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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 April 18, 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
May 28, 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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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 27, 1998 and
April 18, 1999............................................ 3
Consolidated Statements of Operations for the quarters
ended April 19, 1998 and April 18, 1999................... 4
Consolidated Statements of Cash Flows for the quarters
ended April 19, 1998 and April 18, 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.......................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 14
Item 6. Exhibits and Reports on Form 8-K....................... 14
Signature Page.................................................. 15
Exhibit Index................................................... 16
</TABLE>
2
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EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
December 27, April 18,
1998 1999
------------ ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 3,766 $ 5,041
Accounts receivable.............................................. 1,716 1,392
Inventories...................................................... 9,672 8,907
Prepaid expenses and other current assets........................ 1,699 1,713
--------- ---------
Total current assets.......................................... 16,853 17,053
Property and Equipment, net........................................ 122,403 121,729
Goodwill, net...................................................... 223,482 220,066
Trademarks, net.................................................... 2,065 2,072
Recipes, net....................................................... 2,670 2,574
Other Assets, net.................................................. 7,669 6,884
--------- ---------
Total assets.................................................. $ 375,142 $ 370,378
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 17,804 $ 11,202
Accrued expenses................................................. 23,284 31,177
Current portion of senior term loan.............................. 6,000 6,000
--------- ---------
Total current liabilities..................................... 47,088 48,379
Revolving Credit Facility.......................................... 5,625 7,925
Long-Term Portion of Senior Term Loan.............................. 18,000 16,500
Convertible Subordinated Debentures................................ 125,000 125,000
Other Noncurrent Liabilities....................................... 16,140 15,921
Minority Interest.................................................. 33,931 32,997
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 April 1999.... 341 341
Additional paid-in capital....................................... 377,616 377,616
Treasury stock, at cost (813,146 shares
in December 1998 and April 1999).............................. (5,261) (5,261)
Accumulated deficit.............................................. (243,338) (249,040)
--------- ---------
Total stockholders' equity.................................... 129,358 123,656
--------- ---------
Total liabilities and stockholders' equity.................. $ 375,142 $ 370,378
========= =========
</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
----------------------
April 19, April 18,
1998 1999
--------- ---------
<S> <C> <C>
Revenue:
Store revenue............................ $110,475 $112,353
Costs and Expenses:
Store:
Cost of products sold................. 38,572 37,485
Salaries and benefits................. 35,380 35,394
Other controllable costs.............. 9,269 9,187
Rent, occupancy and related costs..... 10,589 11,350
Marketing expenses.................... 3,968 3,371
Depreciation and amortization......... 6,178 3,622
-------- --------
Total store costs and expenses...... 103,956 100,409
Non-Store:
Salaries, benefits, general and
administrative...................... 14,888 10,563
Depreciation and amortization
(excluding goodwill amortization)... 1,045 900
Goodwill amortization................. 3,247 3,415
-------- --------
Total non-store costs and expenses.. 19,180 14,878
-------- --------
Total costs and expenses............ 123,136 115,287
-------- --------
Income (Loss) from Operations.............. (12,661) (2,934)
Other Income (Expense):
Interest income.......................... 246 -
Interest expense......................... (3,591) (3,671)
Other.................................... - (31)
-------- --------
Total other income (expense).......... (3,345) (3,702)
-------- --------
Income (Loss) before Income Taxes and
Minority Interest........................ (16,006) (6,636)
Income Taxes............................... - -
Minority Interest in Loss of Subsidiary.... (2,589) (934)
-------- --------
Net Income (Loss).......................... $(13,417) $ (5,702)
======== ========
Basic Earnings (Loss) per Share............ $(0.41) $(0.17)
======== ========
Diluted Earnings (Loss) per Share.......... $(0.41) $(0.17)
======== ========
Weighted Average Number of Common
Shares Outstanding:
Basic................................. 32,520 33,271
======== ========
Diluted............................... 32,520 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>
Quarter Ended
------------------------------------
April 19, April 18,
1998 1999
--------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $(13,417) $ (5,702)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 10,470 7,937
Minority interest....................................... (2,589) (934)
Provision for write-down of assets...................... - 353
Changes in assets and liabilities:
Accounts receivable................................... 467 324
Accounts payable and accrued expenses................. (9,101) 1,321
Other assets and liabilities.......................... (150) 547
--------------- ---------------
Net cash provided by (used in) operating activities. (14,320) 3,846
--------------- ---------------
Cash Flows from Investing Activities:
Purchase of property and equipment........................ (10,684) (3,335)
Purchase of other assets.................................. (426) (36)
--------------- ---------------
Net cash used in investing activities................... (11,110) (3,371)
--------------- ---------------
Cash Flows Provided by (Used in) Financing Activities:
Borrowings under credit facility.......................... - 48,550
Repayments under credit facility.......................... (1,500) (47,750)
--------------- ---------------
Net cash provided by (used in) financing activities..... (1,500) 800
--------------- ---------------
Net Decrease in Cash and Cash Equivalents................... (26,930) 1,275
Cash and Cash Equivalents, beginning of period.............. 34,148 3,766
---------------
Cash and Cash Equivalents, end of period.................... $ 7,218 $ 5,041
=============== ===============
</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 April 18, 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 April 18, 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. 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.
