<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 July 11, 1999
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
August 16, 1999: 34,083,681 (includes 813,146 shares of common stock held by a
subsidiary of the Company).
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EINSTEIN/NOAH BAGEL CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 27, 1998 and
July 11, 1999........................................................... 3
Consolidated Statements of Operations for the quarter and
two quarters ended July 12, 1998 and July 11, 1999...................... 4
Consolidated Statements of Cash Flows for the
two quarters ended July 12, 1998 and July 11, 1999...................... 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................... 15
Item 5. Other Information....................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................ 16
Signature Page..................................................................... 17
Exhibit Index...................................................................... 18
</TABLE>
2
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 27, July 11,
1998 1999
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents........................................ $ 3,766 $ 4,326
Accounts receivable.............................................. 1,716 1,339
Inventories...................................................... 9,672 8,881
Prepaid expenses and other current assets........................ 1,699 1,550
--------- ---------
Total current assets.......................................... 16,853 16,096
Property and Equipment, net........................................ 122,403 121,768
Goodwill, net...................................................... 223,482 217,335
Trademarks, net.................................................... 2,065 2,063
Recipes, net....................................................... 2,670 2,502
Other Assets, net.................................................. 7,669 6,359
--------- ---------
Total assets.................................................. $ 375,142 $ 366,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable................................................. $ 17,804 $ 13,255
Accrued expenses................................................. 23,284 27,174
Current portion of senior term loan.............................. 6,000 6,000
--------- ---------
Total current liabilities..................................... 47,088 46,429
Revolving Credit Facility.......................................... 5,625 9,975
Long-Term Portion of Senior Term Loan.............................. 18,000 15,000
Convertible Subordinated Debentures................................ 125,000 125,000
Other Noncurrent Liabilities....................................... 16,140 15,770
Minority Interest.................................................. 33,931 33,026
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: 34,083,681 shares in December 1998 and July 1999..... 341 341
Additional paid-in capital....................................... 377,616 377,616
Treasury stock, at cost (813,146 shares
in December 1998 and July 1999)............................... (5,261) (5,261)
Accumulated deficit.............................................. (243,338) (251,773)
--------- ---------
Total stockholders' equity.................................... 129,358 120,923
--------- ---------
Total liabilities and stockholders' equity.................. $ 375,142 $ 366,123
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
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EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
-------------------- --------------------
July 12, July 11, July 12, July 11,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Store revenue................................... $ 87,899 $87,296 $198,374 $199,649
Costs and Expenses:
Store:
Cost of products sold........................ 29,907 28,523 68,479 66,008
Salaries and benefits........................ 27,289 27,356 62,669 62,750
Other controllable costs..................... 6,988 6,753 16,257 15,940
Rent, occupancy and related costs............ 8,002 8,214 18,591 19,564
Marketing expenses........................... 3,489 2,218 7,457 5,589
Depreciation and amortization................ 4,870 2,647 11,048 6,269
-------- ------- -------- --------
Total store costs and expenses............. 80,545 75,711 184,501 176,120
Non-Store:
Salaries, benefits, general and
administrative............................. 7,971 8,215 22,859 18,778
Depreciation and amortization
(excluding goodwill amortization).......... 776 670 1,821 1,570
Goodwill amortization........................ 2,462 2,731 5,709 6,146
-------- ------- -------- --------
Total non-store costs and expenses......... 11,209 11,616 30,389 26,494
-------- ------- -------- --------
Total costs and expenses................... 91,754 87,327 214,890 202,614
-------- ------- -------- --------
Income (Loss) from Operations..................... (3,855) (31) (16,516) (2,965)
Other Income (Expense):
Interest income................................. 22 - 268 -
Interest expense................................ (2,877) (2,689) (6,468) (6,360)
Other........................................... (3,409) 16 (3,409) (15)
-------- ------- -------- --------
Total other income (expense)................. (6,264) (2,673) (9,609) (6,375)
-------- ------- -------- --------
