<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 9, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21097
EINSTEIN/NOAH BAGEL CORP.
(Exact name of registrant as specified in its charter)
Delaware 84-1294908
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1687 Cole Boulevard
Golden, CO 80401
(Address of principal executive offices, including zip code)
(303) 568-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-------
Number of shares of common stock, $.01 par value per share, outstanding as of
August 21, 2000: 34,083,681 (includes 813,146 shares of common stock held by a
subsidiary of the Company).
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 26, 1999 and
July 9, 2000................................................................ 3
Consolidated Statements of Operations for the quarter and two quarters
ended July 11, 1999 and July 9, 2000........................................ 4
Consolidated Statements of Cash Flows for the two quarters
ended July 11, 1999 and July 9, 2000........................................ 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................ 21
Signature Page...................................................................... 22
Exhibit Index....................................................................... 23
</TABLE>
2
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 26, July 9,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........................................ $ 2,708 $ 1,316
Restricted deposits.............................................. - 270
Accounts receivable, net......................................... 1,289 1,170
Inventories...................................................... 9,456 7,594
Prepaid expenses and other current assets........................ 1,327 1,508
--------- ---------
Total current assets.......................................... 14,780 11,858
Property and Equipment, net........................................ 123,736 122,373
Goodwill, net...................................................... 211,848 205,595
Trademarks, net.................................................... 2,052 2,039
Recipes, net....................................................... 2,358 2,189
Other Assets, net.................................................. 6,486 3,942
--------- ---------
Total assets.................................................. $ 361,260 $ 347,996
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities Not Subject to Compromise:
Current Liabilities:
Accounts payable.............................................. $ 15,344 $ 8,552
Accrued expenses.............................................. 20,699 24,464
Revolving credit facility..................................... 18,600 -
Senior term loan.............................................. 18,000 -
Convertible subordinated debentures........................... 125,000 -
--------- ---------
Total current liabilities................................... 197,643 33,016
Debtor-in-Possession Financing................................... - 23,717
Other Noncurrent Liabilities..................................... 15,798 13,034
--------- ---------
Total liabilities not subject to compromise................. 213,441 69,767
Liabilities Subject to Compromise.................................. - 151,757
Minority Interest.................................................. 32,844 30,337
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 December 1999 and July 2000....... 341 341
Additional paid-in capital....................................... 377,616 377,616
Treasury stock, at cost (813,146 shares at
December 1999 and July 2000).................................. (5,261) (5,261)
Accumulated deficit.............................................. (257,721) (276,561)
--------- ---------
Total stockholders' equity.................................... 114,975 96,135
--------- ---------
Total liabilities and stockholders' equity.................... $ 361,260 $ 347,996
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
------------------- --------------------
July 11, July 9, July 11, July 9,
1999 2000 1999 2000
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Store revenue........................................ $87,296 $84,149 $199,649 $202,472
Costs and Expenses:
Store:
Cost of products sold............................. 28,523 27,168 66,008 66,061
Salaries and benefits............................. 27,356 25,481 62,750 62,219
Other controllable costs.......................... 6,753 7,185 15,940 17,523
Rent, occupancy and related costs................. 8,214 7,267 19,564 18,489
Marketing expenses................................ 2,218 3,552 5,589 8,524
Depreciation and amortization..................... 2,400 2,807 5,693 6,460
------- ------- -------- --------
Total store costs and expenses.................. 75,464 73,460 175,544 179,276
Non-Store:
Salaries, benefits, general and
administrative.................................. 8,215 6,696 18,778 17,629
Pre-petition reorganization expenses.............. - - - 2,641
Depreciation and amortization
(excluding goodwill amortization)............... 917 1,659 2,146 3,138
Goodwill amortization............................. 2,731 2,689 6,146 6,253
------- ------- -------- --------
Total non-store costs and expenses.............. 11,863 11,044 27,070 29,661
------- ------- -------- --------
Total costs and expenses........................ 87,327 84,504 202,614 208,937
------- ------- -------- --------
Loss from Operations................................... (31) (355) (2,965) (6,465)
Other Income (Expense):
Interest expense (contractual interest $3,147 for
quarter ended July 9, 2000 and $7,082 for two
quarters ended July 9, 2000)...................... (2,689) (1,385) (6,360) (5,320)
Other................................................ 16 11 (15) 29
------- ------- -------- --------
Total other income (expense)...................... (2,673) (1,374) (6,375) (5,291)
------- ------- -------- --------
Loss before Reorganization Items,
Income Taxes and Minority Interest................... (2,704) (1,729) (9,340) (11,756)
Reorganization Items:
Provision for loss on disposal of assets............. - (3,831) - (3,831)
Provision for rejected executory contracts........... - (2,918) - (2,918)
Professional fees.................................... - (2,812) - (2,812)
------- ------- -------- --------
Total reorganization items........................ - (9,561) - (9,561)
------- ------- -------- --------
Loss before Income Taxes and Minority Interest......... (2,704) (11,290) (9,340) (21,317)
Provision for Income Taxes............................. - - - 30
Minority Interest in Income (Loss) of Subsidiary....... 29 (1,781) (905) (2,507)
------- ------- -------- --------
Net Loss............................................... $(2,733) $(9,509) $ (8,435) $(18,840)
======= ======= ======== ========
Basic Loss per Share................................... $ (0.08) $ (0.29) $ (0.25) $ (0.57)
======= ======= ======== ========
Diluted Loss per Share................................. $ (0.08) $ (0.29) $ (0.25) $ (0.57)
======= ======= ======== ========
Weighted Average Number of Common Shares Outstanding:
Basic............................................. 33,271 33,271 33,271 33,271
======= ======= ======== ========
Diluted........................................... 33,271 33,271 33,271 33,271
======= ======= ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Two Quarters Ended
---------------------
July 11, July 9,
1999 2000
---------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................................ $ (8,435) $ (18,840)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization...................................... 13,985 15,851
Minority interest.................................................. (905) (2,507)
Provision for write-down of assets................................. 353 1,280
Loss on disposal of assets......................................... - 576
Changes in assets and liabilities:
Accounts receivable............................................... 377 119
Accounts payable and accrued expenses............................. (629) 4,910
Other assets and liabilities...................................... 578 1,519
-------- ---------
Net cash provided by operating activities........................ 5,324 2,908
-------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment.................................. (6,055) (7,883)
Purchase of other assets............................................ (59) (34)
-------- ---------
Net cash used in investing activities.............................. (6,114) (7,917)
-------- ---------
Cash Flows from Financing Activities:
Borrowings under credit facility.................................... 86,275 86,140
Repayments under credit facility.................................... (84,925) (106,240)
Borrowings under debtor-in-possession facility...................... - 48,068
Repayments under debtor-in-possession facility...................... - (24,351)
-------- ---------
Net cash provided by financing activities.......................... 1,350 3,617
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents................. 560 (1,392)
Cash and Cash Equivalents, beginning of period....................... 3,766 2,708
-------- ---------
Cash and Cash Equivalents, end of period............................. $ 4,326 $ 1,316
======== =========
Operating Cash Receipts and Payments Resulting from Reorganization:
Professional fees paid.............................................. $ - $ (2,812)
======== =========
Net payments made related to closed stores.......................... $ - $ (2,021)
======== =========
Net proceeds from sale of store leases.............................. $ - $ 30
======== =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
5
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated interim financial statements have been prepared by
Einstein/Noah Bagel Corp. (the "Company") and are unaudited. The financial
statements have been prepared in accordance with the instructions for Form 10-Q
and, therefore, do not necessarily include all information and footnotes
required by generally accepted accounting principles. In the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows as of July 9, 2000 and for all periods
presented have been made. The statements are subject to year-end audit
adjustment. A description of the Company's accounting policies and other
financial information is included in the audited consolidated financial
statements filed with the Securities and Exchange Commission in the Company's
Form 10-K for the year ended December 26, 1999. The consolidated results of
operations for the quarter and two quarters ended July 9, 2000 are not
necessarily indicative of the results expected for the full year.
