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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21097
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EINSTEIN/NOAH BAGEL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 84-1294908
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1687 Cole Boulevard
Golden, CO 80401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 568-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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Common Stock, $.01 par value
7 1/4% Convertible Subordinated Debentures due 2004
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, as
amended (the "Exchange Act"), during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days: Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ].
The aggregate market value of the voting stock of the registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately
$4,277,395 at March 17, 2000 (based on the closing sale price on the Over-the-
Counter Bulletin Board on March 17, 2000). At March 17, 2000, the registrant
had issued and outstanding an aggregate of 34,083,681 shares of common stock
(including 813,146 shares of common stock held by a subsidiary of the Company).
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business", "Item 3.
Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", and elsewhere in this Form 10-K,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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: successful
restructuring of the Company's balance sheet; 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; and other factors referenced in this Form 10-K. 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.
ITEM 1. BUSINESS
General
References in this Form 10-K to the "Company" mean the Company, its
predecessors and its and their subsidiaries, including Bagel Partners, unless
the context otherwise requires. Einstein Bros.(R) and Noah's New York Bagels(R)
are trademarks owned by the Company.
The Company owns and operates specialty retail stores that feature fresh-
baked bagels, proprietary cream cheeses, specialty coffees and teas, and
creative soups, salads and sandwiches, primarily under the Einstein Bros. Bagels
brand name and also under the Noah's New York Bagels brand name. The Company's
primary brand, Einstein Bros. Bagels, was developed by the Company after it was
formed in March 1995. The Noah's New York Bagels brand was acquired by the
Company in February 1996. As of December 26, 1999, there were 539 Company
stores in operation systemwide in 45 designated market areas ("DMAs"), including
428 Einstein Bros. Bagels stores in 38 of such DMAs throughout the United States
and 111 Noah's New York Bagels stores in 7 of such DMAs located in northern
California, portions of Los Angeles, Portland and Seattle/Tacoma. The Company
also licenses one Einstein Bros. Bagels store located in a hotel in Phoenix,
Arizona and one Noah's New York Bagels store located in the San Francisco
International Airport. During fiscal 1999 the Company closed 14 stores and
opened 7 new stores. Subsequent to the end of fiscal 1999, the Company opened
one new store.
During fiscal 1998 and 1999 the Company focused primarily on improving
store operations to increase same store sales and margins. The Company
instituted programs to more effectively hire, train and incentivize store
general managers, established consistent measurements of weekly store level
performance, expanded menus to include new lunch, sweets and catering offerings,
increased menu prices, closed underperforming stores and began more aggressive
in-store merchandising.
A key component of the Company's product strategy is its offering of fresh-
baked bagels, produced utilizing proprietary processes that allow for maximum
inclusion of high quality ingredients, such as whole
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blueberries, raisins and nuts. Bagels are offered in a wide variety of both
traditional and creative flavors and are baked fresh throughout the day in each
store using steamed-baking processes.
The Company's stores also offer consumers a line of traditional and
creative flavors of cream cheese and an extensive line of beverages featuring
branded coffees and teas, fruit teas, bottled and fountain sodas, juices and
waters. The menu also includes creative soups, salads and sandwiches offering
customers a variety of lunch alternatives, as well as branded retail products
that support the major menu categories, including ground and whole bean coffees,
teas, bagel chips, coffee mugs and other items. Stores are typically in leased
locations of approximately 2,000 square feet, substantial indoor seating and
when practical, additional outdoor seating.
The Company was incorporated in Delaware in February 1995 under the name
Progressive Bagel Concepts, Inc. The Company's name was subsequently changed to
Einstein/Noah Bagel Corp. in June 1996. The Company's principal executive
offices are located at 1687 Cole Boulevard, Golden, Colorado 80401 and its
telephone number is (303) 568-8000.
Loan Conversions and Area Developer Merger
From November 1995 until December 1997, stores were developed and operated
primarily by area developers funded in part through convertible loans made by
the Company. The Company believes that its area developers substantially
assisted the Company in accomplishing its goal of rapidly developing stores and
brand awareness in targeted local markets to achieve market leadership.
However, as a result of the Company's decision in 1997 to slow new store
development, the Company believed its business would be strengthened by focusing
on a number of business objectives better accomplished through a Company-
controlled system.
In December 1997 the Company coverted its loans to its area developers into
a majority equity interest in the area developers and four of the Company's five
area developers merged into the surviving area developer now known as
Einstein/Noah Bagel Partners, L.P. ("Bagel Partners"). As a result of the loan
conversions and the area developer merger (together with certain related
transactions, the "Transactions"), the Company owns approximately 78% of Bagel
Partners, with the remaining minority interest owned by Bagel Store Development
Funding, L.L.C. ("Bagel Funding") and management of the former area developers.
Einstein/Noah Bagel Partners, Inc., a wholly-owned subsidiary of the Company, is
the general partner of Bagel Partners (the "General Partner"). By reason of its
holdings, the Company is able to control the affairs and policies of Bagel
Partners, elect the board of directors of the General Partner and approve or
disapprove any matter submitted to a vote of the partners of Bagel Partners,
including a change in control of Bagel Partners.
The Company believes that a Company-controlled system has allowed it to
develop and refine its brands by unifying store operations and customer
experience and has enhanced the Company's focus on store operations. In
addition, a Company-controlled system has enabled the Company to reduce
systemwide overhead, facilitate debt financing, improve tax efficiency and
attract and retain qualified employees through unified performance incentives.
Continued achievement of the foregoing benefits is dependent on a number of
factors, many of which are beyond the control of the Company. See "Special Note
Regarding Forward-Looking Statements" on page 2.
Capital Restructuring
In November 1999 the Company announced that it had retained Donaldson,
Lufkin & Jenrette to assist the Company in analyzing and evaluating possible
transactions for the principal purpose of restructuring its balance sheet, which
the Company's management believes is essential to ensure that the Company has
adequate working capital to operate its business and to enable it to capitalize
on the potential of its brands, Einstein Bros. Bagels and Noah's New York
Bagels. The Company is currently engaged in discussions with an ad hoc
committee of holders of its $125.0 million 7 1/4% convertible subordinated
debentures and representatives of Bagel Funding regarding possible transactions
that, if implemented, would have the effect of converting the debentures and the
interests of Bagel Funding into common stock of the Company. The Company
anticipates that any such restructuring transaction would result in substantial
dilution of the interest of existing equity holders, so that they would hold
little, if any, meaningful stake in the reorganized enterprise. The Company is
also engaged in discussions to obtain new bank financing to replace its existing
secured credit facility, which matures in October 2000. There can be no
assurance that the Company will be successful in implementing the contemplated
balance sheet restructuring or in obtaining new bank financing. See "Special
Note Regarding Forward-Looking Statements" on page 2.
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In the event the Company does not succeed in its restructuring efforts, the
Company's management believes that the Company will not be able to access
capital for new store development and other capital expenditures and that the
Company will have difficulty entering into a significant number of third-party
franchise or license agreements for the building of new stores using capital
resources of franchisees or licensees. The Company's management also believes
that, absent the restructuring, the Company will be unable to offer meaningful
equity incentives to attract and retain key management and that the Company will
be exposed to a significant risk of loss of key employees. In the event the
contemplated restructuring is not consummated, the Company believes that it will
be unable to obtain new bank financing and that it will not have sufficient
liquidity to satisfy its obligation to pay interest on its outstanding
debentures in June 2000. In addition, in the event the Company is unable to
modify the terms of its existing credit facility or obtain other sources of
capital, it is possible that the Company could be unable to satisfy other
obligations as they become due. See "Special Note Regarding Forward-Looking
Statements" on page 2. See also "Item 7. - Management's Discussion and Analysis
of Financial Condition and Results of Operations - General and - Liquidity and
Capital Resources."
Marketing and Competition
The Company believes that a key component in developing both the Einstein
Bros. Bagels and Noah's New York Bagels brands is a strong local and community-
based effort that encourages a close relationship between each store and its
community. The Company utilizes traditional marketing and advertising methods,
including radio, newspapers and other print media (including use of free-
standing inserts and promotional coupons), signage, direct mail and in-store
point-of-purchase displays to promote its brands.
The food service industry is intensely competitive with respect to food
quality, concept, convenience, location, customer service and value. In
addition, there are many well-established food service competitors with
substantially greater financial and other resources and substantially longer
operating histories than the Company. Many of such competitors are less
dependent than the Company on a single, primary product. The Company believes
that it competes with other bagel retailers and bakeries, including Brueggers
and Manhattan Bagel, specialty coffee retailers, including Starbucks, and other
"fast casual" food service retailers, including Panerra Bread, Corner Bakery
and Chipotle Mexican Grill. The Company also competes with fast-food
restaurants, delicatessens, take-out food service companies, supermarkets and
convenience stores. In addition, the Company believes that the start-up costs
associated with retail bagel and similar food service establishments are not a
significant impediment to entry into the retail bagel business. The Company
believes that its Einstein Bros. Bagels and Noah's New York Bagels brands
compete favorably in the important factors of food quality, convenience,
customer service and value.
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
product, and the type, number and location of competing restaurants. Multi-unit
food service businesses such as the Company can also be substantially adversely
affected by publicity resulting from food quality, illness, injury or other
health concerns (including food-borne illness claims) or operating issues
stemming from one store or a limited number of stores, whether or not the
Company is liable. Claims relating to foreign objects, food-borne illness or
operating issues are common in the food service industry and a number of such
claims may exist at any given time. Dependence on frequent deliveries of
produce and supplies also subjects food service businesses such as the Company
to the risk that shortages or interruptions in supply caused by adverse weather
or other conditions could adversely affect the availability, quality and cost of
ingredients. In addition, material changes in, or the Company's failure to
comply with, applicable federal, state and local government regulations, and
factors such as inflation, increased food, labor and employee benefit costs,
regional weather conditions and unavailability of an adequate number of
experienced managers and hourly employees may also adversely affect the food
service industry in general and the Company's results of operations and
financial condition in particular.
Vendors
The Company is party to an agreement with Harlan Bagel Supply Company,
L.L.C. ("Harlan") and the equity owners of Harlan. Under the agreement, Harlan
has agreed to sell frozen bagel dough to the Company at a price equal to the
cost of ingredients and packaging, a predetermined allowance for product losses
and a fixed toll charge (which is subject to adjustment for inflation, changes
in formulations, specifications or procedures required
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by the Company or failure of the Company to purchase certain minimum numbers of
bagels). The Company leases to Harlan certain equipment owned by the Company.
Harlan has granted to the Company an option to acquire all of the assets of
Harlan at a formula price equal to a multiple of Harlan's profits from sales of
products under the supply agreement. The option is exercisable through the term
of the supply agreement or the equipment lease agreement (currently April 2005)
in the event of a default under the equipment lease agreement or a default under
Harlan's third-party loan agreements or other debt obligations.
The Company has a long-term distribution agreement with Marriott
Distribution Services, Inc. ("Marriott"), which provides for distribution of
food, beverages and supplies to stores at a negotiated fixed mark-up above cost.
The Company purchases the majority of its products and supplies from Marriott.
The Company may be subject to shortages or interruptions in supply caused
by transportation strikes, adverse weather or other conditions which could
adversely affect the quality, availability and cost of ingredients.
Trademarks and Other Proprietary Rights
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
Einstein Bros.(R) and Noah's New York Bagels(R). In addition, the Company has
federal trademark applications pending for a number of trademarks and service
marks, as well as the Einstein Bros. logo and certain other logos used by the
Company. The Company has applied to register Noah's New York Bagels in more
than 30 foreign countries and Einstein Bros. in approximately 70 foreign
countries. Most of the applications pending in the United States and foreign
countries were filed in 1995 and 1996. The Company has not yet obtained federal
registrations for certain of the trademarks and service marks used in its
business, and there can be no assurance that such registrations will be
obtained.
The Company considers its intellectual property rights to be important to
its business and actively defends and enforces such rights.
Government Regulation
The restaurant industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and building and zoning requirements. The Company is subject to laws
governing its relationship with employees, including minimum wage requirements,
overtime, working and safety conditions and citizenship requirements. The
failure to obtain or retain food licenses, or increases in employee benefit
costs or other costs associated with employees, could adversely affect the
Company.
Relationship with Boston Chicken
On October 5, 1998, Boston Chicken, the owner of approximately 51% of the
outstanding shares of common stock of the Company, filed a voluntary petition
for protection under Chapter 11 of the Federal Bankruptcy Code. On February 17,
2000, Boston Chicken filed its second amended plan in the United States
Bankruptcy Court for the District of Arizona. The plan provides for the sale of
substantially all of the assets of Boston Chicken and certain affiliated debtors
to a wholly-owned subsidiary of McDonald's Corporation. The stock of the
Company owned by Boston Chicken would not be included in the sale, but rather,
upon the effectiveness of the plan, would be held by a trust to be established
under the plan for the benefit of Boston Chicken's creditors. A preliminary
hearing on the confirmation of the plan is scheduled for April 4, 2000.
Boston Chicken has an option (the "BCI Option") to maintain ownership of
shares of common stock of the Company having up to 52% of the voting power of
all of the outstanding shares of capital stock of the Company having the power
generally to vote in the election of directors. The BCI Option is exercisable
at a per share exercise price equal to (i) the weighted average price per share
at which the Company's common stock is issued or sold in a transaction pursuant
to which the BCI Option becomes exercisable, in the case of a transaction in
which such price per share is readily ascertainable, or (ii) in all other cases,
the average of the closing sale prices for the common stock on the Nasdaq
National Market (or such other principal exchange or market on which the common
stock may then be trading) for the five trading days ending on the fifth trading
day prior to the date of the transaction pursuant to which the BCI Option
becomes exercisable. The BCI Option terminates if (i) Boston Chicken sells or
transfers shares of the Company's common stock and as a result owns less than a
majority of the then outstanding shares of
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the Company's voting stock or (ii) the percentage of outstanding shares of
voting stock of the Company owned by Boston Chicken is reduced below 50% other
than as a result of Boston Chicken's voluntary sale or transfer of shares of the
Company's common stock and Boston Chicken fails to acquire a sufficient number
of shares of common stock so that it owns at least a majority of the then
outstanding shares of voting stock of the Company by July 31 of the calendar
year next following the calendar year in which such reduction occurs. In
addition, the percentage ownership level of 52% is subject to reduction to the
extent voluntary sales or transfers by Boston Chicken reduce its ownership of
the outstanding shares of voting stock of the Company to less than 52% but do
not otherwise result in termination of the BCI Option. In determining the
percentage ownership of the voting stock of the Company owned by Boston Chicken
for purposes of the BCI Option, the following shares are excluded: (i) shares of
the Company's common stock subject to options granted by Boston Chicken and its
subsidiaries prior to the date of the agreement, (ii) any shares of common stock
held by officers, directors or employees of Boston Chicken, and (iii) any shares
of common stock held by any person or entity that would not be counted under
generally accepted accounting principles in determining whether Boston Chicken
owns a majority of the voting stock for consolidated financial statement
purposes. Pursuant to such calculation, as of December 26, 1999, Boston Chicken
had the right to purchase 2,124,579 shares of common stock of the Company at
prices ranging from $3.87 to $30.75 per share. Boston Chicken also has five
demand and unlimited piggyback registration rights under the Securities Act of
1933, as amended (the "Securities Act"), with respect to shares of the Company's
common stock owned by Boston Chicken.
From its inception in 1995 through March 2000, the Company received
accounting, administration, computer and communications services from Boston
Chicken pursuant to various fee for service agreements. In November 1998, the
Company began a program to develop a comprehensive business infrastructure to
permit the Company to perform such services independently of Boston Chicken.
The Company substantially completed the development of a separate business
infrastructure in March 2000, at which time it ceased to purchase services from
Boston Chicken.
Employees; Labor Matters
In connection with the Transactions, the Company offered employment to all
of the employees of Bagel Partners. Pursuant to the services agreement dated
December 15, 1997 between the Company and Bagel Partners, the Company provides
to Bagel Partners the services of such employees and certain other employees
hired by the Company and Bagel Partners reimburses the Company for the cost of
such employees. As of March 17, 2000, the Company had approximately 12,800
employees, of which approximately 12,600 were store-level employees.
Certain operations of the Company conducted in northern California under
the Noah's New York Bagels brand have from time to time been the subject of
union organizing activities. Employees of two stores in the San Francisco Bay
area are currently represented by unions. Union affiliation may have a negative
impact upon employee relations and labor costs.
Executive Officers
Set forth below are the names and ages of the executive officers of the
Company, the positions they hold with the Company, and summaries of their
business experience. Executive officers are elected by, and serve at the
discretion of the Board of Directors. The executive officers of the Company are
as follows:
Robert M. Hartnett, age 48, became Chief Executive Officer and a director
of the Company in February 1998, and he became President and Chairman of the
Board of the Company in May 1998. Mr. Hartnett has also served as Vice
President-Eastern Zone of the General Partner of Bagel Partners since December
1997. From March 1996 to February 1998, Mr. Hartnett served as President and
Chief Executive Officer of one of the Company's former area developers. From
August 1992 until March 1996, Mr. Hartnett was Chief Executive Officer of R&A
Foods, L.L.C., an area developer of Boston Chicken.
Paul J. B. Murphy III, age 45, became Executive Vice President - Operations
of the Company in March 1998. From December 1997 to March 1998, Mr. Murphy
served as Senior Vice President - Operations of the Company and from July 1996
until December 1997, he was Chief Operating Officer of one of the Company's
former area developers. Prior to that time, he was Director of Operations of
R&A Foods, L.L.C., an area developer
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of Boston Chicken, from August 1992 until July 1996. Before that, Mr. Murphy
spent 11 years with S&A Restaurants, owner and operator of Steak & Ale and
Bennigans restaurants. In his most recent position, he was an Area Manager
responsible for Bennigans restaurants in Texas and New Mexico.
