Einstein Noah Restaurant (BAGL)

Let me now give you a summary recap of our second quarter financial highlights:

Revenue in the second quarter increased to $98.0 million from $97.1 million in both the first quarter of this year as well as the comparative second quarter a year ago.  Once again this growth was driven by an increase in comparable store sales — specifically a net 3.6% increase.

Gross profit in the second quarter was $18.5 million, matching our first quarter total and slightly below the $19.2 million in the same quarter a year ago.  Improved margins at company-owned restaurants pushed our restaurant gross profit up by 1.1% in Q2. That margin improvement was offset by negative margins from our manufacturing and commissary operations. These operations were adversely impacted by increases in raw material and freight costs and start-up costs associated with new products and customers. We have operational and sales initiatives in place aimed at returning this part of the business back to positive margins.

Total operating expenses declined 13.6% in the second quarter to $15.3 million from $17.7 million in the same quarter last year.  Total expenses also improved sequentially, by 8.1% over Q1.  The lower expense base for the second quarter as compared to the same quarter a year ago is attributable to three factors: First, a 21% reduction in depreciation and amortization expense, to $5.6 million from $7.1 million.  As of July 4 of this year most of our amortizing assets that came with our acquisition of the Einstein Bros. assets became fully amortized while a big chunk of our other assets became fully depreciated.  As we mentioned in our news release, based on our current purchases of capital assets, we expect our annual depreciation and amortization expense

rate to settle in the $12 to $15 million range, which bodes well for our GAAP earnings moving forward.  The second factor contributing to lower overall expenses is the reduction of impairment and related costs, which declined to $7,000 in Q2 from $1.2 million in the same quarter last year.  And the third contributing factor was an $8,000 net gain in sale, disposal or abandonment of assets as compared with a $161,000 loss in that category a year ago.  These three declines more than offset a 4.5% increase in general and administrative expense, which grew by $400,000 to $9.7 million in the second quarter due to a $200,000 increase in stock based compensation expense and another $200,000 increase in travel and store management development costs.

Operating income was up 123% in the second quarter to $3.2 million versus $1.4 million in the same quarter last year.  We generated $4.1 million in cash from operations in the quarter, up from $136,000 in Q1.  Once gain, our ability to generate cash on a consistent basis is a key indicator of our financial health and future prospects.

Interest expense in Q2 declined by $1.1 million to $4.7 million from $5.8 million in Q2 a year ago.  This improvement is the direct result of the debt refinancing we completed in February of this year.  In that transaction, we lowered our effective interest rate on all debt approximately 2.7% to a weighted-average rate of 10.2% versus the prior rate of 13.9%.  We believe this move will improve our after tax cash flow by more than $5.0 million per year.

Net loss in Q2 was reduced to $1.5 million, or $0.15 per basic and diluted share, as compared with a net loss of $4.3 million, or $0.43 per basic and diluted share, the second quarter a year ago.  Our $1.5 million net loss included $5.8 million in non-cash depreciation, amortization and stock-based compensation charges.

Our balance sheet at July 4th reports total cash of $7.7 million versus $4.7 million at January 3rd year-end.  Cash and cash equivalents were $4.7 million and restricted cash was $3.0 million versus $1.6 million and $3.1 million, respectively, at January 3rd.  We invested $2.8 million in Q2 for new property and equipment.