10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 24, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-21097 EINSTEIN/NOAH BAGEL CORP. (Exact name of registrant as specified in its charter) Delaware 84-1294908 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1687 Cole Boulevard Golden, CO 80401 (Address of principal executive offices, including zip code) (303) 568-8300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Number of shares of common stock, $.01 par value per share, outstanding as of June 1, 2001: 34,083,681 (includes 813,146 shares of common stock held by a subsidiary of the Company). EINSTEIN/NOAH BAGEL CORP. INDEX

2 EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited)

The accompanying notes to the consolidated financial statements are an integral part of these statements. 3 EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)

The accompanying notes to the consolidated financial statements are an integral part of these statements. 4 EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

The accompanying notes to the consolidated financial statements are an integral part of these statements. 5 EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated interim financial statements have been prepared by the Company and are unaudited. The financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not necessarily include all information and footnotes required by generally accepted accounting principles. In the opinion of the Company, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's consolidated financial position, results of operations and cash flows as of April 24, 2001 and for all periods presented have been made. The statements are subject to year-end audit adjustment. A description of the Company's accounting policies and other financial information are included in the audited consolidated financial statements filed with the Securities and Exchange Commission in the Company's Form 10-K for the year ended January 2, 2001. The consolidated results of operations for the quarter ended April 24, 2001 are not necessarily indicative of the results expected for the full year. Certain amounts set forth in the accompanying financial statements for the quarter ended April 16, 2000 have been reclassified to conform to the presentation for the current fiscal quarter. 2. Petitions for Reorganization Under Chapter 11 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. On April 27, 2000, the Company and its majority-owned subsidiary, Einstein/Noah Bagel Partners, L.P. ("Bagel Partners"), filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Arizona in Phoenix (the "Bankruptcy Court"). Effective upon such filings, the Company and Bagel Partners are operating their businesses as debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court. The Chapter 11 cases are being jointly administered for procedural purposes by the Bankruptcy Court under Case No. 00-04447-ECF-CGC. Einstein/Noah Bagel Partners, Inc., a wholly-owned subsidiary of the Company and the general partner of Bagel Partners ("Bagel Partners, Inc."), is not included in the Chapter 11 filings. As of the petition date, actions to collect pre-petition indebtedness are stayed and other contractual obligations may not be enforced against the Company or Bagel Partners. In addition, the Company and Bagel Partners may reject executory contracts and unexpired leases, and parties affected by these rejections may file claims with the Bankruptcy Court in accordance with procedures set by the Bankruptcy Court and the Bankruptcy Code. On April 28, 2000, the Bankruptcy Court approved the Company's payment of pre-petition employee compensation, benefits and reimbursements and withholding taxes, and the continued payment of these items. The Bankruptcy Court also approved the timely payment, without interruption, of all pre-petition trade payables incurred in the ordinary course of business, including vendor bills submitted prior to the filing, provided that the vendors continued to offer the Company and Bagel Partners credit terms that were the same or better than those offered pre-petition. To date, substantially all pre-petition vendors are providing credit on terms meeting the requirements set by the Bankruptcy Court. On May 2, 2000, the Bankruptcy Court set June 30, 2000 as the claims bar date in the Chapter 11 cases. As debtors-in-possession, the Company and Bagel Partners are authorized to operate their businesses, but may not engage in transactions outside the ordinary course of business without approval, after notice and hearing, of the Bankruptcy Court. An official committee of unsecured creditors, consisting of HSBC Bank USA (indenture trustee for the holders of the Company's $125.0 million 7 1/4% Convertible Subordinated Debentures due 2004 (the "Debentures")), and four holders of the Debentures, Loomis, Sayles & Company, L.P., Kayne Anderson, Lonestar Partners, L.P. and Lampe, Conway & Co., L.L.C., was originally formed by the U.S. Trustee on May 9, 2000 (the "Creditors Committee"). 6 On July 28, 2000, the Bankruptcy Court approved the Company's employment contract with Robert M. Hartnett, the Company's chairman, chief executive officer and president; the Company's severance agreements with certain of its officers, providing certain severance benefits in the event of termination of employment following a change in control of the Company; and the Company's amended and restated employee retention program. Upon filing petitions under Chapter 11, the Company and Bagel Partners filed a joint plan of reorganization. Such plan was modified on August 11, 2000, October 31, 2000, January 3, 2001 and January 30, 2001. Under the terms of the plan as originally filed, Bagel Partners would have been merged into the Company, general unsecured creditors of the Company (primarily the holders of the Debentures) would have received approximately 89 percent of the common stock of the reorganized Company, the minority equity holders in Bagel Partners (primarily Bagel Store Development Funding, L.L.C. ("Bagel Funding")) would have received approximately 11 percent of the common stock of the reorganized Company, and holders of the Company's common stock would have received warrants to acquire 2% of the common stock of the Company on a fully diluted basis. The Company had received from BNP Paribas a commitment for a $60.0 million secured credit facility to be made available upon consummation of the plan; however, such commitment was not extended beyond its October 31, 2000 expiration date. The Bankruptcy Court approved the disclosure statement pertaining to the plan on July 28, 2000, and the disclosure statement was mailed on August 14, 2000. On September 14, 2000, the Company announced that it had reached agreement with the Creditors Committee on all outstanding issues regarding the plan of reorganization and that the Creditors Committee supported the plan, although the Creditors Committee reserved the right to challenge the distribution under the