Gail A. Lozoff, age 49, became Chief Marketing Officer of the Company in
March 1998 and has been a director of the Company since April 1995. From
October 1997 until March 1998, Ms. Lozoff served as Chief Concept Officer of the
Company. From September 1996 until October 1997, Ms. Lozoff served as a Vice
President of the Company and from April 1995 until September 1996, she served as
Vice President-Design and Merchandising of the Company. Prior to that time, Ms.
Lozoff was President and Chief Executive Officer of Bagel & Bagel, Inc. from May
1992 until 1995.
Paul A. Strasen, age 43, has been a Senior Vice President of the Company
since February 1997 and has been General Counsel of the Company since April
1995. Mr. Strasen has also served as a Vice President of the General Partner of
Bagel Partners since December 1997 and was a Senior Vice President of Boston
Chicken from May 1997 until December 1997. From April 1995 to February 1997, he
was a Vice President of the Company. Prior to that time, he was a partner at
the Chicago law firm of Bell, Boyd & Lloyd from 1988 to April 1995.
Paula E. Manley, age 46, became Chief Financial Officer of the Company in
April 1999. From February 1998 to April 1999, she was Vice President -
Operations Finance, of the Company. From October 1996 to January 1998, Ms.
Manley was Chief Financial Officer of one of the Company's former area
developers. Prior to that time, Ms. Manley served as Real Estate Manager for
the Franchise Division of Burger King Corp. from October 1994 to October 1996
and as Controller of that division from January 1990 to October 1994.
ITEM 2. PROPERTIES
The Company leases its support center facility (containing its principal
executive offices and test bakery) in Golden, Colorado, which consists of
approximately 46,400 square feet (and certain common areas, including parking
areas). The Company also leases a 54,640 square-foot dough production facility
in Whittier, California, and the Company and its subsidiaries lease sites for
stores and commissaries.
Stores and commissaries leased by the Company are typically leased under
"triple net" leases that require the lessee to pay its proportionate share of
real estate taxes, maintenance costs and insurance premiums. In some cases,
store leases require not only base rent but also percentage rent based on sales
in excess of specified amounts. Generally, the Company's store leases have
initial terms of five years with options to renew for two or three additional
five-year periods at market rates.
In some cases, the Company remains legally obligated on leases for stores
or commissaries that have been closed, either because the Company has assigned
its rights under the lease without termination of the lease or because the
Company has subleased such sites. As of March 17, 2000 the Company had entered
into 12 such lease assignments and 18 such subleases.
The Company also subleases sites for certain stores from Boston Chicken.
As of March 17, 2000, the Company was a sublessee of thirteen sites from Boston
Chicken. As of such date Boston Chicken had not assumed or rejected any of the
prime leases covering such sites in its Chapter 11 bankruptcy proceeding.
ITEM 3. LEGAL PROCEEDINGS
The Company, like others in the food service business, is from time to time
the subject of complaints, threat letters or litigation from customers alleging
illness, injury, or other food quality, health (including food-borne illness
claims), or operational concerns. Claims relating to foreign objects in food,
food-borne illness or operating issues are common in the food service industry,
and a number of such claims may exist at any given time. Adverse publicity
resulting from such allegations may materially adversely affect the Company or
its brands, regardless of whether such allegations are valid or whether the
Company is liable. In addition, the Company encounters complaints and
allegations from former employees or others from time to time, as well as other
matters which are common for businesses such as the Company. The Company does
not believe that any such matters of which it is
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 7, 2000, the Company's common stock began trading on the Over-the-
Counter Bulletin Board. Prior to that time the Company's common stock was
traded on the Nasdaq SmallCap Market.
The following table sets forth the high and low sales prices of the common
stock during each of the Company's 1998 and 1999 fiscal quarters, as quoted on
the Nasdaq National Market or Nasdaq SmallCap Market, as reported by The Wall
Street Journal (Western Edition).
High Low
1998
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First Quarter $6.87500 $3.50000
Second Quarter 6.25000 3.25000
Third Quarter 4.25000 1.09400
Fourth Quarter 3.62500 0.93800
1999
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First Quarter $2.00000 $1.12500
Second Quarter 1.40625 0.96875
Third Quarter .90625 .62500
Fourth Quarter .87500 .31250
On March 17, 2000, the last reported sale price of the common stock on the
Over-the-Counter Bulletin Board was $0.28125 per share. As of March 17, 2000,
there were approximately 709 record holders of the common stock.
The Company has never paid cash dividends on its common stock and the Board
of Directors intends to continue a policy of retaining any earnings for use in
the Company's operations. The Company does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's current credit
facilities contain prohibitions on the payment of any cash dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial and store
data for the Company. This data should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
in Item 8 hereof and Management's Discussion and Analysis of Financial Condition
and Results of Operations included in Item 7 hereof. Income (loss) from
operations includes a $26.6 million write-off of intangible assets during the
1995 period, an $18.2 million charge associated primarily with the Transactions
during fiscal year 1997, and a $212.4 million charge for impairment of store
fixed assets, goodwill and other intangible assets during fiscal year 1998.
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Period from
March 24, 1995
(inception) Fiscal Year Ended
through --------------------------------------------------------
December 31, December 29, December 28, December 27, December 26,
1995 1996 1997 1998 1999
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(In thousands, except per share data and number of stores)
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Consolidated Statements of Operations Data:
Revenue:
Store revenue.............................. $ 25,685 $ 35,803 $ 28,436 $ 371,919 $375,549
Royalties and franchise-related fees....... 671 19,918 28,286 0 0
Interest income from franchisees........... 67 5,986 21,566 0 0
-------------- ------------ ------------ ------------ ------------
Total revenue............................ 26,423 61,707 78,288 371,919 375,549
Income (loss) from operations................ (43,152) 10,039 3,664 (234,885) (3,490)
Net income (loss)............................ (43,716) 5,707 (1,402) (203,927) (14,383)
Basic earnings (loss) per share.............. (7.87) 0.29 (0.04) (6.18) (0.43)
Diluted earnings (loss) per share............ (7.87) 0.27 (0.04) (6.18) (0.43)
Weighted average number of common
shares outstanding:
Basic.................................... 5,570 19,286 32,956 33,024 33,271
Diluted.................................. 5,570 21,023 32,956 33,024 33,271
Store Data (unaudited):
Systemwide net revenue....................... $ 26,410 $138,251 $302,995 $ 371,919 $375,549
Company-owned stores......................... 47 14 574 546 539
Area developer stores........................ 13 301 0 0 0
-------------- ------------ ------------ ------------ ------------
Number of stores at end of year.............. 60 315 574 546 539
============== ============ ============ ============ ============
Consolidated Balance Sheet Data:
Total assets................................. $ 50,299 $332,418 $643,128 $ 375,142 $361,260
Long-term debt............................... 58,875 - 149,000 143,000 -
Stockholders' equity (deficit)............... (20,994) 315,517 330,346 129,358 114,975
</TABLE>
10
<PAGE>
Predecessor Companies
The summary historical combined financial data shown below represent the
financial data of the Company's predecessors: Brackman Brothers, Inc.
("Brackman"), Bagel & Bagel, Inc. ("Bagel & Bagel") and Offerdahl's Bagel
Gourmet, Inc. ("Offerdahl's"). The financial data consists of the results of
operations of the predecessors from January 1, 1995 through their respective
dates of acquisition, which were March 24, 1995 for Brackman and Bagel & Bagel
and March 31, 1995 for Offerdahl's. The financial information is presented on
the historic cost basis of each of the predecessors. The basic and fully diluted
earnings (loss) per share and the weighted average number of common shares
outstanding during the period have not been presented because the Company
believes this information is not meaningful. Subsequent to the acquisition of
these predecessors, the Company sold substantially all of their assets.
Accordingly, the Company does not believe that such operating results are
meaningful or are indicative of future operating results of the Company.
Period from January 1, 1995
through March 31, 1995
(in thousands)
--------------
Combined Statements of Operations Data:
Total revenue $5,882
Income from operations 39
Net income (loss) (158)
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
From November 1995 until December 1997, stores were developed and operated
primarily by area developers of the Company. The area developers were funded in
part through convertible loans made by the Company. The Company believes that
its area developers substantially assisted the Company in accomplishing its goal
of rapidly developing stores and brand awareness in targeted local markets to
achieve market leadership. However, as a result of the Company's decision in
1997 to slow new store development, the Company believed its business would be
strengthened by focusing on a number of business objectives better accomplished
through a Company-controlled system.
In December 1997 the Company converted its loans to its area developers
into a majority equity interest in the area developers and four of the Company's
five area developers merged into Bagel Partners. As a result of the loan
conversions and the area developer merger (together with certain related
transactions, the "Transactions"), the Company owns approximately 78% of Bagel
Partners, with the remaining minority interest owned by Bagel Funding and
management of the former area developers.
While the Company believes it realized certain benefits from the
Transactions, the timing and extent of the benefits were not as anticipated by
management at the time of the Transactions. After operating and controlling the
Einstein Bros. Bagels and Noah's New York Bagels stores acquired in the
Transactions for one year, the Company, as part of its continual evaluation
process, assessed the recoverability of certain long-lived assets and determined
that they were impaired. The impairment was based primarily upon an evaluation
of realized operating results, which were below those anticipated upon
consummation of the Transactions, and revenue growth and cash flow projections
at that time. As a result, the Company recorded an impairment of intangible
assets and identifiable long-lived assets in 1998. See Note 13 of Notes to the
Company's Consolidated Financial Statements. In addition, the Company closed 43
underperforming stores acquired in the Transactions in 1998 and 14 such stores
in 1999.
As of March 17, 2000, 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. See "Item 1. Business
- -- Relationship with Boston Chicken."
From its inception in 1995 through March 2000, the Company received
accounting, administration, computer and communications services from Boston
Chicken pursuant to various fee for service agreements. In November 1998, the
Company began a program to develop a comprehensive business infrastructure to
permit the Company to perform such services independently of Boston Chicken.
The Company substantially completed the development of a separate business
infrastructure in March 2000, at which time it ceased to purchase services from
Boston Chicken.
In November 1999 the Company announced that it had retained Donaldson,
Lufkin & Jenrette to assist the Company in analyzing and evaluating possible
transactions for the principal purpose of restructuring its balance sheet, which
the Company's management believes is essential to ensure that the Company has
adequate working capital to operate its business and to enable it to capitalize
on the potential of its brands, Einstein Bros. Bagels and Noah's New York
Bagels. The Company is currently engaged in discussions with an ad hoc
committee of holders of its $125.0 million 7 1/4% convertible subordinated
debentures and representatives of Bagel Funding regarding possible transactions
that, if implemented, would have the effect of converting the debenture and the
interests of Bagel Funding into common stock of the Company. The Company
anticipates that any such restructuring transaction would result in substantial
dilution of the interest of existing equity holders, so that they would hold
little, if any, meaningful stake in the reorganized enterprise. The Company is
also engaged in discussions to obtain new bank financing to replace its existing
secured credit facility, which matures in October 2000. There can be no
assurance that the Company will be successful in implementing the contemplated
balance sheet restructuring or in obtaining new bank financing. See "Special
Note Regarding Forward-Looking Statements" on page 2.
12
<PAGE>
In the event the Company does not succeed in its restructuring efforts, the
Company's management believes that the Company will not be able to access
capital for new store development and other capital expenditures and that the
Company will have difficulty entering into a significant number of third-party
franchise or license agreements for the building of new stores using capital
resources of franchisees or licensees. The Company's management also believes
that, absent the restructuring, the Company will be unable to offer meaningful
equity incentives to attract and retain key management and that the Company will
be exposed to a significant risk of loss of key employees. In the event the
contemplated restructuring is not consummated, the Company believes that it will
be unable to obtain new bank financing and that it will not have sufficient
liquidity to satisfy its obligation to pay interest on its outstanding
debentures in June 2000. In addition, in the event the Company is unable to
modify the terms of its existing credit facility or obtain other sources of
capital, it is possible that the Company could be unable to satisfy other
obligations as they become due. See "Special Note Regarding Forward-Looking
Statements" on page 2. See also "Item 7. - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Results of Operations
As a result of the Transactions, the revenue generated by the Company as a
lender, franchisor and service provider to the area developers prior to the date
of the Transactions is eliminated in consolidation and replaced with store
revenue and operating expenses from and after the date of the Transactions. The
foregoing results are adjusted in the "minority interest" line item to reflect
the minority interests not owned by the Company. As a result of the
Transactions, the operating results for the 1998 fiscal year and later periods
will not be readily comparable to those for prior fiscal years.
Fiscal year ended December 26, 1999 compared to fiscal year ended December 27,
1998
Revenue. Total store net revenue increased 1.0% to $375.5 million in 1999
compared to $371.9 million in the prior year. The increase in store net revenue
was due to an increase in average net weekly per store sales offset by a
decrease in the average number of stores. Average net weekly per store sales
were $13,490 compared to $13,103 in the prior year. 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 the effect of
several Company initiatives, including menu changes, higher menu prices, closure
of underperforming stores, and focus on improved store level operations. These
Company initiatives were instituted earlier, and have to date proven more
effective, in the Company's Einstein Bros. Bagels concept than in its Noah's New
York Bagels concept, and they were offset by declines due to less marketing
spending and lower per store revenue generated by the Noah's New York Bagels
stores. The average number of stores in operation in 1999 was 540 compared to
551 in the prior year.
Comparable store sales increased 1.0% over fiscal 1998. Comparable store
sales represent average net weekly per store sales for stores open since the
beginning of the prior year. There were 517 stores in the comparable store
base.
Store Costs and Expenses. Cost of products sold as a percent of store net
revenue decreased to 33.0% in 1999 from 34.3% in the prior year. The decrease
was attributable to improved management of food costs. In addition, 1998
reflects a charge associated with the closing of a bagel production plant.
Salaries and benefits as a percent of store net revenue remained unchanged
at 31.3% in 1999 and the prior year.
Other controllable costs (such as utilities, repair and maintenance, and
supplies) as a percent of store net revenue increased to 8.2% in 1999 from 7.9%
in the prior year. The increase was due primarily to an increase in credit card
fees, repair and maintenance charges, and utility costs.
Rent, occupancy and related costs as a percent of store net revenue
remained constant at 9.6% in 1999 and the prior year.
13
<PAGE>
Marketing expenses as a percent of store net revenue decreased to 2.4% in
1999 from 3.6% in the prior year. 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 net revenue increased to
15.4% in 1999 from 13.4% in the prior year.
Depreciation and amortization as a percent of store net revenue decreased
to 3.1% in 1999 from 5.5% in the prior year. The decrease was the result of the
charge taken in 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 decreased to 9.3% in 1999 from 10.1% in the prior year. The decrease
was due to a prior year reduction in force and an associated one-time charge of
$2.3 million for severance offset by a one-time charge of $1.6 million related
to store and commissary closures and a one-time charge of $0.6 million related
to the settlement of stockholder litigation in 1999.
Non-Store Depreciation and Amortization. Non-store depreciation and
amortization (excluding goodwill amortization) as a percent of total revenue
remained relatively constant at 0.9% in 1999 compared to 1.0% in the prior year.
Goodwill amortization as a percent of total revenue also remained relatively
constant at 3.1% in 1999 compared to 2.9% in the prior year. The net changes
reflect an increase due to shortened 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 1998.
Other Expense. The Company incurred other expense of $11.9 million in 1999
compared to $14.9 million in the prior year. The decrease was due to a $3.4
million prior year charge associated with the write-off of certain notes
receivable in 1998.
Minority Interest. The minority interest in losses of Bagel Partners was
$1.1 million in 1999, compared to $46.1 million in the prior year. This
decrease was due to improved financial performance.
Income Taxes. The Company had a $0.1 million income tax expense in 1999,
consisting of state and local taxes.
Fiscal year ended December 27, 1998 compared to fiscal year ended December 28,
1997
The Company's results of operations for fiscal year ended December 27, 1998
reflect the Company's first full year of operations as the majority owner and
operator of stores systemwide.
Revenue. Total systemwide net revenue increased 22.7% to $371.9 million in
1998 compared to $303.0 million in the prior year. The increase in systemwide
net revenue was due to an increase in the average number of stores and average
net weekly per store sales. The average number of stores in operation was 551
compared to 458 in the prior year. Average net weekly per store sales were
$13,103 compared to $12,980 in the prior year. 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
Company initiatives, including a new lunch menu, higher menu prices, closure of
underperforming stores, and focus on improved store level operations. These
Company initiatives were instituted earlier, and have to date proven more
effective, in the Company's Einstein Bros. Bagels concept than in its Noah's New
York Bagels concept, and they were offset by declines due to less marketing
spending and lower per store revenue generated by the Noah's New York Bagels
stores.
The increase in Company store net revenue along with the decline in
royalties and franchise-related fees was due to an increase in average number of
Company stores as a result of the Transactions.
14
<PAGE>
Store Costs and Expenses. Total store costs and expenses increased to
$342.5 million in 1998 compared to $29.1 million in the prior year, due to an
increase in average number of Company stores as a result of the Transactions.
While line by line comparisons may not be meaningful as a result of the
Transactions, the Company believes that overall store performance improved in
1998, compared to the performance of the stores in 1997 following the
Transactions. This improvement was illustrated by the increase in average net
weekly per store sales, mentioned above, in addition to the positive margin
generated from store revenue less store costs and expenses compared to the
negative margin generated in the prior year. However, the improvement in store
level revenue growth and cash flow did not meet the Company's expectations at
the time of the Transactions.