The Company and certain of its current and former officers and directors have
entered into an agreement to settle 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 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 (the "Exchange Act"), and Rule 10b-5
thereunder, as well as certain similar provisions of Colorado state law. The
settlement does 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 settlement of the litigation is being funded with proceeds of director
and officer liability insurance policies and is subject to certain customary
conditions, including final approval of the United States District Court for the
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District of Colorado where the lawsuit is pending. As also required by the
settlement agreement, the United States Bankruptcy Court for the District of
Arizona which has jurisdiction over the Chapter 11 bankruptcy case of Boston
Chicken, Inc., the Company's majority stockholder ("Boston Chicken") has granted
relief from the automatic stay in effect in the Boston Chicken bankruptcy case
to permit the settlement to be funded with proceeds of the insurance policies,
which cover directors and officers of both Boston Chicken and the Company.
The Company has been informed by the Underwriters that they have reached an
agreement in principle to settle the litigation against the Underwriters. The
Company has agreed in principle to pay $0.6 million as part of such settlement.
7
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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 May 28, 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 various fee service agreements,
pursuant to which Boston Chicken provides to the Company certain accounting and
administration and computer and communications services. 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 those services
independently. The Company and Boston Chicken have had discussions regarding
this transition, although the terms on which the Company may be able to
transition from the existing fee service agreements are not known at this time.
The failure of the Company to negotiate acceptable transition terms, the
inability 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" on page 8.
In connection with the development of a 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
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The Company has also commenced negotiations to obtain from several third-
party vendors licenses for 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 also begun to hire additional
support center employees to provide the various accounting, administrative and
systems support services that are currently 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 will require 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
10. 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 increased 1.7% to $112.4 million for the
quarter ended April 18, 1999 compared to $110.5 million for the prior comparable
quarter. The increase in store net revenue was due to an increase in average
net weekly per store sales of 4.7% to $12,946 from $12,360 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. The increase in average net weekly
per store sales was due to a higher proportion of mature stores in comparison to
the 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. These Company initiatives have to date
proven more effective in the Company's Einstein Bros. Bagels concept than in its
Noah's New York Bagels concept.
The average number of stores in operation decreased to 536 for the quarter
from 554 for the prior comparable quarter.
Comparable store sales increased 2.3% 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 are 518
stores in the comparable store sales base.
Store Costs and Expenses. Cost of products sold as a percent of store
revenue decreased to 33.4% for the quarter ended April 18, 1999 from 34.9% for
the prior comparable quarter. The decrease was attributable to a prior year
charge of approximately $0.8 million associated with the closing of a bagel
production plant and improved management of food costs in the first quarter of
1999.
Salaries and benefits as a percent of store revenue decreased to 31.5% for
the quarter ended April 18, 1999 from 32.0% for the prior comparable quarter.
The decrease reflected the Company's ability to leverage store labor as average
net weekly per store sales increased.
Other controllable costs (such as utilities, repair and maintenance, and
supplies) were relatively constant at 8.2% of store revenue for the quarter
ended April 18, 1999 compared to 8.4% for the prior comparable quarter.
Rent, occupancy and related costs as a percent of store revenue increased to
10.1% for the quarter ended April 18, 1999 from 9.6% for the prior comparable
quarter. The increase reflects 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.
9
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Marketing expenses as a percent of store revenue decreased to 3.0% for the
quarter ended April 18, 1999 from 3.6% for the prior comparable quarter. 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 13.9% for the
quarter ended April 18, 1999 from 11.5% for the prior comparable quarter.
Depreciation and amortization as a percent of store revenue decreased to 3.2%
for the quarter ended April 18, 1999 from 5.6% for the prior comparable quarter.
The decrease was the result of the charge taken in the fourth quarter of 1998
for impairment of long-lived assets.
Salaries, Benefits, General and Administrative. Salaries, benefits, general
and administrative expenses as a percent of total revenue decreased to 9.4% for
the quarter ended April 18, 1999 from 13.5% for the prior comparable quarter.
The decrease was primarily 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.
Depreciation and Amortization. Non-store depreciation and amortization
(excluding goodwill amortization) as a percent of total revenue remained
relatively constant at 0.8% for the quarter ended April 18, 1999, compared to
0.9% for the prior comparable quarter. Goodwill amortization as a percent of
total revenue also remained relatively constant at 3.0% for the quarter from
2.9% for the prior comparable quarter. 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 $3.7 million for the
quarter ended April 18, 1999 compared to other expense of $3.3 million for the
prior comparable quarter. The increase was due to the reduction in interest
income related to the higher average cash balance in the prior comparable
period.
Minority Interest. The minority interest in losses of Bagel Partners was
$0.9 million for the quarter ended April 18, 1999 compared to $2.6 million for
the quarter ended April 19, 1998.