plan to Bagel Funding. On October 25, 2000, the Bankruptcy Court denied the motion of the Company and Bagel Partners to extend the time periods during which the Company and Bagel Partners had the exclusive right to file a plan of reorganization and to solicit acceptances of a plan. The Bankruptcy Court conducted hearings on the confirmation of the plan on various dates through February 2, 2001. The plan was accepted by the holders of at least two-thirds in dollar amount and more than one-half in number of the claims of the class consisting of the Company's pre-petition secured bank debt. However, the plan was not accepted by the class consisting of the Company's general unsecured creditors and the Bankruptcy Court denied the motion of the Company and Bagel Partners to count certain ballots of unsecured creditors of the Company that had been received by the solicitation agent after the voting deadline. The Company and Bagel Partners also filed a motion, which remains pending, to designate, pursuant to Section 1126(e) of the Bankruptcy Code, certain votes of the Company's unsecured creditors cast by New World Coffee-Manhattan Bagel, Inc. ("New World"), a competitor of the Company which had purchased the Debentures, and certain other persons associated with New World. In the event such motion were granted, the plan would be deemed accepted by the class consisting of the Company's general unsecured creditors. In the event the motion were denied, such class would not be deemed to have accepted the plan, and it would be possible to confirm the plan only if the requirements of Section 1129(b) of the Bankruptcy Code, as well as other applicable requirements, were satisfied. Objections to the plan were filed by Bagel Funding, the Boston Chicken Plan Trustee and New World. On January 3, 2001, the Company and Bagel Partners filed modifications to the plan that provided for (a) an additional distribution of $2.5 million in cash to minority holders in Bagel Partners, and (b) a distribution to holders of the Company's common stock of (i) warrants to purchase 10% of the common stock of the reorganized Company, on a fully-diluted basis, for an exercise price of approximately $18.7 million and (ii) an amount in cash equal to $1.0 million less the amount payable to the Boston Chicken Plan Trustee for reimbursement of fees and expenses incurred by the Boston Chicken Trustee in connection with the Chapter 11 cases of the Company and Bagel Partners. At that time, Bagel Funding, the Boston Chicken Plan Trustee and the Creditors Committee indicated that they intended to support the plan as so modified. 7 In January 2001, New World, and certain persons associated with New World, on the one hand, and an affiliate of Three Cities Research, a private equity investment firm (with its affiliates, "Three Cities"), on the other hand, purchased positions in the Debentures sufficient to give each a "blocking position" with respect to approval of the Company's joint plan of reorganization in the event the Company and Bagel Partners were required to resolicit votes with respect to the plan. In addition, certain members of the Creditors Committee sold their Debentures and all of the members of the Creditors Committee resigned; to date no other members have been appointed. After the transactions in the Debentures described above, the Company and Bagel Partners negotiated to resolve outstanding objections to the plan. These efforts were unsuccessful, and support by the principal holders of claims and interests in the Chapter 11 cases, including those who had previously supported the plan, waned. On February 2, 2001, the Boston Chicken Plan Trustee filed a conditional reinstatement of objections to the plan. Accordingly, the Company's plan faced a number of obstacles, including, without limitation: the lack of sufficient votes of the Company's general unsecured creditors unless the designation motion of the Company and Bagel Partners was granted; the presence of objections to the plan by New World and the Boston Chicken Plan Trustee (and the risk of reinstatement of objections by Bagel Funding); the need to obtain exit financing to facilitate emergence from Chapter 11 pursuant to the plan; and the risk that the Bankruptcy Court would require resolicitation of votes to confirm the plan as a consequence of plan modifications and changes in the terms of any exit financing. On February 12, 2001, the Company announced that it had entered into an agreement with ENB Acquisition LLC ("ENB"), an affiliate of Three Cities, providing for the sale to ENB of substantially all of the assets of the Company and Bagel Partners under Section 363 of the Bankruptcy Code, for a purchase price consisting of $145.0 million in cash and the assumption of $22.7 million in current liabilities and certain other liabilities and obligations. Under the purchase agreement, if the agreement is terminated and the Company accepts an acquisition proposal from a third party other than ENB, then in certain circumstances the Company will be obligated to make a termination payment of $5.0 million to ENB. On March 5, 2001, the Bankruptcy Court entered an order approving such termination payment and bidding procedures (the "Bidding Procedures Order"), and the court set May 23, 2001 as the date for the hearing (the "Sale Hearing") on the motion (the "Sale Motion") to approve the sale to ENB or to a party submitting a higher or better bid in conformity with the Bidding Procedures Order. The Sale Hearing was conducted on June 1, 2001. At the Sale Hearing, the Bankruptcy Court conducted an auction in which Einstein Acquisition Corp. and Greenlight New World, LLC, affiliates of New World, were the successful bidder. Upon the conclusion of the auction, the Bankruptcy Court approved the sale to such affiliates of substantially all of the assets of the Company and Bagel Partners for a purchase price consisting of $160.0 million in cash and the assumption of current liabilities incurred in the ordinary course of business and certain other liabilities and obligations. The cash purchase price will be increased by the amount, if any, that the current liabilities assumed are less than $22.7 million and it will be decreased by the amount, if any, that the current liabilities assumed exceed $30 million. Under the sale order of the Bankruptcy Court, the New World affiliates will be obligated to close the transaction not later than 12:01 p.m., Eastern Time, on June 20, 2001. The transaction is subject to customary conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In the event the New World affiliates do not consummate the acquisition on or before 12:01 p.m., Eastern Time, on June 20, 2001, ENB will be obligated to consummate the acquisition of substantially all of the assets of the Company and Bagel Partners, on the terms provided for in its backup bid, on June 21, 2001. Under ENB's backup bid, ENB would acquire such assets for a purchase price consisting of $155.0 million (of which $5.0 million consists of