Purchase of other assets..................................... (9,827) (132)
Issuance of notes receivable................................. (299,808) --
Repayment of notes receivable................................ 139,869 --
--------- --------
Net cash used in investing activities..................... (172,754) (14,677)
--------- --------
Cash Flows Provided by Financing Activities:
Proceeds from issuance of common stock....................... 10,350 --
Borrowings under credit facilities........................... 62,200 47,100
Repayments under credit facilities........................... (62,200) (50,400)
Proceeds from convertible debt............................... 125,000 --
--------- --------
Net cash provided by (used in) financing activities....... 135,350 (3,300)
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........... (20,219) (27,897)
Cash and Cash Equivalents, beginning of period................. 50,741 34,148
--------- --------
Cash and Cash Equivalents, end of period....................... $ 30,522 $ 6,251
========= ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
5
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated interim financial statements have been prepared by
Einstein/Noah Bagel Corp. (the "Company") and are unaudited. The financial
statements have been prepared in accordance with the instructions for Form 10-Q
and, therefore, do not necessarily include all information and footnotes
required by generally accepted accounting principles. In the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows as of October 4, 1998 and for all periods
presented have been made. The statements are subject to year-end audit
adjustment. A description of the Company's accounting policies and other
financial information are included in the audited consolidated financial
statements filed with the Securities and Exchange Commission in the Company's
Form 10-K for the year ended December 28, 1997. The consolidated results of
operations for the quarter and three quarters ended October 4, 1998 are not
necessarily indicative of the results expected for the full year.
2. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with certain vendors which provide
for minimum purchases over specified terms. Such agreements call for
retroactive rate adjustments or cash settlement in the event of purchase
shortfalls. Management believes that the ultimate settlement of such
commitments will not have a material impact on the consolidated financial
position or results of operations of the Company.
Bagel Store Development Funding, L.L.C. ("Bagel Funding") has invested a
total of approximately $89.5 million, representing an approximately 21% equity
interest, in Einstein/Noah Bagel Partners, L.P., a majority-owned subsidiary of
the Company ("Bagel Partners"). The Company is the manager of Bagel Funding.
Bagel Funding has the right to require Bagel Partners or the Company to redeem
Bagel Funding's equity interest in Bagel Partners at a pre-determined formula
price based on store level cash flow of Bagel Partners in the event that, at any
time after December 5, 1999 and prior to June 5, 2001, the Company does not
consent to a public offering of such equity interests or the termination of
certain rights and obligations under franchise and license agreements between
the Company and Bagel Partners. Such right becomes exercisable prior to
December 5, 1999 if there is a Change in Control (as defined in the Bagel
Partners partnership agreement) of the Company. The Company or Bagel Partners
may pay the purchase price for such equity interests in cash, shares of the
Company's common stock or a combination thereof.
The Company has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business. 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.
The Company and certain of its current and former executive officers and
directors, the underwriters in the Company's initial public offering and the
Company's independent public accountants are defendants in a class action
lawsuit filed in the United States District Court for the District of Colorado.
In addition, an action was filed in state court in Jefferson County, Colorado,
although such action has been stayed pending resolution of the federal case.
The complaints in such actions allege, among other things, that the Company and
the other defendants violated Sections 11, 12(2) and 15 of the Securities Act of
1933, as amended, and Section 10(b) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 thereunder, as well as certain similar provisions of
Colorado state law. The plaintiffs are seeking, among other things, an award of
unspecified compensatory damages, interest and costs. Although the Company
cannot predict the outcome of these lawsuits, the Company believes the
complaints are without merit and is vigorously defending against the allegations
made in the complaints. On February 10, 1998, the Company filed a motion to
dismiss the complaint in the federal case.
3. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS FORM 10-Q UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE "FORWARD-
LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF EINSTEIN/NOAH BAGEL CORP. (THE "COMPANY"),
EINSTEIN/NOAH BAGEL PARTNERS, L.P., A MAJORITY-OWNED SUBSIDIARY OF THE COMPANY
("BAGEL PARTNERS"), AND EINSTEIN BROS.BAGELS AND NOAH'S NEW YORK BAGELS STORES
TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: COMPETITION; SUCCESS OF OPERATING INITIATIVES;
DEVELOPMENT AND OPERATING COSTS; ADVERTISING AND PROMOTIONAL EFFORTS; BRAND
AWARENESS; AVAILABILITY AND TERMS OF CAPITAL; ADVERSE PUBLICITY; ACCEPTANCE OF
NEW PRODUCT OFFERINGS; THE COMPANY'S RELATIONSHIP WITH, AND BUSINESS OF, BOSTON
CHICKEN, INC., THE COMPANY'S MAJORITY STOCKHOLDER ("BOSTON CHICKEN"); CHANGES IN
BUSINESS STRATEGY OR DEVELOPMENT PLANS; ACHIEVEMENT OF DEVELOPMENT SCHEDULES;
AVAILABILITY, LOCATIONS AND TERMS OF SITES FOR STORE DEVELOPMENT; FOOD, LABOR
AND EMPLOYEE BENEFIT COSTS; CHANGES IN GOVERNMENT REGULATION; REGIONAL WEATHER
CONDITIONS; AND OTHER FACTORS REFERENCED IN THIS FORM 10-Q. THE COMPANY CANNOT
PREDICT WHICH FACTORS WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY THE FORWARD-LOOKING STATEMENTS. IN ADDITION TO CONSIDERING
STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, READERS ARE
URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES", "BELIEF",
"EXPECTS", "PLANS", "ANTICIPATES", "INTENDS" OR THE LIKE TO BE UNCERTAIN AND
FORWARD-LOOKING.
