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UNITED STATESUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 16, 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) 215-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-------
Number of shares of common stock, $.01 par value per share, outstanding as of
May 26, 2000: 34,083,681 (includes 813,146 shares of common stock held by a
subsidiary of the Company).
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EINSTEIN/NOAH BAGEL CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 26, 1999 and
April 16, 2000........................................................ 3
Consolidated Statements of Operations for the quarters
ended April 18, 1999 and April 16, 2000............................... 4
Consolidated Statements of Cash Flows for the quarters
ended April 18, 1999 and April 16, 2000............................... 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 15
Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A....................... 15
Signature Page.................................................................... 16
Exhibit Index..................................................................... 17
</TABLE>
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EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
December 26, April 16,
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........................................ $ 2,708 $ 1,544
Accounts receivable, net......................................... 1,289 1,404
Inventories...................................................... 9,456 8,834
Prepaid expenses and other current assets........................ 1,327 2,260
--------- ---------
Total current assets.......................................... 14,780 14,042
Property and Equipment, net........................................ 123,736 124,939
Goodwill, net...................................................... 211,848 208,284
Trademarks, net.................................................... 2,052 2,031
Recipes, net....................................................... 2,358 2,262
Other Assets, net.................................................. 6,486 4,485
--------- ---------
Total assets.................................................. $ 361,260 $ 356,043
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable................................................. $ 15,344 $ 10,277
Accrued expenses................................................. 20,699 28,372
Revolving credit facility........................................ 18,600 22,402
Senior term loan................................................. 18,000 16,500
Convertible subordinated debentures.............................. 125,000 125,000
--------- ---------
Total current liabilities..................................... 197,643 202,551
Other Noncurrent Liabilities....................................... 15,798 15,730
Minority Interest.................................................. 32,844 32,118
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 April 2000...... 341 341
Additional paid-in capital....................................... 377,616 377,616
Treasury stock, at cost (813,146 shares at
December 1999 and April 2000)................................. (5,261) (5,261)
Accumulated deficit.............................................. (257,721) (267,052)
--------- ---------
Total stockholders' equity.................................... 114,975 105,644
--------- ---------
Total liabilities and stockholders' equity.................... $ 361,260 $ 356,043
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
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EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------
April 18, April 16,
1999 2000
--------- ---------
<S> <C> <C>
Revenue:
Store revenue........................................ $112,353 $118,323
Costs and Expenses:
Store:
Cost of products sold............................. 37,485 38,893
Salaries and benefits............................. 35,394 36,738
Other controllable costs.......................... 9,187 10,337
Rent, occupancy and related costs................. 11,350 11,222
Marketing expenses................................ 3,371 4,972
Depreciation and amortization..................... 3,293 3,654
-------- --------
Total store costs and expenses.................. 100,080 105,816
Non-Store:
Salaries, benefits, general and
administrative.................................. 10,563 10,933
Reorganization expenses........................... - 2,641
Depreciation and amortization
(excluding goodwill amortization)............... 1,229 1,479
Goodwill amortization............................. 3,415 3,564
-------- --------
Total non-store costs and expenses.............. 15,207 18,617
-------- --------
Total costs and expenses........................ 115,287 124,433
-------- --------
Loss from Operations................................... (2,934) (6,110)
Other Income (Expense):
Interest expense..................................... (3,671) (3,935)
Other................................................ (31) 18
-------- --------
Total other income (expense)...................... (3,702) (3,917)
-------- --------
Loss before Income Taxes and Minority Interest......... (6,636) (10,027)
Provision for Income Taxes............................. - 30
Minority Interest in Loss of Subsidiary................ (934) (726)
-------- --------
Net Loss............................................... $ (5,702) $ (9,331)
======== ========
Basic Loss per Share................................... $ (0.17) $ (0.28)
======== ========
Diluted Loss per Share................................. $ (0.17) $ (0.28)
======== ========
Weighted Average Number of Common Shares Outstanding:
Basic............................................. 33,271 33,271
======== ========
Diluted........................................... 33,271 33,271
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
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EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------
April 18, April 16,
1999 2000
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................... $ (5,702) $ (9,331)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 7,937 8,697
Minority interest....................................... (934) (726)
Provision for write-down of assets...................... 353 1,280
Loss on disposal of assets.............................. - 464
