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 October 2, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-19253 PANERA BREAD COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 04-2723701 - ----------------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7930 BIG BEND BLVD, WEBSTER GROVES, MO 63119 - ----------------------------------------- ------------------- (Address of principal executive offices) (Zip code) (314) 918-7779 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 and 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 ------- ------- As of November 9, 1999, 10,616,382 shares and 1,536,321 shares of the registrant's Class A and Class B Common Stock, respectively, $.0001 par value, were outstanding. PANERA BREAD COMPANY INDEX PART I. FINANCIAL INFORMATION PAGE - ------- --------------------- ---------- ITEM 1. FINANCIAL STATEMENTS............................. 3 Consolidated Balance Sheets as of October 2, 1999 and December 26, 1998............ 3 Consolidated Statements of Operations for the twelve and forty weeks ended October 2, 1999 and October 3, 1998........ 4 Consolidated Statements of Cash Flows for the forty weeks ended October 2, 1999 and October 3, 1998......................... 5 Notes to Consolidated Financial Statements....................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................... 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 17 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 17 ITEM 5. OTHER INFORMATION................................ 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................. 18 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PANERA BREAD COMPANY CONSOLIDATED BALANCE SHEETS OCTOBER 2, DECEMBER 26, 1999 1998 ------------- ------------- ASSETS (unaudited) Current assets: Cash and cash equivalents .................. $ 2,110,910 $ 1,860,445 Accounts receivable, net ................... 1,542,939 1,301,185 Inventories ................................ 1,753,504 1,662,573 Prepaid expenses ........................... 987,912 1,780,922 Refundable income taxes .................... 98,483 115,297 Deferred income taxes ...................... 1,500,000 1,500,000 ------------- ------------- Total current assets ................... 7,993,748 8,220,422 ------------- ------------- Property and equipment, less accumulated depreciation and amortization .. 45,062,662 38,855,569 ------------- ------------- Other assets: Assets held for sale, net, non-current (Note D) ................................. -- 69,394,736 Notes receivable ........................... 45,000 20,000 Intangible assets, net of accumulated amortization ............................. 19,006,667 19,786,858 Deferred financing costs ................... 155,458 768,232 Deposits and other ......................... 4,157,839 4,138,219 Deferred income taxes ...................... 12,434,099 12,434,099 ------------- ------------- Total other assets ..................... 35,799,063 106,542,144 ------------- ------------- Total assets ........................... $ 88,855,473 $ 153,618,135 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................... $ 2,793,929 $ 4,020,239 Liabilities held for sale, net (Note D) .... -- 6,469,618 Accrued expenses ........................... 13,754,539 5,927,720 Current maturities of long term debt ....... -- 40,800 ------------- ------------- Total current liabilities .............. 16,548,468 16,458,377 Long Term Liabilities: Deferred revenue ........................... 2,116,000 -- Long term debt, less current maturities .... -- 34,089,587 Convertible Subordinated Notes ............. -- 30,000,000 ------------- ------------- Total liabilities ...................... 18,664,468 80,547,964 ------------- ------------- Minority interest ............................ -- (256,761) Stockholders' equity: Common stock, $.0001 par value: Class A, shares authorized 50,000,000; issued and outstanding 10,614,875 and 10,518,213 in 1999 and 1998, respectively . 1,061 1,047 Class B, shares authorized 2,000,000; issued and outstanding 1,536,747 and 1,557,658 in 1999 and 1998, respectively .. 154 156 Additional paid-in capital .................. 70,487,022 70,031,945 Retained earnings ........................... (297,232) 3,293,784 ------------- ------------- Total stockholders' equity ............ 70,191,005 73,326,932 ------------- ------------- Total liabilities and stockholders' equity .............................. $ 88,855,473 $ 153,618,135 ============= ============= The accompanying notes are an integral part of the consolidated financial statements. 3 PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) FOR THE FOR THE 12 WEEKS ENDED 40 WEEKS ENDED ----------------------------- ------------------------------ OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Revenues: Restaurant sales ................... $ 23,486,771 $ 55,529,242 $ 130,745,602 $ 179,190,997 Franchise sales and other revenues ................. 2,908,618 2,625,133 10,451,570 10,057,019 ------------- ------------- ------------- ------------- 26,395,389 58,154,375 141,197,172 189,248,016 Costs and expenses: Cost of food and paper products .... 9,567,714 19,595,843 48,395,180 66,505,149 Restaurant operating expenses: Labor .......................... 