Einstein Bros 2003 Annual Report Download - page 4

http://www.sec.gov/Archives/edgar/data/949373/000104746904009609/a2132006z10-k.htm[9/11/2014 10:13:55 AM]
breakfast and lunch in a café atmosphere with a neighborhood emphasis. Our product offerings include fresh baked goods, made-to-order
sandwiches on a variety of breads and bagels, soups, salads, desserts, premium coffees and other café beverages. As of December 30, 2003, our
retail system consisted of 464 company-operated, 231 franchised and 41 licensed locations. We also operate a dough production and a coffee
roasting facility. We operate as a single business segment with a focus on our company-operated restaurants. Our manufacturing and franchise
operations are either supportive or ancillary to our main business focus. In October 2003, we appointed a new senior management team. This team
is assessing the current reporting system and determining the appropriate operating metrics for our business, which will be monitored and reported
on in the future.
We are a Delaware corporation and were organized in November 1992.
Acquisitions
In our early years, we operated and franchised specialty coffee cafés in the northeastern United States. In addition to coffee, we also served
fresh, high quality gourmet foods, pastries, etc. Our business strategy in those years was to be a franchisor and grow through acquisitions. With the
acquisition of Manhattan Bagel Company, Inc. ("Manhattan") in 1998 and Chesapeake Bagel Bakery ("Chesapeake") in 1999, we became a
significant franchisor of bagel restaurants and, to a lesser extent, of coffee cafés. In 2001, our strategy evolved to include company-operated
restaurants as well as franchised and licensed locations as we completed the acquisition of substantially all of the assets (the "Einstein Acquisition")
of Einstein/Noah Bagel Corp. ("ENBC") and its majority-owned subsidiary, Einstein/Noah Bagel Partners, L.P. which operated 2 brands: Einstein
Bros. and Noah's New York Bagels ("Noah's"). We currently operate company-owned stores predominantly under the Einstein Bros. and Noah's
brands. Our franchise operations are predominantly under the Manhattan and Chesapeake brands. We also continue to operate and franchise the
New World Coffee restaurants and operate the Willoughby's Coffee and Tea brands.
The Einstein Acquisition in 2001 was accomplished by issuing a substantial amount of short-term debt and mandatorily redeemable preferred
equity, which have since been refinanced and restructured. These transactions and their effect on our current capital structure are discussed more
fully in the following paragraphs.
Financing Transactions
For the period August 2000 through June 19, 2001, we engaged in several financing transactions with various entities to acquire the bonds of
ENBC, which had declared Chapter 11 bankruptcy on April 27, 2000. The face amount of these financings was $250.0 million, which consisted of
$185.0 million of debt and $65.0 million of preferred stock. The proceeds of these financings, net of discounts and issuance costs, were
approximately $225.0 million. These proceeds were primarily used to purchase substantially all the assets of ENBC on June 19, 2001 for
$160.0 million along with the assumption of certain liabilities subject to adjustment to the extent they exceeded $30.0 million. The remaining
amounts were used to fund operating, investing and other financing activities. The maturity date on the debt and redemption date of certain
preferred stock issuances ranged from one to three years. The debt and preferred stock agreements required the issuance of additional warrants and
payment of dividends in the event that they were not redeemed within a certain period.
Between June 2001 and May 2003 several significant events occurred:
•our common stock was delisted from the Nasdaq National Market as a result of violations of two rules relating to stockholder
approval for equity issuances;
•unauthorized bonus payments in the aggregate amount of $3.5 million were made to certain former executive officers and
employees;
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•we engaged Grant Thornton LLP to re-audit our financial statements for fiscal 2001 and fiscal 2000 due to the accounting
treatment we applied to debt and preferred stock specifically related to the accounting treatment for effective interest and derivative
liabilities in the consolidated financial statements as originally filed under the exchange act;
•we incurred non-recurring expenditures in connection with the investigation of the unauthorized bonus payments, the re-audit of
our financial statements and proposed refinancing of our $140 Million of Senior Increasing Rate Notes ("$140 Million Facility");
and,
•we defaulted on the repayment of the $35 million asset-backed loan to our non-restricted subsidiary, New World EnbcDeb Corp.
("Bridge Loan"), which matured on June 15, 2002.