<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Act of 1934
Date of Report (Date of earliest event reported): June 17, 1996
BOSTON CHICKEN, INC.
--------------------
(Exact name of registrant as specified in this charter)
Delaware 0-22802 36-3904053
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(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation)
14103 Denver West Parkway, P.O. Box 4086, Golden, Colorado 80401-4086
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(Address of principal executive offices)
(303) 278-9500
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(Registrant's telephone number, including area code)
Not applicable
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(Former name or former address, if changes since last report)
<PAGE>
Boston Chicken, Inc. (the "Registrant") hereby amends Item 2 and Item 7 of
its Current Report on Form 8-K dated June 17, 1996, filed with the Securities
and Exchange Commission on July 2, 1996, and files Exhibits 23.1, 99.1, and 99.2
to that Current Report. Item 2 and Item 7, as amended, appear below in their
entirety.
ITEM 2. Acquisition or Disposition of Assets.
On June 17, 1996, the Registrant acquired 15,307,421 shares of common stock
(adjusted to give effect to a 225-for-1 stock split effected in July 1996),
$0.01 par value per share, of Einstein/Noah Bagel Corp. (then known as Einstein
Bros. Bagels, Inc.) ("ENBC"), constituting a majority equity interest in ENBC,
by completing the previously announced conversion of the Registrant's loan to
ENBC. In the loan conversion, two-thirds of the Registrant's loan was converted
at a price of $6.38 per share and one-third was converted at a price of $14.42
per share. Such conversion prices represented the estimated per share fair
market value of ENBC's common stock plus a negotiated premium, both determined
at the time the Registrant committed to loan the respective amounts.
ENBC operates and franchises specialty retail stores that feature fresh-
baked bagels, cream cheese, coffee, and other related products, primarily under
the Einstein Bros. Bagels and Noah's New York Bagels brand names. The material
relationships between the Registrant and ENBC and certain of the Registrant's
officers and ENBC are described under the captions "Management," "Certain
Transactions," and "Relationship With Boston Chicken," contained in ENBC's
Prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission on August 5, 1996, as
supplemented on August 6, 1996 (the "ENBC Prospectus"). The information
contained under such captions is incorporated herein in its entirety by this
reference.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired. The financial statements of
ENBC required by this item are incorporated herein by reference to pages F-3
through F-24 of the ENBC Prospectus.
(b) Pro Forma Financial Information. The pro forma financial information
required by this item is filed as Exhibit 99.2 hereto and is incorporated herein
by such reference:
A. Unaudited pro forma consolidated condensed balance sheet at April
21, 1996.
B. Unaudited pro forma consolidated condensed statements of operations
for the fiscal year ended December 31, 1995 and for the quarter
ended April 21, 1996.
C. Notes to unaudited pro forma consolidated condensed financial
statements.
(c) Exhibits. See Exhibit Index appearing elsewhere herein, which is
incorporated herein by such reference.
SIGNATURE
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 hereunto duly authorized.
Dated: August 28, 1996
BOSTON CHICKEN, INC.
By: /s/ Mark A. Link
----------------
Mark A. Link
Vice President-Financial Reporting
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Exhibits
------- --------
23.1 Consent of Arthur Andersen LLP.
99.1 The following pages and sections from the ENBC
Prospectus: Prospectus cover page,
"Management," "Certain Transactions,"
"Relationship With Boston Chicken," and pages
F-3 through F-24.
99.2 Unaudited Pro Forma Consolidated Condensed
Financial Statements.
</TABLE>
In the case of incorporation by reference to documents filed by ENBC, ENBC's
file number under that Act is 0-21097.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report on
Einstein/Noah Bagel Corp. dated July 16, 1996 included in or made a part of this
Current Report on Form 8-K.
Denver, Colorado
August 28, 1996
/s/ Arthur Andersen LLP
<PAGE>
EXHIBIT 99.1
<PAGE>
PROSPECTUS
3,125,000 SHARES
[LOGO OF EINSTEIN NOAH BAGEL CORP.]
COMMON STOCK
---------------
All of the shares of Common Stock offered hereby are being issued and sold
by Einstein/Noah Bagel Corp. (the "Company"). Of the 3,125,000 shares offered
hereby, 2,700,000 shares are being offered in an Initial Public Offering and
425,000 shares are being offered in a non-underwritten Concurrent Public
Offering by the Company directly to certain persons or entities, consisting
primarily of officers, directors and employees of each of the Company and
Boston Chicken, Inc. ("Boston Chicken"). Shares of Common Stock offered in the
Concurrent Public Offering are being offered at a price equal to the initial
public offering price per share, net of underwriting discount. Boston Chicken
will not be a purchaser in the Concurrent Public Offering.
Concurrent with the offering of the shares hereby, the Company is offering
an additional 2,000,000 shares of Common Stock in a Concurrent Private
Placement to Boston Chicken at a price equal to the initial public offering
price per share, net of underwriting discount. Following the Offerings, Boston
Chicken is expected to beneficially own approximately 60.4% of the outstanding
shares of Common Stock.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. The purchase price for the shares being offered in the
Concurrent Public Offering and the Concurrent Private Placement will be $15.81
per share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "ENBX," subject to notice of issuance.
SEE "RISK FACTORS" AT PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON
STOCK.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share--Initial Public
Offering.......................... $17.00 $1.19 $15.81
- -------------------------------------------------------------------------
Per Share--Concurrent Public
Offering.......................... $15.81 -- $15.81
- -------------------------------------------------------------------------
Total (3).......................... $52,619,250 $3,213,000 $49,406,250
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $840,000.
(3) The Company has granted the several Underwriters an option for 30 days to
purchase up to 405,000 additional shares of Common Stock, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount, and Proceeds to Company will be
$59,504,250, $3,694,950, and $55,809,300, respectively. See
"Underwriting."
---------------
The shares of Common Stock offered in the Initial Public Offering are being
offered by the several Underwriters, subject to prior sale, when, as and if
issued to and accepted by the Underwriters, subject to the approval of certain
legal matters by counsel for the Underwriters. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about August 7, 1996.
---------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
---------------
The date of this Prospectus is August 1, 1996.
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott A. Beck(3) 38 Chairman of the Board
Noah C. Alper 49 Vice Chairman of the Board
Mark R. Goldston 41 President, Chief Executive Officer and Director
Michael J. Beaudoin 34 Senior Vice President--Supply Chain
W. Eric Carlborg 32 Senior Vice President--Finance
David G. Stanchak 38 Vice President, Chief Development Officer and Director
Jeffrey L. Butler 34 President of Einstein Bros. Bagels Concept
Joel M. Alam 38 Vice President and Secretary
Paul A. Strasen 39 Vice President and General Counsel
Kyle T. Craig 48 Director
M. Laird Koldyke(1)(2)(3) 35 Director
Gail A. Lozoff 46 Director and Vice President--Design and Merchandising
John H. Muehlstein, Jr.(3) 41 Director
John A. Offerdahl(1) 31 Director and Vice President--Operations, Southeast Zone
Lloyd D. Ruth(1)(2)(3) 49 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the board of directors.
(2) Member of the Reporting Person Stock Option Committee of the board of
directors.
(3) Member of the Compensation and Stock Option Committees of the board of
directors.
Messrs. Craig, Stanchak and Beck were elected to the board of directors as
designees of Boston Chicken, Messrs. Koldyke, Muehlstein and Ruth were elected
to the board of directors as designees of investors in the Company's March
1995 private placement and Messrs. Offerdahl and Daniel V. Colangelo (the
Company's former President and Chief Executive Officer and formerly a
director) and Ms. Lozoff were elected to the board of directors as designees
of Offerdahl's, Brackman and Bagel & Bagel, respectively. Boston Chicken and
Brackman did not designate nominees for the 1996 election of directors and the
private placement investors designated Messrs. Koldyke, Muehlstein and Ruth
for such election. All such contractual designation rights have expired or
will expire upon the consummation of an initial public offering of the Common
Stock. See "Risk Factors--Control by and Conflicts of Interest with Boston
Chicken."
All directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the pleasure of the board of directors.
Mr. Beck became Chairman of the Board of the Company in July 1996. Mr. Beck
has served as a director of the Company since March 1995. He has been Chief
Executive Officer and a director of Boston Chicken since June 1992 and served
as Chairman of Boston Chicken from such time until December 1995 when he
became Co-Chairman. He was Vice Chairman of the Board of Blockbuster
Entertainment Corporation ("Blockbuster") in Fort Lauderdale, Florida from
September 1989 until January 1992, and Chief Operating Officer of Blockbuster
34
<PAGE>
from September 1989 to January 1991. Since 1980, Mr. Beck also has been
President of Pace Affiliates, Inc., an investment banking firm he founded.
Mr. Alper became the Company's Vice Chairman of the Board in March 1996. Mr.
Alper founded Noah's in 1989 and served as its Chairman of the Board until
March 1996.
Mr. Goldston became President and Chief Executive Officer and a director of
the Company in April 1996. Since January 17, 1996, Mr. Goldston has also been
employed by Boston Chicken to undertake various special projects for Boston
Chicken. From July 1994 to April 1996, Mr. Goldston was the Chairman and Chief
Executive Officer of The Goldston Group, a strategic advisory firm which
advises high-growth companies on improving performance and creating operating
leverage and efficiencies. From October 1991 to June 1994, Mr. Goldston served
as President and Chief Operating Officer of L.A. Gear, Inc. From September
1989 to October 1991, Mr. Goldston was a principal of Odyssey Partners, L.P.,
an investment firm, and from September 1988 to September 1989 served as Chief
Marketing Officer of Reebok Inc.
Mr. Beaudoin became the Company's Senior Vice President--Supply Chain in
July 1996. Prior thereto, he served as Vice President and Chief Financial
Officer of the Company from July 1995 to July 1996, after serving as Assistant
to the Chairman of Boston Chicken from February 1995. From December 1992 to
February 1995, he held several positions with NewLeaf Entertainment (a joint
venture between Blockbuster and IBM), including Vice President of Finance,
Marketing and Operations. From June 1990 through November 1992, Mr. Beaudoin
was an Associate and Limited Partner of Pfingsten Partners, L.P., a private
equity investment firm in Deerfield, Illinois.
Mr. Carlborg became Senior Vice President--Finance of the Company in July
1996. From October 1995 through June 1996, he was Vice President of Alignment
and Planning of Boston Chicken. Prior thereto, Mr. Carlborg served as Vice
President--Corporate Finance of Merrill Lynch from January 1994 to October
1995 and served as an Associate of Merrill Lynch from August 1989 through
December 1993.
Mr. Stanchak became a director and Vice President and Chief Development
Officer of the Company in March 1995. From June 1992 until March 1995, he
served as a Senior Vice President of Boston Chicken, and from August 1989
until June 1992, Mr. Stanchak was the National Director of Real Estate and
Real Estate Legal Counsel for Blockbuster.
Mr. Butler became President of Einstein Bros. Bagels Concept in May 1996.
From January 1996 until May 1996, Mr. Butler served as Chief Operating Officer
of the Company. Prior thereto, he was employed by BC Great Lakes, L.L.C., an
area developer of Boston Chicken ("BC Great Lakes"), since June of 1995, and
also served as President of the managing member of BC Heartland, L.L.C., also
a Boston Chicken area developer, since August 1995. From June 1993 until June
1995, Mr. Butler served as President and Chief Executive Officer of the
general partner of BC Detroit L.P., a predecessor of BC Great Lakes. From
January 1992 to June 1993, Mr. Butler served as Vice President--Human
Resources of Boston Chicken. Prior thereto, Mr. Butler was an independent
consultant from July 1991 until January 1992 and was Regional Director of
Operations for Blockbuster in San Diego and Orange County, California from
April 1990 until June 1991.
Mr. Alam became Vice President and Secretary in April 1995. From January
1994 to April 1995, he was Vice President and Associate General Counsel of
Boston Chicken and from May 1993 to January 1994 he was Assistant General
Counsel of Boston Chicken. Prior thereto, Mr. Alam was an associate at the
Chicago law firm of Bell, Boyd & Lloyd from 1986 to May 1993.
Mr. Strasen became Vice President and General Counsel of the Company in
April 1995. Prior thereto, he was a partner at the Chicago law firm of Bell,
Boyd & Lloyd from 1988 to April 1995.
Mr. Craig has been a director of the Company from the date the Company was
incorporated in February 1995. Mr. Craig was Chairman of the Board of the
Company from June 1995 until he resigned in July 1996. From February 1995
until being appointed as Chairman in June 1995, Mr. Craig served as Vice
President of the Company. Mr. Craig also served as the Chief Concept Officer
of Boston Chicken from April 1994 through June
35
<PAGE>
1995. From November 1993 until April 1994, he was President of KFC-Brand
Development, a unit of KFC Corp. in Louisville, Kentucky, and from April 1990
until November 1993, he was President of KFC-USA, also a unit of KFC Corp. in
Louisville, Kentucky. KFC Corp. is a wholly owned subsidiary of PepsiCo, Inc.
Mr. Koldyke became a director of the Company in March 1995. Mr. Koldyke has
served as a general partner of the Frontenac Company ("Frontenac"), a venture
capital company, in Chicago, Illinois since 1989.
Ms. Lozoff became a director and Vice President--Design and Merchandising of
the Company in April 1995, after working with Bagel & Bagel, which she founded
in June 1988. Ms. Lozoff also served as President and Chief Executive Officer
of Bagel & Bagel from May 1992 to April 1995.
Mr. Muehlstein became a director of the Company in March 1995. Since 1986,
he has been a partner at the Chicago law firm of Pedersen & Houpt.
Mr. Offerdahl became a director and Vice President--Operations, Southeast
Zone of the Company in March 1995, after working with Offerdahl's, which he
founded in 1989. Mr. Offerdahl served as the Chairman and Chief Executive
Officer of Offerdahl's from December 1989 until March 1995. From May 1986
until September 1994, Mr. Offerdahl played professional football for the Miami
Dolphins in the National Football League.
Mr. Ruth became a director of the Company in March 1995. Since January 1987,
he has been a general partner at Marquette Management Partners, a venture
capital company, in Deerfield, Illinois.
MANAGEMENT COMPENSATION
The Company was incorporated in February 1995 and did not conduct any
operations prior to that time. The only executive officer of the Company who
earned more than $100,000 in salary and bonus during fiscal year 1995 was
Daniel V. Colangelo, the Company's former President and Chief Executive
Officer who served in that capacity during fiscal year 1995 (the "named
executive officer"). Mr. Colangelo's total cash compensation during fiscal
year 1995 consisted of $103,462 in salary and $47,375 in bonus.
On March 24, 1995, the Company entered into a three-year employment
agreement with Mr. Colangelo, pursuant to which he became the President of the
Company's Rocky Mountain Division and a director of the Company. Mr. Colangelo
was later promoted to President and Chief Executive Officer of the Company.
Under the employment agreement, Mr. Colangelo was entitled to receive an
annual salary of $125,000 and reimbursement for reasonable business expenses.
In addition, during 1995, Mr. Colangelo was granted options to purchase 50,979
shares of Common Stock under the Plan (defined herein) at an exercise price of
$5.88 per share. See "--Option Grants in Last Fiscal Year."
In March 1996, Mr. Colangelo's employment agreement was terminated and the
Company entered into a consulting agreement with him in connection with his
resignation as President and Chief Executive Officer and a director of the
Company. Pursuant to the consulting agreement, Mr. Colangelo will, upon the
Company's request, provide information, advice and assistance to the Company
concerning matters that were within the scope of his knowledge and expertise
during the course of his employment by the Company. The consulting agreement
has a term of one year and is automatically renewed for successive one-year
periods unless terminated by either party upon 30 days' prior written notice.
Under the consulting agreement, Mr. Colangelo receives $100,000 per year and
is entitled to reimbursement for his related reasonable business expenses. In
addition, the options granted during 1995 to Mr. Colangelo under the Plan were
deemed vested and were exercised by him in January 1996. Mr. Colangelo also
retained options granted in January 1996 under the Plan to purchase an
aggregate of 37,931 shares of Common Stock at an exercise price of $6.59 per
share, which options were granted in January 1996 and vest in accordance with
the Plan's vesting schedule during the term of his consulting agreement.
The Company has also entered into employment and consulting agreements with
certain of its other current executive officers and others. See "Certain
Transactions--Employment and Consulting Agreements."
36
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options made to
the named executive officer during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
DATE OF OPTIONS TO EMPLOYEES OR BASE EXPIRATION ----------------------
NAME GRANT GRANTED(1) IN FISCAL YEAR PRICE DATE 5% 10%
- ---- ------- ---------- ---------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel V. Colangelo..... 3/24/95 25,491 1.2% $5.88 3/24/05 $ 94,337 $ 239,068
5/16/95 16,992 0.8 5.88 5/16/05 62,886 159,428
7/25/95 8,496 0.4 5.88 7/25/05 31,443 79,746
</TABLE>
- --------
(1) Options granted to Mr. Colangelo in 1995 were deemed fully vested in
January 1996 in connection with his resignation as President and Chief
Executive Officer of the Company. See "--Management Compensation."
(2) These amounts represent certain assumed annual rates of appreciation
calculated from the exercise price, as required by the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the future
performance of the Common Stock. There can be no assurance that the
amounts reflected in this table will be achieved.
DIRECTOR COMPENSATION
In addition to annual grants under the Directors Plan (as defined herein),
directors who are not officers or employees of, or consultants to, the Company
receive $500 cash compensation for each board of directors meeting at which
they are present and for each committee meeting at which they are present not
held in conjunction with a meeting of the board of directors. Outside
directors are also reimbursed for their expenses for each board and committee
meeting attended.
The Company has also entered into employment and consulting agreements with
certain of its directors who are also current executive or other officers of
the Company. See "Certain Transactions--Employment and Consulting Agreements."