6,495,882 15,870,570 38,287,595 50,610,516 Occupancy (Note E) ............. 1,661,591 6,526,020 13,692,505 21,248,331 Other (Note E) ................. 2,877,528 6,591,344 15,904,257 20,818,007 ------------- ------------- ------------- ------------- 11,035,001 28,987,934 67,884,357 92,676,854 Depreciation and amortization ...... 1,454,611 2,217,358 4,672,607 11,420,108 General & administrative expenses ....................... 3,115,843 4,141,187 13,557,122 14,087,755 Non-recurring charge (Note D) ...... -- 24,235,000 5,545,000 25,445,000 ------------- ------------- ------------- ------------- 25,173,169 79,177,322 140,054,266 210,134,866 ------------- ------------- ------------- ------------- Operating profit/(loss) ................ 1,222,220 (21,022,947) 1,142,906 (20,886,850) Interest expense, net .................. 150,176 1,437,606 2,654,323 4,972,282 Other expense, net ..................... 57,479 177,461 517,591 393,466 Loss on sale of assets (Note F) ........ -- -- -- 734,823 Minority interest ...................... -- (105,515) (25,420) (79,988) ------------- ------------- ------------- ------------- Income/(loss) before income taxes and extraordinary item ............. 1,014,565 (22,532,499) (2,003,588) (26,907,433) Income tax expense (benefit) ........... 346,000 (4,773,000) 1,205,000 (5,806,000) ------------- ------------- ------------- ------------- Income/(loss) before extraordinary item ................. 668,565 (17,759,499) (3,208,588) (21,101,433) ============= ============= ============= ============= Extraordinary loss from early extinguishment of debt, net of tax(Note D) ..................... -- -- 382,428 -- Net income/(loss) ...................... $ 668,565 $ (17,759,499) $ (3,591,016) $ (21,101,433) ============= ============= ============= ============= Basic earnings/(loss) per common share: Income/(loss) before extraordinary loss ............. $ 0.06 $ (1.49) $ (0.27) $ (1.77) Extraordinary loss ................. -- -- $ (0.03) -- ------------- ------------- ------------- ------------- Net Income/(loss) .............. $ 0.06 $ (1.49) $ (0.30) $ (1.77) ------------- ------------- ------------- ------------- Diluted earnings(loss) per common share: Income/(loss) before extraordinary loss ............. $ 0.05 $ (1.49) $ (0.27) $ (1.77) Extraordinary loss ................. -- -- $ (0.03) -- ------------- ------------- ------------- ------------- Net Income/(loss) .............. $ 0.05 $ (1.49) $ (0.30) $ (1.77) ------------- ------------- ------------- ------------- Weighted average number of common and common equivalent shares outstanding - basic ................ 12,150,345 11,966,493 12,128,892 11,896,858 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common and common equivalent shares outstanding - diluted .............. 12,249,060 11,966,493 12,128,892 11,896,858 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- The accompanying notes are an integral part of the consolidated financial statements. 4 PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) FOR THE 40 WEEKS ENDED -------------------------------- OCTOBER 2, OCTOBER 3, 1999 1998 -------------- --------------- Cash flows from operations: Net loss ...................................... $ (3,591,016) $ (21,101,433) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ................ 4,672,607 11,420,108 Amortization of deferred financing costs ..... 339,210 533,988 Provision for losses on accounts receivable .. 21,025 43,165 Minority interest ............................ (25,420) (79,988) Deferred income taxes ........................ -- (4,800,000) Reserve (charge) for closed stores ........... -- -- Non-recurring charge ......................... 5,545,000 25,445,000 Loss on sale of assets ....................... -- 734,823 Extraordinary loss on early extinguishment of debt .................................... 382,428 -- Changes in operating assets and liabilities: Accounts receivable ........................... (380,844) 410,382 Inventories ................................... 61,092 628,828 Prepaid expenses .............................. (4,063,837) (1,835,808) Refundable income taxes ....................... -- 644 Accounts payable .............................. (3,778,642) 93,549 Deferred revenue .............................. 2,116,000 -- Accrued expenses .............................. 2,287,588 182,374 ------------- ------------- Net cash provided by operating activities ... 3,585,191 11,675,632 ------------- ------------- Cash flows from investing activities: Additions to property and equipment ........... (11,699,511) (13,809,108) Proceeds from sale of assets .................. 72,162,987 12,693,917 Change in cash included in net current liabilities sold ............................ (465,748) -- Payments received on notes receivable ......... 139,014 178,028 Increase in intangible assets ................. (50,309) (121,032) (Increase) decrease in deposits and other ..... 655,254 (2,388,804) Increase in notes receivable .................. (65,000) (45,000) ------------- ------------- Net cash provided by/(used in) investing activities ................................ 60,676,687 (3,491,999) ------------- ------------- Cash flow from financing activities: Exercise of employee stock options ............ 38,590 1,017,777 Proceeds from draw down on revolving line of credit .......................... 