a credit for its breakup fee), or $150.0 million net in cash, plus the assumption of liabilities and obligations on substantially the same terms as those provided in the bid of the New World affiliates. (The pending sale to New World or ENB is sometimes herein referred to as the "Pending Sale Transaction.") On April 2, 2001, the Boston Chicken Plan Trustee filed a joint plan of reorganization of the Company and Bagel Partners (the "BCP Plan"), together with a form of disclosure statement relating to such plan, with the Bankruptcy Court. Pursuant to the BCP Plan, as subsequently amended, the Debentures would have allegedly been "reinstated" and other unsecured creditor claims would have been paid in full. Holders of the Debentures would also have received a right to exchange the principal amount of their Debentures and accrued interest thereon for shares of 8 new common stock in the Company. Common stockholders in the Company would also have received shares of new common stock in the reorganized Company. The equity interests in Bagel Partners would have remained outstanding. Under the plan, ENBC and Bagel Partners would have obtained new bank financing in the principal amount of $85.0 million and the Company's pre-petition secured bank financing and debtor-in-possession financing would have been satisfied in full. On May 23, 2001, the Bankruptcy Court denied the motion of New World, as joined in by the Boston Chicken Plan Trustee, to continue the hearing on the Sale Motion. The Bankruptcy Court vacated the dates that had previously been set for a hearing on confirmation of the BCP Plan. At the Sale Hearing, New World withdrew its previous objections to the sale under Section 363, and the objections of the Boston Chicken Plan Trustee were overruled. As permitted under the Bankruptcy Code and approved by the Bankruptcy Court, the Company and Bagel Partners have elected to reject certain real estate leases. The Company and Bagel Partners maintain the right to assume or reject additional leases or executory contracts. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, the uncertainty regarding the eventual outcome of the reorganization of the Company and Bagel Partners, and the effect of other unknown adverse factors, could threaten the debtors' existence as going concerns. Continuing on a going concern basis is dependent upon, among other things, the sale of the debtors' assets as a going concern or the confirmation of a plan of reorganization, the success of future business operations, and the generation of sufficient cash from operations and financing sources to meet the debtors' obligations. The accompanying consolidated financial statements do not reflect (a) adjustments that may be necessary to present the realizable value of assets on a liquidation basis, (b) adjustments to pre-petition liability amounts that may be allowed for claims or contingencies, or their status or priority, (c) the effect of any changes to the debtors' capital structure or in their business operations as the result of a confirmed plan of reorganization, or (d) adjustments to the carrying value of assets or liability amounts that may be necessary as the result of actions by the Bankruptcy Court, including the Pending Sale Transaction. All costs and expenses associated with the Company's balance sheet restructuring efforts incurred prior to the petition filing date have been reflected as pre-petition reorganization expenses. Such expenses consisted principally of professional fees paid to representatives of the Company and Bagel Partners, and professional fees paid by the Company that were incurred by the Company's lenders, the holders of the Debentures and the members of Bagel Funding. Of such expenses, $1.3 million had been incurred in fiscal 1999 and had previously been capitalized in anticipation of the issuance of securities by the Company in a restructuring transaction. All costs and expenses incurred in connection with the Company's reorganization since the petition filing date through April 24, 2001 have been reflected as reorganization items in the accompanying consolidated statements of operations. Through such date, the reorganization items consisted primarily of a provision of $4.7 million for loss on disposal of assets, a provision of $3.2 million for rejected leases and executory contracts, and charges of $14.2 million for other expenses, consisting primarily of professional fees paid to representatives of the Company and Bagel Partners, and professional fees incurred by the Company's lenders and the Creditors Committee which are paid by the Company. 3. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 9 4. Debtor-in-Possession Financing On May 22, 2000, the bankruptcy court gave final approval of the Company's debtor-in-possession financing agreement, providing for borrowings of up to $36.0 million (the "DIP Facility"). Of such amount, $26.0 million replaced the Company's pre-petition revolving credit facility in its entirety and $10.0 million provided additional funding for the Company's and Bagel Partner's operating expenses, including employee salaries and benefits, payments to vendors, interest and certain other payments under the DIP Facility, professional fees and permitted capital expenditures. On November 17, 2000, in consideration for continued extension of the DIP Facility, the DIP Facility was modified to reduce the amount available thereunder from $36.0 million to $34.0 million. Under the most recent amendment, the DIP Facility expires on June 15, 2001. The Company believes that it will be able to obtain an extension of the DIP Facility at least through the required closing date of the Pending Sale Transaction. Draws made under the DIP Facility bear interest at a rate equal to Bank of America, N.A.'s reference rate plus 1.00% (8.5% at April 24, 2001). The Company is required to pay an unused line fee of 0.5%. The DIP Facility is secured by substantially all of the assets of the Company and its subsidiaries, including Bagel Partners. The DIP Facility contains financial covenants requiring the maintenance of minimum cumulative EBITDA (as defined in the DIP Facility) and limiting capital expenditures and restructuring expenditures, as well as negative covenants limiting additional indebtedness, liens and sales of assets, and prohibiting dividend payments. As of April 24, 2001, the Company was in compliance with the covenants included in the DIP Facility. 