1995 STOCK OPTION PLAN
General. The board of directors has adopted the 1995 Employee Stock Option
Plan, effective February 16, 1995, as subsequently amended (the "Plan"). On
May 28, 1996, the Plan was amended and restated by the board of directors and,
as amended and restated, was subsequently approved by the stockholders of the
Company. The board of directors adopted additional amendments to the Plan (as
so amended, the "Amended Plan"), to be effective August 15, 1996, to comply
with recent changes to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules promulgated thereunder.
The purpose of the Amended Plan is to benefit the Company by offering
certain present and future employees, officers and consultants of the Company
and its subsidiaries, if any, a favorable opportunity to become holders of
Common Stock over a period of years, thereby giving them a long-term stake in
the growth and prosperity of the Company and encouraging the continuance of
their involvement with the Company. Under the Amended Plan, eligible persons
may be granted options to purchase an aggregate of not more than 5,500,000
shares of Common Stock. An aggregate of approximately 1,540,000 shares of
Common Stock are currently available for option grants under the Amended Plan.
Such options are not intended to be treated as incentive stock options as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
The Amended Plan will be administered, with respect to persons subject to
Section 16 of the Exchange Act and the rules promulgated thereunder
("Reporting Persons"), by the Reporting Person Stock Option Committee (the
"Reporting Person Committee"), consisting of two members of the board of
directors, each of whom will be "non-employee directors" (as such term is
defined under Rule 16b-3 of the Exchange Act) and, with respect to all other
persons receiving options under the Amended Plan, by the Stock Option
Committee (the "Stock Option Committee").
37
<PAGE>
The Reporting Person Committee may grant options under the Amended Plan to
Reporting Persons and the Stock Option Committee may grant options under the
Amended Plan to other eligible employees, officers, and consultants of the
Company and its subsidiaries, in each case selected initially and from time to
time thereafter by the relevant Committee based on the importance of their
services; provided, however, that the maximum number of shares subject to all
options granted to any individual in any calendar year shall in no event
exceed 300,000. Eligible individuals may be selected individually or by groups
or categories, as determined by the relevant Committee in its discretion.
Options granted under the Amended Plan have a term of 10 years, subject to
earlier expiration if the optionee's service terminates, and no options under
the Amended Plan may be granted after February 1, 2005. Options may not be
transferred other than by will, by the laws of descent and distribution, or
pursuant to a qualified domestic relations order. The relevant Committee has
the discretion to permit the assignment or transfer of an option on such terms
and conditions as such Committee may deem necessary or appropriate or as
otherwise required by or deemed advisable under applicable law.
Options granted under the Amended Plan become exercisable with respect to
10% of the total number of shares subject to the option on the first
anniversary of the date of grant, an additional 20% on the second anniversary
of the date of grant, an additional 30% on the third anniversary of the date
of grant and the balance on the fourth anniversary of the date of grant. The
relevant Committee has the discretion to accelerate the exercisability of any
option subject to such terms and conditions as such Committee deems necessary,
including a requirement that the optionee grant the Company an option to
repurchase all or a portion of the shares issued upon exercise of the
accelerated option for their fair market value on the date of grant. If an
option expires or is terminated or canceled unexercised as to any shares, such
shares may be optioned again. Shares subject to options may be made available
from unissued or reacquired shares of Common Stock.
In the event the relationship between the Company and an officer, employee
or consultant who is an optionee is terminated for any reason other than
death, permanent disability or retirement, such optionee's option shall expire
and all rights to purchase shares pursuant thereto shall terminate on the date
of termination, except that, to the extent any option or portion thereof is
exercisable on the date of termination, such option (or portion thereof) may
be exercised for a period of 15 days after such termination (or until the
scheduled termination of the option, if earlier); provided, however, that,
with respect to any option held by such optionee, the relevant Committee may,
in its sole discretion, accelerate exercisability, permit continued vesting in
accordance with the vesting schedule set forth in the Amended Plan or permit
exercisability beyond the 15-day period referenced above (but in no event
beyond its specified term), subject to such terms and conditions, if any, as
determined by such Committee in its sole discretion.
In the event of termination of said relationship because of death or
permanent disability (as that term is defined in Section 22(e)(3) of the Code,
as now in effect or as subsequently amended), the option may be exercised in
full (to the extent not previously exercised) without regard to the vesting
schedule set forth in the Amended Plan, by the optionee or, if he or she is
not living, by his or her heirs, legatees or legal representative, as the case
may be, during its specified term prior to two years after the date of death
or permanent disability. In the event of termination of employment because of
early, normal or deferred retirement under an approved retirement program of
the Company (or other plan or arrangement as may be approved by the relevant
Committee, in its discretion, for this purpose), the option may be exercised
by the optionee (or, if he or she dies after such retirement, by his or her
heirs, legatees or legal representative, as the case may be), to the extent
that any portion thereof would be exercisable on the date of such retirement
(or with respect to such greater portion as determined by the relevant
Committee), at any time during its specified term prior to one year after the
date of such retirement.
Except as otherwise determined by the relevant Committee, upon the
termination of a relationship between the Company or any subsidiary and a
consultant who is an optionee, such optionee's option shall expire and all
rights to purchase shares pursuant thereto shall terminate.
38
<PAGE>
The exercise price of options granted under the Amended Plan is the fair
market value of the shares of Common Stock on the date of the grant. The
exercise price is payable in cash, by check, by a promissory note in a form
specified by the relevant Committee and payable to the Company no later than
15 business days after the exercise date, or, if approved by such Committee,
by shares of Common Stock or by a combination of these payment methods. In the
event that shares of Common Stock are changed by a stock dividend, split or
combination of shares, merger, consolidation or reorganization of the Company
with any other corporation or corporations in which holders of the Common
Stock receive other securities, or any other relevant change in the
capitalization of the Company, a proportionate or equitable adjustment will be
made to the number or kind of shares subject to the Amended Plan and to the
exercise price.
The relevant Committee may require an optionee to satisfy any tax
withholding obligation upon exercise and may permit an eligible participant
(or any beneficiary or person entitled to act) to elect to pay a portion or
all of the amount requested by the Company for such taxes with respect to such
option, at such time and in such manner as such Committee shall deem to be
appropriate (including, but not limited to, authorizing the Company to
withhold, or agreeing to surrender to the Company on or about the date such
tax liability is determinable, Common Stock, other securities or property, or
other forms of payment, or any combination thereof, owned by such participant,
or a portion of such forms of payment that would otherwise be distributed, or
has been distributed, as the case may be, pursuant to such option to such
participant, having a fair market value equal to the amount of such taxes).
The board of directors may amend or discontinue the Amended Plan at any
time, provided that no amendment or discontinuance may, without the consent of
the optionee, change or impair any option previously granted or, without the
approval of stockholders, materially increase the benefits accruing to
participants under the Amended Plan, materially increase the number of
securities which may be issued under the Amended Plan, or materially modify
the requirements as to eligibility for participation in the Amended Plan.
The Amended Plan provides that, unless otherwise determined by the relevant
Committee in its sole discretion, options granted prior to May 7, 1996 shall
be governed by the Plan as it was in effect prior to such date and options
granted from May 7, 1996 through August 14, 1996 shall be governed by the
Amended Plan as it was in effect during such period.
Federal Income Tax Consequences of the Amended Plan. The following is a
brief summary of the current federal income tax rules relevant to stock
options issued under the Amended Plan. These rules are subject to change in
the future.
Options granted or to be granted under the Amended Plan are, or will be,
non-qualified stock options ("NQO"). In general, an optionee will not
recognize any taxable income, and the Company will not be entitled to a
deduction, upon the grant of an NQO. Upon the exercise of an NQO where the
exercise price is paid in cash, the optionee will recognize ordinary income
(subject to wage and employment tax withholding) equal to the excess of the
fair market value of the shares acquired over the option exercise price. The
amount of such excess is generally determined by reference to the fair market
value of the Common Stock on the date of exercise. An optionee's basis in the
underlying stock received will equal such stock's fair market value on the
date of exercise. The Company will be entitled to a deduction (subject to the
$1 million cap described below, if applicable) equal to the ordinary income
taxable to the optionee in the year of exercise.
Upon the sale of shares acquired pursuant to the exercise of an NQO, such
optionee will recognize capital gain or loss equal to the difference between
the selling price of the shares and the optionee's basis in the shares. Such
capital gain or loss will be long-term gain or loss if the optionee has held
the shares for more than one year. The Company will not be entitled to any
deduction with respect to any capital gain recognized by the optionee.
If an optionee surrenders previously acquired shares of Common Stock,
however acquired, in payment of all or part of the option exercise price of an
NQO, the optionee will not, as a result of such delivery, recognize gain or
loss for federal income tax purposes on the shares surrendered. The optionee's
tax basis in, and holding period for, the previously acquired stock
surrendered will carry over to an equal number of the shares of Common Stock
received on a share-for-share basis. The fair market value of the shares
received in excess of the shares surrendered will constitute compensation
taxable to the optionee as ordinary income. The tax basis for
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such shares will equal their fair market value and such shares' holding period
for federal income tax purposes begins on the date of exercise. The Company
will be entitled to a tax deduction (subject to the $1 million cap described
below, if applicable) equal to the compensation income recognized by the
optionee.
A publicly held corporation may not, subject to certain exceptions, deduct
for federal income tax purposes in any taxable year certain compensation paid
to certain executives in excess of $1 million for each such executive (the "$1
million cap"). The Company believes that under recently promulgated
regulations the $1 million cap will be inapplicable to options granted under
the Amended Plan.
Options Granted under the Plan and the Amended Plan. As of July 30, 1996,
the Company had options outstanding for an aggregate of 3,655,187 shares of
Common Stock under the Plan at exercise prices ranging from $5.88 to $15.00
per share, with a weighted average exercise price of approximately $6.83 per
share. As of such date, no shares of Common Stock had been issued under the
Amended Plan. The following table sets forth certain information with respect
to options granted under the Plan and the Amended Plan (whether or not
exercised) through July 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING
OPTIONS GRANTED UNDER THE PLAN
NAME AND POSITION AND THE AMENDED PLAN
----------------- ------------------------------
<S> <C>
Daniel V. Colangelo, former President and Chief
Executive Officer............................. 88,910
All current executive officers as a group (9
persons)...................................... 695,018
All directors who are not executive officers as
a group (6 persons)........................... 257,322
All associates of all directors and executive
officers (2 persons).......................... 53,650
All eligible employees who are not executive
officers or associates thereof and consultants
as a group.................................... 2,883,244
</TABLE>
DIRECTORS PLAN
General. On May 28, 1996, the board of directors of the Company adopted a
1996 Stock Option Plan for Non-Employee Directors (the "Directors Plan"),
which has been approved by the stockholders of the Company. On May 28, 1996,
options to purchase an aggregate of 4,318 shares of Common Stock were granted
under the Directors Plan to each of Messrs. Koldyke, Muehlstein and Ruth at an
exercise price of $11.58 per share. The Directors Plan is administered by the
board of directors.
Options under the Directors Plan may only be granted to directors of the
Company who are not officers or employees of the Company. Options may be
granted with respect to a total of not more than 100,000 shares of Common
Stock under the Directors Plan, subject to antidilution and other adjustments.
Such options are not intended to be treated as incentive stock options as
defined in Section 422 of the Code. Each option granted under the Directors
Plan is for a term of ten years, subject to earlier termination if the
optionee's service as a director terminates. If an option expires or is
terminated or canceled unexercised as to any shares, such released shares may
again be optioned. Options which have been granted become exercisable after
the end of one year from the date of grant.
Pursuant to the Directors Plan, options for shares having a fair market
value of $50,000 at the date of grant, as determined in good faith by the
board of directors on such date, are granted at the time of each election or
re-election of eligible directors to the Board, except that the initial grants
of options under the Directors Plan were made on the date of adoption of the
Directors Plan by the board of directors, which option grants are subject to
approval of the Directors Plan by the stockholders of the Company. The
exercise price is payable in cash, by check, by a promissory note in a form
specified by the board of directors and payable to the Company no later than
15 business days after the exercise date or, if approved by the board of
directors, by shares of Common Stock of the Company or by a combination of
these methods.
If tenure as a director with the Company or any of its subsidiaries is
terminated for any reason other than death, permanent disability or
resignation, such director's option shall expire and all rights to purchase
shares under it shall terminate 15 days after such termination (or until the
scheduled termination of the option, if earlier).
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In the event of death or permanent disability, an exercisable option may be
exercised in full by the optionee or, if he is not living, by his or her
heirs, legatees, or legal representative, as the case may be, during its
specified term prior to two years after the date of death or permanent
disability; provided, however, that in the event an optionee hereunder should
die or become permanently disabled prior to the end of one year of service as
a director of the Company, then such optionee's option shall become
immediately exercisable as of the date of such death or permanent disability
and shall be exercisable for a period of two years after such date. In the
event of resignation, an exercisable option may be exercised by the optionee
(or, if he or she dies within three months after such termination, by his or
her heirs, legatees, or legal representative, as the case may be), at any time
during its specified term prior to three months after the date of such
resignation.
No option is transferable by the optionee otherwise than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
order, and each option shall be exercisable during an optionee's lifetime only
by him.
The board of directors may amend or discontinue the Directors Plan at any
time, provided, however, that the Directors Plan may not be amended more than
once every six months except to comport with relevant changes in the law, and
provided further that no such amendment or discontinuation shall (a) change or
impair any option previously granted without the consent of the optionee, or
(b) without the approval of stockholders, (i) increase the maximum number of
shares which may be purchased by all optionees, (ii) change the purchase price
of any option, or (iii) change the option period or increase the time
limitations on the grant of options.
Federal Income Tax Consequences of the Directors Plan. The federal income
tax consequences relating to stock options under the Directors Plan are the
same as those relating to stock options issued under the Amended Plan. See "--
1995 Stock Option Plan--Federal Income Tax Consequences of the Amended Plan."
Copies of the Amended Plan and the Directors Plan are exhibits to the
Registration Statement of which this Prospectus is a part.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has approved the terms of compensation paid and to be
paid to the Company's executive officers for fiscal years 1995 and 1996.
During the year ended December 31, 1995, the following persons served as
members of the Stock Option Committee of the board of directors: Scott Beck,
Kyle Craig and John Muehlstein.
Currently, no executive officer of the Company, except for Scott Beck, who
is Chairman of the Board of the Company and a member of the Compensation
Committee of the board of directors, serves as a member of the compensation
committee or as a director of any other entity, one of whose executive
officers serves on the compensation committee or is a director of the Company.
Mr. Beck is Co-Chairman of the Board and Chief Executive Officer of Boston
Chicken. Mr. Beck does not serve on the compensation committee of Boston
Chicken's board of directors.
CERTAIN TRANSACTIONS
FORMATION OF THE COMPANY AND SUBSEQUENT ACQUISITIONS
In March 1995, the Company acquired the operations of Brackman, Bagel &
Bagel and Offerdahl's, and in connection with such acquisitions, issued
1,959,152 shares of Common Stock valued at $5.88 per share to the owners of
such companies. Concurrently with the acquisitions, the Company also raised
approximately $20.8 million in a private placement of its Common Stock to
investors (including approximately $5.2 million of such amount that was
purchased, directly or indirectly, by officers and directors of each of the
Company and Boston Chicken). The terms of each of these transactions resulted
from arms-length negotiations between the Company and unrelated third parties.
In addition, the Company believes that such arms-length negotiations
established the fair market value of the Common Stock as of the date such
transactions were entered into by the Company. These transactions are
separately described below.
On March 24, 1995, pursuant to an agreement to contribute shares, the
Company acquired all of the outstanding capital stock of Brackman, of which
Daniel V. Colangelo, the Company's former President and
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Chief Executive Officer, was a shareholder (the "Brackman Acquisition"). The
consideration paid by the Company consisted of 573,750 shares of Common Stock
and 488,236 shares of Boston Chicken common stock, which shares of Boston
Chicken common stock were purchased by the Company for a cash purchase price
of $17.00 per share, pursuant to a stock purchase agreement between the
Company and Boston Chicken dated as of March 24, 1995. See "Relationship with
Boston Chicken--Other Relationships Between Boston Chicken and the Company."
Following the Brackman Acquisition, Mr. Colangelo entered into an employment
agreement with the Company, pursuant to which he became President--Rocky
Mountain Zone and a director of the Company. See "Management--Management
Compensation."
On March 24, 1995, pursuant to an agreement to contribute assets, the
Company acquired all of the assets, properties and business of Bagel & Bagel,
of which Richard Lozoff, Gail Lozoff's spouse, was the sole shareholder (the
"Bagel & Bagel Acquisition"). The consideration paid by the Company consisted
of 573,750 shares of Common Stock and 323,530 shares of Boston Chicken common
stock, which shares of Boston Chicken common stock were purchased by the
Company for a cash purchase price of $17.00 per share, pursuant to a stock
purchase agreement between the Company and Boston Chicken dated as of March
24, 1995. See "Relationship with Boston Chicken--Other Relationships between
Boston Chicken and the Company." Following the Bagel & Bagel Acquisition, Ms.
Lozoff entered into an employment agreement with the Company, pursuant to
which she became Vice President--Design and Merchandising and a director of
the Company. See "--Employment and Consulting Agreements."
On March 31, 1995, pursuant to an agreement to contribute assets, the
Company acquired substantially all of the assets, properties and business of
Offerdahl's, of which John Offerdahl was a majority shareholder (the
"Offerdahl's Acquisition"). The consideration paid by the Company consisted of
811,652 shares of Common Stock and 331,852 shares of Boston Chicken common
stock, which shares of Boston Chicken common stock were purchased by the
Company for a cash purchase price of $16.875 per share, pursuant to a stock
purchase agreement between the Company and Boston Chicken dated as of March
31, 1995. See "Relationship with Boston Chicken--Other Relationships between
Boston Chicken and the Company." Following the Offerdahl's Acquisition, Mr.