41,837,243 56,057,388 Principal payments on debt .................... (106,072,800) (64,951,000) Proceeds from issuance of common stock ........ 416,495 216,923 Deferred financing costs ...................... (110,141) (491,095) Decrease in minority interest ................. (120,800) (206,411) ------------- ------------- Net cash used in financing activities ....... (64,011,413) (8,356,418) ------------- ------------- Net increase (decrease) in cash and cash equivalents ............................ 250,465 (172,785) ------------- ------------- Cash and cash equivalents, at beginning of period 1,860,445 853,025 ------------- ------------- Cash and cash equivalents, at end of period ..... $ 2,110,910 $ 680,240 ============= ============= The accompanying notes are an integral part of the consolidated financial statements. 5 Notes to Consolidated Financial Statements Note A - Basis of Presentation The accompanying unaudited, consolidated financial statements of Panera Bread Company and Subsidiaries (the "Company") have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with generally accepted accounting principles. They should be read in conjunction with the audited financial statements of the Company for the fiscal year ended December 26, 1998. The accompanying financial statements are unaudited and include all adjustments (consisting of normal recurring adjustments and accruals) that management considers necessary for a fair presentation of its financial position and results of operations for the interim periods, and are not necessarily indicative of the results that may be expected for the entire year. Note B - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share. FOR THE TWELVE WEEKS ENDED FOR THE 40 WEEKS ENDED ---------------------------- ----------------------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 1999 1998 1999 1998 ------------ ------------- ------------- ------------- Net income (loss) used in net income (loss) per common share - basic .. $ 668,565 $(17,759,499) $ (3,591,016) $(21,101,433) Net income (loss) used in net income (loss) per common share - diluted $ 668,565 $(17,759,499) $ (3,591,016) $(21,101,433) Weighted average number of shares outstanding - basic ....... 12,150,345 11,966,493 12,128,892 11,896,858 Effect of dilutive securities: Employee Stock Options .... 58,484 -- -- -- Stock warrants ............ 40,231 -- -- -- ------------ ------------ ------------ ------------ Weighted average number of shares outstanding - diluted ............ 12,249,060 11,966,493 12,128,892 11,896,858 Net income (loss) per common share - basic .................... $ 0.06 $ (1.49) $ (0.30) $ (1.77) Net income (loss) per common share - diluted .................. $ 0.05 $ (1.49) $ (0.30) $ (1.77) During the third quarter of 1998, options to purchase 1,176,000 shares of common stock at $25.50 per share were outstanding in conjunction with the issuance of $30 million of convertible subordinated notes. These shares were not included in the computation of diluted earnings per share for the twelve weeks and forty weeks ended October 3, 1998 because the deduction of interest expense, after the effect of income taxes, would have been antidilutive. The $30 million of convertible subordinated debt was paid in full during the second quarter of 1999, subsequent to the sale of the Au Bon Pain Division (see Note D). 6 During the third quarter of 1998 options to purchase 89,000 shares of common stock and warrants to purchase 38,000 shares of common stock were outstanding but were not included in the computation of diluted earnings per share for the twelve weeks ended October 3, 1998, because the effect would have been antidilutive. Note C - Recent Accounting Pronouncements None Note D - Sale of Au Bon Pain Division and Non-recurring charges The Company, together with its wholly-owned subsidiary ABP Holdings, Inc. ("ABPH") entered into a Stock Purchase Agreement dated August 12, 1998 and amended on October 28, 1998 with ABP Corporation (the "Buyer"), an affiliate of Bruckmann, Rosser, Sherrill & Co., L.P., relative to the transfer of substantially all of the assets and liabilities of the Company's Au Bon Pain Division business (the "Au Bon Pain Division") and sale of all of the outstanding capital stock of ABPH to the Buyer, whereby the Buyer would become the owner of the Au Bon Pain Division (the "Sale"). The Sale was effective May 16, 1999 for $73 million in cash before contractual purchase price adjustments of approximately $1 million. The Company, which now consists of the Panera Bread/Saint Louis Bread Co. Business Unit only, has been renamed Panera Bread Company. The proceeds from the sale were used to pay off all outstanding debt and provide cash for growth. In conjunction with the sale, the Company recorded a non-cash, pre-tax loss in the first quarter of 1999 of approximately $5.5 million. The Company recorded an extraordinary loss before tax of $0.6 million associated with the early extinguishment of debt outstanding in the second quarter of 1999. Operating income in the year-to-date period of 1999 was favorably impacted by $4.7 million due to the suspension of depreciation and amortization associated with the Au Bon Pain Division assets held for sale after August 12, 1998. During the third quarter of 1998, the