5. Commitments and Contingencies The Company has entered into agreements with certain vendors which provide for minimum purchases over specified terms. Such agreements call for retroactive rate adjustments or cash settlement in the event of purchase shortfalls. Management believes that the ultimate settlement of such commitments will not have a material impact on the consolidated financial position or results of operations of the Company. Bagel Funding has invested a total of approximately $89.6 million, representing an equity interest of approximately 22%, in Bagel Partners. The Company is the manager of Bagel Funding. Bagel Funding has the right (the "Put Right") to require Bagel Partners or the Company (at Bagel Partners' election) to redeem Bagel Funding's equity interest in Bagel Partners at a pre-determined formula price based on store level cash flow of Bagel Partners in the event that, at any time after December 5, 1999 and prior to June 5, 2001, the Company does not consent to a public offering of such equity interests or the termination of certain rights and obligations under franchise and license agreements between the Company and Bagel Partners ("License Termination"). The formula price is determined by multiplying Bagel Funding's percentage interest in Bagel Partners by an enterprise valuation of Bagel Partners. Such enterprise valuation is equal to Bagel Partner's income from operations before general and administrative expenses, depreciation and amortization but after franchise royalties and marketing expenses (determined by annualizing the highest of the two fiscal quarters prior to the quarter in which the right is exercised), multiplied by 6.5, less the amount of any outstanding indebtedness of Bagel Partners plus the amount of any cash balances of Bagel Partners. The formula price, if determined using annualized results of the highest of the two fiscal quarters ending April 24, 2001, would be equal to approximately $58.6 million. The Company or Bagel Partners may pay the purchase price for such equity interests in cash, shares of the Company's common stock (valued based on the average closing sales price per share for the 20 trading days ending with the second business day prior to the date such shares are delivered) or a combination thereof. On March 28, 2000, Bagel Partners received a notice from representatives of Bagel Funding requesting on behalf of Bagel Funding that Bagel Partners seek the License Termination, pursuant to the applicable provisions of the partnership agreement governing Bagel Partners. Such termination requires the consent of the Company. By notice dated March 29, 2000, Bagel Partners, through its general partner, Einstein/Noah Bagel Partners, Inc., requested that the Company consent to the License Termination. Under the Bagel Partners partnership agreement, 10 the Company had a period of 120 days to respond to such request. The Company did not and has not consented to the License Termination. On March 30, 2000, Bagel Partners received a letter from a representative of Bagel Funding stating that it was Bagel Funding's position that the Company had already rejected the request for License Termination. The letter further stated that Bagel Funding had determined to exercise its right to require Bagel Partners to purchase Bagel Funding's interest in Bagel Partners and that Bagel Funding demanded immediate cash payment of the purchase price for such interest. On May 10, 2000, the Company and Bagel Partners filed a motion in the Bankruptcy Court in which they asked the court to determine that the joint plan of reorganization filed by them properly classifies the interest of Bagel Funding as an equity interest in Bagel Partners. The Creditors Committee also filed a motion seeking to characterize Bagel Funding's rights as an equity interest or to subordinate any claims Bagel Funding may have. On August 7, 2000, the Bankruptcy Court issued a ruling with respect to the Put Right. Specifically, the court held as to Bagel Partners that the Put Right is an equity interest in, and not a debt claim against, Bagel Partners. The court reserved for determination at the hearing on confirmation of the plan the issue of what value, if any, should be ascribed to the Put Right and whether the Put Right entitled Bagel Funding to a larger distribution than that provided for in the plan. As to the Company, the Bankruptcy Court concluded that the Put Right does not create an enforceable right to payment in favor of Bagel Funding against the Company. Accordingly, the Bankruptcy Court found that any rights that Bagel Funding may have against the Company are not claims against, but equity interests in, the Company. The bankruptcy court further noted that even if Bagel Funding held a claim against the Company based on the Put Right, such claim would be subordinated to other claims in the Company's bankruptcy, including those of the holders of the Debentures, pursuant to the Bankruptcy Code. Bagel Funding filed a notice of appeal of the Bankruptcy Court's ruling. Bagel Funding also filed a motion for leave to prosecute an interlocutory appeal, which was denied by the Bankruptcy Appellate Panel for the Ninth Circuit. The Company has become subject to various lawsuits, claims and other legal matters in the course of conducting its business. The Company does not believe that any such matters of which it is aware are material to the Company individually or in the aggregate, but matters may arise which could adversely affect the Company or its business operations. 6. Liabilities Subject to Compromise Certain claims against the Company and Bagel Partners in existence prior to the filing of the petitions for relief under Chapter 11 of the Bankruptcy Code are stayed while the Company and Bagel Partners are operating their businesses as debtors-in-possession. These pre-petition claims are reflected in the April 24, 2001 consolidated balance sheet as "liabilities subject to compromise." Liabilities subject to compromise consist of the following (in thousands):

11 Additional liabilities subject to compromise may arise subsequent to the petition filing date resulting from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Contractual interest on the Debentures for the quarter ended April 24, 2001, was $2.8 million. No interest was reported on the Debentures for the quarter ended April 24, 2001, which reflects the Company's decision to cease accruing interest on the Debentures as of the petition filing date. 7. Condensed Combined Financial Statements Set forth below are condensed combined financial statements of the Company and Bagel Partners for the quarter ended April 24, 2001. Such financial statements present the financial position and results of operations of the Company and Bagel Partners separately from the financial position and results of operations of Einstein/Noah Bagel Partners, Inc., which is not in reorganization. The financial position and results of operations of the Company and Bagel Partners are shown on a combined basis under the caption entitled "Entities in Reorganization - ENBC & ENBP, L.P." The financial position and results of operations of Einstein/Noah Bagel Partners, Inc. are shown separately under the caption entitled "Entity Not in Reorganization - ENBP, Inc." Eliminations in consolidation are shown under the caption entitled "Eliminations." 12 EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES CONDENSED COMBINED BALANCE SHEETS AS OF APRIL 24, 2001 (in thousands) (unaudited)

13 EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE QUARTER ENDED APRIL 24, 2001 (in thousands) (unaudited)

