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 April 19, 1997 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 ------- Au Bon Pain Co., Inc. ----------------------------------------------------- (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.) 19 Fid Kennedy Avenue, Boston, MA 02210 ---------------------------------------- ------------------ (Address of principal executive offices) (Zip code) (617) 423-2100 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed from last report) 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 May 28, 1997, 10,102,330 shares and 1,632,947 shares of the registrant's Class A and Class B Common Stock, respectively, $.0001 par value, were outstanding. AU BON PAIN CO., INC. INDEX PART I. FINANCIAL INFORMATION PAGE - ------- --------------------- ---- ITEM 1. FINANCIAL STATEMENTS................................. 3 Consolidated Balance Sheets as of April 19, 1997 and December 28, 1996........ 3 Consolidated Statements of Operations for the sixteen weeks ended April 19, 1997 and April 20, 1996.......................... 4 Consolidated Statements of Cash Flows for the sixteen weeks ended April 19, 1997 and April 20, 1996.......................... 5 Notes to Consolidated Financial Statements.. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 8 PART II. OTHER INFORMATION - -------- ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 12 2 Item 1. Financial Statements AU BON PAIN CO., INC. CONSOLIDATED BALANCE SHEETS April 19, December 28, 1997 1996 ---------- ------------ ASSETS (unaudited) - ------ Current assets: Cash and cash equivalents.................... $ 2,963,789 $ 2,578,830 Accounts receivable, net..................... 7,482,767 7,729,628 Inventories.................................. 9,012,931 8,997,077 Prepaid expenses............................. 2,593,924 2,353,415 Refundable income taxes...................... 4,520,824 4,539,947 Deferred income taxes........................ 1,675,003 1,675,003 ------------ ------------ Total current assets..................... 28,249,238 27,873,900 ------------ ------------ Property and equipment, less accumulated depreciation and amortization.... 121,407,688 121,732,876 ------------ ------------ Other assets: Notes receivable............................. 2,269,790 2,290,789 Intangible assets, net of accumulated amortization............................... 32,243,793 32,657,137 Deferred financing costs..................... 1,262,298 1,382,219 Deposits and other........................... 6,813,006 9,109,566 Deferred income taxes........................ 547,067 547,067 ------------ ------------ Total other assets....................... 43,135,954 45,986,778 ------------ ------------ Total assets............................. $192,792,880 $195,593,554 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable............................. $ 8,633,922 $ 11,140,570 Accrued expenses............................. 11,223,172 13,334,901 Current maturities of long term debt......... 535,334 702,264 ------------ ------------ Total current liabilities................ 20,392,428 25,177,735 Long term debt, less current maturities........ 51,769,105 49,735,887 Convertible Subordinated Notes................. 30,000,000 30,000,000 ------------ ------------ Total liabilities........................ 102,161,533 104,913,622 ------------ ------------ Minority interest.............................. 552,858 623,857 Stockholders' equity: Preferred Stock, $.0001 par value: Class B, shares authorized 2,000,000; issued and outstanding 20,000 in 1997 and 1996............................ 2 2 Common stock, $.0001 par value: Class A, shares authorized 50,000,000; issued and outstanding 10,092,430 and 10,066,671 in 1997 and 1996, respectively... 1,009 1,006 Class B, shares authorized 2,000,000; issued and outstanding 1,632,947 and 1,647,354 in 1997 and 1996, respectively.... 163 165 Additional paid-in capital.................... 68,084,874 68,074,384 Retained earnings............................. 21,992,441 21,980,518 ------------ ------------ Total stockholders' equity.............. 90,078,489 90,056,075 ------------ ------------ Total liabilities and stockholders' equity................................ $192,792,880 $195,593,554 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. 3 AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) for the sixteen weeks ended ------------------------------- April 19, April 20, 1997 1996 ----------- ------------ Revenues: Restaurant sales...................... $67,655,615 $66,729,410 Franchise sales and other revenues.... 3,854,202 2,711,374 ----------- ----------- 71,509,817 69,440,784 Costs and expenses: Cost of food and paper products....... 25,742,750 24,286,080 Restaurant operating expenses: Labor............................ 18,466,866 17,978,928 Occupancy........................ 7,225,966 7,392,950 Other............................ 7,561,351 7,646,834 ----------- ----------- 33,254,183 33,018,712 Depreciation and amortization......... 5,079,077 4,856,512 General and administrative expenses... 4,913,963 4,439,512 ----------- ----------- 68,989,973 66,600,816 ----------- ----------- Operating income........................... 