Income (Loss) before Income Taxes and
Minority Interest............................... (10,119) (2,704) (26,125) (9,340)
Income Taxes...................................... - - - -
Minority Interest in Income (Loss) of Subsidiary.. (1,170) 29 (3,759) (905)
-------- ------- -------- --------
Net Income (Loss)................................. $ (8,949) $(2,733) $(22,366) $ (8,435)
======== ======= ======== ========
Basic Earnings (Loss) per Share................... $(0.27) $(0.08) $(0.68) $(0.25)
======== ======= ======== ========
Diluted Earnings (Loss) per Share................. $(0.27) $(0.08) $(0.68) $(0.25)
======== ======= ======== ========
Weighted Average Number of Common
Shares Outstanding:
Basic........................................ 33,137 33,271 32,785 33,271
======== ======= ======== ========
Diluted...................................... 33,137 33,271 32,785 33,271
======== ======= ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
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EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Two Quarters Ended
--------------------
July 12, July 11,
1998 1999
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................ $(22,366) $ (8,435)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 18,578 13,985
Minority interest......................................... (3,759) (905)
Provision for write-down of assets........................ 3,409 353
Changes in assets and liabilities:
Accounts receivable..................................... 739 377
Accounts payable and accrued expenses................... (14,579) (629)
Other assets and liabilities............................ (2,064) 578
-------- --------
Net cash provided by (used in) operating activities.. (20,042) 5,324
-------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment........................... (12,655) (6,055)
Purchase of other assets..................................... (132) (59)
-------- --------
Net cash used in investing activities..................... (12,787) (6,114)
-------- --------
Cash Flows Provided by (used in) Financing Activities:
Borrowings under credit facility............................. 21,700 86,275
Repayments under credit facility............................. (19,875) (84,925)
-------- --------
Net cash provided by (used in) financing activities....... 1,825 1,350
-------- --------
Net Decrease in Cash and Cash Equivalents...................... (31,004) 560
Cash and Cash Equivalents, beginning of period................. 34,148 3,766
-------- --------
Cash and Cash Equivalents, end of period....................... $ 3,144 $ 4,326
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
5
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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 July 11, 1999 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 27, 1998. The consolidated results of
operations for the quarter ended July 11, 1999 are not necessarily indicative of
the results expected for the full year.
2. Use of 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Effective December 28, 1998, the Company elected to change the period used
for amortization of goodwill and trademarks from 35 to 20 years. The Company
has reflected this change in estimate on a prospective basis.
3. 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 $89.6 million, representing an approximately 22% 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. The formula price is determined by multiplying
Bagel Funding's percentage interest in Bagel Partners by an enterprise valuation
of Bagel Partners. Such enterprise valuation is equal to Bagel Partner's income
from operations before general and administrative expenses, depreciation and
amortization but after franchise royalties and marketing expenses (determined by
annualizing the highest of the two fiscal quarters prior to the quarter in which
the right is exercised), multiplied by 6.5, less the amount of any outstanding
indebtedness of Bagel Partners plus the amount of any cash balances of Bagel
Partners. The formula price, if determined using annualized results for the
second quarter of fiscal 1999, would be equal to approximately $57.3 million.
Bagel Funding's 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.
6
<PAGE>
The Company and certain of its former officers and directors have settled a
class action lawsuit brought against them in the United States District Court
for the District of Colorado and in state court in Jefferson County, Colorado.
The complaints alleged, 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
(the "Exchange Act"), and Rule 10b-5 thereunder, as well as certain similar
provisions of Colorado state law. The settlement of the litigation was funded
with proceeds of director and officer liability insurance policies. Final court
approval of the settlement was obtained in June 1999. The settlement did not
include the claims pending in the lawsuit against the underwriters in the
Company's public offerings of common stock in August 1996 and November 1996 (the
"Underwriters") and against the Company's independent public accountants.
The Company has also entered into an agreement to pay $0.6 million and to
reimburse a portion of certain expenses of the Underwriters as part of the
settlement of the related litigation against the Underwriters. The settlement
is subject to customary conditions, including final court approval.
