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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 27, 2011

OR

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33515

 

 

Einstein Noah Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3690261

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

555 Zang Street, Suite 300, Lakewood, Colorado 80228

(Address of principal executive offices)

(303) 568-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   ¨   Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 31, 2011, there were 16,793,272 shares of the registrant’s Common Stock, par value of $0.001 per share outstanding.

 

 

 


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

TABLE OF CONTENTS

 

Part I. Financial Information   

Item 1.

  Financial Statements:   
 

Consolidated Balance Sheets, December 28, 2010 and September 27, 2011 (Unaudited)

     3   
 

Consolidated Statements of Operations, for the thirteen and thirty-nine weeks ended September 28, 2010 and September 27, 2011 (Unaudited)

     4   
 

Consolidated Statements of Cash Flows, for the thirty-nine weeks ended September 28, 2010 and September 27, 2011 (Unaudited)

     5   
 

Notes to Consolidated Financial Statements (Unaudited)

     6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      25   

Item 4.

  Controls and Procedures      25   
Part II. Other Information   

Item 1.

  Legal Proceedings      26   

Item 1A.

  Risk Factors      26   

Item 4.

  (Removed and Reserved)      26   

Item 6.

  Exhibits      26   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

(Unaudited)

 

     December 28,
2010
    September 27,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 11,768      $ 10,271   

Restricted cash

     709        1,045   

Accounts receivable

     5,841        8,476   

Inventories

     5,585        5,816   

Current deferred income tax assets, net

     11,149        10,120   

Prepaid expenses

     5,955        7,079   

Other current assets

     72        73   
  

 

 

   

 

 

 

Total current assets

     41,079        42,880   

Property, plant and equipment, net

     56,663        54,354   

Trademarks and other intangibles, net

     63,831        63,926   

Goodwill

     4,981        5,269   

Long-term deferred income tax assets, net

     34,554        31,985   

Debt issuance costs and other assets, net

     3,959        3,646   
  

 

 

   

 

 

 

Total assets

   $ 205,067      $ 202,060   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 7,445      $ 8,552   

Accrued expenses and other current liabilities

     20,471        23,245   

Current portion of long-term debt

     7,500        9,375   

Current portion of obligations under capital leases

     17        14   
  

 

 

   

 

 

 

Total current liabilities

     35,433        41,186   

Long-term debt

     80,200        66,575   

Long-term obligations under capital leases

     13        16   

Other liabilities

     12,035        11,585   

Mandatorily redeemable, Series Z Preferred Stock, $.001 par value, $1,000 per share liquidation value; 57,000 shares authorized; 0 shares outstanding

     —          —     
  

 

 

   

 

 

 

Total liabilities

     127,681        119,362   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Series A junior participating preferred stock, 700,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $.001 par value; 25,000,000 shares authorized; 16,655,474 and 16,793,232 shares issued and outstanding

     17        17   

Additional paid-in capital

     270,171        272,672   

Accumulated other comprehensive loss

     —          (79

Accumulated deficit

     (192,802     (189,912
  

 

 

   

 

 

 

Total stockholders’ equity

     77,386        82,698   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 205,067      $ 202,060   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except earnings per share and related share information)

(Unaudited)

 

     13 weeks ended      39 weeks ended  
     September 28,
2010
    September 27,
2011
     September 28,
2010
    September 27,
2011
 

Revenues:

         

Company-owned restaurant sales

   $ 91,822      $ 92,311       $ 276,750      $ 275,723   

Manufacturing and commissary revenues

     7,478        8,766         22,705        25,541   

Franchise and license related revenues

     2,061        2,455         6,191        7,191   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     101,361        103,532         305,646        308,455   

Cost of sales (exclusive of depreciation and amortization shown separately below):

         

Company-owned restaurant costs

         

Cost of goods sold

     26,040        27,693         78,589        81,971   

Labor costs

     27,216        27,329         82,419        81,514   

Other operating costs

     10,108        10,145         28,561        29,485   

Marketing costs

     1,750        1,567         7,595        7,793   

Rent and related expenses

     9,696        9,926         29,773        30,205   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total company-owned restaurant costs

     74,810        76,660         226,937        230,968   

Manufacturing and commissary costs

     6,488        8,004         19,149        22,452   

General and administrative expenses

     9,211        8,610         28,268        27,314   

Depreciation and amortization

     4,498        4,836         13,244        13,984   

Restructuring expenses

     —          121         —          334   

Other operating (income) expenses

     (690     47         (620     (776
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     94,317        98,278         286,978        294,276   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     7,044        5,254         18,668        14,179   

Interest expense, net

     1,209        772         4,395        2,507   

Adjustment for Series Z modification

     —          —           929        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     5,835        4,482         13,344        11,672   

Provision for income taxes

     2,435        1,647         6,076        4,589   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 3,400      $ 2,835       $ 7,268      $ 7,083   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 3,400      $ 2,835       $ 7,268      $ 7,083   

Less: Additional redemption on temporary equity

     (124     —           (365     —     

Add: Beneficial conversion feature on temporary equity

     169        —           169        —     

Add: Accretion of premium on Series Z preferred stock

     138        —           637        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common stockholders

   $ 3,583      $ 2,835       $ 7,709      $ 7,083   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common stockholders per share:

         

Basic

   $ 0.22      $ 0.17       $ 0.47      $ 0.43   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.21      $ 0.17       $ 0.46      $ 0.42   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash dividend(s) declared per common share

   $ —        $ 0.125       $ —        $ 0.25   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average number of common shares outstanding:

         

Basic

     16,565,771        16,785,934         16,509,654        16,588,907   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     16,791,275        17,013,086         16,786,191        16,856,275   
  

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     39 weeks ended  
     September 28,
2010
    September 27,
2011
 

OPERATING ACTIVITIES:

    

Net income

   $ 7,268      $ 7,083   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     13,244        13,984   

Deferred income tax expense

     4,968        3,598   

Stock-based compensation expense

     1,231        1,528   

Gain on disposal of assets

     (701     (819

Adjustment for Series Z modification

     929        —     

Provision for losses on accounts receivable

     161        67   

Amortization of debt issuance and debt discount costs

     438        363   

Changes in operating assets and liabilities:

    

Restricted cash

     (78     (336

Accounts receivable

     (430     (2,702

Accounts payable and accrued expenses

     6,156        4,598   

Other assets and liabilities

     (634     (1,935
  

 

 

   

 

 

 

Net cash provided by operating activities

     32,552        25,429   

INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (11,420     (12,756

Proceeds from the sale and disposal of property, plant and equipment

     860        1,191   

Acquisition of restaurant assets

     —          (390
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,560     (11,955

FINANCING ACTIVITIES:

    

Proceeds from line of credit

     11,000        —     

Repayments on line of credit

     —          (8,000

Payments under capital lease obligations

     (19     (17

Repayments under the term loan

     (5,009     —     

Repayments under the credit facility

     —          (3,750

Redemptions under mandatorily redeemable Series Z Preferred Stock

     (25,714     —     

Additional redemption payments on Series Z Preferred Stock

     (242     —     

Dividends paid

     —          (4,177

Proceeds upon stock option exercises

     554        973   
  

 

 

   

 

 

 

Net cash used in financing activities

     (19,430     (14,971

Net increase (decrease) in cash and cash equivalents

     2,562        (1,497

Cash and cash equivalents, beginning of period

     9,885        11,768   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 12,447      $ 10,271   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

1.   Basis of Presentation

The accompanying consolidated balance sheet as of December 28, 2010, which has been derived from audited financial statements, and the unaudited consolidated financial statements of Einstein Noah Restaurant Group, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished within this Form 10-Q reflects all adjustments (consisting only of normal recurring accruals and adjustments), which are, in the Company’s opinion, necessary to fairly state the interim operating results for the respective periods.