2,519,844 2,839,968 Interest expense, net...................... 2,135,164 1,300,083 Other expense, net......................... 271,111 560,422 Minority interest.......................... 52,268 10,248 ----------- ----------- Income before provision for income taxes... 61,301 969,215 Provision for income taxes................. 49,378 171,875 ----------- ----------- Net income................................. $ 11,923 $ 797,340 =========== =========== Net income per common share................ $ 0.00 $ 0.07 =========== =========== Weighted average number of common and common equivalent shares outstanding..... 11,805,126 11,831,325 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 4 AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the sixteen weeks ended --------------------------- April 19, April 20, 1997 1996 --------- --------- Cash flows from operations: Net income................................... $ 11,923 $ 797,340 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............... 5,079,077 4,856,512 Amortization of deferred financing costs.... 202,208 42,810 Provision for losses on accounts receivable. 14,329 21,280 Minority interest........................... 52,268 10,248 Expenditures towards closing of stores...... - (114,712) Changes in operating assets and liabilities: Accounts receivable.......................... 232,532 764,656 Inventories.................................. (15,854) 130,416 Prepaid expenses............................. (240,509) (2,123,219) Refundable income taxes...................... 19,123 77,538 Accounts payable............................. (2,506,648) 1,558,724 Accrued expenses............................. (2,111,729) (720,083) ----------- ----------- Net cash provided by operating activities.. 736,720 5,301,510 ----------- ----------- Cash flows from investing activities: Additions to property and equipment.......... (4,317,461) (5,796,747) Payments received on notes receivable........ 20,999 19,390 Decrease (increase) in intangible assets..... (23,084) (17,938) Decrease (Increase) in deposits and other.... 2,296,560 (501,514) Increase in notes receivable................. - (65,000) ----------- ----------- Net cash used in investing activities..... (2,022,986) (6,361,809) ----------- ----------- Cash flows from financing activities: Exercise of employee stock options........... 10,491 96,156 Proceeds from draw down of revolving line of credit...................................... 23,637,195 19,598,827 Principal payments on revolver and other long term debt.............................. (21,770,907) (21,515,333) Deferred financing costs..................... (82,287) (23,665) Decrease in minority interest................ (123,267) (92,690) ----------- ----------- Net cash provided by (used in) financing activities................................ 1,671,225 (1,936,705) ----------- ----------- Net (decrease) increase in cash and cash equivalents............................... 384,959 (2,997,004) ----------- ----------- Cash and cash equivalents, at beginning of period.................................... 2,578,830 6,419,646 ----------- ----------- Cash and cash equivalents, at end of period. $ 2,963,789 $ 3,422,642 =========== =========== 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 Au Bon Pain Co., Inc. 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 financial statements of the Company for the fiscal year ended December 28, 1996. 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 - Franchise Fees Fees from the sale of area development rights and individual franchises are recognized as revenue upon the completion of all commitments related to the agreements and, for the sale of individual franchises, upon the commencement of franchise operations. Note C - Earnings Per Share Income per share is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for stock options and convertible debt. Fully diluted net income per share has not been presented as the amount would not differ significantly from that presented. Note D - Commitments The Company currently has international franchise development agreements with developers in Chile, certain other South American countries, Thailand, Indonesia, The Philippines and The Canary Islands. Under these agreements, the Company has granted exclusive development rights to franchise and operate Au Bon Pain bakery cafes in the respective country or countries. These agreements generally require the payment of up front development fees, a franchise fee for each Au Bon Pain bakery cafe opened and royalties from the sale of products from each bakery cafe. The developer is, in most instances, required to open bakery cafes according to a specific minimum schedule. The Company may also agree to provide advice, consultation 6 and training for the development of a frozen dough plant. The franchisee is required to purchase all of its croissants, muffins and cookies from the Company until the opening of its own frozen dough plant, subject to importation regulations and restrictions. Note E - Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, and No. 129 ("SFAS 129"), Disclosure of Information About Capital Structure, which are effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 addresses the computation, presentation and disclosure requirements associated with earnings per share. SFAS 129 addresses specific disclosures about an entity's capital structure. SFAS 128 and SFAS 129 will be adopted by the Company in the fourth quarter of 1997. 