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 July 12, 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 August 18, 1997, 10,135,181 shares and 1,632,705 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 July 12, 1997 and December 28, 1996 ......... 3 Consolidated Statements of Operations for the twelve and twenty-eight weeks ended July 12, 1997 and July 13, 1996 ....... 4 Consolidated Statements of Cash Flows for the twenty-eight weeks ended July 12, 1997 and July 13, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............................ 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............ 14 2 Item 1. Financial Statements AU BON PAIN CO., INC. CONSOLIDATED BALANCE SHEETS July 12, December 28, 1997 1996 ----------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents......................... $ 880,128 $ 2,578,830 Accounts receivable, net.......................... 8,526,890 7,729,628 Inventories....................................... 9,288,881 8,997,077 Prepaid expenses.................................. 3,164,319 2,353,415 Refundable income taxes........................... 4,520,824 4,539,947 Deferred income taxes............................. 1,675,003 1,675,003 ------------ ------------ Total current assets.......................... 28,056,045 27,873,900 ------------ ------------ Property and equipment, less accumulated depreciation and amortization..................... 120,803,063 121,732,876 ------------ ------------ Other assets: Notes receivable.................................. 2,241,677 2,290,789 Intangible assets, net of accumulated amortization 31,948,167 32,657,137 Deferred financing costs.......................... 1,162,260 1,382,219 Deposits and other................................ 7,687,012 9,109,566 Deferred income taxes............................. 547,067 547,067 ------------ ------------ Total other assets............................ 43,586,183 45,986,778 ------------ ------------ Total assets.................................. $192,445,291 $195,593,554 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 9,675,585 $ 11,140,570 Accrued expenses.................................. 10,065,994 13,334,901 Current maturities of long term debt.............. 333,067 702,264 ------------ ------------ Total current liabilities..................... 20,074,646 25,177,735 Long-term debt, less current maturities............. 52,004,492 49,735,887 Convertible Subordinated Notes...................... 30,000,000 30,000,000 ------------ ------------ Total liabilities............................. 102,079,138 104,913,622 ------------ ------------ Minority interest................................... 441,118 623,857 ------------ ------------ Stockholders' equity: Common stock, $.0001 par value: Preferred Stock, $.0001 par value: Class B, shares authorized 2,000,000; issued and outstanding none and 20,000 in 1997 and 1996, respectively..................................... - 2 Class A, shares authorized 50,000,000; issued and outstanding 10,125,030 and 10,066,671 in 1997 and 1996, respectively............................... 1,013 1,007 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......................... 68,097,022 68,074,383 Retained earnings.................................. 21,826,837 21,980,518 ------------ ------------ Total stockholders' equity.................... 89,925,035 90,056,075 ------------ ------------ Total liabilities and stockholders' equity.... $192,445,291 $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 12 weeks ended for the 28 weeks ended ------------------------ ------------------------ July 12, July 13, July 12, July 13, 1997 1996 1997 1996 ----------- ----------- ------------ ---------- Revenues: Restaurant sales.............. $54,120,469 $51,930,819 $121,776,084 $118,660,229 Franchise sales and other revenues.................... 4,699,321 2,497,853 8,553,523 5,209,227 ----------- ----------- ------------ ------------ 58,819,790 54,428,672 130,329,607 123,869,456 Costs and expenses: Cost of food and paper products..................... 20,833,718 19,150,944 46,576,468 43,437,024 Restaurant operating expenses: Labor..................... 15,079,213 13,845,981 33,546,079 31,824,909 Occupancy................. 7,167,680 6,974,822 14,393,646 14,367,772 Other..................... 6,578,102 6,313,494 14,139,453 13,960,328 ----------- ----------- ------------ ------------ 28,824,995 27,134,297 62,079,178 60,153,009 Depreciation and amortization. 3,919,262 3,657,092 8,998,339 8,513,604 General and administrative expenses.................... 3,753,654 3,154,768 8,667,617 7,594,280 ----------- ----------- ------------ ------------ 57,331,629 53,097,101 126,321,602 119,697,917 ----------- ----------- ------------ ------------ Operating income................ 1,488,161 1,331,571 4,008,005 4,171,539 Interest expense, net........... 1,608,072 893,252 3,743,236 2,193,335 Other expense, net.............. 229,513 871,642 500,624 1,432,064 Minority interest............... (31,986) (6,313) 20,282 3,935 ----------- ----------- ----------- ------------ Income (loss) before provision for income taxes.............. (317,438) (427,010) (256,137) 542,205 Provision (benefit) for income taxes......................... (151,833) (1,040,426) (102,455) (868,551) ----------- ----------- ----------- ----------- Net income (loss)............... $ (165,605) $ 613,416 $ (153,682) $ 1,410,756 =========== =========== =========== =========== Net income per common share..... $ (0.01) $ 0.05 $ (0.01) $ 0.12 =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding............ 11,748,255 11,854,218 11,741,583 11,885,023 =========== =========== =========== =========== 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 28 weeks ended July 12, July 13, 1997 1996 ------------ ----------- Cash flows from operations: Net income.................................. $ (153,681) $ 1,410,756 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. 