GENERAL
On December 5, 1997, the Company converted its loans to its area developers
into a majority equity interest in the area developers and purchased additional
area developer equity interests, and the area developers merged into a surviving
entity, Einstein/Noah Bagel Partners, L.P. ("Bagel Partners"). As a result of
the loan conversions and the area developer merger (together with certain
related transactions, the "Transactions"), the Company owns approximately 78% of
Bagel Partners with the remaining equity interest owned by Bagel Store
Development Funding, L.L.C. and management of the former area developers.
Prior to the date of the Transactions, the revenue reflected in the
consolidated statements of operations were those generated by the Company as a
lender, franchisor and service provider to the area developers. From and after
the date of the Transactions, the consolidated statements of operations reflect
all store revenue and operating results. Such results are adjusted in the
"minority interest" line item to reflect the minority interest in Bagel Partners
not owned by the Company. As a result of the Transactions, the operating
results for the quarter and three quarters ended October 4, 1998 are not readily
comparable to those for the quarter and three quarters ended October 5, 1997.
As of October 4, 1998, Boston Chicken held approximately 51.0% of the 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. 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. Any interruption of
these services could have a material adverse effect on the Company.
On October 5, 1998, Boston Chicken announced that it and its Boston Market-
related subsidiaries had filed for protection under Chapter 11 of the federal
bankruptcy laws. The Company does not expect the filing to have a material
adverse effect on the business, financial condition or results of operations of
the Company. The business, operations and management of the Company are
separate from Boston Chicken, as are the Company's relationships with its banks
and vendors.
7
<PAGE>
The Company's future financial condition and results of operations are
subject to uncertainties related to stockholder class action lawsuits filed
against the Company and certain other defendants. See Note 2 of Notes to the
Company's Consolidated Financial Statements. Because such litigation is at a
preliminary stage, the Company is unable to make a meaningful estimate of any
loss that could result from an unfavorable outcome of the litigation.
RESULTS OF OPERATIONS
The Company's results of operations for the quarter and three quarters ended
October 5, 1997 reflect the Company's operations primarily as a franchisor. As
a result of the Transactions, the Company's results of operations for the
quarter and three quarters ended October 4, 1998 reflect the results of the
Company as the majority owner and operator of stores systemwide.
Revenue. Total systemwide store net revenue increased 13.4% to $87.3 million
for the quarter ended October 4, 1998 compared to $77.0 million for the prior
comparable quarter. Total systemwide store net revenue increased 27.9% to
$285.7 million for the three quarters ended October 4, 1998 from $223.4 million
for the prior comparable period. The increase in systemwide store net revenue
was due to an increase in the average number of stores in operation systemwide
to 543 for the quarter ended October 4, 1998 from 510 for the quarter ended
October 5, 1997 and an increase to 553 stores for the first three quarters of
1998 from 433 stores for the comparable 1997 period.
Average systemwide weekly per store net sales ("WPSA") were $13,378 and
$12,880 for the quarter and three quarters ended October 4, 1998, compared to
$12,721 and $12,968 for the prior comparable periods. WPSA represents the
weekly per store average revenue, after customer and employee discounts, for all
stores open at the end of the periods presented. The increase in WPSA for the
quarter ended October 4, 1998 compared to the prior comparable quarter was due
to a new lunch menu and higher menu prices in the third quarter of 1998 and the
closure of underperforming stores in the first and second quarters of 1998. The
decrease in WPSA for the three quarters ended October 4, 1998 compared to the
prior comparable period was due to lower revenue generated by Noah's New York
Bagels stores during the 1998 period compared to the prior comparable period.
Company store net revenue was $87.3 million for the quarter ended October 4,
1998. There were no Company stores in operation in the prior comparable
quarter. Company store net revenue increased to $285.7 million for the three
quarters ended October 4, 1998, compared to $2.1 million for the prior
comparable period from stores subsequently sold to area developers. The
increase was due to an increase in the average number of Company stores in
operation to 553 for the three quarters ended October 4, 1998 from an average of
five Company stores for the prior comparable period.
As a result of the Transactions, the Company did not have any royalties and
franchise-related fees for the quarter or three quarters ended October 4, 1998.
Royalties and franchise-related fees were $7.6 million and $24.9 million for the
quarter and three quarters ended October 5, 1997.