Salaries, Benefits, General and Administrative. Salaries, benefits,
general and administrative expenses increased to $37.6 million compared to $27.9
million in the prior year, due primarily to an increase in the number of company
employees as a result of the Transactions. Salaries, benefits, general and
administrative expenses previously paid by the Company's area developers are now
reflected in the Company's consolidated financial statements. Salaries,
benefits, general and administrative expenses include $2.3 million for severance
charges incurred in 1998 in connection with the elimination of certain
positions, primarily at the Company's support center.
Impairment of Long-Lived Assets. In 1998, as part of the Company's ongoing
evaluation of long-lived assets, management made an assessment of the
recoverability of certain long-lived assets. As a result of such assessment,
the Company recorded an impairment of intangible assets and identifiable long-
lived assets aggregating $212.4 million in 1998, consisting of the following
amounts: $125.5 million - goodwill, $20.4 million - trademarks and copyrights,
$3.7 million - capitalized recipes and $62.8 million - property and equipment.
See Note 13 of Notes to the Company's Consolidated Financial Statements.
In 1997 the Company recognized an impairment loss on various long-lived
assets of $10.8 million, resulting primarily from the closure of a bagel dough
production facility and the conversion to a Company-controlled system. The
assets subject to the impairment loss had a net book value of $11.6 million
before the impairment loss.
Useful Lives of Long-Lived Assets. In 1998, as part of the Company's
ongoing evaluation of long-lived assets, management evaluated the useful lives
of goodwill and trademarks. The evaluation was made after the Company had
operated and controlled the Einstein Bros. Bagels and Noah's New York Bagels
stores acquired in the Transactions for a period of one year. Based primarily
upon the assessment of realized operating results, which were below those
anticipated upon consummation of the Transactions, and revenue growth and cash
flow projections at that time, the Company concluded that 20 years would be a
more accurate estimate of useful lives for goodwill and trademarks than the 35-
year and 30-year periods previously used for goodwill and trademarks,
respectively. The new useful life of 20 years is effective on a prospective
basis beginning in 1999. See Note 3 of Notes to the Company's Consolidated
Financial Statements.
Other Expense. The Company incurred other expense of $14.9 million in
1998 compared to $4.1 million in the prior year, due primarily to increased
interest expense from the Company's outstanding subordinated debt being
outstanding for the entire year and a higher average amount of bank facility
debt, together with the write-off of $3.4 million notes receivable from a
stockholder.
Minority Interest. The minority interest in losses of Bagel Partners was
$46.1 million in 1998, compared to $4.0 million in the prior year. This
increase was due to greater losses incurred in the current year.
Income Taxes. The Company had a $0.2 million income tax expense in 1998,
consisting of state and local taxes.
15
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of capital have been from issuances of equity
and debt securities, borrowings under the Company's revolving credit facility
and internally generated cash from operations. In 1999, $6.8 million of cash
was provided from operations, compared to $12.5 million of cash used in
operations in 1998. The increase in cash from operations was a result of
increased revenues and store margins and decreased overhead expenses. Cash used
in operations in 1998 totaled $12.5 million compared to cash provided from
operations of $27.7 million in 1997. The decrease in cash from operations was
due to the Transactions, because cash previously used in area developer
operations is now used in Company operations.
In 1999, $7.0 million of net cash was provided from financing activities,
resulting from net borrowings under the Company's secured credit facility. As
of December 26, 1999, the Company had $2.7 million in cash and cash equivalents
and had outstanding an $18.0 million term loan and an $18.6 million revolving
loan under the Company's secured credit facility with Bank of America, N.A. and
two other lenders. The bank credit facility consists of a term loan facility
(originally in the amount of $30.0 million) and a revolving credit facility
which provides for borrowings of up to $26.0 million through April 30, 2000 and
up to $25.0 million thereafter through maturity. The bank credit facility
contains financial covenants that require the Company to maintain minimum
average weekly net sales levels and to comply with ratios of system cash flow to
senior indebtedness and pro forma fixed charges. See Note 7 of Notes to the
Company's Consolidated Financial Statements.
In 1998, $0.4 million of net cash was used in financing activities,
resulting from repayments under the Company's term loan facility and borrowings
under the Company's revolving credit facility. As of December 27, 1998, the
Company had $3.8 million in cash and cash equivalents and had outstanding a
$24.0 million term loan and a $5.6 million revolving loan under the Company's
credit facility.
Cash provided from financing activities totaled $158.7 million in 1997. In
May 1997, the Company completed a private offering of $125.0 million principal
amount of 7 1/4% convertible subordinated debentures due 2004. As of December
28, 1997, the Company had $34.1 million available in cash and cash equivalents.
In 1999, the Company's primary uses of capital, other than providing
working capital for normal operating expenses, consisted of satisfaction of
current liabilities, expenditures for development of business infrastructure and
systems, expenditures related to building and opening new stores and
retrofitting existing stores, and payment of principal and interest on
outstanding indebtedness.
In 1998, the Company's primary uses of capital, other than providing
working capital for normal operating expenses, consisted of satisfaction of
current liabilities (including liabilities incurred in closing stores and
severance obligations incurred in reducing overhead), expenditures related to
building and opening new stores and retrofitting existing stores, and payment of
principal and interest on outstanding indebtedness.
Prior to 1998, the Company's primary use of capital consisted of providing
partial financing to its area developers for use in rapid store development and
working capital needs. Net loan advances to area developers were $190.0 million
in 1997 (consisting of $359.2 million of loan advances, net of $169.2 million of
loan repayments). The majority of the loan advance and repayment activity
reflects the revolving nature of the loans; that is, amounts were drawn and
repaid on a regular basis to optimize cash management.
In addition to providing funding to its area developers, the Company's
capital requirements in 1997 consisted of store acquisition and development,
development of its corporate infrastructure support systemwide expansion, and
investments in food production facilities. In 1997, the Company expended $8.2
million on its corporate infrastructure and investments in food production
facilities. The Company generated $3.6 million in 1997 from the sale of stores
to newly formed area developers. There were no material gains or losses
recognized as a result of these sales.
The Company's primary uses of capital in 2000, other than providing working
capital for normal operating expenses, are expected to consist primarily of
satisfaction of current liabilities, expenditures related to the
16
<PAGE>
development of business infrastructure and systems, including the acquisition of
hardware, software licenses, maintenance and support for enterprise and store
systems, expenditures related to refurbishing existing stores, payment of
professional fees in connection with the Company's capital restructuring
project, and payment of principal and interest on outstanding indebtedness.
The Company's primary sources of capital in 2000 are expected to consist
primarily of internally generated cash from operations and borrowings under the
Company's credit facility. In the event the Company is unable to consummate a
capital restructuring the Company believes that it will be unable to obtain new
bank financing to replace its existing credit facility and that it will not have
sufficient liquidity to satisfy its obligation to pay interest on its
outstanding debentures in June 2000. In addition, in the event the Company is
unable to modify the terms of its existing credit facility or obtain other
sources of capital, it is possible that the Company could be unable to satisfy
other obligations as they become due. See "Special Note Regarding Forward-
Looking Statements" on page 2. See also Note 2 of Notes to the Company's
Consolidated Financial Statements.
Seasonality
Historically, the Company has experienced lower average store revenue
during November, December and January.
Impact of Inflation
The Company believes that inflation has not had a material impact on its
results of operations to date. Substantial increases in the cost of labor,
employee benefits, food and other operating expenses could adversely affect
results of store operations.
ITEM 7A: 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 December 26, 1999, $36.6 million of floating-rate debt was exposed to
changes in interest rates compared to $29.6 million in the prior year. 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 December 26, 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.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
The following table shows quarterly unaudited financial results for fiscal
years 1999 and 1998. The first quarter consists of four four-week periods and
the second, third and fourth quarters consist of three four-week periods. The
fourth quarter of 1998 Loss from Operations includes a $212.4 million charge for
impairment of store fixed assets, goodwill and other intangibles. See Note 13
of Notes to the Company's Consolidated Financial Statements.
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- -------- -------- ----------
1999:
-----
Revenue................. $112,353 $87,296 $88,363 $ 87,537
Loss from Operations.... (2,934) (31) (45) (480)
Net Loss................ (5,702) (2,733) (2,803) (3,145)
Basic Loss per Share.... (0.17) (0.08) (0.08) (0.10)
Diluted Loss per Share.. (0.17) (0.08) (0.08) (0.10)
1998:
-----
Revenue................. $110,475 $87,899 $87,325 $ 86,220
Loss from Operations.... (12,661) (3,855) (2,636) (215,733)
Net Loss................ (13,417) (8,949) (4,433) (177,128)
Basic Loss per Share.... (0.41) (0.27) (0.13) (5.32)
Diluted Loss per Share.. (0.41) (0.27) (0.13) (5.32)
18
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants........................................................... 20
Consolidated Financial Statements:
Consolidated Balance Sheets at December 27, 1998 and December 26, 1999.......................... 21
Consolidated Statements of Operations for the fiscal years ended December 28, 1997,
December 27, 1998, and December 26, 1999........................................................ 22
Consolidated Statements of Stockholders' Equity for the fiscal years ended
December 28, 1997, December 27, 1998 and December 26, 1999...................................... 23
Consolidated Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 27, 1998 and December 26, 1999......................................................... 24
Notes to Consolidated Financial Statements...................................................... 25
Report of Independent Public Accountants on Schedule II............................................ 39
Supplemental Schedule II........................................................................... 40
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited the accompanying consolidated balance sheets of
Einstein/Noah Bagel Corp. (a Delaware corporation) and subsidiaries as of
December 27, 1998 and December 26, 1999, and the related consolidated statements
of operations, stockholders' equity and cash flows for the fiscal years ended
December 28, 1997, December 27, 1998 and December 26, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Einstein/Noah Bagel Corp.
and subsidiaries as of December 27, 1998 and December 26, 1999, and the results
of their operations and their cash flows for the fiscal years ended December 28,
1997, December 27, 1998 and December 26, 1999, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company may not generate sufficient liquidity to meet
its financial obligations as they become due, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 23, 2000
20
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 27, December 26,
1998 1999
----------------- -----------------
<S> <C> <C>
ASSETS
- ------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents.............................................. $ 3,766 $ 2,708
Accounts receivable, net............................................... 1,716 1,289
Inventories............................................................ 9,672 9,456
Prepaid expenses and other current assets.............................. 1,699 1,327
----------------- -----------------
Total current assets.................................................. 16,853 14,780
Property and Equipment, net............................................. 122,403 123,736
Goodwill, net........................................................... 223,482 211,848
Trademarks, net......................................................... 2,065 2,052
Recipes, net............................................................ 2,670 2,358
Other Assets, net....................................................... 7,669 6,486
----------------- -----------------
Total assets.......................................................... $ 375,142 $ 361,260
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------
Current Liabilities:
Accounts payable....................................................... $ 17,804 $ 15,344
Accrued expenses....................................................... 23,284 20,699
Revolving credit facility.............................................. - 18,600
Current portion of senior term loan.................................... 6,000 18,000
Convertible subordinated debentures.................................... - 125,000
----------------- -----------------
Total current liabilities............................................. 47,088 197,643
Revolving Credit Facility............................................... 5,625 -
Long-Term Portion of Senior Term Loan................................... 18,000 -
Convertible Subordinated Debentures..................................... 125,000 -
Other Noncurrent Liabilities............................................ 16,140 15,798
Minority Interest....................................................... 33,931 32,844
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;
34,083,681 shares issued in 1998 and 1999............................ 341 341
Additional paid-in capital............................................. 377,616 377,616
Treasury Stock, at cost (813,146 shares in 1998 and 1999).............. (5,261) (5,261)
Accumulated deficit.................................................... (243,338) (257,721)
----------------- -----------------
Total stockholders' equity........................................... 129,358 114,975
----------------- -----------------
Total liabilities and stockholders' equity........................... $ 375,142 $ 361,260
================= =================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
21
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
December 28, December 27, December 26,
1997 1998 1999
------------- ------------------ -------------
<S> <C> <C> <C>
Revenue:
Store revenue...................................... $28,436 $ 371,919 $375,549
Royalties and franchise-related fees............... 49,852 - -
------- --------- --------
Total revenue................................... 78,288 371,919 375,549
Costs and Expenses:
Store:
Cost of products sold........................... 9,479 127,573 124,071
Salaries and benefits........................... 10,734 116,226 117,499
Other controllable costs........................ 2,404 29,392 30,664
Rent, occupancy and related costs............... 4,680 35,603 36,222
Marketing expenses.............................. 126 13,291 9,138
Depreciation and amortization................... 1,683 20,411 11,639
------- --------- --------
Total store costs and expenses................ 29,106 342,496 329,233
Non-Store:
Salaries, benefits, general and administrative.. 27,865 37,571 34,911
Impairment of long-lived assets................. 10,835 212,371 -
Depreciation and amortization
(excluding goodwill amortization)............. 4,154 3,588 3,262
Goodwill amortization........................... 2,664 10,778 11,633
------- --------- --------
Total non-store costs and expenses............ 45,518 264,308 49,806
------- --------- --------
Total costs and expenses...................... 74,624 606,804 379,039
------- --------- --------
Income (Loss) from Operations........................ 3,664 (234,885) (3,490)
Other Income (Expense):
Interest income.................................... 1,969 282 -
Interest expense................................... (6,098) (11,811) (11,877)
Other.............................................. - (3,409) 3
------- --------- --------
Total other income (expense).................... (4,129) (14,938) (11,874)
------- --------- --------
Loss before Income Taxes and Minority Interest....... (465) (249,823) (15,364)
Income Taxes......................................... 4,973 221 106
Minority Interest in Loss of Subsidiary.............. (4,036) (46,117) (1,087)
------- --------- --------
Net Loss............................................. $(1,402) $(203,927) $(14,383)
======= ========= ========
Basic Loss per Share................................. $(0.04) $(6.18) $(0.43)
======= ========= ========
Diluted Loss per Share............................... $(0.04) $(6.18) $(0.43)
======= ========= ========
Weighted Average Number of Common
Shares Outstanding:
Basic........................................... 32,956 33,024 33,271
======= ========= ========
Diluted......................................... 32,956 33,024 33,271
======= ========= ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
22
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
December 28, December 27, December 26,
1997 1998 1999
------------- ------------------ -------------
<S> <C> <C> <C>
Common Stock
Balance at beginning of year.................................. $ 323 $ 333 $ 341
Issuance of common stock...................................... 2 8 -
Exercise of stock options and warrants........................ 8 - -
-------- --------- ---------
Balance at end of year........................................ $ 333 $ 341 $ 341
======== ========= =========
Additional Paid-in Capital
Balance at beginning of year.................................. $353,203 $ 374,685 $ 377,616
Issuance of common stock, net of offering costs of
$229 in 1997, $- in 1998 and 1999.......................... 5,369 2,929 -
Exercise of stock options and warrants, including income tax
benefits of $1,597 in 1997................................. 6,694 2 -
Issuance of options and warrants.............................. 1,619 - -
Options issued in connection with acquisitions................ 7,800 - -
-------- --------- ---------
Balance at end of year........................................ $374,685 $ 377,616 $ 377,616
======== ========= =========
Treasury Stock
Balance at beginning of year.................................. $ - $ (5,261) $ (5,261)
Purchase of 813,146 shares in 1997............................ (5,261) - -
-------- --------- ---------
Balance at end of year........................................ $ (5,261) $ (5,261) $ (5,261)
======== ========= =========
Accumulated Deficit
Balance at beginning of year.................................. $(38,009) $ (39,411) $(243,338)
Net loss...................................................... (1,402) (203,927) (14,383)
-------- --------- ---------
Balance at end of year........................................ $(39,411) $(243,338) $(257,721)
======== ========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
23
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
December 28, December 27, December 26,
1997 1998 1999
------------------ ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................. $ (1,402) $(203,927) $ (14,383)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 8,502 34,777 26,534
Minority interest..................................... (4,036) (46,117) (1,087)
Provision for write-down of assets.................... 12,773 217,104 648
Warrant and option expense............................ 1,619 - -
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable................................. 5,662 (123) 427
Accounts payable and accrued expenses............... (11,377) (8,456) (5,575)
Deferred franchise revenue.......................... (1,030) - -
Other assets and liabilities........................ 16,950 (5,724) 254
--------- --------- ---------
Net cash provided by (used in) operating
activities..................................... 27,661 (12,466) 6,818
--------- --------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment....................... (11,189) (17,430) (13,515)
Proceeds from sale of assets............................. 3,600 - -
Purchase of other assets................................. (5,381) (111) (1,336)
Issuance of notes receivable............................. (359,218) - -
Repayment of notes receivable............................ 169,223 - -
--------- --------- ---------
Net cash used in investing activities................. (202,965) (17,541) (14,851)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock................... 10,475 - -
Increase in deferred financing costs..................... (6,764) - -
Proceeds from term loan.................................. 30,000 - -
Borrowings under credit facility......................... 62,200 68,357 172,875
Repayments under credit facility......................... (62,200) (68,732) (165,900)
Proceeds from convertible debt........................... 125,000 - -
--------- --------- ---------
Net cash provided by (used in) financing activities.. 158,711 (375) 6,975
--------- --------- ---------
Net Decrease in Cash and Cash Equivalents.................. (16,593) (30,382) (1,058)
Cash and Cash Equivalents, beginning of year............... 50,741 34,148 3,766
--------- --------- ---------
Cash and Cash Equivalents, end of year..................... $ 34,148 $ 3,766 $ 2,708
========= ========= =========
Supplemental Cash Flow Information:
Interest Paid............................................ $ 5,098 $ 11,818 $ 11,855
========= ========= =========
Income Taxes Paid........................................ $ 640 $ 220 $ 138
========= ========= =========
Supplemental Schedule of Non-Cash Activities:
Conversion of notes receivable into equity interests
and assets............................................ $ 332,646 $ - $ -
========= ========= =========
Issuance of debt in connection with purchase
of equipment and other assets......................... $ - $ 1,682 $ -
========= ========= =========
Tax benefit of stock options exercised................... $ 1,597 $ - $ -
========= ========= =========
Options issued in connection with acquisitions........... $ 7,800 $ - $ -
========= ========= =========
Issuance of common stock in connection with acquisition.. $ - $ 2,922 $ -
========= ========= ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
24
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Einstein/Noah Bagel Corp. and its subsidiaries (the "Company") operate
specialty retail bagel stores in the United States, primarily under the Einstein
Bros. Bagels and Noah's New York Bagels brand names. As of December 26, 1999,
there were 539 Company stores in operation.