Changes in assets and liabilities:
Accounts receivable................................... 324 (115)
Accounts payable and accrued expenses................. 1,321 3,166
Other assets and liabilities.......................... 547 (388)
-------- --------
Net cash provided by operating activities......... 3,846 3,047
-------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment......................... (3,335) (6,512)
Purchase of other assets................................... (36) (1)
-------- --------
Net cash used in investing activities................... (3,371) (6,513)
-------- --------
Cash Flows from Financing Activities:
Borrowings under credit facility........................... 48,550 70,527
Repayments under credit facility........................... (47,750) (68,225)
-------- --------
Net cash provided by financing activities............... 800 2,302
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents......... 1,275 (1,164)
Cash and Cash Equivalents, beginning of period............... 3,766 2,708
-------- --------
Cash and Cash Equivalents, end of period..................... $ 5,041 $ 1,544
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
5
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EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated interim financial statements have been prepared by the
Company and are unaudited. The financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not
necessarily include all information and footnotes required by generally accepted
accounting principles. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position, results of operations and cash
flows as of April 16, 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 are included in
the audited consolidated financial statements filed with the Securities and
Exchange Commission in the Company's Form 10-K for the year ended December 26,
1999. The consolidated results of operations for the quarter ended April 16,
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 ended April 18, 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 business 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. Under the terms of the
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) 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
receive warrants to purchase 2 percent of the common stock of the reorganized
Company on a fully diluted basis, exercisable at the price per share at which
the shares of common stock received by the debenture holders will result in
their recovering the value of their claims in full. The bankruptcy court has not
yet considered approval of either the plan or the disclosure statement
pertaining to the plan, and votes on the plan may not be solicited unless and
until the disclosure statement pertaining to the plan has been approved by the
bankruptcy court.
As debtors-in-possession, the Company and Bagel Partners are authorized to
operate their business, but may not engage in transactions outside of the normal
course of business without approval, after notice and hearing, of the bankruptcy
court. An official committee of unsecured creditors, consisting of HSBC Bank USA
(indenture trustee for the debentures), Loomis, Sayles & Company, L.P. and Kayne
Anderson, was 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 lease obligations, 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
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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, 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.
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 to analyze, and may assume or reject,
additional leases and other executory contracts. The Company and Bagel Partners
cannot presently determine or reasonably estimate the aggregate liability
resulting from rejection of executory contracts and unexpired leases for which
claims have been, or may be, filed. The bankruptcy court has fixed June 30, 2000
as the date by which the holders of claims against or interests in either the
Company or Bagel Partners must file a proof of claim or interest.
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. In addition, the report of the Company's independent public
accountants, Arthur Andersen LLP, for the Company's fiscal year ended December
26, 1999, includes a qualification expressing substantial doubt about the
Company's ability to continue as a going concern. 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 and incurred through April 16, 2000 have been reflected as
reorganization expenses in the accompanying consolidated statements of
operations. Through such date, the reorganization expenses consisted primarily
of professional fees paid to representatives of the Company and professional
fees incurred by the Company's lenders, the holders of the Company's convertible
subordinated debt 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.
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.
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
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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%
(10.00% at April 16, 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. 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 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 April
16, 2000, 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 (value 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
yet responded to the License Termination request.
On March 30, 2000, Bagel Partners received a letter from a representative
of Bagel Funding stating that it is Bagel Funding's position that the Company
has 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 it may have.
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.
8
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6. Subsequent Events
On April 27, 2000, prior to the filing of their Chapter 11 petitions, the
Company and Bagel Partners closed 74 under-performing Einstein Bros. Bagels and
Noah's New York Bagels stores, and in connection with the store closings the
Company terminated the employment of approximately 800 store level and field
employees. The Company expects to take a charge in the second quarter of fiscal
2000 to write off assets of the closed stores, to record accruals for closing
and disposal costs and lease rejection claims by landlords, and to reflect
employee severance payments.