Certain amounts set forth in the accompanying financial statements for the
quarter and two quarters ended July 11, 1999 have been reclassified to conform
to the presentation for the current fiscal quarter.
2. Petitions for Reorganization Under Chapter 11
On April 27, 2000, the Company and its majority-owned subsidiary,
Einstein/Noah Bagel Partners, L.P. ("Bagel Partners"), filed voluntary petitions
for reorganization under Chapter 11 of the Federal Bankruptcy Code in the U.S.
Bankruptcy Court for the District of Arizona in Phoenix. Effective upon such
filings, the Company and Bagel Partners are operating their businesses as
debtors-in-possession, subject to the jurisdiction of the bankruptcy court. The
Chapter 11 cases are being jointly administered for procedural purposes by the
bankruptcy court under Case No. 00-04447-ECF-CGC. Einstein/Noah Bagel Partners,
Inc., a wholly-owned subsidiary of the Company and the general partner of Bagel
Partners, is not included in the Chapter 11 filings.
On April 27, 2000, the Company and Bagel Partners also filed with the
bankruptcy court a proposed joint plan of reorganization, and on August 11,
2000, the Company and Bagel Partners filed their first amended joint plan of
reorganization. Under the terms of the amended plan, Bagel Partners would be
merged into the Company, and general unsecured creditors of the Company
(primarily the holders of the Company's $125.0 million 7 1/4% Convertible
Subordinated Debentures due 2004 (the "Debentures")) would receive approximately
89 percent of the common stock of the reorganized Company and the minority
equity holders in Bagel Partners (primarily Bagel Store Development Funding,
L.L.C. ("Bagel Funding")) would receive approximately 11 percent of the common
stock of the reorganized Company. Holders of the Company's common stock would
not receive any distribution under the amended plan and such shares would be
cancelled. The bankruptcy court approved the disclosure statement pertaining to
the amended plan on July 28, 2000, and the disclosure statement was mailed on
August 14, 2000. The bankruptcy court has scheduled September 19, 2000 as the
date for the hearing on confirmation of the plan.
As debtors-in-possession, the Company and Bagel Partners are authorized to
operate their businesses, but may not engage in transactions outside the
ordinary course of business without approval, after notice and hearing, of the
bankruptcy court. An official committee of unsecured creditors, currently
consisting of HSBC Bank USA (indenture trustee for the Debentures), Loomis,
Sayles & Company, L.P., Kayne Anderson, Lonestar Partners, L.P. and Lampe,
Conway & Co., L.L.C., was originally formed by the U.S. Trustee on May 9, 2000
(the "Creditors Committee").
As of the petition date, actions to collect pre-petition indebtedness are
stayed and other contractual obligations may not be enforced against the Company
or Bagel Partners. In addition, the Company and Bagel Partners may reject
executory contracts and unexpired leases, and parties affected by these
rejections may file claims with the bankruptcy court in accordance with
procedures set by the bankruptcy court and the Bankruptcy Code. On April 28,
2000, the bankruptcy court approved the Company's payment of pre-petition
employee compensation, benefits and reimbursements and withholding taxes, and
the continued payment of these items. The bankruptcy court also approved the
timely payment, without interruption, of all pre-petition trade payables
incurred in the ordinary course of business, including vendor bills submitted
prior to the filing, provided that the vendors continued to offer the
6
<PAGE>
Company and Bagel Partners credit terms that were the same or better than those
offered pre-petition. To date, all pre-petition vendors are providing credit on
these terms.
On May 22, 2000, the bankruptcy court gave final approval to the Company's
debtor-in-possession financing agreement providing for borrowings of up to $36.0
million, $26.0 million of which replaces the Company's pre-petition revolving
credit facility in its entirety and $10.0 million of which provides additional
financing to pay, among other things, employee salaries and benefits, vendors,
interest and certain other payments on senior secured debt, professional fees
and permitted capital expenditures. See Note 4.
On July 27, 2000, the bankruptcy court approved the Company's assumption of
its contract with Marriott Distribution Services, Inc.
On July 28, 2000, the bankruptcy court approved (a) the Company's employment
contract with Robert M. Hartnett, the Company's chairman, chief executive
officer and president, (b) the Company's severance agreements with certain of
its officers, providing certain severance benefits in the event of termination
of employment following a change in control of the Company, and (c) the
Company's amended and restated employee retention program.
As permitted under the Bankruptcy Code and approved by the bankruptcy court,
the Company and Bagel Partners have elected to reject certain real estate
leases. The Company and Bagel Partners have not yet completed their review of
all of their pre-petition contracts and leases for assumption or rejection. The
Company and Bagel Partners will continue their analysis, and may assume or
reject additional leases and other executory contracts. For the two quarters
ended July 9, 2000, the Company and Bagel Partners have recorded a charge to
income of $2.9 million for rejected leases and executory contracts.