Income Taxes. Because of the uncertainty of utilizing the loss incurred in
1999, no income tax benefit was established.
Liquidity and Capital Resources
The Company's primary sources of capital in 1998 and the first quarter of
1999 were from borrowings under the Company's revolving credit facility and
internally generated cash from operations. Cash provided by operations for the
quarter ended April 18, 1999 was $3.8 million compared to $14.3 million of cash
used in operations for the quarter ended April 19, 1998. The increase in cash
provided was due primarily to the prior comparable period reduction in working
capital related to a decrease in accounts payable and accrued expenses and a
decrease in net loss to $5.7 million from $13.4 million in the prior comparable
quarter.
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
$22.5 million was outstanding at April 18, 1999, and a $25.0 million secured
revolving credit facility, of which $7.9 million was outstanding as of April 18,
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 weekly net sales levels and to comply with
ratios of system cash flow to senior indebtedness and pro forma fixed charges.
For the quarter ended April 18, 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,
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development and maintenance of its corporate infrastructure and investments in
commissaries. During the quarter ended April 18, 1999, the Company expended $3.3
million on construction of new stores, corporate infrastructure and investments
in commissaries. For the prior comparable quarter, the Company expended $10.7
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 $0.8 million for the quarter ended
April 18, 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 $1.5 million has been
incurred) and that the capital cost associated with upgrading store systems to
become Year 2000 compliant will be approximately $1.6 million (of which less
than $0.1 million has been incurred), primarily to purchase hardware that will
accommodate Year 2000 compliant software. 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 fee
service agreements with Boston Chicken expire or are terminated, the Company
will continue to be obligated to pay fees to Boston Chicken under those
agreements 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 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
11
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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 Year 2000 compliant software. 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 is currently in the process of
assessing the impact on the Company if any of its third-party 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, during the second fiscal quarter in 1999 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 intends 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 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 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.
12
<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 April 18, 1999, $30.4 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 April 18, 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.
<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 quarter ended April 18, 1999, the
Company filed a current report on Form 8-K dated February 12, 1999 and
a current report on Form 8-K dated February 17, 1999. The report
dated February 12, 1999 disclosed under Item 5 that the Company had
entered into an agreement to settle a securities class action lawsuit
against the Company and certain of its former officers and directors.
The report dated February 17, 1999 referred in Item 5 to the Company's
press release containing its results of operations for the fourth
quarter of fiscal 1998 and included a copy of such press release as an
exhibit.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EINSTEIN/NOAH BAGEL CORP.
Date: June 2, 1999 /s/ Robert M. Hartnett
-------------------------------------
Robert M. Hartnett
Chairman of the Board,
Chief Executive Officer and President
Date: June 2, 1999 /s/ Paula E. Manley
-------------------------------------
Paula E. Manley
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
10.1 Fourth Amendment and Waiver dated as of May 15, 1999 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 Amended and Restated 1996 Stock Option Plan for Non-Employee Directors.
27 Financial Data Schedule.
16
<PAGE>
EXHIBIT 10.1
EXECUTION COPY
FOURTH AMENDMENT AND WAIVER
TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FOURTH AMENDMENT AND WAIVER TO AMENDED AND RESTATED CREDIT
AGREEMENT ("Agreement") is being executed and delivered as of May 15, 1999, by
---------
and among Einstein/Noah Bagel Corp., a Delaware corporation (the "Borrower"),
--------
the financial institutions from time to time party to the Credit Agreement
referred to and defined below (collectively, the "Lenders", and each
-------
individually, a "Lender"), Bank of America National Trust and Savings
------
Association, as the "Agent" for the Lenders (the "Agent") and General Electric
-----
Capital Corporation, as "Co-Agent" for the Lenders (the "Co-Agent"). Undefined
--------
capitalized terms which are used herein shall have the meanings ascribed to such
terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, the Agent and the Co-Agent are
parties to that certain Amended and Restated Secured Credit Agreement dated as
of November 21, 1997 (as heretofore amended and modified by that certain First
Amendment and Waiver thereto dated as of March 27, 1998, that certain Consent
thereto dated as of May 7, 1998, that certain Second Amendment thereto dated as
of October 4, 1998, and that certain Third Amendment and Waiver thereto dated as
of January 29, 1999, in each case among such parties, collectively, the "Credit
------
Agreement"), pursuant to which the Lenders have agreed to provide, subject to
- ---------
the terms and conditions contained therein, certain loans and other financial
accommodations to the Borrower; and
WHEREAS, the Borrower has requested, and subject to the terms and
conditions of this Agreement the Lenders and the Agent have agreed, (i) to waive
the Borrower's compliance with its Pro Forma System Fixed Charge Coverage Ratio
for its fiscal quarter ended April 18, 1999 (its first fiscal quarter of 1999)
and (ii) to amend the required covenant levels for such Pro Forma System Fixed
Charge Coverage Ratio for each of its remaining fiscal quarters in 1999;
WHEREAS, as a condition, among others, to the Lenders' willingness to
grant such waivers and amendments, the Lenders require certain clarifying and
other modifications to the Credit Agreement, and certain supplementary Loan
Documents identified, or to be identified, by the Agent in connection with its
legal review of its existing Loan Documents and related agreements and
instruments.