On October 5, 1998, Boston Chicken, Inc. ("Boston Chicken") the owner of
approximately 51% of the outstanding shares of common stock of the Company,
filed a voluntary petition for protection under Chapter 11 of the Federal
Bankruptcy Code. On February 17, 2000 Boston Chicken filed its second amended
plan in the United States Bankruptcy Court for the District of Arizona. The
plan provides for the sale of substantially all of the assets of Boston Chicken
and certain affiliated debtors to a wholly-owned subsidiary of McDonald's
Corporation. The stock of the Company owned by Boston Chicken would not be
included in the sale, but rather, upon the effectiveness of the plan, would be
held by a trust to be established under the plan for the benefit of Boston
Chicken's creditors. A preliminary hearing on the confirmation of the plan is
scheduled for April 4, 2000.
2. Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 7, the
Company has a secured credit facility providing for borrowings through October
31, 2000. The credit facility contains covenants that, among other things,
require that the Company maintain certain minimum average weekly net sales
levels and comply with ratios of system cash flow to senior indebtedness and pro
forma fixed charges. In addition, the amount that may be incurred under the
Company's revolving loan is limited by a ratio of senior indebtedness to system
cash flow that steps down from 1.75:1.00 to 1.50:1.00 when the Company reports
the results of its first fiscal quarter in 2000. As a result of such incurrence
test, and based upon current operating results, the Company does not expect that
it will have full access to such revolving loan in the second fiscal quarter of
2000. In addition, the Company does not expect that it will be able to
refinance the credit facility when it becomes due in October 2000 absent a
capital restructuring, as described below.
The Company is also the obligor on $125.0 million of 7 1/4% convertible
subordinated debentures due June 1, 2004, with interest payable semi-annually on
June 1 and December 1 of each year, as described in Note 7. Based on current
operating results and availability under its credit facility, the Company does
not expect to have sufficient liquidity to make the semi-annual interest payment
that is due in June 2000.
As discussed in Note 10, Bagel Store Development Funding, L.L.C. ("Bagel
Funding") has the right upon the occurrence of certain events to require
Einstein/Noah Bagel Partners, L.P. ("Bagel Partners") or the Company to redeem
Bagel Funding's minority interest in Bagel Partners at a formula price, which
was approximately $54.4 million at December 26, 1999. The Company does not
currently have sufficient cash to satisfy the redemption price. While the
Company could seek to satisfy the redemption price by delivering shares of its
common stock (subject to stockholder approval requirements), delivery of the
number of shares required to satisfy the redemption right in full, based on the
current trading price of the Company's common stock, would result in a change in
control (as defined in the indenture governing the outstanding debentures),
pursuant to which the Company would be required, as of 40 business days after
the occurrence of the change in control, to purchase for cash all or any part of
its outstanding debentures, at a price equal to the principal amount thereof,
plus accrued but unpaid interest, at the option of the debenture holder. The
Company does not currently have sufficient capital resources to purchase for
cash any material amount of the debentures.
The Company is currently in discussions with an ad hoc committee of its
debenture holders and representatives of Bagel Funding to restructure its
balance sheet. The Company is also engaged in discussions to obtain new bank
financing. Due to the uncertainties related to the foregoing matters, there
exists substantial doubt about the Company's ability to continue as a going
concern.
25
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
3. Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of Einstein/Noah Bagel Corp. and its
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year. The Company's fiscal year is the 52/53-week period ending on
the last Sunday in December, and normally consists of 13 four-week periods. The
first quarter consists of four periods and each of the remaining three quarters
consist of three periods.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash on
hand and on deposit and highly liquid instruments purchased with maturities of
three months or less.
Inventories. Inventories are stated at the lower of cost (first-in, first-
out) or market and consist of food, paper products and supplies.
Long-Lived Assets. The Company evaluates whether events and circumstances
have occurred that indicate revision to the remaining useful lives or the
remaining balances of long-lived assets may be appropriate. Such events and
circumstances include, but are not limited to, a change in business strategy or
a change in current and long-term projected operating performance. When factors
indicate that the carrying amount of an asset may not be recoverable, the
Company estimates the future cash flows expected to result from the use of such
asset and its eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, the Company will recognize an impairment loss equal to the
excess of the carrying amount over the fair value of the asset. See Note 13.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method with buildings
and improvements being depreciated over 12 to 30 years, leasehold improvements
being amortized over the lesser of their useful lives or their lease terms,
including option periods, furniture, fixtures and equipment being depreciated
over five to eight years and computer equipment being depreciated over three
years. The cost and accumulated depreciation for property and equipment sold,
retired or otherwise disposed of are relieved from the accounts, and resulting
gains or losses are reflected in income.
Property and equipment additions include acquisitions of buildings and
equipment, costs incurred in the development and construction of new stores, and
major improvements to existing stores. Expenditures for maintenance and repairs
are charged to expense as incurred. Pre-opening costs consist primarily of
salaries and other direct expenses incurred in connection with the set-up and
stocking of stores, employee training and general store management activities
incurred prior to the opening of new stores. Prior to 1999, pre-opening costs
were capitalized until the stores became operational and amortized over a one-
year period. Beginning in 1999, all pre-opening costs are expensed as incurred
in accordance with AICPA Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities".
Goodwill and Other Intangible Assets. Goodwill, trademarks and recipes
were amortized over 35, 30 and 10 years, respectively, through 1998. In 1998,
as part of the Company's ongoing evaluation of long-lived assets, management
evaluated the useful lives of goodwill and trademarks. The evaluation was made
after the Company had operated and controlled the Einstein Bros. Bagels and
Noah's New York Bagels stores acquired from its area developers for one year.
Based primarily upon the assessment of realized operating results, which were
below those anticipated upon consummation of that acquisition, and revenue
growth and cash flow projections at that time, the
26
<PAGE>
Company concluded that 20 years would be a more accurate estimate of useful
lives for goodwill and trademarks than the periods previously used. The new
useful life of 20 years is effective on a prospective basis beginning in 1999.
Deferred Financing Costs. Deferred financing costs are amortized over the
period of the related financing, which ranges from three to seven years.
Revenue Recognition. Revenue from Company stores is recognized in the
period during which related food and beverage products are sold. Royalties were
recognized in the same period that related franchise store revenue was
generated. Revenue derived from initial franchise fees and area development
fees were recognized when the franchise store opened. Real estate fees were
recognized as earned, and lease income was recognized over the life of the lease
on a straight-line basis. Interest income was recognized as earned. Pursuant
to Statement of Financial Accounting Standards No. 45, "Accounting for Franchise
Fee Revenue" ("SFAS No. 45"), commencing with the Company's announcement in
October 1997 to transition from a franchised to a Company-controlled system, the
Company ceased recognizing initial franchise and area development fees for the
opening of new stores. Upon consummation of the Company's conversion of its
loans to area developers into equity interests on December 5, 1997, revenue
recognized by the Company as lender, franchisor and service provider to the area
developers was eliminated in consolidation. The components of royalties and
franchise-related fees are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal Year Ended
December 28,
1997
-----------------
<S> <C>
Initial franchise and area development fees..... $ 9,920
Royalties....................................... 15,487
Real estate fees and lease income............... 2,375
Other........................................... 504
Interest Income................................. 21,566
-------
Total royalties and franchise related fees.. $49,852
=======
</TABLE>
Per Share Data. Basic earnings (loss) per share are computed by dividing
net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share are computed by dividing
net income (loss) by the weighted average number of common shares and dilutive
Company securities outstanding during the period.
The calculation of diluted earnings (loss) per share excludes outstanding
stock options and warrants, and shares of common stock underlying the Company's
7 1/4% convertible subordinated debentures due June 1, 2004 because of their
antidilutive effect.
Advertising Costs. Advertising costs are expensed in the period incurred.
Advertising expenses were $2.2 million, $13.3 million and $9.1 million in 1997,
1998 and 1999, respectively. See Note 9.
Employee Stock Options. The Company accounts for its employee stock
options in accordance with the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25. Required pro forma disclosures of compensation
expense determined under the fair value method of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), are presented in Note 11.
27
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Employee Benefit Plan. The Company has a 401(k) plan to which the Company
made no contribution in 1997 or 1998. In 1999, the Company contributed an
amount equal to 10% of the contributions of each eligible employee until such
employee contributions reached 6% of such employee's compensation. In 2000,
the Company will contribute an amount equal to at least 25% of the contributions
of each eligible employee until such employee contributions reach 6% of such
employee's compensation.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications have been made to the 1997
amounts to conform with the 1998 presentation.
4. Supplemental Consolidated Financial Statement Data
Accounts receivable are net of an allowance for doubtful accounts of $0.8
million as of December 27, 1998 and $0.2 million as of December 26, 1999.
<TABLE>
<CAPTION>
December 27, December 26,
1998 1999
------------ ------------
<S> <C> <C>
Property and equipment consists of (in thousands of dollars):
Leasehold improvements..................................... $ 73,790 $ 76,266
Furniture, fixtures and equipment.......................... 76,339 87,074
-------- --------
150,129 163,340
Less: Accumulated depreciation and amortization........... (27,726) (39,604)
-------- --------
Total property and equipment, net...................... $122,403 $123,736
======== ========
</TABLE>
Included in furniture, fixtures and equipment are assets leased to others
of $13.5 million (before accumulated depreciation of approximately $1.2 million
as of December 27, 1998 and approximately $1.7 million as of December 26, 1999).
<TABLE>
<CAPTION>
December 27, December 26,
1998 1999
----------- ------------
<S> <C> <C>
Accumulated amortization of intangibles consists
of the following (in thousands of dollars):
Goodwill....................................................... $10,980 $ 22,613
Trademarks..................................................... 99 204
Recipes........................................................ 376 689
-------- --------
Total accumulated amortization............................. $11,455 $ 23,506
======== ========
</TABLE>
28
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
December 27, December 26,
1998 1999
------------ ------------
<S> <C> <C>
Accrued expenses consist of (in thousands of dollars):
Accrued payroll and related benefits................ $ 8,926 $ 9,977
Accrued interest.................................... 892 914
Accrued store closure costs......................... 3,156 698
Accrued vendor loss contracts....................... 820 90
Accrued real property tax........................... 3,314 3,931
Accrued other....................................... 6,176 5,089
------- -------
Total accrued expenses.......................... $23,284 $20,699
======= =======
</TABLE>
5. Acquisitions
In December 1997, the Company converted its outstanding loans to its area
developers into a majority equity interest in the area developers and purchased
additional area developer equity interests by exercising its option under each
of the loan agreements to purchase the amount of equity available under the
unfunded portion of the area developer loans, and the area developers merged
into Bagel Partners. The Company owns an approximately 78% interest in Bagel
Partners. The acquisitions have been accounted for as a purchase and,
accordingly, the purchase price was allocated to assets (both tangible and
intangible) and liabilities to third parties based upon an estimate of fair
values at the date of acquisition. The following is a summary of each area
developer acquisition (in thousands of dollars):
<TABLE>
<CAPTION>
Loan Options Liabilities
Area Developer Converted Exercised Assumed Goodwill
-------------- --------- --------- ----------- --------
<S> <C> <C> <C> <C>
Colonial Bagels, L.P. $46,000 $ - $16,120 $56,252
Great Lakes Bagels, L.P. 87,812 8,688 19,519 76,596
Gulfstream Bagels, L.P. 69,927 16,373 6,743 54,535
Noah's Pacific, L.L.C. 76,862 3,738 19,785 61,591
Sunbelt Bagels, L.L.C. 50,200 - 5,426 47,356
</TABLE>
The goodwill resulting from each acquisition was amortized over a 35-year
period through 1998; thereafter, goodwill is being amortized over 20 years. See
Note 13. In connection with the acquisitions, the Company committed to issue
options to purchase 2,516,829 shares of the Company's common stock in exchange
for options to purchase units of limited partnership interest in Bagel Partners
at an exchange rate of one share of common stock for every 15 units of Bagel
Partners limited partnership interest. Such options were granted in January
1998 at an exercise price of $6.00 per share, with an estimated fair value of
$7.8 million.
The financial statements include the results of operations for the acquired
entities from their dates of acquisition. The following represents the
unaudited pro forma results of operations as if all of the purchase transactions
described above had occurred on December 28, 1997 (in thousands of dollars,
except per share data):
December 28,
1997
------------
Revenue $ 307,035
Net loss (83,729)
Basic loss per share (2.54)
Diluted loss per share (2.54)
29
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - cotinued
The pro forma information given above does not purport to be indicative of
the results that actually would have been reported if the transactions had
occurred at the beginning of the period presented and is not intended to be a
projection of future results or trends.
6. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents. The carrying value approximates fair value due
to the length of maturity of the investments.
Convertible Debt. The estimated fair value of convertible debt, including
the conversion option, is based on the quoted market price of the convertible
debt.
Revolving Credit Facility. The estimated fair value of the revolving
credit facility is based on the discounted value of future payments using the
Company's current borrowing rate.
Senior Term Loan. The estimated fair value of the senior term loan is
based on the discounted value of future payments using the Company's current
borrowing rate.
The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):
December 27, 1998 December 26, 1999
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------- --------- -------
Cash and cash equivalents.. $ 3,766 $ 3,766 $ 2,708 $ 2,708
Convertible debt........... 125,000 58,750 125,000 65,625
Revolving credit facility.. 5,625 5,625 18,600 18,600
Senior term loan........... 24,000 24,000 18,000 18,000
7. Debt
The Company has a secured credit facility, consisting of a term loan
facility (originally in the amount of $30.0 million) and a revolving credit
facility, providing for borrowings through October 31, 2000. The revolving
credit facility provides for borrowings of up to $26.0 million through April 30,
2000 and up to $25.0 million thereafter through maturity. Borrowings under the
credit facility bear interest at the lenders' reference rate (the "Reference
Rate") plus applicable margin. In addition, a commitment fee of 0.50% of the
average daily unused portion of the revolving credit facility is required. The
credit facility contains covenants that, among other things, restrict other
borrowings, prohibit cash dividends and require maintaining certain minimum
average weekly net sales levels and complying with ratios of system cash flow to
senior indebtedness and pro forma fixed charges. The credit facility is
collateralized by substantially all of the assets of the Company. As of
December 26, 1999, $18.0 million was outstanding under the term loan facility,
bearing an interest rate of 8.50%. The term loan facility requires principal
payments of $1.5 million on March 1, June 1, September 1 and December 1 of each
year, continuing through October 2000, at which time the outstanding balance is
due. As of December 26, 1999, the Company had $25.0 million available from its
revolving credit facility of which $18.6 million was outstanding.
In May 1997, the Company issued $125.0 million of 7 1/4% convertible
subordinated debentures due June 1, 2004 (the "Debentures"). Interest is
payable semi-annually on June 1 and December 1 of each year. The
30
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Debentures are convertible at any time prior to maturity into shares of the
Company's common stock at a conversion rate of $21.25 per share, subject to
adjustment under certain conditions. After June 1, 2000, the Debentures may be
redeemed at the option of the Company initially at 104.14% of their principal
amount and at declining prices thereafter, plus accrued interest. In addition,
the Company is required, as of 40 business days after the occurrence of a Change
in Control (as defined in the indenture related to the Debentures), to purchase
all or any part of any Debenture at the option of the Debenture holder.
As described in Note 2, the Company does not expect to have sufficient
liquidity to make the semiannual interest payment on the Debentures that is due
in June 2000. In such event, the principal amount of the Debentures would
become immediately due. Accordingly, the outstanding amount of the Debentures
has been presented as a current liability as of December 26, 1999.
8. Income Taxes
As of December 26, 1999, the Company had cumulative federal and state tax
operating loss carryforwards available to reduce future taxable income of
approximately $117.1 million that begin to expire in 2010.
The primary components of deferred tax assets and liabilities are as
follows (in thousands of dollars):
December 27, December 26,
1998 1999
------------- -------------
Deferred tax assets:
Accounts payable and accrued expenses.. $ 1,440 $ 1,979
Other noncurrent liabilities........... 3,154 608
Property and equipment................. 75,097 72,911
Intangible assets...................... - -
Net operating loss carryforwards....... 25,009 45,679
Other.................................. 14,972 14,599
-------- ---------
Total deferred tax assets.......... 119,672 135,776
Deferred tax liabilities:
Property and equipment................. - -
Intangible assets...................... (30,242) (29,841)
Other assets........................... (1,318) (1,318)
-------- ---------
Total deferred tax liabilities..... (31,560) (31,159)
-------- ---------
Net deferred tax assets............ 88,112 104,617
Valuation allowance.................... (88,112) (104,617)
-------- ---------
Net deferred tax assets................ $ - $ -
======== =========
Income tax expense consists of current state income taxes of $221,000 and
$106,000 for the years ended December 27, 1998 and December 26, 1999,
respectively. Income tax expense consisted of current federal income taxes of
$4,208,000 and current state income taxes of $765,000 for the year ended
December 28, 1997.
