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 10, 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)
Au Bon Pain Co., Inc.
19 FID Kennedy Avenue, Boston, MA 02210
----------------------------------------------------
(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, 1999, 10,614,492 shares and 1,538,247 shares of the
registrant's Class A and Class B Common Stock, respectively, $.0001 par value,
were outstanding.
1
PANERA BREAD COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS........................ 3
Consolidated Balance Sheets as of
July 10, 1999 and December 26, 1998......... 3
Consolidated Statements of Operations
for the twelve and twenty-eight weeks
ended July 10, 1999 and July 11, 1998....... 4
Consolidated Statements of Cash Flows
for the twenty-eight weeks ended July 10,
1999 and July 11, 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 DISCLOSUES
ABOUT MARKET RISK........................... 19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS............................ 19
ITEM 5. OTHER INFORMATION........................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......... 20
2
Part I - Financial Information
Item 1. Financial Statements
PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
July 10, December 26,
1999 1998
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents.................... $ 1,296,108 $ 1,860,445
Accounts receivable, net..................... 1,484,655 1,301,185
Inventories.................................. 1,704,981 1,662,573
Prepaid expenses............................. 881,779 1,780,922
Refundable income taxes...................... 98,483 115,297
Deferred income taxes........................ 1,500,000 1,500,000
------------ ------------
Total current assets..................... 6,966,006 8,220,422
------------ ------------
Property and equipment, less
accumulated depreciation and amortization.... 44,698,132 38,855,569
------------ ------------
Other assets:
Assets held for sale, net, non-current
(Note D)................................... -- 69,394,736
Notes receivable............................. -- 20,000
Intangible assets, net of accumulated
amortization............................... 19,234,768 19,786,858
Deferred financing costs..................... 207,504 768,232
Deposits and other........................... 4,902,656 4,138,219
Deferred income taxes........................ 12,434,099 12,434,099
------------ ------------
Total other assets....................... 36,779,027 106,542,144
------------ ------------
Total assets............................. $ 88,443,165 $153,618,135
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 4,296,721 $ 4,020,239
Liabilities held for sale, net (Note D)...... -- 6,469,618
Accrued expenses............................. 12,521,424 5,927,720
Current maturities of long term debt......... -- 40,800
------------ ------------
Total current liabilities................ 16,818,145 16,458,377
Long Term Liabilities:
Deferred revenue............................. 2,160,000 --
Long term debt, less current maturities...... -- 34,089,587
Convertible Subordinated Notes............... -- 30,000,000
------------ ------------
Total liabilities........................ 18,978,145 80,547,964
------------ ------------
Minority interest.............................. -- (256,761)
Stockholders' equity:
Common stock, $.0001 par value:
Class A, shares authorized 50,000,000;
issued and outstanding 10,603,917 and
10,518,213 in 1999 and 1998, respectively... 1,066 1,047
Class B, shares authorized 2,000,000;
issued and outstanding 1,538,247 and
1,557,658 in 1999 and 1998, respectively.... 154 156
Additional paid-in capital.................... 70,429,598 70,031,945
Retained earnings............................. (965,798) 3,293,784
------------ ------------
Total stockholders' equity.............. 69,465,020 73,326,932
------------ ------------
Total liabilities and stockholders'
equity................................ $ 88,443,165 $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 28 Weeks Ended
---------------------------- ------------------------------
July 10, July 11, July 10, July 11,
1999 1998 1999 1998
------------ ------------- ------------- -------------
Revenues:
Restaurant sales ................. $ 33,847,715 $ 53,942,016 $ 107,258,831 $ 123,661,755
Franchise sales and
other revenues ............... 3,029,213 3,311,576 7,542,952 8,555,120
------------ ------------- ------------- -------------
36,876,928 57,253,592 114,801,783 132,216,875
Costs and expenses:
Cost of food and
paper products ............... 12,826,760 19,965,766 38,827,466 48,032,540
Restaurant operating expenses:
Labor ........................ 9,813,685 15,302,104 31,791,713 34,739,946
Occupancy (Note E) ........... 3,230,524 6,442,669 12,030,914 14,721,622
Other (Note E) ............... 4,239,364 6,191,147 13,026,729 14,226,663
------------ ------------- ------------- -------------
17,283,573 27,935,920 56,849,356 63,688,231