Offerdahl entered into an employment agreement with the Company, pursuant to
which he became Vice President--Operations, Southeast Zone and a director of
the Company. In addition, Mr. Offerdahl's spouse, Lynnora Offerdahl, entered
into a consulting agreement with the Company. See "--Employment and Consulting
Agreements."
On March 24, 1995, the Company entered into Subscription Agreements pursuant
to which certain investors, including Messrs. Craig, Stanchak, Beaudoin,
Butler and Beck, Mr. Alam and his spouse, PJS Bagel Investing, L.L.C., an
entity controlled by Mr. Strasen and his spouse ("PJS"), OBG Holdings, Inc.
(formerly Offerdahl's), of which Mr. Offerdahl and his spouse are majority
stockholders ("OBG"), Frontenac VI, Limited Partnership ("Frontenac"), of
which Mr. Koldyke is a general partner, Marquette Venture Partners II, L.P.
("Marquette") and MVP II Affiliates Fund, L.P. ("MVP II"), the general partner
of each of which is an entity of which Mr. Ruth is a general partner, and
Pedersen Bagel Investments Joint Venture ("Pedersen Bagel"), of which Mr.
Muehlstein is a general partner, purchased 1,618,972 shares of Common Stock at
$5.88 per share.
In February 1996, the Company acquired all of the outstanding stock of
Noah's for an aggregate purchase price of $100.9 million in cash. In
connection with the transaction, certain former shareholders of Noah's,
including Noah Alper, Vice Chairman of the Board, and other members of Noah's
management purchased 855,225 shares of Common Stock at a purchase price of
$10.52 per share.
REGISTRATION RIGHTS
The Company is a party to an amended and restated registration rights
agreement dated as of February 1, 1996 (the "Stockholder Registration
Agreement") with certain stockholders of the Company, including Messrs. Craig,
Alper, Stanchak, Beaudoin, Butler, Beck, Bacheller and Colangelo, as well as
Mr. Alam and his spouse, PJS, OBG, Frontenac, Marquette, MVP II and B&B
Holdings, Inc. (formerly Bagel & Bagel), of which Ms. Lozoff's spouse is the
sole stockholder ("B&B"), and with Boston Chicken (with respect to the shares
of
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<PAGE>
Common Stock issued pursuant to the Loan Conversion). Pursuant to such
agreement, the Company granted to such stockholders and Boston Chicken certain
piggyback registration rights under the Securities Act with respect to shares
of Common Stock owned by them (the "Registrable Securities"). In addition, the
Company is obligated to file, within 13 months after the completion of an
initial public offering, a registration statement under the Securities Act
that would include the Registrable Securities then held by such stockholders
and Boston Chicken, permitting them to make public resales of the Registrable
Securities. The Company expects to file such registration statement shortly
after the completion of the Offerings. Pursuant to the Stockholder
Registration Agreement, each holder of Registrable Securities has agreed not
to sell, for a specified period of time, up to 30% of the Registrable
Securities held by such holder. See "Shares Eligible for Future Sale." The
Company expects to enter into the Boston Chicken Registration Agreement
(defined below) that will supersede the rights of Boston Chicken under the
Stockholder Registration Agreement. The Company has obtained from the parties
to the Stockholder Registration Agreement a waiver of the provision of such
agreement prohibiting the Company from granting registration rights superior
to those granted under the agreement, and a consent to the grant by the
Company to Boston Chicken of registration rights pursuant to the Boston
Chicken Registration Agreement. See "--Concurrent Public Offering,"
"Relationship with Boston Chicken--Concurrent Private Placement Agreement and
Registration Agreement" and "Shares Eligible for Future Sale."
CONCURRENT PUBLIC OFFERING
In the Concurrent Public Offering, the Company is offering to certain
persons or entities, consisting primarily of officers, directors and employees
of each of the Company and Boston Chicken, the opportunity to purchase an
aggregate of 425,000 shares of Common Stock at a price equal to the initial
public offering price per share, net of underwriting discount. In the
Concurrent Public Offering, executive officers and directors of the Company
(none of whom are members of the committee of the Company's board of directors
who negotiated the initial public offering price with the Representatives) are
expected to purchase an aggregate of 35,500 of such shares of Common Stock as
follows: Mr. Scott Beck--3,750; Mr. Goldston--3,750; Mr. Carlborg--3,750; Mr.
Stanchak--3,750; Mr. Beaudoin--3,750; Mr. Butler--3,750; Mr. Alam--3,000; Mr.
Strasen--2,500; Mr. Muehlstein--3,750; and Mr. Ruth--3,750. Certain executive
officers and directors of Boston Chicken (other than Scott Beck) are expected
to purchase in the Concurrent Public Offering an aggregate of 32,000 shares of
Common Stock. The consummation of the Concurrent Public Offering is
conditioned upon the consummation of each of the Initial Public Offering and
the Concurrent Private Placement. In addition, any such sales are also
conditioned upon participants in the Concurrent Public Offering agreeing not
to sell shares of Common Stock purchased in such offering for a period of 365
days after the date of this Prospectus, without the consent of Merrill Lynch.
BAGEL STORE DEVELOPMENT FUNDING
In December 1995, Bagel Funding was formed under the name Einstein Bros.
Equity Funding, L.L.C. with the objective of raising $90.0 million to invest
in existing and proposed area developers of the Company. Bagel Funding has
received total capital commitments from its members aggregating such amount,
$45.8 million of which has been contributed to Bagel Funding and the balance
of which is payable by such members to Bagel Funding at such times on or after
October 1, 1996 and on or before December 31, 1998 as the manager or managers
of Bagel Funding make one or more capital calls. In the event a member fails
to make its capital contribution within three days of the date it is due, or
such longer period as the manager or managers determine (but in no event
longer than 45 days), Bagel Funding is required to treat such defaulting
member's interest in future profits as terminated, so that such defaulting
member is entitled to receive from Bagel Funding only the amount of such
member's capital account at the time of such default, reduced by any future
allocation of losses to such member, payable without interest thereon at the
expiration of the term of Bagel Funding.
Through July 30, 1996, Bagel Funding had invested a total of approximately
$45.8 million in area developers of the Company. See "Business--Area Developer
Financing." No fees were paid to the Company in its capacity as manager in
1995. The Company will be entitled to receive fees of $500,000 and $50,000 for
serving as manager of Bagel Funding during 1996 and the first quarter of 1997,
respectively.
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Bagel Funding has the right to require each area developer to redeem Bagel
Funding's equity interest in the area developer (the "Bagel Funding Put") at a
predetermined formula purchase price based on the store level cash flow of the
area developer in the event (i) the Company acquires a majority interest in
the area developer pursuant to the exercise of its conversion or option rights
under the area developer's secured loan agreement, (ii) the Company's
conversion and option rights expire unexercised and the Company has not
consented to a public offering of the area developer, or (iii) the Company
does not acquire a majority interest in an area developer pursuant to the
exercise of the Company's conversion or option rights, such rights have
expired under the secured loan agreement and the Company has not consented to
a request by the area developer to terminate its area development and
franchise agreements with the Company. In the event the area developer does
not redeem Bagel Funding's equity interest when required to do so, the Company
will be obligated to purchase from Bagel Funding its equity interest in the
area developer at the same price applicable to the area developer.
The Company's term as manager of Bagel Funding expires on April 20, 1997,
although the Company may be removed prior to such time for cause by action of
more than two-thirds in interest of Bagel Funding's members and may be removed
for any reason at fiscal year-end by action of more than four-fifths in
interest of Bagel Funding's members. Prior to the expiration of the Company's
term as manager, Bagel Funding also has a three-person advisory committee, the
members of which were nominated by the Company and approved by a majority in
interest of Bagel Funding's members. None of the members of the advisory
committee are officers, directors or employees of the Company. The advisory
committee is required to approve any sale by Bagel Funding of an interest in
an area developer and to determine the manner in which Bagel Funding's
interests in an area developer should be voted on any merger, consolidation,
sale of all or substantially all of the assets of the area developer or
amendment of its governing documents. The advisory committee is also available
to consult with the manager with respect to any matters requested by the
manager concerning Bagel Funding's investments and has the power to resolve
any questions with respect to potential conflicts of interest between Bagel
Funding and the manager that may be presented to it by the manager. Bagel
Funding's limited liability company agreement contains no specific provisions
with respect to the resolution of potential conflicts of interest between
Bagel Funding and its manager; however, resolution of such potential conflicts
of interest will be governed by applicable Delaware law. The advisory
committee has the authority to adopt rules and procedures not inconsistent
with Bagel Funding's limited liability company agreement, relating to the
conduct of the advisory committee's affairs. Actions taken by the advisory
committee must be authorized by a majority of the persons then serving as
advisory committee members. Each member of the advisory committee may
designate from time to time an alternate and such alternate may attend any and
all meetings of the advisory committee and otherwise may act in place of the
member selecting such alternate.
Effective April 21, 1997, or at such earlier time as the Company ceases to
be the manager of Bagel Funding, each of the members of the advisory committee
will become a manager of Bagel Funding and collectively will constitute the
three-person board of managers. At such time the advisory committee of Bagel
Funding will disband and all authority previously vested in the advisory
committee will be vested in the board of managers. In addition, when the
Company ceases to be the manager of Bagel Funding, the equity interests of
Bagel Funding in the Company's area developers will automatically be converted
from nonvoting equity interests to voting equity interests, which will have
the power to select the manager or general partner, as applicable, of each of
the Company's area developers.
Bagel Funding has also acquired from the Company, for an aggregate purchase
price of $45,000, warrants to acquire 1,012,500 shares of Common Stock of the
Company having an exercise price of $6.47 per share (the "Bagel Funding
Warrants"), or 11,250 shares of Common Stock for every $1.0 million of capital
committed to Bagel Funding. The Bagel Funding Warrants have a term of five
years. In the event the total capital ultimately contributed to Bagel Funding
is less than $90.0 million or Bagel Funding is dissolved prior to the time all
remaining capital commitments have been called, the number of shares
purchasable upon exercise of the Bagel Funding Warrants will be adjusted based
on the total amount of capital contributed or committed to be contributed to
Bagel Funding less the amount of cash to be distributed to the members of
Bagel Funding upon such dissolution. In the event of such a dissolution, the
amount of capital committed to be contributed to Bagel Funding shall be deemed
to be zero. Such adjustments to the number of shares covered by the Bagel
Funding Warrants, if any, will be made by the Company (i) at the time that
Bagel Funding may no longer accept additional capital subscriptions, (ii) at
such time, if any, as any member of Bagel Funding fails to honor its
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commitment to contribute capital and (iii) immediately prior to any
dissolution of Bagel Funding that occurs prior to the time all committed
capital has been contributed to Bagel Funding, but only if the Warrants have
not been distributed by Bagel Funding.
Bagel Funding is required to distribute the Bagel Funding Warrants to its
members on the later of (i) six months after the date of the closing of an
underwritten initial public offering of the Company or (ii) four months after
all committed capital has been contributed to Bagel Funding, but in no event
later than the date that is six months prior to the expiration date of the
Bagel Funding Warrants.
Messrs. Scott Beck, Butler, Carlborg, Muehlstein, Ruth and Stanchak each own
a direct equity interest in Bagel Funding. Such interests aggregate
approximately 8.1% of the outstanding equity interest in Bagel Funding.
Certain executive officers and directors of Boston Chicken own direct equity
interests in Bagel Funding. Such interests, excluding interests owned by Scott
Beck, aggregate approximately 16.3% of the outstanding equity interest in
Bagel Funding.
INTERESTS IN AREA DEVELOPERS BY CERTAIN PERSONS
BCE West Bagels, L.L.C. Effective November 26, 1995, the Company entered
into a convertible secured loan agreement and an area development agreement
with BCE West Bagels, L.L.C. ("Old BCE West") for the development of the
following DMAs: Phoenix (excluding portions of California included in the
Phoenix DMA); Tucson; Albuquerque/Santa Fe; Denver (excluding portions of
South Dakota included in the Denver DMA); Colorado Springs; Las Vegas; and El
Paso. Also effective November 26, 1995, the Company entered into a convertible
secured loan agreement and an area development agreement with BCE SLC Bagels,
L.L.C. ("BCE SLC") for the development of the Salt Lake City DMA. At the time
of the consummation of such transactions, Lawrence Beck, Scott Beck's father,
was the majority equity owner of Old BCE West and BCE SLC. In connection with
the execution of such agreements, the Company sold to Old BCE West and BCE SLC
the Company-operated stores and other assets located in certain of such DMAs
at net book value for an aggregate purchase price of $1,432,519 and
$3,719,625, respectively, pursuant to asset sale agreements, and entered into
a franchise agreement for each such store. The Company realized no significant
gain or loss on such sales. The Company believes that the terms of the
agreements entered into with Old BCE West and BCE SLC are as favorable to the
Company as the terms that could be negotiated with unrelated third parties.
On December 29, 1995, Lawrence Beck sold to Bagel Funding 1,750,000 units of
membership interest in each of Old BCE West and BCE SLC for an aggregate
purchase price of approximately $3.5 million. The Company understands that
Lawrence Beck did not realize any significant gain or loss on such sales.
Lawrence Beck retained a minority equity interest in each of Old BCE West and
BCE SLC, and an entity controlled by him remained the manager of each such
entity.
Effective January 29, 1996, BCE SLC acquired the assets of Old BCE West, BCE
SLC was renamed BCE West, L.L.C. ("BCE West") and Old BCE West was dissolved.
For the Company's 1995 fiscal year and the quarter ended April 21, 1996, BCE
West (together with its predecessor, Old BCE West) paid to the Company an
aggregate of $2,308,714 and $486,553, respectively, in development, franchise,
royalty, real estate, software license, software maintenance, miscellaneous
and accounting fees and deposits. For the quarter ended April 21, 1996, BCE
West paid $80,200 in national and $135,266 in local advertising fund
contributions. In addition, for such period, BCE West paid to the Company
$193,734 in interest on its loan from the Company.
Finest Bagels, L.L.C. Effective January 1, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Finest Bagels, L.L.C. ("Finest") for the development of the following DMAs:
St. Louis; Kansas City; and Minneapolis/St. Paul. Bagel Funding is the
majority equity owner of Finest. In connection with the execution of such
agreements, the Company sold to Finest the Company-operated stores and other
assets located in certain of those DMAs at net book value for an aggregate
purchase price of $6,216,545, pursuant to an asset sale agreement, and entered
into a franchise agreement with Finest for each such store. The Company
realized no significant gain or loss on such sale. For the Company's first
quarter
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ended April 21, 1996, Finest paid to the Company an aggregate of $1,613,001 in
development, franchise, royalty, real estate, software license, software
maintenance, miscellaneous and accounting fees and deposits. For the quarter
ended April 21, 1996, Finest paid $54,350 in national and $109,830 in local
advertising fund contributions. In addition, for such period, Finest paid to
the Company $74,717 in interest on its loan from the Company. The Company
believes that the terms of the agreements entered into with Finest are as
favorable to the Company as terms of agreements that could be negotiated by
the Company with unrelated third parties.
Einstein Bros. America, L.P. Effective March 25, 1996, the Company entered
into a convertible secured loan agreement and an area development agreement
with Einstein Bros. America, L.P. ("EBA") for the development of the following
DMAs: Milwaukee; Chicago; Detroit; Madison; Tampa/St. Petersburg/Sarasota;
Orlando/Daytona Beach/Melbourne; Ft. Myers/Naples; Miami/Ft. Lauderdale; and
West Palm Beach/Ft. Pierce. Bagel Funding is the majority equity owner of EBA.
In connection with the execution of such agreements, the Company sold to EBA
the Company-operated stores and other assets located in certain of those DMAs
at net book value for an aggregate purchase price of $18,622,026, pursuant to
an asset sale agreement, and entered into a franchise agreement with EBA for
each such store. The Company realized no significant gain or loss on such
sale. For the Company's first quarter ended April 21, 1996, EBA paid to the
Company an aggregate of $5,392,331 in development, franchise, real estate
fees, deposits and reimbursement of expenses.
Effective June 17, 1996, EBA contributed to Great Lakes Bagels, L.L.C.
("Great Lakes") its assets located in the following DMAs: Milwaukee; Chicago;
Detroit; and Madison (the "Great Lakes DMAs"). Upon such contribution, the
equity interests in Great Lakes were distributed in redemption of a portion of
the equity interests in EBA and EBA's name was changed to Gulfstream Bagels,
L.P. ("Gulfstream"). At the same time, the Company entered into a convertible
secured loan agreement and an area development agreement with Great Lakes for
the development of the Great Lakes DMAs, and it modified the agreements it had
previously entered into with Gulfstream to exclude the Great Lakes DMAs from
such agreements.
The Company believes that the terms of the agreements entered into with
Gulfstream and Great Lakes are as favorable to the Company as terms of
agreements that could be negotiated by the Company with unrelated third
parties.
Mayfair Bagels, L.L.C. On April 1, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Mayfair Bagels, L.L.C. ("Mayfair") for the development of a portion of the
Baltimore and Washington, D.C. DMAs. Bagel Funding is the majority equity
owner of Mayfair. In connection with the execution of such agreements, the
Company sold to Mayfair certain assets located in certain of those DMAs at net
book value for an aggregate purchase price of $249,084, pursuant to an asset
sale agreement. The Company realized no significant gain or loss on such sale.
For the Company's first quarter ended April 21, 1996, Mayfair paid to the
Company an aggregate of $860,000 in deposits and reimbursement of expenses.
The Company believes that the terms of the agreements entered into with
Mayfair are as favorable to the Company as terms of agreements that could be
negotiated by the Company with unrelated third parties.
Liberty Foods, L.L.C. Effective May 6, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Liberty Foods, L.L.C. ("Liberty") for the development of the New York DMA.