The accompanying consolidated interim financial statements have been prepared
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, the uncertainty regarding the eventual outcome of the
reorganization cases of the Company and Bagel Partners, and the effect of other
unknown adverse factors, could threaten the debtors' existence as going
concerns. Continuing on a going concern basis is dependent upon, among other
things, the confirmation of a plan of reorganization, the success of future
business operations, and the generation of sufficient cash from operations and
financing sources to meet the debtors' obligations. The accompanying
consolidated interim financial statements do not reflect (a) adjustments that
may be necessary to present the realizable value of assets on a liquidation
basis, (b) aggregate pre-petition liability amounts that may be allowed for
claims or contingencies, or their status or priority, (c) the effect of any
changes to the debtors' capital structure or in their business operations as the
result of a confirmed plan of reorganization, or (d) adjustments to the carrying
value of assets or liability amounts that may be necessary as the result of
actions by the bankruptcy court.
All costs and expenses associated with the Company's balance sheet
restructuring efforts incurred prior to the petition filing date have been
reflected as pre-petition reorganization expenses. Such expenses consisted
principally of professional fees paid to representatives of the Company and
Bagel Partners, and professional fees incurred by the Company's lenders, the
holders of the Debentures and the members of Bagel Funding which were paid by
the Company. Of such expenses, $1.3 million had been incurred in fiscal 1999
and had previously been capitalized in anticipation of the issuance of
securities by the Company in a restructuring transaction.
All costs and expenses incurred in connection with the Company's
reorganization since the petition filing date through July 9, 2000 have been
reflected as reorganization items in the accompanying consolidated statements of
operations. Through such date, the reorganization items consisted primarily of
a provision of $3.8 million for loss on disposal of assets, a provision of $2.9
million for rejected leases and executory contracts, and charges of $2.8 million
for professional fees paid to representatives of the Company and Bagel Partners,
and professional fees incurred by the Company's lenders and the Creditors
Committee which were paid by the Company.
3. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7
<PAGE>
4. Debtor-in-Possession Financing
On May 22, 2000, the bankruptcy court gave final approval of the Company's
debtor-in-possession financing agreement, providing for borrowings of up to
$36.0 million (the "DIP Facility"). Of such amount, $26.0 million replaces the
Company's pre-petition revolving credit facility in its entirety and $10.0
million provides additional funding for the Company's and Bagel Partner's
operating expenses, including employee salaries and benefits, payments to
vendors, interest and certain other payments under the DIP Facility,
professional fees and permitted capital expenditures. Under the terms of the
DIP Facility, the revolving funds are available until the earliest of (i)
December 31, 2000, (ii) the date on which a plan of reorganization becomes
effective, or (iii) the stated date on which the Company's exit financing
commitment expires by its terms, as such date may be extended from time to time.
Draws made under the DIP Facility bear interest at a rate equal to Bank of
America, N.A.'s reference rate plus 1.00% (10.5% at July 9, 2000). The Company
is required to pay an unused line fee of 0.5%. The DIP Facility is secured by
substantially all of the assets of the Company and its subsidiaries, including
Bagel Partners. The DIP Facility contains financial covenants requiring the
maintenance of minimum cumulative EBITDA (as defined in the DIP Facility),
weekly per store average ("WPSA") revenues and limiting capital expenditures, as
well as negative covenants limiting additional indebtedness, liens and sales of
assets, and prohibiting dividend payments.
5. Exit Financing Commitment
On April 25, 2000, the Company received from BNP Paribas ("Paribas") a
commitment for a $60.0 million secured credit facility to be made available upon
the Company's and Bagel Partners' emergence from Chapter 11. The facility
includes a $15.0 million revolving line of credit maturing five years from
closing, a $25.0 million amortizing term loan which will have a final maturity
four years after closing and a $20.0 million amortizing term loan which will
have a final maturity five years after closing. Proceeds of the facility would
be used to repay existing indebtedness to the Company's debtor-in-possession and
pre-petition lenders, to fund capital expenditures, and for working capital and
general corporate purposes. The facility would bear interest at rates ranging
from 1.5% to 2.5% over Paribas' base rate (or corresponding margins over LIBOR),
determined based on the Company's ratio of debt to earnings before interest,
taxes, depreciation and amortization (EBITDA). Paribas' commitment is subject
to the satisfaction, on or before October 31, 2000, of certain conditions,
including the confirmation of a plan of reorganization, the conversion of both
the Debentures and the minority equity interest in Bagel Partners into common
stock of the reorganized Company, the continuity of the Company's existing
management team and the satisfaction of certain financial covenants. Paribas'
commitment was approved by the bankruptcy court on May 22, 2000.
6. Commitments and Contingencies
The Company has entered into agreements with certain vendors which provide
for minimum purchases over specified terms. Such agreements call for
retroactive rate adjustments or cash settlement in the event of purchase
shortfalls. Management believes that the ultimate settlement of such
commitments will not have a material impact on the consolidated financial
position or results of operations of the Company.
Bagel 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 (the "Put
Right") to require Bagel Partners or the Company (at Bagel Partners' election)
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 ("License Termination"). 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 July 9, 2000, would be equal to approximately $49.6 million.
The Company or Bagel Partners may pay the purchase price for such equity
interests in cash, shares of the Company's common stock (value
8
<PAGE>
based on the average closing sales price per share for the 20 trading days
ending with the second business day prior to the date such shares are delivered)
or a combination thereof.
On March 28, 2000, Bagel Partners received a notice from representatives of
Bagel Funding requesting on behalf of Bagel Funding that Bagel Partners seek the
License Termination, pursuant to the applicable provisions of the partnership
agreement governing Bagel Partners. Such termination requires the consent of
the Company. By notice dated March 29, 2000, Bagel Partners, through its
general partner, Einstein/Noah Bagel Partners, Inc., requested that the Company
consent to the License Termination. Under the Bagel Partners partnership
agreement, the Company has a period of 120 days to respond to such request. The
Company has not consented to the License Termination.