14 EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES CONDENSED COMBINED STATEMENTS OF CASH FLOWS FOR THE THREE QUARTERS ENDED APRIL 24, 2001 (in thousands) (unaudited)

15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Form 10-Q, including, without limitation, under "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect management's current expectations or beliefs, but involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Einstein/Noah Bagel Corp. ("ENBC" or the "Company") and Einstein/Noah Bagel Partners, L.P., a majority-owned subsidiary of the Company ("ENBP, L.P." or "Bagel Partners"), to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Except as may be required by applicable law, the Company undertakes no obligation to update or revise any "forward-looking statements" that may be included in this Form 10-Q. On April 27, 2000, the Company and Bagel Partners filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), and the Company and Bagel Partners filed a joint plan of reorganization. Forward-looking statements related to the Chapter 11 cases also involve known and unknown risks, uncertainties and other factors, including, without limitation, approval of the Company's plans and activities by the Bankruptcy Court (including a plan of reorganization or a sale of substantially all the assets of the Company and Bagel Partners), opposition of holders of claims and interests in the Chapter 11 cases to the Company's proposed plans and activities, uncertainties with respect to competing plans of reorganization that might be prosecuted by holders of claims or interests in the Chapter 11 cases, the ability of the Company to continue to operate as a going concern, retention of management and other personnel during the Chapter 11 proceedings, the continued availability of debtor-in-possession financing, the availability of exit financing to facilitate emergence from Chapter 11 pursuant to a plan of reorganization, the duration of the Chapter 11 proceedings, the ability of the Company to operate successfully under the Chapter 11 proceedings, uncertainties with respect to the official committee of unsecured creditors and uncertainties with respect to continued public trading in the Company's securities. In addition to restructuring related risks and uncertainties, the results, performance or achievements of the Company and Bagel Partners are subject to a number of risks and uncertainties including, without limitation, the following: the generation of sufficient cash from operations to repay debt obligations; the ability to attract and retain necessary management and other personnel; the ability to successfully build and open new stores; successful development and implementation of a franchise system; the availability and cost of food, beverages and other supplies; competition; success of operating initiatives; development and operating costs; advertising and promotional efforts; brand awareness; availability and terms of capital; adverse publicity; acceptance of new product offerings; changes in business strategy or development plans; achievement of development schedules; availability, locations, and terms of sites for store development; food, labor, and employee benefit costs; changes in government regulation; regional weather conditions; the Company's ability to implement new information technology systems; and other factors referenced in this Form 10-Q. The Company cannot predict which factors would cause actual results to differ materially from those indicated by the forward-looking statements. In addition to considering statements that explicitly describe such risks and uncertainties, readers are urged to consider statements that include the terms "believes," "belief," "expects," "plans," "anticipates," "intends" or the like to be uncertain and forward-looking. General On April 27, 2000, the Company and its majority-owned subsidiary, Einstein/Noah Bagel Partners, L.P. ("Bagel Partners"), filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Arizona in Phoenix (the "Bankruptcy Court"). Effective upon such filings, the Company and Bagel Partners are operating their businesses as debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court. The Chapter 11 cases are being jointly administered for procedural purposes by the Bankruptcy Court under Case No. 00-04447-ECF-CGC. Einstein/Noah Bagel Partners, Inc., a wholly-owned subsidiary of the Company and the general partner of Bagel Partners ("Bagel Partners, Inc."), is not included in the Chapter 11 filings. 16 As of the petition date, actions to collect pre-petition indebtedness are stayed and other contractual obligations may not be enforced against the Company or Bagel Partners. In addition, the Company and Bagel Partners may reject executory contracts and unexpired leases, and parties affected by these rejections may file claims with the Bankruptcy Court in accordance with procedures set by the Bankruptcy Court and the Bankruptcy Code. On April 28, 2000, the Bankruptcy Court approved the Company's payment of pre-petition employee compensation, benefits and reimbursements and withholding taxes, and the continued payment of these items. The Bankruptcy Court also approved the timely payment, without interruption, of all pre-petition trade payables incurred in the ordinary course of business, including vendor bills submitted prior to the filing, provided that the vendors continued to offer the Company and Bagel Partners credit terms that were the same or better than those offered pre-petition. To date, substantially all pre-petition vendors are providing credit on terms meeting the requirements set by the Bankruptcy Court. On May 2, 2000, the Bankruptcy Court set June 30, 2000 as the claims bar date in the Chapter 11 cases. As debtors-in-possession, the Company and Bagel Partners are authorized to operate their businesses, but may not engage in transactions outside the ordinary course of business without approval, after notice and hearing, of the Bankruptcy Court. An official committee of unsecured creditors, consisting of HSBC Bank USA (indenture trustee for the holders of the Company's $125.0 million 7 1/4% Convertible Subordinated Debentures due 2004 (the "Debentures")), and four holders of the Debentures, Loomis, Sayles & Company, L.P., Kayne Anderson, Lonestar Partners, L.P. and Lampe, Conway & Co., L.L.C., was originally formed by the U.S. Trustee on May 9, 2000 (the "Creditors Committee"). On July 28, 2000, the Bankruptcy Court approved the Company's employment contract with Robert M. Hartnett, the Company's Chairman, Chief Executive Officer and President; the Company's severance agreements with certain of its officers, providing certain severance benefits in the event of termination of employment following a change in control of the Company; and the Company's amended and restated employee retention program. Upon filing petitions under Chapter 11, the Company and Bagel Partners filed a joint plan