For the year ended December 28, 1997, the Company recognized income tax
benefits pertaining to the exercise of stock options of $1.6 million, which was
accounted for as a direct increase in additional paid-in capital and did not
reduce reported income tax expense. For the years ended December 27, 1998 and
December 26, 1999, the Company did not have any tax benefit from the exercise of
stock options. As a result of the utilization of
31
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FIANCIAL STATEMENTS - continued
deferred tax assets, during 1997 the Company recognized $2.9 million of the
change in the valuation allowance as a reduction of goodwill from prior
acquisitions. The Company did not utilize any such deferred tax assets during
1998 and 1999.
The difference between the Company's actual tax provision and the tax
provision that would result from applying the statutory federal income tax rate
to income before taxes and minority interest is attributable to the following
(in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
December 28, December 27, December 26,
1997 1998 1999
------------- ------------------ -------------
<S> <C> <C> <C>
Income tax benefit at statutory rate....... $ (163) $(87,438) $ (3,767)
State tax benefit, net of federal benefit.. (38) (9,858) (366)
Permanent difference related to goodwill... 1,138 1,124 69
Other permanent differences................ 57 100 92
Tax attributes of minority interest in
losses of subsidiary..................... 1,574 17,985 (12,427)
Change of valuation allowance.............. 2,405 78,308 16,505
------ -------- --------
Provision for income taxes................. $4,973 $ 221 $ 106
====== ======== ========
</TABLE>
The increase in the valuation allowance of $16.5 million from December 27,
1998 to December 26, 1999 is due to net operating losses created during 1999,
which may not be realizable.
9. National and Local Advertising Funds
Prior to the Company's acquisition of its area developers in December 1997
(see Note 5), the Company administered a National Advertising Fund and Local
Advertising Funds (the "Funds") that provided comprehensive advertising and
sales promotion support for stores. Contributions were made by all stores.
Consistent with SFAS No. 45, such funds were accounted for separately and were
not included in the financial statements of the Company because the Company
acted only as an agent for its franchisees in placing orders for advertising and
paying related invoices out of such accounts. Since the Company converted its
loans to its area developers, the Company no longer maintains the Funds.
10. Commitments and Contingencies
The Company leases sites for its stores, commissaries and office space.
Lease terms are generally five to ten years with two or three five-year renewal
options. Most of the leases contain escalation clauses and common area
maintenance charges. The Company leases certain equipment to a vendor of frozen
bagel dough pursuant to an operating lease.
The following is a schedule of future minimum rental payments that are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year as of December 26, 1999 (in thousands of
dollars):
32
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Minimum Net Minimum
Rental Sublease Rental
Payments Proceeds Payments
-------- -------- -----------
2000........ $ 28,271 $ 673 $ 27,598
2001........ 25,469 556 24,913
2002........ 20,672 444 20,228
2003........ 18,076 355 17,721
2004........ 16,882 288 16,594
Thereafter.. 40,600 636 39,964
-------- ------ --------
$149,970 $2,952 $147,018
======== ====== ========
Rental expense, net of sublease income, under operating leases was
approximately $3.7 million, $28.8 million and $27.8 million for fiscal 1997,
1998 and 1999, respectively.
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 Funding has invested a total of approximately $89.6 million,
representing an equity interest of approximately 22% in 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 of the highest of the two fiscal
quarters ending December 26, 1999, would be equal to approximately $54.4
million. 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.
11. Stockholders' Equity
Common Stock. In February 1997, the Company sold 231,023 shares of common
stock to one of its area developers for an aggregate purchase price of
$5,599,998.
In April 1998, the Company sold 750,000 shares of common stock to Bagel
Partners for an aggregate purchase price of $2,924,500. Such shares were
delivered by Bagel Partners to a third party in satisfaction of an
33
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
obligation incurred by a former area developer of the Company and predecessor of
Bagel Partners in connection with an acquisition by such entity.
Warrants. In 1996, the Company sold warrants to purchase 1,012,500 shares
of common stock of the Company to Bagel Funding. The warrants have an exercise
price of $6.47 per share and expire in 2000. The Company has issued 345,300
shares of common stock in connection with the exercise of such warrants. Also
in 1996, the Company sold or issued warrants to purchase an aggregate of
1,252,425 shares of common stock of the Company to other third parties at
exercise prices ranging from $6.47 to $11.58 per share. The warrants expire at
various dates through 2001. The Company has issued 1,237,050 shares of common
stock in connection with the exercise of such warrants, all of which were
exercised at a price of $6.47 per share.
In 1997, the Company issued warrants to purchase an aggregate of 100,000
shares of common stock of the Company to third parties at an exercise price of
$9.47 per share. Such warrants expire on November 21, 2000.
Stock Option Plans. The Company has an amended and restated 1995 stock
option plan (the "1995 Plan"), under which options to purchase up to 3,650,000
shares of common stock may be granted to certain employees and officers of, and
consultants to, the Company and its subsidiaries. The option price is equal to
the fair market value of the stock on the date of the grant and each option has
a term of ten years. Options granted under the 1995 Plan generally vest at a
rate of 10% at the end of the first year, an additional 20% at the end of the
second year, an additional 30% at the end of the third year, and the balance
vesting at the end of the fourth year from the date of the grant.
In addition, the Company has an amended and restated 1997 stock option plan
(the "1997 Plan"), under which options to purchase up to 7,350,000 shares of
common stock may be granted to employees and officers of, and consultants to,
the Company and its subsidiaries and affiliated companies. The administrators
of the 1997 Plan, consisting of certain members of the board of directors (or,
in the case of grants to "reporting persons" under Section 16(a) of the Exchange
Act, the entire board of directors), have discretion with respect to the terms
of options granted under the 1997 Plan, including price, term and vesting.
The Company also maintains a restated 1997 ENBP stock option plan (the
"ENBP Plan"), under which options to purchase up to 813,146 shares of common
stock of the Company may be granted to employees and officers of, and
consultants to, the Company and its subsidiaries and affiliated companies. The
shares subject to the ENBP Plan are shares of common stock previously issued and
sold by the Company to its area developers. Pursuant to the loan conversions,
the Company assumed the obligations of the area developers with respect to
options granted on such shares and the shares are reflected as treasury stock in
the Company's consolidated financial statements. The terms and provisions of
the ENBP Plan are substantially the same as those of the 1997 Plan.
The Company also has an amended and restated non-employee directors stock
option plan (the "Directors Plan"), under which options to purchase up to
200,000 shares of the common stock of the Company may be granted to directors of
the Company who are not officers or employees of the Company. Under the terms
of the Directors Plan, the Company automatically grants to each such director,
upon election or re-election as a director of the Company, options to purchase
shares having a fair market value of $50,000 at the date of the grant (but in no
event more than 15,000 shares). Options are granted at a price equal to the
fair market value of the stock on the date of grant, become exercisable after
the end of one year from the date of grant and have a term of ten years from the
date of grant. The options are subject to termination should the optionee's
service as a director of the Company terminate. At December 26, 1999, 59,224
shares had been granted under the Directors Plan at a weighted average exercise
price of $3.96 per share.
34
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no employee compensation expense has been recognized for the
Company's stock option plans. Had employee compensation expense for the
Company's plans been determined based on the fair value at the grant date for
awards in 1997, 1998 and 1999 consistent with the provisions of SFAS No. 123,
the Company's net loss and basic and diluted loss per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
data):
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
December 28, December 27, December 26,
1997 1998 1999
------------- ------------------ -------------
<S> <C> <C> <C>
Net loss - as reported................ $(1,402) $(203,927) $(14,383)
Net loss - pro forma.................. (5,161) (208,825) (16,940)
Basic loss per share - as reported.... (0.04) (6.18) (0.43)
Basic loss per share - pro forma...... (0.16) (7.28) (0.80)
Diluted loss per share - as reported.. (0.04) (6.18) (0.43)
Diluted loss per share - pro forma.... (0.16) (7.28) (0.80)
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
December 28, December 27, December 26,
1997 1998 1999
------------- ------------------ -------------
<S> <C> <C> <C>
Expected volatility...... 45.0% 75.0% 100.0%
Risk-free interest rate.. 6.2% 5.6% 4.6%
Expected lives........... 5 years 5 years 5 years
Dividend yield........... 0 0 0
</TABLE>
Activity under the option plans through December 26, 1999 was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Option
Number of Price
Options Per Share
------------------ -----------------
<S> <C> <C>
Outstanding as of December 29, 1996................................ 3,478,075 $ 6.87
Granted.......................................................... 2,327,327 11.48
Exercised........................................................ (269,904) 6.20
Canceled or Forfeited............................................ (579,611) 11.44
Outstanding as of December 28, 1997................................ 4,955,887 8.58
Granted.......................................................... 3,616,159 3.69
Exercised........................................................ (435) 5.88
Canceled or Forfeited............................................ (3,671,651) 8.77
------------------ -----------------
Outstanding as of December 27, 1998................................ 4,899,960 4.82
Granted.......................................................... 3,142,617 1.70
Exercised........................................................ - -
Canceled or Forfeited............................................ (1,183,033) 4.31
------------------ -----------------
Outstanding as of December 26, 1999................................ 6,859,544 $ 3.48
================== =================
Exercisable as of December 26, 1999................................ 2,001,622 $ 5.46
================== =================
</TABLE>
35
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
In May 1998, the Stock Option Committee of the board of directors
authorized a stock option exchange program to provide employees the opportunity
to exchange existing options for new options priced at fair market value on the
date of exchange. Approximately 2.4 million vested and unvested outstanding
options with original exercise prices ranging from $4.56 to $33.13 per share
were cancelled in exchange for the grant of the same number of new options with
an exercise price of $3.65 per share. New options issued upon cancellation of
options originally granted in 1995 vest 50% on each of November 11, 1999 and May
11, 2000. New options issued upon cancellation of options originally granted
after 1995 vest 33-1/3 % on each of November 11, 1999, May 11, 2000 and May 11,
2001.
Information on options outstanding at December 26, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted Options Exercisable
Average --------------------------
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Price of Options Life (years) Exercise Price of Options Exercise Price
- ----------------------- ---------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 - $3.00 2,964,649 9.09 $ 1.71 18,750 $ 2.00
$3.01 - $6.00 3,189,478 7.23 4.17 1,456,930 4.60
$6.01 - $9.00 538,845 2.59 6.59 383,681 6.58
$9.01 - $12.00 155,449 4.36 10.83 134,514 10.84
$18.01 - $21.00 2,684 7.39 18.63 2,684 18.63
$27.01 - $30.00 8,439 6.97 29.63 5,063 29.63
--------- ---- ------ --------- ------
Total 6,859,544 7.60 $ 3.48 2,001,622 $ 5.46
========= ==== ====== ========= ======
</TABLE>
Boston Chicken Option. The Company has granted to Boston Chicken an option
(the "BCI Option") to purchase such number of shares of the Company's common
stock as will permit Boston Chicken to maintain ownership of shares of common
stock having up to 52% of the voting power of all of the outstanding shares of
the capital stock of the Company having the power generally to vote in the
election of directors. The terms of the BCI Option provide that certain shares
of the Company's common stock owned by Boston Chicken are excluded in
determining the percentage ownership of the voting stock of the Company owned by
Boston Chicken for purposes of the BCI Option. As of December 26, 1999, Boston
Chicken had the right under the BCI Option to purchase 2,124,579 shares of the
Company's common stock at a weighted average price of $18.61.
As of December 26, 1999, the Company had 9,866,698 shares of common stock
reserved for issuance upon exercise of options and warrants.
12. Related Party Transactions
Boston Chicken is the majority stockholder of the Company. Boston Chicken
charged the Company amounts aggregating approximately $4.2 million, $6.9 million
and $5.3 million in fiscal 1997, 1998 and 1999, respectively, for software
license, software maintenance, real estate, financial advisory and accounting
fees, and interest.
Pursuant to Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," all of the Company's former area developers may have been
deemed to be related parties as a result of the parties' lending and franchise
relationships. In addition, certain directors and officers and members of their
families had a direct or indirect equity interest in the Company's area
developers. Total royalties and franchise-related fees earned from all
36
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
area developers were $28.3 million in 1997. Total interest income earned from
all area developers was $21.6 million in 1997. The Company also sold to these
entities, stores, inventory, equipment and other miscellaneous net assets for
which it received approximately $3.6 million in fiscal 1997.
A director of the Company is an investor in Bagel Funding and had invested
approximately $0.2 million in Bagel Funding at December 26, 1999. The Company
is the manager of Bagel Funding but has no equity interest in Bagel Funding.
Certain directors and officers of the Company and members of their families
acquired equity interests in the Company's area developers in exchange for
promissory notes. These equity interests were converted into equity interests
in Bagel Partners in December 1997 and were redeemed in exchange for
cancellation of such promissory notes (having an aggregate principal amount of
approximately $0.5 million) in January 1998.
The Company holds notes receivable from a stockholder of $3.4 million. The
notes receivable bear interest at the applicable Reference Rate plus 1%.
Principal and interest are due April 2001. The notes are collateralized by
various assets. The notes, which were carried on the Company's books at $3.4
million as of December 28, 1997, were written off in 1998.
13. Impairment of Long-Lived Assets
In 1997, the Company recognized an impairment loss on various long-lived
assets of $10.8 million, resulting primarily from the closure of a bagel dough
production facility and the conversion to a Company-controlled system. The
assets subject to the impairment loss had a net book value of $11.6 million
before the impairment loss.
In 1998, as part of the Company's ongoing evaluation, management made an
assessment of the recoverability of certain long-lived assets. The assessment
was made after the Company had operated and controlled the Einstein Bros. Bagels
and Noah's New York Bagels stores for a period of one year. Based primarily
upon the assessment of realized operating results, which were below those
anticipated upon the acquisition of the Company's area developers in December
1997, and revenue growth and cash flow projections at that time, the Company
determined that certain of its long-lived assets may be impaired.
The assessment of possible impairment of long-lived assets, including
goodwill, allocable to individual stores took into account current and
anticipated store cash flow of the Company's Einstein Bros. Bagels and Noah's
New York Bagels stores. For those store-level assets that were deemed to be
impaired, the long-lived assets were written down to estimated fair value. Fair
value of the long-lived assets was based upon the net present value of the
estimated future cash flows from the Einstein Bros. Bagels and Noah's New York
Bagels stores.
Long-lived intangible assets that are not allocable to individual stores
were also assessed for possible impairment. Such assessment took into account
current and anticipated cash flow generated by the Einstein Bros. Bagels and
Noah's New York Bagels concepts at the time such assessment was made. Based
upon the limited growth expectations for the Noah's New York Bagels concept, the
cash flow generated by the Noah's New York Bagels stores, the limited potential
royalty income, and the estimated market value of the Noah's New York Bagels
concept at that time, the unamortized intangible long-lived assets allocable to
the Noah's New York Bagels concept were written off. Based on a similar
assessment, the long-lived intangible assets allocable to the Einstein Bros.
Bagels concept were not deemed to be impaired.
37
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
As a result of the Company's assessment, the Company recorded an impairment
of intangible assets and identifiable long-lived assets aggregating $212.4
million in fiscal year 1998, consisting of the following amounts: $125.5
million - goodwill, $20.4 million - trademarks and copyrights, $3.7 million -
capitalized recipes and $62.8 million - property and equipment. Of these
amounts, $138.8 million of impairment of long-lived assets, including goodwill,
is attributable to the store level assessment. The remaining $73.6 million of
impairment is attributable to the goodwill and other intangibles allocable to
the Noah's New York Bagels concept.
38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Einstein/Noah Bagel
Corp. and subsidiaries as of December 28, 1997, December 27, 1998 and December
26, 1999, and for the fiscal years ended December 28, 1997, December 27, 1998
and December 26, 1999 included in this Form 10-K, and have issued our report
thereon dated March 23, 2000. Our report on the financial statements includes
an explanatory paragraph with respect to the uncertainty as to the Company's
ability to continue as a going concern, which is further described in Note 2 to
the financial statements. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The supplemental
schedule listed in Part IV, Item 14 of this Form 10-K is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 23, 2000
39
<PAGE>
SCHEDULE II
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Additions Deductions
at charged to for Balance
beginning costs and accounts at end of
Classifications of period expenses written-off period
<S> <C> <C> <C> <C>
Fiscal year ended December 26, 1999:
Allowance for Doubtful Accounts........ $782,465 $ - $(556,433) $226,032
Fiscal year ended December 27, 1998:
Allowance for Doubtful Accounts........ 810,000 - (27,535) 782,465
Fiscal year ended December 28, 1997:
Allowance for Doubtful Accounts........ - 810,000* - 810,000
</TABLE>
*Of such amount, $0.8 million was charged to goodwill as the result of
acquisitions made by the Company.
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE>
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. Information with respect to the Company's directors will be
included in an amendment to this report on Form 10-K.
Executive Officers. Information with respect to executive officers of the
Company is set forth under the caption "Executive Officers" in Item 1 of this
report.