As of September 27, 2011, the Company owned, franchised or licensed various restaurant concepts under the brand names of Einstein Bros. Bagels (“Einstein Bros.”), Noah’s New York Bagels (“Noah’s”) and Manhattan Bagel Company (“Manhattan Bagel”).

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s annual report on Form 10-K for the fiscal year ended December 28, 2010. The Company believes that the disclosures are sufficient for interim financial reporting purposes. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Additionally, the Company’s business is subject to seasonal trends. Generally, revenues and results of operations in the fourth fiscal quarter tend to be the most significant.

 

2.   Recent Accounting Pronouncements

In September 2011, the FASB issued ASU No. 2011-08 “Testing Goodwill for Impairment.” ASU 2011-08 simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The adoption of this guidance is not anticipated to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

3.   Supplemental Cash Flow Information

 

     39 weeks ended  
     September 28,
2010
    September 27,
2011
 
     (in thousands)  

Cash paid during the year to date period ended:

    

Interest related to:

    

Term loans and credit facility

     2,506      $ 1,435   

Series Z

     1,677        —     

Other

     169        418   

Income taxes

     183      $ 424   

Non-cash investing activities:

    

Non-cash purchase of equipment through capital leasing

   $ 14      $ 17   

Change in accrued expenses for purchases of property and equipment

   $ (740   $ (733

 

6


Table of Contents
4.   Inventories

Inventories, which consist of food, beverage, paper supplies and bagel ingredients, are stated at the lower of cost or market, with cost being determined by the first-in, first-out method. Inventories consist of the following:

 

     December 28,
2010
     September 27,
2011
 
     (in thousands)  

Finished goods

   $ 4,205       $ 4,418   

Raw materials

     1,380         1,398   
  

 

 

    

 

 

 

Total inventories

   $ 5,585       $ 5,816   
  

 

 

    

 

 

 

 

5.   Goodwill, Trademarks and Other Intangibles

Intangible assets include both goodwill and identifiable intangibles arising from the allocation of the purchase prices of assets acquired. Goodwill represents the excess of cost over fair value of net assets acquired in the acquisition of Manhattan Bagel and certain Einstein Bros. restaurants. As of September 27, 2011, intangible assets of $63.9 million included intangible assets of $63.8 million not subject to amortization and consisted primarily of the Einstein Bros., Noah’s and Manhattan Bagel trademarks and amortizable intangible assets of $0.1 million.

The Company performed an impairment analysis of the goodwill and indefinite lived intangible assets related to the Einstein Bros., Noah’s and Manhattan Bagel brands as of December 28, 2010 and there was no indication of impairment. During the thirteen weeks ended September 27, 2011, there were no events or changes in circumstances that indicated that the goodwill or intangible assets might be impaired or may not be recoverable.

On April 7, 2011, the Company acquired the assets of an Einstein Bros. restaurant from one of its franchisees for approximately $0.6 million. The Company recorded tangible assets at their fair value of $0.2 million, reacquired rights at their fair value of $0.1 million and recorded goodwill of approximately $0.3 million.

 

6.   Long-Term Debt

The Company’s debt is composed of a credit facility with a term loan that has a principal amount of $75.0 million and a $50.0 million revolving facility. The term loan had an outstanding balance of $75.0 million and $71.3 million as of December 28, 2010 and September 27, 2011, respectively, and the revolving facility had a balance of $12.7 million and $4.7 million as of December 28, 2010 and September 27, 2011, respectively. The revolving facility and the term loan are scheduled to mature in 2015. As of December 28, 2010 and September 27, 2011, the Company’s total long-term debt had a fair value of $87.7 million and $73.6 million, respectively. The fair value of the Company’s debt was estimated based on the current rates found in the marketplace for debt with the same remaining maturities and similar credit ratings. The Company may prepay amounts outstanding under the credit facility and may terminate commitments in whole at any time without penalty or premium upon prior written notice.

Borrowings under the credit facility bear interest at a rate equal to an applicable margin plus, at the Company’s option, either a variable base rate or a Eurodollar rate. The applicable margin for Eurodollar rate loans ranges from 2.5% to 3.0% and for base rate loans ranges from 1.5% to 2.0%, depending on the level of the Company’s consolidated leverage ratio. Upon the occurrence of a payment event of default which is continuing, all amounts due under the credit facility will bear interest at 2.0% above the interest rate otherwise applicable.

As of September 27, 2011, the weighted average interest rate under the credit facility was 3.0%. The revolving facility and the term loan contain usual and customary covenants including consolidated leverage ratios, fixed charge coverage ratios and limitations on capital expenditures. As of December 28, 2010 and September 27, 2011, the Company was in compliance with all financial and operating covenants.

 

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Table of Contents

Commencing March 31, 2011, quarterly payments on the term loan, ranging in value between $1.8 million and $2.8 million over the term of the credit facility, are due on the last day of each calendar quarter, with any remaining amounts due and payable upon maturity. As of the end of the third quarter 2011, the Company has five payments due by the end of its third quarter of 2012.

 

7.   Derivatives and Other Comprehensive Income

On March 3, 2011, the Company entered into two interest rate cap agreements with two year terms relating to the credit facility. The Company entered into the interest rate caps for a cap rate of 3.0% calculated on an initial notional amount of $18.8 million on each cap for a total notional amount of $37.6 million based on the 3-month London InterBank Offered Rate (“LIBOR”). The effect of the interest rate caps is to cap the LIBOR portion of the interest rate at 3.0%.

The fair value measurement of the interest rate caps was performed using significant other observable inputs (level 2) to calculate an asset of approximately $4 thousand as of September 27, 2011, which was recorded in prepaid expenses on the Company’s consolidated balance sheet. As of September 27, 2011, the change in fair value associated with these caps is recorded in accumulated other comprehensive income within stockholders’ equity.

On May 7, 2008, the Company entered into a two year interest rate swap agreement relating to its term loan, effective August 2008. This agreement expired in August 2010. The Company made payments based on a fixed interest rate of 3.52% calculated on an initial notional amount of $60 million. In exchange, the Company received interest on $60 million of notional amount at a variable rate. The variable rate interest the Company received was based on the 1-month London InterBank Offered Rate (“LIBOR”). The net effect of the swap was to fix the interest rate on $60 million of its term loan at 3.52% plus an applicable margin.

Comprehensive income consisted of the following:

 

     39 weeks ended  
     September 28, 2010      September 27, 2011  
     (in thousands)  

Net income available to common stockholders

   $ 7,709       $ 7,083   

Unrealized gain on cash flow hedge

     1,277         —     

Unrealized loss on interest rate caps

     —           (79
  

 

 

    

 

 

 

Total comprehensive income

   $ 8,986       $ 7,004   
  

 

 

    

 

 

 

 

8.   Stock-Based Compensation

The Company’s stock-based compensation cost for the thirteen weeks ended September 28, 2010 and September 27, 2011 was approximately $0.4 million and $0.6 million, respectively, and for the thirty-nine weeks ended September 28, 2010 and September 27, 2011 were approximately $1.2 million and $1.5 million, respectively. This expense has been included in general and administrative expenses. The fair value of stock options and stock appreciation rights (“SARs”) granted during the quarter is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

     13 weeks ended    39 weeks ended
     September 28,
2010
   September 27,
2011
   September 28,
2010
   September 27,
2011

Expected life of options and SARs from date of grant

   3.25 - 6.0 years    3.25 - 6.0 years    2.75 - 6.0 years    2.75 - 6.0 years

Risk-free interest rate

   1.73 - 2.10%    0.38%    0.78 - 2.74%    0.38 - 2.61%

Volatility

   42%    43%    42 - 43%    42 - 43%

Assumed dividend yield

   0%    3.59%    0%    3.59%

The Company evaluates and revises the assumptions used to calculate the fair value of stock options and SARs granted as necessary, to reflect market conditions and the Company’s experience.