Store Costs and Expenses. There were no Company stores in operation for the
quarter ended October 5, 1997 and there was an average of five Company stores in
operation for the three quarters ended October 5, 1997. Because of the
significant change in the Company store base resulting from the transition to a
Company-controlled system, the Company does not believe that store costs and
expenses for the 1998 periods presented are readily comparable to the
corresponding 1997 periods.
Store costs and expenses increased to $264 million for the three quarters
ended October 4, 1998 from $1.8 million for the prior comparable period. The
increase in store costs and expenses was due to an increase in the number of
Company stores resulting from the transition to a Company-controlled system.
Store costs and expenses, as a percentage of store revenue, for the quarter
ended October 4, 1998 were 91.0%. Store costs and expenses, as a percentage of
store revenue, for the three quarters ended October 4, 1998 were 92.4%, compared
to 84.5% for the prior comparable period. This increase was due to larger
stores, more complex store configurations and higher food costs associated with
different menu offerings for the three quarters ended October 4, 1998, compared
to the prior comparable period. Store costs and expenses for the three quarters
ended October 4, 1998 included approximately $0.8 million associated with the
closing of a bagel production plant. Such increases were offset by a decrease
in
8
<PAGE>
marketing expenses, as a percentage of store revenue, to 3.9% for the three
quarters ended October 4, 1998 from 6.0% for the prior comparable period. Such
decrease was the result of a change in marketing strategy.
Salaries, Benefits, General and Administrative. Salaries, benefits, general
and administrative expenses increased to $7.1 million for the quarter ended
October 4, 1998 from $3.1 million for the prior comparable quarter. Salaries,
benefits, general and administrative expenses increased to $30.0 million for the
three quarters ended October 4, 1998 from $12.9 million for the prior comparable
period. The increases were due to the transition to a Company-controlled
system, under which expenses previously incurred by the Company's area
developers are now reflected on the Company's consolidated financial statements.
In addition, the Company incurred a severance charge of $1.5 million for
terminated employees in the first quarter of 1998.
Depreciation and Amortization. Non-store depreciation and amortization
(excluding goodwill amortization) remained relatively consistent at $0.8 million
for the quarter ended October 4, 1998, compared to $1.1 million for the prior
comparable quarter and $2.6 million for the three quarters ended October 4,
1998, compared to $3.0 million for the prior comparable period. Goodwill
amortization increased to $2.5 million for the quarter ended October 4, 1998
from $0.5 million for the prior comparable quarter and increased to $8.2 million
for the three quarters ended October 4, 1998 from $1.5 million for the prior
comparable period. The increases in goodwill amortization resulted from the
Transactions.
Other Expense. The Company incurred other expense of $2.7 million for the
quarter ended October 4, 1998 compared to other expense of $1.5 million for the
prior comparable quarter. The Company incurred other expense of $12.3 million
for the three quarters ended October 4, 1998 compared to other expense of $2.1
million for the prior comparable period. The increases were due to the interest
on the Company's convertible subordinated debentures issued in the second
quarter of 1997 and a $3.4 million charge associated with the write-off of
certain notes receivable in the second quarter of 1998.
Minority Interest. The minority interest in losses of Bagel Partners was
$0.9 million for the quarter ended October 4, 1998 and $4.7 million for the
three quarters ended October 4, 1998.
Income Taxes. Because of the uncertainty of utilizing the loss incurred in
1998, no income tax benefit was established.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for the three quarters ended October 4, 1998 was $9.9
million compared to $17.2 million of cash provided from operations for the three
quarters ended October 5, 1997. The increase in use of cash was due primarily to
a net loss of $26.7 million for the three quarters ended October 4, 1998
compared to net income of $15.6 million for the prior comparable period. The
primary reason for the net loss was the transition to a Company-controlled
system, where costs previously incurred by the Company's area developers are now
incurred by the Company. The use of cash also increased as the result of a
reduction in accounts payable and other changes in working capital.
For the three quarters ended October 4, 1998, the Company's primary capital
requirements consisted of store development and refurbishment, development and
maintenance of its corporate infrastructure and investments in food production
facilities. During the three quarters ended October 4, 1998, the Company
expended $14.5 million on construction of new stores, corporate infrastructure
and investments in food production facilities. A majority of the expenditures
on new store construction were made in the first quarter of 1998 for stores
opened during the fourth quarter of 1997. For the three quarters ended October
5, 1997, the Company expended $6.6 million related to corporate infrastructure
and investments in food production facilities.
Cash used in financing activities was $3.3 million for the three quarters
ended October 4, 1998. For the three quarters ended October 5, 1997, financing
activities provided $135.0 million in cash, primarily from the issuance of
convertible subordinated debt.