On March 30, 2000, Bagel Partners received a letter from a representative of
Bagel Funding stating that it was Bagel Funding's position that the Company had
already rejected the request for License Termination. The letter further stated
that Bagel Funding had determined to exercise its right to require Bagel
Partners to purchase Bagel Funding's interest in Bagel Partners and that Bagel
Funding demanded immediate cash payment of the purchase price for such interest.
On May 10, 2000, the Company and Bagel Partners filed a motion in the
bankruptcy court in which they asked the court to determine that the joint plan
of reorganization filed by them properly classifies the interest of Bagel
Funding as an equity interest in Bagel Partners. The Creditors Committee also
has filed a motion seeking to characterize Bagel Funding's rights as an equity
interest or to subordinate any claims Bagel Funding may have.
On August 7, 2000, the bankruptcy court issued a ruling with respect to the
Put Right. Specifically, the court held as to Bagel Partners that the Put Right
is an equity interest in, and not a debt claim against, Bagel Partners. The
court reserved for determination at the hearing on confirmation of the plan the
issue of what value, if any, should be ascribed to the Put Right and whether the
Put Right entitles Bagel Funding to a larger distribution than that provided for
in the plan.
As to the Company, the bankruptcy court concluded that the Put Right does not
create an enforceable right to payment in favor of Bagel Funding against the
Company. Accordingly, the bankruptcy court found that any rights that Bagel
Funding may have against the Company are not claims against, but equity
interests in, the Company. The bankruptcy court further noted that even if
Bagel Funding held a claim against the Company based on the Put Right, such
claim would be subordinated to other claims in the Company's bankruptcy,
including those of the holders of the Debentures, pursuant to the Bankruptcy
Code.
Bagel Funding has filed a notice of appeal of the bankruptcy court's ruling.
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.
7. Liabilities Subject to Compromise
Certain claims against the Company and Bagel Partners in existence prior to
the filing of the petitions for relief under Chapter 11 of the Bankruptcy Code
are stayed while the Company and Bagel Partners are operating their businesses
as debtors-in-possession. These pre-petition claims are reflected in the July
9, 2000 balance sheet as "liabilities subject to compromise." Liabilities
subject to compromise consist of the following (in thousands):
Convertible Subordinated Debentures, 7 1/4% $125,000
Senior Term Loan 16,500
Accrued Interest, Convertible Subordinated Debentures, 7 1/4% 3,751
Provision for Rejected Executory Contracts 2,784
Other Miscellaneous Claims 3,722
--------
$151,757
========
9
<PAGE>
Additional liabilities subject to compromise may arise subsequent to the
petition filing date resulting from rejection of executory contracts, including
leases, and from the determination by the bankruptcy court (or agreed to by
parties in interest) of allowed claims for contingencies and other disputed
amounts.
Contractual interest on the Debentures for the quarter and two quarters ended
July 9, 2000, was $2.0 million and $4.9 million, respectively. Reported
interest on the Debentures for the quarter and two quarters ended July 9, 2000
was $0.3 million and $3.1 million, respectively, which reflects the Company's
decision to cease accruing interest on the Debentures as of the petition filing
date.
8. Restricted Deposits
At July 9, 2000, the Company and its subsidiaries held $270,000 in restricted
deposits, consisting of deposits received from bidders on real estate leases and
related equipment of closed stores. Deposits of successful bidders will become
available for unrestricted use upon consummation of the sales, and at such time
deposits of unsuccessful bidders will be required to be returned.
10
<PAGE>
9. Condensed Combined Financial Statements of the Company and Bagel Partners
Set forth below are condensed combined financial statements of the Company
and Bagel Partners for the quarter and two quarters ended July 9, 2000. Such
financial statements present the financial position and results of operations of
the Company and Bagel Partners separately from the financial position and
results of operations of Einstein/Noah Bagel Partners, Inc., which is not in
reorganization. The financial position and results of operations of the Company
and Bagel Partners are shown on a combined basis under the caption entitled
"Entities in Reorganization - ENBC & ENBP, L.P." The financial position and
results of operations of Einstein/Noah Bagel Partners, Inc. are shown separately
under the caption entitled "Entity Not in Reorganization - ENBP, Inc."
Eliminations in consolidation are shown under the caption entitled
"Eliminations."
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
AS OF JULY 9, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Entities In
Reorganization Entity Not In
--------------
ENBC & Reorganization ENBC
---------------
ENBP, LP ENBP, Inc. Eliminations Consolidated
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents......................... $ 1,316 $ - $ - $ 1,316
Restricted deposits............................... 160 110 - 270
Accounts receivable, net.......................... 1,352 - (182) 1,170
Due (to)/from affiliates.......................... (19,723) 19,723 - -
Inventories....................................... 7,594 - - 7,594
Prepaid expenses and other current assets......... 1,308 200 - 1,508
--------- ---------- ------------ ------------
Total current assets........................... (7,993) 20,033 (182) 11,858
Investments in Subsidiaries/Parent.................. 363,035 1,826 (364,861) -
Note Receivable from Subsidiary..................... 22,560 - (22,560) -
Property and Equipment, net......................... 99,967 9,119 13,287 122,373
Goodwill, net....................................... 155,349 - 50,246 205,595
Other Noncurrent Assets, net........................ 11,555 - (3,385) 8,170
--------- ---------- ------------ ------------
Total assets................................... $ 644,473 $ 30,978 $ (327,455) $ 347,996
========= ========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities Not Subject to Compromise:
Current Liabilities:
Accounts payable............................... $ 8,552 $ - $ - $ 8,552
Accrued expenses............................... 24,536 110 (182) 24,464
--------- ---------- ------------ ------------
Total current liabilities.................... 33,088 110 (182) 33,016
Debtor-in-Possession Financing.................... 23,717 - - 23,717
Note Payable to Parent............................ 22,560 - (22,560) -
Other Noncurrent Liabilities...................... 20,584 - (7,550) 13,034
--------- ---------- ------------ ------------
Total liabilities not subject to compromise.. 99,949 110 (30,292) 69,767
Liabilities Subject to Compromise................... 151,757 - - 151,757
Minority Interest................................... - - 30,337 30,337
Total Stockholders' Equity.......................... 392,767 30,868 (327,500) 96,135
--------- ---------- ------------ ------------
Total liabilities and stockholders' equity..... $ 644,473 $ 30,978 $ (327,455) $ 347,996
========= ========== ============ ============
</TABLE>
11
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED JULY 9, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Entities In
Reorganization Entity Not In
--------------
ENBC & Reorganization ENBC
--------------
ENBP, LP ENBP, Inc. Eliminations Consolidated
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Store revenue.......................................... $ 84,149 $ - $ - $ 84,149
Royalties and franchise-related fees................... 4,368 895 (5,263) -
---------- ---------- ------------ ------------
Total revenue....................................... 88,517 895 (5,263) 84,149