 

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Table of Contents

As of September 27, 2011, the Company had approximately $1.6 million of total unrecognized compensation cost related to non-vested awards granted under its stock option and stock appreciation rights plans, which will be recognized over a weighted average period of 1.47 years. As of September 27, 2011, the Company has approximately $12,000 of total unrecognized compensation cost related to the restricted stock grant, which will be recognized over a weighted average period of 0.28 years. As of September 27, 2011, the Company has approximately $0.9 million of total unrecognized compensation cost related to the restricted stock units, which will be recognized over a weighted average period of 1.72 years.

Stock Option Plan Activity

On May 3, 2011, the 2011 Omnibus Incentive Plan became effective after approval by the Board of Directors and the stockholder vote and options were granted under this plan. Upon stockholder approval of the 2011 Omnibus Incentive Plan, the 2004 Stock Option Plan was suspended and no further grants may be made from the 2004 Stock Option Plan. In addition, on May 3, 2011, the Company’s stockholders approved the amendment and restatement of the stock option plan for non-employee members of the Company’s Board of Directors primarily to expand the type of awards under such plan and to change the name of the plan to the Equity Plan for Non-Employee Directors, as amended and restated (the “Director Plan”). Stock option transactions under all plans during the thirty-nine weeks ended September 27, 2011 were as follows:

 

     Number
of
Options
    Weighted
Average
Exercise Price
     Weighted  Average
Remaining

Life (Years)
 

Outstanding, December 28, 2010

     985,666      $ 10.00      

Granted

     383,200        15.62      

Exercised

     (133,959     7.27      

Cancelled/Forfeited

     (67,332     14.04      
  

 

 

   

 

 

    

Outstanding, September 27, 2011

     1,167,575      $ 11.92         7.28   
  

 

 

   

 

 

    

 

 

 

Exercisable and vested, September 27, 2011

     516,898      $ 10.76         5.39   
  

 

 

   

 

 

    

 

 

 

 

     Number
of

Options
    Weighted Average
Grant Date

Fair Value
 

Non-vested options, December 28, 2010

     574,941      $ 4.16   

Granted

     383,200        4.80   

Vested

     (260,141     4.17   

Forfeited

     (47,323     5.03   
  

 

 

   

 

 

 

Non-vested options, September 27, 2011

     650,677      $ 4.47   
  

 

 

   

 

 

 

The aggregate intrinsic value of stock options exercised during the thirty-nine weeks ended September 27, 2011 was $1.1 million. As of September 27, 2011, there were 711,250 and 902,470 shares reserved for future issuance under the Director Plan and the 2011 Omnibus Incentive Plan, respectively.

 

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Stock Appreciation Rights Plan Activity

Transactions during the thirty-nine weeks ended September 27, 2011 were as follows:

 

     Number
of

SARs
    Weighted
Average
Exercise Price
     Weighted Average
Remaining
Life (Years)
 

Outstanding, December 28, 2010

     84,153      $ 11.39      

Granted

     26,000        15.60      

Exercised

     (10,050     9.43      

Forfeited

     (5,850     12.13      
  

 

 

   

 

 

    

Outstanding, September 27, 2011

     94,253      $ 12.71         2.96   
  

 

 

   

 

 

    

 

 

 

Exercisable and vested, September 27, 2011

     50,253      $ 11.45         1.86   
  

 

 

   

 

 

    

 

 

 

 

     Number
of

SARs
    Weighted Average
Grant Date

Fair Value
 

Non-vested rights, December 28, 2010

     39,750      $ 3.55   

Granted

     26,000        3.78   

Vested

     (18,750     3.37   

Forfeited

     (3,000     3.70   
  

 

 

   

 

 

 

Non-vested rights, September 27, 2011

     44,000      $ 3.75   
  

 

 

   

 

 

 

The aggregate intrinsic value of SARs exercised during the thirty-nine weeks ended September 27, 2011 was approximately $57,000. As of September 27, 2011, there were 40,385 shares reserved for future issuance under the SAR plan.

Restricted Stock

On January 9, 2009, the Company’s Compensation Committee granted 63,776 shares of restricted stock with a value of $375,000 in connection with Mr. O’Neill’s appointment as President and Chief Executive Officer. The forfeiture restrictions on 21,259 shares lapsed on January 9, 2010, the first anniversary of the grant and the forfeiture restrictions on 21,259 shares lapsed on January 9, 2011, the second anniversary of the grant. The forfeiture restrictions on the remaining 21,258 shares will lapse on the third anniversary of the grant, provided that Mr. O’Neill remains employed by the Company.

Restricted Stock Units

Historically, the Company used equity awards in the form of stock options as one of the means for recruiting and retaining highly skilled talent. In the second quarter of 2011, restricted stock units (“RSUs”) were issued under the 2011 Omnibus Incentive Plan to eligible employees as a type of long-term equity-based award. The RSU’s have a three year life and one-third becomes unrestricted each year on the anniversary of the grant date. Upon vesting, the RSUs are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of the Company’s common stock. Stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock.

 

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Transactions during the thirty-nine weeks ended September 27, 2011 were as follows:

 

     Number
of
Shares
    Weighted Average
Grant Date

Fair Value
     Aggregate
Intrinsic Value
 

Non-vested rights, December 28, 2010

     —        $ —        

Granted

     77,900        15.52      

Vested

     —          —        

Forfeited

     (3,700     15.52      
  

 

 

   

 

 

    

Non-vested rights, September 27, 2011

     74,200      $ 15.52       $ 1,033,606   
  

 

 

   

 

 

    

 

 

 

 

9.   Net Income Per Common Share

The following table sets forth the computation of basic and diluted net income available to common stockholders per share:

 

     13 weeks ended      39 weeks ended  
     September 28,
2010
    September 27,
2011
     September 28,
2010
    September 27,
2011
 
     (in thousands, except earnings per
share and related share information)
    

(in thousands, except earnings per

share and related share information)

 

Net income

   $ 3,400      $ 2,835       $ 7,268      $ 7,083   

Less: Additional redemption on temporary equity

     (124     —           (365     —     

Add: Beneficial conversion feature on temporary equity

     169        —           169        —     

Add: Accretion of premium on Series Z preferred stock

     138        —           637        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common stockholders (a)

   $ 3,583      $ 2,835       $ 7,709      $ 7,083   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic weighted average shares outstanding (b)

     16,565,771        16,785,934         16,509,654        16,588,907   

Dilutive effect of stock options and SARs

     225,504        227,152         276,537        267,368   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted weighted average shares outstanding (c)

     16,791,275        17,013,086         16,786,191        16,856,275   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common stockholders per share—Basic (a)/(b)

   $ 0.22      $ 0.17       $ 0.47      $ 0.43   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common stockholders per share—Diluted (a)/(c)

   $ 0.21      $ 0.17       $ 0.46      $ 0.42   
  

 

 

   

 

 

    

 

 

   

 

 

 

Anti-dilutive stock options and SARs

     652,882        467,400         458,235        381,273   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of shares of common stock and potential common stock equivalents outstanding during the period using the treasury stock method. Potential common stock equivalents include incremental shares of common stock issuable upon the exercise of stock options. Potential common stock equivalents are excluded from the computation of diluted net income per share when their effect is anti-dilutive.