Depreciation and amortization .... 1,417,635 3,934,950 3,217,996 9,202,750
General & administrative
expenses ..................... 3,553,018 4,472,077 10,441,279 9,946,568
Non-recurring charge (Note D) ... -- -- 5,545,000 1,210,000
------------ ------------- ------------- -------------
35,080,986 56,308,713 114,881,097 132,080,089
------------ ------------- ------------- -------------
Operating profit/(loss) .............. 1,795,942 944,879 (79,314) 136,786
Interest expense, net ................ 620,450 1,407,935 2,504,200 3,534,676
Other expense, net ................... 56,516 78,440 460,112 216,005
Loss on sale of assets (Note F)....... -- -- -- 734,823
Minority interest .................... (14,180) 8,105 (25,473) 25,527
------------ ------------- ------------- -------------
Income/(loss) before income taxes and
extraordinary item ............... 1,133,156 (549,601) (3,018,153) (4,374,245)
Income tax expense (benefit) ......... 385,000 (170,000) 859,000 (1,033,000)
------------ ------------- ------------- -------------
Income/(loss) before
extraordinary item ............... 748,156 (379,601) (3,877,153) (3,341,245)
Extraordinary loss from early
extinquishment of debt, net of
$197,008 tax (Note D) ............ 382,428 -- 382,428 --
------------ ------------- ------------- -------------
Net income/(loss) .................... $ 365,728 $ (379,601) $ (4,259,581) $ (3,341,245)
============ ============= ============= =============
Basic earnings/(loss) per common share:
Income/(loss) before
extraordinary loss ........... $ 0.06 $ (0.03) $ (0.32) $ (0.28)
Extraordinary loss ............... $ (0.03) -- $ (0.03) --
------------ ------------- ------------- -------------
Net Income/(loss) ............ $ 0.03 $ (0.03) $ (0.35) $ (0.28)
------------ ------------- ------------- -------------
Diluted earnings(loss) per common share:
Income/(loss) before
extraordinary loss ........... $ 0.06 $ (0.03) $ (0.32) $ (0.28)
Extraordinary loss ............... $ (0.03) -- $ (0.03) --
------------ ------------- ------------- -------------
Net Income/(loss) ............ $ 0.03 $ (0.03) $ (0.35) $ (0.28)
------------ ------------- ------------- -------------
Weighted average number of common and
common equivalent shares
4
outstanding - basic .............. 12,141,577 11,903,632 12,119,670 11,867,016
============ ============= ============= =============
Weighted average number
of common and common
equivalent shares
outstanding - diluted ............ 12,165,021 11,903,632 12,119,670 $ 11,867,016
============ ============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
5
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the 28 Weeks Ended
-----------------------------
July 10, July 11,
1999 1998
------------- ------------
Cash flows from operations:
Net loss .................................... $ (4,259,581) $ (3,341,245)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization .............. 3,217,996 9,202,750
Amortization of deferred financing costs ... 271,990 385,764
Provision for losses on accounts receivable. 21,025 30,550
Minority interest .......................... (25,473) 25,527
Non-recurring charge ....................... 5,545,000 1,210,000
Loss on sale of assets ..................... -- 734,823
Extraordinary loss on early extinguishment
of debt .................................. 382,428 --
Changes in operating assets and liabilities:
Accounts receivable ......................... (322,561) 789,426
Inventories ................................. 109,615 799,648
Prepaid expenses ............................ (3,957,705) (1,596,366)
Accounts payable ............................ (2,275,850) (388,506)
Deferred revenue ............................ 2,160,000 --
Accrued expenses ............................ 1,054,474 (1,195,517)
------------- ------------
Net cash provided by operating activities . 1,921,358 6,656,854
------------- ------------
Cash flows from investing activities:
Additions to property and equipment ......... (10,108,471) (8,989,727)
Change in cash included in net current
liabilities sold .......................... (465,748) --
Proceeds from sale of assets ................ 72,162,987 12,693,917
Payments received on notes receivable ....... 119,014 120,330
Increase in intangible assets ............... (50,309) (93,641)
Increase in deposits and other .............. (89,563) (2,299,982)
Increase in notes receivable ................ -- (45,000)
------------- ------------
Net cash provided by investing activities . 61,567,910 1,385,897
------------- ------------
Cash flow from financing activities:
Exercise of employee stock options .......... 10,569 874,311
Proceeds from draw down on revolving line
of credit ............................... 41,043,243 43,396,342
Principal payments on long term debt ........ (105,278,800) (52,084,100)
Proceeds from issuance of common stock ...... 387,097 216,920
Deferred financing costs .................... (94,967) (477,411)
Decrease in minority interest ............... (120,747) (131,786)
------------- ------------