Costs and Expenses:
Store:
Cost of products sold............................... 27,168 - - 27,168
Salaries and benefits............................... 25,481 - - 25,481
Other controllable costs............................ 7,185 - - 7,185
Rent, occupancy and related costs................... 11,930 - (4,663) 7,267
Marketing expenses.................................. 3,552 - - 3,552
Depreciation and amortization....................... 2,423 - 384 2,807
---------- ---------- ------------ ------------
Total store costs and expenses.................... 77,739 - (4,279) 73,460
Non-Store:
Salaries, benefits, general and
administrative.................................... 6,804 - (108) 6,696
Depreciation and amortization
(excluding goodwill amortization)................. 1,708 - (49) 1,659
Goodwill amortization............................... 1,956 - 733 2,689
---------- ---------- ------------ ------------
Total non-store costs and expenses................ 10,468 - 576 11,044
---------- ---------- ------------ ------------
Total costs and expenses.......................... 88,207 - (3,703) 84,504
---------- ---------- ------------ ------------
Income (Loss) from Operations............................ 310 895 (1,560) (355)
Total Other Income (Expense)............................. (1,867) - 493 (1,374)
---------- ---------- ------------ ------------
Income (Loss) before Reorganization Items,
Income Taxes and Minority Interest..................... (1,557) 895 (1,067) (1,729)
Reorganization Items:
Provision for gain (loss) on disposal of assets........ (5,080) - 1,249 (3,831)
Provision for rejected executory contracts............. (2,918) - - (2,918)
Professional fees...................................... (2,812) - - (2,812)
---------- ---------- ------------ ------------
Total reorganization items.......................... (10,810) - 1,249 (9,561)
---------- ---------- ------------ ------------
Income (Loss) before Income Taxes and Minority Interest.. (12,367) 895 182 (11,290)
Provision for Income Taxes............................... - - - -
Minority Interest in Loss of Subsidiary.................. - - (1,781) (1,781)
---------- ---------- ------------ ------------
Net Income (Loss)........................................ $ (12,367) $ 895 $ 1,963 $ (9,509)
========== ========== ============ ============
</TABLE>
12
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE TWO QUARTERS ENDED JULY 9, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Entities In
Reorganization Entity Not In
--------------
ENBC & Reorganization ENBC
--------------
ENBP, LP ENBP, Inc. Eliminations Consolidated
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Store revenue.......................................... $ 202,472 $ - $ - $ 202,472
Royalties and franchise-related fees................... 9,921 2,271 (12,192) -
---------- ---------- ------------ ------------
Total revenue....................................... 212,393 2,271 (12,192) 202,472
Costs and Expenses:
Store:
Cost of products sold............................... 66,061 - - 66,061
Salaries and benefits............................... 62,219 - - 62,219
Other controllable costs............................ 17,523 - - 17,523
Rent, occupancy and related costs................... 29,693 - (11,204) 18,489
Marketing expenses.................................. 8,524 - - 8,524
Depreciation and amortization....................... 5,626 - 834 6,460
---------- ---------- ------------ ------------
Total store costs and expenses.................... 189,646 - (10,370) 179,276
Non-Store:
Salaries, benefits, general and
administrative.................................... 17,905 - (276) 17,629
Pre-petition reorganization expenses................ 2,641 - - 2,641
Depreciation and amortization
(excluding goodwill amortization)................. 3,229 - (91) 3,138
Goodwill amortization............................... 4,563 - 1,690 6,253
---------- ---------- ------------ ------------
Total non-store costs and expenses................ 28,338 - 1,323 29,661
---------- ---------- ------------ ------------
Total costs and expenses.......................... 217,984 - (9,047) 208,937
---------- ---------- ------------ ------------
Income (Loss) from Operations............................ (5,591) 2,271 (3,145) (6,465)
Total Other Income (Expense)............................. (5,958) - 667 (5,291)
---------- ---------- ------------ ------------
Income (Loss) before Reorganization Items,
Income Taxes and Minority Interest..................... (11,549) 2,271 (2,478) (11,756)
Reorganization Items:
Provision for gain (loss) on disposal of assets........ (5,080) - 1,249 (3,831)
Provision for rejected executory contracts............. (2,918) - - (2,918)
Professional fees...................................... (2,812) - - (2,812)
---------- ---------- ------------ ------------
Total reorganization items.......................... (10,810) - 1,249 (9,561)
---------- ---------- ------------ ------------
Income (Loss) before Income Taxes and Minority Interest.. (22,359) 2,271 (1,229) (21,317)
Provision for Income Taxes............................... 30 - - 30
Minority Interest in Loss of Subsidiary.................. - - (2,507) (2,507)
---------- ---------- ------------ ------------
Net Income (Loss)........................................ $ (22,389) $ 2,271 $ 1,278 $ (18,840)
========== ========== ============ ============
</TABLE>
13
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
FOR THE TWO QUARTERS ENDED JULY 9, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Entities In
Reorganization Entity Not In
--------------
ENBC & Reorganization ENBC
--------------
ENBP, LP ENBP, Inc. Eliminations Consolidated
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................... $ (22,389) $ 2,271 $ 1,278 $ (18,840)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 13,418 - 2,433 15,851
Minority interest................................ - - (2,507) (2,507)
Provision for write-down of assets............... 1,280 - - 1,280
Loss (Gain) on disposal of assets................ 1,890 - (1,314) 576
Changes in assets and liabilities:
Accounts receivable............................ 45 - 74 119
Accounts payable and accrued expenses.......... 4,984 - (74) 4,910
Other assets and liabilities................... 3,680 (2,271) 110 1,519
---------- ------------ -------------- ------------
Net cash provided by
operating activities...................... 2,908 - - 2,908
---------- ------------ -------------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment.................. (7,883) - - (7,883)
Purchase of other assets............................ (34) - - (34)
---------- ------------ -------------- ------------
Net cash used in investing activities............ (7,917) - - (7,917)
---------- ------------ -------------- ------------
Cash Flows from Financing Activities:
Borrowings under credit facility.................... 86,140 - - 86,140
Repayments under credit facility.................... (106,240) - - (106,240)
Borrowings under debtor-in-possession facility...... 48,068 - - 48,068
Repayments under debtor-in-possession facility...... (24,351) - - (24,351)
---------- ------------ -------------- ------------
Net cash provided by financing activities........ 3,617 - - 3,617
---------- ------------ -------------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents.. (1,392) - - (1,392)
Cash and Cash Equivalents, beginning of period........ 2,708 - - 2,708
---------- ------------ -------------- ------------
Cash and Cash Equivalents, end of period.............. $ 1,316 $ - $ - $ 1,316
========== ============ ============== ============
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-Q under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of Einstein/Noah Bagel Corp. (the "Company"),
Einstein/Noah Bagel Partners, L.P., a majority-owned subsidiary of the Company
("Bagel Partners"), Einstein Bros(R) 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.