of reorganization. Such plan was modified on August 11, 2000, October 31, 2000, January 3, 2001 and January 30, 2001. Under the terms of the plan as originally filed, Bagel Partners would have been merged into the Company, general unsecured creditors of the Company (primarily the holders of the Debentures) would have received approximately 89 percent of the common stock of the reorganized Company, the minority equity holders in Bagel Partners (primarily Bagel Store Development Funding, L.L.C. ("Bagel Funding")) would have received approximately 11 percent of the common stock of the reorganized Company, and holders of the Company's common stock would have received warrants to acquire 2% of the common stock of the Company on a fully diluted basis. The Company had received from BNP Paribas a commitment for a $60.0 million secured credit facility to be made available upon consummation of the plan; however, such commitment was not extended beyond its October 31, 2000 expiration date. The Bankruptcy Court approved the disclosure statement pertaining to the plan on July 28, 2000, and the disclosure statement was mailed on August 14, 2000. On September 14, 2000, the Company announced that it had reached agreement with the Creditors Committee on all outstanding issues regarding the plan of reorganization and that the Creditors Committee supported the plan, although the Creditors Committee reserved the right to challenge the distribution under the plan to Bagel Funding. On October 25, 2000, the Bankruptcy Court denied the motion of the Company and Bagel Partners to extend the time periods during which the Company and Bagel Partners had the exclusive right to file a plan of reorganization and to solicit acceptances of a plan. The Bankruptcy Court conducted hearings on the confirmation of the plan on various dates through February 2, 2001. The plan was accepted by the holders of at least two-thirds in dollar amount and more than one-half in number of the claims of the class consisting of the Company's pre-petition secured bank debt. However, the 17 plan was not accepted by the class consisting of the Company's general unsecured creditors and the Bankruptcy Court denied the motion of the Company and Bagel Partners to count certain ballots of unsecured creditors of the Company that had been received by the solicitation agent after the voting deadline. The Company and Bagel Partners also filed a motion, which remains pending, to designate, pursuant to Section 1126(e) of the Bankruptcy Code, certain votes of the Company's unsecured creditors cast by New World Coffee-Manhattan Bagel, Inc. ("New World"), a competitor of the Company which had purchased Debentures, and certain other persons associated with New World. In the event such motion were granted, the plan would be deemed accepted by the class consisting of the Company's general unsecured creditors. In the event the motion were denied, such class would not be deemed to have accepted the plan, and it would be possible to confirm the plan only if the requirements of Section 1129(b) of the Bankruptcy Code, as well as other applicable requirements, were satisfied. Objections to the plan were filed by Bagel Funding, the trustee under the Boston Chicken plan of reorganization (the "Boston Chicken Plan Trustee"), and New World. On January 3, 2001, the Company and Bagel Partners filed modifications to the plan that provided for (a) an additional distribution of $2.5 million in cash to minority holders in Bagel Partners, and (b) a distribution to holders of the Company's common stock of (i) warrants to purchase 10% of the common stock of the reorganized Company, on a fully-diluted basis, for an exercise price of approximately $18.7 million and (ii) an amount in cash equal to $1.0 million less the amount payable to the Boston Chicken Plan Trustee for reimbursement of fees and expenses incurred by the Boston Chicken Plan Trustee in connection with the Chapter 11 cases of the Company and Bagel Partners. At that time, Bagel Funding, the Boston Chicken Plan Trustee and the Creditors Committee indicated that they intended to support the plan as so modified. In January 2001, New World, and certain persons associated with New World, on the one hand, and an affiliate of Three Cities Research, a private equity investment firm (with its affiliates, "Three Cities"), on the other hand, purchased positions in the Debentures sufficient to give each a "blocking position" with respect to approval of the Company's joint plan of reorganization in the event the Company and Bagel Partners were required to resolicit votes with respect to the plan. In addition, certain members of the Creditors Committee sold their Debentures and all of the members of the Creditors Committee resigned; to date no other members have been appointed. After the transactions in the Debentures described above, the Company and Bagel Partners negotiated to resolve outstanding objections to the plan. These efforts were unsuccessful, and support by the principal holders of claims and interests in the Chapter 11 cases, including those who had previously supported the plan, waned. On February 2, 2001, the Boston Chicken Plan Trustee filed a conditional reinstatement of objections to the plan. Accordingly, the Company's plan faced a number of obstacles, including, without limitation: the lack of sufficient votes of the Company's general unsecured creditors unless the designation motion of the Company and Bagel Partners was granted; the presence of objections to the plan by New World and the Boston Chicken Plan Trustee (and the risk of reinstatement of objections by Bagel Funding); the need to obtain exit financing to facilitate emergence from Chapter 11 pursuant to the plan; and the risk that the Bankruptcy Court would require resolicitation of votes to confirm the plan as a consequence of plan modifications and changes in the terms of any exit financing. On February 12, 2001, the Company announced that it had entered into an agreement with ENB Acquisition LLC ("ENB"), an affiliate of Three Cities, providing for the sale to ENB of substantially all of the assets of the Company and Bagel Partners under Section 363 of the Bankruptcy Code, for a purchase price consisting of $145.0 million in cash and the assumption of $22.7 million in current liabilities and certain other liabilities and obligations. Under the purchase agreement, if the agreement is terminated and the Company accepts an acquisition proposal from a third party other than ENB, then in certain circumstances the Company will be obligated to make a termination payment of $5.0 million to ENB. On March 5, 2001, the Bankruptcy Court entered an order approving such termination payment and bidding procedures (the "Bidding Procedures Order"), and the court set May 23, 2001 as the date for the hearing (the "Sale Hearing") on the motion (the "Sale Motion") to approve the sale to ENB or to a party submitting a higher or better bid in conformity with the Bidding Procedures Order. The Sale