Compliance with Section 16(a) of the Exchange Act. Information with
respect to Section 16(a) Beneficial Ownership Reporting Compliance will be
included in an amendment to this report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included in an
amendment to this report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to principal stockholders and securities ownership
of management will be included in an amendment to this report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to transactions with certain persons related
to the Company and with respect to the relationship with Boston Chicken will be
included in an amendment to this report on Form 10-K.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. The Company's Consolidated Financial Statements are set forth in Part II,
Item 8.
A. Report of Independent Public Accountants (Arthur Andersen LLP);
B. Consolidated Balance Sheets at December 27, 1998 and December 26,1999;
C. Consolidated Statements of Operations for the fiscal years ended
December 28, 1997, December 27, 1998 and December 26, 1999;
D. Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 28, 1997, December 27, 1998 and December 26, 1999;
E. Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 1997, December 27, 1998 and December 26, 1999; and
F. Notes to Consolidated Financial Statements.
2. The following schedules are set forth in Part II, Item 8.
A. Report of Independent Public Accountants (Arthur Andersen LLP); and
B. Schedule II - Valuation and Qualifying Accounts.
3. Exhibits
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:
(i) Amended and Restated 1995 Stock Option Plan.
(ii) Amended and Restated 1996 Stock Option Plan for Non-Employee Directors.
(iii) Amended and Restated 1997 Stock Option Plan.
42
<PAGE>
(iv) Restated 1997 ENBP Stock Option Plan.
(v) Amended and Restated Executive Employment Agreement dated as of
February 11, 2000 between the Company and Robert M. Hartnett (the
"Hartnett Agreement").
(vi) Severance Agreement dated August 26, 1999 between the Company and
Paul Murphy.
(vii) Severance Agreement dated August 26, 1999 between the Company and
Paula E. Manley.
(viii) Severance Agreement dated August 26, 1999 between the Company and
Gail Lozoff.
(ix) Severance Agreement dated August 26, 1999 between the Company and
Paul Strasen.
(x) Amended and Restated Employee Retention Program.
(xi) 2000 Staff Officer Bonus Plan.
(b) Reports on Form 8-K
During the fourth quarter of fiscal 1999, the Company filed three reports
on Form 8-K dated October 14, 1999, November 3, 1999 and December 2, 1999.
The report on Form 8-K dated October 14, 1999 reported under Item 5. (Other
Events) that the Company had been notified by the Nasdaq Stock Market that the
Company was not in compliance with certain requirements for the continued
listing of its common stock on the Nasdaq SmallCap Market.
The report on Form 8-K dated November 3, 1999 reported under Item 5. (Other
Events) that the Company had reported its results for the third quarter ended
October 3, 1999 and included the Company's press release.
The report on Form 8-K dated December 2, 1999 reported under Item 5. (Other
Events) that the Company had been granted an extension of time to meet certain
requirements for continued listing on the Nasdaq SmallCap Market.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2000
EINSTEIN/NOAH BAGEL CORP.
By: /s/ Robert M. Hartnett
-------------------------------------
Robert M. Hartnett
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
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 on March 27, 2000.
Signature Title
--------- -----
Chairman of the Board,
/s/ Robert M. Hartnett Chief Executive Officer,
- ------------------------------------- President and Director
Robert M. Hartnett (Principal Executive Officer)
/s/ Paula E. Manley Chief Financial Officer
- ------------------------------------- (Principal Financial Officer
Paula E. Manley and Principal Accounting
Officer)
Chief Marketing Officer and
/s/ Gail A. Lozoff Director
- -------------------------------------
Gail A. Lozoff
/s/ John H. Muehlstein, Jr. Director
- -------------------------------------
John H. Muehlstein, Jr.
/s/ Martin D Hanan Director
- -------------------------------------
Martin D Hanan
/s/ Donald L. Pierce Director
- -------------------------------------
Donald L. Pierce
44
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit +
- ----------------------- -------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company ("Certificate of
Incorporation") (incorporated by reference to Exhibit 3 to the Company's
quarterly report on Form 10-Q for the quarter ended October 6, 1996).
3.2 Amended and Restated Bylaws of the Company ("Bylaws") (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1
(Registration No. 333-28941)).
4.1 Certificate of Incorporation (included in Exhibit 3.1).
4.2 Bylaws (included in Exhibit 3.2).
4.3 Certificate representing Common Stock (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-1 (Registration No.
333-04725)).
4.4 Amended and Restated Registration Rights Agreement dated February 1, 1996 by
and among the Company and certain stockholders of the Company (incorporated
by reference to Exhibit 4.4 to the Company's Registration Statement on Form
S-1 (Registration No. 333-04725)).
4.5 Concurrent Private Placement Agreement dated August 1, 1996 between Boston
Chicken, Inc. ("Boston Chicken") and the Company (incorporated by reference
to Exhibit 10.3 to Boston Chicken's quarterly report on Form 10-Q for the
quarter ended July 14, 1996).
4.6 Registration Agreement dated August 1, 1996 between Boston Chicken and the
Company (incorporated by reference to Exhibit 10.3 to Boston Chicken's
quarterly report on Form 10-Q for the quarter ended July 14, 1996).
4.7 Concurrent Offering Purchase Agreement dated November 26, 1996 between
Boston Chicken and the Company ("Concurrent Offering Purchase Agreement")
(incorporated by reference to Exhibit 10.41 to Boston Chicken's annual
report on Form 10-K for the year ended December 29, 1996).
4.9 Indenture dated as of May 29, 1997 by and between the Company and Bankers
Trust Company, as Trustee, which includes as Exhibits the forms of Debenture
for the Company's 7-1/4% Convertible Subordinated Debentures due 2004 (the
"Debenture Indenture") (incorporated by reference to Exhibit 4.1 to the
Company's current report on Form 8-K dated May 22, 1997).
4.10 Registration Rights Agreement dated May 22, 1997 by and between the Company
and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Alex Brown & Sons Incorporated, and Morgan Stanley & Co. Incorporated
(incorporated by reference to Exhibit 4.2 to the Company's current report on
Form 8-K dated May 22, 1997).
</TABLE>
+ In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the"Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken, Inc.
("Boston Chicken") under the Exchange Act, Boston Chicken's file number under
that Act is 0-22802.
++ Confidential treatment granted.
Exhibit-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit +
- ----------------------- -------------------------------------------------------------------------------
<C> <S>
10.1(a) Amended and Restated Secured Credit Agreement ("Secured Credit Agreement")
dated as of November 21, 1997 among the Company, Bank of America National
Trust and Savings Association ("Bank of America"), as Agent and Issuing
Lender, General Electric Capital Corporation, as Co-Agent and the Lenders
named therein (incorporated by reference to Exhibit 10.6 to the Company's
current report on Form 8-K dated November 21, 1997).
10.1(b) First Amendment and Waiver dated as of March 27, 1998 to Secured Credit
Agreement (incorporated by reference to Exhibit 10.4(b) to the Company's
annual report on Form 10-K for the year ended December 28, 1997).
10.1(c) Second Amendment and Waiver dated as of October 4, 1998 to Secured Credit
Agreement (incorporated by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended October 4, 1998).
10.1(d) Third Amendment and Waiver dated as of January 29, 1999 to Secured Credit
Agreement (incorporated by reference to Exhibit 10.1(d) to the Company's
annual report on Form 10-K for the year ended December 27, 1998).
10.1(e) Fourth Amendment and Waiver dated as of May 15, 1999 to Secured Credit
Agreement (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 18, 1999).
10.1(f) Fifth Amendment and Waiver dated as of February 29, 2000 to Secured Credit
Agreement.
10.2 Amended and Restated 1995 Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.2 to the Company's annual report on Form 10-K for
the year ended December 27, 1998).
10.3 Amended and Restated 1996 Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.2 to the Company's quarterly report
on Form 10-Q for the quarter ended April 18, 1999).
10.4 Amended and Restated 1997 Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.4 to the Company's annual report on Form 10-K for
the year ended December 27, 1998).
10.5 Restated 1997 ENBP Stock Option Plan of the Company (incorporated by
reference to Exhibit 4.12 to the Company's Registration Statement on Form
S-8 (Reg. No. 333-44353)).
10.6++ Amended and Restated Project and Approved Supplier Agreement dated May 1,
1998 among the Company, Harlan Bagel Supply Company, L.L.C. ("Harlan Bagel
Supply"), Harlan Bakeries, Inc. ("Harlan Bakeries") and Hal P. Harlan, Hugh
P. Harlan and Doug H. Harlan (the "Harlans") (incorporated by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter
ended July 12, 1998).
</TABLE>
+ In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the"Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken, Inc.
("Boston Chicken") under the Exchange Act, Boston Chicken's file number under
that Act is 0-22802.
++ Confidential treatment granted.
Exhibit-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit +
- ----------------------- -------------------------------------------------------------------------------
<C> <S>
10.7 Amended and Restated Option Agreement dated May 1, 1998 among Harlan Bagel
Supply, the Harlans and the Company (incorporated by reference to Exhibit
10.2 to the Company's quarterly report on Form 10-Q for the quarter ended
July 12, 1998).
10.8 Amended and Restated Right of First Refusal Agreement dated May 1, 1998
among Harlan Bakeries, the Harlans and the Company (incorporated by
reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for
the quarter ended July 12, 1998).
10.9 Sixth Amended and Restated Limited Liability Company Agreement of Bagel
Store Development Funding, L.L.C. ("Bagel Funding") dated as of December 5,
1997 (incorporated by reference to Exhibit 10.16 to the Company's 1997
annual report on Form 10-K for the year ended December 26, 1997).
10.10(a) Limited Partnership Agreement of Bagel Partners (incorporated by reference
to Exhibit 10.2 to the Company's current report on Form 8-K dated December
10, 1997).
10.10(b) First Amendment dated March 25,1998 to Limited Partnership Agreement of
Bagel Partners (incorporated by reference to Exhibit 10.18(b) to the
Company's 1997 annual report on Form 10-K for the year ended December 28,
1997).
10.11 Loan Agreement dated December 5, 1997 between the Company and Bagel Partners
(incorporated by reference to Exhibit 10.3 to the Company's current report
on Form 8-K dated December 10, 1997).
10.12(a) Amended and Restated Development Agreement dated December 5, 1997 between
the Company and Bagel Partners ("Development Agreement") (incorporated by
reference to Exhibit 10.4 to the Company's current report on Form 8-K dated
December 10, 1997).
10.12(b) Addendum No. 2 to Development Agreement dated July 25, 1998 (incorporated by
reference to Exhibit 10.15 to the Company's annual report on Form 10-K for
the year ended December 27, 1998).
10.12(c) Addendum No. 3 to Development Agreement dated February 3, 1999 (incorporated
by reference to Exhibit 10.16 to the Company's annual report on Form 10-K
for the year ended December 27, 1998).
10.13 Services Agreement dated as of December 15, 1997 between the Company and
Bagel Partners (incorporated by reference to the Company's current report on
Form 8-K dated December 10, 1997).
10.14 Amended and Restated Executive Employment Agreement dated as of February 11,
2000 between the Company and Robert M. Hartnett.
</TABLE>
+ In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the"Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken, Inc.
("Boston Chicken") under the Exchange Act, Boston Chicken's file number under
that Act is 0-22802.
++ Confidential treatment granted.
Exhibit-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit +
- ----------------------- -------------------------------------------------------------------------------
<C> <S>
10.15 Severance Agreement dated August 26, 1999 between the Company and Paul
Murphy (incorporated by reference to Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended October 3, 1999).
10.16 Severance Agreement dated August 26, 1999 between the Company and Paula E.
Manley (incorporated by reference to Exhibit 10.3 to the Company's quarterly
report on Form 10-Q for the quarter ended October 3, 1999).
10.17 Severance Agreement dated August 26, 1999 between the Company and Gail
Lozoff (incorporated by reference to Exhibit 10.4 to the Company's quarterly
report on Form 10-Q for the quarter ended October 3, 1999).
10.18 Severance Agreement dated August 26, 1999 between the Company and Paul
Strasen (incorporated by reference to Exhibit 10.5 to the Company's
quarterly report on Form 10-Q for the quarter ended October 3, 1999).
10.19 Concurrent Offering Purchase Agreement (included in Exhibit 4.7).
10.20 Amended and Restated Employee Retention Program.
10.21 2000 Staff Officer Bonus Plan.
12 Statement regarding Computation of Ratios.
21 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP with respect to the Audited Consolidated
Financial Statements of the Company and the Supplemental Schedules Contained
in Part IV.
27.1 Financial Data Schedule for Fiscal Year Ended December 26, 1999.
</TABLE>
+ In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the"Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken, Inc.
("Boston Chicken") under the Exchange Act, Boston Chicken's file number under
that Act is 0-22802.
++ Confidential treatment granted.
Exhibit-4
<PAGE>
EXHIBIT 10.1(f)
FIFTH AMENDMENT AND WAIVER
TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIFTH AMENDMENT AND WAIVER TO AMENDED AND RESTATED CREDIT
AGREEMENT ("Agreement") is being executed and delivered as of February 29, 2000,
---------
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, N.A. (as successor to 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, that certain Third Amendment and Waiver thereto dated as of
January 29, 1999, and that certain Fourth Amendment and Waiver thereto dated as
of May 15, 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 amend
the maximum allowed Senior Indebtedness to Annualized System EBITDAL ratio for
the Borrower's credit usage test under Section 5.13 of the Credit Agreement for
------------
its first fiscal quarter of 2000, (ii) to waive the Borrower's compliance with
its minimum required average weekly per store net revenue test under Section 7.1
-----------
of the Credit Agreement for its 1st and 2nd Retail Periods of 2000 and (iii) to
amend the definition of Total Revolving Loan Commitment to temporarily increase
such amount by $1,000,000 for the period March 1, 2000 through April 30, 2000.
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) Article I is amended to delete in its entirety the definition of
---------
"Total Revolving Loan Commitment Amount" set forth therein and to replace such
--------------------------------------
definition with the following definition:
"Total Revolving Loan Commitment" means, subject to modification
thereof pursuant to Section 2.1(1), (1) $26,000,000 at all times during the
--------------
period commencing on March 1, 2000 and ending on April 30, 2000 and (2)
$25,000,000 at all other times.
(b) Section 2.8 is amended to add the following provisions to the
-----------
end of such section:
"Without limiting the foregoing, on each Business Day on or after March 13,
2000, the Borrower shall additionally repay the outstanding principal
balance of the Revolving Loans in an amount substantially equal to the
gross amount of all cash received by the Borrower and its Subsidiaries on
or before such Business Day which is available for withdrawal by the
Borrower's and its Subsidiaries' from their respective deposit accounts as
of such Business Day."
(c) Section 5.13(1) is amended to delete in its entirety from the
---------------
schedule of periods and ratios set forth therein the reference to the period
"Fiscal Year 2000" and the corresponding ratio maximum ratio of "1.50:1.00", and
to replace such references with the following:
"1/st/ Fiscal Quarter, 2000 1.75:1.00
2/nd/ Fiscal Quarter, 2000 and
each Fiscal Quarter thereafter 1.50:1.00"
(d) Schedule 1.1(C) of the Credit Agreement is deleted in its
---------------
entirety.
2. Waiver. Subject to Paragraph 3 of this Agreement, the Lenders
------ -----------
hereby waive any violation of, Default, Event of Default or representation or
warranty as to the absence of any of the foregoing, in each case in respect of
any failure by Borrower to comply with its minimum required average weekly per
store net revenue test under Section 7.1 of the Credit Agreement for its 1st or
-----------
2nd Retail Periods of 2000; provided, however, that, such waivers shall only be
-------- -------
effective if the Borrower has achieved an average weekly net revenue for all
Stores (whether operated by the Borrower or a Franchisee) of not less than
$11,900 per Store during its 1st Retail Period and not less than $12,900 per
Store during its 2nd Retail Period.
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, (b)
<PAGE>
payment in full of the $1,500,000 principal payment with respect to the Term
Loan which is due and payable on March 1, 2000, together with all accrued
interest thereon (or assurances acceptable to the Agent that such payment is in
the process of being made by the Borrower and will be irrevocably received by
the Agent in full on the date of the Agent's receipt of such assurances), and
(c) 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 $25,000
("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. 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.
6. 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.
7. Reaffirmation, Ratification and Acknowledgment. By its execution
----------------------------------------------
below, each of Einstein/Noah Bagel Partners, Inc. and Einstein/Noah Bagel
Partners, L.P. (collectively, the "Guarantors") hereby (a) ratifies and
----------
reaffirms all of its payment and performance
<PAGE>
obligations, contingent or otherwise, and each grant of security interests and
liens in favor of the Agent, under each Loan Document to which it is a party,
(b) agrees and acknowledges that such ratification and reaffirmation is not a
condition to the continued effectiveness of such Loan Documents and (c) agrees
that neither such ratification and reaffirmation, nor the Agent's, or any
Lender's solicitation of such ratification and reaffirmation, constitutes a
course of dealing giving rise to any obligation or condition requiring a similar
or any other ratification or reaffirmation from the Borrower or such other Loan
Parties with respect to any subsequent modifications to the Credit Agreement or
the other Loan Documents.
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 preparation, negotiation and
execution of this Agreement.
10. Changes in Notice Addresses. Pursuant to Section 10.2 of the
--------------------------- ------------
Credit Agreement, the Borrower hereby notifies each of the other parties to the
Credit Agreement that all notices and other communications to the Borrower under
the Credit Agreement and the other Loan Documents shall be provided to the
Borrower's new address at Einstein/Noah Bagel Corp., 1687 Cole Boulevard,
Golden, Colorado 80401, Attention: Paul A. Strasen, telephone: 303-568-8190,
facsimile: 303-568-8199.
11. 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.
* * * *
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By: /s/ Paul A. Strasen
---------------------------------
Name: Paul A. Strasen
--------------------------
Title: Sr Vice Pres.