NOW, THEREFORE, in consideration of the foregoing premises, the terms
and conditions stated herein and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Borrower, the Lenders, the
Agent, and the Co-Agent, such parties hereby agree as follows:
<PAGE>
1. Amendment to Credit Agreement. Subject to Paragraph 3 of this
----------------------------- -----------
Agreement, and effective as of the date of this Agreement, the Credit Agreement
is hereby amended as follows (section and schedule references herein refer to
those of the Credit Agreement):
(a) Section 4.18 is deleted in its entirety and replaced with the
------------
following provision:
SECTION 4.18. Real Property. (a) The Schedule 4.18 hereto
------------- -------------
which is dated as of February 5, 1999 sets forth as of such date, a
complete and accurate list of the addresses of each parcel of real property
owned or leased by the Borrower or any Subsidiary, on which Schedule the
Borrower has indicated by an "X" under the heading "Collateral Assignment",
all real property which is leased by the Borrower or any Subsidiary (as
lessee) and subject to a Collateral Assignment of Lease and, if required by
the terms of the relevant lease, a Landlord's Consent, in favor of the
Agent.
(b) Each Schedule 4.18 delivered to the Agent after February 5,
-------------
1999 pursuant to Section 5.8(6) sets forth, as of the Friday immediately
--------------
preceding the date of delivery required by such section, a complete and
accurate list of the addresses of each parcel of real property owned or
leased by the Borrower or any Subsidiary, on which Schedule the Borrower
has indicated (i) the county of such parcel and, if a store location, the
store number, (ii) which parcels are owned and which are leased and, if
owned, the names of each then current owner, and if leased, the names of
the then current lessee and, if applicable, sublessor and sublessee
thereof, (iii) if such property is owned by the Borrower, whether the
documents, agreements and instruments required by Section 5.14(3) have been
---------------
theretofore delivered to the Agent, (iv) by an "X" under the heading
"Collateral Assignment of Lease", whether a Collateral Assignment of Lease
and Landlord's Consent (to the extent required by the relevant lease) has
been theretofore executed and delivered in favor of the Agent and (v) by an
"X" under the heading "Grandfathered" with respect to each leased parcel
for which no Collateral Assignment of Lease has been executed and delivered
and the terms of the relevant lease would require a Landlord's Consent
prior to the execution and delivery of a Collateral Assignment of Lease
with respect thereto, whether, despite the reasonable efforts of the
Borrower or its Subsidiary, no Landlord Consent has been executed and
delivered in favor of the Agent.
(b) The provisions of Section 5.13(1) which precede the schedule of
---------------
periods and ratios set forth therein is deleted in its entirety and replaced
with the following provisions:
(1) At the time of each incurrence, and after giving effect thereto,
of Debt under this Agreement during any fiscal period set forth below (but
only at such times and at no other times), demonstrate to the Agent that
the ratio of (a) Senior Indebtedness outstanding immediately after such
incurrence to (b) Annualized System EBITDAL for the fiscal quarter then
most recently ended for which financial statements have been delivered to
the Agent pursuant to Section 5.8 or for which financial statements or
-----------
-2-
<PAGE>
financial results have been reported in a press release or in any of the
Borrower's filings with the Securities and Exchange Commission, does not
exceed the ratio set forth below opposite the fiscal period during which
such Debt incurrence is to occur:
(c) Section 5.14 is amended to delete subparagraph (1) thereof in its
------------ ----------------
entirety and to replace such subparagraph with the following subparagraph:
(1) Deliver to the Agent, on or before August 15, 1999 with
respect to each of the leased parcels of real property referenced on
the Schedule 4.18 delivered to the Agent as of February 5, 1999, and
-------------
within ninety (90) days of the delivery of each subsequently delivered
Schedule 4.18 pursuant to Section 5.8(6) with respect to each newly
------------- --------------
leased parcel first identified on such subsequent schedule, each of
the documents set forth in clause (4) below; provided, that the Agent
---------- --------
may decline to accept such documents if in its determination a parcel
is or may have been in violation of any Environmental Laws and,
provided, further, if, prior to February 5, 1999, the Borrower or any
-------- -------
of its Subsidiaries have, despite reasonable efforts, failed to obtain
a Landlord's Consent with respect to any such parcel the relevant
lease for which requires such consent prior to the execution and
delivery of a Collateral Assignment of Lease, then the Borrower and
its Subsidiaries shall have no further obligation under this section
with respect to such parcel until the renewal date of such lease at
which time such parcel shall be then and thereafter treated as a newly
leased parcel pursuant to this paragraph.