8,998,339 8,513,604 Amortization of deferred financing costs...... 263,165 74,917 Provision for losses on accounts receivable... 29,189 37,240 Minority interest............................. 20,282 3,935 Deferred income taxes......................... 19,123 - Expenditures towards closing of stores........ 712,828 (123,736) Changes in operating assets and liabilities: Accounts receivable........................... (826,451) 433,760 Inventories................................... (291,804) (556,040) Prepaid expenses.............................. (810,904) 136,409 Refundable income taxes....................... - 82,583 Accounts payable.............................. (1,464,985) 5,131,036 Accrued expenses.............................. (3,268,907) (2,157,624) ------------ ------------- Net cash provided by operating activities... 3,226,194 12,986,840 ------------ ------------- Cash flows from investing activities: Additions to property and equipment........... (8,017,600) (8,840,559) Payments received on notes receivable......... 49,112 51,375 Increase in intangible assets................. (54,784) (28,058) Decrease in deposits and other................ 1,422,554 21,525 Increase in notes receivable.................. - (474,957) ------------ ------------- Net cash used in investing activities....... (6,600,718) (9,270,674) ----------- ------------- Cash flows from financing activities: Exercise of employee stock options............ 22,641 286,624 Proceeds from long-term debt issuance net of deferred financing costs................. 36,658,341 36,970,366 Principal payments on long-term debt.......... (34,758,933) (38,528,999) Deferred financing costs...................... (43,206) (147,294) (Decrease) in minority interest............... (203,021) (95,927) ------------ ------------- Net cash (used) provided by financing activities................................ 1,675,822 (1,515,230) ------------ ------------- Net increase (decrease) in cash and cash equivalents..................................... (1,698,702) 2,200,936 ------------ ------------- Cash and cash equivalents, at beginning of period. 2,578,830 6,419,646 ------------ ------------- Cash and cash equivalents, at end of period....... $ 880,128 $ 8,620,582 ============ ============= 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, Malaysia, Singapore, the United Kingdom 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 6 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 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, and in June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related Information, 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. SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. The Company is in the process of evaluating the impact of the new standards "SFAS 128 and SFAS 129" on the presentation of the financial statements and the disclosure therein. SFAS 131 will be adopted by the fiscal year 1998. 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 period indicated: For the For the 12 weeks ended 28 weeks ended ------------------ ------------------- July 12, July 13, July 12, July 13, 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Restaurant sales........ 92.0% 95.4% 93.4% 95.8% Franchise sales and other revenues........ 8.0 4.6 6.6 4.2 ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% Costs and expenses: Cost of food and paper products........ 35.4% 35.2% 35.7% 35.0% Restaurant operating expenses.............. 49.0 49.9 47.6 48.6 Depreciation and amortization.......... 6.7 6.7 6.9 6.9 General and administrative........ 6.4 5.8 6.7 6.1 ----- ----- ----- ----- 97.5 97.6 96.9 96.6 ----- ----- ----- ----- Operating margin.......... 2.5 2.4 3.1 3.4 Interest expense, net..... 2.7 1.6 2.9 1.8 Other expense, net........ 0.4 1.6 0.4 1.2 Minority interest......... (0.1) - - - ----- ----- ----- ----- Income before provision for income taxes........ (0.5) (0.8) (0.2) 0.4 Provision for income taxes (0.2) (1.9) (0.1) (0.8) ----- ----- ----- ----- Net income................ (0.3)% 1.1% (0.1)% 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 8 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 Total revenues increased 8% in the second quarter of 1997 to $58.8 million from $54.4 million in the second quarter of 1996. The increase reflects a 23% increase in total revenues to $15.7 million in the second quarter of 1997 in the Saint Louis Bread business, driven by a strong year-over-year comparable restaurant sales increase and strong sales at the new bakery cafes opened in both 1996 and 1997 to-date. In the Au Bon Pain business unit, total revenues increased slightly to $43.1 million for the second quarter of 1997 from $41.6 million in the second quarter of 1996. The Au Bon Pain business unit revenues included $1.0 million of development fee income on the signing of country development agreements for the development of Au Bon Pain bakery cafes in the United Kingdom and Malaysia. Comparable restaurant sales at Saint Louis Bread continued at the pace established in 1996, increasing 9.8% in the second quarter of 1997 versus the comparable period of 1996. The second quarter, 1997 comparable restaurant sales increase is particularly notable on top of the 9.1% comparable restaurant sales increase recorded in the second quarter of 1996. Comparable restaurant sales for the Au Bon Pain business unit in the second quarter of 1997 increased by a modest 1.5% versus the comparable quarter of 1996; however, the trendline during the quarter showed consistent improvement, reaching a positive 4.4% increase in the final four weeks of the quarter. This level of same store sales has continued into the third quarter to-date. Improved execution and the roll-out of new products drove sales growth in both business units. Operating income increased slightly in the second quarter of 1997 to $1.5 million versus $1.3 million in the comparable quarter of 1996. Operating margin was essentially unchanged at 2.5% in