On April 27, 2000, the Company and Bagel Partners filed voluntary petitions
for reorganization under Chapter 11 of the Federal Bankruptcy Code, and the
Company and Bagel Partners filed a joint plan of reorganization. On August 11,
2000, the Company and Bagel Partners filed their first amended joint plan of
reorganization. Forward-looking statements related to the reorganization cases
and the joint plan of reorganization also involve known and unknown risks,
uncertainties and other factors. In particular, the successful emergence of the
Company and Bagel Partners from Chapter 11 is subject to confirmation of a plan
or plans of reorganization. In addition, the consummation of financing upon
emergence from Chapter 11 is subject to certain conditions. See Note 5 of Notes
to the Company's Consolidated Financial Statements.
In general, the results, performance or achievements of the Company, Bagel
Partners, Einstein Bros. stores and Noah's New York Bagels stores are dependent
upon a number of factors including, without limitation, 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; 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-Q. The Company cannot predict which factors
would cause actual results to differ materially from those indicated by the
forward-looking statements. In addition to considering statements that
explicitly describe such risks and uncertainties, readers are urged to consider
statements that include the terms "believes," "belief," "expects," "plans,"
"anticipates," "intends" or the like to be uncertain and forward-looking.
General
On April 27, 2000, the Company and its majority-owned subsidiary,
Einstein/Noah Bagel Partners, L.P. ("Bagel Partners"), filed voluntary petitions
for reorganization under Chapter 11 of the Federal Bankruptcy Code in the U.S.
Bankruptcy Court for the District of Arizona in Phoenix. Effective upon such
filings, the Company and Bagel Partners are currently operating their businesses
as debtors-in-possession, subject to the jurisdiction of the bankruptcy court.
The Chapter 11 cases are being jointly administered for procedural purposes by
the bankruptcy court under Case No. 00-04447-ECF-CGC. All court filings in
connection with the Company's bankruptcy can be accessed on the Internet at
http://azb.uscourts.gov. Einstein/Noah Bagel Partners, Inc., a wholly-owned
subsidiary of the Company and the general partner of Bagel Partners, is not
included in the Chapter 11 filings.
On April 27, 2000, the Company and Bagel Partners also filed with the
bankruptcy court a proposed joint plan of reorganization, and on August 11,
2000, the Company and Bagel Partners filed their first amended joint plan of
reorganization. Under the terms of the amended plan, Bagel Partners would be
merged into the Company, and general unsecured creditors of the Company
(primarily the holders of the Company's $125.0 million 7 1/4% Convertible
Subordinated Debentures due 2004 (the "Debentures")) would receive approximately
89 percent of the common stock of the reorganized Company and the minority
equity holders in Bagel Partners (primarily Bagel Store Development Funding,
L.L.C. ("Bagel Funding")) would receive approximately 11 percent of the common
15
<PAGE>
stock of the reorganized Company. Holders of the Company's common stock would
not receive any distribution under the amended plan and such shares would be
cancelled. The bankruptcy court has scheduled September 19, 2000 as the date
for the hearing on confirmation of the plan.
As debtors-in-possession, the Company and Bagel Partners are authorized to
operate their businesses, but may not engage in transactions outside the
ordinary course of business without approval, after notice and hearing, of the
bankruptcy court. An official committee of unsecured creditors, currently
consisting of HSBC Bank USA (indenture trustee for the Debentures), Loomis,
Sayles & Company, L.P., Kayne Anderson, Lonestar Partners, L.P., and Lampe,
Conway & Co., L.L.C., was originally formed by the U.S. Trustee on May 9, 2000
(the "Creditors Committee").
As of the petition date, actions to collect pre-petition indebtedness are
stayed and other contractual obligations may not be enforced against the Company
or Bagel Partners. In addition, the Company and Bagel Partners may reject
executory contracts and unexpired leases, and parties affected by these
rejections may file claims with the bankruptcy court in accordance with
procedures set by the bankruptcy court and the Bankruptcy Code. On April 28,
2000, the bankruptcy court approved the Company's payment of pre-petition
employee compensation, benefits and reimbursements and withholding taxes, and
the continued payment of these items. The bankruptcy court also approved the
timely payment, without interruption, of all pre-petition trade payables
incurred in the ordinary course of business, including vendor bills submitted
prior to the filing, provided that the vendors continued to offer the Company
and Bagel Partners credit terms that were the same or better than those offered
pre-petition. To date, all pre-petition vendors are providing the Company and
Bagel Partners credit on these terms.
On May 22, 2000, the bankruptcy court gave final approval to the Company's
debtor-in-possession financing agreement providing for borrowings of up to $36.0
million, of which $26.0 million replaces the Company's pre-petition revolving
credit facility in its entirety and $10.0 million of which provides additional
financing to pay, among other things, employee salaries and benefits, vendors,
interest and certain other payments on senior secured debt, professional fees
and permitted capital expenditures. See Note 4 of Notes to the Company's
Consolidated Financial Statements.
On July 27, 2000, the bankruptcy court approved the Company's assumption of
its contract with Marriott Distribution Services, Inc.
On July 28, 2000, the bankruptcy court approved (a) the Company's employment
contract with Robert M. Hartnett, the Company's chairman, chief executive
officer and president, (b) the Company's severance agreements with certain of
its officers, providing certain severance benefits in the event of termination
of employment following a change in control of the Company, and (c) the
Company's amended and restated employee retention program.