Company recorded a non-recurring, non-cash charge of $24.2 million principally to reflect a write-down under Statement of Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of" ("SFAS 121"). The charge is included as a separate component of operating expenses. The non-cash charge was taken to record an impairment for long lived assets to be disposed of as a result of the agreement entered into for the subsequent sale of the Au Bon Pain Division. During the first quarter of 1998, the Company recorded a $1.2 million non-cash charge to write-down the net book value of eight underperforming Au Bon Pain stores whose leases expired in 1998 and were not renewed. The charge is included as a separate component of operating expenses. For the sixteen weeks ended April 18, 1998 and April 19, 1997, the stores included in the reserve had sales of $869,000 and $1,238,000, respectively, and pre-tax losses of $175,000 and $73,000, respectively. 7 Note E - Restatement of Prior Periods Results of operations for the twelve weeks and forty weeks ended October 3, 1998 have been restated with respect to certain restaurant operating expenses, principally rent, between interim periods. These expenses are now being recognized on a weekly basis during interim reporting periods. Previously, three months of these expenses were recorded in each of the Company's quarterly external reporting periods. Since the first quarter reporting period consists of sixteen weeks, this change resulted in the recognition of an additional $1,533,000 of restaurant operating expenses for the period ended April 18, 1998. The second, third and fourth quarters of 1998 will also be restated to reflect a reduction of restaurant operating expenses of $605,000, $665,000 and $263,000, respectively. Results for the full fiscal 1998 year remain unchanged. Depicted in the table below are the reported and restated quarterly results. QUARTER ENDING FISCAL YEAR ---------------------------------------------- ----------- 04/18/98 07/11/98 10/03/98 12/26/98 1998 AS REPORTED Net Income $ (1,950) $ (779) $ (18,198) $ 433 $ (20,494) Basic earnings per share (0.16) (0.07) (1.52) 0.03 (1.72) Diluted earnings per share (0.16) (0.07) (1.52) 0.03 (1.72) RESTATED Net Income $ (2,962) $ (380) $ (17,759) $ 607 $ (20,494) Basic earnings per share (0.25) (0.03) (1.49) 0.05 (1.72) Diluted earnings per share (0.25) (0.03) (1.49) 0.05 (1.72) Note F - Loss on sale of assets On March 23, 1998 the Company sold the Mexico, MO production facility and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for approximately $13 million in cash, and recognized a pre-tax loss of $734,023. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the percentage relationship to total revenues, except where otherwise noted, of certain items included in the Company's consolidated statements of operations for the periods indicated. Percentages may not add due to rounding: FOR THE FOR THE 12 WEEKS ENDED 40 WEEKS ENDED ------------------------- ----------------------- OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3, 1999 1998 1999 1998 ----------- ---------- ----------- ---------- Revenues: Restaurant sales .......................................... 89.0% 95.5% 92.6% 94.7% Franchise sales and other revenues ........................ 11.0 4.5 7.4 5.3 ----------- ---------- ----------- ---------- Total revenue ............................................. 100.0% 100.0% 100.0% 100.0% Costs of sales (as a percentage of Company restaurant sales): Food and paper products ................................... 40.7% 35.3% 37.0% 37.1% Labor ..................................................... 27.7 28.6 29.3 28.2 Occupancy ................................................. 7.1 11.8 10.5 11.9 Other ..................................................... 12.3 11.9 12.2 11.6 ----------- ---------- ----------- ---------- Total Cost of Sales ....................................... 87.7% 87.5% 88.9% 88.8% Depreciation and amortization ............................. 5.5 3.8 3.3 6.0 General and administrative ................................ 11.8 7.1 9.6 7.4 Non-recurring charge ...................................... -- 41.7 3.9 13.4 ----------- ---------- ----------- ---------- Operating profit (loss) ..................................... 4.6 (36.2) 0.8 (11.0) Interest expense, net ....................................... 0.6 2.5 1.9 2.6 Other (income), net ......................................... 0.2 0.3 0.4 0.2 Loss on sale of assets ...................................... -- -- -- 0.4 Minority interest ........................................... -- (0.2) -- -- ----------- ---------- ----------- ---------- Profit before provision for income taxes ............................................ 3.8 (38.7) (1.4) (14.2) Provision for income taxes .................................. 1.3 (8.2) 0.9 (3.1) Extraordinary loss from early extinguishment of debt, net of tax .............................................. -- -- 0.3 -- ----------- ---------- ----------- ---------- Net income (loss) ........................................... 