Bagel Funding is the majority equity owner of Liberty. In connection with the
execution of such agreements, the Company sold to Liberty the Company-operated
store and certain assets located in the DMA at net book value for an aggregate
purchase price of $869,743, pursuant to an asset sale agreement, and entered
into a franchise agreement with Liberty for such store. The Company realized
no significant gain or loss on such sale. The Company believes that the terms
of agreements entered into with Liberty are as favorable to the Company as
terms of agreements that could be negotiated by the Company with unrelated
third parties.
Colonial Bagels, L.P. Effective June 17, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Colonial Bagels, L.L.C. ("Colonial") for the development of the following
DMAs: Boston; Burlington/Plattsburgh; Cleveland; Pittsburgh; Providence/New
Bedford; and Springfield, MA. Bagel Funding is the majority equity owner of
Colonial. Lawrence Beck owns a 50 percent
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interest in the general partner of Colonial. In connection with the execution
of such agreements, the Company sold to Colonial certain assets located in
certain of those DMAs at net book value for an aggregate purchase price of
$72,377, pursuant to an asset sale agreement. The Company realized no
significant gain or loss on such sale. The Company believes that the terms of
agreements entered into with Colonial are as favorable to the Company as terms
of agreements that could be negotiated by the Company with unrelated third
parties.
Noah's Pacific, L.L.C. Effective June 17, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Noah's Pacific, L.L.C. ("Noah's Pacific") for the development of the following
DMAs: Los Angeles; Portland; Seattle/Tacoma; and Las Vegas. Bagel Funding is
the majority equity owner of Noah's Pacific. Noah Alper owns a minority equity
interest in Noah's Pacific. In connection with the execution of such
agreements, the Company sold to Noah's Pacific the Company-owned stores and
certain assets located in certain of those DMAs at net book value for an
aggregate purchase price of approximately $15.8 million, pursuant to an asset
sale agreement, and entered into a franchise agreement with Noah's Pacific for
each such store. The Company realized no significant gain or loss on such
sale. The Company believes that the terms of agreements entered into with
Noah's Pacific are as favorable to the Company as terms of agreements that
could be negotiated by the Company with unrelated third parties.
Noah's Bay Area Bagels, L.L.C. Effective July 15, 1996, the Company entered
into a convertible secured loan agreement and an area development agreement
with Noah's Bay Area Bagels, L.L.C. ("Noah's Bay Area") for the development of
the following DMAs: San Francisco/Oakland/San Jose and Sacramento/Stockton/
Modesto. Bagel Funding is the majority equity owner of Noah's Bay Area. Noah
Alper owns a minority equity interest in Noah's Bay Area. In connection with
the execution of such agreements, the Company sold to Noah's Bay Area the
Company-owned stores and certain assets located in those DMAs at net book
value for an aggregate purchase price of approximately $13.6 million, pursuant
to an asset sale agreement, and entered into a franchise agreement with Noah's
Bay Area for each such store. The Company realized no significant gain or loss
on such sale. The Company believes that the terms of the agreements entered
into with Noah's Bay Area are as favorable to the Company as terms of
agreements that could be negotiated by the Company with unrelated third
parties.
Philly Rose, L.P. On July 29, 1996, the Company entered into a convertible
secured loan agreement and an area development agreement with Philly Rose,
L.P. ("Philly Rose") for the development of the Philadelphia DMA. Bagel
Funding is the majority equity owner of Philly Rose. In connection with the
execution of such agreements, the Company sold to Philly Rose the Company-
owned stores and certain assets located in such DMA at net book value for an
aggregate purchase price of $375,455, pursuant to an asset sale agreement, and
entered into a franchise agreement with Philly Rose for each such store. The
Company realized no significant gain or loss on such sale. The Company
believes that the terms of the agreements entered into with Philly Rose are as
favorable to the Company as terms of agreements that could be negotiated by
the Company with unrelated third parties.
BCE West, Finest, Gulfstream, Great Lakes, Mayfair, Colonial, Noah's Pacific
and Noah's Bay Area are each represented by Pedersen & Houpt, a law firm in
which John Muehlstein, Jr., a director of the Company, is a partner.
AREA DEVELOPER WARRANTS
On January 15, 1996, in connection with the formation of the Company's
prospective area developers, the Company issued to eleven such entities
warrants to acquire an aggregate of 1,237,050 shares of Common Stock of the
Company, each at an exercise price per share of $6.47, as follows: BCE SLC
(now named BCE West)-- 85,050 shares; Finest--77,175 shares; Great Lakes
Bagels, L.L.C. ("Great Lakes")--108,225 shares; Liberty--100,350 shares;
Mayfair--77,175 shares; NJ Rose Bagels, L.L.C. ("NJ Rose")--92,700 shares;
NNYB, L.L.C. ("NNYB")--270,000 shares; P&L Bagels, L.L.C. ("P&L")--100,350
shares; P&L II Bagels, L.L.C. ("P&L II")--156,150 shares; R&A Bagels ("R&A")--
92,700 shares; and Texas Bagels, L.L.C.--77,175 shares. The warrants issued to
Great Lakes and R&A were transferred to EBA in connection with EBA's
transactions with the Company. In addition, NNYB assigned warrants for 168,750
shares of Common Stock to Noah's Pacific in
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connection with Noah's Pacific's transactions with the Company, P&L assigned
all of the warrants issued to it to Colonial in connection with Colonial's
transactions with the Company and NJ Rose assigned all of the warrants issued
to it to Philly Rose in connection with Philly Rose's transactions with the
Company. See "--Interests in Area Developers by Certain Persons." Each warrant
becomes exercisable by the holder thereof during the five-day period
commencing on the date of entering into an area development agreement and
secured loan agreement with the Company, and is exercisable only in its
entirety. If an area development agreement and secured loan agreement are not
entered into prior to July 15, 1997, each warrant expires as of such date.
Lawrence Beck owns a majority equity interest in each of P&L and P&L II. As of
July 30, 1996, each of the warrants granted to BCE West, Finest, Great Lakes,
Liberty, Mayfair, NJ Rose, P&L and R&A, as well as the warrants transferred to
Noah's Pacific, had been exercised.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into a consulting agreement with Mr. Colangelo in
connection with his resignation as President and Chief Executive Officer of
the Company. See "Management--Management Compensation."
On March 24, 1995, the Company entered into an employment agreement with Ms.
Lozoff, pursuant to which Ms. Lozoff became Vice President--Design and
Merchandising and a director of the Company. The employment agreement
terminates August 1, 1998. Ms. Lozoff receives an annual salary of $125,000
and reimbursement of reasonable business expenses. In addition, at the time
she entered into the employment agreement, Ms. Lozoff was granted options to
purchase 42,483 shares of Common Stock under the Plan with an exercise price
of $5.88 per share.
On March 31, 1995, the Company entered into an employment agreement with Mr.
Offerdahl, pursuant to which Mr. Offerdahl became Vice President of
Operations--Southeast Zone and a director of the Company. The employment
agreement terminates August 1, 1998. Mr. Offerdahl receives an annual salary
of $125,000 per year and reimbursement of reasonable business expenses. In
addition, at the time he entered into the employment agreement, Mr. Offerdahl
was granted options to purchase 42,483 shares of Common Stock under the Plan
with an exercise price of $5.88 per share.
On March 31, 1995, the Company entered into a consulting agreement with
Lynnora Offerdahl, Mr. Offerdahl's spouse, pursuant to which she provides
information, advice and assistance concerning product development, restaurant
design and general projects for the Company. The one-year consulting agreement
is automatically renewed for additional one year periods unless terminated by
either party upon 60 days' prior written notice. Ms. Offerdahl receives a
monthly consulting fee of $5,000 and reimbursement of reasonable business
expenses. In addition, at the time she entered into the consulting agreement,
Ms. Offerdahl was granted options to purchase 42,483 shares of Common Stock
under the Plan with an exercise price of $5.88 per share.
On April 5, 1996, Mr. Goldston was elected President and Chief Executive
Officer and a director of the Company. The Company has agreed to pay to Mr.
Goldston a base salary of $360,000 per year, with a guaranteed bonus of
$400,000 for fiscal year 1996. For fiscal year 1997, Mr. Goldston will be
eligible for a $400,000 bonus, his receipt of which will be based upon the
achievement of mutually agreed upon reasonable performance goals. In addition,
the Company granted to Mr. Goldston options under the Plan to purchase 114,030
shares of Common Stock at an exercise price of $10.52 per share. Beginning in
fiscal year 1997, and for each year thereafter as long as he remains an
employee of the Company, Mr. Goldston will be eligible for an annual stock
option grant under the Amended Plan to purchase, at a minimum, that number of
shares of Common Stock that have an aggregate exercise price of $800,000. In
connection with his employment, Mr. Goldston also purchased 28,508 shares of
Common Stock at a price of $10.52 per share.
Effective January 17, 1996, Boston Chicken employed Mr. Goldston to
undertake various special projects for Boston Chicken. As an employee of
Boston Chicken, Mr. Goldston receives an annual salary of $40,000 and is
eligible to participate in Boston Chicken's employee stock option plan. Mr.
Goldston has been granted options
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under that plan to purchase 100,000 shares of Boston Chicken common stock at
an exercise price of $27.9375 per share. Boston Chicken has agreed to
structure Mr. Goldston's future projects so that his employment with Boston
Chicken will not interfere with his duties with the Company.
In addition, in consideration for certain consulting services rendered to
Boston Chicken by Mr. Goldston and the consulting firm of which Mr. Goldston
was a principal, Boston Chicken has paid $1,818,086 for consulting services
rendered during fiscal years 1995 and 1996 and granted an option (outside of
the Boston Chicken employee option plan) to purchase 100,000 shares of Boston
Chicken common stock at an exercise price of $16.00 per share. Boston Chicken
has also granted to Mr. Goldston an option to purchase from Boston Chicken
344,673 shares of Common Stock at an exercise price of $6.38 per share.
On July 1, 1996, the Company entered into a transition and consulting
agreement with Mr. Craig in connection with his resignation as Chairman of the
Board of the Company, pursuant to which Mr. Craig will continue as a full-time
employee of the Company until June 30, 1997 and will provide consulting
services to the Company for a period of one year thereafter. As an employee of
the Company Mr. Craig will be paid approximately $3,600 bi-weekly through the
end of fiscal 1996 and approximately $7,900 bi-weekly during the first six
months of fiscal 1997. During the term of his employment, Mr. Craig will
continue to participate in the Company's employee benefit plans, except that
he will not be eligible to receive options under any of the Company's stock
option plans.
BOWANA AVIATION, INC.
During the 1995 fiscal year, the Company from time to time used airplanes
owned by a company controlled by Scott Beck and Lawrence Beck, for which the
Company incurred aggregate rental expense of $85,874 in such fiscal year. The
Company believes that the terms of its use of the planes were at least as
favorable to the Company as those it could have obtained from an unaffiliated
party. The Company has entered into two subleases with Boston Chicken,
pursuant to which the Company will be entitled to the non-exclusive use of
aircraft leased by Boston Chicken from unaffiliated leasing companies. See
"Relationship with Boston Chicken--Other Relationships Between Boston Chicken
and the Company."
LOANS TO EXECUTIVE OFFICERS
On August 9, 1995, the Company made a loan to Mr. Craig in the principal
amount of $400,000, the proceeds of which were used by Mr. Craig to pay off a
loan from Boston Chicken. Interest on the principal amount of the Company's
loan to Mr. Craig accrues at the reference rate announced by Bank of America
Illinois from time to time plus 1%. The principal balance of the loan and all
accrued but unpaid interest thereon are due and payable upon demand.
On March 31, 1995, in connection with the Company's acquisition of the
assets of Offerdahl's (now known as OBG) the Company made a non-recourse loan
to OBG in the principal amount of $437,497, the proceeds of which were used to
purchase an aggregate of 74,345 shares of Common Stock, which shares secure
the payment of principal and interest under such loan. Also on March 31, 1995,
the Company made a non-recourse loan to OBG in the principal amount of
$1,312,500, the proceeds of which were used to purchase an equity interest in
BC Equity Funding, L.L.C., a Delaware limited liability company which invests
in Boston Chicken area developers ("BCEF"), which equity interest secures the
payment of principal and interest under such loan. Each loan described above
accrues interest on the principal amount at the reference rate announced by
Bank of America Illinois from time to time plus 1%. The principal balance of
each loan and all accrued but unpaid interest thereon are due and payable on
April 15, 2001, but may be required to be repaid earlier under certain
circumstances.
Also in connection with the Company's acquisition of the assets of
Offerdahl's, on each of April 15, 1995, June 15, 1995, September 15, 1995 and
January 15, 1996, the Company made an interest-free loan to OBG in the
principal amount of $46,100, and on April 15, 1996, the Company made an
additional interest-free loan to
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OBG in the principal amount of $1,502,276. The proceeds of each such loan were
used to satisfy income tax obligations arising from the acquisition. Each such
loan is secured by units of membership interest in BCEF owned by OBG. The
principal balance of each loan and all accrued but unpaid interest thereon are
due and payable on April 15, 2001, but may be required to be repaid in whole
or in part under certain circumstances.
OTHER RELATIONSHIPS
Blind Faith, Inc., of which Ms. Lozoff and her spouse are the sole
shareholders, leases to the Company the land and building on which a store is
located. The Company subleases such land and building to one of its area
developers. The annual rental payments under the lease and sublease, each of
which terminates in May 2009, aggregate $72,000.
Quantum Media International, Inc. ("Quantum"), of which Mr. Goldston was a
director, performs advertising and marketing services for the Noah's New York
Bagels brand. During 1995, Noah's paid Quantum an aggregate of approximately
$188,000. Through May 1996, Noah's and the Company paid Quantum an aggregate
of approximately $61,000. The Company intends to retain the services of
Quantum for the Noah's New York Bagels brand during 1996.
CERTAIN TRANSACTIONS WITH BOSTON CHICKEN
See "Risk Factors--Dependence on Boston Chicken," "Risk Factors--Control by
and Conflicts of Interest with Boston Chicken" and "Relationship with Boston
Chicken."
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RELATIONSHIP WITH BOSTON CHICKEN
During 1994 and 1995 Boston Chicken spent substantial amounts of time and
resources investigating the potential of the bagel business. In March 1995,
Boston Chicken made an investment in the Company in the form of a convertible
secured loan and sold to the Company at net book value certain assets and
certain know-how and agreements. On June 17, 1996, Boston Chicken converted
the loan into shares of Common Stock, as more fully described below. Also in
March 1995, Boston Chicken and the Company entered into fee service agreements
pursuant to which Boston Chicken has provided the Company with certain multi-
unit retail infrastructure support, including accounting and administration
services, financial services, real estate services and computer and
communications services. Any of the foregoing fee service agreements which
remain in effect may be changed at any time, as may be agreed by Boston
Chicken and the Company. See "Risk Factors--Control by and Conflicts of
Interest with Boston Chicken."
The loan agreement between Boston Chicken and the Company, each of the other
agreements referred to above and other agreements between the Company and
Boston Chicken, are summarized below and are attached as exhibits to the
Registration Statement of which this Prospectus is a part.
LOAN AGREEMENT
On March 24, 1995, Boston Chicken made a senior secured convertible loan to
the Company, secured by substantially all of the Company's and its
subsidiaries' assets, pursuant to which the Company could draw on a line of
credit through March 1998, in order to provide partial funding for store
development and working capital. In February 1996, in connection with the
Noah's acquisition, Boston Chicken increased the amount available under the
loan from $80.0 million to $120.0 million. Also in February 1996, Boston
Chicken provided a $25.0 million bridge loan to the Company (later increased
to $40.0 million), which was repaid by the Company upon the closing of the
Company's secured revolving credit facility. On May 9, 1996, Boston Chicken
and the Company amended the convertible loan agreement to include a $14.0
million non-convertible facility, which was subsequently increased to $50.0
million. On June 17, 1996, pursuant to the terms of the convertible loan
agreement, Boston Chicken converted $80.0 million outstanding under the loan
into Common Stock at a conversion price of $6.38 per share, and converted the
remaining $40.0 million outstanding under the loan into Common Stock at a
conversion price of $14.42 per share. The Company issued an aggregate of
15,307,421 shares of Common Stock in the Loan Conversion, including 510,246
shares issued to BCEF pursuant to its participation interest in the
convertible loan, which interest is described below. As of July 30, 1996,
approximately $20.0 million was outstanding under the non-convertible loan
facility. Interest on the non-convertible loan is based on the reference rate
of Bank of America Illinois plus 1.0%. Any borrowings outstanding under the
Company's non-convertible loan facility from Boston Chicken are payable on
June 15, 2003. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 of Notes to the Company's
Audited Consolidated Financial Statements.
Boston Chicken may satisfy a portion of its funding obligations under the
loan agreement in cash or in shares of Boston Chicken common stock. Boston
Chicken has agreed to guarantee the price of any shares of Boston Chicken
common stock delivered to the Company in satisfaction of Boston Chicken's
obligations under the loan agreement and thereafter sold by the Company.
Boston Chicken's obligation to guarantee the selling price of the shares is
contingent upon the Company selling all of the shares of Boston Chicken common
stock received by it with respect to a particular advance within the first
seven trading days after the advance date in one or more bona fide broker's or
market maker transactions through or to Merrill Lynch to one or more persons
not affiliated with, related to, or associated with the Company. As of July
30, 1996 Boston Chicken had issued to the Company, and the Company had sold in
the over-the-counter market, through Merrill Lynch acting as broker, 2,701,615
shares of registered Boston Chicken common stock for aggregate proceeds of
approximately $88.0 million.