Net cash used by financing activities ..... (64,053,605) (8,205,724)
------------- ------------
Net (decrease) in cash and cash equivalents ... (564,337) (162,973)
------------- ------------
Cash and cash equivalents, at beginning of
period ...................................... 1,860,445 853,025
------------- ------------
Cash and cash equivalents, at end of period ... $ 1,296,108 $ 690,052
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
6
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 28 Weeks Ended
------------------------- ----------------------------
July 10, July 11, July 10, July 11,
1999 1998 1999 1998
---------- ------------ ------------ ------------
Net income (loss) used in net income
(loss) per common share - basic.. $ 365,728 $ (379,601) $ (4,259,581) $ (3,341,245)
Net income (loss) used in net income
(loss) per common share - diluted. $ 365,728 $ (379,601) $ (4,259,581) $ (3,341,245)
Weighted average number of
shares outstanding - basic ........ 12,141,577 11,903,632 12,119,670 11,867,016
Effect of dilutive securities:
Employee Stock Options ..... 2,087 -- -- --
Stock warrants ............. 21,357 -- -- --
---------- ------------ ------------ ------------
Weighted average number of shares
outstanding - diluted ............. 12,165,021 11,903,632 12,119,670 11,867,016
Net income (loss) per common
share - basic ..................... $ 0.03 $ (0.03) $ (0.35) $ (0.28)
Net income (loss) per common
share - diluted ................... $ 0.03 $ (0.03) $ (0.35) $ (0.28)
During the second quarters of 1998 and 1999, 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 twenty-eight weeks ended July 10, 1999 and July 11,
1998 because the deduction of interest expense, after the effect of income
taxes, would have been antidilutive.
7
During the second quarter of 1998 options to purchase 77,000
shares of common stock and warrants to purchase 170,000 shares of common
stock were outstanding but were not included in the computation of diluted
earnings per share for the twelve weeks ended July 11, 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 estimated to be $1 million. The balance sheet presented
with this From 10Q is not reflective of any potential purchase price
adjustments. 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, charge of
$0.6 million associated with the early extinguishment of debt outstanding in
the second quarter of 1999.
Operating income in the second quarter and year to date period of 1999 was
favorably impacted by $0.9 million, and $4.7 million respectively, due to the
suspension of depreciation and amortization associated with the Au Bon Pain
Division assets held for sale after August 12, 1998.
Revenues and net operating income (before the suspension of depreciation and
amortization) in the Au Bon Pain Division held for sale for the twelve weeks and
twenty-eight weeks ended July 10,1999 were $12.7 million and $0.2 million and
$61.2 million and $1.5 million, respectively.
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 expire in 1998 and will not be 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.
8
Note E - Restatement of Prior Periods
Results of operations for the twelve weeks and twenty-eight weeks ended
July 11, 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.
9
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 For the
12 Weeks Ended 28 Weeks Ended
------------------- -----------------
July 10, July 11, July 10, July 11,
1999 1998 1999 1998
----- ----- ----- -----
Revenues:
Restaurant sales .... 91.8% 94.2% 93.4% 93.5%
Franchise sales and
other revenues .. 8.2 5.8 6.6 6.5
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of food and
paper products 34.8% 34.9% 33.8% 36.3%
Restaurant operating
expenses ...... 46.9 48.8 49.5 48.2
Depreciation and
amortization .. 3.8 6.9 2.8 7.0
General and
administrative 9.6 7.8 9.1 7.5
Non-recurring
charge ........ -- -- 4.8 0.9
----- ----- ----- -----
95.1 98.4 100.0 99.9
----- ----- ----- -----
Operating profit ...... 4.9 1.6 -- 0.1
Interest expense, net . 1.7 2.5 2.2 2.7
Other expense, net .... 0.2 0.1 0.4 0.2
Loss on sale of assets -- -- -- 0.5
Minority interest ..... -- -- -- --
----- ----- ----- -----
Income (loss) before
income taxes and
extraordinary item .. 3.0 (1.0) (2.6) (3.3)
Income tax expense/
(benefit) ......... 1.0 (0.3) 0.7 (0.8)
----- ----- ----- -----
Income (loss) before
extraordinary item .. 2.0 (0.7) (3.3) (2.5)
Extraordinary loss from
early extinguishment
of debt, net of tax . 1.0 -- 0.4 --
----- ----- ----- -----
Net income/(loss) ..... 1.0% (0.7)% (3.7)% (2.5)%
===== ===== ===== =====
10
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.
Results of Operations
Effective May 16, 1999, the Company completed its transaction to
sell the Au Bon Pain Division. For the twenty-eight weeks ended July 10, 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 second quarter of 1999 include the results
of the subsequently divested Au Bon Pain business unit for the period
April 18, 1999 through May 15, 1999.