2.5% (30.5)% (2.5)% (11.1)% ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------- 9 General The Company's revenues are derived from restaurant sales and franchise sales and other revenues. Franchise sales and other revenues include sales of frozen dough products to franchisees, royalty income and franchise fees. Certain expenses (cost of food and paper products, restaurant operating expenses, and depreciation and amortization) relate primarily to restaurant sales, while general and administrative expenses relate to all areas of revenue generation. The Company's fiscal year ends on the last Saturday in December. The Company's fiscal year normally consists of 13 four-week periods, with the first, second and third quarters ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year. Results of Operations Effective May 16, 1999, the Company completed its transaction to sell the Au Bon Pain Division. For the forty weeks ended October 2, 1999 the Company has recorded a pre-tax loss of $5.5 million related to the transaction and a $0.6 million pre-tax ($0.4 million after tax) extraordinary loss related to the early extinguishment of debt from the proceeds of the sale. Results of operations in the third quarter of 1999 include only the results of the Panera Bread/Saint Louis Bread Company business unit. Results of operations for the forty weeks ended October 2, 1999, also include the results of the divested Au Bon Pain business unit for the period December 27, 1998 through May 15, 1999. Total revenues in the third quarter of 1999 totaled $26.4 million, versus $58.2 million in the comparable quarter of 1998. Total revenues for the forty weeks ended October 2, 1999 and October 3, 1998 were $141.2 million and $189.2 million, respectively. The decrease in revenue was caused by the sale of the Au Bon Pain Division effective May 16, 1999. Total revenues in the Panera Bread business unit increased 34.7% over the prior year to $26.4 million in the third quarter of 1999 and 31.1% to $80.0 million for the forty week period ended October 2, 1999. Company restaurant sales in the Panera Bread business unit for the twelve weeks and forty weeks ended October 2, 1999 increased 29.9% to $23.5 million and 25.2% to $71.4 million, respectively, principally due to the opening of 15 new Company-operated bakery-cafes since the third quarter of 1998. Panera Bread's comparable restaurant sales for the third quarter and forty week period ending October 2, 1999 increased by 4.9% and 2.8% respectively. Franchise sales and other revenues for the Panera Bread business unit increased 92.1% to $2.9 million in the third quarter of 1999 from $1.5 million in the third quarter of 1998, primarily driven by increased franchise royalties, which grew 169.6% to $1.2 million in the third quarter of 1999, and an increase in product sales to franchisees. For the forty weeks ended October 2, 1999, franchise sales and other revenues for the Panera Bread business unit increased 115% to $8.6 million. The cost of food and paper products as a percentage of Company restaurant sales was 40.7% in the third quarter compared to 35.3% for the same period in 1998. For the forty weeks ended October 2, 1999, the cost of food and paper products was 37.0% compared to 37.1% for the same period in 1998. Included in food costs are costs associated with the commissary operations that sell fresh dough products to both Company-owned and franchised bakery-cafes. The increase in the third quarter was due to the fact that the Panera Bread/Saint Louis Bread Company business unit utilizes fresh dough commissaries while the Au Bon Pain business unit did not and the fact that Panera Bread has opened 6 commissaries since 1998 that become more efficient as they service more bakery-cafes. The cost of labor as a percentage of restaurant revenue decreased 0.9% to 27.7% from 28.6% in the third quarter compared to the same period in 1998 and increased 1.1% to 29.3% from 28.2% for the forty week period ended October 2, 10 1999, compared to the same period in 1998. The decrease in the third quarter between years is due to the fact that the Panera Bread/Saint Louis Bread Company business unit operates at lower labor percentages than the Au Bon Pain business unit. The overall increase in the year-to-date labor is primarily due to an increase in the average hourly wage rate due to the highly competitive labor market. Total operating profit/(loss) for the Company in the third quarter of 1999 versus the comparable quarter of the previous year increased to $1.2 million in 1999 from $(21.0) million in 1998. For the forty weeks ended October 2, 1999 and October 3, 1998, total operating income/(loss) for the Company was $1.1 million and $(20.9), respectively. The forty weeks ended October 2, 1999 includes $4.7 million in reduced depreciation and amortization expense associated with the Au Bon Pain business unit assets held for sale. The 1998 results included a $24.2 million write-down of assets connected to the sale. Operating income in the Panera Bread Division for the twelve weeks and forty weeks ended October 2, 1999, was $1.2 million and $2.6 million respectively, on a stand-alone, pro forma basis which includes an additional allocation for overhead services provided by ABP Corporation. During the third quarter of 1999, no additional Panera Bread franchise area development agreements were signed. As of October 2, 1999, the Company had franchise commitments to develop 529 additional bakery-cafes. In the third quarter of 1999, 11 Panera Bread bakery-cafes were opened, including 2 Company-owned cafes and 9 franchisee-operated cafes. As of October 2, 1999, there were 80 Company-owned bakery-cafes (including two specialty bakery-cafes) and 80 franchised bakery-cafes open. Interest expense declined to $150,176 compared to $1,437,606 for the third quarter and $2,654,323 versus $4,972,282 for the forty weeks ended October 2, 1999 and October 3, 1998 due to the repayment in the second quarter of all the Company's outstanding debt. As a result of the above, the Company recorded a net income/(loss) of $668,565 and $(3,591,016) for the twelve weeks and forty weeks ended October 2, 1999 compared to a net loss of $(17,759,499) and $(21,101,433) for the comparable 1998 period. 