 

10.   Income Taxes

Utilization of net operating loss (“NOL”) carryforwards reduced the Company’s current federal and state income tax liability incurred in 2010 and 2011. The Company has recorded provisions for income tax expense on taxable earnings for the thirteen weeks ended September 28, 2010 and September 27, 2011 of $2.4 million and $1.6 million respectively, and for the thirty-nine weeks ended September 28, 2010 and September 27, 2011 of $6.1 million and $4.6 million, respectively.

As of December 28, 2010, NOL carryforwards of $115.7 million were available to be utilized against future taxable income for years through fiscal 2029, subject in part to annual limitations and excluding approximately $12.2 million of NOL carryforwards that will expire prior to utilization. Accordingly, the Company has provided a full valuation allowance of $4.8 million related to this portion of deferred tax assets. The Company’s ability to utilize its NOLs could be further limited if the Company experiences an “ownership change” as defined by Section 382 of the Internal Revenue Code. The occurrence of an additional ownership change would limit the Company’s ability to

 

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utilize approximately $100.3 million of NOL carryforwards that are not currently subject to limitation, and could further limit the Company’s ability to utilize its remaining NOL carryforwards and possibly other tax attributes. Approximately $15.4 million of the Company’s NOLs are currently subject to limitation.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company remains subject to examination by U.S. federal, state and local tax authorities for tax years 2008 through 2010 and with certain state and local authorities for tax years 2007 through 2010. The Internal Revenue Service has completed its examination of the Company’s 2008 federal tax return without significant findings. The IRS has notified the Company that its 2009 federal tax return has been selected for examination. With a few exceptions, the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for the tax year 2006 and prior.

 

11.   Commitments and Contingencies

Letters of Credit and Line of Credit

As of September 27, 2011, the Company had $7.1 million in letters of credit outstanding which reduce its availability under the revolving facility. The letters of credit expire on various dates during 2011 and 2012, typically renew annually and are payable upon demand in the event that the Company fails to pay the underlying obligations.

As of September 27, 2011, the Company had a balance of $4.7 million on its revolving facility. The availability under the Company’s $50 million revolving facility was $38.2 million as of September 27, 2011.

Litigation

The Company is subject to claims and legal actions in the ordinary course of business, including claims by or against its franchisees, licensees and employees or former employees and others. The Company does not believe any currently pending or threatened matter would have a material adverse effect on its business, results of operations or financial condition.

 

12.   Dividends

The Company’s Board of Directors declared the following cash dividends payable in 2011 which were included in accrued expenses and other current liabilities on the Consolidated Balance Sheets:

 

Date Declared

  

Record Date

   Dividend
Per
Share
     Total Amount      Payment Date
    

(in thousands)

December 20, 2010

   March 1, 2011    $ 0.125       $ 2,083       April 15, 2011

May 3, 2011

   June 1, 2011    $ 0.125       $ 2,094       July 15, 2011

August 3, 2011

   September 1, 2011    $ 0.125       $ 2,096       October 15, 2011

 

13.   Restructuring Expenses

In the third quarter of 2011, the Company committed to a plan to close its Columbus commissary by the end of 2011. The Company incurred $0.1 million of restructuring expenses in the third quarter of 2011 including employee termination benefits for the employees at its Columbus commissary. Subsequent to the third quarter of 2011, the Company finalized its plan to close its remaining four commissaries and expects to close its commissaries by the end of the first quarter of 2012. Estimates of restructuring expenses related to the closure of the Company’s commissaries total $1.1 million to $1.3 million with $0.5 million to $0.8 million to be incurred in 2011 and $0.5 million to $0.8 million to be incurred in the first quarter of 2012. These restructuring expenses include costs for employee termination benefits of $0.4 million to $0.5 million, lease contract terminations of approximately $0.3 million, and other associated costs of $0.4 million to $0.5 million.

 

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The 2011 year to date restructuring expenses include expenses related to the closure of the Company’s commissaries as well as $0.2 million related to the completion of its 2010 plan to restructure the organization to align with its franchise growth model.

 

14.   Subsequent Events

On October 25, 2011, the Company purchased one franchised restaurant from a franchisee for approximately $0.6 million.

On November 2, 2011, the Corporation’s Board of Directors declared a cash dividend payable January 15, 2012 to shareholders of record on December 1, 2011.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

We wish to caution our readers that the following important factors, among others, could cause the actual results to differ materially from those indicated by forward-looking statements made in this report and periodically in news releases, reports, proxy statements, registration statements and other written communications, as well as verbal forward-looking statements made by Company representatives. In addition, our definitions of non-GAAP disclosures may differ from how others in our industry may define them. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future performance or achievements expressed or implied by these forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include matters such as future economic performance, general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operating and financing activities for our future liquidity and capital resource needs, growth of franchise and licensing, the impact on our business as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) and the rules promulgated there under, future litigation and other matters, and are generally accompanied by words such as: “believes”, “anticipates”, “plans”, “intends”, “estimates”, “predicts”, “targets”, “expects”, “contemplates” and similar expressions that convey the uncertainty of future events or outcomes. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the year ended December 28, 2010 as updated in subsequent quarterly reports on Form 10-Q, including Item 1A of Part II of this report.

General

This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Form 10-K for the fiscal year ended December 28, 2010. The following discussion and analysis includes historical and certain forward-looking information that should be read together with the accompanying consolidated financial statements, related footnotes and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward-looking statements.

We have a 52/53-week fiscal year ending on the Tuesday closest to December 31. The third quarters in fiscal years 2010 and 2011 ended on September 28, 2010 and September 27, 2011, respectively, and each quarter contained thirteen weeks and each year to date period contained thirty-nine weeks. Our current fiscal year ends on January 3, 2012 and consists of 53 weeks.

Use of Non-GAAP Financial Information

In addition to the results reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”) included in this filing, the Company has provided certain non-GAAP financial information, including adjusted earnings before interest, taxes, depreciation, amortization, adjustment for Series Z modification, restructuring expenses and other operating expenses/income (“adjusted EBITDA”) and free cash flow, or net cash provided by operating activities less net cash used in investing activities. Management believes that the presentation of this non-GAAP financial information provides useful information to investors because this information may allow investors to better evaluate ongoing business performance and certain components of the Company’s results. In addition, the Company’s Board of Directors uses this non-GAAP financial information to evaluate the performance of the Company and the management team. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information on pages 18 and 23 in this Form 10-Q to the nearest GAAP measure.