Results of Operations
Revenue. Total store net revenue decreased 3.7% to $84.1 million for the
quarter ended July 9, 2000 compared to $87.3 million for the prior comparable
quarter. The decrease in store net revenue for the quarter was primarily due to
a decrease in the average number of stores in operation to 471 from 538 for the
prior comparable quarter. The reduction in the average number of stores in
operation was the result of closing 74 underperforming stores in the second
quarter of 2000. The impact of fewer stores was offset by an increase in
average net weekly per store sales of 9.3% to $14,920 from $13,529 for the prior
comparable period. Average net weekly per store sales represents weekly per
store average revenue, after customer and employee discounts, for all stores
open at the end of the periods presented.
Total store net revenue increased 1.4% to $202.5 million for the two quarters
ended July 9, 2000 from $199.6 million for the prior comparable period. The
increase in store net revenue for the two quarters was due to an increase in
average net weekly per store sales of 10.0% to $14,655 from $13,196. The
increase in average net weekly per store sales was due to the effect of several
Company initiatives, including closure of underperforming stores, increased
marketing spending, menu changes, higher menu prices and focus on improved store
level operations. The increase in average net weekly per store sales was offset
by a decrease in the average number of stores in operation to 507 for the two
quarters from 537 for the prior comparable period.
16
<PAGE>
Comparable store sales increased 4.5% from the prior comparable quarter.
Comparable store sales represent average net weekly per store sales for stores
open since the beginning of the prior year's comparable period. There were 462
stores in the comparable store sales base.
Store Costs and Expenses. Cost of products sold as a percent of store net
revenue decreased to 32.3% for the quarter ended July 9, 2000 from 32.7% for the
prior comparable quarter and decreased to 32.6% for the two quarters ended July
9, 2000 from 33.1% for the prior comparable period. The decrease was
attributable to improved management of food costs.
Salaries and benefits as a percent of store net revenue decreased to 30.3%
for the quarter ended July 9, 2000 from 31.3% for the prior comparable quarter
and decreased to 30.7% for the two quarters ended July 9, 2000 from 31.4% for
the prior comparable period. The decrease reflects the elimination of higher
fixed labor costs as a percent of revenue at the underperforming stores closed
in the second quarter of 2000, as well as the Company's ability to leverage
store labor at operating stores as average net weekly per store sales increased.
Other controllable costs (such as utilities, repair and maintenance, and
supplies) as a percent of store net revenue increased to 8.5% for the quarter
ended July 9, 2000 from 7.7% for the prior comparable quarter and increased to
8.7% for the two quarters ended July 9, 2000 from 8.0% for the prior comparable
period. The increase was due primarily to an increase in system support fees,
credit card fees, and repair and maintenance charges.
Rent, occupancy and related costs as a percent of store net revenue decreased
to 8.6% for the quarter ended July 9, 2000 from 9.4% for the prior comparable
quarter and decreased to 9.1% for the two quarters ended July 9, 2000 from 9.8%
for the prior comparable period. The decrease reflects the elimination of
higher fixed rent expenses as a percent of revenue at the underperforming stores
closed in the second quarter of 2000, as well as the leverage gained by
increased average net weekly per store sales at operating stores.
Marketing expenses as a percent of store net revenue increased to 4.2% for
the quarter ended July 9, 2000 from 2.5% for the prior comparable quarter and
increased to 4.2% for the two quarters ended July 9, 2000 from 2.8% for the
prior comparable period. The increase was the result of a decision to increase
marketing spending in fiscal 2000.
As a result of the factors described above, store margins before depreciation
and amortization as a percent of store net revenue remained relatively constant
at 16.0% for the quarter ended July 9, 2000 compared to 16.3% for the prior
comparable quarter and 14.6% for the two quarters ended July 9, 2000 compared to
14.9% for the prior comparable period.
Depreciation and amortization as a percent of store net revenue increased to
3.3% for the quarter ended July 9, 2000 compared to 2.7% for the prior
comparable quarter and increased to 3.2% for the two quarters ended July 9, 2000
compared to 2.9% for the prior comparable period. The increase reflects the
elimination of negligible depreciation expense related to the underperforming
stores closed in the second quarter of 2000, the long-lived assets of which had
previously been determined to be impaired and were reduced to minimal amounts in
1998.
Non-Store Salaries, Benefits, General and Administrative. Non-store salaries,
benefits, general and administrative expenses as a percent of total revenue
decreased to 8.0% for the quarter ended July 9, 2000 compared to 9.4% for the
prior comparable quarter and decreased to 8.7% for the two quarters ended July
9, 2000 compared to 9.4% for the prior comparable period. The net change for
the two quarters reflects retention bonus accruals of $1.1 million, retention
bonus payments of $0.5 million, and a one-time charge of $0.4 million related to
commissary closures in the first quarter of 2000, offset by efficiencies of $1.5
million gained by the Company related to the infrastructure separation from
Boston Chicken, Inc., a one-time charge of $1.1 million related to store
closures in the first quarter of 1999 and a one-time charge of $0.6 million
related to the settlement of shareholder litigation in the second quarter of
1999.
Pre-Petition Reorganization Expenses. The Company incurred pre-petition
reorganization expenses of $2.6 million for the two quarters ended July 9, 2000;
there were no reorganization charges in the prior comparable
17
<PAGE>
period. Such expenses consist primarily of professional fees paid to
representatives of the Company and Bagel Partners, and professional fees
incurred by the Company's bank lenders, the holders of the Debentures and the
members of Bagel Funding, which were paid by the Company, including $1.3 million
of which had been incurred in fiscal 1999 and had previously been capitalized in
anticipation of the issuance of securities by the Company in a restructuring
transaction.
Non-Store Depreciation and Amortization. Non-store depreciation and
amortization (excluding goodwill amortization) as a percent of total revenue
increased to 2.0% for the quarter ended July 9, 2000 from 1.1% for the prior
comparable quarter and increased to 1.6% for the two quarters ended July 9, 2000
from 1.1% for the prior comparable period. The increase reflects the
capitalization of hardware, software and implementation services related to the
development of a business infrastructure independent of Boston Chicken, Inc.
Goodwill amortization as a percent of total revenue remained relatively constant
at 3.2% for the quarter ended July 9, 2000 compared to 3.1% for the prior
comparable quarter and remained constant at 3.1% for the two quarters ended July
9, 2000 and the prior comparable period.