11 Liquidity and Capital Resources Effective May 16, 1999, the Company completed its transaction to sell the Au Bon Pain business unit. In the second quarter of 1999 the Company repaid all of its outstanding debt with the proceeds from the Sale (see Note D). In connection with the early retirement of debt, in the second quarter of 1999, the Company recorded an after tax extraordinary non-cash charge of approximately $382,000. The Company's principal requirements for cash are capital expenditures for constructing and equipping new bakery-cafes and commissaries, maintaining or remodeling existing bakery-cafes and commissaries, the implementation of a new financial system and working capital. To date, the Company has met its requirements for capital with cash from operations, proceeds from the sale of equity and debt securities, the sale of assets and bank borrowings. Cash and cash equivalents were $2,110,910 at October 2, 1999, compared to $1,860,445 at December 26, 1998. Funds provided by operating activities were primarily the result of an increase in the working capital deficit and deferred revenue. Total capital expenditures for the forty weeks ended October 2, 1999 of $11.7 million were related primarily to the opening of 11 new Company-operated Panera Bread bakery-cafes, maintaining or remodeling existing bakery-cafes and commissaries and implementing a new financial system. The expenditures were mainly funded by net cash from operating activities and the use of the remaining proceeds from the sale of the Au Bon Pain business unit. Total capital expenditures for the forty weeks ended October 3, 1998 were $13.8 million. On March 23, 1998 the Company sold its Mexico, MO production facility and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for approximately $13 million in cash. The net proceeds of the sale were used to repay the $7.9 million outstanding for the Company's Industrial Revenue Bond and to reduce amounts outstanding under the Company's revolving credit line. There were no gains or losses associated with the early retirement of the Industrial Revenue Bond or the partial repayment of the revolving credit line. Concurrently with the sale of the Au Bon Pain business unit effective May 16,1999, the Company amended its existing credit facility to reduce the unsecured revolving line of credit to $10.0 million, reflecting reduced needs for debt financing. Amounts outstanding under the amended facility bear interest at either LIBOR plus 2.25% or the commercial bank's prime rate plus .75%, at the Company's option. As of October 2, 1999, the Company had $9.4 million available to it under the $10.0 million revolving line of credit, reduced by a $0.6 million outstanding standby letter of credit. Excluding the expenditures related to the divested Au Bon Pain business unit, the Company currently anticipates spending approximately $16 million in 1999, principally for the opening of new Panera Bread Company bakery-cafes and commissaries, maintaining or remodeling existing cafes and implementing a new financial system. The Company expects to fund these expenditures principally through internally generated cash flow and cash remaining from the sale of the Au Bon Pain business unit after repayment of all outstanding debt. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS Matters discussed in this report which relate to events or developments that are expected to occur in the future, including any discussion of growth or anticipated operating results are forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the 12 Securities Exchange Act of 1934 (identified by the words "estimate," "project," "anticipates," "expects," "intends," "believes," "future," and similar expressions). These are statements which express management's belief, expectations or intentions regarding the Company's future performance. Moreover, a number of factors could cause the Company's actual results to differ materially from those set forth in the forward-looking statements due to known and unknown risks and uncertainties. The Company's operating results may be negatively affected by many factors, included but not limited to the lack of availability of sufficient capital to it and the developers party to franchise development agreements with the Company, variations in the number and timing of bakery-cafe openings, public acceptance of new bakery-cafes, consumer preferences, competition, commodity costs, and other factors that may affect retailers in general. The foregoing list of important factors is not exclusive. Year 2000 Issue The "Year 2000 Issue" is the result of