In April 1996, Boston Chicken sold a $4 million undivided interest in the
convertible loan to BCEF pursuant to a participation agreement. BCEF's
interest in the convertible loan included the pro rata participation by BCEF
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in the principal, interest and security of the loan and the conversion and
option rights of Boston Chicken under such loan. In connection with the
conversion and option rights, two-thirds of BCEF's participation interest was
convertible into Common Stock at a conversion price of $6.38 per share and the
remaining one-third had a conversion price of $14.42 per share. BCEF had no
independent right to exercise any conversion or option rights with respect to
its participation interest, or to cause Boston Chicken to exercise such
conversion or option rights. Upon conversion of the convertible loan by Boston
Chicken, BCEF received 510,246 shares of Common Stock. The shares of Common
Stock acquired by BCEF upon Boston Chicken's conversion of the loan may not be
transferred by BCEF without providing Boston Chicken prior notice and the
opportunity to purchase such shares for, at the option of Boston Chicken, cash
or registered shares of Boston Chicken common stock. Certain executive
officers and directors of the Company own in the aggregate less than 10% of
the outstanding equity interests of BCEF.
In connection with the closing of the Company's secured revolving credit
facility with Bank of America Illinois, Boston Chicken agreed to subordinate
all of its loans to the Company, both convertible and non-convertible, to all
indebtedness under the Company's secured revolving credit facility, and
further agreed to release its security interest in the assets of the Company.
CONCURRENT PRIVATE PLACEMENT AGREEMENT AND REGISTRATION AGREEMENT
Concurrent with the consummation of the Initial Public Offering and the
Concurrent Public Offering, the Company expects to enter into a concurrent
private placement agreement with Boston Chicken (the "Concurrent Private
Placement Agreement"), pursuant to which Boston Chicken would purchase
2,000,000 shares of Common Stock at the initial public offering price per
share, net of underwriting discount. The Concurrent Private Placement
Agreement includes customary terms and provisions, representations and
warranties and indemnification obligations. In addition, the Concurrent
Private Placement Agreement would permit Boston Chicken to maintain ownership
of shares of Common Stock having up to 52% of the voting power of all of the
outstanding shares of capital stock of the Company having the power generally
to vote in the election of directors pursuant to an option (the "BCI Option")
to purchase newly issued shares of Common Stock for cash or registered shares
of Boston Chicken common stock at a per share exercise price equal to the (i)
the weighted average price per share at which the Common Stock was issued or
sold in a transaction pursuant to which the BCI Option becomes exercisable, in
the case of a transaction in which such price per share is readily
ascertainable, or (ii) in all other cases, the average of the closing sale
prices for the Common Stock on the Nasdaq National Market (or such other
principal exchange or market on which the Common Stock may then be trading)
for the five trading days ending on the fifth trading day prior to the date of
the transaction pursuant to which the BCI Option becomes exercisable, but
subject in each case to adjustments for issuances of shares of Common Stock in
connection with recapitalizations, dividends, stock splits, consolidations of
shares and other diluting events. In the event payment is made in registered
shares of Boston Chicken common stock, Boston Chicken will guarantee the price
at which those shares can be sold at the market within a limited time period.
The BCI Option will terminate if (i) Boston Chicken sells or transfers shares
of Common Stock and as a result owns less than a majority of the then
outstanding shares of the Company's voting stock or (ii) the percentage of
outstanding shares of voting stock of the Company owned by Boston Chicken is
reduced below 50% other than as a result of Boston Chicken's voluntary sale or
transfer of shares of Common Stock and Boston Chicken fails to acquire a
sufficient number of shares of Common Stock so that it owns at least a
majority of the then outstanding shares of voting stock of the Company by July
31 of the calendar year next following the calendar year in which such
reduction occurs. In addition, the percentage ownership level of 52% is
subject to reduction to the extent voluntary sales or transfers by Boston
Chicken reduce its ownership of the outstanding shares of voting stock of the
Company to less than 52% but do not otherwise result in termination of the BCI
Option. The Concurrent Private Placement Agreement prohibits the Company from
taking certain actions without the consent of Boston Chicken as long as the
BCI Option has not terminated, including altering any rights attaching to the
Common Stock, offering or issuing any equity securities or debt securities
convertible into equity securities, in either case other than Common Stock,
distributing assets or securities of the Company having a fair market value in
excess of 10% of the Company's consolidated gross assets or consolidated gross
revenues measured as of the immediately preceding fiscal year end, and filing
a petition in bankruptcy.
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In connection with the Concurrent Private Placement Agreement, the Company
also expects to enter into a registration agreement with Boston Chicken (the
"Boston Chicken Registration Agreement"), pursuant to which the Company would
grant to Boston Chicken five demand and unlimited piggyback registration
rights under the Securities Act with respect to the shares of Common Stock
purchased by Boston Chicken in the Concurrent Private Placement or otherwise
owned by it, including shares of Common Stock subject to the BCI Option for
which the Company will bear substantially all of the expenses in connection
with such registrations (other than underwriting discounts or commissions).
The Boston Chicken Registration Agreement will supersede the rights of Boston
Chicken under the Stockholder Registration Agreement. Boston Chicken's demand
registration rights under the Boston Chicken Registration Agreement are not
exercisable by it until the earlier of (i) the date on which the Company
requests the effectiveness of the resale registration statement under the
Stockholder Registration Agreement or (ii) 13 months after the closing of the
Offerings. In addition, the Company has agreed in connection with Boston
Chicken's first demand registration, to waive the requirement of the
Stockholder Registration Agreement, if it is still applicable, that the
holders of the Registrable Securities agree not to sell up to 30% of such
Registrable Securities for certain periods and Boston Chicken has agreed to
consent to such waiver. The Company has obtained from the parties to the
Stockholder Registration Agreement a waiver of the provision of such agreement
prohibiting the Company from granting registration rights superior to those
granted under such agreement, and a consent to the grant by the Company to
Boston Chicken of registration rights pursuant to the Boston Chicken
Registration Agreement. See "Certain Transactions--Registration Rights" and
"Shares Eligible for Future Sale."
The Concurrent Private Placement Agreement and the Boston Chicken
Registration Agreement are exhibits to the Registration Statement of which
this Prospectus is a part.
ASSIGNMENT AND REIMBURSEMENT AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into an assignment
and reimbursement agreement, pursuant to which Boston Chicken assigned to the
Company certain intellectual property rights relating to the development,
manufacture and sale of bagels and bagel-related products (the "Bagel Rights")
and certain rights under contracts to which Boston Chicken was a party,
including Boston Chicken's rights under a lease of office space in Golden,
Colorado that is currently used as the Company's support center (the "Bagel
Contracts"). The Company paid to Boston Chicken an aggregate of $1,160,334 in
consideration for certain assets and Boston Chicken's assignment of the Bagel
Rights and the Bagel Contracts, and in reimbursement of certain costs and
expenses paid by Boston Chicken in connection with the development and
creation of the Company and certain of its relationships, the development or
acquisition of the Bagel Rights, the negotiation of the Bagel Contracts and
the costs associated with transferring certain employees from Boston Chicken
to the Company. The Company also agreed to assume Boston Chicken's liabilities
and obligations under the Bagel Contracts and in connection with the other
activities performed by Boston Chicken for which the Company reimbursed Boston
Chicken.
ACCOUNTING AND ADMINISTRATION SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into an accounting
and administration services agreement, subsequently amended and restated in
May 1996 and June 1996 to incorporate minor changes to such agreement (the
"Accounting and Administration Services Agreement"), pursuant to which Boston
Chicken has agreed to assist the Company, its subsidiaries and its area
developers in performing certain services, including maintaining accounting
records, performing accounting activities, preparing financial reports,
administering options, establishing and administering employee benefits, human
resources, insurance and recordkeeping services, assisting with lease
negotiations, maintaining lease files and complying with reporting obligations
thereunder, and providing certain other administrative support services.
In consideration for such assistance, the Company has agreed to pay to
Boston Chicken a base fee of $30,000 for each four-week accounting period, and
to cause each Entity (defined below) to pay a supplemental base fee of $4,500
for each accounting period for services to each area developer or business
unit of the Company (each such area developer or business unit being herein
sometimes referred to as an "Entity"), which fees may
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be increased cumulatively not more than 10% per fiscal year by Boston Chicken.
The Accounting and Administration Services Agreement also provides for a per
store fee, ranging from $850 per four-week accounting period if the Company or
Entity operates fewer than twelve bagel stores, to $350 per four-week
accounting period if the Company or Entity operates more than 200 bagel stores
(which range of per store fees may be reduced to a range from $700 to $250
upon compliance with certain reporting requirements, administrative procedure
compliance requirements and timeliness deadlines established by Boston
Chicken). The Company has also agreed to reimburse Boston Chicken for all non-
ordinary, out-of-pocket expenses incurred by Boston Chicken or its affiliates
in connection with the Accounting and Administration Services Agreement. All
such expenses in excess of $50,000 must be approved by the Company prior to
being incurred. Pursuant to the Accounting and Administration Services
Agreement, the Company paid to Boston Chicken in fiscal year 1995 fees
aggregating $489,750.
The Accounting and Administration Services Agreement has a term of three
years and may be terminated by the Company or Boston Chicken upon 180 days'
prior written notice. In addition, Boston Chicken may terminate the agreement
without notice 15 days after giving notice of non-payment of the fees provided
for in the agreement, unless such non-payment is cured within such 15-day
period.
FINANCIAL SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into a financial
services agreement, (as amended, the "Financial Services Agreement"), pursuant
to which Boston Chicken agreed to provide certain financial services to the
Company and its area developers, including identification and analysis of
possible transactions and related financial and strategic advice, assistance
in budget and forecast preparation, consultations and advice as to
presentations, discussions and disclosures to financial analysts and the
financial press, and advice concerning crisis management and control. In
consideration for such financial services, the Company agreed to pay to Boston
Chicken financial services fees aggregating $500,000 for fiscal year 1995 and
approximately $96,000 for fiscal year 1996. The Company also agreed to
reimburse Boston Chicken for all non-ordinary, out-of-pocket expenses incurred
by Boston Chicken or its affiliates in connection with the Financial Services
Agreement. All such expenses in excess of $50,000 were required to be approved
by the Company prior to being incurred. The Financial Services Agreement was
terminated effective as of May 20, 1996.
REAL ESTATE SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into a real estate
services agreement, subsequently amended and restated in May 1996 to make
minor changes to such agreement (the "Real Estate Services Agreement"),
pursuant to which Boston Chicken agreed to assist the Company, its
subsidiaries and its area developers in conducting certain real estate-related
activities, including site analysis, advisory services regarding customer
trade area studies and other real estate matters. In consideration for such
real estate services, the Company agreed to pay a general real estate advisory
fee of $5,000 for each bagel store location proposed to be owned, operated,
leased or franchised by the Company or any of its area developers or
subsidiaries. The Company also agreed that the Company and its subsidiaries
would pay Boston Chicken's regular fees for customer area trade studies,
market development plans, and demographic and census reports, charts and maps
(which fees were subject to change from time to time by Boston Chicken). The
Company also agreed to reimburse Boston Chicken for all non-ordinary, out-of-
pocket expenses incurred by Boston Chicken or its affiliates in connection
with the Real Estate Services Agreement. All such expenses in excess of
$50,000 were required to be approved by the Company prior to being incurred.
Pursuant to the Real Estate Services Agreement, the Company paid to Boston
Chicken in fiscal year 1995 fees aggregating $280,000. The Real Estate
Services Agreement was terminated effective as of June 17, 1996.
COMPUTER AND COMMUNICATIONS SYSTEMS SERVICES AGREEMENTS
On March 24, 1995, Boston Chicken and the Company entered into the Computer
Services Agreement, subsequently amended and restated in May 1996 and June
1996 to make certain changes to such agreement, pursuant to which (i) the
Company has agreed to acquire communications and computer systems or hardware
57
<PAGE>
specified or required from time to time by Boston Chicken for use by the
Company and its subsidiaries and area developers (except for Noah's Pacific an
area developer of the Company operating Noah's New York Bagels stores, which
has entered into a separate agreement with Boston Chicken for computer systems
conversion and services as more fully described below), (ii) Boston Chicken
has licensed the Company to use retail store-level computer software programs
and certain other computer software programs in connection with various
support and control functions (which the Company has agreed to use
exclusively, along with other software specified by Boston Chicken), and (iii)
Boston Chicken has agreed to provide certain computer and communications
support services. In consideration for such license and provision of services,
the Company has agreed to pay, and to cause each of its subsidiaries and area
developers to pay, to Boston Chicken a one-time license fee of $15,000 per
bagel store. In addition, the Company agreed to pay fees aggregating $156,000
for certain real estate software, fees aggregating $156,000 for certain Lotus
Notes Database(R) templates and fees aggregating $156,000 for certain
structured report software. In addition, the Company has agreed to pay to
Boston Chicken, for data center and network service operations and support of
certain infrastructure programs, $750,000 for each of the 1996, 1997 and 1998
fiscal years and 0.25% of net systemwide revenue of the Company, its
subsidiaries and its area developers (excluding the revenue derived from
Noah's New York Bagels stores) for each of the 1999 and 2000 fiscal years. The
Company has also agreed to pay, and to cause each of its subsidiaries and area
developers to pay, to Boston Chicken a software maintenance and support
service fee of $323 for each of Boston Chicken's four-week accounting periods
for each installed copy of certain software licensed from Boston Chicken,
which fee may be increased by Boston Chicken at any time at its option. The
Company has also agreed to compensate Boston Chicken at hourly rates for
performance of support services not otherwise covered by the foregoing fees
and to incur certain additional amounts as may be needed to modify, enhance or
replace computer or communications systems or computer software, some of which
amounts may be payable to Boston Chicken. The Company has also agreed to
reimburse Boston Chicken for certain costs and expenses incurred by Boston
Chicken in connection with the Computer Services Agreement. Pursuant to the
Computer Services Agreement, the Company, its subsidiaries and area developers
paid to Boston Chicken in fiscal year 1995 fees aggregating $234,823.
The Computer Services Agreement has a term of five years and may be
terminated by the Company or Boston Chicken upon one year prior written
notice. In addition, Boston Chicken may terminate the agreement without notice
15 days after giving notice of non-payment of the fees provided for in the
agreement, unless such non-payment is cured within such 15-day period.
In June 1996, Noah's Pacific and Boston Chicken entered into a computer and
communications systems conversion and services agreement (the "Noah's Pacific
Agreement") substantially similar to the Computer Services Agreement with
respect to the systems and hardware acquired by Noah's Pacific and the
computer and communications support services provided by Boston Chicken. The
Noah's Pacific Agreement provides that Boston Chicken will provide certain
conversion assistance to Noah's Pacific and Noah's Bay Area, L.L.C. ("Noah's
Bay Area"), an entity which has entered into an area development agreement and
franchise agreements with the Company for the development and operation of
additional Noah's New York Bagels stores and for which Noah's Pacific performs
certain services. The conversion services provided by Boston Chicken under the
Noah's Pacific Agreement include assisting with the development of a
conversion plan and timetable for converting the Noah's Pacific system to the
Company's system, the development of employee training materials, programs and
processes and customizing and adapting the Company's systems and software
programs for use in connection with the development and operation of Noah's
New York Bagels stores. In consideration of the conversion assistance,
software support and other services to be provided by Boston Chicken pursuant
to the Noah's Pacific Agreement, Noah's Pacific has agreed to pay to Boston
Chicken $1.5 million for the period beginning June 17, 1996 and ending
December 29, 1996, $3.0 million for each of Boston Chicken's 1997 and 1998
fiscal years and, for each of Boston Chicken's accounting periods in fiscal
1999 and 2000, an amount equal to 0.5% of the combined Royalty Base Revenue of
all stores owned by Noah's Pacific, Noah's Bay Area or their subsidiaries or
affiliates which are operating during any such accounting period.
The Noah's Pacific Agreement terminates at the end of Boston Chicken's
fiscal year 2000. In addition, Boston Chicken may terminate the agreement
without notice (i) 15 days after giving notice of non-payment of
58
<PAGE>
the fees provided for in the agreement, unless such non-payment is cured
within such 15-day period and (ii) if Noah's Pacific breaches any provision of
the agreement or, as to a particular store owned and operated by Noah's
Pacific or Noah's Bay Area, if the franchise agreement covering the operation
of the store is terminated for any reason.
OTHER RELATIONSHIPS BETWEEN BOSTON CHICKEN AND THE COMPANY
Pursuant to subscription agreements and certain other agreements entered
into upon the formation of the Company, the stockholders of the Company agreed
to vote their shares in favor of three persons designated by Boston Chicken as
directors of the Company. The Company currently has ten directors, including
the following designees of Boston Chicken: Scott Beck, Kyle Craig and David
Stanchak. Boston Chicken did not designate nominees for the 1996 election of
directors. In addition, certain officers of the Company were previously
officers or employees of Boston Chicken. See "Management."
The Company has from time to time purchased from Boston Chicken shares of
Boston Chicken common stock for delivery by the Company in connection with
acquisitions of other businesses by the Company. In addition to shares of
Boston Chicken common stock funded by Boston Chicken under the loan agreement,
during the period from March 24, 1995 through August 10, 1995, the Company
also purchased an aggregate of 1,298,958 shares of Boston Chicken common stock
in connection with such acquisitions, having an aggregate market value,
measured as of the respective dates such shares were acquired, of
approximately $23.4 million. See "Certain Transactions--Formation of the
Company and Subsequent Acquisitions." The Company may from time to time
acquire shares of common stock, or other securities, of Boston Chicken for
such purposes in the future. See also "--Loan Agreement."
In connection with the formation of the Company, the Company granted options
to purchase an aggregate of 224,300 shares of Common Stock to certain officers
and employees of Boston Chicken at an exercise price of $5.88 per share. Of
such shares, 50,978 shares are subject to options granted to executive
officers of Boston Chicken as follows: Mark W. Stephens, Vice Chairman of the
Board and Chief Financial Officer, 15,294 shares; Thomas R. Sprague, Executive
Vice President, 15,294 shares; Donald J. Bingle, Vice President, General
Counsel and Secretary, 10,195 shares; and Mark A. Link, Vice President--
Financial Reporting, 10,195 shares.