9
<PAGE>
The Company is party to a secured credit agreement with Bank of America
National Trust and Savings Association and the lenders named therein (the
"Credit Facility"), that consists of a secured term loan facility, under which
$25.5 million was outstanding at October 4, 1998, and a $25.0 million secured
revolving credit facility, of which $1.2 million was outstanding as of October
4, 1998. Amounts available under the $25.0 million revolving credit facility
are subject to an incurrence test based on the ratio of senior indebtedness to
cash flow. The Credit Facility contains financial covenants that require
maintaining certain minimum average weekly net sales levels and cash flow
ratios.
The Company's primary uses of capital for the remainder of 1998, other than
providing working capital for normal operating expenses, are expected to consist
primarily of satisfaction of current liabilities, expenditures related to
maintaining and refurbishing existing stores, and payment of principal and
interest on outstanding indebtedness. In the event the Company requires
additional capital for working capital needs, there can be no assurance that the
Company will be able to raise such capital on satisfactory terms, if at all.
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
YEAR 2000
The Year 2000 issue is the result of computer programs written to identify
the applicable year with two digits rather than four. As written, these program
may identify the year "00" as 1900 rather than 2000, which could result in
systems miscalculations or systems failure leading to potentially substantial
business disruptions. The Company has adopted a comprehensive plan to identify
and resolve its Year 2000 issues. The Company's Year 2000 plan consists of
assuring that its information technology systems, provided by Boston Chicken
under the terms of a computer and communications services agreement, are Year
2000 compliant. In addition, the Company has implemented a program to obtain
assurances from its third party vendors that their businesses and systems will
be Year 2000 compliant on a timely basis.
Boston Chicken has informed the Company that the information technology
systems it provides are, or will be by September 1999, Year 2000 compliant.
Such systems include back office and point of sale store systems as well as
financial, human resources, payroll and desktop systems utilized at the
Company's Support Center. In addition to the public disclosure provided by
Boston Chicken with respect to its Year 2000 compliance efforts, the Company
receives periodic reports from Boston Chicken management relating to Year 2000
issues. In addition to the fees the Company pays to Boston Chicken under the
computer and communications services agreement, the Company expects to incur
capital expenditures of approximately $1.5 million, primarily to purchase Year
2000 compliant hardware. The Company intends to continue monitoring Boston
Chicken's Year 2000 compliance efforts on a regular basis. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
The Company has also implemented a program to obtain third party vendor
assurances of Year 2000 compliance. The Company is currently in the process of
identifying all of its third party vendors and assessing the impact on the
Company if vendors are not Year 2000 compliant. Management of the Company
expects to meet with its most significant vendors, such as its bagel and cream
cheese suppliers and its distribution vendor, by the end of 1998 to discuss
their Year 2000 compliance plans. Substantially all other vendors, including the
Company's landlords, equipment vendors, service providers, banks and utility
companies, will receive letters from the Company requesting written assurance of
Year 2000 compliance on a timely basis. The Company expects that substantially
all third party vendor letters will be sent by mid-December 1998. Management
will then evaluate all vendor responses and, if any response is deemed
inadequate, will follow-up with letters, telephone calls and/or meetings with
the applicable vendor. Throughout this process, management of the Company will
assess both the likelihood of compliance by the vendor and the impact on the
Company if it is determined that the vendor will not be compliant on a timely
basis. To the extent that the Company determines that a significant vendor is
not likely to be Year 2000 compliant in a timely manner, the Company intends to
develop contingency plans, including obtaining alternative sources for any
product or service material to maintaining uninterrupted business operations.
The Company expects that its third party vendor compliance program, including
the development and implementation of contingency plans, if necessary, will be
complete by June 1999. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS"
ON PAGE 7.
10
<PAGE>
The Company's Year 2000 compliance efforts involve a significant amount of
time and effort by management and employees, the total cost of which is
difficult to precisely estimate. The Company does not, however, anticipate that
these costs will be material to the Company. The Company does not expect
significant business disruptions arising from the failure of its third party
vendors to be Year 2000 compliant on a timely basis; however, third party
compliance efforts are not within the Company's control. There can be no
assurance that all of the Company's material third party vendors will be Year
2000 compliant, or that the Company will successfully develop and implement
satisfactory contingency plans on a timely basis. The occurrence of any such
event could have a material adverse effect on the financial condition or results
of operations of the Company. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 7.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Note 2 of the Company's Notes to
Consolidated Financial Statements contained in Part I of this Form 10-Q is
incorporated herein by reference thereto.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits: See Exhibit Index appearing elsewhere herein, which is
incorporated herein by reference.
B. Reports on Form 8-K: During the third quarter ended October 4, 1998,
the Company filed a current report on Form 8-K dated July 15, 1998.
The Form 8-K reported under Item 5 that the Company had been notified
that the Nasdaq Stock Market ("Nasdaq") had determined that the
Company was not in compliance with certain listing requirements for
continued listing of the Company's common stock on the Nasdaq National
Market. Subsequent to the end of the third quarter, the Company filed
a current report on Form 8-K dated October 13, 1998 announcing that as
a result of a Nasdaq hearing held in August 1998, Nasdaq had notified
the Company that the Company's common stock would begin trading on the
Nasdaq Small Cap Market effective October 15, 1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EINSTEIN/NOAH BAGEL CORP.