manufactured equipment and computer programs using two digits rather than four to define the applicable year. If the Company's equipment and computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, but not limited to, a temporary inability to process transactions, generate invoices or engage in similar normal business practices. During 1997, the Company formed an ongoing internal review team to address the Year 2000 Issue that encompasses operating and administrative areas of the Company. Internal information technology professionals are working to identify and resolve all significant Year 2000 issues in a timely and effective manner. The Company's executive management monitors the status of the Year 2000 remediation plans, including an assessment of issues and development of said remediation plans, where necessary, as they relate to internally used software, computer hardware and use of computer applications. The Company has completed a comprehensive inventory of all systems in the cafes, commissaries and corporate offices and has notified critical vendors of the Company's requirements pertaining to the Year 2000 Issue. The Company has completed its assessment of the Year 2000 impact for both information technology ("IT") and Non-IT systems. In regard to IT systems, the Company has identified the following as the main areas of Year 2000 focus: payroll systems, financial systems, network/integration systems, register and store management systems and commissary systems. Network/integration systems are corporate office electronic systems and tools which link various information subsystems and databases, encompassing e-mail and all major financial systems, such as general ledger database systems, and all major operational systems, such as store operating performance database systems. Register systems are the point-of-sale systems used within each retail bakery-cafe. These are electronically linked with the personal computer-based store back office management systems also located within each retail bakery-cafe, providing tools for the cafe management. Commissary systems allow commissaries to accept electronic orders from cafe's and deliver the ordered product back to the cafe's. The cost of addressing the Year 2000 Issues are included in the overall costs of establishing an independent computer network for Panera Bread. The total cost of establishing the new system is estimated to be approximately $2.8 million, of which approximately $550,000 is specifically related to the Year 2000 issue. In addition to the above IT systems, the Company has identified the following as the primary Non-IT systems subject to the Year 2000 Issue: ovens, 13 alarms, proofers, HVAC-freezers, and safes. The Company is currently in contact with vendors and/or landlords in order to assess the potential impact. Based on this review, the Company believes the potential impact of the Year 2000 Issue pertaining to Non-IT systems to be minor. The Company is addressing, in order of criticality, the potential issues, and is developing remediation and contingency plans. While the Company believes it is taking all appropriate steps to assure Year 2000 compliance, it is dependent on key business partner and/or vendor compliance to some extent. The Year 2000 Issue is pervasive and complex as virtually every computer operation will be affected in some way. If, due to unforeseen circumstances, the implementation is not completed on a timely basis, or key business partners and/or vendors fail to resolve all significant Year 2000 issues in a timely and effective manner, the Year 2000 Issue could have a material adverse impact on the Company. In addition to the estimated costs outlined above, the Company has estimated the costs for adopting all "worst case" contingency plans to be an additional $130,000. The following chart depicts the phases, status, timetable, estimated cost of completion, contingency plans and risks, and estimated cost of implementing contingency plans pertaining to Year 2000 issues associated with IT systems. The most reasonably likely worst case scenarios are outlined under the columns "Contingency Plan/Risks" and "Estimated Contingency Cost". All information pertaining directly to the Au Bon Pain Division has been removed from the chart, leaving a Panera Bread Company Year 2000 summary only. 14 PANERA BREAD COMPANY YEAR 2000 SUMMARY FOR IT SYSTEMS - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- AREA/SYSTEM PHASES STATUS TIMETABLE ESTIMATED CONTINGENCY PLAN/RISKS ESTIMATED COST CONTINGENCY COST - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- New Financial -Purchase of Integrated Complete 4/99 $1,630,000 Additional consulting Systems GL, AP, AR, Assets, HR, effort needed. Cash, Property Application certified Management and to be Y2K compliant. Purchasing -Implementation Planning Complete 6/99 -Conversion & Complete 7/99 Interface Programming -Testing/Parallel Complete 8/99 -Production Complete 10/99 - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- Payroll- -Contract Negotiations Complete 5/99 Outsource -Conversion of Panera Complete 8/99 active employees -Production Complete 9/99 - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- Network Systems & -Network Infrastructure Complete 4/99 $500,000 No contingency needed Computer Facility Design as