--------------------------
EINSTEIN/NOAH BAGEL PARTNERS, INC.
By: /s/ Paul A. Strasen
---------------------------------
Name: Paul A. Strasen
--------------------------
Title: Vice Pres.
--------------------------
EINSTEIN/NOAH BAGEL PARTNERS, L.P.
By: EINSTEIN/NOAH BAGEL PARTNERS,
INC., as General Partner
By: /s/ Paul A. Strasen
---------------------------------
Name: Paul A. Strasen
--------------------------
Title: Vice Pres.
--------------------------
<PAGE>
BANK OF AMERICA, N.A. (as successor to
Bank of America National Trust and
Savings Association), as Agent
By: /s/ Kristine D. Hyde
---------------------------------
Name: Kristine D. Hyde
--------------------------
Title: Assistant Vice President
--------------------------
BANK OF AMERICA, N.A. (as successor to
Bank of America National Trust and
Savings Association), as a Lender
By: /s/ Lynn D. Simmons
---------------------------------
Name: Lynn D. Simmons
--------------------------
Title: Senior Vice President
--------------------------
GENERAL ELECTRIC CAPITAL CORPORATION, as
a Lender and as Co-Agent
By: /s/ Timothy S. Shanahan
---------------------------------
Name: Timothy S. Shanahan
--------------------------
Title: Vice President
--------------------------
LASALLE BANK NATIONAL ASSOCIATION (as
successor to LaSalle National Bank), as
a Lender
By: /s/ John C. Thurston
---------------------------------
Name: John C. Thurston
--------------------------
Title: Vice President
--------------------------
<PAGE>
EXHIBIT 10.14
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
This Amended and Restated Executive Employment Agreement (the "Agreement")
is made as of the 11th day of February, 2000, by and between Einstein/Noah Bagel
Corp., a Delaware corporation (the "Company"), and Robert M. Hartnett (the
"Executive").
Recitals
--------
WHEREAS, Executive is currently serving as Chairman, Chief Executive
Officer and President of the Company; and
WHEREAS, to assure the continued services of the Executive in such
capacities, the Company has entered into an employment agreement with the
Executive; and
WHEREAS, the Company and the Executive desire to amend and restate the
Agreement.
Covenants
---------
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
terms and conditions hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are specifically
acknowledged, the parties hereto hereby agree as follows:
Section 1. Employment. The Company hereby employs the Executive as
----------
Chairman, Chief Executive Officer and President for a term commencing on the
date hereof and continuing until February 11, 2002, such term to be extended by
one additional year on each anniversary of the date hereof (the "Term" or
"Employment Period"), unless the Term is earlier terminated pursuant to the
provisions hereof. Executive hereby accepts employment from the Company.
Section 2. The Executive's Duties.
----------------------
(a) The Executive hereby agrees to serve the Company faithfully and
honestly and to use his best efforts and ability on behalf of the Company in the
position of Chairman, Chief Executive Officer and President, and as a member of
the Board of Directors of the Company, to discharge the duties as Chairman,
Chief Executive Officer and President and to perform such duties and services of
an executive, administrative and managerial nature, which duties are consistent
with his position in the Company, as shall be specified and designated from time
to time by the Board of Directors of the Company in connection with the business
and activities of the Company.
(b) The Company hereby agrees that, in his capacities as a director and
officer of the Company during the term of this Agreement, the Executive shall be
indemnified by the Company (including without limitation by advancement of
expenses) to the fullest extent permitted from time to time by applicable law.
<PAGE>
(c) During the term hereof, the Executive shall be employed by the Company
on a full-time basis and shall perform such duties and responsibilities on
behalf of the Company consistent with Executive's position of Chairman, Chief
Executive Officer and President as may be designated from time to time by the
Board of Directors. During the term hereof, the Executive shall devote his full
business time and his best efforts, business judgment, skill and knowledge
exclusively to the advancement of the business and interests of the Company and
its affiliates and to the discharge of his duties and responsibilities
hereunder. The Executive shall not engage in any other business activity or
serve in any industry, trade, professional, governmental or academic position
during the term of this Agreement, except as may be expressly approved in
writing, which approval shall not be unreasonably withheld, by the Board, as the
Company encourages participation by the Executive in community and charitable
activities generally considered to be in the public interest and the Company's
interest. In addition, the Company recognizes that the Executive may make
passive investments which will not interfere with his commitments and duties to
the Company.
(d) The Executive agrees to observe and comply with all lawful written
rules, regulations, policies and practices adopted by the Company as they now
exist and as they may be duly and properly adopted or modified from time to
time.
Section 3. Compensation and Benefits. In consideration for all services
-------------------------
rendered by the Executive to the Company pursuant to this Agreement, including
services as an officer, director, member of any committee or in the performance
of other like duties consistent with his position of Chairman, Chief Executive
Officer and President assigned to him by the Board of Directors of the Company,
the Company hereby agrees to pay compensation to the Executive as follows:
(a) Executive shall be paid a base salary at a rate of $500,000 (subject
to any increases as may be determined by the Compensation Committee of the Board
of Directors at its discretion), payable in equal bi-weekly installments in
arrears.
(b) The Executive shall participate in an annual bonus plan with a target
payout equal to 50% of the Executive's base salary and which shall be based upon
the Company's performance relative to targets generally applicable in
determining bonus compensation payable to senior executives of the Company.
(c) The Executive shall participate in the Company's Amended and Restated
1997 Stock Option Plan (or such other stock option plan as may hereafter be
adopted to provide for the grant of stock options to executive employees of the
Company), pursuant to which the Executive shall receive option grants at the
same time as other senior executives of the Company and shall in any event
receive an option grant at least once each calendar year, beginning in calendar
year 1999, of a number of shares not less than 150% of the highest number of
shares subject to a regular annual option grant made to any other officer of the
Company.
(d) Executive shall be entitled to first class air travel and lodging when
he is traveling on Company business and shall be entitled to such other fringe
benefits as are paid to other senior executives of the Company.
2
<PAGE>
(e) The Company shall provide and maintain such group medical, dental,
life and disability insurance benefits for the Executive as are provided to
other senior executives of the Company.
(f) The Executive shall receive from the Company a paid vacation each year
in accordance with the present policy and practice of the Company regarding
vacations for senior executives.
Section 4. Expenses. The Company shall pay or reimburse the Executive for
--------
reasonable and necessary expenses incurred in the ordinary course of conducting
the Company's business and in accordance with written policies established by
the Company. Executive shall submit expense reports accompanied by receipts and
other appropriate substantiation for all items of business expenses for which
payment or reimbursement is sought.
Section 5. Duration and Termination.
------------------------
(a) The Executive's employment shall be for the Term provided for in
Section 1 hereof, unless the Term is earlier terminated pursuant to the
provisions hereof.
(b) If during the Employment Period the Executive shall be unable to
perform his duties hereunder on account of illness or disability, he shall be
entitled to compensation in accordance with this Agreement providing that such
illness or disability lasts for less than six months. In the event such illness
or disability lasts for more than a consecutive six month period, the Executive
shall be entitled to compensation in accordance with the sick leave plan of the
Company, if any, and shall be covered by the Company's disability income policy,
if any, and in all other respects the Company's obligations under this Agreement
shall terminate.
(c) In the event of the Executive's death during his employment hereunder,
his compensation shall cease as of the last day of the full calendar month
following the month in which such event occurs, or the last day of the
Employment Period, whichever is earlier. The salary for the period following
the Executive's death shall be paid to his legal heirs or the representative of
his estate and in all other respects the Company's obligations under this
Agreement shall terminate.
(d) In the event the Executive voluntarily terminates his employment
without Just Grounds for any reason, his right to all compensation shall cease
as of the end of the month of the date of termination of his employment. "Just
Grounds" shall mean resignation by the Executive due to (i) a material breach of
this Agreement by the Company which the Company has failed to cure within thirty
days after the Company receives written notice thereof, or (ii) the material
diminution of the Executive's duties, authority or responsibilities as Chairman
and Chief Executive Officer or a member of the Board of Directors except in
connection with a termination of Executive's employment for Just Cause.
(e) In the event (i) this Agreement and the Executive's employment shall
be terminated without Just Cause (as hereinafter defined) or (ii) the Executive
terminates his employment with Just Grounds, (A) the Executive shall receive
from the Company within five
3
<PAGE>
days after such termination a lump-sum payment equal to the greater of (x) one
time the sum of his then current annual base salary and his then current target
bonus, or (y) the amount that would have been paid to him for the balance of the
Employment Period assuming that he were to receive during such period an annual
salary equal to his then current annual base salary and an annual bonus for each
fiscal year ending during the Employment Period equal to his then current target
bonus, (B) the Company shall continue to provide, for a period of eighteen
months from the date of termination and at its expense, the benefits then being
provided to the Executive at the time of such termination pursuant to Section
3(e) hereof, and (C) each option to purchase shares of common stock of the
Company outstanding at the time of termination shall become fully vested and
exercisable at the time of termination and shall remain exercisable during the
term of the option. The amount of any payment or benefit provided for in this
Section 5(e) shall not be reduced by any compensation earned by the Executive as
the result of employment or engagement by another person, by retirement
benefits, by offset against any amount claimed to be owed by the Executive to
the Company or otherwise.
(f) In the event the Board of Directors determines that this Agreement and
the Executive's services hereunder should be terminated with Just Cause, the
Executive's right to all compensation and benefits shall cease as of the end of
the month of the date of termination of his employment. In such event, the
Executive shall be entitled only to such rights as shall have vested prior to
such termination or violation, and he shall not be entitled to any future cash
or non-cash compensation, benefits or termination pay. For purposes of this
Agreement, termination for "Just Cause" shall mean (i) a termination due to (A)
a material breach of this Agreement by the Executive, (B) willful or gross
neglect of duties for which employed or (C) willful misconduct or gross
negligence in the performance of such duties, all of such facts to be determined
in good faith by the Board of Directors of the Company after the Executive has
been given written notice of his purported material breach of this Agreement,
willful or gross neglect of duties or willful misconduct or gross negligence and
has failed to cure such breach or alter such conduct within thirty days after
the Executive's receiving such written notice, or (ii) a termination due to the
Executive's committing a felony for which he is convicted with no further rights
of appeal.
(g) Notwithstanding any other provision of this Agreement, in the event of
any termination of Executive's employment the Executive shall be entitled to
receive amounts payable under the Company's Amended and Restated Employee
Retention Program on the terms and subject to the conditions provided for
therein.
(h) If any of the payments or benefits received or to be received by the
Executive (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any person whose actions result in a
change in control of the Company or any person affiliated with the Company or
such person) (all such payments and benefits, excluding the Gross-Up Payment,
being hereinafter referred to as the "Total Payments") will be subject to an
excise tax (the "Excise Tax") imposed pursuant to Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment
4
<PAGE>
taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total
Payments. For purposes of determining whether any of the Total Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (i) all of the
Total Payments shall be treated as "parachute payments" (within the meaning of
Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting
firm which was, immediately prior to the change in control of the Company, the
Company's independent auditor (the "Auditor"), such payments or benefits (in
whole or in part) do not constitute parachute payments, including by reason of
Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within
the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of
the Base Amount (as defined in Section 280G(b)(3) of the Code) allocable to such
reasonable compensation, or are otherwise not subject to the Excise Tax, and
(iii) the value of any noncash benefits or any deferred payment or benefit shall
be determined by the Auditor in accordance with the principles of Sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the date on which the Gross-Up Payment is to be made, net of the
maximum reduction in federal income taxes which could be obtained from deduction
of such state and local taxes. In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Executive shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive,
to the extent that such repayment results in a reduction in the Excise Tax and a
dollar-for-dollar reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment taxes, plus interest
on the amount of such repayment at 120% of the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in calculating the Gross-Up
Payment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) within five (5) business days following the time that the amount of such
excess is finally determined. The Executive and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Total Payments. The provisions of this Section 5(h)
shall survive the expiration of the Term.
5
<PAGE>
Section 6. Governing Law and Arbitration.
-----------------------------
(a) Any controversy or claim arising out of or relating to this Agreement
or its interpretation, construction or any breach thereof, or any relationship
between the parties hereto, whether such claim is grounded in common law or
statutory law, shall be settled exclusively by arbitration in the State of
Colorado, in accordance with the then-applicable rules of the American
Arbitration Association, and judgment upon the award rendered may be entered in
any court of competent jurisdiction. In the event of any such controversy or
claim, the prevailing party shall be entitled to recover from the other party
all of the costs and expenses of the prevailing party in connection with such
claim or controversy including reasonable attorneys' fees.
(b) The failure or refusal of either party to submit to arbitration in
accordance with this provision shall be deemed a breach of this Agreement.
(c) Notwithstanding anything to the contrary herein contained, neither
party shall pursue the arbitration remedy provided for herein without thirty
days prior written notice, which thirty-day period shall be available for
informal dispute resolution discussions.
Section 7. Non-Assignment. The Executive shall have no right to delegate
--------------
any of the duties created by this Agreement, and any delegation or attempted
delegation of the Executive's duties, shall be null and void. In all other
respects, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, beneficiaries, personal
representatives, successors, assigns, officers and directors.
Section 8. Authorization, Validity and No-Conflict.
---------------------------------------
(a) The Company represents and warrants to the Executive that the
execution, delivery and performance by the Company of this Agreement has been
duly authorized and constitutes a valid and legally binding obligation of the
Company enforceable in accordance with the terms hereof, and that the execution,
delivery and performance of this Agreement by the Company will not violate the
terms of any agreement or obligation of the Company.
(b) The Executive represents and warrants to the Company that this
Agreement constitutes the valid and legally binding obligation of the Executive
enforceable in accordance with its terms, and that the execution, delivery and
performance of this Agreement by the Executive will not violate the terms of any
other agreement or obligation of the Executive.
Section 9. Severability. If any portion or provision of this Agreement
------------
shall to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
6
<PAGE>
Section 10. Waiver. No waiver of any provision hereof shall be effective
------
unless made in writing and signed by the waiving party. The failure of either
party to require the performance of any term or obligation of this Agreement, or
the waiver by either party of any breach of this Agreement, shall not prevent
any subsequent enforcement of such term or obligation or be deemed a waiver of
any subsequent breach.
Section 11. Notices. All notices pursuant to this Agreement shall be in
-------
writing.
a. Notice to Executive. A notice to the Executive shall be sufficient in
-------------------
all respects if delivered, or mailed by first class registered or certified
mail, postage and fees prepaid, or sent by an established, reputable courier
service, addressed to the following or such other address as provided by written
notice made pursuant to this Section 11:
If to Executive: Robert M. Hartnett
317 Madison
Denver, CO 80206
b. Notice to Company. A notice to the Company shall be sufficient in all
-----------------
respects if delivered, or mailed by first class registered or certified mail,
postage and fees prepaid, or sent by an established, reputable courier service,
addressed to the following or such other address provided by written notice made
pursuant to this Section 12:
If to Company: Einstein/Noah Bagel Corp.
1687 Cole Boulevard
Golden, CO 80401
Attention: General Counsel
Section 12. Entire Agreement. Except for that certain Confidentiality and
----------------
Non-Compete Agreement previously entered into by the Executive, this Agreement
constitutes the entire agreement between the parties and supersedes all prior
communications, agreements and understandings, written or oral, with respect to
the terms and conditions of the Executive's employment. Without limiting the
generality of the foregoing, this Agreement supersedes that certain letter
agreement dated April 29, 1998 between the Company and the Executive and that
certain severance agreement dated May 8, 1998 between the Company and the
Executive, and this Agreement amends and restates that certain executive
employment agreement dated September 11, 1998, as amended.
Section 13. Amendment. This Agreement may be amended or modified only by a
---------
written instrument signed by the Executive and by a representative of the
Company expressly authorized by the Board of Directors or the Compensation
Committee of the Board of Directors to execute any such amendment.
Section 14. Headings. The headings and captions in this Agreement are for
--------
convenience only and in no way define or describe the scope or content of any
provision of this Agreement.
7
<PAGE>
Section 15. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
EINSTEIN/NOAH BAGEL CORP.
By /s/ Paul A. Strasen
-----------------------------
/s/ Robert M. Hartnett
-------------------------------
Robert M. Hartnett
8
<PAGE>
EXHIBIT 10.20
Amended and Restated Einstein/Noah Bagel Corp.
Employee Retention Program
1. Statement of Purpose; Summary. Einstein/Noah Bagel Corp. ("ENBC") is
-----------------------------
currently pursuing the following initiatives (the "Business Initiatives"): (a)
development of information systems that are independent of Boston Chicken, Inc.
("BCI"); (b) development of a business infrastructure that is independent of
BCI, so that ENBC will no longer depend upon BCI for the provision of
accounting, administration or systems support services; and (c) possible
modification of its capital structure to eliminate the minority equity interest
in Einstein/Noah Bagel Partners, L.P. and to reduce the amount of outstanding
indebtedness of ENBC (the "Restructuring"). ENBC's employee retention program
(the "Retention Program") provides for compensation of up to 30 identified
officers and key employees of ENBC ("Critical Employees") in order to assure
their retention and availability to ENBC during the Restructuring. In addition,
the Retention Program provides for the payment of compensation in the form of
discretionary bonuses of up to $150,000 ("Discretionary Bonuses") to persons and
in amounts determined by ENBC's Chief Executive Officer in his sole discretion.
The aggregate amount of bonuses payable pursuant to the Retention Program
(including Discretionary Bonuses) will not exceed $2,609,750 ("Stay Bonuses").
