Einstein Bros 2006 Annual Report Download - page 26

http://www.sec.gov/Archives/edgar/data/949373/000104746907001622/a2176540z10-k.htm[9/11/2014 10:12:36 AM]
Depreciation and amortization $ 16,949 $ 26,316 $ 27,848 $ 34,013 $ 35,047
Capital expenditures 13,172 10,264 9,393 6,921 5,172
Number of locations at end of period 598 626 690 736 747
Franchised and licensed 182 191 237 272 287
Company-owned and operated 416 435 453 464 460
Increase (decrease) in comp store sales(4) 4.5% 5.2% (1.9)% (3.5)% 1.9%
(1) We have a 52/53-week fiscal year ending on the Tuesday closest to December 31. Fiscal years 2006, 2004, 2003 and 2002, which ended
on January 2, 2007, December 28, 2004, December 30, 2003, December 31, 2002 and January 1, 2002, respectively, contained 52 weeks,
while fiscal year 2005, which ended on January 3, 2006, contained 53 weeks.
(2) Interest expense is comprised of interest paid or payable in cash and non-cash interest expense resulting from the amortization of debt
discount, notes paid-in-kind, debt issuance costs and the amortization of warrants issued in connection with debt financings.
(3) The adoption of Statement of Financial Accounting Standard (SFAS) No. 150 resulted in the Series Z Preferred Stock being presented as a
liability rather than the historical mezzanine presentation of the Series F.
(4) Comparable store sales represent sales at restaurants that were open for one full year and have not been relocated or closed during the
current year. Comparable store sales are also referred to as "same-store" sales and as "comp sales" within the restaurant industry.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading fast-casual restaurant chain, specializing in high-quality foods for breakfast and lunch in a café atmosphere with a
neighborhood emphasis. As of January 2, 2007, we own and operate, franchise or license 598 restaurants in 36 states and the District of Columbia,
primarily under the Einstein Bros., Noah's and Manhattan brands. Einstein Bros. is a national fast-casual restaurant chain. Noah's is a regional fast-
casual restaurant chain operated exclusively on the West Coast and Manhattan is a regional fast casual chain operated predominantly in the
Northeast. Our product offerings include fresh bagels and other goods baked on-site, made-to-order sandwiches on a variety of bagels and breads,
gourmet soups and salads, decadent desserts, premium coffees and other café beverages. Our manufacturing and commissary operations prepare
and assemble consistent, high-quality ingredients and we deliver them to our restaurants quickly and efficiently through our network of
independent distributors. These operations support our main business focus, restaurant operations, by exposing our brands to new product channels
as well as enabling sales of our products to third parties.
We commenced operations as an operator and franchisor of coffee cafes in 1993. Substantial growth in our restaurant counts occurred through
a series of acquisitions. In 1998, we acquired the stock of Manhattan Bagel Company. In 1999, we acquired the assets of Chesapeake Bagel
Bakery. Our largest acquisition was in 2001 when we acquired substantially all the assets of Einstein/Noah Bagel Corp. in an auction conducted by
the bankruptcy court. To consummate this acquisition, we engaged in several rounds of financing that included the issuance of $165 million of debt
and $65 million of mandatorily redeemable preferred stock. In mid-2003, we recapitalized our balance sheets with the issuance of $160 million of
indentures and the issuance of $57 million of mandatorily redeemable preferred stock. In late 2003, we replaced several members of the former
senior management team with our current management team. This team focused on our core business, the operation of company-owned restaurants
and the improvements necessary to generate positive operating income and cash flow. In early 2006, based on our improved financial condition
and favorable market conditions, we redeemed the $160 million indenture and replaced it with our current debt structure.
Current Restaurant Base
As of January 2, 2007, we own and operate, franchise or license 598 locations. Our current base of company-owned restaurants includes 341
Einstein Bros. locations and 73 Noah's locations. Also, we franchise 80 Manhattan locations and franchise/license 93 Einstein Bros. locations and 3
Noah's locations.
Our company-owned restaurants vary in their unit volume, profitability and recent comparable store sales performance. As of January 2, 2007,
we have 153 restaurants that generate an AUV in excess of $900,000. These restaurants have an AUV of approximately $1.1 million and an
average gross profit of $0.3 million. In the aggregate, these restaurants contribute approximately 44.8% of total restaurant sales and 61.4% of total
gross profit. Since 2003, as part of our efforts to improve financial performance, we completed a thorough evaluation of our restaurant base. At the
end of 2003, we had 736 restaurants across 33 states and the District of Columbia. Since that time, we have closed 51 company-owned restaurants