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 could
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 Company's convertible subordinated debentures and the minority equity
interest in Bagel Partners into common stock of the 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.
On May 26, 2000, the shares of common stock of the Company previously owned
by Boston Chicken, Inc., representing approximately 51% of the outstanding
shares of common stock of the Company, were transferred to Gerald K. Smith, as
plan trustee under the trust formed for the benefit of Boston Chicken's
creditors pursuant to the third amended plan of reorganization dated May 3, 2000
that was confirmed in Boston Chicken's Chapter 11 reorganization case.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-Q under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of Einstein/Noah Bagel Corp. (the "Company"),
Einstein/Noah Bagel Partners, L.P., a majority-owned subsidiary of the Company
("Bagel Partners"), Einstein Bros(R) 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. 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 6 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 business
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. Under the terms of the
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) 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
receive warrants to purchase 2 percent of the common stock of the reorganized
Company on a fully diluted basis, exercisable at the price per share at which
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the shares of common stock received by the debenture holders will result in
their recovering the value of their claims in full. The bankruptcy court has not
yet considered approval of either the plan or the disclosure statement
pertaining to the plan, and votes on the plan may not be solicited unless and
until the disclosure statement pertaining to the plan has been approved by the
bankruptcy court.
As debtors-in-possession, the Company and Bagel Partners are authorized to
operate their business, but may not engage in transactions outside of the normal
course of business without approval, after notice and hearing, of the bankruptcy
court. An official committee of unsecured creditors, consisting of HSBC Bank USA
(indenture trustee for the debentures), Loomis, Sayles & Company, L.P. and Kayne
Anderson, was formed by the U.S. Trustee on May 9, 2000.
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 lease obligations, 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.
Results of Operations
Revenue. Total store net revenue increased 5.3% to $118.3 million for the
quarter ended April 16, 2000 compared to $112.4 million for the prior comparable
quarter. The increase in store net revenue was due to an increase in average net
weekly per store sales of 5.6% to $13,667 from $12,946 for the prior comparable
period. Average net weekly per store sales represents weekly per store average
revenue, after customer and employee discounts, for all stores open at the end
of the periods presented. The increase in average net weekly per store sales was
due to the effect of several Company initiatives, including increased marketing
spending, menu changes, higher menu prices and focus on improved store level
operations. The average number of stores in operation decreased to 535 for the
quarter from 536 for the prior comparable quarter.
Comparable store sales increased 4.8% 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 532
stores in the comparable store sales base.
Store Costs and Expenses. Cost of products sold as a percent of store net
revenue decreased to 32.9% for the quarter ended April 16, 2000 from 33.4% for
the prior comparable quarter. The decrease was attributable to improved
management of food costs.
Salaries and benefits as a percent of store net revenue decreased to 31.0%
for the quarter ended April 16, 2000 from 31.5% for the prior comparable
quarter. The decrease reflected the Company's ability to leverage store labor as
average net weekly per store sales increased.
Other controllable costs (such as utilities, repair and maintenance, and
supplies) as a percent of store net revenue increased to 8.7% for the quarter
ended April 16, 2000 from 8.2% for the prior comparable quarter. The
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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 9.5% for the quarter ended April 16, 2000 from 10.1% for the prior
comparable quarter. The decrease reflected leverage gained by increased average
net weekly per store sales.
Marketing expenses as a percent of store net revenue increased to 4.2% for
the quarter ended April 16, 2000 from 3.0% for the prior comparable quarter. 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 13.7% for the quarter ended April 16, 2000 compared to
13.9% for the prior comparable quarter.
Depreciation and amortization as a percent of store net revenue remained
relatively constant at 3.1% for the quarter ended April 16, 2000 compared to
2.9% for the prior comparable quarter.
Non-Store Salaries, Benefits, General and Administrative. Non-store
salaries, benefits, general and administrative expenses as a percent of total
revenue remained relatively constant at 9.2% for the quarter ended April 16,
2000 compared to 9.4% for the prior comparable quarter. The net change reflects
the payment of retention bonus compensation of $1.2 million and a one-time
charge of $0.4 million related to commissary closures in the first quarter of
2000, offset by a one-time charge of $1.1 million related to store closures in
the first quarter of 1999.