7
<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 that 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"), Einstein Bros(R) 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; advertising and promotional
efforts; brand awareness; availability and terms of capital; adverse publicity;
acceptance of new product offerings; the Company's relationship with Boston
Chicken, Inc. ("Boston Chicken"), the Company's majority stockholder; 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; the Company's ability to implement new information technology
systems; Year 2000 compliance of systems provided to the Company by Boston
Chicken or other third party vendors; Year 2000 compliance of systems used by
Company suppliers; 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
As of August 16, 1999, Boston Chicken held approximately 51% of the voting
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 a fee service agreement,
pursuant to which Boston Chicken provides to the Company certain computer and
communications systems services. Such agreement expires by its terms on March
26, 2000. In addition, Boston Chicken has continued to provide to the Company
certain accounting and administration services on the same terms such services
were previously provided pursuant to a fee service agreement that expired on May
31, 1999. In January 1999, the Company's management informed Boston Chicken
that the Company intended to develop a business infrastructure that will permit
it to perform all of such services independently from Boston Chicken. The
Company currently intends to complete the transition to an independent
infrastructure by the end of the first quarter of fiscal 2000. The inability of
the Company to effect the transition on a timely basis or the interruption of
services provided by Boston Chicken prior to the Company's development and
implementation of a satisfactory business infrastructure could have a material
adverse effect on the Company. See "Special Note Regarding Forward-Looking
Statements" above.
In connection with the development of its business infrastructure, in
February 1999 the Company entered into license and support service agreements
with a third-party software vendor to obtain a license and support services for
enterprise systems (consisting of financial, human resources and payroll
systems). The Company has also entered into an agreement with a third-party
consulting group that will assist the Company in the implementation of the new
systems. The Company currently anticipates that the financial systems will
begin operating in the third quarter of fiscal 1999 and that the human resources
and payroll systems will begin operating at the beginning of fiscal 2000.
8
<PAGE>
The Company has also entered into agreements with several third-party vendors
for licenses of back office and point-of-sale store systems and support services
for those systems, and it anticipates entering into negotiations to obtain other
licenses and support services required in the operation of its business. The
Company has hired additional support center employees to provide the various
accounting, administrative and systems support services that were previously
provided by Boston Chicken, including human resources administration, benefits
administration, risk management, payroll, accounts payable, fixed assets,
treasury, and systems administration and support.
The transition to a business structure and systems that are independent of
Boston Chicken requires the dedication of significant management resources and
may distract attention from the day-to-day business of the Company, which could
adversely affect the Company's business and operating results. In addition,
there can be no assurance that the new systems will be implemented in a timely
fashion or that the cost of such implementation will not exceed the amount
estimated by the Company. See "Liquidity and Capital Resources" on page 11.
The failure to implement such systems in a timely manner or at the budgeted cost
could have a material adverse effect on the Company. There can also be no
assurance that the Company will be able to hire and train sufficient qualified
personnel to perform the required services in a timely manner and on acceptable
terms. See "Special Note Regarding Forward-Looking Statements" on page 8.
Results of Operations
Revenue. Total store net revenue decreased 0.7% to $87.3 million for the
quarter ended July 11, 1999 compared to $87.9 million for the prior comparable
quarter. The decrease in store net revenue for the quarter was primarily due to
a decrease in the average number of stores in operation to 538 from 554 for the
prior comparable quarter. The reduction in the average number of stores in
operation was the result of closing underperforming stores in the previous year.
The impact of fewer stores was offset by an increase in average net weekly per
store sales of 1.5% to $13,529 from $13,326 for the prior comparable period.
Average net weekly per store sales represents weekly per store average revenue,
after customer and employee discounts, for all stores open at the end of the
periods presented.