(d) Section 6.6 amended to delete in its entirety the beginning of
-----------
such section through and including the end of clause (ii) of such section and to
-----------
replace such deleted provisions with the following provisions:
SECTION 6.6. Dividends. Do any of the following, or permit any
---------
of its Subsidiaries to do any of the following: (a) declare or pay, any
dividends or distributions of income to the shareholders of the Borrower or
the shareholders of any Subsidiary of the Borrower which is not a Wholly-
Owned Subsidiary; (b) purchase, redeem, retire, or otherwise acquire for
value any of the now or hereafter outstanding capital stock or other equity
interests of the Borrower or any Subsidiary of the Borrower which is not a
Wholly-Owned Subsidiary; (c) make any distribution of assets to the
stockholders or equity interest holders of the Borrower or any Subsidiary
of the Borrower which is not a Wholly-Owned Subsidiary in cash, assets, or
obligations of the Borrower or such Subsidiary; (d) allocate or otherwise
set apart any sum for the payment of any dividend or distribution on, or
for the purchase, redemption, or retirement of, any shares of capital stock
or other units of equity of the Borrower or any Subsidiary of the Borrower
which is not a Wholly-Owned Subsidiary; or (d) purchase or otherwise
acquire for value any stock or other equity interests of the Borrower or
any Subsidiary of the Borrower which is not a Wholly-Owned Subsidiary;
except that (i) the Borrower may declare and deliver dividends and make
distributions payable solely in capital stock of the Borrower and may
-3-
<PAGE>
acquire equity interests of any of its Subsidiaries solely in exchange for
capital stock of the Borrower, (ii) any Subsidiary of the Borrower may
redeem shares of its capital stock or other units of its equity held by a
shareholder or other equity holder (other than the Borrower) solely in
exchange for the cancellation of Debt owed by such shareholder or other
equity holder to such Subsidiary, (iii) the Borrower may purchase from any
Financed Subsidiary capital stock of the Borrower required to be delivered
to optionees under stock option plans of such Financed Subsidiary assumed
by the Borrower for a purchase price not to exceed the exercise price of
such options, such price to be payable solely by cancellation of Debt of
the Financed Subsidiary to the Borrower, and (iv) any Subsidiary of the
Borrower which is organized in a form which requires it to pass through its
income and losses to its equity holders for Federal income tax may declare
and pay dividends or income distributions in amounts not to exceed its
Permitted Tax Distributions, provided, that both before and after giving
--------
effect to such Permitted Tax Distribution no Default or Event of Default
shall have occurred and be continuing. For purposes of this Section 6.6,
-----------
"Permitted Tax Distribution" means, with respect to any Subsidiary for any
taxable year, the maximum aggregate amount of Federal and applicable state
taxes which would be payable for such taxable year by the shareholders or
other equity holders of such Subsidiary with respect to income or losses of
such Subsidiary calculated at the maximum Federal and applicable state
income tax rates then in effect, without reference to the actual income tax
returns of such shareholders or other equity holders.
(e) Section 6.8 is amended to delete clause (1)(c) thereof in its
----------- -------------
entirety and to add the word "and" immediately following clause (1)(a) thereof.
-------------
(f) Section 6.8 is further amended to add the phrase "solely in
-----------
exchange for capital stock of the Borrower" immediately following the existing
phrase "Financed Franchisees, Financed Subsidiaries or Subsidiary" in such
section.
(g) Section 6.11(2) is amended to delete clause (c)(i) of such
--------------- -------------
section in its entirety and to replace such clause with the following provision:
(i) or sold for fair consideration, but only with respect to capital stock,
partnership units or other equity interests of Persons which are not
Subsidiaries of the Borrower,
(h) The schedule of periods and ratios set forth in Section 7.5 is
-----------
deleted in its entirety and replaced with the following schedule of periods and
ratios:
<TABLE>
<CAPTION>
Fiscal Period(s) Covenant Level
---------------- --------------
<S> <C>
Q3/1998 1.25:1.00
Q4/1998 1.25:1.00
Q1/1999 1.50:1.00
Q2/1999 1.20:1.00
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Period(s) Covenant Level
---------------- --------------
<S> <C>
Q3-Q4/1999 1.30:1.00
Q1-Q4/2000 2.00:1.00
</TABLE>
2. Waiver. Subject to Paragraph 3 of this Agreement, and effective
------ -----------
as of the date of this Agreement, the Lenders hereby waive the Borrower's
compliance with its Pro Forma System Fixed Charge Coverage Ratio set forth in
Section 7.5 of the Credit Agreement for its first fiscal quarter of 1999,
- -----------
provided that the Borrower achieved a ratio under such section of at least
- --------
1.10:1.00 for such fiscal quarter.
3. Effectiveness of this Agreement; Conditions Precedent. The
-----------------------------------------------------
provisions of Paragraphs 1 and 2 shall be deemed to have become effective as of
------------ -
the date of this Agreement, but such effectiveness shall be expressly
conditioned upon the Agent's receipt of (a) an originally-executed counterpart
(or facsimile thereof) of this Agreement executed by a duly authorized officer
of the Borrower and by duly authorized officers of each of the Lenders and (b)
payment in full of the "Amendment Fee" referred to and defined below in
Paragraph 4 below, in immediately available funds.