 

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We include in this report information on system-wide comparable store sales percentages. In fiscal 2011, we modified the method by which we determine restaurants included in our comparable store sales percentages to include those restaurants in operation for a full six fiscal quarters, which we refer to as our base store restaurants. Previously, comparable store sales percentages were based on restaurants that had been in operation for thirteen months. This methodology modification did not have a material impact on previously reported amounts. Comparable store sales percentages refer to changes in sales of our restaurants, whether operated by the company or by franchisees and licensees, in operation for six fiscal quarters including those restaurants temporarily closed for an immaterial amount of time. Some of the reasons restaurants may be temporarily closed include remodeling, relocations, road construction, rebuilding related to site-specific catastrophes and natural disasters. Franchise and license comparable store sales percentages are based on sales of franchised and licensed restaurants, as reported by franchisees and licensees. System-wide sales include sales at all restaurants, whether operated by the Company, franchisees or licensees. Management reviews the increase or decrease in comparable sales to assess business trends. Comparable store sales exclude closed locations.

We use company-owned comparable store sales, franchise and license sales and the resulting system-wide sales information internally in connection with restaurant development decisions, planning, and budgeting analyses. We believe comparable store sales information is useful in assessing consumer acceptance of our brands; facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income; helps us evaluate the effectiveness of our advertising and marketing initiatives; and provides information that is relevant for comparison within the industry.

Comparable store sales percentages are non-GAAP financial measures, which should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP, and may not be equivalent to comparable store sales as defined or used by other companies. We do not record franchise or license restaurant sales as revenues. However, royalty revenues are calculated based on a percentage of franchise and license restaurant sales, as reported by the franchisees or licensees.

 

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Table of Contents

Overview

In evaluating and assessing our financial performance for the third quarter of 2011, we considered the following key factors:

 

   

Comparable store sales – We saw a sequential improvement in system-wide and company-owned comparable store sales and average check during the third quarter of 2011, representing our third consecutive quarter of improvement. System-wide comparable store sales improved from +0.2% in the second quarter 2011 to +1.0% in the third quarter of 2011. Our company-owned comparable store sales improved from -0.3% in the second quarter of 2011 to +0.7% in the third quarter of 2011.

 

   

Store margins – We continued to see inflationary pressures across our food costs. As a percent of company-owned restaurant sales, cost of goods sold increased to 30.0% from 28.4% in the third quarter of 2010. Although we have increased our menu prices during the year to offset inflation, our gross profit has remained below 2010. For the third quarter, our gross profit margin was 17.0% compared to 18.5% in 2010. As a percentage of company-owned restaurant sales - labor costs, other operating costs, rent and related costs, and marketing costs were essentially flat to 2010 for the third quarter on a combined basis.

 

   

Manufacturing and commissary revenues and margins – While revenues for this segment increased 12.5% year to date from 2010, margins for the quarter and year to date declined as a result of inflation in commodity costs and a shift in sales volume to lower margin export customers. Year to date margins were 12.1% compared with 15.7% for the same period in 2010.

 

   

Unit development – As of September 27, 2011, we owned/operated, franchised, and licensed 758 restaurants. Our current base of company-owned restaurants includes 358 Einstein Bros., 72 Noah’s, and one Manhattan Bagel. Also, we franchise 70 Manhattan Bagel and 24 Einstein Bros. restaurants, and have increased our licensed restaurant base to 233 Einstein Bros. restaurants. We include in our restaurant count our locations that are temporarily closed due to upgrades, remodeling and relocation. We have opened 38 new units this year. Our year to date 2011 refranchising activities include the sale of two restaurants to a franchisee and the purchase of one restaurant from a franchisee. We plan to open a total of 60 to 65 units in 2011.

 

   

Net cash provided by operating and investing activities – We generated $25.4 million of cash from operations through the third quarter of 2011 compared to $32.6 million in 2010. Our investments in new restaurants and various upgrades for our existing restaurants as well as at our manufacturing operations increased by $1.4 million from $11.4 million to $12.8 million.

 

   

Impact of deleveraging our balance sheet – In 2011, we are realizing the impacts of the efforts that were made during the second half of 2010 to decrease our overall debt balance. The refinancing of our debt combined with the expiration of our interest rate swap, the pay down of our debt facility and the full redemption of our Series Z mandatorily redeemable preferred stock lowered our average debt balance to $105.3 million and $80.6 million for the first three quarters of 2010 and 2011, respectively. These efforts also decreased our weighted average interest rates on our overall debt from 5.1% in 2010 to 3.1% for the first three quarters of 2011.

 

   

Streamlining our supply chain – We have decided to close our five food commissary facilities to help streamline our supply chain and to reduce our cost base. In the third quarter of 2011, we incurred $0.1 million of restructuring expenses related to our plan to close our commissaries including employee termination benefits for the employees at our Columbus commissary. Subsequent to the third quarter of 2011, we finalized our plan to close our remaining commissaries. We expect to close our Columbus commissary in the fourth quarter of 2011 and the remaining four commissaries in the first quarter of 2012. We expect the closing of these facilities will result in annual cost savings of $1.0 million to $1.5 million.

 

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Table of Contents
   

Estimates of restructuring expenses related to the closure of our commissaries total $1.1 million to $1.3 million with $0.5 million to $0.8 million to be incurred in 2011 and $0.5 million to $0.8 million to be incurred in the first quarter of 2012. These restructuring expenses include costs for employee termination benefits of $0.4 million to $0.5 million, lease contract terminations of approximately $0.3 million, and other associated costs of $0.4 million to $0.5 million.

Outlook for the remainder of 2011

To increase sales and build customer loyalty, we plan to continue to offer new products that build the relevance of our brands with consumers by emphasizing our leadership position in health and Fresh baked quality. In addition, our new coffee program is now in most of our company-owned restaurants and by mid-November we will have completed the rollout of this program across the system. This program has shown in testing to positively impact both transactions and average check as more consumers choose our brands for their specialty coffee. In addition, we continue to build on catering sales sequentially and, on a year over year basis, remain focused on the balance of our new premium sandwich innovation.

For the remainder of 2011, we plan to continue to concentrate primarily on the breakfast and lunch day parts, with an emphasis on product innovation. We have a strong line-up of new product offerings to drive new traffic and repeat visits. In the fourth quarter, we are featuring breakfast and lunch sandwiches made with premium steak. Also to coincide with full distribution of our new coffee program we have introduced seasonal holiday beverages that will continue until the end of the year. We will also continue with our successful mail drop coupons as a means of prompting trial and repeat purchases for both new and loyal customers. We also plan to continue with billboard advertising in select markets.

We remain focused on increasing the presence of our national Einstein Bros. brand and plan to open between 60 and 65 total units for the year. Our growth will continue to be franchise first focused and we plan to evolve our franchise base to include large multi-unit operators.

We plan to remain committed to growing our franchise network, initiating construction of company-owned restaurants, and refranchising. Refranchising remains an important part of our overall strategy for unit development. We intend to continue to expand our company-owned restaurants in 2011 with the addition of up to ten units including acquisitions. These new units will be focused primarily in our more developed markets. During the thirty-nine weeks ended September 27, 2011, we opened two new company-owned restaurants.

We have a strong pipeline of existing franchise development agreements and new license locations. Our license restaurants will be primarily in colleges and universities, hospitals, and airports. During the thirty-nine weeks ended September 27, 2011 we opened four franchise restaurants and 32 license restaurants. We closed three franchise restaurants, one company-owned restaurant and nine license locations during the thirty-nine weeks ended September 27, 2011.

Results of Operations for the Quarter and Year to Date Periods Ended September 28, 2010 and September 27, 2011

Financial Highlights for the Third Quarter 2011 as Compared to the Third Quarter 2010

 

   

Revenues increased $2.2 million, or 2.1%, driven by a strong increase in franchise and license revenue of 19.1% and a strong increase in manufacturing revenue of 17.2%.