Reorganization Expenses. The Company incurred reorganization expenses of
$2.6 million for the quarter ended April 16, 2000; there were no reorganization
charges in the prior comparable quarter. Such expenses consist primarily of
professional fees paid to representatives of the Company and professional fees
incurred by the Company's bank lenders, the holders of the Company's convertible
subordinated debt 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 1.2% for the quarter ended April 16, 2000 from 1.1% for the prior
comparable quarter. The increase reflects the capitalization of certain
expenditures related to the development of a business infrastructure independent
of Boston Chicken, Inc. Goodwill amortization as a percent of total revenue
remained constant at 3.0% for the quarter and for the prior comparable quarter.
Other Expense. The Company incurred other expense of $3.9 million for the
quarter ended April 16, 2000 compared to other expense of $3.7 million for the
prior comparable quarter. The increase was due to the increase in interest
expense related to a higher average amount of bank facility debt in the first
quarter of 2000.
Minority Interest. The minority interest in losses of Bagel Partners was
$0.7 million for the quarter ended April 16, 2000 compared to $0.9 million for
the quarter ended April 18, 1999.
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 quarter of
2000 were from internally generated cash from operations and borrowings under
the Company's revolving credit facility. Cash provided by operations for the
quarter ended April 16, 2000 was $3.0 million compared to $3.8 million for the
quarter ended April 18,
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1999. The decrease in cash from operations was primarily the result of
reorganization expenses 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 1.00% (10.00% at April
16, 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. 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 $2.3 million for the quarter
ended April 16, 2000, resulting from the net borrowings and repayments under the
Company's credit facility. Borrowings and repayments for the quarter ended April
16, 2000 exceeded those for the prior comparable quarter because the Company's
credit agreement was amended in the current quarter 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 6 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 10.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Over time, the Company is exposed to market risks arising from changes in
interest rates. The Company has not historically used derivative financial
instruments.
As of April 16, 2000, $38.9 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 April 16, 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 Note 2 of the Company's Notes to
Consolidated Financial Statements contained in Part I of this Form 10-Q is
incorporated herein by reference thereto.
Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A
A. Exhibits: See Exhibit Index appearing elsewhere herein,
which is incorporated herein by reference.
B. Reports on Form 8-K: During the quarter ended April 16,
2000, the Company filed two current reports on Form 8-K, one
dated March 7, 2000 and one dated April 7, 2000. The report
dated March 7, 2000 disclosed under Item 5 that the Company
had been delisted from the Nasdaq SmallCap Market. The
report dated April 7, 2000 disclosed in Item 5 that the
Company had received a notice from representatives of Bagel
Store Development Funding, L.L.C. ("Bagel Funding")
requesting on behalf of Bagel Funding that Einstein/Noah
Bagel Partners, L.P. ("Bagel Partners") seek to terminate
certain rights and obligations under outstanding franchise
and license agreements between Bagel Partners and the
Company.
C. Reports on Form 8-K/A: During the quarter ended April 16,
2000, the Company filed a current report on Form 8-K/A dated
March 8, 2000 to correct a typographical error on the cover
sheet of the Form 8-K dated March 7, 2000.
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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: May 30, 2000 /s/ Robert M. Hartnett
--------------------------------------------
Robert M. Hartnett
Chairman of the Board,
Chief Executive Officer and President
Date: May 30, 2000 /s/ Paula E. Manley
--------------------------------------------
Paula E. Manley
Chief Financial Officer
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EXHIBIT INDEX
10.1 Amendment dated as of March 1, 2000 to Severance Agreement between the
Company and Paul Murphy.
10.2 Amendment dated as of March 1, 2000 to Severance Agreement between the
Company and Paula E. Manley.
10.3 Amendment dated as of March 1, 2000 to Severance Agreement between the
Company and Gail Lozoff.
10.4 Amendment dated as of March 1, 2000 to Severance Agreement between the
Company and Paul Strasen.
27 Financial Data Schedule.
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