In July 1996, the Company, as tenant, entered into a lease with Boston
Chicken, as landlord, for approximately 38,000 square feet of office space
(and certain common areas, including parking areas) located in Golden,
Colorado to which the Company intends to relocate its support center facility.
The lease commences on September 1, 1996 and has a 15-year term, renewable for
two consecutive five-year terms. The lease provides for initial rent of
approximately $38,000 per month to be increased by 15% every five years during
the initial term and any renewal term of the lease. Under the lease, the
Company has agreed that, in the event Boston Chicken enters into a
sale/leaseback transaction with any third party, the Company will, at Boston
Chicken's option, amend the amount of rental payments under the lease to equal
40% of the rental amounts agreed to be paid by Boston Chicken pursuant to such
a transaction. The lease is a "triple net" lease, which requires the Company
to pay its proportionate share of costs associated with the property, building
and common areas related to the leased premises, including, without
limitation, real estate taxes, maintenance costs and insurance premiums. In
addition, the Company is required to pay to Boston Chicken an administrative
and management fee not to exceed 15% of such costs. Under the terms of the
lease, the Company is required to procure and maintain comprehensive
commercial liability and property damage insurance for the leased premises.
The lease contains other provisions typical of commercial leases generally,
including indemnification provisions, a prohibition against subleasing without
landlord consent and standard provisions relating to defaults under the lease
and remedies available upon default. The Company believes the terms and
provisions of the lease, including the rent payable thereunder, are at least
as favorable to the Company as those it could have obtained from an
unaffiliated third party.
The Company is a party to two subleases with Boston Chicken, pursuant to
which the Company is entitled to the non-exclusive use of aircraft leased by
Boston Chicken from unaffiliated leasing companies. Under the subleases, the
Company is obligated to pay to Boston Chicken between $1,900 and $2,800
(depending on the
59
<PAGE>
type of aircraft) for each hour of flight time such aircraft is used by the
Company. There is no minimum monthly use requirement or lease payment under
either of the subleases, and both subleases may be terminated by either party
upon 30 days' written notice. The Company believes that costs incurred by it
under the subleases are lower than the costs it would incur to lease and
maintain its own aircraft from an unaffiliated third party lessor and slightly
higher than the costs it would incur to charter individual aircraft on a spot-
basis from unaffiliated third party lessors. However, the Company believes
that such higher costs are reasonably related to the benefits to the Company
from the subleases, including aircraft availability and higher maintenance
standards, that it would not realize from charter arrangements with
unaffiliated third party lessors.
See also "Risk Factors--Dependence on Boston Chicken," "Risk Factors--
Control by and Conflicts of Interest with Boston Chicken" and "Certain
Transactions."
60
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited the accompanying consolidated balance sheet of Einstein/Noah
Bagel Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995,
and the related consolidated statements of operations, stockholders' deficit
and cash flows for the period from inception (March 24, 1995) through December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Einstein/Noah Bagel Corp.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the period from inception (March 24, 1995) through
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
July 16, 1996
F-3
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
ASSETS
- ------
<S> <C>
Current Assets:
Cash and cash equivalents....................................... $ 5,368
Accounts receivable............................................. 1,327
Inventory....................................................... 883
Deposits........................................................ 1,492
Prepaid expenses and other current assets....................... 217
-------
Total current assets.......................................... 9,287
Property and Equipment, net....................................... 19,410
Notes Receivable.................................................. 7,267
Excess of Purchase Price Over Fair Value of Net Assets Acquired,
net.............................................................. 13,715
Other Assets, net................................................. 620
-------
Total assets.................................................. $50,299
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current Liabilities:
Accounts payable................................................ $ 5,633
Accrued expenses................................................ 2,968
Deferred franchise revenue...................................... 645
-------
Total current liabilities..................................... 9,246
Convertible Debt.................................................. 40,000
Deferred Franchise Revenue........................................ 265
Other Noncurrent Liabilities...................................... 2,907
Repurchase Common Stock Shares--1,721,250 shares issued and
outstanding...................................................... 11,062
Series A Preferred Stock--6,250 shares issued and outstanding..... 7,813
Commitments
Stockholders' Deficit:
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;
3,848,607 shares issued and outstanding........................ 38
Additional paid-in capital...................................... 22,684
Accumulated deficit............................................. (43,716)
-------
Total stockholders' deficit................................... (20,994)
-------
Total liabilities and stockholders' deficit................... $50,299
=======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-4
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Revenue:
Company-operated stores............................................ $ 25,685
Royalties and franchise-related fees............................... 738
--------
26,423
Costs and Expenses:
Cost of products sold.............................................. 8,239
Salaries and benefits.............................................. 13,531
General and administrative......................................... 21,230
Write-off of intangible assets..................................... 26,575
--------
Total costs and expenses........................................... 69,575
--------
Loss from Operations................................................. (43,152)
Other Income (Expense):
Interest expense, net.............................................. (1,281)
Other income, net.................................................. 717
--------
Total other expense.............................................. (564)
========
Net loss........................................................... $(43,716)
========
Net loss per common and equivalent share........................... $ (4.54)
========
Weighted average number of common and equivalent shares
outstanding....................................................... 9,659
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-5
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Common Stock
Balance at inception............................................... $ --
Issuance of common stock........................................... 38
--------
Balance at December 31, 1995....................................... $ 38
========
Additional paid-in capital
Balance at inception............................................... $ --
Issuance of common stock, net of offering cost of $500............. 22,051
Dividends on Series A preferred stock and accretion of dividends on
repurchase shares................................................. (1,077)
Expense recognized for warrants issued............................. 1,710
--------
Balance at December 31, 1995....................................... $ 22,684
========
Accumulated deficit
Balance at inception............................................... $ --
Net loss........................................................... (43,716)
--------
Balance at December 31, 1995....................................... $(43,716)
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-6
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss........................................................... $(43,716)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 1,657
Warrant expense.................................................. 1,710
Write-off of intangible assets................................... 26,575
Gain on the sale of marketable equity securities..................... (719)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable................................................ (680)
Accounts payable and accrued expenses.............................. 1,778
Deferred franchise revenue......................................... 910
Other assets and liabilities....................................... 173
--------
Net cash used in operating activities............................ (12,312)
Cash Flows from Investing Activities:
Purchase of property and equipment................................. (18,109)
Proceeds from sale of property and equipment....................... 5,519
Purchase of marketable equity securities, net of proceeds from
sales............................................................. (22,682)
Purchase of other assets........................................... (621)
Issuance of notes receivable....................................... (10,569)
Repayment of notes receivable...................................... 3,831
--------
Net cash used in investing activities............................ (42,631)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock............................. 20,311
Proceeds from convertible debt..................................... 91,060
Repayment of convertible debt...................................... (51,060)
--------
Net cash provided by financing activities........................ 60,311
--------
Net Increase in Cash and Cash Equivalents............................ 5,368
Cash and Cash Equivalents, inception................................. --
--------
Cash and Cash Equivalents, end of year............................... $ 5,368
========
Supplemental Cash Flow Information:
Interest Paid...................................................... $ 1,107
========
Supplemental Schedule of Non-Cash Activities:
Exchange of Series A preferred stock, repurchase common stock,
common stock and marketable equity securities for net assets
acquired.......................................................... $ 42,742
========
Issuance of common stock for note receivable....................... $ 437
========
Accretion of dividends on repurchase common stock.................. $ 933
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-7
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Einstein/Noah Bagel Corp. and subsidiaries, formerly Einstein Bros. Bagels,
Inc. (the "Company"), operate and franchise specialty retail stores in the
United States that feature fresh-baked bagels, proprietary cream cheeses,
specialty coffees and teas, and creative soups, salads and sandwiches. At
December 31, 1995, there were 60 stores in operation systemwide, consisting of
47 Company-operated stores and 13 franchise stores. In 1995, the Company sold
13 Company-operated stores to newly-formed area developers of the Company.
Subject to the provisions of the applicable franchise agreements, the Company
is obligated to allow franchisees to utilize the Company's trademarks,
copyrights, recipes, operating procedures and other elements of its systems in
the operation of franchised stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year is the 52/53 week period ending on the last Sunday
in December.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit, and highly
liquid instruments purchased with maturities of three months or less.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of food, paper products and supplies.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization has been
calculated using the straight-line method. The following represent the useful
lives over which the assets are depreciated and amortized:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15-30 years
Furniture, fixtures and equipment............................. 6-8 years
Pre-opening expenses.......................................... 1 year
</TABLE>
Property and equipment additions include acquisitions of buildings and
equipment, costs incurred in the development and construction of new stores
and major improvements to existing stores. Expenditures for maintenance and
repairs are charged to expense as incurred. Pre-opening costs consist
primarily of salaries and other direct expenses incurred in connection with
the set-up, initial stocking of stores, initial training of employees and
general management activities incurred prior to the opening of new stores.
F-8
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" to evaluate the recoverability of long-lived assets and
assets to be disposed of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. SFAS No. 121 also establishes
the procedures for review of recoverability, and measurement of impairment if
necessary, of long-lived assets and certain identifiable intangibles to be
held and used by an entity.
Excess Purchase Price Over Fair Value of Identifiable Net Assets Acquired
The excess purchase price over the fair value of identifiable net assets
acquired from acquisitions is being amortized on a straight-line basis over 35
years. The Company evaluates whether events and circumstances have occurred
that indicate revision to the remaining useful life or the remaining balances
may be appropriate. Such events and circumstances include, but are not limited
to, a change in business strategy or change in current and long-term projected
operating performance. When factors indicate that the carrying amount of an
asset may not be recoverable, the Company estimates the future cash flows
expected to result from the use of such asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company will
recognize an impairment loss equal to the excess of the carrying amount over
the fair value of the asset.
Revenue Recognition
Revenue from Company-operated stores is recognized in the period related
food and beverage products are sold. Royalties are recognized in the same
period that related franchised store revenue is generated. Revenue derived
from initial franchise fees and area development fees is recognized when the
franchised store opens. Interest is recognized as earned. The components of
royalties and franchise-related fees for fiscal 1995 are as follows (in
thousands of dollars):
<TABLE>
<S> <C>
Initial franchise and area development fees......................... $520
Royalties........................................................... 35
Other............................................................... 183
----
Total royalties and franchise-related fees.......................... $738
====
</TABLE>
Per Share Data
Net loss per common share is computed by dividing net loss, adjusted for
dividends on Series A preferred stock, by the weighted average number of
common shares outstanding during the period and common stock and common stock
equivalent shares issued within one year prior to the effective date of the
Company's initial public offering at a price or exercise price less than the
initial public offering price. The common stock equivalents have been reduced
by the number of shares of common stock which could be purchased with the
proceeds from the assumed exercise of the options and warrants, including tax
benefits assumed to be realized.
Stock Options
Employee stock options are accounted for pursuant to APB No. 25.
Employee Benefit Plan
The Company has a 401(k) plan to which the Company makes no contributions.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT DATA
Accounts receivable are net of an allowance for doubtful accounts of $81,000
at December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS OF
DOLLARS)
<S> <C>
Property and equipment consists of:
Land.................................................. $ 123
Buildings and improvements............................ 12,083
Furniture, fixtures and equipment..................... 7,544
Pre-opening expenses.................................. 401
-------
20,151
Less: Accumulated depreciation and amortization....... (741)
-------
Total property and equipment, net................... $19,410
=======
Accrued expenses consist of:
Accrued payroll and fringe benefits................... $ 876
Accrued interest...................................... 325
Accrued other......................................... 1,767
-------
Total accrued expenses.............................. $ 2,968
=======
Interest expense, net consists of:
Interest expense...................................... $ 1,432
Interest income....................................... (151)
-------
Total interest expense, net......................... $ 1,281
=======
</TABLE>
4. ACQUISITIONS
In 1995, the Company acquired four regional bagel companies. In March 1995,
the acquisitions included Brackman Brothers, Inc. ("Brackman") for which the
Company issued 573,750 shares of common stock valued at $5.88 per share and
other marketable equity securities with a value of $8.3 million, Bagel &
Bagel, Inc. ("Bagel & Bagel") for which the Company issued 573,750 shares of
common stock valued at $5.88 per share and other marketable equity securities
with a value of $5.5 million, and Offerdahl's Bagel Gourmet, Inc.
("Offerdahl's") for which the Company issued 811,625 shares of common stock
valued at $5.88 per share and other marketable equity securities with a value
of $5.6 million. In August 1995, the Company acquired Baltimore Bagel Co.
("Baltimore Bagel") for which the Company issued 6,250 shares of Series A
preferred stock with a value of $7.8 million and other marketable equity
securities with a value of $4.0 million. Pursuant to the acquisitions, the
Company agreed to repurchase up to 1,721,250 shares of the common stock under
certain circumstances (see Note 12). The acquisitions have been accounted for
as purchases, and, accordingly, the purchase prices were allocated to assets
(both tangible and identifiable intangible) and liabilities based upon an
evaluation of their fair values at the dates of the acquisitions. The total
purchase price for these four companies, including assumption of liabilities,
was $51.1 million, of which $21.2 million was allocated to trademarks
(amortized over a 35-year life), $5.4 million was allocated to recipes
(amortized over a 10-year life) and $14.0 million was allocated to excess
purchase price over fair value of identifiable net assets acquired (amortized
over a 35-year life). Such intangibles were identified by management based
upon its evaluation of the businesses acquired. The allocation of the purchase
price to trademarks and recipes was based upon a royalty savings methodology
which determines the present value of the stream of royalties which the
Company believes an independent third party would be willing to pay to obtain
the use of such trademarks and recipes. The estimated useful life for these
assets was based upon various factors which existed at the time of the
acquisitions, including the anticipated periods of benefit to be derived from
the utilization of such assets in connection with executing a
F-10
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
regional brand business strategy, increasing consumer demand for bagel
products, the lack of a competitor with national brand awareness, the lack of
regulatory limitations on the potential useful lives of such assets, the
absence of any inherent or technological obsolescence for such assets, and in
the case of trademarks, the long-lived nature of a primary brand name in the
consumer marketplace. Subsequent to these acquisitions, management launched a
development project which resulted in the development of the Einstein Bros.
Bagel brand and store, at which time management determined it would
discontinue the use of the acquired trademarks and recipes. Consequently, this
change in business strategy resulted in an impairment of these identifiable
intangible assets, and accordingly, the assets were written down to their fair
market values, resulting in a write-off of $26.6 million (see Note 13). The
financial statements include the results of operations for the acquired
entities from their dates of acquisition.
The following represents the unaudited pro forma results of operations as if
all of the above-noted business combinations had occurred at the beginning of
the Company's fiscal year (in thousands of dollars, except per share data):
<TABLE>
<S> <C>
Revenue........................................................... $38,065
Net loss.......................................................... 43,540
Net loss per share................................................ $ 4.51
</TABLE>
The pro forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined as of the beginning of the Company's fiscal year, and is not intended
to be a projection of future results or trends.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
The carrying value approximates fair value due to the length of maturity of
the investments.
Notes Receivable
The estimated fair value of the Company's notes receivable, including the
conversion option (Notes 6 and 11), is based on the discounted value of future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings.
Convertible Debt
The estimated fair value of the Company's convertible debt, including the
conversion option (see Note 7), is based on the discounted value of future
payments using the current rate at which a similar loan would be made to a
company with similar credit ratings.
Common Stock Subject to Repurchase
The estimated fair value of the Company's common stock subject to repurchase
by the Company is based on the price of other common stock equity transactions
near December 31, 1995.
Series A Preferred Stock
The estimated fair value of the Company's Series A preferred stock is based
on the discounted value of future cash flows using interest rates which would
be applicable to similar instruments held in companies with similar credit
ratings.
The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Cash and cash equivalents...................... $ 5,368 $ 5,368
Notes receivable............................... 7,267 7,267
Convertible debt............................... 40,000 40,000
Repurchase common stock........................ 11,062 11,142
Series A preferred stock....................... 7,813 7,813
</TABLE>
F-11
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES RECEIVABLE
The following table summarizes the primary components of notes receivable as
of December 31, 1995 (in thousands of dollars):
<TABLE>
<S> <C>
Due from area developers (Note 11)................................ $3,538
Notes receivable from stockholder................................. 1,888
Term loans........................................................ 1,108
Revolving loan.................................................... 226
Other............................................................. 507
------
$7,267
======
</TABLE>
Notes receivable from stockholder bear interest at 1% over the applicable
reference rate of Bank of America Illinois. Principal and interest are due
April 2001. The notes are collateralized by various assets.
Term loans bear interest based upon the reference rate plus 1%. Principal is
due in annual installments with balloon payments required through various
dates through 2001. The loans are collateralized by various assets.
The revolving loan provides a credit facility to a vendor of up to $400,000
through October 2000 with interest payable currently based upon the reference
rate plus 1%. The loan is collateralized by various assets.
7. DEBT
The Company has entered into a secured loan agreement (the "Agreement")
providing borrowings through March 1998, pursuant to which Boston Chicken,
Inc. ("Boston Chicken") provides debt financing and, in turn, obtains the
right to convert all or any portion of the loan into shares of common stock of
the Company. In January 1996, Boston Chicken increased the available
borrowings under the Agreement from $80.0 million to $120.0 million. The
ownership percentage represented by the shares of common stock to be acquired
upon conversion (or exercise of the option, as provided below) is dependent
upon total equity and rights outstanding, but would represent a majority
ownership in certain instances. The loan may be converted at any time after
the earlier of April 1997, the completion of an initial public offering, or
the Company being in default of the loan and until October 2003. Additionally,
during this same period, to the extent the loan is not fully drawn or has been
drawn and repaid, Boston Chicken has the option to acquire at the loan
conversion price, as defined, the amount of additional equity it could have
acquired by conversion of the loan had the loan been fully drawn. The loan is
collateralized by substantially all of the assets of the Company and a pledge
of the common stock of its subsidiaries. The Agreement contains various
restrictive covenants including restricting cash dividends and limiting
additional indebtedness. Interest is based upon the reference rate of Bank of
America Illinois plus 1% and is payable currently. In April 1998, the loan
converts to an amortizing term loan payable through May 2003, with a final
balloon payment.