7 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 of certain items included in the Company's consolidated statements of operations for the periods indicated: for the sixteen weeks ended --------------------------- April 19, April 20, 1997 1996 -------- -------- Revenues: Restaurant sales.................... 94.6% 96.1% Franchise sales and other revenues.. 5.4 3.9 ----- ----- 100.0% 100.0% Costs and expenses: Cost of food and paper products..... 36.0% 35.0% Restaurant operating expenses....... 46.5 47.5 Depreciation and amortization....... 7.1 7.0 General and administrative.......... 6.9 6.4 ----- ----- 96.5 95.9 ----- ----- Operating margin...................... 3.5 4.1 Interest expense, net................. 3.0 1.9 Other expense, net.................... 0.3 0.8 Minority interest..................... 0.1 0.0 ----- ----- Income before provision for income taxes............................... 0.1 1.4 Provision for income taxes............ 0.1 0.2 ----- ----- Net income............................ 0.0% 1.2% ----- ----- 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 and others, 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. 8 Results of Operations Total revenues for the sixteen weeks ended April 19, 1997 increased 3% to $71.5 million from $69.4 million for the comparable period of 1996. The increase reflects an 18% increase in total revenues to $18.9 million in the first quarter of 1997 in the Saint Louis Bread business unit driven principally by increased comparable restaurant sales. In the Au Bon Pain business unit, total revenues decreased slightly to $53.1 million for the first quarter of 1997, reflecting the disposal of certain restaurants throughout 1996. Comparable restaurant sales at Saint Louis Bread continued at the double-digit pace established in 1996, increasing 14% in the first quarter of 1997 versus the comparable period of 1996, reflecting the impact of the sourdough bagel program first introduced a year ago in the Saint Louis Bread business unit. Comparable restaurant sales for the Au Bon Pain business unit in the first quarter of 1997 increased by a modest 0.7%. The initial rollout of a new hot sourdough bagel program in the Au Bon Pain business unit in the quarter contributed to the sequentially improving comparable restaurant sales trend. Operating income in the first quarter of 1997 decreased 11% to $2,520,000 versus $2,840,000 in the first quarter of 1996, as operating margin was 3.5% in the first quarter of 1997 versus 4.1% in the comparable period of 1996. On a sequential basis, the first quarter, 1997 operating margin of 3.5% was equivalent to that of the immediately preceding fourth quarter of 1996. The 0.6 point year-over-year decline in margin was principally a result of higher costs in areas which, management believes, will be leveraged as the Company begins to grow again later in 1997: the new layer of cost associated with the frozen dough facility in Missouri, and additional general and administrative expenses to effect the franchise and Company-operated growth coming later this year. Despite the anticipated year-over-year higher fixed manufacturing overhead costs, the efficiency of the new facility has continued to significantly improve each quarter. At the Saint Louis Bread business unit, operating margin in the first quarter of 1997 was 4.7 points higher than the first quarter of 1996. The improvement was principally driven by the leverage of 14% comparable restaurant sales that more than offset the increase in overhead costs to accommodate growth in both company-owned and franchise restaurants. Depreciation and amortization costs were 0.5 points lower and commissary contribution turned positive, with income of 1.5 points versus a loss in the first quarter of 1996 of 0.7 points. Operating margin in the Au Bon Pain business unit in the first quarter of 1997 was 2.6 points below that of the first quarter of 1996. The Au Bon Pain business unit results were mainly impacted by higher manufacturing overhead costs combined with lower sales volume, which produced an increase of 1.9 points from the year ago quarter in manufacturing overhead costs. The flat sales in the first quarter of 1997 versus the comparable quarter of 1996 contributed to negative 9 leverage against fixed costs as depreciation and amortization increased 0.2 points. Partially offsetting the higher costs was lower restaurant operating costs of 0.5, driven by lower percentage occupancy costs, as poorly performing stores were closed throughout 1996. The significantly lower operating income in the first quarter of 1997 as compared with the comparable period of 1996, combined with higher interest expense of $2.1 million versus $1.3 million in the first quarter of 1996, resulted in a decrease in net income to $12,000 from $797,000 in the first quarter of 1996. The higher interest expense was due to the higher costs associated with the subordinated debt financing completed in the third quarter