Total revenues in the second quarter of 1999 totaled $36.9 million,
versus $57.3 million in the comparable quarter of 1998. Total revenues for the
twenty-eight weeks ended July 10, 1999 and July 11, 1998 were $114.8 million
versus $132.2 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 30.0% over the prior year to $24.2 million
in the second quarter of 1999 and 34% to $53.6 million for the twenty-eight week
period ended July 10, 1999. Restaurant sales in the Panera Bread business unit
for the twelve weeks and twenty-eight weeks ended July 10, 1999 increased 27% to
$21.6 million and 23% to $47.9 million, respectively, principally due to the
opening of 15 new Company-operated bakery-cafes since the second quarter of
1998. Panera Bread's comparable restaurant sales for the second quarter and year
to date period ending July 10, 1999 were 4.3% and 1.9% respectively. Franchise
sales and other revenues for the Panera Bread business unit increased 66.0% to
$2.6 million in the second quarter of 1999 from $1.6 million in the second
quarter of 1998, primarily driven by increased franchise royalties, which grew
188% to $1.0 million in the second quarter of 1999, increased franchise fees and
an increase in product sales to franchisees. For the twenty-eight weeks ended
July 10, 1999, franchise sales and other revenues for the Panera Bread business
unit increased 384% to $5.7 million.
The cost of food and paper products as a percentage of total revenue
decreased 0.1% to 34.8% from 34.9% in the second quarter and decreased 2.5%
to 33.8% from 36.3% for the year-to-date period. Included in food cost, are
costs associated with the sale of fresh dough products to both Company-owned
bakery cafes and franchise bakery cafe.
The cost of labor as a percentage of restaurant revenue increased 0.6%
to 29.0% from 28.4% in the second quarter and increase 1.5% to 29.6% from
28.1% for the year-to-date period. The increase in labor is due primarily to
an increase in the averge hourly wage rate due to the highly competitive
labor market.
11
Total operating income for the Company in the second quarter of 1999
versus the comparable quarter of the previous year increased to $1.8 million in
1999 from $0.9 million in 1998, including $0.9 million in reduced depreciation
and amortization expense associated with the Au Bon Pain business unit assets
held for sale. For the twenty-eight weeks ended July 10, 1999 and July 11, 1999,
total operating income/(loss) for the Company was $(.08) million and $0.1,
respectively. The twenty-eight weeks ended July 10, 1999 includes $4.7 million
in reduced depreciation and amortization expense associated with the Au Bon Pain
business unit assets held for sale. Operating income in the Panera Bread
Division for the twelve weeks and twenty-eight weeks ended July 10, 1999, was
$0.7 million and $1.4 million respectively, on a "stand-alone" pro-forma basis
which includes an additional allocation for overhead services provided by Au Bon
Pain Co., Inc.
During the second quarter of 1999, 1 Panera Bread franchise area
development agreement was signed, representing commitments for the development
of 10 bakery-cafes and increasing the number of franchise commitments to a total
of 543 remaining bakery-cafes to be developed. In the second quarter of 1999, 15
Panera Bread bakery-cafes were opened, including 5 Company-owned cafes and 10
franchisee-operated cafes. As of July 10, 1999, there were 78 Company-owned
bakery-cafes (including two specialty bakery-cafes) and 71 franchised
bakery-cafes open.
Net Income
The Company recorded a net income/(loss) of $366,000 and $(4,260,000) for
the twelve weeks and twenty-eight weeks ended July 10, 1999 versus a net loss of
$(380,000) and $(3,341,000) for the comparable 1998 period. Interest expense
declined to $620,000 compared to $1,408,000 for the second quarter and
$2,504,000 versus $3,535,000 for the twenty-eight weeks ended July 10, 1999
and July 11, 1998 due to the repayment in the second quarter of all the
Company's outstanding debt. For the twelve weeks and twenty-eight weeks ended
July 10, 1999 and July 11, 1998, other expense was $57,000 and $460,000
compared to $78,000 and $216,000, respectively.
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, and
maintaining or remodeling existing bakery-cafes, commissaries, the
implementation of a new financial system and working capital. To date, the
Company has met its requirements
12
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 $1,296,000 at July 10, 1999, versus
$1,860,000 at December 26, 1998. Funds provided by operating activities were
primarily the result of an increase in the working captial deficit and
deferred revenue.
Total capital expenditures for the twenty-eight weeks ended July 10,
1999 of $10.1 million were related primarily to the opening of 9 new
Company-operated Panera Bread bakery-cafes, to 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 twenty-eight weeks
ended July 11, 1998 were $9.0 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 July 10, 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 $14 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
Securities Exchange Act of 1934 (identified by the words "estimate,"
13
"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 following are some of the
factors: The ability of the Company to aggressively expand its business going
forward is subject to the availability of sufficient capital to it and the
developers party to franchise development agreements with the Company.