 

   

Net income available to common stockholders was $2.8 million down from $3.6 million in 2010, with diluted earnings per share of $0.17 compared to $0.21, respectively.

 

   

Franchise and license related revenues continued to grow in the third quarter of 2011 with comparable stores sales registering at +2.2% and revenues increasing 19.1% for the quarter compared to 2010.

 

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Table of Contents

Consolidated Results

 

     13 weeks ended     39 weeks ended  
     (dollars in thousands)      Increase/
(Decrease)
    (dollars in thousands)     Increase/
(Decrease)
 
     September 28,
2010
    September 27,
2011
     2011
vs. 2010
    September 28,
2010
    September 27,
2011
    2011
vs. 2010
 

Revenues

   $ 101,361      $ 103,532         2.1   $ 305,646      $ 308,455        0.9

Cost of sales

     81,298        84,664         4.1     246,086        253,420        3.0

Operating expenses

     13,019        13,614         4.6     40,892        40,856        (0.1 %) 
  

 

 

   

 

 

      

 

 

   

 

 

   

Income from operations

     7,044        5,254         (25.4 %)      18,668        14,179        (24.0 %) 

Interest expense, net

     1,209        772         (36.1 %)      4,395        2,507        (43.0 %) 

Adjustment for Series Z modification*

     —          —           0.0     929        —          (100.0 %) 
  

 

 

   

 

 

      

 

 

   

 

 

   

Income before income taxes

     5,835        4,482         (23.2 %)      13,344        11,672        (12.5 %) 

Total provision for income taxes

     2,435        1,647         (32.4 %)      6,076        4,589        (24.5 %) 
  

 

 

   

 

 

      

 

 

   

 

 

   

Net income

   $ 3,400      $ 2,835         (16.6 %)    $ 7,268      $ 7,083        (2.5 %) 

Adjustments to net income:

             

Interest expense, net

     1,209        772         (36.1 %)      4,395        2,507        (43.0 %) 

Provision for income taxes

     2,435        1,647         (32.4 %)      6,076        4,589        (24.5 %) 

Depreciation and amortization

     4,498        4,836         7.5     13,244        13,984        5.6

Series Z modification

     —          —           0.0     929        —          (100.0 %) 

Restructuring expenses

     —          121         *     —          334        *

Other operating expenses (income)

     (690     47         (106.8 %)      (620     (776     25.2
  

 

 

   

 

 

      

 

 

   

 

 

   

Adjusted EBITDA

   $ 10,852      $ 10,258         (5.5 %)    $ 31,292      $ 27,721        (11.4 %) 
  

 

 

   

 

 

      

 

 

   

 

 

   

 

  * As a result of the March 17, 2010 agreement modifying our Series Z, we recognized a non-cash loss of $0.9 million on the extinguishment of debt, recorded additional redemption within stockholders’ equity and recorded a discount within interest expense.
  ** Not meaningful

During the third quarter of 2011, we maintained our focus on delivering product innovation focused on health and quality, under the theme of “Club Favorites”. This promotion included a premium triple decker club sandwich, an under-400 calorie bagel thin club breakfast sandwich, and a chopped club salad. To continue building our fresh-baked brand equity, we launched our popular seasonal pumpkin promotion, featuring pumpkin bagels, cream cheese, bagel poppers, muffins, and pumpkin latte.

System-wide comparable store sales were +1.0% and +0.1% in the third quarter and year to date 2011, respectively. Average check and system-wide transactions were +5.0% and -4.0%, respectively, in the third quarter and were +2.9% and -2.8%, respectively, year to date 2011. Our comparable transactions decreased from 2010 due primarily to the transaction impact of our 2011 everyday $5 value bundle promotion not generating as many transactions as our 2010 free bagel promotions.

Net income decreased for the third quarter of 2011 from the third quarter of 2010 primarily due to lower income from operations, partially offset by lower interest expense and lower income tax expense.

Year to date, interest expense, net decreased $1.9 million primarily due to realizing the impacts of decreasing our overall debt balance during the second half of 2010. The refinancing of our debt combined with the expiration of our interest rate swap, the pay down of our credit facility and the full redemption of our Series Z mandatorily redeemable preferred stock lowered our average debt balance to $105.3 million and $80.6 million for the first three quarters of 2010 and 2011, respectively. These efforts also decreased our weighted average interest rates on our overall debt from 5.1% in 2010 to 3.1% for the first three quarters of 2011.

 

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Company-Owned Restaurant Operations

 

     13 weeks ended  
     (dollars in thousands)     Increase/
(Decrease)
    Percentage of company-owned
restaurant sales
 
     September 28,
2010
    September 27,
2011
    2011
vs. 2010
    September 28,
2010
    September 27,
2011
 

Company-owned restaurant sales

   $ 91,822      $ 92,311        0.5    

Percent of total revenues

     90.6     89.2      

Cost of sales:

          

Cost of goods sold

   $ 26,040      $ 27,693        6.3     28.4     30.0

Labor costs

     27,216        27,329        0.4     29.6     29.6

Other operating costs

     10,108        10,145        0.4     11.0     11.0

Marketing costs

     1,750        1,567        (10.5 %)      1.9     1.7

Rent and related expenses

     9,696        9,926        2.4     10.6     10.8
  

 

 

   

 

 

       

Total company-owned restaurant costs

   $ 74,810      $ 76,660        2.5     81.5     83.0
  

 

 

   

 

 

       

Total company-owned restaurant gross profit

   $ 17,012      $ 15,651        (8.0 %)      18.5     17.0
  

 

 

   

 

 

       
     39 weeks ended  
     (dollars in thousands)     Increase/
(Decrease)
    Percentage of company-owned
restaurant sales
 
     September 28,
2010
    September 27,
2011
    2011
vs. 2010
    September 28,
2010
    September 27,
2011
 

Company-owned restaurant sales

   $ 276,750      $ 275,723        (0.4 %)     

Percent of total revenues

     90.5     89.4      

Cost of sales:

          

Cost of goods sold

   $ 78,589      $ 81,971        4.3     28.4     29.7

Labor costs

     82,419        81,514        (1.1 %)      29.8     29.6

Other operating costs

     28,561        29,485        3.2     10.3     10.7

Marketing costs

     7,595        7,793        2.6     2.7     2.8

Rent and related expenses

     29,773        30,205        1.5     10.8     11.0
  

 

 

   

 

 

       

Total company-owned restaurant costs

   $ 226,937      $ 230,968        1.8     82.0     83.8
  

 

 

   

 

 

       

Total company-owned restaurant gross profit

   $ 49,813      $ 44,755        (10.2 %)      18.0     16.2
  

 

 

   

 

 

       

Company-owned comparable store sales improved to +0.7% and -0.3% for third quarter and year to date, respectively. Company-owned restaurant sales for the third quarter and year to date 2011 increased 0.5% and decreased 0.4%, respectively. The gross profit percentage for our company-owned restaurants decreased from 18.5% in the third quarter of 2010 to 17.0% in the third quarter of 2011, primarily due to inflationary pressures in our product costs. We did take a price increase of 2.0% in September 2011 to bring our year to date price increases to a total of 3.4%. As a percentage of sales, we saw an increase in our food costs to 30.0% in the third quarter of 2011 from 28.4% in the third quarter of 2010. This 1.6% net unfavorable change includes impacts of inflation in our commodity costs (1.8% unfavorable) and a product mix shift towards catering and sandwiches (1.2% unfavorable) partially offset by price increases (0.7% favorable) and savings from our initiatives (0.7% favorable). We anticipate overall inflation to be in the range of 3.0% to 4.0% for the full year. As a percentage of company-owned restaurant sales, labor costs, other operating costs, rent and related costs, and marketing costs were essentially flat to 2010 for the third quarter.