Total store net revenue increased 0.6% to $199.6 million for the two quarters
ended July 11, 1999 from $198.4 million for the prior comparable period. The
increase in store net revenue for the two quarters was due to an increase in
average net weekly per store sales of 2.5% to $13,196 from $12,866. The
increase in average net weekly per store sales was due to a higher proportion of
mature stores in comparison to prior year and to the effect of several
previously instituted Company initiatives, including a new lunch menu, higher
menu prices, closure of underperforming stores, and focus on improved store
level operations offset by declines due to less marketing spending. The average
number of stores in operation decreased to 537 for the two quarters from 557 for
the prior comparable period.
Comparable store sales decreased 0.1% from the prior comparable quarter.
Comparable store sales represent average net weekly per store sales for stores
open since the beginning of the prior year's comparable period. There were 525
stores in the comparable store base.
Store Costs and Expenses. Cost of products sold as a percent of store
revenue decreased to 32.7% for the quarter ended July 11, 1999 from 34.0% for
the prior comparable quarter and decreased to 33.1% for the two quarters ended
July 11, 1999 from 34.5% for the prior comparable period. The decrease was
attributable to improved management of food costs. In addition, the results for
the two quarters ended July 12, 1998 reflect a charge associated with the
closing of a bagel production plant.
Salaries and benefits as a percent of store revenue were relatively constant
at 31.3% for the quarter ended July 11, 1999 compared to 31.0% for the prior
comparable quarter and 31.4% for the two quarters ended July 11, 1999 compared
to 31.6% for the prior comparable period.
9
<PAGE>
Other controllable costs (such as utilities, repair and maintenance, and
supplies) as a percent of store revenue were relatively constant at 7.7% for the
quarter ended July 11, 1999 compared to 8.0% for the prior comparable quarter
and 8.0% for the two quarters ended July 11, 1999 compared to 8.2% for the prior
comparable period.
Rent, occupancy and related costs as a percent of store revenue were
relatively constant at 9.4% for the quarter ended July 11, 1999 compared to 9.1%
for the prior comparable quarter and increased to 9.8% for the two quarters
ended July 11, 1999 from 9.4% for the prior comparable period. The increase for
the two quarters was due to greater average rents per store in part associated
with larger stores in premium locations as the Company continued to focus on
closing underperforming stores in poor locations.
Marketing expenses as a percent of store revenue decreased to 2.5% for the
quarter ended July 11, 1999 from 4.0% for the prior comparable quarter and
decreased to 2.8% for the two quarters ended July 11, 1999 from 3.8% for the
prior comparable period. The decrease was the result of a decision to reduce
marketing spending in fiscal 1999.
As a result of the factors described above, store margins before depreciation
and amortization as a percent of store revenue increased to 16.3% for the
quarter ended July 11, 1999 from 13.9% for the prior comparable quarter and
increased to 14.9% for the two quarters ended July 11, 1999 from 12.6% for the
prior comparable period.
Depreciation and amortization as a percent of store revenue decreased to 3.0%
for the quarter ended July 11, 1999 from 5.5% for the prior comparable quarter
and decreased to 3.1% for the two quarters ended July 11, 1999 from 5.6% for the
prior comparable period. The decrease was the result of the charge taken in the
fourth quarter of 1998 for impairment of long-lived assets.
Non-Store Salaries, Benefits, General and Administrative. Non-store
salaries, benefits, general and administrative expenses as a percent of total
revenue were relatively constant at 9.4% for the quarter ended July 11, 1999
compared to 9.1% for the prior comparable quarter and decreased to 9.4% for the
two quarters ended July 11, 1999 from 11.5% for the prior comparable period.
The decrease for the two quarters was due to a prior year reduction in force and
an associated one-time charge of $1.5 million for severance offset by a one-time
charge of $1.1 million related to store closures in the first quarter of 1999
and a one-time charge of $0.6 million related to the settlement of shareholder
litigation in the second quarter of 1999.