Other Expense. The Company incurred other expense of $1.4 million for the
quarter ended July 9, 2000 compared to $2.7 million for the prior comparable
quarter and incurred $5.3 million for the two quarters ended July 9, 2000
compared to $6.4 million for the prior comparable period. The net change
reflects a decrease in interest expense recognized on the Debentures as a result
of the Company's Chapter 11 filing, offset by an increase in expense related to
a higher average amount of bank facility debt in the first two quarters of 2000.
See Note 7 of Notes to the Company's Consolidated Financial Statements.
Reorganization Items. The Company incurred reorganization items of $9.6
million for the quarter and the two quarters ended July 9, 2000; there were no
reorganization charges in the prior comparable periods. Such expenses consist
primarily of a provision of $3.8 million for loss on disposal of assets, a
provision of $2.9 million for rejected leases and executory contracts, and
charges of $2.8 million for professional fees paid to representatives of the
Company and professional fees incurred by the Company's bank lenders and the
Creditors Committee which were paid by the Company.
Minority Interest. The minority interest in losses of Bagel Partners was
$1.8 million for the quarter ended July 9, 2000 compared to a negligible amount
for the prior comparable quarter and $2.5 million for the two quarters ended
July 9, 2000 compared to $0.9 million for the prior comparable period.
Income Taxes. The Company had a $30,000 income tax expense in the first
quarter of 2000, consisting of state and local taxes.
Liquidity and Capital Resources
The Company's primary sources of capital in 1999 and the first two quarters
of 2000 were from internally generated cash from operations and borrowings under
the Company's revolving credit facility and debtor-in-possession financing
facility. Cash provided by operations for the two quarters ended July 9, 2000
was $2.9 million compared to $5.3 million for the prior comparable period. The
decrease in cash from operations was primarily the result of reorganization
expenses and reorganization items in an amount in excess of increases in store
cash flow.
The Company is a party to a debtor-in-possession financing agreement,
providing for borrowings in the form of a revolving loan of up to $36.0 million
(the "DIP Facility"). Of such amount, $26.0 million replaces the Company's pre-
petition revolving credit facility in its entirety and $10.0 million provides
additional funding for the Company's operating expenses, including employee
salaries and benefits, payments to vendors, interest and certain other payments
under the DIP Facility, professional fees and permitted capital expenditures.
Under the terms of the DIP Facility, the revolving loan is available to the
Company until the earliest of (i) December 31, 2000, (ii) the date on which a
plan of reorganization becomes effective, or (iii) the stated date on which the
Company's exit financing commitment expires by its terms, as such date may be
extended from time to time. Draws made under the DIP Facility bear interest at
a rate equal to Bank of America, N.A.'s reference rate plus 1.0% (10.5% at July
9, 2000). The Company is required to pay an unused line fee of 0.5%. The DIP
Facility is secured by substantially all of the
18
<PAGE>
assets of the Company and its subsidiaries. The DIP Facility contains financial
covenants requiring the maintenance of minimum cumulative EBITDA (as defined in
the DIP Facility), weekly per store average ("WPSA") revenues and limiting
capital expenditures, as well as negative covenants limiting additional
indebtedness, liens and sales of assets, and prohibiting dividend payments.
Cash provided by financing activities was $3.6 million for the two quarters
ended July 9, 2000, resulting from the net borrowings and repayments under the
Company's credit facilities. Borrowings and repayments for the two quarters
ended July 9, 2000 exceeded those for the prior comparable period because the
Company's credit agreement was amended in the first quarter of fiscal 2000 to
require daily repayment of funds and reborrowing on a gross basis, rather than
on a net basis, as previously permitted.
The Company's primary uses of capital in 2000, other than providing working
capital for normal operating expenses, are expected to consist primarily of
payment of professional fees in connection with the Company's capital
restructuring project and the Chapter 11 cases, expenditures related to the
development of business infrastructure and systems, including the acquisition of
hardware, software licenses, and implementation services for enterprise and
store systems, expenditures related to refurbishing existing stores,
expenditures related to the completion of work on the Company's support center,
and payment of interest and fees under the DIP Facility.
The Company's primary sources of capital in 2000 are expected to consist
primarily of internally generated cash from operations and borrowings under the
DIP Facility. In the event a plan of reorganization is confirmed and the
Company and Bagel Partners emerge from Chapter 11 on or before October 31, 2000,
the Company expects to enter into a $60 million secured credit facility with
Paribas, pursuant to the financing commitment it has received from Paribas. See
Note 5 of Notes to the Company's Consolidated Financial Statements. However,
the confirmation of a plan and the emergence of the Company and Bagel Partners
are subject to significant risks and uncertainties, and Paribas' commitment is
subject to a number of conditions. See "Special Note Regarding Forward-Looking
Statements" on page 15.
19
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Over time, the Company is exposed to market risks arising from changes in
interest rates. The Company has not historically used derivative financial
instruments.
As of July 9, 2000, $40.2 million of floating-rate debt was exposed to
changes in interest rates compared to $36.6 million at December 26, 1999. 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 results of operations.
As of July 9, 2000 and December 26, 1999, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Notes 2 and 6 of the Company's Notes to
Consolidated Financial Statements contained in Part I of this Form 10-Q is
incorporated herein by reference thereto.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits: See Exhibit Index appearing elsewhere herein, which is
incorporated herein by reference.
B. Reports on Form 8-K: During the quarter ended July 9, 2000, the
Company filed one current report on Form 8-K, dated April 27,
2000. The report disclosed in Item 3 that the Company and its
subsidiary, Einstein/Noah Bagel Partners, L.P. ("Bagel Partners"),
had filed voluntary petitions for protection under Chapter 11 of
the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the
District of Arizona in Phoenix.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EINSTEIN/NOAH BAGEL CORP.
Date: August 23, 2000 /s/ Robert M. Hartnett
----------------------------------------
Robert M. Hartnett
Chairman of the Board,
Chief Executive Officer and President
Date: August 23, 2000 /s/ Paula E. Manley
----------------------------------------
Paula E. Manley
Chief Financial Officer
22
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EXHIBIT INDEX
10.1 Restated Sixth Amendment and Waiver to Amended and Restated Credit
Agreement executed and delivered as of April 27, 2000 and restated and
modified as of June 15, 2000.
27 Financial Data Schedule.
23