Our bagel thin sandwich offerings, which were introduced in the second quarter of 2010, comprised approximately 4.8% of our total mix for the third quarter 2011 compared to 3.2% for the third quarter 2010. Catering sales comprised approximately 6.3% of our total sales for the third quarter and year to date in 2011, reflecting year over year increases in sales of 19.8% and 15.5%, respectively.

 

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Compared to 2010, most of our commodity-based food costs have increased in 2011. We have secured protection for 100% of our wheat and coffee needs for the remainder of 2011. We have also implemented a cross functional cost team to evaluate innovative ways to efficiently save $3.0 million in annualized incremental savings on a go-forward basis without negatively impacting the customer experience. We have secured protection on approximately 44% and 70% of our wheat and coffee needs for 2012, respectively. At this time last year, we had secured protection on only 50% of our wheat needs for the first quarter of 2011.

Manufacturing and Commissary Operations

 

     13 weeks ended  
     (dollars in thousands)     Increase/
(Decrease)
    Percentage of manufacturing
and commissary revenues
 
     September 28,
2010
    September 27,
2011
    2011
vs. 2010
    September 28,
2010
    September 27,
2011
 

Manufacturing and commissary revenues

   $ 7,478      $ 8,766        17.2    

Percent of total revenues

     7.4     8.4      

Manufacturing and commissary costs

   $ 6,488      $ 8,004        23.4     86.8     91.3
  

 

 

   

 

 

       

Total manufacturing and commissary gross profit

   $ 990      $ 762        (23.0 %)      13.2     8.7
  

 

 

   

 

 

       
     39 weeks ended  
     (dollars in thousands)     Increase/
(Decrease)
    Percentage of manufacturing
and commissary revenues
 
     September 28,
2010
    September 27,
2011
    2011
vs. 2010
    September 28,
2010
    September 27,
2011
 

Manufacturing and commissary revenues

   $ 22,705      $ 25,541        12.5    

Percent of total revenues

     7.4     8.3      

Manufacturing and commissary costs

   $ 19,149      $ 22,452        17.2     84.3     87.9
  

 

 

   

 

 

       

Total manufacturing and commissary gross profit

   $ 3,556      $ 3,089        (13.1 %)      15.7     12.1
  

 

 

   

 

 

       

Manufacturing and commissary revenues for the third quarter and year to date 2011 were up 17.2% and 12.5%, respectively, driven mainly by higher frozen dough sales to third parties from our manufacturing facility. Manufacturing gross profit decreased 23.0% and 13.1%, respectively, in the third quarter and year to date 2011 primarily due to higher commodity costs and a shift in sales volume to lower margin export customers. On a year to date basis, gross profit as a percentage of manufacturing and commissary revenue was 12.1%, down from 15.7% in 2010.

We expect to close our Columbus commissary in the fourth quarter of 2011 and the remaining four commissaries in the first quarter of 2012. We believe the closing of these facilities will result in annual cost savings of $1.0 million to $1.5 million.

 

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Table of Contents

Franchise and License Operations

 

     13 weeks ended  
     (dollars in thousands)     Increase/
(Decrease)
 
     September 28,
2010
    September 27,
2011
    2011
vs. 2010
 

Franchise and license related revenues

   $ 2,061      $ 2,455        19.1

Percent of total revenues

     2.0     2.4  

Number of franchise and license restaurants

     285        327     
     39 weeks ended  
     (dollars in thousands)     Increase/
(Decrease)
 
     September 28,
2010
    September 27,
2011
    2011
vs. 2010
 

Franchise and license related revenues

   $ 6,191      $ 7,191        16.2

Percent of total revenues

     2.0     2.3  

Number of franchise and license restaurants

     285        327     

Overall, franchise and license revenue improvement was driven by continued unit development which netted an additional 33 license locations and nine franchise locations since September 28, 2010. Franchise and license comparable store sales were +2.2% and +1.5% for the thirteen and thirty-nine weeks ended September 27, 2011, respectively. Franchise and license revenues improved by $0.4 million, or 19.1%, and by $1.0 million, or 16.2%, in the third quarter and year to date 2011, respectively, as a result of unit development over the past four quarters, and single-digit increases in comparable store sales. The third quarter of 2011 also benefited from higher initial fees from franchisees and licensees as a result of a higher number of franchise and license openings occurring in 2011 than the third quarter of 2010.

 

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Table of Contents

Corporate

 

     13 weeks ended  
     (dollars in thousands)      Increase/
(Decrease)
    Percentage of
total revenues
 
     September 28,
2010
    September 27,
2011
     2011
vs. 2010
    September 28,
2010
    September 27,
2011
 

General and administrative expenses

   $ 9,211      $ 8,610         (6.5 %)      9.1     8.3

Depreciation and amortization

     4,498        4,836         7.5     4.4     4.7

Restructuring expenses

     —          121         *     0.0     0.1

Other operating (income) expenses

     (690     47         (106.8 %)      (0.7 %)      0.0
  

 

 

   

 

 

        

Total operating expenses

   $ 13,019      $ 13,614         4.6     12.8     13.1

Interest expense, net

     1,209        772         (36.1 %)      1.2     0.7

Provision for income taxes

     2,435        1,647         (32.4 %)      2.4     1.6

 

** Not meaningful

 

     39 weeks ended  
     (dollars in thousands)     Increase/
(Decrease)
    Percentage of
total revenues
 
     September 28,
2010
    September 27,
2011
    2011
vs. 2010
    September 28,
2010
    September 27,
2011
 

General and administrative expenses

   $ 28,268      $ 27,314        (3.4 %)      9.2     8.9

Depreciation and amortization

     13,244        13,984        5.6     4.3     4.5

Restructuring expenses

     —          334        *     0.0     0.1

Other operating income

     (620     (776     25.2     (0.2 %)      (0.3 %) 
  

 

 

   

 

 

       

Total operating expenses

   $ 40,892      $ 40,856        (0.1 %)      13.4     13.2

Interest expense, net

     4,395        2,507        (43.0 %)      1.4     0.8

Adjustment for Series Z modification

     929        —          (100.0 %)      0.3     0.0

Provision for income taxes

     6,076        4,589        (24.5 %)      2.0     1.5

 

** Not meaningful

Our total general and administrative expenses decreased in the third quarter due to lower variable incentive compensation expense, recruiting expense and relocation expense. On a year to date basis, the decline in general and administrative expenses primarily related to lower variable incentive compensation expense and a decline in legal expenses.

Depreciation and amortization expenses increased $0.4 million and $0.7 million for the third quarter and year to date 2011, respectively, when compared to 2010. The increase is due to additional investments in company-owned restaurants that were either added or upgraded since the third quarter of 2010. Based on our current planned purchases of capital assets, our existing base of assets, and our projections for new purchases of fixed assets, we believe depreciation expense for 2011 will be in the range of approximately $19.0 million to $21.0 million.

We incurred $0.1 million of restructuring expenses in the third quarter of 2011 related to our plan to close our five commissaries The 2011 year to date restructuring expenses include expenses related to the closure of our commissaries as well as $0.2 million related to the completion of our 2010 plan to restructure the organization to align with our franchise growth model.