Depreciation and Amortization. Non-store depreciation and amortization
(excluding goodwill amortization) as a percent of total revenue remained
relatively constant at 0.8% for both the quarter and two quarters ended July 11,
1999 compared to 0.9% for both of the prior comparable periods. Goodwill
amortization as a percent of total revenue also remained relatively constant at
3.1% for both the quarter and two quarters ended July 11, 1999 compared to 2.8%
and 2.9% for the respective prior comparable periods. The net changes reflect
an increase due to shortened useful lives of trademarks and goodwill offset by
the decrease in the remaining balances as a result of the charge for impairment
of long-lived assets taken in the last quarter of 1998.
Other Expense. The Company incurred other expense of $2.7 million for the
quarter ended July 11, 1999 compared to $6.3 million for the prior comparable
quarter and $6.4 million for the two quarters ended July 11, 1999 compared to
$9.6 million for the prior comparable period. The decrease was due to a $3.4
million prior year charge associated with the write-off of certain notes
receivable in the second quarter of 1998.
Minority Interest. The minority interest in income or loss of Bagel Partners
was negligible for the quarter ended July 11, 1999 compared to a $1.2 million
interest in losses for the prior comparable period. The minority interest in
losses of Bagel Partners for the two quarters ended July 11, 1999 was $0.9
million compared to $3.8 million for the prior comparable period.
Income Taxes. Because of the uncertainty of utilizing the loss incurred in
1999, no income tax benefit was established.
10
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of capital in 1998 and the first two quarters
of 1999 were from borrowings under the Company's revolving credit facility and
internally generated cash from operations. Cash provided by operations for the
two quarters ended July 11, 1999 was $5.3 million compared to $20.0 million of
cash used in operations for the prior comparable period. The increase in cash
provided was due primarily to a decrease in net loss to $8.4 million from $22.4
million in the prior comparable period.
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
$21.0 million was outstanding at July 11, 1999, and a $25.0 million secured
revolving credit facility, of which $10.0 million was outstanding as of July 11,
1999. 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 the Company
to maintain certain minimum average net weekly per store sales levels and to
comply with ratios of system cash flow to senior indebtedness and pro forma
fixed charges.
For the two quarters ended July 11, 1999, the Company's primary uses of
capital, other than providing working capital for normal operating expenses,
consisted of expenditures for store development and refurbishment, development
and maintenance of its business infrastructure and systems, and investments in
commissaries. During the two quarters ended July 11, 1999, the Company expended
$6.1 million on construction of new stores and refurbishing of existing stores,
business infrastructure and systems, and investments in commissaries. For the
prior comparable period, the Company expended $12.8 million related to
development of new stores, a majority of which were opened in the fourth quarter
of 1997, and corporate infrastructure and investments in commissaries.
Cash provided by financing activities was $1.4 million for the two quarters
ended July 11, 1999 resulting from the net borrowings and repayments under the
Company's credit facility.
The Company's primary uses of capital in 1999, other than providing working
capital for normal operating expenses, are expected to consist primarily of
satisfaction of current liabilities, expenditures related to the development of
business infrastructure and systems, including the acquisition of hardware,
software licenses, maintenance and support for enterprise and store systems,
expenditures related to building and opening a small number of new stores and
refurbishing existing stores, and payment of principal and interest on
outstanding indebtedness. The Company estimates that the aggregate cost
associated with acquiring and implementing new enterprise systems will be
approximately $3.8 million (of which approximately $1.8 million was incurred as
of the end of the second quarter of fiscal 1999) and that the capital cost
associated with upgrading store systems will be approximately $1.6 million (of
which approximately $1.4 million was incurred as of the end of the second
quarter of fiscal 1999), primarily to purchase hardware that will accommodate
software that will be licensed from third parties other than Boston Chicken and
that will be Year 2000 compliant. In addition, the Company expects to incur
additional capital costs in obtaining ownership of software licenses, including
licenses for back office and point-of-sale store systems, and additional
operating expenses in building and operating a business infrastructure to
perform services that to date have been provided to the Company by Boston
Chicken. Moreover, until such time as the Company's computer and communications
systems agreement with Boston Chicken expires or is terminated, the Company will
continue to be obligated to pay fees to Boston Chicken under that agreement in
addition to paying the expenses of building and operating its own
infrastructure.