Principal maturities on the outstanding balance as of December 31, 1995 were
as follows (in thousands of dollars):
<TABLE>
<S> <C>
1998.............................................................. $ 3,077
1999.............................................................. 4,000
2000.............................................................. 4,000
Thereafter........................................................ 28,923
-------
$40,000
=======
</TABLE>
In connection with the acquisition of Noah's New York Bagels, Inc.
("Noah's") in February 1996 (Note 15), Boston Chicken provided the Company
with a non-convertible bridge loan facility of up to $40.0 million.
F-12
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
As of December 31, 1995, the Company had cumulative federal and state tax
operating loss carryforwards available to reduce future taxable income of
approximately $11.1 million which begin to expire in 2010.
The primary components that comprise the net deferred tax asset as of
December 31, 1995 are as follows (in thousands of dollars):
<TABLE>
<S> <C>
Deferred tax assets:
Accounts payable and accrued expenses.......................... $ 218
Deferred franchise revenue..................................... 355
Other noncurrent liabilities................................... 220
Write-off of intangible assets that are amortizable for tax.... 2,017
Net operating loss............................................. 4,104
Other.......................................................... 1,380
-------
Total deferred tax assets.................................... 8,294
Deferred tax liabilities:
Property and equipment......................................... (489)
Other assets................................................... (116)
-------
Total deferred tax liabilities............................... (605)
-------
Net deferred tax asset....................................... 7,689
Valuation allowance.............................................. (7,689)
-------
Net deferred tax asset........................................... $ --
=======
</TABLE>
The increase in the valuation allowance of $7,689,000 from inception through
December 31, 1995, is due to uncertainty regarding the realization of the
related tax benefits.
9. NATIONAL AND LOCAL ADVERTISING FUNDS
The Company administers a National Advertising Fund to which Company-
operated stores and franchised stores make contributions based on individual
franchise agreements (2% of net revenue). Collected amounts are spent
primarily on developing marketing and advertising materials for use
systemwide. Such amounts are not segregated from the cash resources of the
Company, but the National Advertising Fund is accounted for separately and not
included in the financial statements of the Company.
The Company maintains Local Advertising Funds that provide comprehensive
advertising and sales promotion support for stores in particular markets.
Contributions are made by both Company-operated and franchised stores
(currently 4% of net revenue). The Company disburses funds and accounts for
all transactions related to such Local Advertising Funds. Such amounts are not
segregated from the cash resources of the Company, but are accounted for
separately and are not included in the financial statements of the Company.
10. COMMITMENTS
The Company leases sites for its stores, commissaries and office space.
Lease terms are generally five years with two or three five-year renewal
options. The Company also subleases sites to its area developers. The sublease
terms to area developers are negotiated at arms length on commercially
reasonable terms. The Company is contingently liable for all lease costs
including common area maintenance charges. Most of the leases contain
escalation clauses and common area maintenance charges.
F-13
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year and sublease proceeds as of December 31,
1995 (in thousands of dollars):
<TABLE>
<CAPTION>
MINIMUM SUBLEASE NET MINIMUM
RENTAL PAYMENTS PROCEEDS RENTAL PAYMENTS
--------------- -------- ---------------
<S> <C> <C> <C>
1996............................. $ 3,495 $ 822 $ 2,673
1997............................. 2,908 597 2,311
1998............................. 2,686 590 2,096
1999............................. 2,403 560 1,843
2000............................. 1,587 529 1,058
Thereafter....................... 3,046 1,352 1,694
------- ------ -------
$16,125 $4,450 $11,675
======= ====== =======
</TABLE>
The net rental expense under operating leases, primarily for Company-
operated stores, was approximately $1,909,000 for the period from March 24,
1995 (inception) through December 31, 1995.
In December 1995, Bagel Store Development Funding, L.L.C. ("Bagel Funding"),
formerly Einstein Bros. Equity Funding, L.L.C., was formed with the objective
of raising $90.0 million to invest in existing and proposed area developers.
Through December 31, 1995, Bagel Funding had raised approximately $40.0
million (including an aggregate of $20.0 million in subscription receivables)
and had invested a total of $3.5 million in area developers. In March 1996,
Bagel Funding raised the remainder of anticipated funds, so that the funds
raised equalled the $90.0 million (including an aggregate of $45.0 million in
subscription receivables). Bagel Funding can require an area developer to
redeem Bagel Funding's equity interest at a formula price in the event the
Company acquires a majority interest in the area developer, and if the area
developer fails to do so, the Company will be required to purchase Bagel
Funding's unredeemed equity interest at the formula price. In the event the
Company's conversion and/or option rights expire unexercised under the area
developer's secured loan agreement with the Company, as originally in effect,
Bagel Funding will have the right to require, subject to the Company's prior
consent, that the area developer undertake a firm commitment underwritten
public offering of equity of the area developer. In the event the Company does
not consent to a public offering, the area developer can be required to
purchase Bagel Funding's unredeemed equity interest in the area developer at a
formula price and if the area developer fails to do so, the Company will be
required to purchase Bagel Funding's unredeemed equity interest. Also, in the
event the Company does not acquire a majority interest in the area developer
pursuant to the Company's conversion and/or option rights prior to the time
such rights expire unexercised under the area developer's secured loan
agreement with the Company, as originally in effect, Bagel Funding will have
the right to request that the area developer seek to terminate its area
development and franchise agreements with the Company. If the Company does not
consent to such termination, the area developer can be required to redeem
Bagel Funding's equity interest in the area developer at a formula price, and
if the area developer fails to do so, the Company will be required to purchase
Bagel Funding's unredeemed equity interest.
The Company has entered into a supply agreement relating to the purchase of
certain minimum levels of cream cheese, which expires in October 2000, or
earlier in certain circumstances. The agreement requires the Company, its
subsidiaries, area developers and other authorized purchasers to purchase the
lesser of 160,000 pounds of cream cheese per week or 60% of their requirements
for cream cheese (excluding certain requirements that may be satisfied through
other commitments and certain requirements of acquired companies). The price
per pound is determined over the term of the contract based upon production
costs.
11. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for
use in expansion of their operations. These financing arrangements permit the
Company to obtain an equity interest in the area developer
F-14
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at a predetermined price after a moratorium (generally two years) and after
the area developer has completed not less than 80% of its area development
commitment (or in the event of certain defaults) on conversion of the loan
into equity. The maximum loan amount is established to give the Company
majority ownership of the area developer upon conversion (or option exercise,
as described further below) provided the Company exercises its right to
participate in any intervening financing of the area developer.
Area developer financing requires the developer to expend at least 75% of
its contributed capital toward developing stores prior to drawing on the
revolving loan account, with draws permitted during a three-year draw period
in a pre-determined maximum amount equal to four times the amount of the area
developer's equity capital. Upon expiration of the draw period, the loan
converts to an amortizing term loan payable over five years in periodic
installments, with a final balloon payment. Interest is set at 1% over the
applicable reference rate of Bank of America Illinois from time to time and is
payable each four-week period. The loan is secured by a pledge of substantially
all of the assets of the area developer.
(a) Loan Conversion Option
All or any portion of the loan amount may be converted at the Company's
election at any time after the expiration of a specified moratorium period
(generally two years) and after the area developer has completed not less than
80% of its area development commitment (or in the event of certain defaults)
into equity in the area developer at the conversion price set forth in such
loan agreement, generally at a 12% premium over the per equity unit price paid
by the investors in the area developer for the equity investment made
concurrently with the execution of the loan agreement. To the extent such loan
is not fully drawn or has been drawn and repaid, the Company has a
corresponding option to acquire at the loan conversion price the amount of
additional equity it could have acquired by conversion of the loan had it been
fully drawn.
There can be no assurance the Company will or will not convert any loan
amount or exercise its option at such time as it may be permitted to do so
and, if it does convert, that such conversion will constitute a majority
interest in the area developer.
(b) Commitments to Extend Area Developer Financing
The following table summarizes as of December 31, 1995 credit commitments
for area developer financing (in thousands of dollars):
<TABLE>
<S> <C>
Number of area developers receiving financing.................... 2
Loan commitments................................................. $16,000
Unused loans..................................................... 12,462
-------
Loans outstanding (included in Notes Receivable)................. $ 3,538
=======
Allowance for loan losses........................................ $ --
=======
</TABLE>
The principal maturities on the aforementioned notes receivable are as
follows (in thousands of dollars):
<TABLE>
<S> <C>
1998............................................................... $ 82
1999............................................................... 354
2000............................................................... 354
Thereafter......................................................... 2,748
------
$3,538
======
</TABLE>
F-15
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Credit Risk and Allowance for Loan Losses
The allowance for credit losses is maintained at a level that in
management's judgment is adequate to provide for estimated possible loan
losses. The amount of the allowance is based on management's review of each
area developer's use of loan proceeds, stage of development, adherence to its
store development schedule, store performance trends, type and amount of
collateral securing the loan, prevailing economic conditions, and other
factors which management deems relevant at the time. Based upon this review
and analysis, no allowance was required as of December 31, 1995.
12. STOCKHOLDERS' EQUITY
Common Stock
On July 8, 1996, the Company approved a 225-for-one split of the Company's
common stock in the form of a stock dividend. Per share amounts, the number of
common shares and capital accounts have been restated to give retroactive
effect to the stock split.
The Company issued 3,536,361 shares of common stock at the time of its
formation, which provided net proceeds of approximately $20.8 million.
Preferred Stock
In connection with the acquisition of the net assets of Baltimore Bagel, the
Company issued 6,250 shares of Series A preferred stock. The Series A
preferred stock has a liquidation preference of $1,000 per share, pays annual
dividends of $60 per share, and is automatically convertible into common stock
of the Company in an initial public offering with the number of shares of
common stock received being equal to $1,000 plus accrued and unpaid dividends
divided by 80% of the gross offering price per share to the public.
The Series A preferred stock is redeemable by the Company at any time after
February 10, 1999, at a price per share equal to $1,250 plus accrued and
unpaid dividends. A majority of the holders may require the Company to redeem
one-third of the shares of Series A preferred stock on each of February 28,
1998, May 1, 1998 and August 1, 1998, at a price of $1,250 plus accrued and
unpaid dividends. The holders of the Series A preferred stock may also require
redemption in the event the Company has failed to pay three consecutive
quarterly dividends.
Common Stock Subject to Repurchase
Pursuant to the purchase agreements (see Note 4), the Company has agreed
that, in the event it has not completed an initial public offering of its
common stock resulting in gross proceeds of at least $15.0 million by
specified dates or Boston Chicken's ownership of, or right to acquire an
ownership interest in, the Company's common stock falls below 25%, the holders
of common stock subject to repurchase by the Company can require the Company
to redeem such shares of common stock at their fair market value, but not less
than a specified floor price per share. The difference between the
consideration paid per share and the greater of the fair market value of the
shares or the floor price per share is being accreted to the shares as a
dividend over the life of the put option.
Warrants
The Company sold warrants to purchase 1,012,500 shares of common stock of
the Company to Bagel Funding. The warrants have an exercise price of $6.47 per
common share and expire in 2000. The market value of the warrants was recorded
as an expense and credited to additional paid-in capital during fiscal 1995.
F-16
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plan
The Company has a stock option plan (the "Plan") under which options to
purchase up to 3,600,000 shares of common stock, subsequently increased to
5,500,000 shares of common stock, may be granted to certain employees and
officers of, and consultants to, the Company. The option price is equal to the
fair market value of the stock on the date of the grant and each option has a
term of ten years. Options granted under the Plan generally vest at a rate of
10% at the end of the first year, an additional 20% at the end of the second
year, an additional 30% at the end of the third year, with the balance vesting
at the end of the fourth year from the date of the grant.
Activity under the option plan through December 31, 1995 was as follows:
<TABLE>
<CAPTION>
OPTION
PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Granted........................................... 2,090,248 $5.88-$6.47
Cancelled......................................... (16,778) 5.88
--------- -----------
Outstanding as of December 31, 1995............... 2,073,470 $5.88-$6.47
========= ===========
Exercisable as of December 31, 1995............... 29,738 $ 5.88
========= ===========
</TABLE>
As of December 31, 1995, the Company had 17,146,125 shares of common stock
reserved for issuance upon exercise of options and warrants and conversion of
Boston Chicken's loan into common stock. In addition, the Company has
contractually agreed to reserve a sufficient number of shares of common stock
for issuance to the holder of the Series A preferred stock upon conversion.
13. WRITE-OFF OF INTANGIBLE ASSETS
After the acquisition of Brackman, Bagel & Bagel, Offerdahl's and Baltimore
Bagel (collectively the "Founding Companies"), the Company launched a
development project, pursuant to which management analyzed (i) the Founding
Companies' stores, including brand positionings, product offerings,
operational service systems and atmosphere, (ii) the competitive environment
and (iii) the preferences of consumers across the United States. The project
resulted in the development of the Einstein Bros. Bagels brand and store. In
connection with, and as a result of, the development of the Einstein Bros.
Bagels brand and store, management determined to discontinue the use of the
identifiable intangible assets acquired in the acquisitions of the Founding
Companies, including trademarks and recipes. Consequently, this change in
business strategy resulted in an impairment of these identifiable intangible
assets, and accordingly, the assets were written down to their fair market
values resulting in a write-off of $26.6 million.
14. RELATED-PARTY TRANSACTIONS
Certain officers and directors of Boston Chicken have an equity interest in
the Company. For the Company's 1995 fiscal year, the Company paid to Boston
Chicken approximately $1.2 million for the purchase of furniture, equipment
and other miscellaneous assets and approximately $3.0 million in software
license, software maintenance, real estate, financial advisory, accounting
fees and interest on its loan with Boston Chicken.
Certain officers and directors of the Company are officers and investors in
Bagel Funding and had invested $8.4 million in Bagel Funding at December 31,
1995. The Company is the manager of Bagel Funding. No fees were paid to the
Company in its capacity as manager during 1995.
The Company has entered into secured loan and area developer agreements with
certain area developers in which certain directors and officers and members of
their families have a direct or indirect equity interest. The
F-17
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Company received from these entities approximately $2.3 million in
development, franchise, royalty, management services and interest in fiscal
1995. The Company has also sold to these entities, stores, inventory,
equipment and other miscellaneous assets for which it received approximately
$5.5 million in 1995.
During 1995, the Company paid $85,874 to Bowana Aviation, Inc. ("Bowana")
for the Company's use of an aircraft owned by Bowana. A director and a member
of his family (both stockholders of the Company) own Bowana. The Company
believes that the amounts charged are at rates comparable to those charged by
third parties.
15. SUBSEQUENT EVENTS
In February 1996, the Company acquired Noah's, the largest regional bagel
retailer on the West Coast, for approximately $100.9 million, including
approximately $83.7 million of intangible assets, including excess purchase
price over the fair value of net assets acquired.
In May 1996, the Company entered into a secured revolving credit facility
providing for borrowings of up to $45.0 million through April 30, 1998.
Borrowing under the facility may be either floating rate loans with interest
at the lender's base rate plus 1.0% or, at the Company's option, the rate
offered in the interbank Eurodollar market for one-, two-, or three-month
dollar deposits offered by the lender plus 3.0%. In addition, a commitment fee
of .25% of the average daily unused portion of the loan is required. The
facility contains covenants, among others, restricting other borrowings,
prohibiting cash dividends, and requires the Company to maintain minimum
interest coverage and cash flow ratios, specified store level sales, and a
minimum capital level.
In June 1996, the $120.0 million convertible loan to the Company was
converted into 15,307,421 shares of common stock of the Company.