Other operating expenses (income) decreased $0.7 million and increased $0.2 million for the third quarter and year to date 2011, respectively. In the third quarter of 2010, we recognized a gain on the sale of a restaurant to a franchisee. On a year to date basis, 2011 includes a gain on the sale of two restaurants to a franchisee in the second quarter as well as a gain recognized on the insurance proceeds from a restaurant fire.

We currently estimate our 2011 annual effective tax rate to be 39.3%, which compares to a 2010 annual effective tax rate of 48.3%. This decrease relates to the elimination of several non-deductible items in 2010, including the

 

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Table of Contents

$0.9 million loss on the modification of the Series Z, the additional redemption expense on the Series Z, and the remaining deferred tax associated with our interest rate swap which expired in 2010. We also expect to realize higher federal employment tax credits in 2011 than 2010.

Financial Condition, Liquidity and Capital Resources

The restaurant industry is predominantly a cash business where cash is received at the time of the transaction. We believe we will generate sufficient cash flow to fund operations, capital expenditures, and required debt and interest payments. Our investment in inventory is minimal because our products are perishable. Our accounts payable are on terms that we believe are consistent with those of other companies within the industry.

The primary driver of our operating cash flow is our restaurant revenue, specifically the gross margin from our company-owned restaurants. Therefore, we focus on the elements of those operations including store sales and controllable expenses to ensure a steady stream of operating profits that enable us to meet our cash obligations.

Our results depend on consumer spending, which is influenced by consumer confidence and disposable income. Accordingly, we believe we experience declines in comparable store sales during economic downturns or during periods of economic uncertainty. Any material decline in the amount of consumer discretionary spending could have a material adverse effect on our sales and income.

 

     39 weeks ended  
     September 28,
2010
    September 27,
2011
 
     (dollars in thousands)  

Net cash provided by operating activities

   $ 32,552      $ 25,429   

Net cash used in investing activities

     (10,560     (11,955
  

 

 

   

 

 

 

Free cash flow

     21,992        13,474   

Net cash used in financing activities

     (19,430     (14,971
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     2,562        (1,497

Cash and cash equivalents, beginning of period

     9,885        11,768   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 12,447      $ 10,271   
  

 

 

   

 

 

 

Our free cash flow declined by $8.5 million through the third quarter of 2011 compared to 2010 primarily due to a $4.5 million decline in income from operations, a $1.3 million increase in the purchase of property and equipment, and a decline in working capital in 2011 relative to changes in working capital over the same period in 2010.

Working Capital

Our working capital was $5.6 million and $1.7 million as of December 28, 2010 and September 27, 2011, respectively. This $3.9 million decline was due primarily to the increase in our accrued expenses and other current liabilities as well as an additional $1.9 million for a fifth quarterly installment within the current portion of long-term debt. Accrued expenses and other current liabilities increased due to an increase in deferred revenue for gift card sales. The increase in the current portion of long-term debt relates to the differences between the dating of our fiscal year versus calendar-month dating used in our debt agreement. The increase in accounts receivable was the result of an increase in franchise and license billings for purchases from our commissaries as well as vendor rebates and credits. Prepaid expenses increased due to an increase in prepaid marketing and prepaid software licenses. Other elements of working capital fluctuated in the normal course of business. As of September 27, 2011, we had unrestricted cash of $10.3 million, a decrease of $1.5 million from December 28, 2010.

 

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Table of Contents
     December 28,
2010
     September 27,
2011
     Change  

Current assets:

        

Cash and cash equivalents

   $ 11,768       $ 10,271       $ (1,497

Restricted cash

     709         1,045         336   

Accounts receivable

     5,841         8,476         2,635   

Inventories

     5,585         5,816         231   

Current deferred income tax assets, net

     11,149         10,120         (1,029

Prepaid expenses

     5,955         7,079         1,124   

Other current assets

     72         73         1   
  

 

 

    

 

 

    

 

 

 

Total current assets

     41,079         42,880         1,801   

Current liabilities:

        

Accounts payable

   $ 7,445       $ 8,552       $ 1,107   

Accrued expenses and other current liabilities

     20,471         23,245         2,774   

Current portion of long-term debt

     7,500         9,375         1,875   

Current portion of obligations under capital leases

     17         14         (3
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     35,433         41,186         5,753   

Working capital surplus

   $ 5,646       $ 1,694       $ (3,952
  

 

 

    

 

 

    

 

 

 

Covenants

We are subject to a number of customary covenants under our term loan, including limitations on additional borrowings, acquisitions, and requirements to maintain certain financial ratios. As of September 27, 2011, we were in compliance with all debt covenants.

Capital Expenditures

During the thirty-nine weeks ended September 27, 2011, we used approximately $12.8 million of cash to pay for additional property and equipment that included the following:

 

   

$7.3 million for new restaurants and upgrades of existing restaurants, including the installation of new coffee equipment, exterior signs and new menu boards;

 

   

$4.8 million for replacement of equipment at our existing company-owned restaurants and at our manufacturing operations; and

 

   

$0.7 million for information technology and corporate infrastructure.

The majority of our capital expenditures has been and will continue to be for upgrades in our current restaurants, including the installation of new coffee equipment in our restaurants and new exterior signs, and for new company-owned restaurants.

Off-Balance Sheet Arrangements

Other than our revolving facility and letters of credit, we do not have any off-balance sheet arrangements.

Contractual Obligations

For the thirty-nine weeks ended September 27, 2011, there were no material changes outside the ordinary course of business to our contractual obligations.

 

24


Table of Contents

Critical Accounting Policies and Estimates

There were no material changes in our critical accounting policies since the filing of our 2010 Annual Report on Form 10-K. As discussed in that filing, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of our Annual Report on Form 10-K for the year ended December 28, 2010.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of company management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 27, 2011. Based upon that evaluation, our chief executive officer and our chief financial officer have concluded that the design and operation of our disclosure controls and procedures were effective in timely making known to them material information relating to the Company required to be disclosed in reports that we file or submit under the Exchange Act rules.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable assurance regarding management’s control objectives. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control over Financial Reporting

During the quarter ended September 27, 2011, there were no changes to our internal control over financial reporting that were identified in connection with the evaluation of our disclosure controls and procedures required by the Exchange Act rules and that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

25


Table of Contents

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is subject to claims and legal actions in the ordinary course of business, including claims by or against its franchisees, licensees and employees or former employees and others. The Company does not believe any currently pending or threatened matter would have a material adverse effect on its business, results of operations or financial condition.

 

Item 1A. Risk Factors

Our business is subject to a number of risks, including those identified in Item 1A. — “Risk Factors” of our 2010 Annual Report on Form 10-K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period.

As of September 27, 2011, there have been no material changes to the risks disclosed in our most recent Annual Report on Form 10-K. We may also disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

Item 4. (Removed and Reserved)

Not applicable

 

Item 6. Exhibits

 

31.1    Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certifications by Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following materials from the Quarterly Report on Form 10-Q of Einstein Noah Restaurant Group, Inc. for the quarter ended September 27, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

26


Table of Contents

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 RESTAURANT GROUP, INC.
Date: November 3, 2011      

By: /s/ Jeffrey J. O’Neill

      Jeffrey J. O’Neill
      Chief Executive Officer
Date: November 3, 2011      

By: /s/ Emanuel P.N. Hilario

      Emanuel P.N. Hilario
      Chief Financial Officer

 

27