Hearing was conducted on June 1, 2001. At the Sale Hearing, the Bankruptcy Court conducted an auction in which Einstein Acquisition Corp. and Greenlight New World, LLC, affiliates of New World, were the successful bidder. Upon the conclusion of the auction, the Bankruptcy Court approved the sale to such affiliates of substantially all of the assets of the Company and Bagel Partners for a purchase price consisting of $160.0 million in cash and the assumption of current liabilities incurred in the ordinary course of business and certain other liabilities and obligations. The cash purchase price will be increased by the amount, if any, that the current liabilities assumed 18 are less than $22.7 million and it will be decreased by the amount, if any, that the current liabilities exceed $30 million. Under the sale order of the Bankruptcy Court, the New World affiliates will be obligated to close the transaction not later than 12:01 p.m., Eastern Time, on June 20, 2001. The transaction is subject to customary conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In the event the New World affiliates do no consummate the acquisition on or before 12:01 p.m., Eastern Time, on June 20, 2001, ENB will be obligated to consummate the acquisition of substantially all of the assets of the Company and Bagel Partners, on the terms provided for in its backup bid, on June 21, 2001. Under ENB's backup bid, ENB would acquire such assets for a purchase price consisting of $155.0 million (of which $5.0 million consists of a credit for its breakup fee), or $150.0 million net in cash, plus the assumption of liabilities and obligations on substantially the same terms as those provided in the bid of the New World affiliates. On April 2, 2001, the Boston Chicken Plan Trustee filed a joint plan of reorganization of the Company and Bagel Partners (the "BCP Plan"), together with a form of disclosure statement relating to such plan, with the Bankruptcy Court. Pursuant to the BCP Plan, as subsequently amended, the Debentures would have allegedly been "reinstated" and other unsecured creditor claims would have been paid in full. Holders of the Debentures would also have received a right to exchange the principal amount of their Debentures and accrued interest thereon for shares of new common stock in the Company. Common stockholders in the Company would also have received shares of new common stock in the reorganized Company. The equity interests in Bagel Partners would have remained outstanding. Under the plan, ENBC and Bagel Partners would have obtained new bank financing in the principal amount of $85.0 million and the Company's pre-petition secured bank financing and debtor-in-possession financing would have been satisfied in full. On May 23, 2001, the Bankruptcy Court denied the motion of New World, as joined in by the Boston Chicken Plan Trustee, to continue the hearing on the Sale Motion. The Bankruptcy Court vacated the dates that had previously been set for a hearing on confirmation of the BCP Plan. At the Sale Hearing, New World withdrew its previous objections to the sale under Section 363, and the objections of the Boston Chicken Plan Trustee were overruled. Results of Operations Revenue. Total store net revenue decreased 5.5% to $111.8 million for the quarter ended April 24, 2001 compared to $118.3 million for the prior comparable quarter. The decrease in store net revenue was due to a decrease in the average number of stores from 535 to 459. This decrease is offset by an increase in average net weekly per store sales of 10.5% to $15,103 from $13,667 for the prior comparable period. Average net weekly per store sales represents weekly per store average revenue, after customer and employee discounts, for all stores open at the end of the periods presented. The increase in average net weekly per store sales was due to several factors, including the closure of 85 under performing units, increased marketing spending, menu changes, higher menu prices and focus on improved store level operations. Comparable store sales increased 3.7% from the prior comparable quarter. Comparable store sales represent average net weekly per store sales for stores open since the beginning of the prior year's comparable period. There were 454 stores in the comparable store sales base. Store Costs and Expenses. Cost of products sold as a percent of store net revenue remained relatively constant at 32.8% for the quarter ended April 24, 2001 from 32.9% for the prior comparable quarter. Salaries and benefits as a percent of store net revenue decreased to 29.9% for the quarter ended April 24, 2001 from 31.0% for the prior comparable quarter. The decrease reflected the Company's ability to leverage store labor as average net weekly per store sales increased. 19 Other controllable costs (such as utilities, repair and maintenance, and supplies) as a percent of store net revenue decreased to 8.4% for the quarter ended April 24, 2001 from 8.7% for the prior comparable quarter. The decrease was due primarily to the leverage achieved through the closure of under performing stores. Rent, occupancy and related costs as a percent of store net revenue decreased to 8.9% for the quarter ended April 24, 2001 from 9.5% for the prior comparable quarter. The decrease reflects leverage gained by the closure of under performing stores as well as the leverage gained by the increased average net weekly per store sales. Marketing expenses as a percent of store net revenue increased to 4.7% for the quarter ended April 24, 2001 from 4.2% for the prior comparable quarter. The increase was the result of a decision to increase marketing spending in fiscal 2001. As a result of the factors described above, store margins before depreciation and amortization as a percent of store net revenue increased to 15.3% for the quarter ended April 24, 2001 compared to 13.7% for the prior comparable quarter. Depreciation and amortization as a percent of store net revenue remained relatively constant at 3.6% for the quarter ended April 24, 2001 compared to 3.1% for the prior comparable quarter. Non-Store Salaries, Benefits, General and Administrative. Non-store salaries, benefits, general and administrative expenses as a percent of total revenue remained relatively constant at 8.8% for the quarter ended April 24, 2001 compared to 9.2% for the prior comparable quarter. The majority of the net change is represented by the $1.2 million retention bonus which was paid out in the quarter ended April 16, 2000. Reorganization Expenses. The Company incurred reorganization expenses of $3.8 million for the quarter ended April 24, 2001; compared to pre-petition reorganization expense of $2.6 million. Such expenses consist primarily of professional fees paid to representatives of the Company and professional fees incurred by the Company's bank lenders, the holders of the Company's convertible subordinated debt and the members of Bagel Funding. Non-Store Depreciation and Amortization. Non-store depreciation and amortization (excluding goodwill amortization) as a percent of total revenue remained relatively constant at 1.3% for the quarter ended April 24, 2001 from 1.2% for the prior comparable quarter. Goodwill amortization as a percent of total revenue remained relatively constant at 3.2% for the quarter and 3.0% for the prior comparable quarter. Other Expense. The Company incurred other expense of $1.4 million for the quarter ended April 24, 2001 compared to other expense of $3.9 million for the prior comparable quarter. The decrease was due to the exclusion of bond interest due to the Company's Chapter 11 filing. Minority Interest. The minority interest in losses of Bagel Partners was $0.2 million for the quarter ended April 24, 2001 compared to $0.7 million for the quarter ended April 16, 2000. Income Taxes. The Company had a $52,000 income tax expense in the first quarter of 2001, consisting of state and local taxes. Liquidity and Capital Resources The Company's primary sources of capital in 2000 and the first quarter of 2001 were from internally generated cash from operations and borrowings under the Company's revolving credit facility. Cash provided by operations for the quarter ended April 24, 2001 was $2.6 million compared to $3.0 million for the quarter ended April 16, 2000. The decrease in cash from operations was primarily the result of reorganization expenses in an amount in excess of increases in store cash flow. 20 The Company is a party to a debtor-in-possession financing agreement, providing for borrowings in the form of a revolving loan of up to $34.0 million (the "DIP Facility"). Under the terms of the DIP Facility, the revolving loan is available to the Company until June 15, 2001, although the Company is currently negotiating the terms of an extension to the DIP facility through the date of the closing of the sale of substantially all of the assets of the Company and Bagel Partners under Section 363 of the Bankruptcy Code. Draws made under the DIP Facility bear interest at a rate equal to Bank of America, N.A.'s reference rate plus 1.00% (8.5% at April 24, 2001). The Company is required to pay an unused line fee of 0.5%. The DIP Facility is secured by substantially all of the assets of the Company and its subsidiaries. The DIP Facility contains financial covenants requiring the maintenance of minimum cumulative EBITDA (as defined in the DIP Facility) and limiting capital expenditures and restructuring expenditures, as well as negative covenants limiting additional indebtedness, liens and sales of assets, and prohibiting dividend payments. Cash provided by financing activities was $2.5 million for the quarter ended April 24, 2001, resulting from the net borrowings and repayments under the Company's credit facility. Borrowings and repayments for the quarter ended April 16, 2000 were comparable. The Company's primary uses of capital in 2001, other than providing working capital for normal operating expenses, are expected to consist primarily of payment of professional fees in connection with the Company's capital restructuring project and the Chapter 11 cases, expenditures related to the development of business infrastructure and systems, including the acquisition of hardware, software licenses, and implementation services for enterprise and store systems, expenditures related to refurbishing existing stores, expenditures related to the completion of work on the Company's support center, and payment of interest and fees under the DIP Facility. The Company's primary sources of capital in 2001 are expected to consist primarily of internally generated cash from operations and borrowings under the DIP Facility. 21 Quantitative and Qualitative Disclosures About Market Risk Over time, the Company is exposed to market risks arising from changes in interest rates. The Company has not historically used derivative financial instruments. As of April 24, 2001, $41.4 million of floating-rate debt was exposed to changes in interest rates compared to $39.0 million at January 2, 2001. This exposure was primarily linked to the prime lending rate. A hypothetical 10% change in the prime lending rate would not have had a material effect on the Company's annual results of operations. As of April 24, 2001 and January 2, 2001, the Company also had $125.0 million of fixed-rate convertible subordinated debentures due 2004. A hypothetical 10% change in interest rates on this debt would affect the market value of these financial instruments. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings The information set forth under Note 2 of the Company's Notes to Consolidated Financial Statements contained in Part I of this Form 10-Q is incorporated herein by reference thereto. Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A A. Exhibits: See Exhibit Index appearing elsewhere herein, which is incorporated herein by reference. B. Reports on Form 8-K: During the quarter ended April 24, 2001, the Company filed four current reports on Form 8-K, dated February 13, 2001, March 8, 2001, March 15, 2001 and April 3, 2001. The report on Form 8-K dated February 13, 2001 reported that the Company was seeking Bankruptcy Court approval of the sale of substantially all of the assets of the Company and Bagel Partners to an affiliate of Three Cities. The report on Form 8-K dated March 8, 2001 reported that the Bankruptcy Court had approved bidding procedures and the terms of a termination fee payable to the Three Cities affiliate under certain circumstances. The report on Form 8-K dated March 15, 2001 reported preliminary financial results for the fiscal year ended January 2, 2001, and it attached as an exhibit an overview of the Company in the form being provided to prospective bidders. The report on Form 8-K dated April 3, 2001, reported that the Boston Chicken Plan Trustee had filed a proposed plan of reorganization. C. Reports on Form 8-K/A: During the quarter ended April 24, 2001, the Company filed one current report on Form 8-K/A dated April 12, 2001. The report on Form 8-K/A modified the report on Form 8-K dated April 3, 2001, to clarify the amount of common stock that would have been available under the proposed plan of reorganization that had been filed by Boston Chicken Plan Trustee. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EINSTEIN/NOAH BAGEL CORP. Date: June 8, 2001 /s/ Robert M. Hartnett ------------------------------------- Robert M. Hartnett Chairman of the Board, Chief Executive Officer and President Date: June 8, 2001 /s/ Robert C. Ellis ------------------------------------- Robert C. Ellis Chief Financial Officer 24 EXHIBITS+ Exhibit No. Description of Exhibit --------------------- ------------------------------------------------- 2.1 Letter dated May 24, 2001 from Einstein Acquisition Corp. and Greenlight-New World, LLC -------- + In the case of incorporation by reference to documents filed by the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company's file number under that Act is 0-21097. 25

EINSTEIN NOAH BAGEL CORP 10-Q