- -----------
4. Amendment Fee. Upon the execution and delivery of this Agreement
-------------
by the Borrower and the Lenders, the Borrower shall pay to the Agent, for the
ratable benefit of the Lenders, an amendment fee in the amount of $40,000
("Amendment Fee"), which fee shall be payable in immediately available funds and
- ---------------
shall be fully-earned and nonrefundable upon such execution and delivery by the
Borrower and the Lenders.
5. Supplementary Loan and Collateral Documents. The Borrower
-------------------------------------------
understands that the Agent has engaged Sidley & Austin to conduct a legal review
of the Loan Documents and Collateral Documents, including, without limitation,
with respect to the perfection and priority of the Agent's Liens on the
properties of the Borrower and its Subsidiaries, and that, as of the date
hereof, such review has not been completed. Without limiting the generality of
any similar undertakings by the Borrower or any of its Subsidiaries pursuant to
the terms of the Loan Documents, the Borrower hereby agrees to, as soon as
practicable following the Agent's request therefor, and in any event, within
thirty (30) days thereafter (except as otherwise provided in Section 5.14(1) of
---------------
the Credit Agreement, as amended hereby), to take such actions, and execute and
deliver such agreements, documents, instruments, certificates and opinions as
the Agent may reasonably request: (a) to perfect, or otherwise establish the
priority of, the Agent's Liens on the Borrower's and its Subsidiaries'
properties (and the Borrower's Liens on the properties of Einstein/Noah Bagel
Partners, L.P.), to the extent not previously achieved, (b) to obtain such
consents to and approvals of the Agent's Liens on the Collateral or other
provisions of the Loan Documents as are reasonably deemed necessary or desirable
by the Agent to avoid or resolve existing conflicts or violations of other
agreements or instruments binding upon the Borrower or any of its Subsidiaries
(in cases where such consents or approvals had not been previously obtained) and
(c) to modify the Collateral Documents (and each Lender hereby authorizes and
approves such actions) to provide that the Agent's Liens on the Collateral
additionally to secure, on a ratable basis the with Lenders' other claims under
and with respect to the Credit Agreement
-5-
<PAGE>
and other Loan Documents, any and all obligations now or hereafter owing
(contingent or otherwise) by the Borrower or any of its Subsidiaries to any of
the Lenders with respect to deposit, demand, disbursement and other bank
accounts and any other cash management services from time to time provided to or
maintained for the benefit of the Borrower or any of its Subsidiaries by any of
the Lenders.
6. Representations, Warranties and Covenants. (a) The Borrower
-----------------------------------------
hereby represents and warrants that this Agreement constitutes the legal, valid
and binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms.
(b) The Borrower hereby represents and warrants that its execution
and delivery of this Agreement, and its performance hereafter of the Credit
Agreement as modified by this Agreement, have been duly authorized by all
necessary corporate action, do not violate any provision of its certificate of
incorporation, bylaws or other charter documents, will not violate any law,
regulation, court order or writ applicable to it, will not require the approval
or consent of any governmental agency, and do not require the approval or
consent of any third party under the terms of any contract or agreement to which
the Borrower or any of its Subsidiaries is bound.
(c) The Borrower hereby represents and warrants that, after giving
effect to all of the provisions of this Agreement, (i) no Default or Event of
Default has occurred and is continuing or will have occurred and be continuing
and (ii) all of the representations and warranties of the Borrower contained in
the Credit Agreement (other than representations and warranties which, in
accordance with their express terms, are made only as of an earlier specific
date) are, and will be, true and correct as of the date of the Borrower's
execution hereof in all material respects as though made on and as of such date.
7. Reference to and Effect on Credit Agreement. The Credit
-------------------------------------------
Agreement shall remain in full force and effect and is hereby ratified and
confirmed. Except as expressly provided in Paragraph 2 hereof, neither the
-----------
execution, delivery nor effectiveness of this Agreement shall operate as a
waiver of any right, power or remedy of the Agent or any Lender of any Default
or Event of Default under the Credit Agreement, all of which the Agent and the
Lenders hereby expressly reserve. Nothing contained herein shall require the
Agent or the Lender to hereafter waive any Default or Event of Default, or to
further amend any provisions of any Loan Document, whether or not similar to the
waivers or amendments effected by this Agreement. The Borrower, the Lenders and
the Agent agree and acknowledge that this Agreement constitutes a "Loan
Document" under and as defined in the Credit Agreement.
8. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws and decisions of the State of Illinois.
9. Agent's Expenses. The Borrower hereby agrees to promptly
----------------
reimburse the Agent for all of the reasonable out-of-pocket expenses, including,
without limitation, attorneys' and paralegals' fees, it has heretofore or
hereafter incurred or incurs in connection with the
-6-
<PAGE>
preparation, negotiation and execution of this Agreement and the legal review
referred to in Paragraph 5 above.