F-18
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, APRIL 21, APRIL 21,
1995 1996 1996
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 7)
ASSETS
- ------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................ $ 5,368 $ 2,912 $ 2,912
Accounts receivable...................... 1,327 5,334 5,334
Inventory................................ 883 1,408 1,408
Deposits................................. 1,492 3,319 3,319
Prepaid expenses and other current
assets.................................. 217 634 634
-------- -------- --------
Total current assets................... 9,287 13,607 13,607
Property and Equipment, net............... 19,410 34,564 34,564
Notes Receivable.......................... 7,267 38,298 38,298
Excess of Purchase Price Over Fair Value
of Identifiable Net Assets Acquired, net. 13,715 69,547 69,547
Trademarks, net........................... -- 21,986 21,986
Recipes, net.............................. -- 5,121 5,121
Other Assets, net......................... 620 1,391 1,391
-------- -------- --------
Total assets........................... $ 50,299 $184,514 $184,514
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
- ------------------------------------
Current Liabilities:
Accounts payable......................... $ 5,633 $ 5,418 $ 5,418
Accrued expenses......................... 2,968 6,556 6,556
Deferred franchise revenue............... 645 990 990
-------- -------- --------
Total current liabilities.............. 9,246 12,964 12,964
Convertible Debt.......................... 40,000 120,000 --
Long-term Debt............................ -- 38,497 38,497
Deferred Franchise Revenue................ 265 1,595 1,595
Other Noncurrent Liabilities.............. 2,907 3,826 3,826
Repurchase Common Stock Shares--1,721,250
shares issued and outstanding............ 11,062 11,852 11,852
Series A Preferred Stock--6,250 shares
issued and outstanding................... 7,813 7,813 7,813
Commitments
Stockholders' Equity (Deficit):
Preferred Stock--$.01 par value;
20,000,000 shares authorized; no shares
issued and outstanding.................. -- -- --
Common Stock--$.01 par value;
200,000,000 shares authorized issued
and outstanding, 3,848,607 shares in
1995, 5,353,128 shares in 1996 and
20,660,549 shares in 1996 on a pro
forma basis............................. 38 54 207
Additional paid-in capital............... 22,684 34,946 154,793
Accumulated deficit...................... (43,716) (47,033) (47,033)
-------- -------- --------
Total stockholders' equity (deficit)... (20,994) (12,033) 107,967
-------- -------- --------
Total liabilities and stockholders'
equity (deficit)...................... $ 50,299 $184,514 $184,514
======== ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-19
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 24, 1995)
THROUGH QUARTER ENDED
APRIL 16, 1995 APRIL 21, 1996
--------------------- --------------
<S> <C> <C>
Revenue:
Company-operated stores................. $1,423 $18,397
Royalties and franchise-related fees.... -- 3,982
------ -------
1,423 22,379
Costs and Expenses:
Cost of products sold................... 438 5,490
Salaries and benefits................... 643 9,128
General and administrative.............. 522 9,031
------ -------
Total costs and expenses.............. 1,603 23,649
------ -------
Loss from Operations...................... (180) (1,270)
Other Income (Expense):
Interest expense, net................... (80) (3,333)
Other income, net....................... -- 1,286
------ -------
Total other expense................... (80) (2,047)
------ -------
Net loss.................................. $ (260) $(3,317)
====== =======
Net loss per common and equivalent share.. $(0.03) $ (0.35)
====== =======
Weighted average number of common and
equivalent shares outstanding............ 9,432 9,679
====== =======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-20
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 24, 1995
(INCEPTION)
THROUGH QUARTER ENDED
APRIL 16, 1995 APRIL 21, 1996
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $ (260) $ (3,317)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 67 1,914
Gain on sale of marketable equity securities... -- (1,267)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable.......................... 454 (3,710)
Accounts payable and accrued expenses........ (1,673) (2,440)
Deferred franchise revenue................... -- 1,660
Other assets and liabilities................. 24 (2,923)
-------- ---------
Net cash used in operating activities........ (1,388) (10,083)
Cash Flows from Investing Activities:
Purchase of property and equipment............. (389) (17,557)
Proceeds from sale of property and equipment... -- 25,088
Acquisition of Noah's New York Bagels, Inc..... -- (100,902)
Net proceeds (purchases) from investment in
marketable equity securities.................. (21,465) 1,267
Purchase of other assets....................... (59) (744)
Issuance of notes receivable................... (2,041) (39,003)
Repayment of notes receivable.................. -- 7,972
-------- ---------
Net cash used in investing activities........ (23,954) (123,879)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock......... 20,183 13,009
Proceeds from debt............................. 34,637 208,929
Repayment of debt.............................. (26,533) (90,432)
-------- ---------
Net cash provided by financing activities.... 28,287 131,506
-------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 2,945 (2,456)
Cash and Cash Equivalents, beginning of period... -- 5,368
-------- ---------
Cash and Cash Equivalents, end of period......... $ 2,945 $ 2,912
======== =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-21
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by Einstein/Noah
Bagel Corp. (the "Company") and are unaudited except for the consolidated
balance sheet at December 31, 1995. 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 21, 1996 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 included elsewhere herein. The
consolidated results of operations for the quarter ended April 21, 1996 are
not necessarily indicative of the results expected for the full year.
2. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for
use in expansion of their operations. These financing arrangements permit the
Company to obtain an equity interest in the area developer at a predetermined
price after a moratorium (generally two years) and after the area developer
has completed not less than 80% of its area development commitment (or in the
event of certain defaults) on conversion of the loan into equity. The maximum
loan amount is established to give the Company majority ownership of the area
developer upon conversion (or option exercise, as described further below)
provided the Company exercises its right to participate in any intervening
financing of the area developer.
Area developer financing requires the area developer to expend at least 75%
of its contributed capital toward developing stores prior to drawing on the
revolving loan account, with draws permitted during a three-year draw period
in a pre-determined maximum amount equal to four times the amount of the area
developer's equity capital. Upon expiration of the draw period, the loan
converts to an amortizing term loan payable over five years in periodic
installments, with a final balloon payment. Interest is set at 1% over the
applicable reference rate of Bank of America Illinois from time to time and is
payable each four-week period. The loan is secured by a pledge of
substantially all of the assets of the area developer.
(a) Loan Conversion Option
All or any portion of the loan amount may be converted at the Company's
election at any time after the expiration of a specified moratorium (generally
two years) and after the area developer has completed not less than 80% of its
area development commitment (or in the event of certain defaults) into equity
in the area developer at the conversion price set forth in such loan
agreement, generally at a 12% premium over the per equity unit price paid by
the investors in the area developer for the equity investment made
concurrently with the execution of the loan agreement. To the extent such loan
is not fully drawn or has been drawn and repaid, the Company has a
corresponding option to acquire at the loan conversion price the amount of
additional equity it could have acquired by conversion of the loan, had it
been fully drawn.
There can be no assurance the Company will or will not convert any loan
amount or exercise its option at such time as it may be permitted to do so
and, if it does convert, that such conversion will constitute a majority
interest in the area developer.
F-22
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Commitments to Extend Area Developer Financing
The following table summarizes credit commitments for area developer
financing (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 21,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Number of area developers receiving financing... 2 4
Loan commitments................................ $16,000 $89,500
Unused Loans.................................... 12,462 56,934
------- -------
Loans outstanding (included in Notes
Receivable).................................... $ 3,538 $32,566
======= =======
Allowance for loan losses....................... $ -- $ --
======= =======
</TABLE>
(c) Credit Risk and Allowance for Loan Losses
The allowance for credit losses is maintained at a level that in
management's judgment is adequate to provide for estimated possible loan
losses. The amount of the allowance is based on management's review of each
area developer's use of loan proceeds, stage of development, adherence to its
store development schedule, store performance trends, type and amount of
collateral securing the loan, prevailing economic conditions, and other
factors which management deems relevant at the time. Based upon this review
and analysis, no allowance was required as of December 31, 1995 and April 21,
1996.
3. STOCK SPLIT
On July 8, 1996, the board of directors of the Company approved a 225-for-
one stock split of the Company's common stock in the form of a stock dividend.
Per share amounts, the number of common shares, and capital accounts have been
restated to give retroactive effect to the stock split.
4. ROYALTIES AND FRANCHISE-RELATED FEES
The components of royalties and franchise-related fees are comprised of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
QUARTER ENDED
APRIL 21, 1996
--------------
(UNAUDITED)
<S> <C>
Royalties.................................................. $ 680
Initial franchise and area developer fees.................. 2,600
Interest income............................................ 423
Other...................................................... 279
------
$3,982
======
</TABLE>
5. ACQUISITION
In February 1996, the Company acquired Noah's New York Bagel's, Inc. for
approximately $100.9 million. The acquisition has been accounted for as a
purchase, and, accordingly, the purchase price was allocated to assets (both
tangible and identifiable intangible) and liabilities based upon an evaluation
of their fair values at the date of the acquisition. Of such total purchase
price, $22.1 million was allocated to trademarks (amortized over a 35-year
life), $5.2 million was allocated to recipes (amortized over a 10-year life)
and $56.3 million was allocated to excess purchase price over fair value of
identifiable net assets acquired (amortized over a 35-year life). Such
intangibles were identified by management based upon its evaluation of the
business acquired. The allocation of the purchase price to trademarks and
recipes was based upon a royalty savings methodology which determines the
present value of the stream of royalties which the Company believes an
independent third party would be willing to pay to obtain the use of such
trademarks and recipes. The estimated useful life for these assets was based
upon various factors which existed at the time of the acquisition, including
the anticipated periods of benefit to be derived from the utilization of such
assets in connection with executing a dual brand business strategy, increasing
consumer demand for bagel products, the lack of a competitor with national
brand awareness, the lack of regulatory limitations on the potential useful
lives of such assets, the absence of any inherent or technological
obsolescence for such assets, and in the case of trademarks, the long-lived
nature of a primary brand name in the consumer marketplace.
F-23
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The following represents the unaudited pro forma results of operations as if
the combination had occurred at the beginning of the Company's fiscal year (in
thousands of dollars, except per share data):
<TABLE>
<S> <C>
Revenue........................................................... $25,683
Net loss.......................................................... 5,199
Net loss per share................................................ $ 0.55
</TABLE>
The pro forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined as of the beginning of the Company's fiscal year, and is not intended
to be a projection of future results or trends.
6. COMMITMENTS
In December 1995, Bagel Store Development Funding, L.L.C. ("Bagel Funding"),
formerly Einstein Bros. Equity Funding, L.L.C., ("Bagel Funding") was formed
to invest in existing and proposed area developers. Through April 21, 1996,
Bagel Funding had raised $90.0 million (including an aggregate of $45.0
million in subscriptions receivable) and had invested a total of $21.9 million
in area developers. Bagel Funding can require an area developer to redeem
Bagel Funding's equity interest at a formula price in the event the Company
acquires a majority interest in the area developer, and if the area developer
fails to do so, the Company will be required to purchase Bagel Funding's
unredeemed equity interest. In the event the Company's conversion and/or
option rights expire unexercised under the area developer's secured loan
agreement with the Company, as originally in effect, Bagel Funding will have
the right to require, subject to the Company's prior consent, that the area
developer undertake a firm commitment underwritten public offering of equity
of the area developer. In the event the Company does not consent to a public
offering, the area developer can be required to purchase Bagel Funding's
unredeemed equity interest in the area developer at a formula price and if the
area developer fails to do so, the Company will be required to purchase Bagel
Funding's unredeemed equity interest. Also, in the event the Company does not
acquire a majority interest in the area developer pursuant to the Company's
conversion and/or option rights prior to the time such rights expire
unexercised under the area developer's secured loan agreement with the
Company, as originally in effect, Bagel Funding will have the right to request
that the area developer seek to terminate its area developer and franchise
agreements with the Company. If the Company does not consent to such
termination, the area developer can be required to redeem Bagel Funding's
equity interest in the area developer at a formula price, and if the area
developer fails to do so, the Company will be required to purchase Bagel
Funding's unredeemed equity interest.
7. SUBSEQUENT EVENT
In May 1996, the Company entered into a secured revolving credit facility
providing for borrowings of up to $45.0 million through April 30, 1998.
Borrowing under the facility may be either floating rate loans with interest
at the lender's base rate plus 1.0% or, at the Company's option, the rate
offered in the interbank Eurodollar market for one-, two-, or three-month
dollar deposits offered by the lender plus 3.0%. In addition, a commitment fee
of .25% of the average daily unused portion of the loan is required. The
facility contains covenants, among others, restricting other borrowings,
prohibiting cash dividends, and requires the Company to maintain minimum
interest coverage and cash flow ratios, specified store level sales and a
minimum capital level. In May 1996, the Company utilized $39.6 million to
repay the outstanding bridge loan from Boston Chicken, Inc. The Company's
balance sheet as of April 21, 1996, gives effect to this refinancing as if it
occurred as of the balance sheet date.
In June 1996, the $120.0 million convertible loan to the Company was
converted into 15,307,421 shares of common stock of the Company. The pro forma
balance sheet gives effect to this conversion as if it had occurred on April
21, 1996.
F-24
<PAGE>
EXHIBIT 99.2
BOSTON CHICKEN, INC. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
The following unaudited pro forma consolidated condensed balance sheet reflects
the conversion by Boston Chicken, Inc. of its convertible loan as if it had
occurred on April 21, 1996, giving effect to the pro forma adjustments set forth
in the accompanying notes to the pro forma financial statements.
The following unaudited pro forma consolidated condensed statements of
operations reflect the conversion by Boston Chicken, Inc. of its convertible
loan into a majority equity interest of Einstein/Noah Bagel Corp. as if it had
occurred on December 26, 1994, giving effect to the pro forma adjustments set
forth in the accompanying notes to the pro forma financial statements.
The unaudited pro forma consolidated balance sheet and consolidated statements
of operations are not indicative of what the actual consolidated results of
operations of Boston Chicken, Inc. would have been as set forth above, nor do
they represent the future consolidated financial position or consolidated
results of operations of Boston Chicken, Inc.
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
APRIL 21, 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Boston Einstein/
Chicken, Noah Bagel
Inc. Corp. Pro Forma Unaudited
(Historical) (Historical) Adjustments Pro Forma
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents............ $ 155,483 $ 2,912 $ 158,395
Other current assets................. 68,798 10,695 $ (1,355)(1) 39,641
(38,497)(2)
---------- -------- ------------- ----------
Total current assets.............. 224,281 13,607 (39,852) 198,036
Property and Equipment, net............ 265,521 34,564 300,085
Notes Receivable....................... 671,504 38,298 (120,000)(2) 589,802
Other Assets, net...................... 26,251 98,045 43,481 (3) 167,777
---------- -------- ------------- ----------
Total assets...................... $1,187,557 $184,514 $ (116,371) $1,255,700
========== ======== ============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities.................... $ 25,528 $ 12,964 $ (1,355)(1) $ 37,137
Liquid Yield Option Notes.............. 173,024 - 173,024
Convertible Debt....................... 129,862 120,000 (120,000)(2) 129,862
Other Noncurrent Liabilities........... 23,351 63,583 (38,497)(2) 48,437
Minority Interest...................... - - 31,448 (3) 31,448
Stockholders' Equity:
Preferred Stock...................... - - -
Common Stock......................... 626 54 (54)(3) 626
Additional paid-in capital........... 778,888 34,946 (34,946)(3) 778,888
Retained earnings (deficit).......... 56,278 (47,033) 47,033 (3) 56,278
---------- -------- ------------- ----------
835,792 (12,033) 12,033 835,792
---------- -------- ------------- ----------
Total liabilities and
stockholders' equity............. $1,187,557 $184,514 $ (116,371) $1,255,700
========== ======== ============= ==========
</TABLE>
The accompanying notes to the unaudited pro forma consolidated condensed
financial statements are an integral part of this statement.
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED APRIL 21, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Boston Einstein/
Chicken, Noah Bagel
Inc. Corp. Pro Forma Unaudited
(Historical) (Historical) Adjustments Pro Forma
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Royalties and franchise-related fees..... $46,033 $ 3,982 $(4,157)(4) $45,858
Company-operated stores.................. 1,314 18,397 19,711
------------ ------------ ---------- ---------
47,347 22,379 (4,157) 65,569
Costs and Expenses:
Cost of products sold.................... 480 5,490 5,970
Salaries and benefits.................... 7,509 9,128 16,637
General and administrative............... 10,811 9,031 (267)(4) 19,936
361 (5)
------------ ------------ ---------- ---------
Total costs and expenses.............. 18,800 23,649 94 42,543
------------ ------------ ---------- ---------
Income (Loss) from Operations.............. 28,547 (1,270) (4,251) 23,026
Other Expenses, net........................ (2,791) (2,047) 2,217 (4) (2,621)
------------ ------------ ---------- ---------
Income (Loss) Before Income Taxes and
Minority Interest......................... 25,756 (3,317) (2,034) 20,405
Income Taxes............................... 10,107 - 10,107
Minority Interest in Loss of Subsidiary.... - - 966 (6) 966
------------ ------------ ---------- ---------
Net Income (Loss).......................... $15,649 $(3,317) $(1,068) $11,264
============ ============ ========== =========
Net Income per Common and Equivalent
Share..................................... $0.24 $0.17(7)
============ =========
Weighted Average Number of Common and
Equivalent Shares Outstanding............ 64,317 64,317
============ =========
</TABLE>
The accompanying notes to the unaudited pro forma condensed consolidated
financial statements are an integral part of this statement.
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Boston Einstein/
Chicken, Noah Bagel
Inc. Corp. Pro Forma Unaudited
(Historical) (Historical) Adjustments Pro Forma
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Revenue:
Royalties and franchise-related fees....... $107,913 $ 738 $ (1,917)(4) $106,734
Company-operated stores.................... 51,566 25,685 77,251
------------- ------------- -------------- ----------
159,479 26,423 (1,917) 183,985
Costs and Expenses:...........................
Cost of products sold...................... 19,737 8,239 27,976
Salaries and benefits...................... 31,137 13,531 44,668
General and administrative................. 41,367 21,230 (163)(4) 63,609
1,175 (5)
Write-off of intangible assets............. - 26,575 26,575
------------- ------------- -------------- ----------
Total costs and expenses............. 92,241 69,575 1,012 162,828
------------- ------------ ------------- ----------
Income (Loss) from Operations................. 67,238 (43,152) (2,929) 21,157
Other Expense, net............................ (12,865) (564) 691 (4) (12,738)
------------- ------------- ------------- ----------
Income (Loss) Before Income Taxes and
Minority Interest............................ 54,373 (43,716) (2,238) 8,419
Provision for Income Taxes.................... 20,814 - 20,814
Minority Interest in Loss of Subsidiary....... - - 12,733 (6) 12,733
------------- ------------- ------------- ----------
Net Income (Loss)............................. $ 33,559 $(43,716) $ 10,495 $ 338
============= ============= ============= ==========
Net Income (Loss) per Common and
Equivalent Share............................. $ 0.66 $ 0.00(7)
============ ==========
Weighted Average Number of Common and
Equivalent Shares Outstanding................ 50,972 50,972
============ ==========
</TABLE>
The accompanying notes to the unaudited pro forma consolidated condensed
financial statements are an integral part of this statement.
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Elimination of intercompany payables/receivables.
2. Elimination of loans made to Einstein/Noah Bagel Corp. ("ENBC") by Boston
Chicken, Inc. (the "Company").
3. To reflect the conversion of the Company's convertible loan in ENBC, record
the excess of the purchase price over the fair market value of the assets
acquired, and record the minority interest.
4. To eliminate revenue and expenses on transactions between the Company and
ENBC.
5. To amortize goodwill resulting from the transaction over a 35-year period.
6. To recognize the minority interests' portion of the loss of ENBC.
7. The calculation of net income per share includes a reduction in net income
for dividends on ENBC's Series A preferred stock.