all hardware & software is new & Y2K -Network Implementation Complete 6/99 compliant. out for bid -Computer Room Complete 6/99 constructed -Network Bid Assigned Complete 6/99 -Network Install Complete 6/99 -Voice Mail Replacement Complete 8/99 - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- Register Systems -Micros 2400 registers Complete 11/99 $155,000 No contingency needed and software tested as application for compliance certified by Micros & -MWS+ to be installed In process 12/99 tested to be compliant -Register to PC Code In process 12/99 not Y2K compliant - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- 15 - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- AREA/SYSTEM PHASES STATUS TIMETABLE ESTIMATED CONTINGENCY PLAN/RISKS ESTIMATED COST CONTINGENCY COST - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- Register Systems Processes being In process 12/99 $50,000 Contingency not Central Support modified for ease of required - application support for is compliant, if multi-market pricing & modifications are not new product rollout complete is more manual effort. - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- Bakery Back -Inventory of Complete 5/99 $445,000 -Development Costs $100,000 Office Systems Applications & Hardware exceed estimates or not completed on schedule. -Design New BOH Complete 6/99 Would need to hire register & applications rollout experts to compress rollout time -Development Complete 10/99 -Lab Test Complete 11/99 -Pilot In process 11/99 -Rollout In process 12/99 - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- Commissary Systems New Application & Complete 6/99 $60,000 Implementation $30,000 hardware to replace DOS postponed requiring based solution with addition rollout help customization. Testing Complete 9/99 Pilot Complete 9/99 Rollout - in phase with In process 12/99 BOH for integration - ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- ------------- 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's unsecured revolving line of credit bears an interest rate using the commercial bank's prime rate or LIBOR as the basis, and therefore is subject to additional expense should there be an increase in prime or LIBOR interest rates. In the past, the Company has been able to recover inflationary cost increases through increased menu prices. There have been and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit the Company's ability to recover such cost increases in their entirety. Historically, the effects of inflation on the Company's net income have not been materially adverse. In the past, the Company has been able to recover commodity price increases through increased menu prices. There have been and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit the Company's ability to recover such cost increases in their entirety. Historically, the effects of commodity increases on the Company's net income have not been materially adverse. A majority of the Company's employees are paid hourly rates related to federal and state minimum wage laws. Although the Company has and will continue to attempt to pass along any increased labor costs through food price increases, there can be no assurance that all such increased labor costs can be reflected in its prices or that increased prices will be absorbed by consumers without diminishing to some degree consumer spending at the bakery-cafes. However, the Company has not experienced to date a significant reduction in gross profit margins as a result of changes in such laws, and management does not anticipate any related future significant reductions in gross profit margins. PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on September 17, 1999, to consider and vote upon the following matters: 1. To elect one (1) member of the Board of Directors, for a three-year term ending at the Company's 2002 Annual Meeting (the "Director Proposal"); and 2. To ratify the action of the Board of Directors reappointing PricewaterhouseCoopers LLP as auditors for the Company for the fiscal year ending December 25, 1999 (the "Auditors Proposal"); With respect to the Directors Proposal, Ronald M. Shaich, the sole Nominee, received the following votes in favor, and withheld, from his nomination: FOR WITHHELD --- -------- 13,389,399 327,087 17 Accordingly, Mr. Shaich was elected as a member of the Board of Directors, to serve a three-year term expiring at the Company's 2002 Annual Meeting and until his successor has been duly elected and qualified. With respect to the Auditors Proposal, 13,687,089 votes were cast for the proposal, 19,707 votes were cast against the proposal, and there were 9,690 abstentions on the proposal. Accordingly, the Auditors Proposal was approved. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 Financial Data Schedule (b) Panera Bread Company did not file any reports on Form 8-K during the quarter ended October 2, 1999. 18 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. PANERA BREAD COMPANY ----------------------------- (Registrant) Dated: November 15, 1999 By: /S/ RONALD M. SHAICH ---------------------------------------- Ronald M. Shaich Chairman and Chief Executive Officer Dated: November 15, 1999 By: /S/ WILLIAM W. MORETON ---------------------------------------- William W. Moreton Chief Financial Officer 19