-----------
10. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be an original and all of which together shall constitute
one and the same agreement among the parties.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
EINSTEIN/NOAH BAGEL CORP.
/s/ Paul A. Straser
By: ____________________________
Name: Paul A. Straser
Title: Senior Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Agent
/s/ David A. Johanson
By: ____________________________
Name: David A. Johanson
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Lender
/s/ Michael Staunton
By: ____________________________
Name: Michael Staunton
Title: Vice President
GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender
and as Co-Agent
/s/ Frederick J. Maurice
By: ____________________________
Name: Frederick J. Maurice
Title: Risk Manager
LASALLE NATIONAL BANK, as a Lender
/s/ John C. Thurston
By: ____________________________
Name: John C. Thurston
Title: Vice President
-7-
<PAGE>
EXHIBIT 10.2
EINSTEIN BROS. BAGELS, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
(as amended through May 24, 1999)
1. Statement of Purpose. The principal purpose of this Stock Option Plan
for Non-Employee Directors (the "Plan") is to benefit Einstein Bros. Bagels,
Inc. (the "Company") through offering its directors who are not employees or
officers of the Company or its subsidiaries, if any, a favorable opportunity to
become holders of the common stock of the Company ("Common Stock"), thereby
giving them a long term stake in the growth and prosperity of the Company, in
order to enable them to represent the viewpoint of other stockholders of the
Company more effectively and to encourage them to continue serving as directors
of the Company.
2. Eligibility. Options shall be granted under this Plan only to members
of the Board of Directors who are not employees or officers of the Company or
its subsidiaries, if any.
3. Granting of Options. Each director of the Company who is eligible to
be granted an option under the Plan shall receive an automatic grant of an
option for shares having a fair market value of $50,000 at the date of grant, as
determined in good faith by the board of directors on such date, each time he or
she is elected a director of the Company, except that such grant shall in no
event include more than 15,000 shares and no director shall receive more than
one grant in any calendar year. The aggregate number of shares which shall be
available for such options under this Plan shall be 200,000 shares. Such number
of shares, and the number of shares subject to options outstanding under the
Plan, shall be subject in all cases to adjustment as provided in Paragraph 9.
No option shall be granted under the Plan subsequent to May 28, 2006. Options
granted under the Plan are intended not to be treated as incentive stock options
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
Notwithstanding any of the foregoing to the contrary, in the event an
option expires unexercised as to any shares, such shares may again be optioned.
Shares subject to options may be made available from unissued or reacquired
shares of Common Stock.
Nothing contained in the Plan or in any option granted pursuant thereto
shall in itself confer upon any optionee any right to continue serving as a
director of the Company or interfere in any way with any right of the Board of
Directors or stockholders of the Company pursuant to the certificate of
incorporation or by-laws of the Company or applicable law to remove such
director.
4. Option Price. Subject to adjustment under Paragraph 9, the option
price shall be the fair market value at the time the option is granted of the
shares of Common Stock subject to the option.
<PAGE>
5. Duration of Options, Increments and Extensions. Subject to the
provisions of Paragraph 7, each option shall be for a term of ten years and
shall become exercisable at the end of one year of service as a director of the
Company.
6. Exercise of Option. An option may be exercised by giving written
notice to the Company, attention of the Secretary, specifying the number of
shares to be purchased, accompanied by the full purchase price for the shares to
be purchased either in cash, by check, by a promissory note in a form specified
by the board of directors and payable to the Company no later than 15 business
days after the date of exercise of the option, or by shares of the Common Stock
of the Company, or by a combination of these methods of payment. For this
purpose, the per share value of the Company's Common Stock shall be the fair
market value at the time of exercise for the shares being purchased. The Board
of Directors may in its discretion permit an optionee to deliver a promissory
note in a form specified by the Board of Directors and payable to the Company no
later than the fifteenth day of April in the year following the year of exercise
of any option in payment of any withholding tax requirements of the Company with
respect to such exercise.
7. Termination -- Exercise Thereafter. In the event an optionee ceases to
be a director of the Company for any reason other than death, permanent
disability or resignation, such optionee's option shall expire and all rights to
purchase shares pursuant thereto shall terminate, except that any then
exercisable option shall be exercisable for a period of 15 days after the date
of such termination (or until the scheduled termination of the option, if
earlier).
In the event of death or permanent disability (as that term is defined in
Section 22(e)(3) of the Code, as now in effect or as it shall be subsequently
amended), an exercisable option may be exercised in full by the optionee or, if
he is not living, by his or her heirs, legatees, or legal representative, as the
case may be, during its specified term prior to two years after the date of
death or permanent disability; provided, however, that in the event an optionee
hereunder should die or become permanently disabled (as such term is defined
herein) prior to the end of one year of service as a director of the Company,
then such optionee's option shall become immediately exercisable as of the date
of such death or permanent disability and shall be exercisable for a period of
two years after such date. In the event of resignation, an exercisable option
may be exercised by the optionee (or, if he or she dies within three months
after such termination, by his or her heirs, legatees, or legal representative,
as the case may be), at any time during its specified term prior to three months
after the date of such resignation.