the second quarter of 1997, as significant improvements in operating margin at the Saint Louis Bread business unit were offset by the higher fixed costs associated with the new frozen dough facility opened in the third quarter of 1996 and increased general and administrative costs, particularly, costs associated with supporting the growth in the international franchise business. Saint Louis Bread franchise area agreements have been executed to-date in 13 markets, including: Orlando and Jacksonville, Florida; the Quad Cities of Iowa;, parts of suburban Chicago, Illinois; Louisville/Lexington, Kentucky; Northern New England; Southeastern Massachusetts; Kansas City, Jefferson City and Springfield, Missouri; Cleveland and Columbus, Ohio; and Tulsa, Oklahoma. Saint Louis Bread now has commitments for development of 178 stores. During the second quarter of 1997, Au Bon Pain International has added 9 commitments for development in Malaysia, Singapore, Argentina, Brazil and the United Kingdom to prior commitments in Chile, Indonesia, the Philippines and Thailand. There is now a commitment for development of 132 Au Bon Pain bakery cafes. Despite higher operating income in the second quarter of 1997 versus the second quarter of 1996, net income was lower in the second quarter of 1997 versus the comparable quarter of 1996. Interest expense increased to $1.6 million in the second quarter of 1997 versus $.9 million in the second quarter of 1996, due to both higher average debt outstanding and the higher interest rate associated with the new financing completed in the third quarter of 1996. In addition, the wind-down of the Company's corporate-owned life insurance program contributed to a decrease in the income tax benefit recognized in the second quarter of 1997 versus the comparable quarter of 1996. 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 twenty-eight weeks ended July 12, 1997 of $8.0 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 3.55% on July 12, 1997. 10 The Company has a $28 million unsecured revolving line of credit which bears interest at either the commercial bank's prime rate plus .5 basis points, or LIBOR plus an amount ranging between .75% and 3.0%, depending upon certain financial tests. At July 12, 1997 $24.2 million was outstanding under the line of credit and an additional $.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 July 12, 1997 the Company had a $3.4 million term loan outstanding, collaterialized by an office building located in Woburn, MA. The term loan matures on March 15, 2000. The Company currently anticipates spending approximately $15 million in 1997 for capital expenditures, principally for the opening of new bakery cafes and the remodeling of existing Au Bon Pain bakery cafes. The Company expects to fund these expenditures principally through internally generated cash flow and the use of the Company's revolving line of credit. 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, warrants were issued to purchase between 400,000 and 580,000 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 existing revolving line of credit, the Company's management believes it has the capital resources necessary to meet its growth goals through 1998. 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. 11 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, and in June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related Information, 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. SFAS 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. The Company is in the process of evaluating the impact of the new standards "SFAS 128 and SFAS 129" on the presentation of the financial statements and the disclosure therein. SFAS 131 will be adopted by the fiscal year 1998. 12 PART II. OTHER INFORMATION - -------- ----------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of shareholders was held on June 12, 1997. (b) Not required. See Instruction 3. (c) Set forth below is a brief description of each matter voted upon at the meeting, including the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each such matter, and including a separate tabulation with respect to each nominee for office: 1. Election of Directors. Class A Class B --------------------- --------------------- Number of Shares Number of Votes --------------------- --------------------- Withhold Withhold For Authority For Authority --------- --------- --------- --------- Louis I. Kane 7,487,855 597,586 4,006,554 -0- James R. McManus 7,484,789 600,652 4,006,554 -0- 2. To ratify appointment of Coopers & Lybrand L.L.P. as auditors for the Company. Number of Shares Number of Votes ---------------- --------------- For 7,977,951 4,006,554 Against 60,935 -0- Abstain 46,555 -0- 3. To approve an amendment to the Company's 1992 Equity Incentive Plan to increase the number of shares of Class A Common Stock available for awards thereunder. Number of Shares Number of Votes ---------------- --------------- For 3,123,109 4,006,554 Against 1,798,265 -0- Abstain 82,596 -0- 4. To approve an amendment to the Company's 1992 Employee Stock Purchase Plan to increase the number of shares of Class A Common Stock available for purchase thereunder. Number of Shares Number of Votes ---------------- --------------- For 3,803,461 4,006,554 Against 1,118,074 -0- Abstain 82,435 -0- 5. To transact such other business as may properly come before the meeting. Number of Votes --------------- No Vote Taken 13 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 July 12, 1997. 14 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: August 25, 1997 By: /S/ LOUIS I. KANE ---------------------------- Louis I. Kane Co-Chairman Dated: August 25, 1997 By: /S/ RONALD M. SHAICH ---------------------------- Ronald M. Shaich Co-Chairman and Chief Executive Officer Dated: August 25, 1997 By: /S/ ANTHONY J. CARROLL ---------------------------- Anthony J. Carroll Senior Vice President and Chief Financial Officer 15