of 1996, as well as greater average debt outstanding. Liquidity and Capital Resources The Company's principal requirements for cash are capital expenditures for constructing and equipping new bakery cafes, maintaining or remodeling existing bakery cafes 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 and bank borrowings. Total capital expenditures for the sixteen weeks ended April 19, 1997 of $4.4 million were related primarily to the construction of new Saint Louis Bread bakery cafes and the remodeling of existing Au Bon Pain bakery cafes. The expenditures were funded principally by net cash from operating activities and by use of the Company's revolving line of credit. In December 1993, the Company issued the 1993 Notes. The 1993 Notes are convertible into shares of the Company's Class A Common Stock, at a conversion price per share of $25.50, subject to adjustment. Beginning in December 1997, the Company may, at its option, redeem all or any part of the 1993 Notes upon the payment of the principal amount together with a premium based upon a declining percentage of the principal amount. In July 1995, the Company obtained an $8.6 million industrial development bond to fund the construction of a second production facility in Mexico, Missouri. The bond was issued by the City of Mexico, Missouri, and secured by an $8.7 million letter of credit issued by a commercial bank. Interest accrues at a weekly floating rate, which was 4.0% on April 19, 1997. On July 24, 1996, the Company issued $15 million senior subordinated debentures maturing in July, 2000. The debentures accrue interest at varying fixed rates over the four year term, ranging between 11.25% and 14.0%. In connection with the private placement, 10 warrants with an exercise price of $5.62 per share were issued to purchase between 400,000 and 500,000 shares of the Company's Class A common stock, depending on the term which the debentures remain outstanding and certain future events. The net proceeds of the financing were used to reduce the amount outstanding under the Company's bank revolving line of credit. With the senior subordinated financing and the Company's revolving line of credit, the Company's management believes it has the capital resources necessary to meet its growth goals through 1998. At April 19, 1997, the Company had a $28.0 million unsecured revolving line of credit which bore interest at either the commercial bank's prime rate plus 0.5% or LIBOR plus an amount ranging between .75% and 3.0%, depending upon certain financial tests. At April 19, 1997, $24.0 million was outstanding under the line of credit and an additional $0.9 million of the remaining availability was utilized by outstanding letters of credit issued by the bank on behalf of the Company. In addition, at April 19, 1997 the Company had a $3.5 million term loan outstanding, collateralized by an office building located in Woburn, MA. The term loan matures on March 15, 2000. In 1997, the Company currently anticipates spending approximately $15 million for capital expenditures, principally for the opening of new bakery cafes and the remodeling of existing units. The Company expects to fund these expenditures principally through internally generated cash flow. Certain Factors Affecting Future Operating Results Statements made or incorporated in this Form 10-Q include a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward- looking statements include, without limitation, statements containing the words "anticipates," "believes," "expects," "intends," "future," and words of similar import which express management's belief, expectations or intentions regarding the Company's future performance. The Company's actual results could differ materially from those set forth in the forward-looking statements. In particular, with respect to the statement regarding management's belief that the Company will grow later in 1997, the expected growth is dependent upon the successful execution of business plans by the Company's franchisees and the adequacy of capital available for expansion plans. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, and No. 129 ("SFAS 129"), Disclosure of Information About Capital Structure, which are effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 addresses the computation, presentation and disclosure requirements associated with earnings per share. SFAS 129 addresses specific disclosures about an entity's capital structure. SFAS 128 and SFAS 129 will be adopted by the Company in the fourth quarter of 1997. 11 PART II. OTHER INFORMATION - -------- ----------------- Item 6 Exhibits and reports on Form 8-K. (a) Not applicable. (b) Au Bon Pain Co., Inc. did not file any reports on Form 8-K during the quarter ended April 19, 1997. 12 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. AU BON PAIN CO., INC. --------------------- (Registrant) Dated: June 3, 1997 By: /S/ LOUIS I. KANE ------------------ Louis I. Kane Co-Chairman Dated: June 3, 1997 By: /S/ RONALD M. SHAICH --------------------- Ronald M. Shaich Co-Chairman and Chief Executive Officer Dated: June 3, 1997 By: /S/ ANTHONY J. CARROLL ----------------------- Anthony J. Carroll Senior Vice President and Chief Financial Officer 13