Date: November 17, 1998
/s/ Robert M. Hartnett
-------------------------------------
Robert M. Hartnett
Chairman of the Board,
Chief Executive Officer and President
Date: November 17, 1998
/s/ W. Eric Carlborg
-------------------------------------
W. Eric Carlborg
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
10.1 Second Amendment and Waiver dated as of October 4, 1998 to Amended and
Restated Secured Credit Agreement dated as of November 21, 1997 among the
Company, Bank of America National Trust and Savings Association, as Agent
and Issuing Lender, General Electric Capital Corporation, as Co-Agent and
the Lenders named therein.
10.2 Employment Agreement dated September 11, 1998 between the Company and
Robert M. Hartnett.
27 Financial Data Schedule.
14
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT (this "Amendment") dated as of October 4, 1998 is
entered into by and among Einstein/Noah Bagel Corp., a Delaware corporation (the
"Borrower"), the lenders who are party to the Credit Agreement referred to below
(the "Lenders"), General Electric Capital Corporation, as Co-Agent (herein, in
such capacity, the "Co-Agent"), and Bank of America National Trust and Savings
Association, as Agent for the Lenders (herein, in such capacity, the "Agent").
W I T N E S E T H
- - - - - - - - -
WHEREAS, the Borrower, the Lenders, the Co-Agent and the Agent are parties
to a certain Amended and Restated Secured Credit Agreement dated as of November
21, 1997 (as heretofore amended, called the "Credit Agreement"; terms used but
not otherwise defined herein are used herein as defined in the Credit
Agreement);
WHEREAS, the Borrower desires to amend the Credit Agreement to revise the
Proforma System Fixed Charge Ratio covenant in certain respects; and
WHEREAS, subject to the terms and conditions set forth herein the Agent,
the Co-Agent and the Lenders are willing to undertake such amendment;
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Borrower, the Agent, the Co-Agent and the Lenders
hereby agree as follows:
Section 1. Amendment.
Upon satisfaction of the conditions precedent set forth in Section 2 below
---------
and in reliance on the Borrower's warranties set forth in Section 3 below, as of
---------
the date hereof Section 7.5 of the Credit Agreement is amended to read in its
entirety as follows:
<PAGE>
"SECTION 7.5. Proforma System Fixed Charge Coverage Ratio. Maintain, as of
the last day of each fiscal quarter occurring during the respective fiscal
periods set forth below, a ratio of (1) Annualized System EBITDAL for such
fiscal quarter to (2) Proforma Fixed Charges, as of such date, of not less
than the ratio set forth below opposite such fiscal period; provided,
however, for the purposes hereof, Proforma Fixed Charges shall exclude
$12,000,000 of the final quarterly installment payment on the Term Loan due
10/31/00:
Fiscal Period(s) Covenant Level
---------------- --------------
Q3/1998 1.25:1.00
Q4/1998 1.25:1.00
Q1 - Q2 1999 1.50:1.00
Q3 - Q4 1999 1.75:1.00
Q1 - Q4 2000 2.00:1.00
Section 2. Conditions Precedent.
This Amendment shall become effective upon receipt by the Agent of (a) duly
executed counterpart signature pages from the Borrower and the Required Lenders,
and (b) payment in immediately available funds of an amendment fee of $30,000
paid by the Borrower to the Agent for the account of each Lender according to
its respective Percentage.
Section 3. Warranties.
To induce the Agent, the Co-Agent and the Lenders to enter into this
Amendment, the Borrower warrants to the Agent, the Co-Agent and the Lenders as
of the date hereof that:
(a) The representations and warranties contained in the Credit
Agreement and Loan Documents are true and correct in all material respects
on and as of the date hereof (except to the extent such representations and
warranties expressly refer to an earlier date); and
(b) No Default or Event of Default has occurred and is continuing.
-2-
<PAGE>
Section 4. General.
(a) The Borrower agrees to pay on demand all reasonable costs and
expenses in connection with the preparation, execution, and delivery of
this Amendment, including, without limitation, the reasonable fees and out-
of-pocket expenses of counsel for the Agent and the Co-Agent.
(b) As hereby modified, the Credit Agreement shall remain in full
force and effect and is hereby ratified, approved and confirmed in all
respects.
(c) This Amendment shall be binding upon and shall inure to the
benefit of the Borrower, the Lenders, the Co-Agent and the Agent and
respective successors and assigns of the Lenders, the Co-Agent and the
Agent.
(d) This Amendment may be executed in any number of counterparts
and by the different parties on separate counterparts, and each such
counterpart shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Amendment.