The Company's primary sources of capital in 1999 are expected to consist
primarily of internally generated cash from operations and borrowings under the
Company's revolving credit facility. The Company anticipates the expected
sources of capital will be sufficient to fund the expected uses. In the event
the Company requires additional capital for the foregoing purposes, 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 8. If the Company is unable to comply with any of the financial covenants
under its bank credit facility, the Company would be unable to draw on its
revolving credit facility and, upon action of the lenders under the bank credit
facility, all outstanding principal and interest under the bank credit facility
could be accelerated and become immediately due and payable. To the extent the
Company did not have borrowing availability under the bank credit
11
<PAGE>
facility, the Company could be required to seek additional sources of capital
and, if unable to obtain such capital, could be unable to satisfy its
obligations when due.
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
programs 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 (a)
assuring that its information technology systems, currently provided by Boston
Chicken under the terms of a computer and communications services agreement, are
Year 2000 compliant, (b) assuring that new information technology systems
acquired by the Company as part of its development of an independent business
infrastructure are Year 2000 compliant, and (c) obtaining assurances from other
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 November 1, 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 $1.6 million, primarily to purchase
hardware for store systems that will accommodate software that will be licensed
from third parties other than Boston Chicken and that will be Year 2000
compliant. The Company intends to continue monitoring Boston Chicken's Year
2000 compliance efforts on a regular basis with respect to systems provided by
Boston Chicken and to seek assurances of Year 2000 compliance from any other
vendors who may grant licenses to the Company or support its information
technology systems in the future. See "Special Note Regarding Forward-Looking
Statements" on page 8.
The Company has received assurances from the third party software vendor that
is providing the Company with a software license and support services for its
enterprise systems that the software will be Year 2000 compliant. The Company
has received similar assurances from its principal third party systems hardware
vendor. The Company intends to seek assurances of Year 2000 compliance from
other vendors of systems software, hardware and services. See "Special Note
Regarding Forward-Looking Statements" on page 8.
The Company has also implemented a program to obtain third-party vendor
assurances of Year 2000 compliance. The Company has completed an assessment of
the impact on the Company if any of its third-party vendors are not Year 2000
compliant and has met with substantially all of its critical vendors, such as
its bagel and cream cheese suppliers and its distribution vendor, to discuss
their Year 2000 compliance plans. The Company has sent to substantially all
other vendors, including the Company's landlords, equipment vendors, service
providers and banks, letters requesting written assurance of Year 2000
compliance on a timely basis. Management is continuing to evaluate all vendor
responses and, if any response is deemed inadequate, to follow-up with letters,
telephone calls and/or meetings with the applicable vendor. Throughout this
process, management of the Company will continue to 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 of contingency
plans, if necessary, will be complete by the end of its third fiscal quarter in
1999. See "Special Note Regarding Forward-Looking Statements" on page 8.
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, compliance
12
<PAGE>
efforts of Boston Chicken, other providers of information technology systems and
other third party vendors are not within the Company's control. There can be no
assurance that all of such persons 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 8.
13
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Over time, the Company is exposed to market risks arising from changes in
interest rates. The Company has not historically used derivative financial
instruments.
As of July 11, 1999, $31.0 million of floating-rate debt was exposed to
changes in interest rates compared to $29.6 million at December 27, 1998. This
exposure was primarily linked to the prime lending rate. A hypothetical 10%
change in the prime lending rate would not have had a material effect on the
Company's annual earnings.
As of July 11, 1999 and December 27, 1998, the Company also had $125.0
million of fixed-rate convertible subordinated debentures due 2004. A
hypothetical 10% change in interest rates on this debt would affect the market
value of these financial instruments.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 former officers and directors have settled a
class action lawsuit brought against them in the United States District Court
for the District of Colorado and in state court in Jefferson County, Colorado.