Additionally, the Company's operating results may be affected by many
factors, including but not limited to variations in the number and timing of
bakery-cafe openings and 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-
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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 $2.6
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,
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 $250,000.
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.
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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 $1,430,000 Additional consulting $100,000
Systems GL, AP, AR, Assets, HR, effort needed.
Cash, Property Application certified
Management and to be Y2K compliant.
Purchasing Complete 6/99
-Implementation
Planning Complete 7/99 Dependent upon ABP
making minor
-Conversion & modifications to
Interface In process 8/99 Production processes to
Programming allow capture of data
through 11/99
-Testing/Parallel After 10/99
Parallel
-Production
- --------------------------------------------------------------------------------------------------------------------------------
Payroll- -Contract Negotiations Complete 5/99
Outsource
-Conversion of Panera In Process 8/99
active employees
-Production In conjunction 9/99
with new
financial system
-Copy ABP & Panera 10/99 May have to provide a $20,000
inactive personnel from No plans to way to maintain
ABP system for direct convert, but addresses
input to W2 processing will create
1999 W2s
- --------------------------------------------------------------------------------------------------------------------------------
Network Systems & -Network Infrastructure Complete 4/99 $500,000 No contingency needed
Computer Facility Design as all hardware &
software is new & Y2K
compliant
-Network Implementation Complete 6/99
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 In Process 10/99 $155,000 No contingency needed
and software tested as application
for compliance certified by Micros &
-MWS+ to be installed tested to be compliant
-Register to PC Code
not Y2K compliant 9/99
- --------------------------------------------------------------------------------------------------------------------------------
16
- --------------------------------------------------------------------------------------------------------------------------------
AREA/SYSTEM PHASES STATUS TIMETABLE ESTIMATED CONTINGENCY PLAN/RISKS ESTIMATED
COST CONTINGENCY
COST
- --------------------------------------------------------------------------------------------------------------------------------
Register Systems Processes being In process 10/99 $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 $425,000 -Development Costs $100,000
Office Systems Applications & Hardware exceed estimates or not
completed on schedule.
-Design New BOH Would need to hire
register & applications Complete 6/99 rollout experts to
compress rollout time
-Development In Process 8/99
-Lab Test 8/99
-Pilot 9/99
- Rollout 10/99
- --------------------------------------------------------------------------------------------------------------------------------
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 In Process 8/99
Pilot After Testing 9/99
Rollout - in phase with Upon Production 10/99
BOH for integration of application
- --------------------------------------------------------------------------------------------------------------------------------
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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
None.
Item 5. Other Information
Pursuant to the terms of the Stock Purchase Agreement dated August 12, 1998
between Panera Bread Company (f/k/a/ Au bon Pain Co., Inc. ) the "Company", ABP
Holdings, Inc., a Delaware corporation and wholly owned subsidiary of the
Company ("ABPH"), and ABP Corporation, a Delaware corporation controlled by
Bruckmann, Rosser, Sherrill & Co., Inc., a private equity investment firm based
in New York (the "Buyer"), as amended by Amendment dated October 28, 1998 (the
"Agreement"), effective May 16, 1999 the Company (a) transferred to ABPH and its
wholly owned subsidiary ABP Equipment Company substantially all of the operating
assets, store leases, contracts and liabilities associated with the Company's
bakery-cafe food service and franchise business concept generally known as Au
Bon Pain (the "Au Bon Pain Division"), (b) caused the merger of ABP Equipment
Company with and into ABPH, with ABPH being the surviving corporation and (c)
sold all of the capital stock of ABPH to the Buyer, whereby the Buyer became the
owner of the Au Bon Pain Division (the "Sale"). The Company received cash
payment equal to $73,000,000 subject to certain price adjustments estimated to
be $1,000,000 in connection with the Sale. The description of the Agreement
contained herein is qualified in its entirety by reference to (a) the Agreement
and certain letter agreements with respect to the Sale, attached as Exhibits 2,
10.1 and 10.2, respectively, to the Company's Form 8-K filed August 21, 1998 and
incorporated herein by reference and (b) the October 28, 1998 Amendment,
attached as Exhibit 2 to the
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Company's Form 8-K filed November 6, 1998 and incorporated by reference herein.
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 July 10, 1999.
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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: August 24, 1999 By: /s/ RONALD M. SHAICH
-------------------------------
Ronald M. Shaich
Chairman and Chief Executive Officer
Dated: August 24, 1999 By: /s/ WILLIAM W. MORETON
-------------------------------
William W. Moreton
Chief Financial Officer
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