2. Critical Employees. The names of each Critical Employee and the amount
------------------
of his or her Stay Bonus is specifically described on the Schedule of Payments
for the Retention Program. The employees selected to receive Stay Bonuses
pursuant to the Retention Program are considered by ENBC to be critical to
ENBC's Business Initiatives. Specifically, these employees possess unique or
critical knowledge of ENBC's business, which knowledge (1) is necessary to
assure the successful completion of ENBC's Business Initiatives and assure
ENBC's continuation as an ongoing business enterprise and (2) could not be
readily replaced on the open market.
3. Bonus Amounts. The amounts of the Stay Bonuses for each Critical
-------------
Employee have been determined by ENBC's Chief Executive Officer after
consultation with other members of management and members of the Board of
Directors' compensation committee and are based upon: (1) the employee's
importance to ENBC and the Restructuring; (2) the marketability of the
employee's skills and the likelihood that he or she might leave ENBC; and (3)
the financial constraints currently imposed upon ENBC. As set forth on the
Schedule of Payments, the amount of each Stay Bonus is based on a fraction of
each Critical Employee's current regular annual base salary. The Stay Bonuses
are in addition to any other bonuses to which a Critical Employee may otherwise
be entitled.
4. Payment Date. Each Critical Employee will be paid his or her Stay
------------
Bonus on the payment dates set forth in the Schedule of Payments. Discretionary
Bonuses will be paid at such time or times as determined by ENBC's Chief
Executive Officer in his sole discretion. In the event a Critical Employee is
terminated without Cause or resigns for Good Reason, the remaining unpaid
portion of his or her Stay Bonus will be payable as if such Critical Employee
had remained an employee. In the event a Critical Employee is terminated for
Cause or resigns other than for Good Reason prior to the date any portion of the
Stay Bonus would otherwise be
<PAGE>
payable, then ENBC shall have no further obligation to pay any remaining portion
of the Stay Bonus. Upon the death or total disability of a Critical Employee
prior to the completion of the Restructuring, ENBC will pay a prorated portion
of the Stay Bonus to the Critical Employee or his or her estate on each date a
Stay Bonus payment would otherwise have been payable.
5. Definition of "Cause." For the purpose of the Retention Program,
---------------------
"Cause" means (1) the willful and continued failure by the Critical Employee to
substantially perform the Critical Employee's duties with the Company (other
than any such failure resulting from the Critical Employee's incapacity due to
physical or mental illness or any such actual or anticipated failure after
termination by the Critical Employee for Good Reason) after a written demand for
substantial performance is delivered to the Critical Employee by ENBC, which
demand specifically identifies the manner in which ENBC believes that the
Critical Employee has not substantially performed the duties; (2) the
misappropriation of funds or other property of ENBC; (3) the commission of any
felony or any crime involving moral turpitude; (4) the commission of fraud or
theft; or (5) the material breach by the Critical Employee of any obligation of
the Critical Employee under any written confidentiality or non-compete agreement
between the Critical Employee and ENBC. For purposes of this definition, (x) no
act, or failure to act, on the Critical Employee's part shall be deemed
"willful" unless done, or omitted to be done, by the Critical Employee not in
good faith and without reasonable belief that the Critical Employee's act, or
failure to act, was in the best interest of ENBC and (y) in the event of a
dispute concerning the application of this provision, no claim by ENBC that
Cause exists shall be given effect unless ENBC establishes by clear and
convincing evidence that Cause exists.
6. Definition of "Good Reason." For the purpose of the Retention Program,
---------------------------
Good Reason" means the occurrence (without the Critical Employee's express
written consent) of any one of the following acts by ENBC or failures by ENBC to
act, unless, in the case of any act or failure to act described in paragraph
(1), (5) or (6) below, such act or failure to act is corrected within 15 days of
notice thereof given by the Critical Employee to ENBC: (1) a substantial adverse
alteration in the nature or status of the Critical Employee's responsibilities;
(2) a reduction by ENBC in the Critical Employee's annual base salary as in
effect on the date of the adoption of this Retention Program or as the same may
be increased from time to time; (3) the relocation of the Critical Employee's
principal place of employment to a location more than 60 miles from the Critical
Employee's existing principal place of employment or ENBC's requiring the
Critical Employee to be based anywhere other than such principal place of
employment (or permitted relocation thereof) except for required travel on
ENBC's business to an extent substantially consistent with the Critical
Employee's obligations; (4) the failure by ENBC to pay to the Critical Employee
any portion of his or her current compensation within seven (7) days of the date
such compensation is due; (5) the failure by the Company to continue in effect
any compensation plan in which the Critical Employee participates on the date of
the adoption of this Retention Program which is material to the Critical
Employee's total compensation, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to such plan,
or the failure by ENBC to continue the Critical Employee's participation therein
(or in such substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount or timing of payment of benefits provided
and the level of Critical Employee's participation relative to other
participants; or (6) the failure by ENBC to
2
<PAGE>
continue to provide the Critical Employee with benefits substantially similar to
those enjoyed by the Critical Employee under any of ENBC's life insurance,
medical, health and accident, or disability plans (except for across the board
changes similarly affecting all management employees of ENBC) or the failure of
ENBC to provide the Critical Employee with the number of paid vacation days to
which the Critical Employee is entitled in accordance with ENBC's normal
vacation policy in effect on the date of the adoption of this Retention Program.
The Critical Employee's right to terminate his or her employment for Good Reason
shall not be affected by the Critical Employee's incapacity due to physical or
mental illness. The Critical Employee's continued employment shall not
constitute consent to, or waiver of rights with respect to, any act or failure
to act constituting Good Reason hereunder. For purposes of any determination
regarding the existence of Good Reason, any claim by the Critical Employee that
Good Reason exists shall be presumed to be correct unless ENBC establishes by
clear and convincing evidence that Good Reason does not exist.
7. Vacancies in Critical Positions. If the position held by a Critical
-------------------------------
Employee becomes vacant prior to the successful completion of the restructuring
and ENBC hires a new employee for, or promotes a current employee to, that
position, the appropriate officers of ENBC will be authorized to offer to the
new or promoted employee a Stay Bonus up to the amount of the Stay Bonus
indicated on the Schedule of Payments for the employee currently holding that
position.
8. Assurances of Payment. ENBC will take such action as may be reasonably
---------------------
required to assure payment of the Stay Bonuses. Without limiting the generality
of the foregoing, the appropriate officers of ENBC are expressly authorized to
cause the issuance of one or more letters of credit, or similar security, to
secure such payment. In the event ENBC seeks to complete the Restructuring
pursuant to a reorganization proceeding, ENBC shall seek assumption of the
Retention Program as soon as practicable after commencing its case and will seek
to have all unpaid Stay Bonuses treated as administrative claims.
9. Miscellaneous Provisions.
------------------------
(a) No eligible employee shall have any right with respect to a Stay
Bonus hereunder until all of the conditions to the receipt of such Stay Bonus
have been met.
(b) ENBC shall have the right to deduct from any payment made under
this Employee Retention Program any federal, state, local or foreign income or
other taxes required by law to be withheld with respect to such payment.
(c) The expenses of administering the Employee Retention Program
shall be borne by ENBC.
(d) By accepting any benefit under this Employee Retention Program,
each eligible employee and each person claiming under or through such person
shall be conclusively deemed to have indicated his or her acceptance and
ratification of, and consent to, any action taken under the Employee Retention
Program by ENBC or those administering the Employee Retention Program.
3
<PAGE>
EXHIBIT 10.21
EINSTEIN
BAGEL CORP
N O A H 2000 Staff Officer Bonus Plan
I. Purpose
The purpose of the Plan is to establish a program of incentive
compensation for designated corporate officers of the Company that is
directly related to the performance results of the Company. The Plan
provides an annual incentive, contingent upon continued employment and
the achievement of certain corporate goals, to certain corporate officers
who make substantial contributions to the Company.
II. Definitions
Bonus Award means the award, as determined by the Committee, to be
granted to a Participant under the Plan.
Committee refers to the Compensation Committee of the Board of Directors
of the Company.
Company means Einstein/Noah Bagel Corp.
Corporate Staff Officer refers to a corporate officer of the Company who
holds any of the positions of President, Chief Executive Officer,
Executive VP of Operations, Chief Financial Officer, Chief Information
Officer, Chief Marketing Officer, SrVP & General Counsel, SrVP of Human
Resources, VP of Supply Chain, VP of Operational/Technical Services and
any other corporate officer of the Company so designated at the sole
discretion of the Committee.
Designated Beneficiary means the beneficiary or beneficiaries designated
in accordance with Article X hereof to receive the amount, if any,
payable under the Plan upon the Participant's death.
Fiscal Year refers to the period of time between the dates of December
27, 1999 and December 31, 2000.
Long-term Disability means the inability of the Participant to
substantially perform his or her duties to the Company by reason of
physical or mental disability, as determined by the Committee in its
reasonable discretion.
Participant means any officer designated by the Committee to participate
in the Plan who has received written notice of his or her designation as
a Participant.
Plan means the ENBC 2000 Staff Officer Bonus Plan
III. Eligibility
Participants in the Plan shall be selected by the Committee for the 2000
Fiscal Year from those Corporate Staff Officers whose efforts contribute
materially to the annual success of the Company. No employee shall be a
Participant unless he or she is chosen by the Committee, in its sole
discretion, and receives notice of such choice. No employee shall at any
time have the right to be selected as a Participant, nor, having been
selected as a Participant for the 2000 Fiscal Year, to be selected as a
participant in any other year.
<PAGE>
IV. Administration
The Committee, in its sole discretion, will determine eligibility for
participation, establish the target payout levels for each Participant,
establish corporate performance goals, calculate and determine the level
of attainment of such goals, and calculate the Bonus Award for each
Participant under the Plan. The Committee will also determine the time at
which Bonus Awards will be paid, and any restrictions on payment.
V. Bonus Awards
The Committee, with the input of management of the Company, will
establish a target payout level for each Participant and communicate such
target payout level to each Participant prior to or during the Fiscal
Year for which such award may be made. The Committee shall also establish
a system target for earnings before interest, taxes, depreciation and
amortization (EBITDA), and communicate such corporate performance goals
to each Participant prior to or during the Fiscal Year for which such
awards may be made. For this purpose EBITDA will be deemed to be
equivalent to "System EBITDAL" as defined in the agreement governing the
Company's bank debt as in effect on the date hereof. Bonus Awards will be
earned by each Participant based upon the level of attainment of such
corporate goal during the Fiscal Year, as determined by the Committee in
its sole discretion. As soon as practicable after the end of the Fiscal
Year the Committee shall determine the level of attainment of the
corporate goal and the Bonus Award to be made to each Participant.
VI. Termination of Employment
In the event of termination of a Participant's employment with the
Company by reason of death or long-term disability before the payment of
any Bonus Award, such Participant shall be eligible for a pro rata
portion of the Bonus Award that would have been paid in respect of the
Fiscal Year in which the termination occurred (provided a Bonus Award
would otherwise have been earned). Any such Bonus Award shall be paid as
soon as practicable after the end of the fiscal year in which such
termination occurs. In the event of a Participant's' death, such pro rata
payment shall be made to the Participant's Designated Beneficiary, or if
there is none living, to the estate of the Participant.
In the event of a Participant's voluntary termination of employment with
the Company for any reason, or termination by the Company for cause (as
defined in the Participant's Change of Control Agreement) before payment
of a Bonus Award is made, the Participant shall be ineligible for such
payment unless the Committee specifically determines that such Bonus
Award is to be paid.
VII. Non-Transferability of Benefits
A Participant may not assign, sell, encumber, transfer or otherwise
dispose of any rights or interests under the Plan except by will of the
laws of descent and distribution. Any attempted disposition not permitted
by the preceding sentence shall be null and void.
VIII. No Claim of Right Under the Plan
Other than as may be provided in an employment agreement as approved by
the Committee, no employee or other person shall have any claim or right
to be selected as a Participant under the Plan. Neither the Plan nor any
action taken pursuant to the Plan shall be construed as giving any
employee any right to be retained in the employ of the Company.
IX. Taxes
The Company shall deduct from all amounts paid under the Plan all
federal, state, local and other taxes required by law to be withheld with
respect to such payments.
2
<PAGE>
X. Designation and Change of Beneficiary
Each Participant may indicate upon notice to him or her by the Committee
of his or her right to receive a Bonus Award a designation of one or more
persons as the Designated Beneficiary who shall be entitled to receive
the amount, if any, payable under the Plan upon the death of the
Participant. Such designation shall be in writing to the Committee. A
Participant may, from time to time, revoke or change his or her
Designated Beneficiary without the consent of any prior Designated
Beneficiary by filing a written designation with the Committee. The last
such designation received by the Committee shall be controlling, provided
however that no designation, or change or revocation thereof, shall be
effective unless received by the Committee prior to the Participant's
death, and in no event shall it be effective as of a date prior to such
receipt.
XI. Payments to Persons Other Than the Participant
If the Committee shall find that any person to whom any amount is payable
under the Plan is unable to care for his or her affairs because of
illness or accident, or has died, then any payment due to such person or
his or her estate (unless a prior claim therefore has been made by a duly
appointed legal representative) may, if the Committee so directs, be paid
to his or her spouse, a child, a relative, an institution maintaining or
having custody of such person, or any other person deemed by the
Committee, in its sole discretion, to be a proper recipient on behalf of
such person otherwise entitled to payment. Any such payment shall be a
complete discharge of the liability of the Company therefor.
XII. No Liability of Committee Members; Indemnification
No member of the Committee shall be personally liable by reason of any
contract or other instrument related to the Plan executed by such member
or on his or her behalf in his or her capacity as a member of the
Committee, nor for any mistake of judgment made in good faith, and the
Company shall indemnify and hold harmless each employee, officer or
director of the Company to whom any duty or power relating to the
administration or interpretation of the Plan may be allocated or
delegated, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such
member in connection with any action, suit or proceeding arising out of
or relating to the Plan if such member acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the Company. Any determination as to whether indemnification
shall be provided hereunder shall be made by the Board of Directors of
the Company.
XIII. Termination or Amendment of the Bonus Plan
The Committee may amend, suspend or terminate the Plan at any time, in
its sole discretion.
XIV. Unfunded Plan
Participants shall have no right, title, or interest whatsoever in or to
any investments that the Company may make to aid it in meeting its
obligations under the Plan. Notwithstanding anything contained herein to
the contrary, to the extent that any person acquires a right to receive
payments from the Company under the Plan, such right shall be no greater
than the right of an unsecured general creditor of the Company.
The Plan is not intended to be subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). To the extent the Plan is
determined to be so subject, it is intended to constitute a "plan which
is unfunded and is maintained by the employer primarily for the purpose
of providing deferred compensation for a select group of management or
highly compensated employees," as such phrased is used in ERISA, and the
terms of the Plan shall be interpreted consistent with such intent.
3
<PAGE>
XV. Governing Law
The terms of the Plan and all rights thereunder shall be governed by and
construed in accordance with the laws of the State of Colorado, without
reference to principles of conflict of laws.
XVI. Effective Date
The effective date of the Plan is February 11, 2000.
4
<PAGE>
Exhibit 12
Einstein/Noah Bagel Corp.
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
---------------------------------------------------------------------------
December 31, December 29, December 28, December 27, December 26,
1995 1996 1997 1998 1999
------------- ------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes...... $(43,716) $ 5,707 $ 3,571 $(203,706) $(14,277)
Add: Total fixed charges deducted
from earnings (loss)................. 2,064 7,478 7,403 22,393 22,119
------------- ------------ ---------------- ------------- -------------
Earnings (loss) available for payment
of fixed charges..................... $(41,652) $13,185 $10,974 $(181,313) $ 7,842
============= ============ ================ ============= =============
Fixed Charges:
Interest expense..................... $ 1,434 $ 6,950 $ 6,098 $ 11,811 $ 11,877
Portion of operating lease payments
deemed to be interest............ 630 528 1,305 10,582 10,242
------------- ------------ ---------------- ------------- -------------
Total fixed charges...................... $ 2,064 $ 7,478 $ 7,403 $ 22,393 $ 22,119
============= ============ ================ ============= =============
Ratio of earnings to fixed charges....... - 1.76 1.48 - 0.35
============= ============ ================ ============= =============
Deficiency of earnings available
to cover fixed charges............... $(43,716) $(203,706)
============= =============
</TABLE>
<PAGE>
Exhibit 21
Einstein/Noah Bagel Corp.
Subsidiaries of the Company
---------------------------
Einstein/Noah Bagel Partners, Inc.,
a California corporation
Einstein/Noah Bagel Partners, L.P.,
a Delaware limited partnership
<PAGE>
Exhibit 23.1
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation
of our reports dated March 23, 2000 on our audit of the consolidated financial
statements, and the related schedule, of Einstein/Noah Bagel Corp. (the
"Company") included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-28941, 333-44339 and 333-44353.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 2,708
<SECURITIES> 0
<RECEIVABLES> 1,289
<ALLOWANCES> 0
<INVENTORY> 9,456
<CURRENT-ASSETS> 14,780
<PP&E> 123,736
<DEPRECIATION> 0
<TOTAL-ASSETS> 361,260
<CURRENT-LIABILITIES> 197,643
<BONDS> 0
0
0
<COMMON> 341
<OTHER-SE> 114,634
<TOTAL-LIABILITY-AND-EQUITY> 361,260
<SALES> 375,549
<TOTAL-REVENUES> 375,549
<CGS> 124,071
<TOTAL-COSTS> 329,233
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,877)
<INCOME-PRETAX> (15,364)
<INCOME-TAX> 106
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,383)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
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