* * * * *
-3-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By: /s/ Paul A. Strasen
--------------------------------
Title: Senior Vice President
-----------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By: /s/ David A. Johanson
--------------------------------
Title: Vice President
-----------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Lender
By: /s/ Marcia Clausen
--------------------------------
Title: Managing Partner
-----------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION, as Co-Agent and Lender
By: /s/ Fred Maurice
--------------------------------
Title: Vice President-Risk Manager
-----------------------------
LASALLE NATIONAL BANK
By: /s/ John C. Thurston
--------------------------------
Title: Assistant Vice President
-----------------------------
-4-
<PAGE>
The undersigned hereby acknowledge the foregoing amendments and reaffirm
their respective duties and obligations arising under the Loan Documents to
which each is a party.
EINSTEIN NOAH BAGEL PARTNERS, INC.
By: /s/ Paul A. Strasen
-------------------------------
Title: Vice President
---------------------------
-5-
<PAGE>
EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is made as of the
11th day of September, 1998, by and between Einstein/Noah Bagel Corp., a
Delaware corporation (the "Company"), and Robert M. Hartnett (the "Executive").
RECITALS
--------
WHEREAS, Executive is currently serving as Chairman, Chief Executive
Officer and President of the Company; and
WHEREAS, to assure the continued services of the Executive in such
capacities, the Company desires to enter into an employment agreement with the
Executive on the terms herein provided, and the Executive desires to enter into
such an agreement.
COVENANTS
---------
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
terms and conditions hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are specifically
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. EMPLOYMENT. The Company hereby employs the Executive as
----------
Chairman, Chief Executive Officer and President for a term of two years from the
date hereof (the "Term" or "Employment Period") unless the Term is earlier
terminated pursuant to the provisions hereof. Executive hereby accepts
employment from the Company.
SECTION 2. THE EXECUTIVE'S DUTIES.
----------------------
(a) The Executive hereby agrees to serve the Company faithfully and
honestly and to use his best efforts and ability on behalf of the Company in the
position of Chairman, Chief Executive Officer and President, and as a member of
the Board of Directors of the Company, to discharge the duties as Chairman,
Chief Executive Officer and President and to perform such duties and services of
an executive, administrative and managerial nature, which duties are consistent
with his position in the Company, as shall be specified and designated from time
to time by the Board of Directors of the Company in connection with the business
and activities of the Company.
(b) The Company hereby agrees that, in his capacities as a director and
officer of the Company during the term of this Agreement, the Executive shall be
indemnified by the Company (including without limitation by advancement of
expenses) to the fullest extent permitted from time to time by applicable law.
(c) During the term hereof, the Executive shall be employed by the Company
on a full-time basis and shall perform such duties and responsibilities on
behalf of the Company
<PAGE>
consistent with Executive's position of Chairman, Chief Executive Officer and
President as may be designated from time to time by the Board of Directors.
During the term hereof, the Executive shall devote his full business time and
his best efforts, business judgment, skill and knowledge exclusively to the
advancement of the business and interests of the Company and its affiliates and
to the discharge of his duties and responsibilities hereunder. The Executive
shall not engage in any other business activity or serve in any industry, trade,
professional, governmental or academic position during the term of this
Agreement, except as may be expressly approved in writing, which approval shall
not be unreasonably withheld, by the Board, as the Company encourages
participation by the Executive in community and charitable activities generally
considered to be in the public interest and the Company's interest. In addition,
the Company recognizes that the Executive may make passive investments which
will not interfere with his commitments and duties to the Company.
(d) The Executive agrees to observe and comply with all lawful written
rules, regulations, policies and practices adopted by the Company as they now
exist and as they may be duly and properly adopted or modified from time to
time.
SECTION 3. COMPENSATION AND BENEFITS. In consideration for all services
-------------------------
rendered by the Executive to the Company pursuant to this Agreement, including
services as an officer, director, member of any committee or in the performance
of other like duties consistent with his position of Chairman, Chief Executive
Officer and President assigned to him by the Board of Directors of the Company,
the Company hereby agrees to pay compensation to the Executive as follows:
(a) Executive shall be paid a base salary at a rate of $400,000 (subject to
any increases as may be determined by the Compensation Committee of the Board of
Directors at its discretion), payable in equal bi-weekly installments in
arrears.
(b) The Executive shall participate in an annual bonus plan with a target
payout equal to 50% of the Executive's base salary and which shall be based upon
the Company's performance relative to targets generally applicable in
determining bonus compensation payable to senior executives of the Company
(currently, 50% weighted to achievement of each of EBITDA and store revenue
targets).
(c) The Executive shall participate in the Company's Amended and Restated
1997 Stock Option Plan (or such other stock option plan as may hereafter be
adopted to provide for the grant of stock options to executive employees of the
Company), pursuant to which the Executive shall receive option grants at the
same time as other senior executives of the Company and shall in any event
receive an option grant at least once each calendar year, beginning in calendar
year 1999, of a number of shares not less than 150% of the highest number of
shares subject to a regular annual option grant made to any other officer of the
Company.
(d) Executive shall be entitled to first class air travel and lodging when
he is traveling on Company business and shall be entitled to such other fringe
benefits as are paid to other senior executives of the Company.