The complaints alleged, 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
(the "Exchange Act"), and Rule 10b-5 thereunder, as well as certain similar
provisions of Colorado state law. The settlement of the litigation was funded
with proceeds of director and officer liability insurance policies. Final court
approval of the settlement was obtained in June 1999. The settlement did not
include the claims pending in the lawsuit against the underwriters in the
Company's public offerings of common stock in August 1996 and November 1996 (the
"Underwriters") and against the Company's independent public accountants.
The Company has also entered into an agreement to pay $0.6 million and to
reimburse a portion of certain expenses of the Underwriters as part of the
settlement of the related litigation against the Underwriters. The settlement
is subject to customary conditions, including final court approval.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting was held on May 24, 1999. The first matter
voted upon at the meeting was the election of directors. The votes cast for and
withheld for each individual nominated as a director were as follows:
Director For Withheld
-------- ---------- ---------
Martin D Hanan 30,848,050 325,217
Robert M. Hartnett 30,892,544 280,723
J. Michael Jenkins 30,785,409 387,858
Gail A. Lozoff 30,904,550 268,717
John H. Muehlstein, Jr. 30,855,400 317,867
Donald L. Pierce 30,847,550 325,717
David G. Stanchak 30,095,247 1,077,520
On July 16, 1999, J. Michael Jenkins resigned as a director of the Company.
The second matter voted upon at the meeting was a proposal to approve
certain amendments to the Company's 1996 Stock Option Plan for Non-Employee
Directors. 29,617,779 shares were voted for approval of the proposal, 583,901
shares were voted against the proposal, 119,995 shares abstained from voting and
851,592 shares were broker non-votes.
Item 5. Other Information
The Company has been notified by the Nasdaq Stock Market ("Nasdaq") of
Nasdaq's determination that the Company is not in compliance with the net
tangible assets/market capitalization/net income requirement for continued
listing of its common stock on the Nasdaq SmallCap Market and that Nasdaq is
reviewing the Company's eligibility for continued listing. Nasdaq's rules
require that an issuer satisfy at least one of the following listing standards:
(a) have net tangible assets of at least $2,000,000, (b) have a market
capitalization of $35,000,000 or (c) have net income of $500,000. Nasdaq's
rules also require that issuers maintain a minimum bid price of at least $1.
15
<PAGE>
Nasdaq has indicated to the Company that it intends to issue a notice of
delisting unless the Company is able to consummate transactions that would
result in the satisfaction of the net tangible assets/market capitalization/net
income test by not later than October 30, 1999 (and receive any required
stockholder approval of such transactions by September 30, 1999).
Delisting of the common stock could have a material adverse effect on the
market price of, and the efficiency of the trading market for, the Company's
common stock.
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 quarter ended July 11, 1999, the
Company filed a current report on Form 8-K dated April 23, 1999,
which disclosed that W. Eric Carlborg had resigned as Chief
Financial Officer of the Company and that the Company had named
Paula E. Manley to succeed Mr. Carlborg.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EINSTEIN/NOAH BAGEL CORP.
Date: August 18, 1999 /s/ Robert M. Hartnett
-------------------------------------
Robert M. Hartnett
Chairman of the Board,
Chief Executive Officer and President
Date: August 18, 1999 /s/ Paula E. Manley
-------------------------------------
Paula E. Manley
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> JUL-11-1999
<CASH> 4,326
<SECURITIES> 0
<RECEIVABLES> 1,339
<ALLOWANCES> 0
<INVENTORY> 8,881
<CURRENT-ASSETS> 16,096
<PP&E> 121,768
<DEPRECIATION> 0
<TOTAL-ASSETS> 366,123
<CURRENT-LIABILITIES> 46,429
<BONDS> 125,000
0
0
<COMMON> 341
<OTHER-SE> 120,582
<TOTAL-LIABILITY-AND-EQUITY> 366,123
<SALES> 199,649
<TOTAL-REVENUES> 199,649
<CGS> 66,008
<TOTAL-COSTS> 176,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,360)
<INCOME-PRETAX> (9,340)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,435)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