8. Non-Transferability of Options. During the lifetime of the optionee,
options shall be exercisable only by the optionee, and options shall not be
assignable or transferable by the optionee otherwise than by will or by the laws
of descent and distribution, or pursuant to a qualified domestic relations order
as defined by (a) the Code or (b) Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or the rules or regulations
thereunder. This restriction on transferability is effective only so long as it
is required pursuant to Section 16 under the Securities Exchange Act of 1934, as
amended ("Exchange Act"). At the time such restriction on transferability is no
longer so required, the board of directors, in its discretion, may permit the
assignment or transfer of an option on such terms and subject to such
2
<PAGE>
conditions as the board may deem necessary or appropriate or as otherwise may be
required by applicable law or regulation.
9. Adjustment. The number of shares subject to the Plan and to options
granted under the Plan shall be adjusted as follows: (a) in the event that the
Company's outstanding Common Stock is changed by any stock dividend, stock split
or combination of shares, the number of shares subject to the Plan and to
options granted thereunder shall be proportionately adjusted; (b) in the event
of any merger, consolidation or reorganization of the Company with any other
corporation or corporations, there shall be substituted on an equitable basis as
determined by the board of directors, for each share of Common Stock then
subject to the Plan, whether or not at the time subject to outstanding options,
the number and kind of shares of stock or other securities to which the holders
of Common Stock of the Company will be entitled pursuant to the transaction; and
(c) in the event of any other relevant change in the capitalization of the
Company, the board of directors shall provide for an equitable adjustment in the
number of shares of Common Stock then subject to the Plan, whether or not then
subject to outstanding options. In the event of any such adjustment the
purchase price per share shall be proportionately adjusted.
10. Amendment of Plan. The board of directors may amend or discontinue
the Plan at any time; provided, however:
-------- -------
(a) that no amendment or discontinuance shall change or impair any options
previously granted without the consent of the optionee;
(b) that no amendment shall, without the affirmative vote of the holders
of a majority of the outstanding shares of all classes of stock of the Company
voting in person or by proxy, and entitled to vote at a duly held stockholders
meeting, or without the written consent of the holders of a majority of the
outstanding shares of all classes of stock entitled to vote, (i) materially
increase the benefits accruing to participants under the Plan, (ii) materially
increase the number of securities which may be issued under the Plan, or (iii)
materially modify the requirements as to eligibility for participation in the
Plan;
(c) that the provisions of the Plan relating to the amount and price of
securities to be issued under the Plan, or the timing of such issuances, shall
not be amended more than once every six months, other than to comport with
changes in the Code, ERISA, or the rules or regulations thereunder.
11. Effective Date. The board of directors adopted and approved the Plan
on May 28, 1996 and authorized its submission to the stockholders of the Company
for their approval by written consent.
12. Miscellaneous.
(a) No shares of Common Stock shall be issued hereunder with respect to any
option unless counsel for the Company shall be satisfied that such issuance will
be in compliance with
3
<PAGE>
applicable federal, state, local and foreign legal, securities exchange and
other applicable requirements.
(b) It is the intent of the Company that the Plan comply in all respects
with Rule 16b-3 under the Exchange Act, that any ambiguities or inconsistencies
in construction of the Plan be interpreted to give effect to such intention and
that if any provision of the Plan is found not to be in compliance with Rule
16b-3, such provision shall be deemed null and void to the extent required to
permit the Plan to comply with Rule 16b-3.
(c) The Company shall have the right to deduct from any payment made under
the Plan any federal, state, local or foreign income or other taxes required by
law to be withheld with respect to such payment. It shall be a condition to the
obligation of the Company to issue Common Stock, other securities or property,
or other forms of payment, or any combination thereof, upon exercise, settlement
or payment of any option under the Plan, that the participant (or any
beneficiary or person entitled to act) pay to the Company, upon its demand, such
amount as may be required by the Company for the purpose of satisfying any
liability to withhold federal, state, local or foreign income or other taxes.
If the amount requested is not paid, the Company may refuse to issue Common
Stock, other securities or property, or other forms of payment, or any
combination thereof. Notwithstanding anything in the Plan to the contrary, the
Board of Directors may, in its discretion, permit an eligible participant (or
any beneficiary or person entitled to act) to elect to pay a portion or all of
the amount requested by the Company for such taxes with respect to such option,
at such time and in such manner as the Board of Directors shall deem to be
appropriate (including, but not limited to, by authorizing the Company to
withhold, or agreeing to surrender to the Company on or about the date such tax
liability is determinable, Common Stock, other securities or property, or other
forms of payment, or any combination thereof, owned by such person or a portion
of such forms of payment that would otherwise be distributed, or have been
distributed, as the case may be, pursuant to such option to such person, having
a fair market value equal to the amount of such taxes).
(d) The expense of the Plan shall be borne by the Company.
4
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