2
<PAGE>
(e) The Company shall provide and maintain such group medical, dental, life
and disability insurance benefits for the Executive as are provided to other
senior executives of the Company.
(f) The Executive shall receive from the Company a paid vacation each year
in accordance with the present policy and practice of the Company regarding
vacations for senior executives.
SECTION 4. EXPENSES. The Company shall pay or reimburse the Executive for
--------
reasonable and necessary expenses incurred in the ordinary course of conducting
the Company's business and in accordance with written policies established by
the Company. Executive shall submit expense reports accompanied by receipts and
other appropriate substantiation for all items of business expenses for which
payment or reimbursement is sought.
SECTION 5. DURATION AND TERMINATION.
------------------------
(a) The Executive's employment shall be for a Term of two years commencing
on the date hereof and ending on the second anniversary hereof, unless
terminated at an earlier date pursuant to this Section 5.
(b) If during the Employment Period the Executive shall be unable to
perform his duties hereunder on account of illness or disability, he shall be
entitled to compensation in accordance with this Agreement providing that such
illness or disability lasts for less than six months. In the event such illness
or disability lasts for more than a consecutive six month period, the Executive
shall be entitled to compensation in accordance with the sick leave plan of the
Company, if any, and shall be covered by the Company's disability income policy,
if any, and in all other respects the Company's obligations under this Agreement
shall terminate.
(c) In the event of the Executive's death during his employment hereunder,
his compensation shall cease as of the last day of the full calendar month
following the month in which such event occurs, or the last day of the
Employment Period, whichever is earlier. The salary for the period following
the Executive's death shall be paid to his legal heirs or the representative of
his estate and in all other respects the Company's obligations under this
Agreement shall terminate.
(d) In the event the Executive voluntarily terminates his employment
without Just Grounds for any reason, his right to all compensation shall cease
as of the end of the month of the date of termination of his employment. "Just
Grounds" shall mean resignation by the Executive due to (i) a material breach of
this Agreement by the Company which the Company has failed to cure within thirty
days after the Company receives written notice thereof, or (ii) the material
diminution of the Executive's duties, authority or responsibilities as Chairman
and Chief Executive Officer or a member of the Board of Directors except in
connection with a termination of Executive's employment for Just Grounds.
(e) In the event (i) this Agreement and the Executive's employment shall be
terminated without Just Cause (as hereinafter defined) or (ii) the Executive
terminates his
3
<PAGE>
employment with Just Grounds, (A) the Executive shall receive from the Company
within five days after such termination a lump-sum payment equal to the greater
of (x) one time the sum of his then current annual base salary and his then
current target bonus, or (y) the amount that would have been paid to him for the
balance of the Employment Period assuming that he were to receive during such
period an annual salary equal to his then current annual base salary and an
annual bonus equal to his then current target bonus (or a pro rata portion of
such target bonus for any period less than one year), (B) the Company shall
continue to provide, for a period of eighteen months from the date of
termination and at its expense, the benefits then being provided to the
Executive at the time of such termination pursuant to Section 3(e) hereof, and
(C) each option to purchase shares of common stock of the Company outstanding at
the time of termination shall become fully vested and exercisable at the time of
termination and shall remain exercisable during the term of the option. The
amount of any payment or benefit provided for in this Section 5(e) shall not be
reduced by any compensation earned by the Executive as the result of employment
or engagement by another person, by retirement benefits, by offset against any
amount claimed to be owed by the Executive to the Company or otherwise.
(f) In the event the Board of Directors determines that this Agreement and
the Executive's services hereunder should be terminated with Just Cause, the
Executive's right to all compensation and benefits shall cease as of the end of
the month of the date of termination of his employment. In such event, the
Executive shall be entitled only to such rights as shall have vested prior to
such termination or violation, and he shall not be entitled to any future cash
or non-cash compensation, benefits or termination pay. For purposes of this
Agreement, termination for "Just Cause" shall mean (i) a termination due to (A)
a material breach of this Agreement by the Executive, (B) willful or gross
neglect of duties for which employed or (C) willful misconduct or gross
negligence in the performance of such duties, all of such facts to be determined
in good faith by the Board of Directors of the Company after the Executive has
been given written notice of his purported material breach of this Agreement,
willful or gross neglect of duties or willful misconduct or gross negligence and
has failed to cure such breach or alter such conduct within thirty days after
the Executive's receiving such written notice, or (ii) a termination due to the
Executive's committing a felony for which he is convicted with no further rights
of appeal.
SECTION 6. GOVERNING LAW AND ARBITRATION.
-----------------------------
(a) Any controversy or claim arising out of or relating to this Agreement
or its interpretation, construction or any breach thereof, or any relationship
between the parties hereto, whether such claim is grounded in common law or
statutory law, shall be settled exclusively by arbitration in the State of
Colorado, in accordance with the then-applicable rules of the American
Arbitration Association, and judgment upon the award rendered may be entered in
any court of competent jurisdiction. In the event of any such controversy or
claim, the prevailing party shall be entitled to recover from the other party
all of the costs and expenses of the prevailing party in connection with such
claim or controversy including reasonable attorneys' fees.
(b) The failure or refusal of either party to submit to arbitration in
accordance with this provision shall be deemed a breach of this Agreement.
4
<PAGE>
(c) Notwithstanding anything to the contrary herein contained, neither
party shall pursue the arbitration remedy provided for herein without thirty
days prior written notice, which thirty-day period shall be available for
informal dispute resolution discussions.
SECTION 7. NON-ASSIGNMENT. The Executive shall have no right to delegate
--------------
any of the duties created by this Agreement, and any delegation or attempted
delegation of the Executive's duties, shall be null and void. In all other
respects, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, beneficiaries, personal
representatives, successors, assigns, officers and directors.
SECTION 8. AUTHORIZATION, VALIDITY AND NO-CONFLICT.
---------------------------------------
(a) The Company represents and warrants to the Executive that the
execution, delivery and performance by the Company of this Agreement has been
duly authorized by the Board of Directors of the Company and constitutes a valid
and legally binding obligation of the Company enforceable in accordance with the
terms hereof, and that the execution, delivery and performance of this Agreement
by the Company will not violate the terms of any agreement or obligation of the
Company.
(b) The Executive represents and warrants to the Company that this
Agreement constitutes the valid and legally binding obligation of the Executive
enforceable in accordance with its terms, and that the execution, delivery and
performance of this Agreement by the Executive will not violate the terms of any
other agreement or obligation of the Executive.
SECTION 9. SEVERABILITY. If any portion or provision of this Agreement
------------
shall to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
SECTION 10. WAIVER. No waiver of any provision hereof shall be effective
------
unless made in writing and signed by the waiving party. The failure of either
party to require the performance of any term or obligation of this Agreement, or
the waiver by either party of any breach of this Agreement, shall not prevent
any subsequent enforcement of such term or obligation or be deemed a waiver of
any subsequent breach.
SECTION 11. NOTICES. All notices pursuant to this Agreement shall be in
-------
writing.
a. Notice to Executive. A notice to the Executive shall be sufficient in
-------------------
all respects if delivered, or mailed by first class registered or certified
mail, postage and fees prepaid, or sent by an established, reputable courier
service, addressed to the following or such other address as provided by written
notice made pursuant to this Section 11:
5
<PAGE>
If to Executive: Robert M. Hartnett
317 Madison
Denver, CO 80206
b. Notice to Company. A notice to the Company shall be sufficient in all
-----------------
respects if delivered, or mailed by first class registered or certified mail,
postage and fees prepaid, or sent by an established, reputable courier service,
addressed to the following or such other address provided by written notice made
pursuant to this Section 12:
If to Company: Einstein/Noah Bagel Corp.
14103 Denver West Parkway
Golden, CO 80401-4086
Attention: General Counsel
SECTION 12. ENTIRE AGREEMENT. Except for that certain Confidentiality and
----------------
Non-Compete Agreement previously entered into by the Executive, this Agreement
constitutes the entire agreement between the parties and supersedes all prior
communications, agreements and understandings, written or oral, with respect to
the terms and conditions of the Executive's employment. Without limiting the
generality of the foregoing, this Agreement supersedes that certain letter
agreement dated April 29, 1998 between the Company and the Executive and that
certain severance agreement dated May 8, 1998 between the Company and the
Executive.
SECTION 13. AMENDMENT. This Agreement may be amended or modified only by
---------
a written instrument signed by the Executive and by an expressly authorized
representative of the Company expressly authorized by the Board of Directors to
execute any such amendment.
SECTION 14. HEADINGS. The headings and captions in this Agreement are for
--------
convenience only and in no way define or describe the scope or content of any
provision of this Agreement.
6
<PAGE>
SECTION 15. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
EINSTEIN/NOAH BAGEL CORP.
By /s/ Paul A. Strasen
____________________________________
/s/ Robert M. Hartnett
____________________________________
Robert M. Hartnett
7
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> OCT-04-1998
<CASH> 6,251
<SECURITIES> 0
<RECEIVABLES> 922
<ALLOWANCES> 0
<INVENTORY> 9,385
<CURRENT-ASSETS> 17,305
<PP&E> 191,068
<DEPRECIATION> 0
<TOTAL-ASSETS> 602,774
<CURRENT-LIABILITIES> 55,461
<BONDS> 125,000
0
0
<COMMON> 341
<OTHER-SE> 306,145
<TOTAL-LIABILITY-AND-EQUITY> 602,774
<SALES> 285,699
<TOTAL-REVENUES> 285,699
<CGS> 98,038
<TOTAL-COSTS> 264,027
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,162
<INCOME-PRETAX> (31,451)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,799)
<EPS-PRIMARY> (.81)
<EPS-DILUTED> (.81)
</TABLE>
